Jo Ann Howard & Assocs., P.C. v. Cassity

• Decision Date: 11 September 2012
• Docket Number: Case No. 4:09CV01252 ERW
• Court: U.S. District Court — Eastern District of Missouri
• Parties: JO ANN HOWARD & ASSOCIATES, P.C., et al., Plaintiffs, v. J. DOUGLAS CASSITY, et al., Defendants.

JO ANN HOWARD & ASSOCIATES, P.C., et al., Plaintiffs, v. J. DOUGLAS CASSITY, et al., Defendants.

Case No. 4:09CV01252 ERW

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MISSOURI EASTERN DIVISION

Dated: September 11, 2012

MEMORANDUM ORDER

This matter comes before the Court on The Missouri Trustee Defendants'¹ Motion to Dismiss the Aiding-and-Abetting Counts for Failure to State a Claim [ECF No. 1016]; Defendant U.S. Bank, National Association's ("U.S. Bank") Motion to Dismiss Plaintiffs' Third Amended Complaint or, in the Alternative, for a More Definite Statement [ECF No. 1023]; and Defendant Richard Markow's Motion to Dismiss Counts 36-38 of Plaintiffs' Third Amended Complaint [ECF No. 1082].

I. FACTUAL AND PROCEDURAL BACKGROUND

This litigation arises out of proceedings instituted by the Texas Department of Insurance in Travis County, Texas, in which National Prearranged Services, Inc. ("NPS"), Lincoln Memorial Life Insurance Company ("Lincoln"), and Memorial Service Life Insurance Company ("Memorial") were placed in receivership and are currently in the process of being liquidated. Plaintiffs in this litigation are Jo Ann Howard and Associates, P.C., acting on behalf of NPS,Lincoln, and Memorial, as Special Deputy Receiver ("SDR") in connection with the Texas receivership proceedings; the National Organization of Life and Health Guaranty Associations ("NOLHGA")²; and the individual state life and health insurance guaranty associations of Arkansas, Illinois, Kansas, Kentucky, Missouri, Oklahoma, and Texas. These individual guaranty associations, as well as those represented by NOLHGA, are statutory entities created by state legislatures to provide protection for resident policyholders in the event that a member insurance company becomes insolvent. Plaintiffs represent that these state guaranty associations have been assigned or subrogated to the claims of funeral homes and consumers arising out of dealings with NPS through (1) each state guaranty association's enabling act; (2) the NPS / Lincoln / Memorial Liquidation Plan approved by the Texas Receivership Court on September 22, 2008; or (3) express assignments received from recipients of death benefits paid by a state guaranty association.

Prior to the institution of the Texas proceedings, NPS was in the business of selling pre-need funeral service contracts, which were sold to consumers through funeral homes. Lincoln and Memorial were issuers of life insurance policies. NPS marketed its pre-need contracts by assuring consumers that funds paid to NPS would be secured in pre-need trusts and backed by whole life insurance policies issued by Lincoln or Memorial for the full amount of the contract. NPS represented to these consumers that the necessary funds would be available when the pre-need beneficiary died and the funeral home's claim became due. In accordance with state law, this process was accomplished in certain states by requiring the purchaser to simultaneouslyapply for a life insurance policy issued by Lincoln or Memorial in an amount corresponding to the amount of the pre-need contract. In other states, the pre-need trust itself purchased the life insurance policies.

On May 3, 20, 2012, Plaintiffs herein filed their Third Amended Complaint, asserting a wide variety of claims against various defendants, including, but not limited to, claims for violations of the Racketeer Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. §§ 1961-1968, violations of the Lanham Act, 15 U.S.C. §§ 1051-1141n, state law claims concerning intentional and negligent fraudulent misrepresentations, and violations of the Texas Receivership Act, Tex. Ins. Code §§ 443.202-443.205 [ECF No. 916]. The Third Amended Complaint alleges that the fraudulent scheme's ultimate goal was to siphon funds away from NPS, Lincoln, and Memorial for the personal use of certain defendants, a scheme that ultimately left more than $600 million in liabilities to be satisfied by the SDR and the state life and health guaranty association Plaintiffs.

There are over forty defendants named in Plaintiffs' Third Amended Complaint, with varying degrees of alleged involvement in what Plaintiffs characterize as a scheme to defraud individual consumers and funeral homes in the sale of NPS's pre-need funeral contracts. Six of the defendants named in this matter are being prosecuted for a variety of fraud-based crimes in a parallel criminal case, United States v. Sutton, Case No. 4:09CR00509 JCH (E.D. Mo.).

The principal focus of Plaintiffs' claims is a group of defendants, defined as "the RICO Defendants," consisting of (1) Doug Cassity, Tyler Cassity, Rhonda Cassity, and Brent Cassity ("the Cassity Defendants"), who are the beneficial owners of NPS, Lincoln, Memorial, and a number of affiliated entities through the RBT Trust II - a family trust of which Doug Cassity is the settlor and the Cassity Defendants are the sole beneficiaries; (2) certain officers andemployees of the Cassity-controlled entities; (3) a number of attorneys and law firms engaged by those entities; and (4) several of those entities themselves. Plaintiffs allege that the RICO Defendants defrauded and conspired to defraud NPS's individual and funeral home consumers by, among other things:

(1) not revealing to NPS employees, funeral homes, or consumers that Lincoln and Memorial, as issuers of the life insurance policies intended to fund the pre-need contracts upon the death of the purchaser, were not independent of NPS, and that Lincoln, Memorial, NPS, and the Cassity Defendants were not independent of each other;

(2) in states in which the purchaser of the pre-need contract applied for the life insurance policy directly, altering policy applications to indicate that the policy was to be paid for in installments, when in fact the purchaser had paid the full amount of the policy in full, so that NPS would only be required to deposit the first installment into a pre-need trust, with the remainder of the amount then ultimately diverted to the RICO or Cassity Defendants through various Cassity-controlled entities, including NPS, Lincoln, and Memorial;

(3) in states in which the pre-need trusts purchased the life insurance policies, purchasing installment policies with monthly payments when the consumer paid for the pre-need contract with a single payment in full, likewise in order to avoid depositing the entire policy amount into a pre-need trust and to siphon the remaining funds to the RICO or Cassity Defendants;

(4) altering life insurance policy applications to indicate that NPS was the owner or beneficiary of the policy, in order to allow NPS to take out loans on the policies from Lincoln or Memorial, and then denying that NPS had taken out any such loans in response to inquiries from funeral homes;

(5) directing NPS to stop paying premiums to Lincoln on whole life policies and surrendering whole life policies for their cash value, with the effect of reducing NPS's obligations to Lincoln and allowing NPS to retain a greater percentage of funds received from consumers in exchange for the pre-need funeral contracts;

(6) removing funds from the NPS pre-need trusts in exchange for the issuance of promissory notes or debentures, with repayment only occurring through book entries unsupported by actual transactions or through the temporary shifting of funds between various entities controlled by the RICO Defendants; and

(7) engaging in "roll-over" transactions with funeral homes, whereby a funeral home would agree to transfer its existing pre-need contracts to NPS andremit to NPS the balance of its trust funds from those contracts, with NPS then using the above-described tactics with whole life insurance policies issued by Lincoln to avoid placing as much as possible of the "roll-over" funds into a pre-need trust, and diverting the remainder to the RICO or Cassity Defendants.

Based on these allegedly wrongful actions, Plaintiffs assert additional claims related to allegedly fraudulent transfers between Cassity-controlled entities against another set of Defendants that are collectively referred to as "the Fraudulent Transfer Defendants." Plaintiffs bring another set of claims arising out of the removal of funds from the pre-need trusts through the issuance of promissory notes and debentures against yet another group of defendants that are defined as "the Promissory Note Defendants," some of whom are likewise RICO or Fraudulent Transfer Defendants.

The defendants bringing the Motions to Dismiss presently before the Court are members of the group of defendants defined in the Third Amended Complaint as the "Trustee Defendants," and individual defendant Richard Markow ("Defendant Markow"), who was head of Trustee Defendant Bremen Bank's trust department, and a Senior Vice President and Trust Officer for Bremen Bank. The claims stated against Trustee Defendants allege that they breached their fiduciary duties to NPS, funeral homes, and consumers, by failing to properly manage the NPS pre-need trust assets, and by failing to ensure that those assets were prudently handled.

Plaintiffs' claims against Trustee Defendants include Breach of Fiduciary Duty by Trustee Banks (Count 19); Negligence and Gross Negligence by Trustee Banks (Count 20); Unjust Enrichment (Count 28); Money Had and Received (Count 29); Aiding and Abetting Fraud (Count 31); Aiding and Abetting Breach of Fiduciary Duty by Investment Advisors (Count 32); Aiding and Abetting Breach of Fiduciary Duty by Bremen Bank (Counts 33 and 34); Breach of Fiduciary Duty (against Defendant Markow) (Count 36); Participation in a Breach of Trust Duties andAiding and Abetting Breach of Fiduciary Duties (against Defendant Markow) (Count 37); and Aiding and Abetting Fraud (against Defendant Markow) (Count 38).

In their Motion, Missouri Trustee Defendants urge the Court to dismiss Counts 31 through 34 of Plaintiff's Third Amended Complaint. In its pleading, Defendant U.S. Bank separately moves to...