Belleville funeral home claims investors used pre-need contracts in 'Ponzi' scheme

Kelly Holleran Aug. 16, 2010, 5:50am

Kurrus Funeral Home

A Belleville funeral home says it has incurred substantial losses in attempting to honor pre-need contracts after investment agencies participated in a Ponzi scheme supported with life insurance policies.

Charles G. Kurrus III doing business as Kurrus Funeral Homes filed a lawsuit July 28 in St. Clair County Circuit Court against Merrill Lynch, Pierce, Henner and Smith; Merrill Lynch Life Agency; Edward L. Schainker; Paul W. Felsch; Mark A. Summer; Merrill Lynch Bank and Trust Company; Mark K. Cullen; and Sorling, Northrup, Hanna, Cullen and Cochran.

Kurrus claims his funeral home has incurred substantial funeral costs after honoring pre-need contracts.

Families purchase the pre-need contracts before they die and the funds are supposed to be placed in a trust. Once a family member dies, money from that trust is withdrawn to pay for funeral expenses.

However, enormous deficits in the pre-need trusts have forced Kurrus Funeral Homes to lose money in honoring the contracts purchased by its customers prior to their deaths, according to the complaint.

When he advised his clients to purchase the pre-need contracts, Kurrus believed the funds were being invested into a safe, tax-exempt trust, the suit states. Instead, however, at the advice of Merrill Lynch and its agent Schainker, the Illinois Funeral Directors Association -- the holder of the trusts -- purchased life insurance policies for funeral home directors with a majority of the funds, the complaint says.

By Jan. 31, 2009, the IFDA had taken $88,272,900 from the trust to pay for life insurance premiums for funeral directors and other IFDA insiders, the complaint says.

When the directors die, the money from their life insurance policy is deposited into the IFDA account and, in theory, should have covered the pre-need contracts purchased, the plaintiffs claim.

However, the directors aren't passing away quick enough to supplement the ongoing costs associated with the pre-need contracts, according to the complaint.

"Schainker knew or should have known that these insurance policies were mere wagering bets on the lives of funeral directors," the suit states. "These 'investments' were therefore against public policy, mere speculation and not investments made with regard to the permanent disposition of funds."

Despite the deficits that were being created as a result of the scheme, Merrill Lynch and Schainker continued to advocate the sale of the life insurance policies because they profited from it. For example, some of the policies contained investment divisions that invested in mutual fund portfolios in the Merrill Lynch Series Fund, the complaint says.

"The nature of the VUL policies and the Merrill Lynch Defendants' management of them allowed the Merrill Lynch Defendants to make commissions, fees and other income from the policies long after the VUL policies were sold," the suit states.

"Merrill Lynch could and did advise and otherwise direct that moneys in the VUL policies' subaccounts be invested in funds that Merrill Lynch managed and/or unit trusts from which it received commissions, income or fees."

In fact, by August 2008, 38 percent of the trust funds, or more than $63 million, was invested in Merrill Lynch mutual funds, the complaint says.

Not only did the life insurance policies create deficits and benefit Merrill Lynch, but they also destroyed the required tax-exempt nature of the trust funds, according to the complaint.

If the IFDA was forced to cash out on a life insurance policy before funeral director's death, it had to pay taxes on that policy, thus damaging the trust's tax-exemption, the plaintiff claims.

At least three life insurance policies were purchased on Kurrus Funeral Home owners Charles G. Kurrus III and Dale Kurrus, Charles G. Kurrus claims.

But Charles G. Kurrus III claims he and other funeral directors were in the dark about the reason they owned the life insurance policies.

"Most of the funeral directors who consented to allow insurance policies to be issued on their lives were unaware of the true nature of these investments or why the Merrill Lynch Defedants recommended them," the suit states. "These individuals were told that the policies were somehow intended to 'endow' the IFDA, that the life insurance policies were required to maintain the tax-exempt status of the Tax-exempt Trust and/or that the nature and extent of the policies was related to the amounts that the insured funeral director had placed into the Tax-Exempt Trust."

Unlike the funeral directors, defendant Sorling Law Firm -- which represented the IFDA from 1986 until 2009 -- knew the scheme violated Illinois law, the plaintiff claims. In addition, they should have known that IFDA had no right to serve as trustee after 1997 amendments to the Burial Funds Act, according to the complaint.

Eventually, IFDA stopped purchasing life insurance policies for the trust in 1997, the suit states. But when it stopped purchasing the policies and when funeral directors failed to die on time, it had no money to pay for pre-need contracts of those who did die, the complaint says.

Therefore, the IFDA was forced to pay funeral and burial expenses from funds obtained through new pre-need contracts issued, the plaintiff claims.

"What should have been a conservatively-run trust that commingled approximately 50,000 individual trusts became the equivalent of ponzi scheme," the suit states.

Kurrus alleges unfair and deceptive practices and civil conspiracy against all the defendants. It alleges breach of fiduciary duty and negligence against Merrill Lynch and Schainker. The Sorling defendants were guilty of malpractice, according to the complaint.

In its compaint, Kurrus asks that the court order the defendants to relinquish all compensation they received in connection with the life insurance policies and the trusts and that it order an accounting.

It also seeks unspecified damages, pre- and post-judgment interest, costs and other relief the court deems just.

Kenneth A. Wexler, Edward A. Wallace, Amber M. Nesbitt and Dawn M. Goulet of Wexler Wallace in Chicago will b representing it.

St. Clair County Circuit Court case number: 10-L-391.

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