8th Circuit Affirms $106M Judgement in Bank Breach of Duty Case for Reilly

An 8th Circuit Court of Appeals ruling held up a lower court’s award of $106 million in a decades-long case involving bad actors and a bank's involvement in a Ponzi-like scheme.

The 8th Circuit Court of Appeals rejected all four of a bank’s arguments for reversal in a decades-long case centering on bad actors and a bank’s connection. The court held that the over $100 million awards of compensatory and punitive judgment, prejudgment interest and attorneys’ fee by a judge were supported by the bank’s “systematic breach of trust” and misconduct, according to an announcement on the case.

The breach of trust and “intentional misconduct” by Allegiant Bank allowed a fraudulent scheme to persist via the bank’s term as trustee — resulting in substantial trust losses to thousands of Missouri consumer beneficiaries, according to the release.

“This is a great day for our clients, Jo Ann Howard, and everyone involved in the state insurance guaranty association system,” said Dan Reilly, who served as lead legal counsel and argued before the 8th Circuit court.

Reilly complimented Judge Richard Webber as a great trial judge and said that he was vigilant in listening to the evidence and that the basis for his decisions were legally and factually sound, and based on “common sense.” Reilly said the legal team had felt a high level of confidence that the circuit would affirm Webber’s ruling. He added that there is interest running on the judgement and he believes that there is a right to receive attorney fees for the work done on the appeal, which is currently under review.

Reilly LLP recently joined Fennemore. Prior to this move, Reilly LLP was a well-recognized and award-winning litigation firm founded in 2000.

As previously reported by Law Week, the group of plaintiffs involved some banking and accounting firms and other individuals asserting that Allegiant Bank, the original trustee of the National Prearranged Service Inc. fund, breached multiple trustee duties and failed to control trusts, protect assets and keep adequate records of activities. All the original defendants either settled or acquitted — except PNC Bank, which was sued as successor to Allegiant Bank.

The case against PNC Bank was brought by Jo Ann Howard and Associates, P.C., the Special Deputy Receiver, 35 state guaranty associations and their national organization and the National Organization of Life and Health Insurance Guaranty Associations, according to the release. 

The events leading to the case started in 1998. Some “bad actors” at the National Prearranged Service ran a Ponzi-like scheme in which money from policy buyers was used to pay out then-current funeral claims, Reilly told Law Week last year. In the process, money was taken from the pre-need trusts by people at the National Prearranged Service, and meanwhile, the policies’ cash value was depleted, as described in a 2012 amended complaint. This was accomplished by actions such as taking out policy loans and replacing insurance policies that were fully paid with policies that were paid on a continual monthly basis.

Roughly 45,000 consumers were affected by these actions, which took place between 1998-2004, Reilly told Law Week last year.

The National Prearranged Service was required to place 80% of money collected into a bank, he explained. The bank itself wasn’t party to the Ponzi-esque part of the scheme but was involved because money was allowed to be drawn from the fund whenever it was wanted. Further, money was removed from the bank soon after it was deposited.

Acting as the trustee, the bank was required to protect the beneficiaries from misuse, but issues arose such an insufficient record kept by the banks.

If more sufficient records had been kept by the bank, it would’ve been easier to realize the insurance policies were stripped of value, Reilly told Law Week in 2019.

A 2015 jury trial on the case was held on claims of negligence and breach of fiduciary duty and the jury found the banks were liable for $335.5 million in compensatory damages and $355,550,000 in punitive damages. 

An appeal to the 8th Circuit ruled the defendants’ claims arose under trust law instead of tort and found Allegiant had fiduciary duties to over 50,000 Missouri consumers since their funds were supposed to be protected and held by Allegiant trusts.

In 2019, after a decade of travel through the courts, a group of 30 plaintiffs in the case received judgement of over $102 million. The Missouri bench trial lasted four weeks and Webber ruled against PNC and National City Bank.

In February 2020, the clients were awarded over $7 million in attorneys’ fees and costs over $139,000 in an order from Senior Judge Webber of the Eastern District of Missouri.

The attorneys’ fees and costs were awarded in February due to the liability findings in the underlying judgment. 

“The court finds this case falls within the narrow exception for awarding attorneys’ fees,” Judge Webber wrote in the order. “Specifically, Missouri courts have applied an intentional misconduct exception to non-declaratory judgment actions when the party against whom the fees were awarded engaged in intentional conduct that was spiteful, fraudulent or groundless.”

Further, the court previously entered a judgment of $99,497,290 on the underlying merits of the fiduciary trust claim against PNC.

The judge determined that his previous ruling supported a finding of “special circumstances sufficient” to award the attorneys’ fees to the plaintiffs. In addition, Webber found use of “numerous” professional staff and attorneys was warranted due to the complexities and size of the plaintiffs’ cause of action and the “vigorous defense” of PNC.

“We’re much closer to an endpoint,” Reilly said. He noted that PNC can still request the 8th Circuit to reconsider the case, but this affirmation of the commitments of his clients to pursuing the case to the very end.

Members of the Reilly team included Reilly, Clare Pennington, Michael Robertson, John McHugh, Robert Kelly, Larry Pozner, Farrell Carfield, Tony Giacomini, Stephen Segall, as well as Maurice Graham of Gray Ritter & Graham in St. Louis.

“There’s cases you’ll never forget,” Reilly said, adding that he was sure none of the team who worked on the case would ever be able to forget it. “I never have seen anything like it.”

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