Bank of New York v. Janowick , 470 F.3d 264 ( 2006 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 06a0433p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
-
BANK OF NEW YORK, as former Trustee for
Plaintiff, -
National-Southwire Company Pension Plan,
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-
Nos. 05-6390/6456
,
SOUTHWIRE COMPANY, >
Defendant-Appellee, -
-
-
-
v.
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JOHN STEPHEN JANOWICK, GARY ERWIN, and MERL
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KANNAPEL, on behalf of themselves and as the
representatives of a class of current and deferred -
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annuitants of Prudential Group Annuity Contracts
Defendants-Appellants (05-6390), -
GA 5543 and GA 5542,
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CENTURY ALUMINUM COMPANY, -
Defendant-Appellant (05-6456). -
N
Appeal from the United States District Court
for the Western District of Kentucky at Owensboro.
No. 03-00020—Joseph H. McKinley, Jr., District Judge.
Argued: September 18, 2006
Decided and Filed: November 22, 2006
Before: BATCHELDER and MOORE, Circuit Judges; COHN, District Judge.*
_________________
COUNSEL
ARGUED: Leon Dayan, BREDHOFF & KAISER, Washington, D.C., for Appellants. Mark S.
Riddle, GREENEBAUM, DOLL & McDONALD, Louisville, Kentucky, for Appellee. ON BRIEF:
Michael C. Merrick, Frank P. Doheny, Jr., DINSMORE & SHOHL, Louisville, Kentucky, Leon
Dayan, Lisa M. Powell, BREDHOFF & KAISER, Washington, D.C., for Appellants. Mark S.
*
The Honorable Avern Cohn, United States District Judge for the Eastern District of Michigan, sitting by
designation.
1
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Riddle, Melissa Norman Bork, Benjamin J. Evans, GREENEBAUM, DOLL & McDONALD,
Louisville, Kentucky, for Appellee.
MOORE, J., delivered the opinion of the court, in which COHN, D. J., joined.
BATCHELDER, J. (p. 10), delivered a separate dissenting opinion.
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OPINION
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KAREN NELSON MOORE, Circuit Judge. When an insurance company’s reorganization
yields a pot of money that no one expected or even envisioned, who receives the proceeds? In short,
that is the issue this case requires the court to resolve.
Bank of New York (“BNY”) filed this interpleader action to resolve conflicting claims to
stock it received from Prudential Insurance Company of America’s demutualization, i.e., its
reorganization from a mutual insurance company to a stock company. BNY received the stock as
successor-in-interest to the former trustee of the National-Southwire Aluminum Company (“NSA”)
Pension Plan (“NSA Plan” or “Plan”). The Plan terminated in 1986, and the trustee used the Plan’s
assets to purchase two group annuity contracts, which satisfied the Plan’s ERISA obligations to the
employees.
The claimants to the stock are a class of employees (“Employees”) of the now-defunct NSA
(represented by Defendants-Appellants Janowick, Erwin, and Kannapel), Defendant-Appellee
Southwire Company (“Southwire”) (the parent company of the former NSA), and Defendant-
Appellant Century Aluminum Company (“Century”) (the purchaser of the former NSA’s assets).
The district court addressed the claims in two phases, first concluding via summary judgment that
Southwire’s claims were superior to those of the Employees, and next concluding that Southwire’s
claims trumped Century’s. The Employees and Century both appeal.
Regarding the Employees’ appeal, we REVERSE the district court’s grant of summary
judgment to Southwire, as we conclude that both Kentucky law and the nature of demutualization
compel the conclusion that the Employees are entitled to the proceeds, and REMAND for further
proceedings consistent with this opinion. As to Century’s appeal, we VACATE the district court’s
judgment and DISMISS Century’s appeal as moot, as we conclude that Century could not have
purchased from Southwire that which Southwire never owned.
I. BACKGROUND
A. The Pension Plan
In 1970, NSA created the Plan as a defined-benefit pension plan for the Employees, who
worked at an aluminum smelting plant NSA operated in Hawesville, Kentucky. Under a defined-
benefit plan, “the benefits to be received by employees are fixed and the employer’s contribution
is adjusted to whatever level is necessary to provide those benefits.” Ala. Power Co. v. Davis, 431
U.S. 581, 593 n.18 (1977). Thus, NSA paid contributions to the Plan through a funding agent, and
the Plan held in trust and managed these funds on behalf of the Employees.
The Plan became governed by ERISA upon ERISA’s enactment in 1974. In December 1986,
NSA terminated the Plan. At that time, Irving Trust Company (“Irving”) was the designated Plan
trustee. Consistent with ERISA’s requirements, see 29 U.S.C. § 1341(b), Irving purchased two
group annuity contracts (nos. GA-5542 and GA-5543) from the Prudential Insurance Company of
America (“Prudential”) for the benefit of the Employees. These annuity contracts constitute an
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“irrevocable commitment[ on behalf of Prudential] to provide all benefit liabilities under the plan.”
29 U.S.C. § 1341(b)(3)(A)(i). See also 29 C.F.R. §§ 4001.2, 4041.28(c)(1), 4041.28(d)(1).
After Irving bought the annuity contracts (which cost approximately $7 million) from
Prudential, some funds remained in the trust. Consistent with ERISA, the governing documents of
the NSA Plan provided that such surplus funds could revert to NSA once the trustee fully satisfied
the plan’s obligations to its beneficiaries. See 29 U.S.C. § 1344(d)(1); Joint Appendix (“J.A.”) at
157-58 (NSA Plan § 9.2). NSA received approximately $11.5 million under this provision. After
all of the Plan’s assets were distributed, Irving’s status as trustee terminated sometime in 1987. At
that point, the Plan was defunct.
B. Subsequent Transactions
Starting in the early 1990s, NSA underwent a series of corporate transactions with other
companies under the umbrella of NSA’s parent corporation, Southwire. In August 2000, Century
agreed to purchase from Southwire the Hawesville plant and assets associated with its business.
C. Prudential’s Demutualization
At the time Irving purchased the annuity contracts, Prudential was organized as a mutual
insurance company under the laws of New Jersey. “A mutual insurance company has no
shareholders and is instead owned by its policyholders.” James A. Smallenberger, Restructuring
Mutual Life Insurance Companies: A Practical Guide Through the Process, 49 DRAKE L. REV. 513,
516 (2001). Those who purchase policies from mutual insurance companies receive both
membership interests (e.g., the right to elect directors and the right to receive a proportionate share
of the company if it liquidates) and contract rights (i.e., the obligations of the insurance company
under the policy). Id. at n.4.
Prior to 1998, New Jersey did not allow insurance companies to organize as stock
companies. J.A. at 476 (NJ Dep’t of Banking & Ins. Order No. A01-153 § I.). New Jersey law
changed in 1998, and in December 2000, Prudential’s board of directors adopted a plan to
demutualize, that is, to reorganize from a mutual insurance company to a stock company. The
demutualization plan was approved by policyholders in July 2001, and within three months, the New
Jersey Insurance Commissioner approved the plan. Id. Prudential’s demutualization plan required
the new company, Prudential Financial, Inc. (“PFI”), to issue stock to eligible policyholders as
consideration for their membership interests in the old company.
In early 2002, PFI issued 35,119 shares of stock to BNY as the successor-in-interest to
Irving. The stock was intended to compensate Irving for the loss of membership interests that it held
as the contract-holder of the group annuities purchased to terminate the NSA plan. However, BNY
denied both that it was the contract-holder and that it was entitled to the stock. Soon, BNY began
receiving conflicting demands for the demutualization proceeds when Southwire, the Employees,
and Century all asserted entitlement to the stock. To settle these claims, BNY filed its interpleader
complaint on February 3, 2003, naming Southwire, the Employees, and Century all as defendants.
The district court had jurisdiction under the minimal diversity requirement of the federal interpleader
statute because two of the claimants are diverse, as the Employees are Kentucky residents and
Southwire is organized as a Delaware corporation. 28 U.S.C. § 1335(a); State Farm Fire & Cas.
Co. v. Tashire, 386 U.S. 523, 530-31 (1967).
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D. Procedural History
The district court certified a defendant class consisting of the Employees and dismissed BNY
from the case, leaving the three claimants as parties to the litigation. It also granted BNY permission
to sell the stock and ordered it to deposit the proceeds with the court. Accordingly, BNY deposited
approximately $1.3 million with the district court.
The district court proceeded in two phases to settle the claimants’ dispute. First, it pitted
Southwire against the Employees to determine which of those two parties had the better claim to the
demutualization proceeds. On September 29, 2004, it granted summary judgment to Southwire and
denied summary judgment to the Employees.
Next, the district court decided whether Century’s claim to the proceeds was superior to
Southwire’s. On August 10, 2005, it granted summary judgment to Southwire and denied summary
judgment to Century.
Both the Employees and Century appealed, and their appeals were consolidated for briefing
and submission. We have jurisdiction over the Employees’ and Century’s appeals from the district
court’s final judgment under 28 U.S.C. § 1291.
II. STANDARD OF REVIEW
We review de novo a district court’s order granting summary judgment, DiCarlo v. Potter,
358 F.3d 408, 414 (6th Cir. 2004), and will affirm a grant of summary judgment “[i]f the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,
show that there is no genuine issue as to any material fact and that the moving party is entitled to
a judgment as a matter of law.” Fed. R. Civ. P. 56(c). In reviewing the district court’s decision to
grant summary judgment, we must view all evidence in the light most favorable to the nonmoving
party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
III. ANALYSIS
The Employees argue that Southwire never had a right to the demutualization proceeds, and
Century argues that it purchased the right to the proceeds when it bought the Hawesville plant from
Southwire in 2000. Because we conclude that the Employees are correct, Southwire never could
have transferred the interest in the demutualization proceeds to Century.
Ultimately, we conclude that the Employees are entitled to the demutualization proceeds for
three separate reasons. First, we conclude that the terms of the annuity contract compel the
conclusion that the Employees are now the contract-holders, and thus entitled to the demutualization
proceeds. Second, we conclude that under relevant contract principles, we would supply a term to
the annuity contracts under Restatement (Second) of Contracts § 204 entitling the Employees to
unforeseen demutualization proceeds. Finally, we consider the nature of demutualization and
conclude that Southwire could not have had any claim to the demutualization proceeds because it
never held any ownership interest in Prudential.
A. Terms of the Annuity Contract
Prudential’s demutualization plan entitles “Eligible Policyholders”—i.e., the “owners” of
eligible policies and annuity contracts, J.A. at 297 (Reorganization Plan § 1)—to demutualization
compensation. J.A. at 318 (Reorganization Plan § 7.1(b)). For group annuity contracts, it defines
the designated contract-holders as “owners.” J.A. at 312 (Reorganization Plan § 5.3). Here, the
annuity contracts designate Irving as the contract-holder “as trustee for [the] National-Southwire
Aluminum Company Pension Plan.” J.A. at 190, 235. Irving’s successor (BNY) claims that Irving’s
Nos. 05-6390/6456 Bank of New York et al. v. Janowick et al. Page 5
status as contract-holder ceased, presumably when its status as trustee of the NSA Plan terminated
in 1988. The demutualization plan does not indicate how shares should be distributed when a policy
lacks an owner.1
Because the demutualization plan does not resolve the dispute, we turn elsewhere. The
Department of Labor (“DOL”) has concluded that, in disputes over demutualization proceeds born
from an annuity contract purchased to terminate an ERISA plan,2 the terms of the relevant annuity
contracts and state law govern. Dep’t of Labor, Office of Pension and Welfare Benefit Programs
Op. No. 2003-05A, 2003 WL 1901900 (Apr. 10, 2003). Although the DOL’s advisory opinion is
not binding on us, it is worthy of “some deference.” Christensen v. Harris County, 529 U.S. 576,
587 (2000) (quoting Reno v. Koray, 515 U.S. 50, 61 (1995)). Interpretive guidance from
administrative agencies that is not the product of formal, notice-and-comment rulemaking is entitled
to respect “to the extent that th[e] interpretations have the ‘power to persuade.’” Id. (quoting
Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)). The Fifth Circuit applied this standard and
deferred to similar guidance from the DOL in Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 296 (5th
Cir. 2000). We conclude that the DOL guidance is persuasive because a membership interest in a
mutual insurance company is a precondition to any right to demutualization proceeds, and the
annuity contract creates such interests. Regardless of whether the annuity contract contemplates the
right to demutualization proceeds, previous documents (e.g., the NSA Plan documents) could not
have contemplated such a right, as they neither created nor encompassed membership interests in
Prudential.
We conclude that the terms of the annuity contracts entitle the Employees to the
demutualization proceeds. The parties do not press this argument in their briefs, but they have
provided copies of the annuity contracts in the Joint Appendix. We address the parties’ primary
argument, whether we should apply Restatement (Second) of Contracts § 204 to supply a missing
term to the annuity contracts, infra in Part III.B.
As noted above, Prudential’s demutualization plan provides that contract-holders, as
“owners” of the contracts, are to receive consideration in the form of stock. The annuity contracts
dub Irving the contract-holder, but this provision is of no help because, as noted above, Irving’s
successor claims that it is no longer the contract-holder. The contracts further provide:
The Contract-Holder at any time may, with the consent of the Prudential, appoint a
successor Contract-Holder. . . . [H]owever, . . . if the Contract-Holder notifies the
Prudential that it will cease to exist or cease to perform the duties of the Contract-
Holder hereunder and no successor Contract-Holder is appointed, this contract shall
nevertheless remain in full force and effect . . . .
J.A. at 195 (Annuity Contract No. 5543 at § 1.10), 242 (Annuity Contract No. 5542 at § 3.7). The
record contains no indication that Irving appointed a successor contract-holder or notified Prudential
prior to 2002 that it would no longer perform the duties of contract-holder. Notably, the contracts
are silent regarding who becomes the successor contract-holder in this situation.
1
Although no party so argues, the demutualization plan hints that Prudential should have resolved this dispute
by invoking its “Resolution Procedures” once BNY disclaimed entitlement to the demutualization consideration. J.A.
at 314 (Reorganization Plan § 5.9). The record contains no indication that Prudential did so.
2
The “final distribution” of a terminating ERISA plan’s assets occurs when the administrator “purchase[s]
irrevocable commitments from an insurer to provide all benefit liabilities under the plan, or . . . otherwise fully provide[s]
all benefit liabilities under the plan.” 29 U.S.C. § 1341(b)(3); 29 C.F.R. § 4041.28(c). Annuities are an example of such
“irrevocable commitments.” See 29 C.F.R. § 4001.2.
Nos. 05-6390/6456 Bank of New York et al. v. Janowick et al. Page 6
“The primary object in construing a contract . . . is to effectuate the intentions of the parties.”
Cantrell Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 384 (Ky. Ct. App. 2002). Kentucky
courts3 have long held that in so doing, it is proper to consider “the circumstances surrounding the
parties, and the object” of the contract, in addition to the contract’s language. Owens v. Ga. Life Ins.
Co., 177 S.W. 294, 298 (Ky. 1915) (quoting Mitchell v. S. Ry. Co., 74 S.W. 216, 217 (Ky. 1903)).
“Whe[n] a contract is . . . silent on a vital matter,” it is especially appropriate for courts to consider
each of these factors, as well as “the subject matter of the contract.” Cantrell Supply, 94 S.W.3d at
385.
Here, these factors strongly indicate that the parties to the annuity contracts intended for the
Employees to step into Irving’s shoes as the contract-holders after Irving withdrew. The purpose
of the annuity contracts was to provide pension benefits to which the Employees were entitled under
the defunct NSA Plan. Accordingly, the Employees are third-party creditor beneficiaries of the
contracts. See Presnell Const. Managers, Inc. v. EH Const., L.L.C., 134 S.W.3d 575, 579 n.12 (Ky.
2004) (quoting Sexton v. Taylor County, 692 S.W.2d 808, 810 (Ky. Ct. App. 1985)). Other than
Prudential, which is not a party to this case, only the Employees have a direct interest in the annuity
contracts. By contrast, Southwire is neither a party to, nor a beneficiary of, the contracts. For these
reasons, we conclude that the parties’ intent in entering the contract was that the Employees would
become the contract-holders if Irving were to step down.4
B. Restatement (Second) of Contracts
Aside from our analysis of the contract’s existing terms, we conclude that the Employees are
entitled to the demutualization proceeds under Restatement (Second) of Contracts § 204. The
annuity contracts say nothing regarding demutualization, which is not surprising as demutualization
was not legal in New Jersey (where Prudential was located) when Irving purchased the annuity
contracts from Prudential on the Employees’ behalf. Because the annuity contracts do not contain
a term regarding entitlement to demutualization proceeds, the Employees urge the court to apply
Restatement of Contracts (Second) § 204 to supply the annuity contracts with a missing term.
Section 204 states: “When the parties to a . . . contract have not agreed with respect to a term which
3
The annuity contracts contain choice-of-law provisions selecting New York law. J.A. at 196 (Annuity
Contract No. GA-5543 § 1.13), 243 (Annuity Contract No. GA-5542 § 3.11). Notwithstanding these provisions, we
believe that, for the following reasons, Kentucky law governs interpretation of the annuity contracts.
As explained above, federal jurisdiction arises under the federal interpleader statute’s minimal diversity
requirement. See supra Part I.C. Accordingly, we apply the choice-of-law provisions of the forum state — here,
Kentucky. Republican Nat’l Comm. v. Taylor, 299 F.3d 887, 890 (D.C. Cir. 2002). See also Andersons, Inc. v. Consol,
Inc., 348 F.3d 496, 501 (6th Cir. 2003) (forum state’s choice-of-law provisions apply when federal district court has
diversity jurisdiction under 28 U.S.C. § 1332).
We have previously determined that under Kentucky law, § 187 of the Restatement (Second) of Conflict of Laws
governs contractual choice-of-law provisions. Wallace Hardware Co. v. Abrams, 223 F.3d 382, 397 (6th Cir. 2000).
Section 187 applies the law of the chosen state unless “the chosen state has no substantial relationship to the parties or
the transaction and there is no other reasonable basis for the parties’ choice.” RESTATEMENT (SECOND) OF CONFLICT
OF LAWS § 187(2)(a), quoted in Wallace Hardware, 223 F.3d at 393 n.9.
The present dispute does not involve any parties domiciled in New York, nor any business conducted in New
York. Even the purchase of the annuity contracts, in which the trustee to the pension plan of a Delaware corporation
purchased annuity contracts from a New Jersey-based insurer for the corporation’s Kentucky employees, involves no
substantial relationship to New York. The only basis for the parties’ choice is that Irving, which is no longer the
contract-holder, was based in New York. For these reasons, under § 187(2)(a), Kentucky law applies. Further, both
parties’ briefs apply Kentucky law, which indicates that the parties agree that Kentucky law should govern our
interpretation of the annuity contracts.
4
If we were to analyze this issue as supplying a missing term rather than interpreting existing terms, we would
reach the same conclusion, employing the same analysis under Restatement (Second) of Contracts § 204 as employed
in Part III.B.
Nos. 05-6390/6456 Bank of New York et al. v. Janowick et al. Page 7
is essential to a determination of their rights and duties, a term which is reasonable in the
circumstances is supplied by the court.”
Southwire objects, claiming that Kentucky courts have not endorsed § 204. Although no
reported case in Kentucky has applied this provision of the Restatement, the Kentucky Supreme
Court has applied various other sections of the Restatement, which demonstrates that the
Restatement is generally valid authority in Kentucky. See, e.g., Hargis v. Baize, 168 S.W.3d 36, 47
(Ky. 2005) (applying § 195(2)); Nucor Corp. v. Gen. Elec. Co., 812 S.W.2d 136, 144 (Ky. 1991)
(§ 354); id. at 145 n.2 (§ 350); Stevens v. Stevens, 798 S.W.2d 136, 139 (Ky. 1990) (§ 305). Further,
Kentucky courts have recognized the principle that “if a contract is silent on a certain point, the law
will imply an obligation to carry out the purpose for which the contract was made” — exactly the
substance of § 204. Old Republic Ins. Co. v. Ashley, 722 S.W.2d 55, 58 (Ky. Ct. App. 1986) (citing
Warfield Nat. Gas Co. v. Allen, 59 S.W.2d 534 (Ky. 1933)). Cf. Richardson v. Eastland, Inc., 680
S.W.2d 7, 8 (Ky. 1983) (“Where the contract is silent we must interpret the intent of the parties.”).5
Sitting in diversity, our duty is to apply the law of the forum state as announced by its highest court.
West Bay Exploration Co. v. AIG Specialty Agencies of Tex., Inc., 915 F.2d 1030, 1034 (6th Cir.
1990). Where the relevant state supreme court has not spoken on an issue, we apply the rule that
we believe the state supreme court would apply if it were to decide the case. Himmel v. Ford Motor
Co., 342 F.3d 593, 598 (6th Cir. 2003). Under these circumstances, we believe the Kentucky
Supreme Court would employ Restatement § 204. Accordingly, so do we.
Section 204’s comment d instructs courts to apply “community standards of fairness” to
determine a term that is reasonable in the circumstances. Here, it is clear that none of the parties
expected to receive the demutualization proceeds, which will constitute a windfall to whoever
receives them. It is also clear that NSA’s decision to terminate the Plan in 1986 relieved it of any
risk associated with the Plan—namely, the responsibility to provide whatever level of funding is
necessary to yield the fixed level of benefits promised. See Hughes Aircraft Co. v. Jacobson, 525
U.S. 432, 439 (1999) (noting that under an ongoing defined benefit plan, “the employer typically
bears the entire investment risk and—short of the consequences of plan termination—must6 cover
any underfunding as the result of a shortfall that may occur from the plan’s investments”).
At the same time, the termination of the NSA Plan shifted risk onto the Employees. On
paper, at least, the Employees are entitled to exactly the same level of benefits under the annuity
contracts as they were under the NSA Plan, but crucially, their benefits are no longer guaranteed.
Under ERISA, ongoing pension plans are guaranteed by the Pension Benefit Guarantee Corporation
(PBGC). See 29 C.F.R. §§ 4022.1 et seq. Not so for the annuity contracts. If Prudential were to
become insolvent and default on its obligations under the annuity contracts, the Employees would
be unable to recover the full value of the benefits. Accordingly, the NSA Plan’s termination—the
very event that necessitated purchase of the annuity contracts—stuck the Employees with a new (and
unbargained-for) risk. Applying community standards of fairness, the inserted term should not
entitle a party absolved of risk, such as Southwire, to unforeseen demutualization proceeds in
5
Southwire argues that Kentucky courts are reluctant to add terms to contracts. The cases it cites, however,
are readily distinguishable, as they concern courts refusing to alter the existing terms of the contracts in question. See,
e.g., O.P. Link Handle Co. v. Wright, 429 S.W.2d 842, 847 (Ky. 1968) (declining “to change the obligations of a
contract”); State Farm Mut. Auto. Ins. Co. v. Hobbs, 268 S.W.2d 420, 422 (Ky. 1954) (stating that the court cannot
“make a contract for the parties or revise the agreement while professing to construe it” and refusing to alter the
contract’s express termination date).
6
Contrary to the dissent’s conclusion, Jacobson in no way forecloses the Employees’ claim to the
demutualization proceeds. The dissent apparently fails to appreciate the key distinction between the two cases:
Jacobson involved an ongoing retirement plan, whereas the Plan at issue here has been defunct since 1987.
Consequently, as explained in Part III.C., the funds at issue could not have belonged to the Plan, and thus could never
have been “plan surplus.” For this reason, Jacobson is not controlling.
Nos. 05-6390/6456 Bank of New York et al. v. Janowick et al. Page 8
preference to the party burdened with additional risk. Accordingly, 7we supply a term to the annuity
contracts entitling the Employees to the demutualization proceeds.
C. The Nature of Demutualization
Finally, the nature of demutualization compels the conclusion that Southwire never could
have had any right to the demutualization proceeds. As noted above, by definition demutualization
“involves a conversion of the mutual policyholders’ ownership interest in the old [mutual] company
into ownership interest in the form of stock in the new [stock] company.” UNUM Corp. v. United
States, 130 F.3d 501, 502 (1st Cir. 1997), cert. denied, 525 U.S. 810 (1998). Here, no ownership
interests materialized until April 1988, when Irving purchased the annuity contracts for the
Employees’ benefit.8 NSA did not purchase any annuities from Prudential, and was not the contract-
holder. The same is true of Southwire, NSA’s parent company. Accordingly Southwire did not
hold, and could not have held, any membership interest in Prudential, and thus could not have held
any claim to the demutualization proceeds.
Similarly, the ownership interests in Prudential never inured to the NSA Plan. The Plan’s
trustee (Irving) purchased group annuity contracts from Prudential to effectuate the “final
distribution” of the Plan’s assets under 29 U.S.C. § 1341(b)(3). This purchase represents the
“closeout” of the Plan under 29 C.F.R. § 4041.28. Only then, after the NSA Plan terminated, did
any entity (Irving) receive an ownership interest in Prudential. Thus, like Southwire, the NSA Plan
could not have held a right to demutualization proceeds. Southwire apparently recognizes as much,
as it states9 that the right to demutualization proceeds does not constitute a “plan asset[].” Southwire
Br. at 26. In sum, because neither Southwire nor the NSA Plan ever held an ownership interest in
Prudential—a precondition for entitlement to demutualization proceeds—neither could have been
entitled to the money at issue.
Southwire disagrees, arguing that the right to demutualization proceeds reverted to NSA
along with the $11.5 million in surplus trust funds. Flaws in this argument abound. First, Southwire
overlooks that neither NSA nor the NSA Plan ever held any ownership interest in Prudential, as
explained above.
7
Were we to attempt to discern the term to which the parties to the annuity contracts would have agreed (the
less-favored mode of analysis under § 204’s comment d), we would reach the same conclusion. As noted above, NSA’s
decision to terminate the Plan burdened the Employees with a risk for which they did not bargain. Accordingly, we
conclude that under the “hypothetical model of bargaining” approach, Irving as the trustee would have demanded that
any unanticipated proceeds from an unforeseen insurance company demutualization inure to the Employees to
compensate them for this additional risk. Prudential would not have been in a position to favor either the Employees
or Southwire, and would not have objected to this term.
8
The signature pages reflect that the contracts were signed in April 1988, but were effective November 1, 1986.
9
The Northern District of Illinois concluded in an unpublished opinion that the rights to an unforeseen
demutualization may constitute “plan assets.” See Chicago Truck Drivers Union (Indep.) Health & Welfare Fund v.
Local 710, Int’l Bhd. of Teamsters, No. 02 C 3115, 2005 WL 525427 (N.D. Ill. March 4, 2005) (unpublished opinion).
Although the case involved a pension plan that had terminated decades ago, the court based its conclusion on two
interpretive letters from the Department of Labor that both addressed situations involving ongoing ERISA-covered plans.
See U.S. Dep’t of Labor, Employee Benefits Security Admin. Advisory Op. 2001-02A (Feb. 15, 2001); U.S. Dep’t of
Labor, Pension & Welfare Benefits Office of Regulations & Interpretations Advisory Op. 92-02A (Jan. 17, 1992).
The court did not address the critical distinction between ongoing and defunct plans and did not provide any
explanation of how demutualization proceeds can become an asset of a plan that is defunct and has no assets.
Consequently, it appears doubtful that the case was correctly decided.
We reject the Northern District of Illinois’s analysis, and instead follow the 2003 DOL opinion, which addresses
how to treat demutualization proceeds purchased with the funds of a defunct pension plan. See Dep’t of Labor, Office
of Pension and Welfare Benefit Programs Op. No. 2003-05A, 2003 WL 1901900 (Apr. 10, 2003).
Nos. 05-6390/6456 Bank of New York et al. v. Janowick et al. Page 9
Second, Southwire’s argument tortures the language of the Plan documents, which provide
that only “funds remaining after the satisfaction of all liabilities” revert to Southwire. J.A. at 463
(NSA Pension Plan ¶ 9.2). Southwire provides no reason for us to accept the counterintuitive
proposition that an asserted right to proceeds from an unforeseen, and at the time unlawful, future
demutualization of an insurance company was a fund remaining in the NSA Plan after Irving
purchased the group annuity contracts.
Finally, Southwire’s argument misdefines the right at issue. Southwire’s position assumes
the existence of some abstract right to demutualization proceeds, a right that apparently existed not
only at a time predating the demutualization plan, but even when demutualization was not even legal
and thus hardly foreseeable. This assumption is infinitely dubious, as the stack of documents
regarding the Plan termination, purchase of annuity contracts, and reversion of remaining funds
contains nary a word regarding such a right.
In reality, rights to proceeds from a demutualization arise only when a mutual insurance
company demutualizes, and in such a situation, the mutual company’s demutualization plan defines
those rights. With a proper understanding of the right at issue, it is apparent that no right to the
Prudential demutualization proceeds could have arisen prior to December 2000, when Prudential
announced its plan to demutualize. By that time, the NSA Plan—the only vessel through which
Southwire could receive any right to demutualization proceeds—had been defunct for over a dozen
years.
In short, Southwire’s position is incompatible with the definition of demutualization. This
problem does not, however, apply to the Employees’ position, which is perfectly consistent with the
understanding that no rights to demutualization proceeds arise until the demutualization is
announced, absent a clear earlier agreement.
D. Century’s Appeal
Century argues that it received the right to the demutualization proceeds from Southwire
when it purchased from Southwire the Hawesville plant and associated assets in 2000. We have
already concluded that Southwire never had any right to the demutualization proceeds. Accordingly,
Century could never have received from Southwire any right to or interest in the funds here at issue,
as they were not Southwire’s to sell.
IV. CONCLUSION
For all of the foregoing reasons, we REVERSE the district court’s order granting summary
judgment to Southwire and denying the Employees’ motion for summary judgment, and REMAND
this case for further proceedings consistent with this opinion. Additionally, we VACATE the
district court’s order granting judgment to Southwire and denying Century’s motion for summary
judgment, and DISMISS Century’s appeal as moot.
Nos. 05-6390/6456 Bank of New York et al. v. Janowick et al. Page 10
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DISSENT
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ALICE M. BATCHELDER, Circuit Judge, dissenting. I respectfully dissent, as I disagree
with the reasoning and the outcome of the majority opinion. I believe this case is foreclosed by
Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 440-41 (1999) (holding that plan participants in a
defined benefit pension plan have no claim to the plan’s surplus assets). This case involves a
defined benefit plan. There is no dispute that the annuities were properly calculated and funded to
ensure that the employees will receive all of the benefits promised under the plan. The $1.3 million
is surplus; it did not evolve over time into an additional defined benefit or become part of the
annuity payments.
The majority provides multiple theories for gifting this money to the employees. None of
these theories, however, changes the basic, irrefutable fact that these employees are only entitled to
the benefits defined under the plan, and correspondingly, secured by the annuities. There is no
evidence in the record and we have no basis to assume that these employees will not receive from
Prudential all of the benefits to which they are entitled. I would affirm the decision of the district
court and hold that this money represents surplus assets of a defined benefit plan, which was paid
into the trust by the employer and must be returned to the employer as trust settlor.