566 F.3d 541 (5th Cir. 2009), 08-10450, Kimberly-Clark Corp. v. Factory Mut. Ins. Co.

Docket Nº:08-10450.
Citation:566 F.3d 541
Opinion Judge:DENNIS, Circuit Judge:
Attorney:Charles J. Malaret, Morgan, Lewis & Bockius, Los Angeles, CA, R. Ted Cruz (argued), Allyson N. Ho, Morgan, Lewis & Bockius, Houston, TX, for Plaintiff-Appellee. Claudia Wilson Frost (argued), Amy P. Mohan, Pillsbury, Winthrop, Shaw, Pittman, Houston, TX, Thomas Hal Cook, Robert Tate Gorman, Zelle...
Judge Panel:Before GARWOOD, DENNIS and PRADO, Circuit Judges.
Case Date:April 27, 2009
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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566 F.3d 541 (5th Cir. 2009)




No. 08-10450.

United States Court of Appeals, Fifth Circuit.

April 27, 2009

Page 542

Charles J. Malaret, Morgan, Lewis & Bockius, Los Angeles, CA, R. Ted Cruz (argued), Allyson N. Ho, Morgan, Lewis & Bockius, Houston, TX, for Plaintiff-Appellee.

Claudia Wilson Frost (argued), Amy P. Mohan, Pillsbury, Winthrop, Shaw, Pittman, Houston, TX, Thomas Hal Cook, Robert Tate Gorman, Zelle, Hofmann, Voelbel & Mason, LLP, Dallas, TX, for Defendant-Appellant.

Appeal from the United States District Court for the Northern District of Texas.

Before GARWOOD, DENNIS and PRADO, Circuit Judges.

DENNIS, Circuit Judge:

This case concerns defendant-appellant Factory Mutual's decision in October 2003 to distribute to its policyholders a $325 million membership credit that was contingent on policy renewal. Factory Mutual is a mutual insurance company1 and plaintiff-appellee Kimberly-Clark was a policyholder for almost 30 years with Factory Mutual and its predecessor company. The district court concluded that Factory Mutual breached its contract with Kimberly-Clark when it denied Kimberly-Clark its equitable share of the $325 million distribution. The district court held that because Kimberly-Clark was a policyholder and member in good-standing on the distribution's record date, Kimberly-Clark should be accorded its equitable share. We agree and AFFIRM the district court's judgment.


Factory Mutual's charter stipulates that the company, like all mutual insurance companies, will " establish and maintain a surplus against extraordinary losses and other contingencies, by appropriating from time to time such sums as the board of directors may determine" " in addition to any unearned premium or reinsurance." In accordance with the charter, Factory Mutual maintains a surplus fund that includes appropriated sums and unearned premiums to cover extraordinary losses and other contingencies. In mid-2003, Factory Mutual initiated internal discussions regarding a membership credit for

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its policyholders. One major reason for a membership credit was the unexpected growth in the surplus funds.

At about the same time, after extensive discussions with Factory Mutual, Kimberly-Clark indicated to Factory Mutual during a meeting with Factory Mutual on August 26, 2003, that it intended not to renew its policy. Kimberly-Clark's policy expired on October 1, 2003.

On October 8, 2003, Factory Mutual informed the Rhode Island Department of Business Regulation (" DBR" ) that it was planning a proposed membership credit. On October 9, 2003, Factory Mutual's Board of Directors approved the proposed $325 million membership credit. Factory Mutual publicly announced the credit on October 20, 2003. In a series of documents, Factory Mutual described the membership credit to its policyholders. Factory Mutual set eligibility for the distribution as follows: " [a]ll Factory Mutual Insurance Company policyholders ... on the date of record will be eligible to receive the membership credit when their policies renew during the membership credit period." (emphasis added). Factory Mutual thereby conditioned the distribution of the membership credit on a policyholder's future act-signing a policy renewal before the policy expired. Factory Mutual also established the " date of record" (or record date) as September 30, 2003.

In its notices to policyholders, Factory Mutual specifically linked the membership credit to its surplus growth and framed the distribution as a reward or return from that growth. In an October 20, 2003 press release, Factory Mutual stated:

Policyholders of commercial and industrial property insurer FM Global will receive a collective US$325 million in savings on their premium beginning January 1, 2004 as a result of lower than expected property losses during recent years, resulting in higher than projected surplus growth. The return will be disbursed to FM Global policyholders as a membership credit on premium for 2004 policy renewals.

(emphasis added). Factory Mutual specifically apportioned shares of the membership credit distribution based on the amount of each policyholder's premium contribution on the record date and the number of years the policyholder held a policy with the company. The distribution acted akin to a mutual insurance company's typical distribution of surplus capital as a return to policyholders in proportion to their past contributions, except that Factory Mutual's distribution was contingent on policy renewal.2

On the distribution's record date, Kimberly-Clark was a Factory Mutual policyholder in good standing, but it had decided not to renew its policy when the policy expired on October 1, 2003. Because it was a policyholder in good standing on the distribution's record date, Kimberly-Clark requested a portion of the 2004 membership credit in cash, which Factory Mutual denied. Subsequent negotiations between the parties failed to resolve the dispute. Kimberly-Clark therefore filed suit on September 30, 2005, in the 116th Judicial District Court of Dallas County, Texas,

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against Factory Mutual, alleging breach of contract, fraud, negligent misrepresentation, unjust enrichment, and violations of the Texas Insurance Code. On October 24, 2005, Factory Mutual filed a notice of removal to the United States District Court for the Northern District of Texas. On October 5, 2006, the parties entered into a joint stipulation, dismissing with prejudice the fraud and negligent misrepresentation claims along with several Texas Insurance Code claims. On December 15, 2006, both parties filed cross-motions for summary judgment on the breach of contract, unjust enrichment, and remaining Texas Insurance Code claims.

On September 21, 2007, the district court issued a Memorandum Order granting summary judgment in favor of Kimberly-Clark on the breach of contract claim awarding Kimberly-Clark $3,062,776.90 in damages. The damages reflect the share of the distribution that Kimberly-Clark would have received had it been accorded a share. The district court found that the charter of the company, the by-laws, and the policy unambiguously confirmed that Kimberly Clark " bargained for coverage by and membership in a mutual insurance company (as opposed to a stock insurance company) and all of the rights and benefits that typically accompany membership in a mutual insurance company." The district court therefore concluded that:

Thus, the Court infers that under the Policy, upon purchasing a policy and obtaining membership in the Company, a policyholder gains an interest in the surplus and has a right to its equitable share in any distribution of such surplus as declared by the Board, so long as the policyholder is a member of the company on the relevant date. Consequently, refusing to provide Kimberly-Clark its equitable share of the surplus, even though the company was a member of Factory Mutual on the record date, breaches the Policy.

Factory Mutual timely appeals on two grounds: (1) that the district court erroneously considered the plaintiff's claims within a breach-of-contract framework rather than under a corporate governance framework; and (2) if the claims are considered within a breach-of-contract framework, the district court erred in concluding that Factory Mutual breached its contract.


This court reviews a district court's grant of summary judgment de novo, applying the same standards as the district court: A party is entitled to summary judgment only if " the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." FED.R.CIV.P. 56(c). On a motion for summary judgment, the court must view the facts in the light most favorable to the non-moving party and draw all reasonable inferences in its favor. See Hockman v. Westward Commc'ns, LLC, 407 F.3d 317, 325 (5th Cir.2004). In reviewing the evidence, the court must therefore " refrain from making credibility determinations or weighing the evidence." Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir.2007).


I. Kimberly-Clark's claims are properly analyzed under contract law

Factory Mutual contends that Kimberly-Clark's claims for a portion of the surplus distribution implicate corporate governance law, specifically the " business

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judgment rule," 3 and therefore should not be considered under a breach-of-contract framework. This choice between viewing a mutual insurance policyholder's claims as a matter of contract or as a matter of internal corporate governance originates with the policyholder's dual roles vis-a-vis the mutual insurance company: the policyholder is both an insured customer and also a controlling member of the insurer-company. See, e.g., Keystone Auto. Club Cas. Co. v. Comm'r, 122 F.2d 886, 889-90 (3d Cir.1941); Ohio Farmers Indem. Co. v. Comm'r, 108 F.2d 665, 667 (6th Cir.1940); Hutchins Mut. Ins. Co. of D.C. v. Hazen, 105 F.2d 53, 57 (D.C.Cir.1939). Kimberly-Clark's claims against Factory Mutual can be framed as either a breach of Kimberly-Clark and Factory Mutual's contractual relationship or as Kimberly-Clark's disagreement with other co-members about corporate governance and internal affairs.

Kimberly-Clark's underlying claims allege that Factory Mutual improperly denied Kimberly-Clark's right, or eligibility, to a share of an announced surplus disbursement. Courts clearly consider a policyholder's right to a share of a surplus distribution as a matter governed by...

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