Bank of New York v. Janowick

• Decision Date: 22 November 2006
• Docket Number: No. 05-6456.,No. 05-6390.,05-6390.,05-6456.
• Parties: BANK OF NEW YORK, as former Trustee for National-Southwire Company Pension Plan, Plaintiff, Southwire Company, Defendant-Appellee, v. John Stephen JANOWICK, Gary Erwin, and Merl Kannapel, on behalf of themselves and as the representatives of a class of current and deferred annuitants of Prudential Group Annuity Contracts GA 5543 and GA 5542, Defendants-Appellants (05-6390), Century Aluminum Company, Defendant-Appellant (05-6456).
• Court: U.S. Court of Appeals — Sixth Circuit

470 F.3d 264

BANK OF NEW YORK, as former Trustee for National-Southwire Company Pension Plan, Plaintiff, Southwire Company, Defendant-Appellee, v. John Stephen JANOWICK, Gary Erwin, and Merl Kannapel, on behalf of themselves and as the representatives of a class of current and deferred annuitants of Prudential Group Annuity Contracts GA 5543 and GA 5542, Defendants-Appellants (05-6390),

Century Aluminum Company, Defendant-Appellant (05-6456).

No. 05-6390.

No. 05-6456.

United States Court of Appeals, Sixth Circuit.

Argued: September 18, 2006.

Decided and Filed: November 22, 2006.

COPYRIGHT MATERIAL OMITTED

ARGUED: Leon Dayan, Bredhoff & Kaiser, Washington, DC, 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. Riddle, Melissa Norman Bork, Benjamin J. Evans, Greenebaum, Doll & McDonald, Louisville, Kentucky, for Appellee.

Before: BATCHELDER and MOORE, Circuit Judges; COHN, District Judge.^*

BATCHELDER, J. (p. 274), delivered a separate dissenting opinion.

OPINION

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, 97 S.Ct. 2002, 52 L.Ed.2d 595 (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 "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, 87 S.Ct. 1199, 18 L.Ed.2d 270 (1967).

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, 106 S.Ct. 1348, 89 L.Ed.2d 538 (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...