“Mutu al insurance, a s its nameimplies, exi sts whereseveral pe rsons have j oin ed 1 togethe r forth eir united protect io n, eachmembe r co ntributing to a fund for the pay ment of the losses and exp en s es . Un der such an organi zation , each member is in a se nse bothan insured and an insurer . . . Th e policyhol ders in a mutual are e quivalent tostockholde rs ina st ock c orpo rationinsof ar a s rightsan d re me di esarec once rn ed
. Lik e st ockh ol de rs , policyholde rs participate in the operationof t he mutu al thro ugh vo ting ri ghts, an d share in th e co mp a ny’sf

in a nci al su cc es s or failure .” L EE R USS & T H OM AS S EG ALLA , 3 C OUC H ON I NS . § 3 9 :1 5( 3 d ed
. 2 0 0 8) (f oo tnot eso mitt ed); see a lso Heritage Healt hcare Servs ., I nc. v. Beacon Mut. Ins. Co., No. C .A. 02-7 016 , 2 0 0 4WL2 5 3 5 4 7 , at* 4(R
. I
. S u p e r . C t
. J a n . 2 1 , 2 0 0 4) 1 

### INTHE UNI TED S TATESCOU RT OFAPPEALS

FORTHE FIFTH CIRCU IT

N o. 08- 10450

KI M BE RL Y

- CL AR K C OR P OR AT I ON P l ai n t i f f - A pp el l ee v. F AC T OR YMUTUA L I NS URA NCE C OMPA NY D e fe nda nt- Appe l l ant
A pp ealf

rom t h e U n i t ed S t ates D i st ri ctC ou rt f ort he N or t her n D i st r i c tof Texas

B e fo r e G A R W O O D , D E N N IS , a n d P R A D O , C ir c u it J u d g e s . D E N N IS, C i rcui tJu dg e: T h is ca s e co n c e r n s d e fe n d a n t-a p p e lla n t F a c to r y M u tu a l ’s d e c is io n in O c to b e r2 0 0 3 to d is tr ib u te to its p o lic y h o ld e r s a $ 3 2 5 m illio n m e m b e r s h ip cr e d it t h at w as conti n gen ton p ol i cy renew al
. F act ory M u t u ali s a m u t u ali n suran ce com pa n y an d p l ai n t i f f

- ap pel l ee K i m berly-C la rk w as a pol i cyholder f or al m ost 1 United States Court of App eals Fifth Circuit 

### F I L E D April 27, 2009 Cha rl es R. F ulb ru g e II I Clerk(u npub li sh ed) (s a me). 2

30 yea rs w i t h F a cto ry M u t u alan d i t s predecessorcom pa n y. T h e di st ri ctcourt concl u ded t h at Fa ct ory M u t u alb reached it s c on t ractw i t h K i m berl y- C l ark w h en i tde ni e d Ki m be r l y- Cl ar k i t s e qui t ab l e s har e o f t he $ 32 5 m i l l i o n di s t r i but i o n. The di s t r i c tc o ur the l d t hatb e c aus e K i m be r l y- Cl ar k was a po l i c yho l de ra nd
m em ber i n good-s t an di n g on t h e di st ri b u t i on ’ s r ecord date, K i m berl y- C l ark shou l d be accorded i t s equit able sha re. W e a gree an d A F F IR M t h e di st ri ct
cou rt’ s j u d gm en t. BA CK GRO UND Fact or y M ut ual ’ s c hart ersti p u l at es t hat t he c om pany, l i ke al lm ut ual i n suran ce c om pa n i es, w i l l“ est ablish an d m ai n t ai n a surpl u s agai n st
e x tr a o r d in a r y lo s s e s a n d o th e rco n tin g e n c i es, b y a p p ro p r ia tin gfr o m tim e to tim e such sum s as t h e board of di rect ors m ay d et erm i n e” “ i n add i t i on t o an y u n earn ed pre m i um o r r ei nsur ance . ” I n ac c or dance w i t h t he c hart er , Fact or y M ut ual
m ai n t ai n s a surpl u s f u n d th a t in cl u des ap propri ated sum s and un earn ed pre m i um s t o c ove rex t r aor di nary l os se s and ot herc ont i ngenci es . I n m i d- 2003, F act ory M u t u ali n i t i at e d i n t erna ldi scussi on s r egard i n g a m em bershi p credi tf or i t s pol i cyholders. O n e m aj or r eason f or a m em bershi p credi tw as t h e un exp ect ed g r o w th in th e s u r p lu s fu n d s . A t a b o u t th e s a m e t im e , a fte re x te n s iv e d is c u s s io n s w ith F a c to r y M u tu a l, K i m berl y- C l ark i n di cat ed to F act ory M u t u aldu ri n g a m eet i n g w i t h F act ory M ut ualon Au gust26, 2003, t hat i ti nt ended nott o r enew i t s pol i c y. K i m ber l yC la r k ’ s p o lic y e x p ir e d o n O c to b e r1 , 2 0 0 3
. O n Oct o be r8 , 2 00 3, Fac t o r y M ut uali nf o r m e d the Rhode I s l and D epa rt m en tof

B u si n ess R egu l ati on ( “ D B R ” ) t h at i tw as pl an n i n g a prop osed
m em bershi p credi t
. O n O ct ober 9 , 2 003 , F act ory M u t u al ’ s B oard of D i rect ors3

a p p r o v e d t h e p r o p o s e d $ 3 2 5 m i l l i o n m e m b e r s h i p c r e d i t . F a c t o r y M u t u a lp u b l i c ly
a n n o u n ce d t h e cr edi ton O ct ober 20, 200 3. I n a ser i es of docum en t s, F act ory M u t u aldescribed t h e m em bershi p credi tt o i t s pol i cyholders. F act ory M u t u alset el i gi bi l i t y f

or t h e di st ribu t i on as f ol l ow s: “ [ a] l lF act ory M u tu alI n suran ce C o m p a n y p o lic y h o ld e r s . . . o n t he dat e of r e c o r d w i l lb e eli gi bl e t o r e c e i ve t he
m e m b e r s h ip cr e d it w h e n th e irp o lic ie s re n e w d u r in gth e m e m b e r s h ip cr e d it peri od. ” ( em ph asi s add ed). F act ory M u t u alt h ereby cond i t i on ed the di st ribu t i on of t h e m em bershi p credi ton a p ol i cyho ld e r’s f u t u re act- - si gn i n g a poli cy renew albef

ore t h e p ol i cy ex pi red. F act ory M u t u alal so es t abli shed t h e “ da t e of
r e c o r d ” (o rre c o r d d a te ) a s S e p te m b e r3 0 , 2 0 0 3
. I n i t s no t i c e s t o po l i c yho l de r s , Fac t o r y M ut ualspe c i f i c al l y l i nke d t he
m em bershi p credi tt o it s su rpl u s grow t h an d f ram ed the di st ribu t i on as a rew ard
or r et u rn f

rom t h at gr ow t h
. I n an O ct ober 20, 200 3 pr e ss rel ease, F act ory M u tu a l s ta te d : Po l i c y ho l d e r s o f

c o m m e r c i a la nd i nd us t r i a lp r o p e r t y i ns ur e rFM G lo b a l w ill re c e iv e a co lle c tiv e U S $ 3 2 5 m illio n in s a v in g s o n th e ir p r e m i um b e g i nn i ngJ a nu a r y 1 , 2 0 0 4 as a r e s ul tof lo w e rt han e x pe c t e d pr o

pe r ty lo s s e s dur i ng r e c e ntye ar s , re s ul t i ng i n highe rt han p ro jecte dsu rp lu s g ro w th
. Th e re t urn w i l lbe di sb urs ed t o FM G l obal pol i cyholders as a m em bershi p credi ton p rem i u m f or 2 0 0 4 poli cy renew al s. ( e m pha s i s a dde d)
. Fac t o r y M ut uals pe c i f i c al l y ap po r t i o ne d s har e s o f t he
m e m b e r s h ip c r e d it d is t r ib u t io n b a s e d o n th e a m o u n to f e a c h p o li c y h o ld e r ’s pr e m i um c o nt r i bu t i on o n t he r e c o r d d at e a nd t he num be ro f y e ar s t he pol i cyholder hel d a p ol icy w i t h t h e com pa n y. T h e di st ribu t i on act ed ak i n t o a m u t u ali n suran ce com pa n y’ s t yp i caldi st ribu t i on of surpl u s c ap i t alas a ret u rn t o pol i cyholders i n proporti on to t h ei r pastcontr i bu t i on s, except t h at Fa ct orySee, e.g. , I nre Me tL if

e Dem u t u al izat io nL it ig
. 4 9 5F
. Supp . 2 d 310, 313 ( E .D. N. Y. 2 200 7) (“A mutual insur anc e company’s role with respect to its policyhol ders is to apportionth e company’s surplu s -- cr eate d inpart fro m thepayment of pre miums paid byth e policyhol ders

-- e quit ab lya mo n gp olicyh ol de rsinp ro po rtio n t o t heir co ntrib ution s th er eto. ”) ; RUSS & S EG ALLA , 3 C OUC H ON I NS . § 3 9:18(“As a ge neral rule , th e ‘ surplu s’ of a mutual c ompany belong s equitablyto the policyholde rs who contributed to it, in the p roportioninwhich they co ntrib ute d. ”)
. 4 M u tu a l’ s d is tr ib u tio n w a s co n tin g e n t o n p o lic y re n e w a l. 2 O n t he di st r i but i on’ s r ec or d dat e, K i m ber l y- C l ar k w as a Fac t or y M ut ual po l i c yho l de ri n g o o d s t and i ng, but i t had de c i de d no tt o r e ne w i t s po l i c y w he n t he po l i c y e xp i r e d o n Oct o be r 1, 20 03
. Bec aus e i t w as a po l i c yho l de ri n g o o d s t and i ng on t he di st r i but i on’ s r ec or d d at e, K i m ber l y- C l ar k r eques t ed a por t i on o f t he 2004
m e m be r s hi p c r e di ti n c as h, w hi c h Fac t o r y M ut ualde ni e d. Sub s e que nt
n egoti ati on s bet w een t h e parti es fai l ed to resol ve t h e d i spu t e. K i m berl y- C l ark t h eref ore f i l ed su i ton S eptem ber 30, 200 5, i n t h e 116 t h Ju di ci alD i st ri ctC ou rt of D a l l a s C ou n ty, T ex a s, ag a i n st F a ctory M u tu a l, a l l eg i n g b rea ch of con tract, f r aud , ne gl i ge ntm i s r e pr e s e nt at i o n, unj us te nr i c hm e nt , a nd v i o l at i o ns o f t he T exas Insu ran ce C ode. O n O ct ober 24, 200 5, F act ory M u tu alf i l ed a n ot i ce of
rem oval t o t h e U n i t ed Stat es D i st ri ctC ou rtf or t h e N ort h ern D i st ri ctof T exas. O n O ctob er 5 , 20 0 6 , the pa rti es e n tered i n to a joi n t st i p u l a ti on , dism i ssing w i th prej udi c e t he f

r aud and negl i gent m i sr epr es ent at i on c l ai m s al ong w i t h se ver al T exas Insu ran ce C ode cl ai m s. O n D ecem ber 15, 200 6, both parti es f i l ed cross

m oti on s f

or su m m a ry j u d gm en t o n the bre a ch of con tract, u nj u st en ri ch m en t,
a n d re m a in in gT e x a s In s u r a n c e C o d e cla im s . O n S e p te m ber 21, 200 7, t h e di st ri ctcourti ssued a M em oran du m O rder gran t i n g sum m ary j u dg m en ti n favor of K i m berl y- C l ark on t h e b re a ch of
c o nt r ac tc l ai m a w ar di ng K i m be r l y- Cl ar k $ 3, 06 2, 77 6. 90 i n da m ag e s . The dam ages r ef

l ec tt he s hare of

t he di st r i but i on tha t K i m ber l y- C l ar k w oul d have received ha d i t been accorded a sha re. T h e di st ri ct court f ou n d t h at t h e charter5

of t he c om pany, t he by- l aw s, and t he pol i c y u n a m bi guousl y c onf i r m ed t hat K i m ber l y Cl ar k “bar gai ned f orc ove ra ge by and m em ber shi p i n a m ut ual i ns ur anc e c o m pa ny ( as o ppo s ed t o a sto c k i ns ur anc e c o m pa ny) a nd a l lo f t he ri gh t s and ben ef

i t s t h at t yp i cal l y accom pa n y m em bershi p i n a m u t u ali n suran ce c o m p a n y .” T h e d is tr ic t c o u r t t h e r e fo r e co n c lu d e d th a t: Th us, t he C our ti nfer s t hat unde r the Pol i c y, upon purc hasi ng a p o li cy an d obtai n i n g m em bershi p i n t h e C om pa n y, a pol i cyholder g a i n s a n in te r e s t in th e s u r p lu s a n d h a s a rig h t t o its e q u ita b le s har e i n a ny di s t r i but i o n o f s uc h s ur pl us a s de c l ar e d by t he Boa r d, s o long as the po l i c yho l de ri s a m e m be ro f t he c o m pa ny o n t he relev a n t da te. C on seq u en tl y, ref u sing to p rov i d e K i m b erly-C l a rk i ts equ i t able sha re of th e surpl u s, even t h ou gh t h e com pa n y w as a m em berof

Fact or y M ut ualon t he rec or d d at e, brea c hes the Pol i c y. F act ory M u t u alt i m el y ap pea l s on t w o grou n d s: (1 ) t h at t h e di st ri ctcourt
erroneou sl y con sid ered t h e pl ai n t i f f ’ s c l ai m s w i t h i n a breach-of

- contract f r am e w o r k r at he rt han unde ra c o r po r at e g o ve r nanc e f r am e w o r k; a nd ( 2) i f t he cl ai m s are consi dered w i t h i n a b reach-of

- contractfr am ew ork, the di st ri ctcourt
e r r e d in co n c lu d in gth a t F a c to r y M u tu a l b r e a c h e d its co n tr a c t. S TA NDARD OF RE VI EW T h i s cou rt review s a d i stri ct co u rt’ s gra n t of su m m a ry j u d gm en t de no vo , a p p l yin g th e sa m e sta n d a rd s as the distri ct cou rt: Apa rty is en ti tl ed to
s u m m a r y ju d g m e n t o n ly if “th e p le a d in g s , th e d is cov eryan ddiscl osu re m a te r ia ls on f i l e, and any af

f i davi t s sho w t hat t her e i s no genui ne i ss ue as t o a ny m at er i al fact an d tha t t h e m ov a n t i s en ti tl ed to j u d gm en t as a m a tter of l a w . ” F ED . R. C IV . P . 5 6 (c ). O n a m o tio n fo rs u m m a r y ju d g m e n t, th e co u r t m u s t v ie w th e fa c ts in th e lig h t m o s t fa v o r a b le to th e n o n -m o v in gp a r ty a n d d r a w a ll re a s o n a b le in fe r e n c e s in its fa v o r . Se e Ho c k m a n v . W e s t war d Co m m c ’

ns , LLC , 407 F. 3d 317, 3 2 5 (5 th C ir
. 2 0 0 4 ). In r e v ie w in g th e e v id e n c e , th e c o u r t m u s t t h e r e fo r e “r e fr a in from m a k i n g cre d i b i l i ty d eterm i n a ti on s or w eigh i n g th e ev i d en ce.” Turne rv.“Th e pr ecise cont ent of th e Busin ess Ju dgment Ruleis provided bys t ate law b ut, 3 ge nerallyspeaking , ‘[u]nder this famili ar rul e of American jurispru dence , th e courts refr ain fromse co n d gu es sin gb u siness de ci sion s m a deb yc orpo ratedir ecto rsinth e ab se nceo f a showin g of fraud, unfairness or ove rreaching .’” Hoff ma nv. K

ra me r, 362F .3d 3 08, 317n .4 (5 th Cir. 2004) (qu oti ng Cap italBancsh ares, Inc. v. F.D .I. C. , 9 5 7F .2 d 2 0 3 , 2 0 7( 5 thC ir
. 1 992)) (alt er ationino ri gin al)
. 6 B aylorR i cha rdson Med. C t r. , 4 7 6 F .3d 3 3 7 , 3 4 3 (5t h C ir. 2 0 0 7 ). A N A L Y S IS I . K i m ber l y- C l ar k’ s cl ai m s ar e pr oper l y anal yze d un der co nt r actl aw Fac t o r y M ut ual c o nt e nds t hat K i m be r l y- Cl ar k’ s c l ai m s f o ra po r t i o n o f

t he surplus di s t r i but i o n i m pl i c at e c o r po r at e g o ve r nanc e l aw, s pe c i f i c al l y t he

“bu si n ess j u dg m en trul e, ” an d theref ore s h ou l d n otbe consi dered u n der a 3 breach

- of

- contractf

ram ew ork. T h i s choi ce betw een vi ew i n g a m u t u ali n suran ce p oli cy h olde r’ s cl a i m s a s a m a tter o f con tract or a s a m a tter o f i n tern a lcorp ora te gov er nance or i gi nat es w i t h t he pol i c yhol der ’ s d u alr ol es vi s- a- vi s t he m ut ual i n suran ce c om pa n y: t h e pol i cyholder i s bot h an i n sur e d c u stom er and al so a c o n tr o llin gm e m b e ro f th e in s u r e r -c o m p a n y . See , e . g. , K eyst on e A u t o. C l u b C as. C o . v . Co m m ’

r, 1 2 2 F .2 d 8 8 6 , 8 8 9 -9 0 (3 d C ir . 1 9 4 1 ); O hi o Farm e r s I ndem
. Co. v. C o m m ’ r, 1 0 8 F .2 d 6 6 5 , 6 6 7 ( 6 t h C ir . 1 9 4 0 ); H ut c hi ns Mut
. I ns. Co. of

D
. C

. v. Ha z e n , 105 F
. 2d 53, 57 ( D
. C
. C i r . 1 93 9)
. K i m berl y- C l ark’ s c l ai m s agai n stF act ory M u t u alcan be f

ram ed as ei t h er a breach of K i m berl y- C la rk a n d F act ory M u tu a l ’ s con tractu a lrelati on sh i p o r as K i m b erly-C l a rk ’ s d i sa gr ee m en t w i th
o th e rco -m e m b e r s a b o u t c o r p o r a te g o v e r n a n c e a n d in te r n a l a ffa ir s . K im b e r ly -C la r k ’ s u n d e r ly i n gc la im s a lle g e th a t F a c to r yM u tu a l im p r o p e r ly de ni e d Ki m be r l y- Cl ar k’ s r i ght , o re l i gibi l i t y, t o a sha r e o f a n a nno unc e d s ur pl us di sbu rsem en t
. C ou rt s c l earl y consi der a pol i cyholder’ s r ightto a sh a re of a surplus di st ribu t i on as a m att er governed by contractl a w w h e reas a po l i c yho l de r ’ s g r i e va nc e s w i t h a s ur pl us di s t r i but i o n’ s “ t i m i ng, a m o unt , a ndI n its a dmis s io ns belo w, FactoryMutu al describ es th e corporate b oard as h aving 4 “discretion to determine the time, amou nt and metho d of distrib utio n of th e m ember ship credit.” In Lop ez

v . State F

ar m M u t u al A utomo b ile I

nsu ra n ceC

o. , 200 8 WL 274 460 9, at *4 5 (Tex . App.-Corpus C hri sti June30 , 20 08) (unpubli shed), a T ex as C ourtof Appe als inan unp ublishe d decisionc ontrasted the policyholde r’s co ntractual right to participate in a n n ounce d divid en dsan d th e co rp or ateb oard’sdis cr etio noverth e distrib utiono f thos e divid en ds : (1 ) “M utu al in surancep olicyh ol de rsdo n otp urch a seth e ri ght tor ec eive divid en ds , only the right to participate in dividen ds, if any , on terms and con ditio ns fixe d byth e b oard” and (2) “Th e relations hi p b et ween a mutual insurance company and its policyhol ders i s co ntr a ctu al, notf

idu ci ary , a n d th e in sure r ow esno duti es to th e po licyh ol de rs oth er th a nth os e st ate d inth e po licy .” 7 m et h od” are c orporate gover n an ce m att ers an d thereby i n sul ated f rom m ost 4 p o lic y h o ld e r la w s u its b y th e b u s in e s s ju d g m e n t r u l e . S ee E q u ita b le L ife A s s u r a n c e S o c ie ty of th e U.S . v . B r o w n , 2 1 3 U .S
. 2 5 , 4 7 (19 0 9 ); Br o w n v . Roy al H ig h la n d e r s , 299 N
. W
. 467 , 471 (N e b . 1 9 4 1 ); seeal so P r u d e n t i a lI n s . Co . of

A m. v. Mi l l er B rew i ng C o. , 7 8 9 F .2d 1 2 6 9 , 1 2 7 9 (7t h C ir. 1 9 8 6 ); A n d re w s v . E q u ita b le L ife A s s u r a n c e S o c . of U.S ., 124 F. 2d 788, 7 8 9 (7 th C ir . 1 9 4 1 ); B oy n ton v. S ta te F arm Mu t
. A u t o. I

n s. Co. , 4 2 9 S .E .2 d 3 0 4 , 3 0 7 (G a . C t. A p p . 1 9 9 3 ); G r e ef f v. E q u ita b le L ife A s s u r a n c e S o c . of U.S ., 5 4 N .E
. 7 1 2 , 7 1 5 (N .Y
. 1 8 9 9 ). 5 The pa r t i e s do no t di s put e t he pr o pr i e t y o f t he t i m i ng o r am ou n t of t he di st ribu t i on , bu tF act ory M u t u alcontends that i t s c orporate deci si on s i n res pect t o a pol i c yhol der ’ s el i gibi l i t y f ora sur pl us di st r i but i on s houl d be c ons i der ed as p a r t o f its d is c r e tio n o v e rth e “m e th o d ” o f a s u r p lu s d is tr ib u tio n . A t is s u e in th is case i s w h et h er F act ory M u t u al ’ s “ m et h od” of di st ribu t i on di scr i m i n ates aga i n st a pa rt i cul ar subset of pol i cyholders becau se t h ey chose not t o renew t h ei r pol i ces bu tw ere ot h erw i se i n good st an di n g a n d h ad contr i bu t ed to t h e surpl u s. Su ch di s c r i m i nat i o n woul d b e c l e ar l y o ut s i de o f t he b o ar d’ s di s c r e t i o n o ve rs ur pl us di s t r i but i o ns be c aus e i t w o ul d c o nt r av e ne s t at e po l i c y and i s t he r e by not p r o te c te d b y th e b u s in e s s ju d g m e n t r u le
. S ee N.Y. L ife In s . Co . v . S tr e e t, 265I n its b riefs, FactoryMutu al empha size s the fact that this case must b e de cided und er 6 Rhode Isl and and not Tex as law. However , Factory Mutual also conc edes in its b riefs and in oralar gu ment that T ex as and Rhode Isl and’ s formulations of th e b usin ess j udgment rul e do n otc onflict. C

om pa reC atesv . S pa rk ma n, 1 1 S. W. 8 4 6 , 8 4 9(T ex . 1 8 8 9) with Lyn ch v. Jo hn W. Ke n n ed y C o. , No. PB03 -335 5, 2 005WL15 304 69, at *6 (R.I . Super. C t. J une23, 20 05) (unpubli shed) (announcin g simil ar formul atio ns of th e b usin ess j udgment rul e). Factory Mutual i s corr ect that co rporate governance issues must b e a dju dicated u sing the law of the st ateo f inco rp or ation , inthisc a se , Rh od e I sl a n d. SeeAskanas e v. F at jo, 130F .3d 6 57, 670(5th Cir. 1 997). However, b ecau se th e b usin ess judgment rul es for Rhode I slan d and T ex as donot co nflict, thisc ourtn ee d n otu n de rt akeach oice -o f- law an aly si s. See Ra il roa d Mgmt. Co., L.L.C. v. CF S La. Midst ream C

o. , 428 F.3d 21 4, 222(5th Cir. 20 05) (“Wh ere ther e are no differe nces betwee n the relevant substantive l aws of the respective states, th ere is no co nflict, and a c ourt nee d not undert ake achoiceof law analysis.”). The parti es also d o not disputeth at the pertin ent rul es u nder Tex as and Rhode Isl and contract law applicab le to this case are not in conflict. Ac c o r di n gly , w eal s on e e dno te n ga geinach o ic e - o f

- l aw a n aly s i sf o rth ec o ntract cl aim s. 8 S .W
. 3 9 7 , 4 0 2 -0 3 (T e x . C iv . A p p . 1 9 2 4 ); T EX . I NS
. C ODE § 5 4 4 .0 5 2 ; R HODE I SLAND G EN . L AWS§ 2 7- 8- 4 ( de scr i bi n g s t at e po l i c y ag ai ns tdi s c r i m i nat i o n a m o ng i n sureds of

t h e sam e cl ass)
. T h e q u est i on p resented to u s i s theref ore: w h et h er F act ory M u t u al ’ s di scr i m i n ati on breaches K i m berl y- C l ark’ s r i gh tt o a di s t r i but i o n s har e i f

o t he rpo l i c y- ho l de r s , w i t h m a t e r i a l l yi d e n t i c alc o nt r ac t s a nd
m at er i al l y i dent i c alr i gh ts t o a s hare , had r ec ei ved t hei rs hare s. A c c or di ngl y, K i m berl y- C l ark’ s c l ai m s f or a di st ribu t i on share m u stbe an al yzed u n der a breach

- of

- contractrubri c and not un der t h e bu si n ess j u dg m en trul e. 6 II . F a c to r y M u tu a l b r e a c h e d its c o n tr a c t w ith K im b e r ly -C la r k w h e n it deni ed K i m ber l y- C l ar k i t s s hare of t he s urpl us di s t r i but i on The po l i c y c o nt r ac t i s c l e ar l y l ab e l e d a “ m ut ual i ns ur anc e ” c o nt r ac t
. The pol i cy i s s i l en tas t o t h e board ’ s di scr et i on over t h e di st ribu t i on of excess surplus, but st at es t hat “ [ t ] hi s pol i c y i s i ss ued by a m ut ual c om pany havi n g sp eci al regulat i on s la w f

u l l y ap pl i cabl e t o i t s or gan i zati on , m em bershi p, pol i ci es, or contract s of

i n suran ce. ” I ta l so stat es that “[ t ] h e insured b y accepti n g t h i s pol i cy h ere b y b eco m es a m em b er of th i s C om p a n y an d su b j ect to th e pro visi on s of i ts cha rt e ra nd b y- l aws, w i t h po w e rt o v o t e a ti t s m e e t i ngs . ” Se c t i o n 5 o f Fac t ory9

M u tu a l’ s C h a r te rs ta te s : [ E ] ac h nat uralp e r s o n, par t ner shi p, as so c i at i on, c or por at i on o rl egal en tity in sured on t h e m u t u alpl an by the C orporati on shallbe a m e m ber of th e Cor po r at i o n du r i ng t he t e r m o f i t s po l i c y, b utno l o nge r , a nd at al lm e e t i ngs o f t he m e m be r s s hal lb e e nt i t l e d t o o ne vote ei t h er i n person or by proxy; prov ided, how ever, t h at w h ere th e r e is m o r e th a n o n e in s u r e d u n d e ra n y p o lic y , su c h in s u r e d s s h a ll n evert h el ess be deem ed to be a si n gl e m em ber of t h e C orporati on f

or a ll pu rposes . Th e C orporati on m ay i ssue pol i ci es w h i ch do n ot en ti tl e th e insu red to m e m b ersh i p i n the C orp ora ti on n or to pa rt i ci pa t e i n i t s s u rpl u s. ( em ph asi s add ed). F i n al l y, sec t i on 10 of F act ory M u t u al ’ s c h art er s t ates: “ U pon t erm i n ati on of

t h e m em bershi p of

an y m em ber, al lhi s or i t s r i gh tan d i n t erest i n the su rp l u s , r e serv es a n d oth er a sse ts of th e C orp ora ti on sh a l lf orth w i th
c eas e. ” I n sum , Fact or y M ut ualand K i m ber l y- C l ar k’ s c ont r ac t( 1) i s a “ m ut ual i n su ra n ce” p oli cy ; ( 2 ) a ck n ow l ed ge s th e “sp ecial regu l a ti on s” ap p l ic a b l e to
m u t u ali n suran ce c om pa n i es; an d ( 3) gran t s pol i cyholders an enti t l em en tas a m e m be rfo r“ al lpur po s e s , ” w hi c h i nc l ude s ( 4) r i ght s a nd i nt e r e s t s i n t he s ur pl us unt i lt he po l i c y’ s t e r m i nat i o n ( unl e s s t he po l i c y s t at e s o t h e r wi s e , w hi c h i s no tt he
c a s e h e r e ). Cour t s c o ns i s t e nt l y de s c r i be “ m ut uali ns ur anc e ” c o nt r ac t s a s c r e at i ng c e r t a i n s e t t l e d e x p e c t a t i o n s b e t w e e n t h e p a r t i e s . A s t h e Wi s c o n s i n S u p r e me Cour tno t e d: E very pol i cy- h old e r [ of a m u t u ali n suran ce c om pa n y] kn ow s, or o ugh tt o kno w , t hathe w i l lr e m ai n a m e m be rs o l o ng as he r e m ai ns a pol i c y- hol derand no l onger . H e know s, orought t o know , t hat as soon as h i s m e m bershi p rel ati on i s es t abli shed he becom es po s s e s s e d o f

a n e qui t ab l e i nt e r e s ti n t he a s s e t s o f t he c o m pa ny c ons i st i ng of

al lac c um ul at i ons pr i ort o hi s t i m e, and s uch as m ay be ad ded thereto du ri n g h i s m em bershi p, bu tw h i ch can n otbe real i zed o n i n pos s e s s i o n i n t he a bs e nc e o f a ne c e s s ar y di s t r i but i o n o f t he s u r p l u s o n a c c o u n to f t h e c o mp a n y g o i n go u to f b u s i n e s s , o ri n s o me p r o p e rw a y .10

H u b e rv . Ma r tin , 1 0 5 N .W
. 1 0 3 1 , 1 0 3 9 (W i s . 1 9 0 6 ); seeal so Fid. & C as. Co. of N.Y . v . Met ro. L if

e I n s. Co. , 2 48 N
. Y. S. 2d 5 59 , 5 65 ( N
. Y. Sup. Ct
. 1 96 3)
. The Supr e m e Cour ti n Penn syl van i a M u t u al L if e I n suran ce C o. v. L edererdescribed th e m u tu a l co m p a n y in th is w a y : I n a m ut ualc o m pa ny, w hat e ve rt he f i e l d o f i t s o pe r at i o n, t he pr e m i um ex ac t e d i s nec e s s ar i l y gr e at e rt han t he e xp e c t e d c o s to f t he i ns ur anc e , a s t he r e dund anc y i n t he pr e m i u m fur ni s he s t he g u a r a n ty fu n d o u t o f w h ic h e x tr a o r d in a r y lo s s e s m a y b e m e t, w h ile i n a st ock com pa n y t h ey m ay be m etf rom t h e capi t alst ock sub scr i bed
. I ti s of

t h e ess en ce of

m u t u ali n suran ce t h at t h e excess i n t he pr em i um ov ert he ac t ualc os tas l at eras c er t ai ned s hal lbe r e tu r n e d to th e p o lic y h o ld e r . 2 5 2 U
. S
. 52 3 , 52 5 ( 1 9 2 0 ); seeal so Nat’ lC h i ropract i c I

n s. Co. v. Un i t ed S t ate s, 4 9 4 F .2 d 3 3 2 , 3 3 4 (8 th C ir . 1 9 7 4 ); T h omp son v. W

h it e R iver B u rial A ss’ n , 178 F .2 d 9 5 4 , 9 5 7 (8 th C ir . 1 9 5 0 ); K ey sto n e M u t. C a s. Co . v . D ris co ll , 137 F. 2d 907, 911 (3d C i r. 1 943 )
. B asi cal l y, the set t l ed exp ect ati on s w h en enteri n g a contract
w i th a m u tu a li n su ra n ce co m p a n y a re: (1) th e p oli cy h olde rs p a y p rem i u m s i n to
a com m on f

u n d to cover c on t i n gen ci es, an d ( 2) i f t h ere i s an accum u l ated excess
o f ca p ita l be y o n d w h a t is n e ce ss a ry to c o v e r co n tin g e n cie s (i. e ., ex ce ss su rp lu s), t he i ns ur anc e c o m pa ny r e t ur ns t he e xc e ss i n sur pl us di s t r i but i o ns t o t he p o li c y h o l d e r s . T h is e s s e n t ia l a s p e c to f t h e m u t u a l in s u r a n c e c o m p a n y ’s rel ati on shi p w i t h i t s pol i cyholders i s s o- cal l ed i n suran ce atact u alcos tor “i n su ra n ce a t cost. ” S e e W h ite R iv e rB u r ia l A s s ’ n , 178 F. 2d at957 ( “ To sa y t hat
an ess en t i alof

m u t u ali n suran ce i s t h at t h e e x ce ss of prem i u m s r ecei ved over t h e act u alcostof i n suran ce sh al lb e returned to the pol i cyholders i s but another
w ay o f s ayi ng t hat t he e ss ent i alof m ut ual i t y i s i n sur ance atc os t
. ” )
. W e have
s t at e d t hat“ [ t ] he f

ur ni s hi ng o f

i ns ur anc e t o m e m be r s a tc o s ti s t he c hi e f a i m a nd f u n ct i on of

a m u t u ali n suran ce c o m p a n y , an d an y com pa n y w h i ch does n ot ret u rn to t h e pol i cyholders or m em bers t h e excess of t h e prem i u m over t h e cos t11

ca n n ot be said to be a m u tu a l in s u r a n c e com p a n y.” A m . I ns. Co. of

Tex. v. T h o m a s , 1 4 6 F
. 2 d 43 4 , 43 6 ( 5 th C i r. 19 4 5 ). T e x a s cou rts also ag ree w i th describi n g t h e m u t u al i n suran ce com pa n y’ s pu rpose as provi di n g pol i cyholders in s u r a n c e “a t c o s t.” S e e Me r c u r y L ife & He a lth C o . v . H ug h e s , 271 S. W
. 2d 842, 845 ( T ex. C i v. A pp . 195 4) ( “ W h i l e t h e [ m u t u alinsuran ce] pol i cyholders do n ot
r e c e i ve divi de nds , t he y ge to t he r e qua l l y va l uab l e be ne f i t s . I t i s t he dut y o f

t he di rect ors t o operate t h e com pa n y as econom i cal l y as possible an d f u rni sh i n su ra n ce to i ts po l i cy h ol d ers a s n ea r actu a lcost as po ssible. ”)
. O t h er authori t i es unan i m ous l y agr ee i n des c r i bi ng t he pu r pos e of a m ut uali nsur ance c om pany as p rov i d i n g in su ra n ce “at cos t. ” See , e . g. , Mut
. Fi r e I ns. Co. of

G e r m ant ow n v. Un ite dS ta te s , 1 4 2 F .2 d 3 4 4 , 3 4 7 (3 d C ir . 1 9 4 4 ); Fi d. & C as. C o . of N. Y. , 248 N
. Y. S. 2d a t5 66 ( “ The di s t r i but i o n o f divi s i bl e s ur pl us i s i n r e al i t y an adj us t m e nt
o f th e p r e m iu m in re tr o s p e c t o f t h e a m o u n t fo u n d to h a v e b e e n a c tu a lly
n ecess ary t o cover t h e conti n gen ci es w h i ch m ater i a li z e d an d i tef fect s a r e d u c tio n i n t h e c o s t o f th e in s u r a n c e .”); D ryden v. S u n L if e A ssuran ce C o. of Can. , 7 3 7 F . S u p p . 1 0 5 8 , 1 0 6 2 -6 3 (S .D . In d . 1 9 8 9 ); C

. J
. S i mo n s & Co . v . A m. Mu t. L ia b . In s . Co ., 2 5 7 A .2 d 7 4 3 , 7 4 5 (N .J . S u p . C t. 1 9 6 9 ); McQ u ad e v. T h ach er, 1 9 8 N .Y .S .2 d 7 1 5 , 7 1 8 (N .Y . S u p . C t. 1 9 6 0 ). S ee g en er a lly R USS & S EGALLA , 1 C OUCH ON I NS
. § 1: 32 ( “ T h e obj ect[ of m u t u al i n suran ce] i s t o provi de i n suran ce p r o te c tio n a t c o s t.” ). C on sequ e n tly , becau se t h ey contract ed f or “ at c ost ” i n suran ce, pol i cyholders w h o contribu t e t o a surplus are equ i t ably “ en t i t l ed” t o a share of
an y an n ou n ced surplus di st ribu t i on as a proport i on ate r et u rn on t h e i r pri or c o n tr ib u tio n s to th e a c c u m u la te d ca p ita l s to c k
. S ee, e . g. , In re MetL ife D e m u tu a liz a tio n L itig
. 4 9 5 F . S u p p .2 d 3 1 0 , 3 1 3 (E .D .N .Y . 2 0 0 7 ); R USS & S EGALLA , 3 C OUCH ON I NS
. § 39: 18 ( “A s a ge ner alr ul e, t he ‘ sur pl us’of a m ut ual
c o m pa ny bel o ngs e qui t ab l y t o t he po l i c yho l de r s w ho c o nt r i but e d t o i t , i n t he12

p r o p o r t i o n i n wh i c h t h e y c o n t r i b u t e d
. ” )
. C o n s i s t e n twi t h t h e s e a u t h o r i t i e s , we h a ve stated , i n a d i ve rsit y ca se inv olving T ex a s l a w , tha t: D i vi dends nor m al l y bel ong t o t he st oc khol der s, w hi c h i n a m u t ual com p a n y a re th e p olicy h olde rs, bu t t h e insu red tho u gh n ot a s to c k h o ld e rm a y b y co n tr a c t b e a llo w e d to p a r tic ip a te . T h is s h a r e in pr o f i t s m o r e na t ur al l y be l o ngs t o t he i ns ur e d t han t o t he ben ef i ci ary, an d i s a r et u rn to h im o f a part of hi s prem i u m w h i ch th e y e a r ’ s re s u lts h a v e s h o w n w a s n o t n e c e s s a r y to h a v e b e e n p a id t o m ai n t ai n t h e i n suran ce w i t h i t s l egal reser ve. Un io n C e n t. L ife In s . Co . v . Willia m s , 65 F. 2d 240, 243 ( 5t h C i r . 1933)
. Si m i l ar l y, R h ode Isl an d h as def i n ed “m u t u alinsuran ce com pa n y” to “ m ean [] a corporat i on i n w h i ch sha res are h el d excl u si vel y by m em bers to w h om prof i t s are di st ribu t ed
a s d iv i d en d s an d m em b ers a re b oth the i n su rer a n d the i n su red ” i n a h ea l th i n s u r a n c e a c t
. R. I. G EN . L AWS § 27-66- 4( 9) ( em ph asi s add ed). H ere, F act ory M ut ual ’ s s ur pl us di s t r i but i o n was a ppo r t i o ne d ba s e d o n pa s tc o nt r i but i o ns , a nd t h e re for e p o li cy h o ld e rs w h o co n trib u te d , li k e K im b e rly -C la rk , sh o u ld b e en t i t l ed to a s h a r e . Bec aus e t he r i ght t o t he s ur pl us i s di c t at e d b y c o nt r ac ta nd i s t he pol i cyholder’ s equit able ri gh tbased on pa stcontr i bu t i on s, t h e cor porate board h a s n o com p eti n g ri gh t to th e su rp l u s a sse ts o n ce th ey an n ou n ce th e su rp l u s to p o lic y h o ld e r s . T h e K e n tu c k y S u p r e m e C o u r t h a s s ta te d : [ W ] h ere t h e com pa n y i s a m u t u al , bein g condu ct ed on t h e pl an of givi ng t he c he ap e s tsa fe i ns ur anc e t o i t s m e m be r s , a l ls ur pl us o ugh t t o b el ong t o t he m em ber s, t he pol i c y hol der s. Fori n a pure l y m ut ual com p a n y th ere are n o stock h old e r s , a n d n o on e else th ere fore to w h o m th e s u r p lu s co u ld g o th a n its p o lic y h o ld e r s . A n d it s h o u ld in e qui t y go t o t ho s e w ho ha d c o nt r i but e d i t
. The o f f i c e r s o f s uc h a c or por at i on be i ng pai d s al ar i es f ort hei rser vi c es h ave no i nt er es tas such i n t h e surpl u s. U.S . L ife In s . Co . v . S p in k s , 9 6 S .W . 8 8 9 , 8 9 4 ( K y . 1 9 0 6 ) (e m p h a s is a d d e d ); see13

a ls o C a r lto n v . S . Mu t. In s . Co ., 72 G a. 371, 1884 W L 2172 , at*2 1 ( G a. June 10, 1 8 8 4 ); R USS & S EGALLA , 3 C OUCH ON I NS
. § 39: 37. Like a t ru ste e , th e board
m ana ge s a n d h o l ds t he f unds unt i lt he f

unds a r e di s t r i but e d t o t he i ns ur e dben ef i ci ary, at w h i ch point i t n o l on ger ha s a c om peti n g i n t erestover t h e f u n ds. Su m m ar i zi ng t hes e pri n ci pl es , R uss & Segal l a, 3 Couch on I nsur ance § 39: 40,
c o n c lu d e s : Al t ho ugh t he l e ga l t i t l e t o t he pr o pe r t y o f a m ut ualc o m pa ny i s h eld b y th e com p a n y, t h e p rop erty i s h eld for the be n efi t of i ts m e m be r s , po l i c yho l de r s , a n ds t o c k h o l d e r s . T h e f u n d s o f t h e c o m pa ny a r e to b e tr e a te d a s a tr u s t fu n d fo rth e m e m b e r s . . . . E ach m em ber ha s t h e sam e proporti on ate i n t erestt h at ever y oth er m em b er p oss ess es. P oli cy h olde rs a re en ti tl ed to pa rti ci p a te in th e a n n u a l s u r p lu s o f th e c o m p a n y a n d if th e r e is a n in e q u ita b le di st ribu t i on of

su rp lu s a pol i cyholder m ay su e t o obtai n hi s orher proporti on ate s h are. T h e ri gh t t o sha re i n a surpl u s m ay, how ever, be rest ri ct ed to current pol i cyholders. (fo o tn o te s o m itt e d ); s e e a ls o H u b e r, 1 0 5 N
. W
. a t 1 0 3 2
. A ccord i n gly, a corp ora te b o a rd h a s th e d iscr e tion to m a n a g e th e “tim in g , a m o u n t, a n d m e th o d ” of a
s u r p lu s d is tr ib u tio n b u t o n c e a d is tr ib u t i o n ’s tim in g , a m o u n t a n d m e th o d is dec l ar ed, t he di st r i but i on f und s no l ongercon st i t ut e t he c om pany’ s pro per t y; i n ste a d , th e f

u n ds becom e t h e j oi n tassethel d by t h e m em bers w h o are pol i cyholders at t h e di st ribu t i on ’ s operat i ve da t e. T h e W i sconsi n Su prem e C ou rt
s ta te d : A ll t h i s resu l ts i n a n ece ssit y th a t s o m e def i ni t et i m e b e adopted w h en t h e r igh t s of

i n d i vi d u als b ec o m e f ixed , af t erw hi c h m ay be a p p l i ed the arithm eti ca lpr oce ss b y w h i ch the y b eco m e k n ow n . In defer en ce t o such n ecess i t y, t h e rul e ha s becom e set t l ed as to st ock corporat i on s t h at a di vi den d belongs t o th ose w h o ow n t h e st ock w h en i ti s decl ar e d . C om pl et e an al ogy exi st s bet w een ri gh t s of m e m be r s i n a m ut uali ns ur anc e com pa ny and s t o c kho l de r s i n a s to c k co m p a n y in a n d to s u c h a s u r p lu s . D e c la r in ga d i v id e n d is no t hi ng but aut ho r i t at i ve l y de c i di ng t o di s t r i but e s o m e o r al l o f t he14

s ur pl us . W e t he r e f

o r e t hi nk i te nt i r e l y l o gi c alt o appl y t he f o r e go i ng w e l l

- e s t ab l i s he d r ul e , an d t o ho l d t hato n M ar c h 1 9, 1 90 6, [ t he d i vid en d distrib u ti on ] b eca m e se p a ra ted f rom the co rp ora te as sets and b eca m e t he pr ope r t y o f t he s eve r alm em ber s t hen exi st i ng, payabl e t o e ac h on dem and w hen t h e a m ount t o w hi c h he w as e n tit le d h a d b e e n a s c e r ta in e d
. Z i n n v. G erm an t ow n F arm ers ’ Mu t
. I n s. Co. , 111 N
. W
. 1107, 1108 (W i s. 19 0 7) ( em ph asi s ad ded ) ( ci t ati on s om i t t ed). A s t h e W i sconsi n S u pr e m e C ou rt
a c k n o w le d g e d , th e r e is a “c o m p le te a n a lo g y ” b e tw e e n t h e “ r ig h ts o f m e m b e r s in
a m u t u ali n suran ce c om pa n y an d st ockh ol ders i n a st ock com pa n y i n a n d to such
a su rp l u s. ” Id
. A s t h i s court h as st ated i n t h e an al ogou s c on t ext of st ockh ol der d iv id e n d s : U ndert he l aw of

Texas, a dec l ar at i on o f di vi dends c r eat es a de bt ow ed by t h e cor porati on i n favor of each st ockh ol der w h i ch ca n n ot be resc i n ded
. A l t h ou gh t h e decl arati on of t h i s di vi den d p rovi ded t h at t h e sum s t h ereun der w ere paya bl e t o t h e st ockh ol ders of rec ord at such t i m e s a nd i n s uc h i ns t al l m e nt s dur i ng t he y e ara s t he d i rector s sa w f

i t, the l i a b i l i ty of th e com p a n y a ccru ed as o f th e d a te o f t he de c l ar at i o n. C .I.R . v . Co h e n , 1 2 1 F
. 2 d 34 8 , 34 9 ( 5 th C i r. 19 4 1 ) (fo o tn o te om i tted). In sh ort,
w he n a di s t r i but i o n i s de c l ar e d, t he c o m pa ny be c o m e s l i ab l e t o pa y t he po l i c yho l de r s b e c a us e t he y c o l l e c t i ve l y o w n a ny anno unc e d d i s t r i but i o n f r o m t he
s u r p lu s . B e c a u s e th e co r p o r a te b o a r d co n tr o ls th e tim in go f th e d is tr ib u tio n , it
n ecess ari l y est abli shes “ som e d ef i n i t e ti m e . . . w h en t h e ri gh t s of [ pol i cyholders] be c o m e f

i xe d” and t he di s t r i but e d f unds ar e ow ne d b y t ho s e po l i c yho l de r s w ho h a v e rig h ts a t t h a t t im e . Zi nn , 111 N
. W
. at1108. T h e p art i es d i spu t e the da t e w h en ri gh t s of t h e pol i cyholders becam e f i xed f ort he di st r i but i on, i
. e. , t he di st r i but i on’ s ope r at i ve dat e. Fact ory M ut ual
con ten d s th e op era ti ve d a te th a t f i xe s th e righ ts of th e p oli cy h olde rs i s th e d a te t he c o r po r at e b o ar d d e c l ar e d i t s a ppr o va lof the di s t r i but i o n (i
. e . , t heThe corpor ate board o f a mutual insurance company does not necessarilyh ave to 7 restrict adistributionto “curr ent policyholde rs” at th e ti me of the decision or anno unc ement ; it may choo se to se t ar etro a ctive op er ative date
. See RUSS & S EG ALLA , 3 C OUC H ON I NS URAN CE § 3 9 :4 0(“Th e ri ght tosh areinasurp lu s may , ho wever , b e re strict edt o curr ent po licyh ol de rs .” (empha sis a dded)). The dissent reli es ona provision of the Ch arte r th at simplyprovi des th at a policyis effective only during the effectivelife of th e policy . The corpor ate board de cided to se t th e op er ative date , i.e. , the“rec ordd ate, ” f or its dist ribut ion on a datewit hin the ef fec tive lif e o f Ki mb e rly - C l ark’ s p o lic y . Th e b o ar d al s o s t at e dth at “[ a] ll F actory Mut ual Insuran ce Compan y po licyho lde rs. . . o n th e dateof record will be eli gibleto receiveth e memb ership cr editwhenth eir po lici esr en ewdurin gth e me mb er shipc re dit pe riod .”(em ph a si s a dd ed). Unlike th e ca ses cited b y the dis s ent, the board h ere clearlyset a r ecord date that was differe nt from th e de clar atio n date. Infact, th e corporate b oard in Spen ce v. Medical Mut ual L ia b il it y I nsu ra n ceSoc ie t

y of Ma ry la nd, 500A .2d 1 066 , 10 67 (Md. Ct . Spec . App. 19 85) empha siz e d th e d at e o f r e c o r d a n d n o t th e d e c l ar ati o n d at e a s th e o p e r ative d at e of th e distrib utio n. As we no ted above, th e re cord date defin es th e setof policyholde rs entitle d to the di strib utionan d th e ti min go f th e di strib ution , i.e. , settin g the recor d-date, is protected byth e “b u sin es s j u dgme nt rule ,”ap oint co nce de d b yF a ct oryMutu al.
15 “ dec l a r a t i o n d a t e ” ) , whi c h was O c t obe r9. K i m ber l y- C l ar k c ont ends t he o per at i ve da t e w as t h e date of

rec ord or t h e recor d-date as described i n t h e pu bl i c noti ces t o m em bers d escr i bi n g t h e d i st ribu t i on d et ai l s, w h i ch i s Sep t em ber 30. F act ory 7 M u t u al ’ s c on t en t i on i s w i t h ou tm eri t
. A gain, t h e “co m pl et e an al ogy” bet w een s t o c kho l de r s i n st o c k c o m pa ni e s a nd m ut uali ns ur anc e po l i c yho l de r s , a s t o t he d is t r i b u tio n o f a s u r p lu s , is u s e fu l. T h e d is tr ib u tio n m a te r ia ls s p e c ific a lly
es t abl i sh t he r ec or d dat e a s S ep te m ber30, 2003, and on t hat dat e K i m ber l yCl ar k was a po l i c yho l de ri n g o o d s t and i ng. The “ de c l ar at i o n da t e ” i s i m po r t ant
o nl y be c aus e t he c o m pa ny i nc ur s l i ab i l i t y t o payi t s pr o m i s e d d i s t r i but i o n o n t he dec l ar ati on d at e. H ow eve r , w e have def i ned t he “ r ec or d dat e” as t he o per at i ve da t e one u ses t o d et erm i n e the setof st ockh ol ders w h o can p art i ci pa t e i n a st ock corp ora ti on ’ s d i vid en d distrib u ti on , i
. e., the stock h olde rs “of reco rd
. ” See , e. g. , C aru t h C o rp . v. Un i t ed S t ate s, 8 6 5 F .2 d 6 4 4 , 6 4 8 (5 th C ir . 1 9 8 9 ) (“I n g e n e r a l, di vi de nd i nc o m e is t ax e d t o t he s har e ho l de rw ho , o n t he r e c o r d d at e , o w ns t he
s t o c k wi t h r e s pe c tt o w hi c h di vi de nds ar e pa i d and w ho i s e nt i t l e d t o r e c e i ve t he16

d iv id e n d .”); C o h e n , 1 2 1 F
. 2 d a t 3 4 9 ( n oti n g th a t t h e com p a n y in cu rred i ts li a b il ityto p a y d ivid e n d s o n th e d e cla ra tion d a te to th e sto ck h o ld e rs “of re co rd ”). S ee g en er a lly B LAC K’ S L AW D I C T I ONARY 423 ( 8th ed. 2 004 ) ( defi n i n g “ recor d d ate” t o m ean t h e “ [ t ] h e date on w h i ch a st ockh ol der m u stow n shares t o be enti t l ed t o vo t e orr e c e i ve a divi de nd. - - Al s o t e r m e d d ate of re cord”)
. T h e relev a n t st a te statu tes a l so e m p h a size the i m p orta n ce of the “re cord d a te” as th e op era ti ve da te t o ascer t ai n t h e st ockh ol ders of rec ord f

or a c ap i t aldi st ribu t i on i n st ock
c o r p o r a tio n s . S ee T EX . B US
. C ORP
. A CT A NN . a rt. 2
. 2 6 ( d escr i b i n g th e rec ord da te
a s d e t e r m i n i n g wh i c h s h a r e h o l d e r s h a v e r i g h t s t o a s t o c k d i v i d e n d ) ; R. I. G EN . L AWS § 7 -1. 2 -61 4 (a)( 2 ) (sam e). A ccord i n gly, th e record d a te i s th e ef fective da te t o det e r m i ne w hi c h st o c kho l de r s ca n par t ak e i n t he di s t r i but i o n e ve n t ho ugh t he
com pa n y accrues i t s li abil i t y t o pay t h e an n ou n ced di st ribu t i on t o t h ose stock h olde rs of record on the de cl a ra ti on da te
. See , e . g. , C oh en , 121 F. 2d at 349. I n a c c o r da nc e w i t h t he s e g e ne r alpr i nc i pl e s a nd t he c o m pl e t e a nal o gy , as t o t he
r i ght t o receive s urpl us di st r i but i ons , be t w ee n st oc khol der s and m ut ual i n suran ce pol i cyholders, K i m berl y- C l ark, as a pol i cyholder of good-s t an di n g on th e re c o r d d a te , w a s e n tit le d to p a r tic ip a te in th e d is tr ib u te d s u r p lu s . F a ctory M u tu a l ’ s f

i n a larg u m en t ag a i n st acco rd i n g K i m b erly-C l a rk i ts
s h a r e is b a s e d o n t h e fa c t th a t K im b e r ly -C la r k d id n o t r e n e w it s p o lic y b e fo r e it exp i red, w h i ch the board ha d est abli shed as a condit i o n preceden tf or pa rt i ci pa t i n g i n t h e di st ribu t i on . T h e K en t u cky C ou rtof A pp eal s and a N ew Yor k c o ur t , t he o nl y c o ur t s t o di r e c t l y c o nf r o ntt h i s i s s ue , b ar r e d t he c o ndi t i o ni ng of su rpl u s di st ribu t i on s on f u t u re r en ew alby rel yi n g on t h e gen eralpri n ci pl es u n d e r ly in gm u tu a l in s u r a n c e w e d e s c r ib e d a b o v e . S ee Mu t
. B en. L i ab
. I n s. Co. v D a v is , 7 3 S .W
. 1 0 2 0 , 1 0 2 1 (K y . C t. A p p . 1 9 0 3 ); W e lls v . Me tr o . L ife In s . Co ., 13 N .Y .S .2 d 2 2 , 2 5 -2 6 (N .Y . C ity C t. 1 9 3 9 ); seeal so A et n a L i ab
. In s. C o. v Hart l ey , 6 7 S .W . 1 9 , 2 1 , o

pi ni o n m o dif

i e d o n o t he rg r o unds , 6 8 S
. W
. 1 0 8 1 ( Ky
. Ct
. Ap p.F a ct ory Mut ual cit es B ryan tv . Mu t u al Benef itL if e I nsu ra n ceC

o. , 109F . 74 8, 7 56 8 (M.D. Tenn. 1 901 ), an d P et ri e v. M

utualBe nef

itL if e I nsu ra n ceC

o. , 100N.W. 236 , 23 8-39 (Minn . 19 04), as e spousin g opposin g positions, i.e., p ermittingmutu al insur anc e co mpani es toc on ditiondis trib ution s o nr en ew al. We dis agree withF a ct oryMutu al’ s r ea din go f thos e cases. Th e corporate boar d in each caseconditione d a s urplus divi dend on a futurepre mium pay me nt b ec au seth e po licyh ol de r wa s inarr ears . I no th erword s, th e po licyh ol de rs inth os e cases were notm em be r s “ingood standing” and ther eforenot o n equ al footingwithoth er members who actuallycontrib uted to the cap it alsurplus and were therefore entitled to an equit ab lesh are . E.g. , W el ls, 13 N.Y.S.2d at 25. In Bryant , th e co urt allowed amutu al company to refuse to credit an anticipated divi dend befo re t h ats am eyear’ s c ontrib utionwa s p aid
. See B ryan t, 109F . at75 5-57 . I n P et ri e, the Minn esota court similarly p er m it t ed th e corporate board toonlyapp lya dividen d cre dit to the policyholde r’s d el in qu ent acco untif the po licyh ol de r paidth e pr em iu m du e inth e year of th e divid en d. 1 0 0N.W . at23 9 . I nb othc a se s, th e po licyh ol de rsl oan edf ro m th e mutu al co mp a ny a g ain st th eir po licyan d we reinarr ears ; th e po licyh ol de rswe reth er eb yb orro wi n ga g ain stan d de pl etin gth e co mp a ny’sc a pital st ock. SeeBryan t, 1 0 9F
. at 7 4 9 -5 0 ; P et ri e, 100N.W
. a t2 37-38. Insuch circu mstance s, a mutual company, consis t en tw ith its gene ral principle s, cancon ditio n the policyholde r’s ri ght to anticipated divi dends on the pay ment of existin g debts and policy rene wal, because dividen ds de rive fromacc u mulate d co ntrib ution s an d exce ss capital st ock; ino th erwo rd s, t he pa st failure to paythose c ontribution s an d th e takingout of loans th at deple te the capital stock can ju stifythe adju stment of those me mbers’ equ itab le right to a dividen d distributionu nle ss they prom is e top ayp re miu ms th at re duceth eir deb t toth e capital sto ck
. SeeRUSS & S EG ALLA , C OUC H ON I NS URAN CE § 77:7 (ci ting Bryant , 1 0 9F
. at 7 4 8 ; P et ri e , 1 0 0 N
. W
. at 2 3 6)
. I t i s undispute d that Kimberly-C lark was a policyholde r in go od standing on the recor d date and had contributed to th e accumulate d capitalstock. Th erefo re, these cases are inapposite. Fac t or y M utu al also refere nces an unp ublishe d memorandu m orde r fro m a district co urtinOhiof

orf urth ersupp ort. See And e rs ons, In c. v. Factory Mut . I ns. Co. , No. 3:01 CV 762 0 (Me moran dum Opinion) (N.D. Ohio Se pt. 3 , 20 03) (unpubli shed).Notonlyis this unp ublishe d or der’s precedent ialv alu e limited , it does not provide anyrea sons fo r its co nclu sionth at F a ct oryMutu al’ s m emb er shipc re dit progra m i s a “u nil ate ral co ntr a ct .”I t als o do es notc on si de r th e factth at F a ct oryMutu al isamutu al in surancec om pany . Forth es e reaso ns, th e o rder is not persuasive . 17 19 02 )
. W e a gr e e w i t h t he s e a ut ho r i t i e s . As w e no t e d earl i er, o nc e a s ur pl us 8 di s t r i but i o n i s a nno unc e d, t he po l i c yho l de r s o n t he r e c o r d d at e o w n t he s ur pl us an d the corporat e board n o l on ger h as an y ri gh t s or i n t erest s i n t h e di st ribu t ed
am o unt s . Ac c o r di ngl y, K i m be r l y- Cl ar k, a s a po l i c yh ol der o f r e c o r d, o w ne d a sha re of t h e surpl u s, an d F act ory M u t u alcann ott h en di senti t l e K i m berl y- C l ark based i t s s u bsequ en tfai l u re t o ren ew it s pol i cy - - presum ably, K i m berl y- C l ark coul d h ave ch an ged i t s m i n d an d d eci ded t o renew i t s pol i cy on O ct ober 1, w h i ch18

is a ft e r t h e d is t r ib u t io n ’s r e c o r d d a t e . A s a p r a c t ic a l m a t t e r , F a c t o r y M u t u a l’s
e l i gibi l i t y r ul e s e f

fe c t i ve l y ba ra ny r e t ur n o f e xc e s s c ap i t alt o m e m be r s o n t he
r e c o r d d a te w h o n o lo n g e rn e e d in s u r a n c e o rca n n o t a ffo r d to re n e w th e ir i n su ra n ce, t h ereby di rect l y contravening m em bers’equ i t able ri gh t s t o a di st ribu t i on f

rom a surplus t h at w as creat ed, i n part, by thei r pastcontr i bu t i on s. C on d i ti on i n g a ri gh t to a d i strib u ti on on ren ew a lw ou l d ad d a n ew con d i ti on to t h e pol i cy t h at s u bstanti al l y l i m i t s and encu m bers a pol i cyh o ld e r’ s r i gh t s t o a surplus di st ribu t i on w i t h ou ta n y contract u albasi s and un derm i n es t h e set t l ed
ex p ecta ti on tha t m u tu a li n su ra n ce p rov i d es ins u ra n ce “at cos t. ” I n t h i s c ase, F act ory M u t u al d e cla red a $32 5 m i l l i on di st ribu t i on f rom e xc e s s s ur pl us f

unds a s a r e t ur n t o p ol i cyhol de r s a nd i ta ppo r t i o ne d t he di st r i but i on bas ed o n t he pol i c yhol der s’ c ont r i but i on t o t he ac c um ul at ed c api t al stock , i
. e., th eir p a st p rem i u m s. F a ctory M u tu a lseg reg a ted this am ou n t f rom i ts capi t alst ock on O ct ober 9 , 2 0 03, f or exi st i n g pol i cyholders of t h e rec ord da t e: Sept em ber30, 2003. O nce Fact or y M ut ual ’ s c or por at e b o a r ds e g r egat ed t he $325
m i l l i on f

rom t h e surpl u s an d m arked itfordi st ribu t i on t o exi st i n g m em bers on t he r e c o r d d at e, those exi s t i ng m e m be r s b e c am e e nt i t l e d t o t he w ho l e a m o unt based on thei r equi t able sha re as ca l cul ated pu rsuan tt o t h e board’ s f orm u l as. T h e cor porate board al so becam e l i able t o f ol l ow t h rough w i t h t h e di st ribu t i on on t h e date of

d ecl arati on . F u rt h erm ore, a f t er decl ari n g t h e surpl u s, t h e board coul d not t h en cond i t i on a pol i cyholder’ s r i gh tt o a share of t h e di st ribu t i on on a f ut ur e , po st
- re c o r d- da t e a c t , s uc h a s po l i c y r e ne w al , b e c aus e t he b o ar d no l on ger ha d an y com peti n g i n t erest s orri gh t s t o t h e di st rib u t i on f u n ds. Since K i m berl y- C l ark w as a p ol i cyholder on the recor d da t e, i tequ i t ably ow n s a share
o f th e d is tr ib u tio n ca lc u la te d p u r s u a n t t o th e b o a r d ’ s fo r m u la w h e th e ro rn o t it h ad renew ed i t s pol i cy bef ore t h e pol i cy’ s expi rat i on . T h eref ore, t h e di st ri ctcourt pr o pe r l y awar de d Ki m be r l y- Cl ar k i t s pr o pe r l y cal cul at e d s har e o f t he19

di s t r i but i o n. F or th ese rea son s, w e A F F IR M the distri ct cou rt’ s j u d gm en t.20

G A R W O O D , C i r c ui tJudge, di ss ent i ng. I r e s p e c tfu lly d is s e n t. It is u n d is p u te d th a t K im b e r ly -C la r k ’ s o n ly
r el evantFact or y M ut ualpol i c y e xpi r ed byi t s t er m s on Sept em ber30, 2003, t hatpr i o rt o t hatt i m e K i m be r l y- Cl ar k ha d d e t e r m i ne d no tt o r e ne w t he pol i c y, s o i nf

or m i ng Fact or y M ut uali n l at e Au gust2003, and t hat K i m ber l yCl ar k ne ve ra t t e m pt e d t o r e ne w t he po l i c y. On O c t o be r9 , 2 00 3, a f t e rt he K i m berl y- C l ark p ol i cy ha d i n di spu t ably expi red, t h e F act ory M u t u al ’ s B oard of D i r ec t or s dec l ar ed a so m e $ 325 m i l l i on s urpl us al lof w hi c h w oul d be
c r e di t e d t o po l i c yho l de r s a s o f Se pt e m be r3 0, 2 00 3 as a r e duc t i o n o f t he prem i u m pay able on t h e renew alof t h ei r pol i cy. A s K i m berl y- C l ark’ s pol i cy had al r eady expi r ed, and t her e w as neve rany at t em pt t o r enew i t , K i m ber l yCl ar k r e c e i ve d no t hi ng byv i r t ue o f t he O c t o be r9 , 2 00 3 bo ar d a c t i o n, b ut
n evert h el ess cl ai m s an en t i t l em en tt o a share of t h e $32 5 m i l l i on surpl u s. K i m b erly-C l a rk ’ s releva n t po l i cy ex p ress l y sta tes th a t i t i s su b j ect to t h e t erm s of

t h e C h art er of

F act ory M u t u al
. Sect i on 5 of t h e C h art er provi des t h at a pol i cyholder of t h e cor porati on “ sha l lbe a m em ber of t h e C orporati on du ri n g t h e t erm of

i t s pol i cy, bu tno l on ger, ” an d sect i on 10 of t h e C h art er states tha t “ u p on term i n a ti on of th e m em b ersh i p of a n y m em b er, a l lh i s or it s ri gh tan d i n t eresti n t h e surpl u s, res erves and ot h er ass et s of t h e C orporati on s hal lf o r t hw i t h c e as e . ” The r e i s no e vi de nc e t hatt he s e Char t e rpr o vi s i o ns ever read ot h erw i se atan y rel evan tt i m e, nor ha s t h ei r val i di t y been
c hal l e nge d i n t hi s c as e . Fo re xa m pl e , i n Z i n n v. G erm an t ow n F arm ers ’ Mut ual , 111 N W 1107 (W i s. 1907) , a m ut uali nsur ance c om pany on M ar c h 19, 190 6 decl ared a $5 0, 000 surpl u s t o be di st ribu t ed to m em bers “ en t i t l ed th ere to. ” It w a s h eld th a t o n ly t h ose w h o w ere pol i cyhol der s on Marc h 19, 1906 – t h e date t h e surpl u s w as decl ared an d ordered d i st ribu t ed – w ere e n tit le d to p a r tic ip a te , sp e c ific a lly e x c lu d in g , in tera lia , th o s e “w h o h a d h e ld21

pol i ci es and contr i bu t ed tow ard the surplus, bu tw h ose pol i ci es had l ap sed
a n d ex p i red , an d w h o w ere n ot p oli cy h olde rs on M a rch 19 , 19 0 6
. ” S ee als o, e . g. , Spe nc e v . Me di c alMut
. Li ab
. I ns . So c ’ y of Mar y l and , 500 A 2d 1066, 1067 (M d
. A p p . 1 9 8 5 ) ( “f

orm erpol i cyholders of a m u t u alcom pa n y . . . are n ot
e nt i t l e d t o pa r t i c i pa t e i n t he di s t r i but i o n o f a divi de nd f

r o m e ar ne d s ur pl us s te m m in gfr o m a y e a rfr o m w h ic h th e y h a d p o lic ie s in e ffe c t.” (e m p h a s is
a d d ed )) ; R u ss & S eg a l l a , 3 C ou ch on In su ra n ce (20 0 5 ) § 3 9
. 4 0 ( “T h e righ t t o s h a r e in s u r p lu s m a y , h o w e v e r , b e re s tr ic te d to cu r r e n t p o lic y h o ld e r s .”). Thi s i s no tt o s ugg e s tt hatc har t e rpr o vi s i o ns s uc h a s t ho s e o f s e c t i o n 5
an d 10 of

t h e F act ory M u t u alC h art er m u st be i ncl uded i n eve r y m ut ual i n suran ce c om pa n y’ s c h art er. Acharterw h i ch does n oti n cl u de su ch p rov i sion s w ou l d l i k ely n ot t h ere by b e in v a lid
. H o w e v e r , it s tr a in s lo g ic w e ll pastt he br eaki ng poi nt t o s ugges t , as doe s t he m aj or i t y i n i t s f oo t not e 7 , w hi c h si m pl y i gnor es s ec t i on 10 of t he C hart erand m i sr eads s ec t i on 5, t hat
onc e t he c hoi c e i s m ade t o i ncl ude s uch pr ovi si ons i n t he c hart erof a m ut ual i n suran ce c om pa n y, i t s B oard of D i rect ors i s t h ereaf

t er f ree t o di sregard t h e m. At no t i m e s i nc e Se pt e m be r3 0, 2 00 3, ha s K i m be r l y- Cl ar k b e e n a m e m be ro f

Fac t o r y M ut ual
. Con s e que nt l y, K i m be r l y- Cl ar k was e nt i t l e d t o no sha re of t h e di st ribu t i on of

surpl u s provi ded f

or i n t h e O ct ober 9 B oard
r es ol ut i on. The B oar d had no po w ert o i t se l f am end t he Fact or y M ut ual C hart er , and di d notpurpo r tt o do s o. O n O c t obe r9, t he Fact or y M ut ual B o a r d co u ld h a v e d e c la r e d a s u r p lu s d is tr ib u tio n p a y a b le to , a n d o n ly to , a ll
w h o w ere m em bers on t h at date, w h i ch w ou l d h ave i n cl u ded nothi n g f or K i m be r l y- Cl ar k. The fac tt hatFac t o r y M ut ualc o ndi t i o ne d r e c e i pto f t he s ur pl us di st ribu t i on on p ol i cy renew al , provi di n g t h e di st ribu t i on be only a c redi ton22

th e ren ew a lpr em i u m , i s n oth i n g o f w h i ch K i m b erly-C l a rk h a s an y righ t t o com pl ai n , becau se i tha d n o ri gh tt o any d is tr ib u tio n o f a n y o f th e s u r p lu s . K i m berl y- C l ark w as not a m em ber on O ct ober 9, 200 3, an d w as enti t l ed t o no par tof

t he s urpl us de t er m i ned t o t hen exi stand t hen or der ed t o b e di st r i but ed, and i thas notbe en a m em beratany t i m e s i nce Sept em ber30, 200 3, an d thu s i t s r i gh t s w ere not i n an y w ay i n f ri n ged by the B oard
r es ol ut i on o f

O c t obe r9, 2003. I acco rd i n gly re sp ectfull y d i sse n t.