Opinion ID: 731288
Heading Depth: 2
Heading Rank: 5

Heading: Reasonableness of the 1987 bylaw amendment

Text: 44 The parties agree that, under Tennessee law, [a]mendments to the Bylaws of a mutual organization are enforceable as long as they are reasonable and do not deprive a member of a vested right. See Mutual Guar. Corp. v. Arsenal Credit Union, 771 F.Supp. 288, 291 (E.D.Mo.1991). CKCU argues that the 1987 bylaw amendment was unreasonable and therefore unenforceable. The district court held that, as a matter of law, based on the undisputed facts, [t]he amendment was a reasonable way for [Mutual Guaranty] to shore up its capital needs, to strengthen the fund's viability, to work toward a public perception of private insurance being stable and adequately funded, to secure a competitive position with federal insurance, and to slow down withdrawals that could jeopardize [Mutual Guaranty's] ability to protect remaining members. Aplt's Br., Addendum at 28. The court further held that the doctrine of laches barred CKCU from challenging the amendment. 45 CKCU offers five grounds on which to find the bylaw unreasonable: (1) the one hundred percent forfeiture was unprecedented and not reasonably foreseeable, Aplt's Br. at 31; (2) Mutual Guaranty provided insufficient notice of the bylaw amendment, such that it would have been impossible for a credit union to withdraw before the amendment had become effective, id. at 32; (3) the penalty was designed to lock in members to prevent withdrawals, id. at 32-33; (4) the bylaw fail[ed] to take into consideration that [CKCU's] withdrawal was not a matter over which [CKCU] possessed control because the withdrawal was practically required by Kansas law, id. at 33; (5) Mutual Guaranty enforced the ... forfeiture provision against the Kansas credit unions, but not against the Tennessee credit unions, which now stand to profit from Mutual Guaranty's retention of the forfeited funds, id. at 34-35. CKCU also argues that the district court improperly relied on Arsenal Credit Union in concluding that the bylaw was reasonable. CKCU urges that, in any event, it was error for the district court to determine the reasonableness of the bylaw as a matter of law on summary judgment. 4 Mutual Guaranty counters that the question of reasonableness is one of law, properly determined by the court on summary judgment, and further that the district court was correct in its substantive determination that the forfeiture provision was not unreasonable. 46 We review first whether it was proper to decide this issue on summary judgment. Because we conclude that it was, we then review the district court's substantive holding that the amendment was reasonable.
47 Summary judgment is properly granted [i]f there is no genuine issue of material fact in dispute. Wolf, 50 F.3d at 796; see Fed.R.Civ.P. 56. Here, the underlying facts are uncontested. The district court therefore held that the reasonableness of an amendment is an issue of law for the court. Aplt's Br., Addendum at 28. CKCU contends that [q]uestions of reasonableness are quintessential issues of fact, which therefore should be submitted to a jury. Aplt's Br. at 31. To support this contention, however, CKCU cites only two cases: a decision of the Supreme Court of Kansas holding that what is a commercially reasonable sale under the Uniform Commercial Code is a question of fact, Garden Nat'l Bank v. Cada, 241 Kan. 494, 738 P.2d 429, 430 (1987), and a decision of the U.S. District Court for the District of Rhode Island holding that [w]here there exist disputed facts concerning the reasonableness of withholding consent to an assignment, that issue should be decided by the trier of facts. Thompson Trading, Ltd. v. Allied Breweries Overseas Trading, Ltd., 748 F.Supp. 936, 942 (D.R.I.1990). On the other hand, Mutual Guaranty argues that, [s]ince the turn of the century, Tennessee courts have been determining the reasonability of bylaws as a matter of law. Aple's Br. at 29. 48 Because whether the reasonableness of bylaws is a legal or factual issue is itself a substantive question, we apply the choice of law rules of the forum state. See Missouri Pacific R.R. Co. v. Kansas Gas & Elec. Co., 862 F.2d 796, 798 n. 1 (10th Cir.1988). Under Kansas law, subject to specified inapplicable exceptions, the parties to a contract may determine which state's law shall govern the rights and duties of the parties, so long as the chosen state bears a reasonable relation to the transaction. Mark Twain Kan. City Bank v. Cates, 248 Kan. 700, 810 P.2d 1154, 1158-59 (1991); Kan. Stat. Ann. § 84-1-105. Here, CKCU and Mutual Guaranty agreed in the contract of insurance that the contract shall be governed by the laws of the State of Tennessee. Aplt's App. vol. I at 61. The contract of insurance was the vehicle through which CKCU agree[d] to comply with the bylaws of [Mutual Guaranty] as time to time amended, and the parties agreed explicitly that the contract itself could be amended by an amendment to the bylaws. Id. at 48. Hence, insofar as CKCU has an interest in Mutual Guaranty's bylaws, that interest flows through the contract of insurance. Therefore, the law of Tennessee governs any substantive claims relating to the bylaws, including CKCU's claim that the reasonableness of the 1987 amendment is a question of fact. 49 But as neither Tennessee nor the parties volunteer much law to help us, we look more broadly to determine the general rule. The parties cite different, seemingly contradictory phrases from the same section of the same treatise on corporations. Compare 8 William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 4191 (perm. ed. rev. vol. 1992) (Generally speaking, a claim that a particular bylaw is invalid because unreasonable presents a question of law for the court rather than one of fact for the jury, although the question may be presented as one of fact.) with id. ([T]he reasonableness of bylaws is a question of fact, subject to limited review on appeal.). Although the question is close, our own research reveals more support for the proposition that the reasonableness of the bylaws of a mutual corporation is a question of law that is properly decided by the court on summary judgment. See McKee & Co. v. First Nat'l Bank, 265 F.Supp. 1, 13 (S.D.Cal.1967) (granting summary judgment on the question of the reasonableness of the new bylaws of a banking association and holding explicitly that reasonableness is a question of law and not of fact); 36 Am.Jur.2d Fraternal Orders § 22 (1968) (Where the facts are undisputed, the question whether a change or amendment of the bylaws of a fraternal order and benefit society is reasonable is one of law for the court.); Fletcher, supra, § 4191 n. 23 (citing cases). Cf. South Fla. R.R. Co. v. Rhoads, 25 Fla. 40, 5 So. 633, 634-35 (1889) (The reasonableness of rules prescribed by railroad companies, and like corporations with like powers, is a question of law to be decided by the courts, and not a question of fact to be decided by juries.). But see Brennan v. Minneapolis Soc'y for the Blind, Inc., 282 N.W.2d 515, 521 (Minn.1979) (Because the unreasonableness of bylaws [of a non-profit corporation] is a question of fact, the findings of the trier of fact will not be disturbed if the evidence as a whole sustains the findings.) (citations omitted); Allen v. Gleaner Life Ins. Soc'y, 274 Mich. 171, 264 N.W. 332, 333 (1936) (holding that the reasonableness of the bylaws of an insurance society depends upon the particular circumstances and matters in pais, and is therefore a question for the jury). Although no Tennessee court has had occasion recently to address the issue, the Tennessee Supreme Court appears at least not to have countermanded this general rule. See Lee, 291 S.W.2d at 277 (affirming the trial court's determination that an insurance company's bylaw was reasonable). 50 We conclude that it was proper for the district court to decide the reasonableness issue on summary judgment. See Kansas Teachers Credit Union v. Mutual Guar. Corp., No. 94-1524-DES, 1996 WL 109495, at  5-6 (D.Kan. Feb.29, 1996) (holding that Mutual Guaranty's 1987 bylaw amendment was reasonable as a matter of law); Telephone Employees' Credit Union v. Mutual Guar. Corp., No. 89 CV 871, slip op. at 12-14 (D.Kan. March 11, 1994) (same); Mutual Guar. Corp. v. Arsenal Credit Union, 771 F.Supp. at 291-92 (granting summary judgment to Mutual Guaranty and rejecting its member credit union's counter-claim that the 1987 bylaw amendment was unenforceable where the credit union did not contend that Mutual Guaranty had contravened prescribed amendment procedures or deprived it of a vested right). 51
52 We further hold that the district court was correct in its determination that, as a matter of law, the forfeiture provision was reasonable. The record reflects the undisputed fact that Mutual Guaranty faced an environment in which confidence in private insurance was eroding due to both an industry crisis and the threat of state legislation requiring credit unions to obtain federal insurance. In this context, an amendment increasing the amount forfeited from thirty percent 5 to one hundred percent was a reasonable means of slowing withdrawals which could have threatened Mutual Guaranty's founding purpose: to protect and guarantee share holdings and insured accounts and to advance the general welfare of its member credit unions. 53 We also note several other undisputed facts appearing in the record which constitute convincing evidence of the reasonableness of the bylaw. CKCU President Ron Ogle was a member of the board of directors of Mutual Guaranty in 1987 when the amended forfeiture provision was adopted; he was present at the meeting at which the amendment was adopted; and he voted in favor of the amendment. True, Mr. Ogle testified that, in playing the dual role of director of Mutual Guaranty and president of CKCU, he cast [his] vote in a fashion that was in the interest of [Mutual Guaranty], not in a fashion that was in the interest of [CKCU] or any other person and that, when he sat and served on the board of directors of [Mutual Guaranty, he] did not act as a representative of CKCU. Aplt's App. vol. II, at 395. However, this testimony does not raise a genuine issue as to a material fact in light of other undisputed evidence. 54 The amendment was subsequently discussed at a CKCU board of directors' meeting on October 15, 1987. The minutes of that meeting reflect no concerns by any CKCU director that Mutual Guaranty's recently adopted forfeiture provision was unreasonable. The relevant paragraph in the minutes is worth quoting because it indicates that the view of the amendment taken by CKCU directors at the time was generally positive: 55 Ron Ogle presented letters from Mutual Guaranty Corporation. The cost of private insurance is going up. They are setting a special assessment of one half of one percent, which in our case equals approximately $100,000. The Kansas Department of Credit Union Administrator has not ruled on the accounting for this special assessment. It could be an additional asset, or an expense. [Mutual Guaranty] has also set a locked door policy--there will be a 100% penalty to get out of this insurance. These two changes will make [Mutual Guaranty] the strongest insurer, in terms of risk/capital. 56 Aplt's App. vol. II, at 331 (emphasis added). This evidence strongly suggests that the amendment appeared reasonable to CKCU's directors as long as CKCU benefited from the added security the forfeiture provision gave to Mutual Guaranty. CKCU decided the amendment was unreasonable only after it withdrew from Mutual Guaranty and forfeited its own capital contribution. 57 CKCU complains that even if the forfeiture provision was not unreasonable on its face, it was unreasonable to enforce it against CKCU. It argues that its withdrawal was not a matter over which [CKCU] possessed control, because the action was compelled by the amendment to Kan.Stat.Ann. § 17-2246 requiring credit unions to obtain federal insurance. Aplt's Br. at 33. This characterization of the events leading to the amendment of § 17-2246 is misleading. Mutual Guaranty suggests that CKCU itself supported this change in Kansas law, claiming that [i]n 1991, the Kansas Credit Union League, in which CKCU was an active member, began lobbying for an amendment to K.S.A. 17-2246 that would require every Kansas credit union not then insured by [NCUSIF] to obtain insurance from that entity within 18 months. Aple's Br. at 7. Although Mutual Guaranty points to no support in the record for this claim, CKCU does not deny it. CKCU instead points to Mr. Ogle's testimony that CKCU did not instruct the League to lobby for the amendment and that the League's activities were not within the control of CKCU. See Aplt's App. vol. II, at 396. But as the district court pointed out, CKCU tellingly does not argue that it opposed the passage of the League's legislative initiative. In our view, CKCU's silence on this matter greatly weakens its claim that events beyond its control forced its withdrawal from Mutual Guaranty, and thereby undermines the argument that it was unreasonable to apply the forfeiture provision to CKCU. While CKCU's contemporaneous reaction to the bylaw amendment is not dispositive of the amendment's reasonableness, it is relevant that CKCU has presented no evidence that it considered the one hundred percent forfeiture provision to be unreasonable under the circumstances the parties were then facing. 58 CKCU also contends that the one hundred percent forfeiture provision was unprecedented. To the contrary, although such provisions are not common, they are not unprecedented. See United Employees Credit Union v. Massachusetts Credit Union Share Ins. Corp., 380 Mass. 398, 403 N.E.2d 408 (1980) (upholding a similar provision). Finally, we note that, according to an undisputed averment in the affidavit of Mutual Guaranty's president during the relevant period, the one hundred percent forfeiture provision was recommended to Mutual Guaranty by the Tennessee Commissioner of Financial Institutions. Aplt's App. vol. I, at 239. This evidence, which CKCU did not rebut, further precludes a determination that the bylaw amendment was an unreasonable measure. 59 Our review of the record taken as a whole, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (quoting First Nat'l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 1592-93, 20 L.Ed.2d 569 (1968)), compels the conclusion that the bylaw is reasonable and therefore enforceable. We therefore hold that the district court was correct in granting summary judgment to Mutual Guaranty as to this issue. See Kansas Teachers Credit Union, 1996 WL 109495, at  5-6 (granting summary judgment to Mutual Guaranty on the same issue); Arsenal Credit Union, 771 F.Supp. at 291-92 (same); Telephone Employees' Credit Union, No. 89 CV 871, slip op. at 12-14 (holding that Mutual Guaranty's 1987 bylaw amendment was reasonable as a matter of law). 60