Opinion ID: 796142
Heading Depth: 3
Heading Rank: 2

Heading: Restatement (Second) of Contracts

Text: 27 Aside from our analysis of the contract's existing terms, we conclude that the Employees are entitled to the demutualization proceeds under Restatement (Second) of Contracts § 204. The annuity contracts say nothing regarding demutualization, which is not surprising as demutualization was not legal in New Jersey (where Prudential was located) when Irving purchased the annuity contracts from Prudential on the Employees' behalf. Because the annuity contracts do not contain a term regarding entitlement to demutualization proceeds, the Employees urge the court to apply Restatement of Contracts (Second) § 204 to supply the annuity contracts with a missing term. Section 204 states: When the parties to a . . . contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court. 28 Southwire objects, claiming that Kentucky courts have not endorsed § 204. Although no reported case in Kentucky has applied this provision of the Restatement, the Kentucky Supreme Court has applied various other sections of the Restatement, which demonstrates that the Restatement is generally valid authority in Kentucky. See, e.g., Hargis v. Baize, 168 S.W.3d 36, 47 (Ky. 2005) (applying § 195(2)); Nucor Corp. v. Gen. Elec. Co., 812 S.W.2d 136, 144 (Ky. 1991) (§ 354); id. at 145 n. 2 (§ 350); Stevens v. Stevens, 798 S.W.2d 136, 139 (Ky. 1990) (§ 305). Further, Kentucky courts have recognized the principle that if a contract is silent on a certain point, the law will imply an obligation to carry out the purpose for which the contract was made—exactly the substance of § 204. Old Republic Ins. Co. v. Ashley, 722 S.W.2d 55, 58 (Ky.Ct.App. 1986) (citing Warfield Nat. Gas Co. v. Allen, 248 Ky. 646, 59 S.W.2d 534 (1933)). Cf. Richardson v. Eastland, Inc., 660 S.W.2d 7, 8 (Ky. 1983) (Where the contract is silent we must interpret the intent of the parties.). 5 Sitting in diversity, our duty is to apply the law of the forum state as announced by its highest court. West Bay Exploration Co. v. AIG Specialty Agencies of Tex., Inc., 915 F.2d 1030, 1034 (6th Cir. 1990). Where the relevant state supreme court has not spoken on an issue, we apply the rule that we believe the state supreme court would apply if it were to decide the case. Himmel v. Ford Motor Co., 342 F.3d 593, 598 (6th Cir. 2003). Under these circumstances, we believe the Kentucky Supreme Court would employ Restatement § 204. Accordingly, so do we. 29 Section 204's comment d instructs courts to apply community standards of fairness to determine a term that is reasonable in the circumstances. Here, it is clear that none of the parties expected to receive the demutualization proceeds, which will constitute a windfall to whoever receives them. It is also clear that NSA's decision to terminate the Plan in 1986 relieved it of any risk associated with the Plan—namely, the responsibility to provide whatever level of funding is necessary to yield the fixed level of benefits promised. See Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999) (noting that under an ongoing defined benefit plan, the employer typically bears the entire investment risk and—short of the consequences of plan termination—must cover any underfunding as the result of a shortfall that may occur from the plan's investments). 6 30 At the same time, the termination of the NSA Plan shifted risk onto the Employees. On paper, at least, the Employees are entitled to exactly the same level of benefits under the annuity contracts as they were under the NSA Plan, but crucially, their benefits are no longer guaranteed. Under ERISA, ongoing pension plans are guaranteed by the Pension Benefit Guarantee Corporation (PBGC). See 29 C.F.R. §§ 4022.1 et seq. Not so for the annuity contracts. If Prudential were to become insolvent and default on its obligations under the annuity contracts, the Employees would be unable to recover the full value of the benefits. Accordingly, the NSA Plan's termination—the very event that necessitated purchase of the annuity contracts—stuck the Employees with a new (and unbargained-for) risk. Applying community standards of fairness, the inserted term should not entitle a party absolved of risk, such as Southwire, to unforeseen demutualization proceeds in preference to the party burdened with additional risk. Accordingly, we supply a term to the annuity contracts entitling the Employees to the demutualization proceeds. 7