Opinion ID: 796142
Heading Depth: 3
Heading Rank: 1

Heading: Terms of the Annuity Contract

Text: 19 Prudential's demutualization plan entitles Eligible Policyholders—i.e., the owners of eligible policies and annuity contracts, J.A. at 297 (Reorganization Plan § 1)—to demutualization compensation. J.A. at 318 (Reorganization Plan § 7.1(b)). For group annuity contracts, it defines the designated contract-holders as owners. J.A. at 312 (Reorganization Plan § 5.3). Here, the annuity contracts designate Irving as the contract-holder as trustee for [the] National-Southwire Aluminum Company Pension Plan. J.A. at 190, 235. Irving's successor (BNY) claims that Irving's status as contract-holder ceased, presumably when its status as trustee of the NSA Plan terminated in 1988. The demutualization plan does not indicate how shares should be distributed when a policy lacks an owner. 1 20 Because the demutualization plan does not resolve the dispute, we turn elsewhere. The Department of Labor (DOL) has concluded that, in disputes over demutualization proceeds born from an annuity contract purchased to terminate an ERISA plan, 2 the terms of the relevant annuity contracts and state law govern. Dep't of Labor, Office of Pension and Welfare Benefit Programs Op. No.2003-05A, 2003 WL 1901900 (Apr. 10, 2003). Although the DOL's advisory opinion is not binding on us, it is worthy of some deference. Christensen v. Harris County, 529 U.S. 576, 587, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000) (quoting Reno v. Koray, 515 U.S. 50, 61, 115 S.Ct. 2021, 132 L.Ed.2d 46 (1995)). Interpretive guidance from administrative agencies that is not the product of formal, notice-and-comment rulemaking is entitled to respect to the extent that th[e] interpretations have the `power to persuade.' Id. (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944)). The Fifth Circuit applied this standard and deferred to similar guidance from the DOL in Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 296 (5th Cir.2000). We conclude that the DOL guidance is persuasive because a membership interest in a mutual insurance company is a precondition to any right to demutualization proceeds, and the annuity contract creates such interests. Regardless of whether the annuity contract contemplates the right to demutualization proceeds, previous documents (e.g., the NSA Plan documents) could not have contemplated such a right, as they neither created nor encompassed membership interests in Prudential. 21 We conclude that the terms of the annuity contracts entitle the Employees to the demutualization proceeds. The parties do not press this argument in their briefs, but they have provided copies of the annuity contracts in the Joint Appendix. We address the parties' primary argument, whether we should apply Restatement (Second) of Contracts § 204 to supply a missing term to the annuity contracts, infra in Part III.B. 22 As noted above, Prudential's demutualization plan provides that contract-holders, as owners of the contracts, are to receive consideration in the form of stock. The annuity contracts dub Irving the contract-holder, but this provision is of no help because, as noted above, Irving's successor claims that it is no longer the contract-holder. The contracts further provide: 23 The Contract-Holder at any time may, with the consent of the Prudential, appoint a successor Contract-Holder.... [H]owever, . . . if the Contract-Holder notifies the Prudential that it will cease to exist or cease to perform the duties of the Contract-Holder hereunder and no successor Contract-Holder is appointed, this contract shall nevertheless remain in full force and effect . . . . 24 J.A. at 195 (Annuity Contract No. 5543 at § 1.10), 242 (Annuity Contract No. 5542 at § 3.7). The record contains no indication that Irving appointed a successor contract-holder or notified Prudential prior to 2002 that it would no longer perform the duties of contract-holder. Notably, the contracts are silent regarding who becomes the successor contract-holder in this situation. 25 The primary object in construing a contract . . . is to effectuate the intentions of the parties. Cantrell Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 384 (Ky.Ct.App.2002). Kentucky courts 3 have long held that in so doing, it is proper to consider the circumstances surrounding the parties, and the object of the contract, in addition to the contract's language. Owens v. Ga. Life Ins. Co., 165 Ky. 507, 177 S.W. 294, 298 (1915) (quoting Mitchell v. S. Ry. Co., 124 Ky. 146, 74 S.W. 216, 217 (1903)). Whe[n] a contract is . . . silent on a vital matter, it is especially appropriate for courts to consider each of these factors, as well as the subject matter of the contract. Cantrell Supply, 94 S.W.3d at 385. 26 Here, these factors strongly indicate that the parties to the annuity contracts intended for the Employees to step into Irving's shoes as the contract-holders after Irving withdrew. The purpose of the annuity contracts was to provide pension benefits to which the Employees were entitled under the defunct NSA Plan. Accordingly, the Employees are third-party creditor beneficiaries of the contracts. See Presnell Const. Managers, Inc. v. EH Const., L.L.C., 134 S.W.3d 575, 579 n. 12 (Ky. 2004) (quoting Sexton v. Taylor County, 692 S.W.2d 808, 810 (Ky.Ct.App.1985)). Other than Prudential, which is not a party to this case, only the Employees have a direct interest in the annuity contracts. By contrast, Southwire is neither a party to, nor a beneficiary of, the contracts. For these reasons, we conclude that the parties' intent in entering thi contract was that the Employees would become the contract-holders if Irving were to step down. 4