Court Opinion

ID: 2683748
Source: CourtListenerOpinion
Date Created: 2014-07-15 16:00:48.339601+00
Date Added: 2024-06-11T13:13:37.865469
License: Public Domain

United States Court of Appeals
                              For the Eighth Circuit
                          ___________________________

                                  No. 13-2045
                          ___________________________

                                      William Murr

                         lllllllllllllllllllll Plaintiff - Appellant

                                             v.

                     Midland National Life Insurance Company

                        lllllllllllllllllllll Defendant - Appellee
                                       ____________

                      Appeal from United States District Court
                   for the Southern District of Iowa - Des Moines
                                   ____________

                              Submitted: April 16, 2014
                                Filed: July 15, 2014
                                  ____________

Before WOLLMAN, BYE, and SHEPHERD, Circuit Judges.
                          ____________

WOLLMAN, Circuit Judge.

       This dispute concerns a missing term in an annuity contract sold by Midland
National Life Insurance Company (Midland) to William Murr. Murr contends that
the plain language of the contract dictates that the term is zero or that, at a minimum,
Midland’s proffered term is unreasonable. The district court1 granted summary
judgment in favor of Midland. Murr appeals, and we affirm.

                                    I. Background

                      A. Midland’s Legacy Bonus 11 Annuity

      Midland markets and sells various types of life insurance policies and annuity
products. Relevant to this dispute is one of Midland’s fixed deferred annuity
products, named the Legacy Bonus 11 Annuity. Generally, an annuity is a contract
purchased from an insurance company that enables the annuitant to receive an income
stream for the duration of his life. The annuitant makes a lump sum premium
payment or series of premium payments in return for regular disbursements from the
insurance company that begin either immediately or at some point in the future.

       When a new certificate of the Legacy Bonus 11 Annuity is purchased, Midland
credits interest on the initial premium on the certificate’s issue date at a rate that
Midland has declared (the current interest rate). The current interest rate is set forth
by Midland in the annuity contract along with the duration for which the rate is
guaranteed. Midland then declares new interest rates for future durations.

       The Legacy Bonus 11 Annuity contract allows annuitants to add subsequent
premiums to their annuity certificates. Midland periodically declares the interest rate
for the subsequent premiums added to existing Legacy Bonus 11 Annuity certificates
(the current new money rate). The current new money rate cannot be less than the
minimum interest rate guaranteed for the life of the annuity.

      1
       The Honorable John A. Jarvey, United States District Judge for the Southern
District of Iowa.

                                          -2-
     Midland uses the same process to determine the current interest rate for the
Legacy Bonus 11 Annuity as it does to determine the current new money rate for the
Legacy Bonus 11 Annuity. To determine the current interest rate and the current new
money rate, Midland follows a process in which it considers several factors, such as
market yields, market trends, competitive conditions, costs, and business judgment.

       Based on these factors, Midland declares for the Legacy Bonus 11 Annuity a
single interest rate that it uses as the current interest rate and the current new money
rate. In other words, at any given point in time, the current interest rate is the same
as the current new money rate. When Midland discontinued selling certificates of the
Legacy Bonus 11 Annuity and consequently was no longer declaring the current
interest rate, Midland continued to declare the current new money rate using the same
process.

       The Legacy Bonus 11 Annuity contract permits annuitants to fully surrender
their annuity at any time prior to the annuity’s maturity date. When an annuitant
elects to surrender his annuity, the surrender value must be calculated to determine
the amount payable to the annuitant upon surrender. The surrender value is equal to
the accumulation value multiplied by the interest adjustment less the surrender charge
and any applicable premium tax. But the surrender value cannot be less than the
minimum guaranteed cash value or greater than the accumulation value. Midland
assesses a surrender charge if the annuitant makes a full surrender within the
contract’s fourteen-year surrender period. Anytime an annuitant initiates a full
surrender subject to a surrender charge, the contract also requires the calculation of
the interest adjustment.

     The dispute in this case centers on a term in the interest adjustment formula.
The main purpose of the interest adjustment is to facilitate the equitable allocation
between Midland and annuitants of the risk associated with early surrenders. The
amount of the interest adjustment is determined by comparing the current interest rate

                                          -3-
that was offered on the Legacy Bonus 11 Annuity certificate when that certificate was
issued with the current interest rate offered on newly issued Legacy Bonus 11
Annuity certificates on the date of surrender. The formula also adjusts for the amount
of time remaining in the surrender period. The formula for the interest adjustment is
represented mathematically as [(1 + io - .005)/(1 + it)]^(T).2 The value of “io” is the
current interest rate offered on the annuity certificate on the certificate’s issue date.
The value of “it” is the current interest rate offered on new annuity certificates as of
the date of surrendered. If io - .005 is greater than it, the formula will generally result
in a positive interest adjustment, which will increase the surrender value. Conversely,
if io - .005 is less than it, the formula will generally result in a negative interest
adjustment, which will decrease the surrender value.

                                    B. The Dispute

       Murr purchased the Legacy Bonus 11 Annuity from Midland in 2004. Murr’s
annuity certificate bore an initial interest rate of 3.4% and had a guaranteed minimum
interest rate of 2% for the life of the annuity. In 2009, during the fifth year of his
contract, Murr requested a full surrender of his annuity. Two years prior to Murr’s
surrender, however, Midland had discontinued the Legacy Bonus 11 Annuity.
Because Midland was not offering new certificates of the Legacy Bonus 11 Annuity
and consequently was not declaring the current interest rate to use for the value of
“it,” Midland, in calculating Murr’s interest adjustment, used the current new money
rate that Midland was offering on the date of Murr’s surrender. The current new
money rate on the date of Murr’s surrender was 3.55%.

       Murr filed suit for breach of contract and unjust enrichment. Murr moved for
certification on behalf of a class of annuity purchasers who surrendered their

      2
       The value of T is time in years, including fractional years, remaining in the
surrender period. The symbol ^ means to the Tth power.

                                           -4-
annuities after their particular annuities were discontinued. The district court denied
the motion, reasoning that “[b]ecause the merits can be resolved so efficiently,”
Murr’s individual claims should be evaluated first, before any class certification
ruling. D. Ct. Order of Sept. 20, 2012, at 2.

       The parties thereafter filed cross-motions for summary judgment. The district
court denied Murr’s motion and granted Midland’s motion. The district court found
that the annuity contract was silent as to the value of “it” in this case, where Midland
had discontinued the annuity. D. Ct. Order of Apr. 11, 2013, at 7. Pursuant to
Restatement (Second) of Contracts § 204, the district court looked for a term for the
value of “it” that was reasonable under the circumstances. Id. at 7-8. The district
court found that Midland’s use of the 3.55% interest rate that it was offering as the
current new money rate on the date of Murr’s surrender was reasonable and thus
supplied that interest rate. Id. at 8.

                                    II. Discussion

       “This court reviews ‘de novo a district court’s grant of summary judgment, as
well as its interpretation of state law and the terms of a contract.’” Knutson v.
Schwan’s Home Serv., Inc., 711 F.3d 911, 916 (8th Cir. 2013) (quoting Emp’rs
Reinsurance Co. v. Mass. Mut. Life Ins. Co., 654 F.3d 782, 789 (8th Cir. 2011)).
“Summary judgment is proper if, viewing the record in the light most favorable to
[Murr], there is no genuine issue of material fact and [Midland] is entitled to
judgment as a matter of law.” Id. (quoting Myers v. Richland County, 429 F.3d 740,
750 (8th Cir. 2005)). Because in a diversity case a contract must be construed
according to state law, see St. Louis Produce Mkt. v. Hughes, 735 F.3d 829, 831 (8th
Cir. 2013), we construe the contract according to Iowa law.3

      3
       Murr contends that Iowa law applies. Midland contends that Arizona law
should govern, but maintains that we need not engage in a choice-of-law analysis to

                                          -5-
       Murr asserts that Midland breached the annuity contract because it used 3.55%
for the value of “it” when Midland was no longer offering new certificates of the
Legacy Bonus 11 Annuity. Specifically, Murr argues that the plain language of the
annuity contract requires that the value of “it” be zero when no new certificates are
being offered. Murr further contends that Restatement (Second) of Contracts § 204
does not apply. In the event that § 204 does apply, Murr argues that he has provided
sufficient evidence to create a material factual dispute as to the reasonableness of
3.55%.

        The parties agree that the annuity contract is unambiguous, but they dispute
whether the terms of the contract address the issue presented in this case.4
Accordingly, we must determine whether the annuity contract sets forth the value of
“it” when Midland no longer offers new certificates of the Legacy Bonus 11 Annuity.
When a contract is clear, the court is bound to enforce its terms as they are written,
as it is improper for a court to “substitute a different meaning for that which the
parties clearly intended and embodied in unambiguous terms.” Christoffersen v.
Yellow Book USA, 536 F.3d 947, 949 (8th Cir. 2008) (quoting Midwest Oilseeds,
Inc. v. Limagrain Genetics Corp., 387 F.3d 705, 711 (8th Cir. 2004)) (applying Iowa

resolve this appeal because under either law, the judgment should be affirmed. The
district court applied Iowa law because “[n]either party ha[d] identified a true conflict
between the laws of these two states.” D. Ct. Order of Apr. 11, 2013, at 6 n.6.
      4
       Murr contends that because the contract is unambiguous, we are compelled to
enforce the plain language of the contract. Murr’s argument is based on the
assumption that if a contract is unambiguous then the plain language provides all that
is necessary to determine the rights and obligations of the parties. When a term is
missing, however, there is nothing to interpret or to find ambiguous. Cf. A.Y.
McDonald Indus., Inc. v. Ins. Co. of N. Am., 475 N.W.2d 607, 618 (Iowa 1991)
(explaining that an ambiguity occurs in a contract when a genuine uncertainty exists
concerning which one of two or more reasonable interpretations of a disputed term
is proper). The determination that a term is missing thus does not compel the
determination that the contract is ambiguous.

                                          -6-
law). In a casus omissus,5 however, where the four corners of the parties’ written
agreement fail to provide for the dispute at hand, it is up to the court to fill the gap
left by the contracting parties. See Restatement (Second) of Contracts § 204; see also
Family Snacks of N.C., Inc. v. Prepared Prods. Co., 295 F.3d 864, 869 (8th Cir.
2002); Taylor Enter., Inc. v. Clarinda Prod. Credit Ass’n, 447 N.W.2d 113, 116 (Iowa
1989) (recognizing § 204’s application when a term is not covered by the expressed
contract).

        Murr argues that the plain language of the contract dictates that the value of “i t”
is zero when Midland is no longer offering new certificates. We disagree.
Completely absent from the annuity contract is any indication about the interest rate
to be applied in the event that Midland is no longer offering new certificates of the
annuity. The contract defines “it” as “[t]he Current Interest Rate (excluding any
additional interest) offered for new certificates.” This language does not provide for
the value of “it” when new certificates are not being offered. If the plain language of
the contract dictates that the value of “it” is zero in these circumstances, as Murr
argues, that would mean that a new certificate of the Legacy Bonus 11 Annuity would
have had a declared current interest rate of zero at the time of Murr’s surrender. This
is not the case, as no new certificates were being issued from which to determine the
value of “it.”

       Murr relies on Tranzact Technologies, Ltd. v. Evergreen Partners, Ltd., 366
F.3d 542 (7th Cir. 2004), to support his argument. Tranzact, however, is inapposite.
In that case, the parties entered into a contract for the performance of advisory
services. Id. at 544. The contract provided that the advisors would be paid fees for
their work on certain transactions. Id. at 544-45. The amount of those fees was

       5
       Casus omissus is defined as “[a] situation not provided for by a statute or
contract, and therefore governed by caselaw or new judge-made law.” Black’s Law
Dictionary 210 (7th ed. 1999).

                                            -7-
determined by calculating a percentage of the “Total Transaction Value.”6 Id. at 545.
“Total Transaction Value” was defined as the “total consideration paid for an equity
interest in Tranzact[.]” Id. The advisors brought suit to recover a fee for a
transaction involving an asset sale. Id. at 544. Tranzact refused to pay the advisors,
arguing that under the plain terms of the fee provision, the advisors were entitled to
fees only for transactions that involved equity interest, not asset sales. Id. The
Seventh Circuit agreed: “Based on the plain language, fees are provided only as a
percentage of Transaction Value. The Transaction Value in this case is zero because
the formula calls for data involving equity interest, which is not a factor in asset
sales.” Id. at 548. The plain language of the contract in Tranzact explained how to
determine the amount of the Transaction Value under all circumstances—the
consideration paid for equity interest. Id. at 545. The annuity contract here, however,
does not set forth how to determine the value of “it” when Midland is not offering
new certificates of the annuity. In Tranzact, the amount of consideration paid for
equity interest in the transaction, which was zero, was ascertainable because the
transaction did not involve equity interest. In this case, however, the current interest
rate for new certificates of the annuity was unavailable because no new certificates
existed from which the value of “it” could be ascertained.

        Midland argues that because the annuity contract does not provide a value for
“it” in the circumstances of this case, the court must supply a reasonable term under
Restatement (Second) of Contracts § 204. Section 204 provides as follows: “When
the parties to a bargain sufficiently defined to be 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.”

      6
      The court assumed that “Total Transaction Value” had the same meaning as
“Transaction Value” and therefore used the terms interchangeably. Id. at 547.

                                           -8-
       Murr argues that § 204 does not apply because the annuity contract provided
all essential terms and because Midland foresaw the situation that gave rise to this
dispute. Murr’s argument that § 204 does not apply because the express written
contract provides all essential terms is foreclosed by our previous conclusion that the
contract is silent regarding the value of “it” in the absence of new certificates. It is
clear that the adjustment interest and in turn the surrender value must be calculated
in order to determine the amount to which Murr is entitled under the contract. A
value for “it” is thus essential to the determination of the parties’ rights and duties.

       Moreover, nothing in the express terms of § 204 supports Murr’s assertion that
its application is dependent on whether Midland foresaw the need for the missing
term. Instead, § 204 states that a court is authorized to supplement a contract
whenever the parties have not agreed regarding an essential term. The lack of mutual
assent resulting in an omission may be attributable not only to the parties’ failure to
foresee the situation that gave rise to the dispute, but also to the parties’ failure to
address their respective expectations:

      The parties to an agreement . . . may have expectations but fail to
      manifest them, either because the expectation rests on an assumption
      which is unconscious or only partly conscious, or because the situation
      seems to be unimportant or unlikely, or because discussion of it might
      be unpleasant or might produce delay or impasse.

Restatement (Second) of Contracts § 204 cmt. b.

       Midland and Murr’s bargain was sufficiently defined to be a contract, as
evidenced by their performance thereunder. Further, there is no doubt that the parties
agreed to the calculation of the surrender value and, as part of the surrender value, the
interest adjustment. But the parties failed to manifest their expectations with respect
to the value of “it” in the absence of new certificates. This may have been because
Midland assumed that it was permitted to use the current new money rate for the

                                          -9-
value of “it” when new certificates are not being offered, as it had always done in the
past. Nonetheless, Midland and Murr’s bargain is sufficiently defined as a contract,
and they failed to agree to the term for the value of “it” in the absence of new
certificates, a term that is required to determine Murr’s rights and Midland’s duties
under the annuity contract. Thus, § 204 permits the court to supply a term for the
value of “it” that is reasonable under the circumstances of this case.

      Murr lastly argues that in the event that § 204 applies and allows the court to
supply the missing term, he has raised a genuine dispute of material fact as to whether
3.55% is a reasonable term. Comment d of § 204, provides guidance regarding the
process of supplying an omitted term:

      The process of supplying an omitted term has sometimes been disguised
      as a literal or a purposive reading of contract language directed to a
      situation other than the situation that arises. Sometimes it is said that the
      search is for the term the parties would have agreed to if the question
      had been brought to their attention. Both the meaning of the words used
      and the probability that a particular term would have been used if the
      question had been raised may be factors in determining what term is
      reasonable in the circumstances. But where there is in fact no
      agreement, the court should supply a term which comports with
      community standards of fairness and policy rather than analyze a
      hypothetical model of the bargaining process.

       A court is not interpreting the contract when it supplies a missing term. See
Restatement (Second) of Contracts § 204 cmt. c (“[T]he supplying of an omitted term
is not within the definition of interpretation[.]”). The same sort of evidence that is
relevant to a court’s interpretation of a contract, however, can be viewed as relevant
to a court’s supplying a missing term. As the Supreme Court of Iowa has recognized,
the court may use extrinsic evidence to determine what meanings of a term are
reasonably possible and to choose among possible meanings, even absent a
determination that an ambiguity exists. Pillsbury Co. v. Wells Dairy, Inc., 752

                                          -10-
N.W.2d 430, 436 (Iowa 2008). “[T]he meaning of a contract ‘can almost never be
plain except in a context.’” Id. (quoting Restatement (Second) of Contracts § 212
cmt. b). “Any determination of meaning or ambiguity should only be made in the
light of relevant evidence of the situation and relations of the parties, the subject
matter of the transaction, preliminary negotiations and statements made therein,
usages of trade, and the course of dealing between the parties.” Fausel v. JRJ Enters.
Inc., 603 N.W.2d 612, 618 (Iowa 1999) (alteration omitted) (quoting Restatement
(Second) of Contracts § 212 cmt. b). The term for the value of “it” in the absence of
new certificates is neither plain nor ordinary, nor is it deducible from the face of the
annuity contract. Accordingly, we may refer to extrinsic evidence to supply a
reasonable term. See, e.g., Edwards v. Wyatt, 330 F. App’x 342, 349-50 (3d Cir.
2009) (examining course of dealing to supply a missing term); Bank of N.Y. v.
Janowick, 470 F.3d 264, 272 (6th Cir. 2006) (applying § 204 and considering
evidence of the parties’ efforts to allocate and shift risks through contractual
mechanisms).

       Murr contends that 3.55% is not reasonable, because when new certificates are
no longer being offered the factors that Midland uses to set the current new money
rate—competitive conditions, costs, and business judgment—are different from what
they would have been had Midland continued to offer new certificates. Specifically,
Murr contends that the current new money rate when new certificates are no longer
being offered is affected by the drop in costs associated with no longer selling new
certificates. This causes the declared current new money rate to be higher than it
would have been had new certificates still been offered. Moreover, without the sale
of new certificates, Midland’s incentive is no longer to attract customers to purchase
the annuity. Because subsequent premiums make up a small percentage of Midland’s
business, Murr argues, the competitive landscape in which the current new money
rate is set is different. In these circumstances, Midland could use its business
judgment to set the current new money rate higher than the rate it would have set had
it not exercised its business judgment in order to obtain a gain from a negative

                                         -11-
interest adjustment, because that gain could exceed the amount of any additional
interest credited to subsequent premiums.

       Murr’s evidence supporting his theory consists primarily of the declaration of
Terry Long, a consulting actuary. In his declaration, Long stated: “While the
procedure may be the same, the interest rate that is determined pursuant to that
procedure probably will not be the same because the procedure incorporates the
application of business judgment, and when business judgment is applied to differing
situations, different judgments will be made.” Long further stated that “[m]arket
factors, economic factors and the structure and design of the old policies will affect
the business judgment used in calculating the [current] new money rate when the
particular annuity contract is no longer offered for sale.” (internal quotation marks
omitted). Long also confirmed that Midland could set the current new money rate
higher than the rate it would have set had it not exercised its business judgment to
decrease any positive interest adjustment, because the “gain from the Interest
Adjustment could exceed the amount of any additional interest credited to new
premium payments in [subsequent] years.”

       In his deposition testimony, however, Long admitted that he did not analyze
the current new money rates that Midland had offered to assess whether they were
higher or lower than the rate Midland would have set had it not exercised its business
judgment; that he did not know whether the 3.55% interest rate was higher than the
rate Midland would have set had it not exercised its business judgment; and that, if
the current new money rate was higher, he would be unable to determine the reason
for the overstatement. In fact, the record reflects that the 3.55% interest rate was
below the rate Midland would have set had it not exercised its business judgment.

        Once a movant for summary judgment has properly supported its motion, the
nonmovant “must set forth specific facts showing that there is a genuine issue for
trial.” Fed. R. Civ. P. 56(e). “Conclusory affidavits, even from expert witnesses, do

                                        -12-
not provide a basis upon which to deny motions for summary judgment.” Jackson v.
Anchor Packing Co., 994 F.2d 1295, 1304 (8th Cir. 1993). Long’s declaration is
insufficient as a matter of law to establish that a genuine issue of material fact exists.
Although it states, albeit in a conclusory manner, that the procedure by which
Midland calculates the current new money rate may result in a different interest rate
when no new certificates are being offered because Midland’s business judgment
changes when new certificates are being offered, Long’s declaration does not
demonstrate that Midland’s business judgment affected its determination of the 3.55%
interest rate in this particular situation. Even if Midland had been offering new
certificates, its business judgment, although different from its business judgment
when it is not offering new certificates, may have nonetheless led it to set the current
interest rate at 3.55%. Similarly, even though Murr pointed to testimony averring that
the costs associated with selling new certificates are no longer present when new
certificates are not being offered, Murr has not presented evidence that the amount
attributable to these costs affected the reasonableness of the 3.55% interest rate. In
other words, Murr has not set forth facts to show that 3.55% is an unreasonable term
even though using the current new money rate for the value of “it” when no new
certificates are being offered could theoretically be unreasonable in some situations.
Murr thus has not raised a genuine issue of material fact concerning the
reasonableness of using the 3.55% interest rate for the value of “i t” in this case.

                                    III. Conclusion

      The judgment is affirmed.
                     ______________________________

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