FCLT Loans Asset Corporation v. First City Fin. Corp.
(Tex.App.- Houston [1st Dist.] Jun. 4, 2009)(Bland) (demutualization dispute)
Demutualization is the process of converting from a mutual insurance company (which is owned by
policyholders) to a stock insurance company (which is owned by outside shareholders).
REVERSE TC JUDGMENT AND REMAND CASE TO TC FOR FURTHER PROCEEDINGS:
Opinion by
Justice Bland  
Before Justices Jennings, Hanks and Bland
01-06-00798-CV FCLT Loans Asset Corporation and Timothy J. Blair, Class Representative v. FIRST
CITY FINANCIAL CORPORATION, Appellee/Appellant; J.P. MORGAN CHASE BANK, NATIONAL
ASSOCIATION AS SUCCESSOR TRUSTEE OF FIRST CITY BANCORPORATION EMPLOYEES
RETIREMENT TRUST.
Appeal from 152nd District Court of Harris County
Trial Court Judge:
Hon. Kenneth P. Wise  

O P I N I O N

    Before its failure in the early 1990s, First City Bancorporation of Texas, Inc. (First City), acting as
trustee of its employee retirement trust, purchased a number of group annuity contracts (GACs) to
replace the defined benefits formerly available to its employees under its employee retirement benefit
plan.  In 2001, Prudential Insurance Company (Prudential), one of the insurance companies from
which First City purchased GACs, converted from a mutual company to a stockholder-owned
company, a process known as demutualization.  This conversion resulted in the distribution of stock
worth more than $ 17 million (the demutualization proceeds), in exchange for the membership interest
in the two GACs.[1]  

A dispute over the ownership of these demutualization proceeds arose.  First City Financial
Corporation (FCFC) and FCLT Loans Asset Corporation (FCLT)—two entities created in connection
with First City’s bankruptcy—and Timothy J. Blair, as representative for a class of the former First City
retirement plan participants, each has claimed exclusive entitlement to the proceeds, and filed cross-
motions for summary judgment on the issue in the trial court.  The trial court granted summary
judgment in favor of FCFC.  Holding that none of the appellants is entitled to the demutualization
proceeds as a matter of law without a determination of ownership from the trustee of the benefit
plan—who holds legal title to the GACs—we reverse the judgment and remand the cause to the trial
court for further proceedings consistent with this opinion.

Background

    In 1983, First City established and funded a defined benefit retirement plan[2] for its employees.  
First City placed the plan in a trust and appointed First City National Bank of Houston (the Houston
Bank) to serve as the trustee.  In its capacity as trustee, the Houston Bank administered the plan, and
held and invested First City’s contributions to the plan.  

    Three years later, First City decided to terminate the retirement plan and the trust.[3]  To replace
the benefits promised under the plan, the Houston Bank, acting in its capacity as trustee, purchased
two GACs[4] from Prudential in accordance with ERISA requirements.  See 29 U.S.C. § 1341(b)(3)(A)
(i) (2000).  The GACs name as “Contract-Holder” “First City National Bank of Houston As Trustee of
the First City Bancorporation Employee Retirement Trust,” and provide that:

The Contract-Holder will be the sole representative under this contract of each person and
organization with an interest in the Plan.  The Prudential will deal with the Contract-Holder except to
the extent the Contract-Holder has directed The Prudential to do otherwise and The Prudential has
consented thereto.  The Prudential will be entitled to rely on any action taken or omitted by or on
behalf of the Contract-Holder pursuant to the terms of this contract.  The Contract-Holder at any time
may, with the consent of The Prudential, appoint a successor Contract-Holder.  Any successor
Contract-Holder will have all the rights, duties, and obligations of the Contract-Holder; provided,
however, that if the Contract-Holder notified 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 until the date on which there ceases to
be any further Pension or other payments payable in accordance with the terms of this contract.  That
date will be the date as of which this contract terminates.

    In 1992, the Federal Deposit Insurance Corporation (FDIC) declared the Houston Bank insolvent
and appointed itself receiver.  The FDIC created New First City, Texas—Houston, N.A. (New Houston
Bank) to take possession of certain assets of the Houston Bank, including its trust department.  

Shortly after the receivership, First City became the subject of an involuntary Chapter 11 bankruptcy
proceeding.  See 11 U.S.C. § 303.  Two entities created in connection with First City’s bankruptcy
reorganization plan still exist—FCFC and FCLT.

    Following confirmation of the plan, FCFC’s Portfolio Committee adopted resolutions concerning
the administration of the Houston Bank’s employee benefit plans.  The document memorializing those
resolutions recites:

WHEREAS, the [liquidating trust] was established pursuant to the Confirmation Order and is a
successor in interest and assignee of [the Houston Bank] under the Joint Plan of Reorganization,
pursuant to which [the Houston Bank] transferred to [the liquidating trust] substantially all of its non-
cash assets, including, but not limited to, its obligations as related to the Plans; and the trust
accounts for such Plans and related trusts, along with the obligation to serve as trustee and/or
investment manager under the terms of the trust agreements, to the extent such obligation remained,
were transferred to Texas Commerce Bank National Association as a result of the Purchase and
Assumption Agreement dated as of February 12, 1993 among the FDIC as Receiver of New First City,
Texas—Houston, N.A., the FDIC, and Texas Commerce Bank National Association;

NOW, THEREFORE, BE IT

RESOLVED that Chase Bank of Texas (formerly Texas Commerce Bank National Association) be,
and it hereby is, confirmed, effective July 3, 1995, as Trustee and Investment Manager under the
terms of the aforementioned Plans and related trust agreements . . . .

Through a series of mergers and other transactions, JPMorgan Chase Bank, N.A. (JPMorgan)
currently holds the two GACs purchased by the Houston Bank in its capacity as trustee, but JPMorgan’
s name does not appear on the GACs as the contract-holder, and the Houston Bank remains the
named contract-holder on their face.     

Nearly a decade after First City’s bankruptcy, Prudential “demutualized”[5] by reorganizing its
business from a mutual insurance company to a stock insurance company.  As part of the
demutualization, Prudential exchanged its policyholders’ membership interests for newly issued
common stock.  In this case, Prudential exchanged the membership interests attached to the two
Prudential GACs for 321,211 shares of stock.  

When Prudential attempted to locate the successor to “First City National Bank of Houston As Trustee
of the First City Bancorporation Employee Retirement Trust”—the named contract holder—FCLT,
FCFC, and JP Morgan made competing claims to ownership of the demutualization proceeds.  
Prudential brought this interpleader action after it found that it could not satisfactorily resolve the
question of which entity was the successor trustee, and, as such, entitled to claim the proceeds.  

FCLT, FCFC, and JPMorgan answered.  FCFC also brought a counterclaim, asking that it be
declared owner of the demutualization proceeds.  In its answer, JP Morgan clarified that it did not
claim the funds in its individual corporate capacity, but only in its capacity as successor trustee of the
First City employee retirement trust.  JPMorgan acknowledged that, as successor trustee, it was the
proper recipient of the demutualization proceeds as “contract holder” under Prudential’s plan of
reorganization.  In addition, JPMorgan filed a petition invoking the trial court’s jurisdiction under the
Texas Trust Code, asking for construction of trust provisions and determination of other issues
relevant to the disbursement of the Prudential stock, specifically: (1) to whom the demutualization
proceeds should ultimately belong; and (2) whether the event that produced the demutualization
proceeds is an “actuarial error” within the meaning of applicable language in the trust.  JP Morgan
also petitioned for joinder of Timothy J. Blair, a former First City employee, to serve as representative
of a certified class of the former plan participants covered by the GACs.[6]  

The trial court addressed Prudential’s petition in interpleader and an “Agreed Emergency Motion for
Immediate Release of Interpled Property” to JP Morgan, “as successor trustee of First City
Bancorporation Employee Retirement Trust,” which the trial court considered as an unopposed
request for re-registration of the interpled account and granted.  Shortly thereafter, the trial court
signed an order discharging Prudential from the suit and allowing it to recover its costs and attorney’s
fees from JP Morgan, as successor trustee.  In addition, the trial court amended its re-registration
order to authorize JP Morgan to serve as “Successor Trustee of the Trust, with all of the rights,
powers and authority provided under the Trust Agreement (as amended) which established the Trust
and under applicable law.”[7]

Blair, on behalf of the retirement plan participants, FCFC, and FCLT all filed cross-motions for
summary judgment, each claiming—to the exclusion of the others—entitlement to the demutualization
proceeds as a matter of law.  JP Morgan did not move for summary judgment, but did file an omnibus
response to the other parties’ motions.  The trial court denied FCLT and Blair’s motions, and granted
FCFC’s motion, and rendered judgment that FCFC was owner of the demutualization proceeds.  This
appeal followed.

DISCUSSION

Blair, as class representative, and FCLT each claim that the trial court erred in granting summary
judgment in favor of FCFC declaring its entitlement to the demutualization proceeds as a matter of
law.  

Standard of Review

We review a trial court’s summary judgment de novo.  Valence Operating Co. v. Dorsett, 164 S.W.3d
656, 661 (Tex. 2005); Provident Life & Accid. Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003).  
When reviewing a summary judgment, we take as true all evidence favorable to the nonmovant, and
indulge every reasonable inference and resolve any doubts in the nonmovant’s favor.  Dorsett, 164 S.
W.3d at 661; Knott, 128 S.W.3d at 215; Sci. Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 911 (Tex.
1997).  Under Texas Rule of Civil Procedure 166a(c), the party moving for summary judgment bears
the burden of showing that no genuine issue of material fact exists and that it is entitled to judgment
as a matter of law.  Tex. R. Civ. P. 166a(c); Knott, 128 S.W.3d at 215–16.  When all parties move for
summary judgment and the trial court grants one motion and denies the others, the reviewing court
considers the summary judgment evidence presented by all sides, determines all questions
presented, and if the reviewing court determines that the trial court erred, renders the judgment the
trial court should have rendered.  See Dorsett, 164 S.W.3d at 661; FM Props. Operating Co. v. City
of Austin, 22 S.W.3d 868, 872 (Tex. 2000).

    Propriety of summary judgment ruling

    Before FCLT, FCFC, and Blair moved for summary judgment, the trial court had already signed an
order holding that JP Morgan, as successor trustee, was the contract holder of the GACs, and
dismissing Prudential from the lawsuit.  By virtue of its status as contract holder, JP Morgan,
therefore, is the legal owner of the demutualization proceeds as a matter of law.  For this reason,
neither Blair, as class representative, FCFC, nor FCLT is entitled to the demutualization proceeds as
a matter of law.  Accordingly, we hold that the trial court erred in granting summary judgment in favor
of FCFC on that issue.

    When the trial court, with Prudential’s agreement, declared JP Morgan as successor trustee and
contract holder, the nature of the lawsuit changed.  JP Morgan did not merely slip into Prudential’s
shoes in the interpleader action.  An interpleader is a suit to determine a right to property held by a
disinterested third party who is in doubt about ownership and who, therefore, deposits the property
with the trial court to permit interested parties to litigate ownership, letting the court decide who is
entitled to the funds and thereby avoiding the peril of deciding ownership itself.  Clements v. Minn.
Life Ins. Co., 176 S.W.3d 258, 263 (Tex. App.—Houston [1st Dist.] 2004, no pet.); Olmos v. Pecan
Grove Mun. Util. Dist., 857 S.W.2d 734, 741 (Tex. App.—Houston [14th Dist.] 1993, no writ).  It is
undeniable that JP Morgan, as the successor trustee, holds legal title to the GACs and is responsible
for the distribution of their proceeds.  

    JP Morgan’s own pleadings, which invoke jurisdiction under the Texas Trust Code and
acknowledge that proper disbursement of the demutualization proceeds requires an interpretation of
trust language, repudiate any suggestion that JP Morgan lacks an interest in the proceeds.  In its
summary judgment response, JP Morgan stressed that this is a trust case and urged the trial court to
construe the trust instrument to ascertain the proper beneficial owner or owners of the
demutualization proceeds.  Yet, without a request for affirmative relief from JP Morgan, the trial court
was not in a position to make the rulings JP Morgan and the parties to this appeal sought assistance
in determining, i.e., the ownership of these demutualization proceeds beyond the legal title vested
with the trustee.

    The Texas Trust Code accords jurisdiction over proceedings to

(1)     construe a trust instrument;

(2)     determine law applicable to a trust instrument;

. . .

(4)     determine the powers, responsibilities, duties, and liability of a trustee;

(5)     ascertain beneficiaries; [and]

(6)     make determinations of fact affecting the administration, distribution, or duration of a trust . . . .

Tex. Prop. Code Ann. § 115.001(a) (Vernon 2007 & Supp. 2008).  These are the provisions invoked
by JP Morgan and the provisions under which JP Morgan must proceed.  The other parties’ summary
judgment motions were not properly before the court insofar as a determination of the legal
ownership of the interpled funds, and the record as it stands is not sufficient to yield an unequivocal
answer to the question of the ownership of the proceeds beyond the legal title holder.

Conclusion

We hold that JPMorgan, as successor trustee, is the legal owner of the interpled demutualization
proceeds as a matter of law, and the trial court thus erred in granting summary judgment in favor of
FCFC on that issue.  Because the trustee’s participation is necessary to determine the appropriate
disbursement of the demutualization proceeds, in consideration of the competing parties’ interests
and the status of the annuities purchased by the Plan, we deny the parties’ agreed motion to abate
this appeal, reverse the judgment and remand the cause to the trial court for further proceedings
consistent with this opinion.  All other pending motions are dismissed as moot.

                                                             Jane Bland

                                                             Justice

Panel consists of Justices Jennings, Hanks, and Bland.

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[1] The parties agreed that the stock should be liquidated to its cash value while the interpleader
action was in the trial court.  

[2] A defined benefit retirement plan consists of a general pool of assets upon which the employer
bears the entire investment risk and must cover any underfunding as the result of a shortfall that may
occur from the plan’s investments.  Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439–40, 119 S.
Ct. 755, 761 (1999).  Conversely, if the defined benefit plan is overfunded, the employer may reduce
or suspend his contributions.  Id. at 440, 119 S. Ct. at 761.  Upon retirement, the employee is entitled
to a fixed periodic payment under the terms of the plan.  Id. at 439, 119 S. Ct. at 761.

[3]  First City discovered that the plan was overfunded, and took this action to recoup the surplus.

[4] “Annuities are contracts under which the purchaser makes one or more premium payments to the
issuer in exchange for a series of payments, which continue either for a fixed period or for the life of
the purchaser or a designated beneficiary.”  NationsBank of N.C., N.A. v. Variable Annuity Life Ins.
Co., 513 U.S. 251, 254, 115 S. Ct. 810, 812 (1995).

[5] Demutualization is the process of converting from a mutual insurance company (which is owned by
policyholders) to a stock insurance company (which is owned by outside shareholders).  Black’s Law
Dictionary 445 (7th ed. 1999); see also Bank of N.Y. v. Janowick, 470 F.3d 264, 267 (6th Cir. 2006);
James A. Smallenberger, Restructuring Mutual Life Insurance Companies: A Practical Guide Through
the Process, 49 Drake L. Rev. 513, 516 (2001).

[6]  JPMorgan declined to participate in this appeal.

[7] At Blair’s request, the trial court also added a statement that the order would “not prejudice the
ability of any party to contend that the Trust terminated at some previous time.”