IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
June 10, 2009
No. 08-50782 Charles R. Fulbruge III
Clerk
JAMES E TRUE, Individually and on Behalf of All Other Similarly Situated
Persons
Plaintiff-Appellant
v.
JOSUE ROBLES; JOHN H. MOELLERING; JOHN P. ABIZAID; PATRICIA
C. BARRON; JOHN D. BUCKELEW; THOMAS P. CARNEY; DANIEL W.
CHRISTMAN; EILEEN M. COLLINS; STEPHEN B. CROKER; LESLIE G.
DENEND; THOMAS B. FARGO; FREDERICK M. HAMILTON;
MARCELITE J. HARRIS; WILLIAM J. HYBL; JAY JOHNSON; LESTER L.
LYLES; MICHAEL E. RYAN; JOSEPH C. STRASSNER
Defendants-Appellees
Appeal from the United States District Court
for the Western District of Texas
USDC No. SA-08-CA-53-OG
Before REAVLEY, DAVIS, and BENAVIDES, Circuit Judges.
FORTUNATO P. BENAVIDES, Circuit Judge:
This putative class-action suit raises a novel question concerning the
fundamental legal structure of a peculiar entity known as a reciprocal insurance
exchange, which is essentially an insurance company cooperatively owned by
those it insures, known as “members” or “subscribers.” Specifically, we must
inquire into the nature of the legal relationship between the board of directors
No. 08-50782
of the United Services Automobile Association (“USAA”), a large reciprocal
insurance exchange, and its subscribers, and determine what legal duties are
created by that relationship. James True, a USAA subscriber, alleges that the
USAA board of directors breached fiduciary and contractual duties owed to
individual members by retaining billions of dollars in unallocated surplus funds,
and not allocating those funds to the USAA savings accounts of individual
subscribers. True contends that the unallocated surplus vastly exceeds the
amount required by applicable state regulations or needed to ensure USAA’s
financial stability.
The district court, applying Texas law, dismissed the suit, holding that: (1)
the board did not owe a fiduciary duty to USAA’s individual members, but rather
only to the entity itself, and therefore that individual members could not pursue
claims for breach of fiduciary duty or constructive fraud against the board; (2)
True’s subscriber agreement with USAA was not a contract between True and
the board, and thus could not serve as the basis for a breach of contract claim;
and (3) True had failed to allege facts sufficient to avoid the application of the
business judgment rule to the board’s decision. True contends that the district
court erred with respect to each of these holdings.
For the reasons discussed in greater detail below, we hold that there is no
fiduciary or contractual relationship between individual subscribers and the
USAA board of directors, and therefore that True has failed to state a claim for
relief. Because we hold that True has failed to allege that the board violated any
legal obligation owed to individual subscribers, we do not reach the question of
whether the board’s decision to retain billions of dollars in unallocated surplus
funds, rather than allocate those funds to the USAA savings accounts of
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No. 08-50782
individual subscribers, should be accorded business judgment deference.
Accordingly, we AFFIRM the judgment of the district court.
I. Background
A. Reciprocal Insurance Exchanges
1. In General
The parties refer to USAA as a “reciprocal interinsurance exchange,” but
such an association is also referred to as a “reciprocal insurer,” a “reciprocal
insurance exchange,” an “interinsurance exchange,” an “interindemnity
exchange,” or a “reciprocal.” The most commonly used name appears to be
“reciprocal insurance exchange.” A reciprocal insurance exchange is essentially
an insurance company cooperatively owned by those it insures. See Kiepfer v.
Beller, 944 F.2d 1213, 1216 (5th Cir. 1991); Wilson v. Marshall, 218 S.W.2d 345,
346 (Tex. Civ. App. 1949). Through such an entity, members “undertake to
indemnify each other against certain kinds of losses by means of a mutual
exchange of insurance contracts, usually through the medium of a common
attorney-in-fact appointed for that purpose by each of the underwriters . . . .” 43
Am. Jur. 2d Insurance § 81 (2008). Thus, in its pure form, a reciprocal insurance
exchange is a web of contractual relationships between subscribers who agree
to insure one another, consummated through a common agent with power of
attorney. See Dennis F. Reinmuth, The Regulation Of Reciprocal Insurance
Exchanges 11 (1967) (“[C]onceptually a reciprocal consists of a series of private
contracts among the members or subscribers, each agreeing to insure one
another, the exchange of insurance being consummated through the common
agent of the members, the attorney-in-fact, and by means of the subscriber’s
agreement of power of attorney.”).
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2. A Brief History
When reciprocal insurance exchanges were first established in the late
nineteenth century, subscribers had several, not joint, liability on all of the
exchange’s liabilities. See Lee v. Interinsurance Exch. of the Auto. Club of S.
Cal., 50 Cal. App. 4th 694, 702–03 (Cal. Ct. App. 1996) (citing Delos v. Farmers
Ins. Group, 93 Cal. App. 3d 642, 652 (1979); 2 Couch on Insurance 2d § 18.11, at
613 (1984); Reinmuth, supra, at 10–20). The exchange had no capital, and funds
for the payment of losses were collected from subscribers after losses occurred.
Id. at 703 (citing Mitchell v. Pac.Greyhound Lines, 33 Cal. App. 2d 53, 59–60
(1939); Couch, supra, §§ 18:11, at 614–15; Reinmuth, supra, at 2).
To avoid delays, exchanges began collecting advance annual deposits,
which were kept in a separate account for each subscriber, with the subscriber’s
pro rata share of losses and expenses being deducted as needed. If a subscriber’s
account had a positive balance at the end of the year, that amount became part
of a subscriber’s “savings” or “surplus,” and was either distributed to subscribers
or held until the subscriber withdrew from the exchange. If the balance was
negative, the subscriber could be assessed for a specified maximum amount
beyond their deposit. Id. at 703 (citing Couch, supra, §§ 18:26–18:30, at
633–641; Reinmuth, supra, at 2, 30–31).
The original concept of reciprocal insurance contemplated the allocation
of all surplus to the accounts of individual subscribers, but over time it became
customary for reciprocals to accumulate unallocated surplus, which was held
perpetually in anticipation of catastrophic losses and not subject to withdrawal
by departing subscribers. However, the use of such separate surplus accounts
is merely an internal bookkeeping device; all assets are held in a common fund,
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No. 08-50782
and there is no physical segregation of assets to individuals. Reinmuth, supra,
at 31. As a result of the accumulation of surplus assets, many reciprocals,
including USAA, began issuing nonassessable policies, under which subscribers
had no contingent liability for claims, expenses, or losses of the exchange. See
Lee, 50 Cal. App. 4th at 703–04 (citing Reinmuth, supra, at 2, 18, 30–37,
186–87). True holds such a nonassessable policy from USAA.
3. Under Texas Law
The Texas Insurance Code specifically authorizes the establishment of
reciprocal insurance exchanges and establishes rules relating to their operation.
See Tex. Ins. Code Ann. § 942 (2008); see also 44 Tex. Jur. 3d Insurance
Companies § 57. The statute provides that “subscribers of this state may
exchange reciprocal or interinsurance contracts with other subscribers of this
state or of another state or country to provide indemnity among those
subscribers for a loss for which insurance coverage may be obtained under other
law.” Tex. Ins. Code Ann. § 942.002(a).
A “subscriber” is defined as “an individual, partnership, or corporation
who, through an attorney in fact, enters into a reciprocal or interinsurance
contract.” Id. § 942.001(4). A “reciprocal or interinsurance contract” is defined
as “an insurance policy or other contract that provides indemnity among a group
of subscribers for certain losses,” id. § 942.001(3), and the statute provides that
such a contract may be executed by an attorney in fact appointed by the
subscribers of an exchange, id. § 942.051.
The statute requires subscribers, through an attorney in fact, to file a
declaration specifying the name of the proposed exchange, the kinds of insurance
to be provided, a copy of the power of attorney or other authorization of the
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No. 08-50782
attorney in fact, the location of the exchange’s offices, and an affidavit stating
that the capital and surplus is the bona fide property of the exchange and that
the information in the declaration is true. Id. § 942.053. The statute imposes
financial requirements on exchanges relating to the maintenance of sufficient
unencumbered surplus and reserves. Id. § 942.155. “The primary purpose of
[such requirements are] to provide policyholder security in the event of adverse
or catastrophic loss experience.” Reinmuth, supra, at 119.
B. The USAA Bylaws, Subscriber Agreements, and Insurance
Policies
The USAA bylaws state that USAA “is a reciprocal interinsurance
exchange,” and that “[t]he purpose of USAA is to provide insurance coverages
and other financial products and services and engage in other activities for the
benefit of its members, associates and their families as shall be determined by
the board of directors.” The bylaws provide that members are entitled to voting
rights that may be exercised to elect members of the board of directors at the
USAA annual meeting, and that:
[t]he business management and affairs of USAA shall be under the
discretion and control of the board of directors . . . and the board of
directors shall have authority to authorize contracts, incur
liabilities, expend or invest funds, and such other matters and
things connected with the conduct of USAA as they may determine,
subject always, however, to the right of the members to modify, alter
or withdraw the powers of the board of directors. . . .
Article XII of the bylaws specifically addresses the issue of surplus funds.
Under the section heading “Statutory and Financial Requirements,” the bylaws
state that “[t]he surplus accruing from the operation of USAA shall be allocated
and/or segregated in the Surplus Account as required by regulatory authorities
and as the board of directors may determine.” Under the section heading
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No. 08-50782
“Distribution to Members,” the bylaws state that “[t]he Surplus in excess of that
required by regulatory authorities or for the financial stability of USAA as
determined by the board of directors shall be returned to members under the
rules formulated by the board of directors.”
Under the bylaws, each subscriber is required to execute a power of
attorney, also known as a subscriber agreement, to the attorney in fact
designated by the board of directors. The subscriber agreement is entitled
“Power of Attorney,” and states that the subscriber:
agrees with other subscribers . . . to obtain . . . benefits by the
exchange of private contracts of indemnity, and to that end I . . .
appoint . . . [the person designated by the board of directors] . . . my
attorney . . . [t]o exchange with other subscribers . . . indemnity to
the extent determined by the Exchange, and to subscribe and
deliver all proper contracts to do and perform every other thing that
I could do in respect to such contracts so exchanged . . . .
However, the power vested in the attorney in fact is to be exercised “only in
accordance with the decisions of the Board of Directors.” The subscriber
agreement contains a provision stating that “I hereby adopt as part hereof the
By-Laws of the Exchange now hereafter effective.” It also contains a provision
limiting a subscriber’s right to recover on any judgment against the board of
directors: “I agree that no right of recovery shall ever exist in my favor under the
policy contracts applied for or hereafter applied for, or otherwise arising out of
my subscribership, against any subscriber, officer, director or agent of the
Association and that I will look solely to the assets of the Exchange for payment
of any sum owing me, whether before or after final judgment.” The reverse side
of the subscriber agreement contains “An Explanation of the Power of Attorney,”
stating that:
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No. 08-50782
[t]he Association is that form of an insurance concern known as a
reciprocal exchange. The members act collectively through
attorneys-in-fact, insuring each of the members. The power of
attorney is the legal device whereby the contracts may be executed
thus eliminating the necessity of all the members signing each
contract.
The insurance policies issued by USAA also discuss the rights and
liabilities of USAA subscribers. The policies state that “[by] purchasing this
policy you are a member of USAA and are subject to its bylaws.” The policies
specifically discuss the allocation of surplus funds:
The USAA Board of Directors may annually allocate a portion of
USAA’s surplus to Subscriber’s Savings Accounts. Amounts
allocated to such accounts remain a part of USAA’s surplus and may
be used as necessary to support the operations of the Association.
A member shall have no right to any balance in the member’s
account except until following termination of membership, as
provided in the bylaws.
II. Standard of Review
This court reviews de novo a district court’s grant or denial of a Rule
12(b)(6) motion to dismiss, “accepting all well-pleaded facts as true and viewing
those facts in the light most favorable to the plaintiff,” Stokes v. Gann, 498 F.3d
483, 484 (5th Cir. 2007). Dismissal is appropriate when the plaintiff has not
alleged “enough facts to state a claim to relief that is plausible on its face” and
has failed to “raise a right to relief above the speculative level.” Bell Atl. Corp.
v. Twombly, 500 U.S. 544, 555, 570 (2007).
III. Analysis
The district court held that the board did not owe a fiduciary duty to
USAA’s individual members, but rather only to the entity itself, on the grounds
that the legal relationship between the board of directors of a reciprocal
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No. 08-50782
insurance exchange and its subscribers is analogous to the relationship between
the board of a corporation and its shareholders. In the latter relationship, under
Texas law, the directors have a fiduciary duty only to the corporation as a whole,
not to individual shareholders, unless a contract or confidential relationship
exists between them in addition to the corporate relationship. See Gearhart
Indus., Inc. v. Smith Intern., Inc., 741 F.2d 707, 721 (5th Cir. 1984) (citing 15
Tex. Jur. 3d Corporations §§ 165–171 (1981)); Somers v. Crane, Nos.
01-07-00754-CV, 01-08-00119-CV, --- S.W.3d ----, 2009 WL 793751, at *4 (Tex.
App. March 26, 2009); Cotten v. Weatherford Bancshares, Inc., 187 S.W.3d 687,
698 (Tex. App. 2006); Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex. App. 1997).
True argues that it is inappropriate to draw this analogy for the purpose of
analyzing the nature of the legal relationship between the board of a reciprocal
insurance exchange and its subscribers because of fundamental differences in
the structure of reciprocal insurance exchanges and corporations. Specifically,
a reciprocal insurance exchange is not a separate person, like a corporation, that
can sue its directors and officers, but rather an association of contracting parties
represented in their dealings with each other by an attorney in fact.
The relevant Texas statutes do not address whether the directors of a
reciprocal insurance exchange owe a fiduciary duty to individual subscribers,
and we are not aware of any cases, in Texas or elsewhere, that do so.1 We must
1
True contends that courts in other states, including California, have held that the
board of a reciprocal insurance exchange owes fiduciary duties to individual subscribers. True
misrepresents these holdings. For example, True includes the following quotation from Tran
v. Farmers Group, Inc., 104 Cal. App. 4th 1202 (Cal. Ct. App. 2002), as modified on denial of
reh'g, (Jan. 27, 2003), in his brief:
Respondents contend their fiduciary duty runs not to individual subscribers, but
to the exchange as a collective whole. . . . In Lee v. Interinsurance Exchange, and
Industrial Indem. Co. v. Golden State Co., the courts held that the
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No. 08-50782
thus look to other areas of the law for guidance. There is some support for the
proposition that Texas corporations law should guide this court in determining
the legal duties of the board of a reciprocal insurance exchange. Texas courts
and statutes have recognized that reciprocals and corporations share some basic
common features. Texas courts have broadly analogized subscribers in a
reciprocal insurance exchange to stockholders in a corporation in several cases.
See, e.g., Physicians, Surgeons and Hosps. Prof’l Servs., Inc. v. Texas, No.
03-01-00373-CV, 2002 WL 1727396, at *3 (Tex. App. July 26, 2002) (“In a
reciprocal insurance exchange, the subscriber is not only a policyholder/insured,
but is also an owner of the business, just as stockholders are owners of a
corporation.”); Wilson v. Marshall, 218 S.W.2d 345, 346 (Tex. Civ. App. 1949)
(“The subscribers at a reciprocal exchange . . . own the insurance business just
as stockholders own their corporation. . . . When called upon to pay an
assessment for his pro rata part of the losses, the subscriber at the exchange
stands in the position of a stockholder in a stock insurance company whose
capital structure has become depleted and who is required to pay a certain
attorneys-in-fact of a reciprocal exchange owe fiduciary duties to the subscribers
analogous to the duties owed to shareholders by corporate management.
Respondents’ claim that the trustee of a trust owes a fiduciary duty to the trust
itself but not to the beneficiaries is absurd. The business decisions made by the
attorney-in-fact on behalf of the exchange are protected by the business
judgment rule, but this does not absolve them of fiduciary responsibility to
individual subscribers.
Id. The respondents in that case were attorneys in fact, not board members, and the quoted
passage states only that an attorney in fact, not the board of directors, owes a fiduciary duty
to individual subscribers. This is made even clearer when one considers the sentence that
follows the first sentence of the quoted passage, and which True omitted with an ellipses:
“Section 1305, however, clearly states that when the attorney-in-fact executes contracts, it is
‘acting for [the] subscribers under powers of attorney.’”
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amount on each share of stock he owns into the coffers of the company to remove
the deficit.”).
The chapter of the Texas Insurance Code addressing reciprocal insurance
exchanges itself explicitly states that reciprocal insurance exchanges are subject
to a number of the same statutory provisions that apply to corporations. The
provisions of the Texas Business Corporation Act that relate to the
indemnification of officers and directors apply to an exchange. Tex. Ins. Code
Ann. § 942.003. Although reciprocal insurance exchanges are generally exempt
from the operation of state insurance laws, subscribers to an exchange and their
attorney in fact are still subject to a number of laws regarding the formation and
structure of insurance companies. With the exception that references to “articles
of incorporation” should instead be read to refer to “declaration of subscribers,”
and that the unencumbered surplus of an exchange should be considered “capital
structure,” the following statutory provisions, among others, apply with equal
force to reciprocal insurance exchanges and insurance companies: (1) to form a
company, each incorporator must adopt and sign the articles of incorporation of
the company; (2) to obtain a charter for an insurance company, incorporators
must file an application for charter, the proposed articles of incorporation, and
an affidavit stating that the capital and surplus is the bona fide property of the
company and that the information in the articles of incorporation is true; and (3)
in considering an application, the insurance commissioner must assess whether
the proposed capital structure of the company meets the requirements of the
insurance code, whether the proposed officers, directors, attorney in fact, or
managing head of the company have sufficient insurance experience, ability,
standing, and good record to make success of the proposed company probable,
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No. 08-50782
and whether the applicants are acting in good faith. Id. §§ 822.051,
822.057–822.060, 822.201, 942.003.
This court’s precedent provides more direct support for drawing the
corporate analogy. In one case, this court looked to Texas corporations law to fill
in gaps in the statutory scheme for reciprocal insurance exchanges, resorting to
the provisions of the Texas Business Corporation Act to determine whether the
directors of a reciprocal insurance exchange are agents of the exchange, an issue
not addressed in the Texas Insurance Code. See Kiepfer, 944 F.2d at 1217–18.
True concedes that it may be appropriate to draw analogies between
members of a reciprocal insurance exchange and shareholders of corporations in
certain contexts, but that such an analogy is inappropriate here on the grounds
that: (1) USAA’s members chose the reciprocal form specifically because one of
the structural features of that form is direct accountability to the individual
members; and (2) the board cannot owe a fiduciary duty to the membership as
a whole because USAA is not a distinct legal entity. We do not believe that
either of these objections is grounds for rejecting the corporate analogy in this
suit.
Of course, a reciprocal insurance exchange is not a corporation. It would
indeed be inappropriate to blindly apply corporations law to reciprocal insurance
exchanges as if there were absolutely no legal difference between the two.
However, in areas in which reciprocal insurance exchanges and corporations
possess similar structural features and in which similar interests and policy
concerns are implicated, corporations law may provide helpful guidance in
determining the applicable rule under Texas law. See Audler v. CBC Innovis
Inc., 519 F.3d 239, 248–49 (5th Cir. 2008) (stating that a federal court may
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No. 08-50782
consult a variety of sources, including the general rule on the issue, decisions
from other jurisdictions, and general policy concerns, when deciding a
substantive issue under state law when that body of law provides no definitive
answers to the question presented).
True correctly notes that reciprocal insurance exchanges and corporations
are fundamentally different entities with respect to certain aspects of their basic
organizational structures. A reciprocal insurance exchange in its pure form is
essentially a web of contractual relationships between subscribers and their
agent, see Reinmuth, supra, at 11, whereas a corporation is a distinct legal entity
which comes into existence by a charter from the state and is separate from the
individuals who own it, and whose existence and internal organization is not
premised on contracts between its owners, see 15 Tex. Jur. 3d Corporations § 1.
There is thus a certain amount of direct accountability inherent in the reciprocal
form that is not present in the corporate form because of the direct individual
duties created by the contracts that are the foundation of a reciprocal insurance
exchange. Specifically, the attorney in fact that lies at the center of the
reciprocal form owes fiduciary duties to each subscriber under the power of
attorney agreements executed by each subscriber as a precondition of
membership. See Physicians, Surgeons and Hosps. Prof’l Servs., Inc., 2002 WL
1727396, at *3 (holding that a reciprocal insurance exchange and a subscriber
“were in an existing fiduciary relationship of principal and agent because of the
power of attorney granted by” the subscriber).
However, the fact that certain foundational relationships in a reciprocal
insurance exchange are characterized by direct accountability to individual
subscribers does not mean that direct accountability is inherent in all features
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No. 08-50782
of any reciprocal insurance exchange. The direct accountability that
characterizes the relationship between subscribers and the attorney in fact is
rooted in the signed power of attorney executed by the former in favor of the
latter, not in some vague understanding of the general purpose of reciprocal
insurance exchanges and their organizational structure.
In this case, unlike the attorney in fact, the board of directors does not
derive its authority from any power of attorney executed by subscribers. The
subscriber agreement states that the attorney in fact’s power to enter into
indemnity agreements with other subscribers is to be exercised “only in
accordance with the decisions of the Board of Directors,” but the subscriber
agreement itself does not grant any power directly to the board, and the fact that
the board itself has the power to appoint the attorney in fact and limit his power
makes clear that the board is not simply an agent of the attorney in fact. The
board derives its power from the USAA bylaws, consented to by the subscribers
in their subscriber agreements and through their decision to purchase policies
with USAA. Although subscribers adopt the bylaws by signing the subscriber
agreement, the subscriber agreement is not a contract between the subscriber
and the board, but rather a delegation of power to the attorney in fact. Pursuant
to the bylaws, subscribers have the power to elect board members, but
subscribers and the board are not in contractual privity. The USAA board exists
outside of the web of contractual relationships between subscribers and the
attorney in fact, and thus does not fall within the web of direct accountability
inherent in the pure reciprocal form.
To be sure, the organizational structure of USAA—essentially an elected
board grafted onto the standard reciprocal form consisting of a web of
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No. 08-50782
contractual relationships between subscribers and their agent—does not appear
to be that of a typical reciprocal insurance exchange. It seems to be somewhat
more common for a board of directors to serve as the attorney in fact, and to
manage the assets of a reciprocal in that capacity. Reinmuth, supra, at 12–13
& n.8. In that scenario, the board would owe fiduciary duties to individual
subscribers by virtue of the board’s position as each individual subscriber’s
appointed attorney in fact. However, the mere fact that USAA possesses an
atypical structure does not counsel in favor of glossing over its atypical features.
If anything, the atypical nature of USAA calls for careful scrutiny of its unique
organizational traits.
The role of USAA’s board of directors and its relationship to subscribers
is nearly identical to the role of a board of directors and its relationship to
shareholders in a corporation. In both situations, the board derives its power
from the organization’s foundational documents rather than through contracts
or powers of attorney executed by individual owners; is charged with managing
the business affairs of the entity; and is accountable to the ownership as a whole
through regular board elections. As one California decision cited by the parties
and the district court has stated in explaining why the business judgment rule
from the corporate context should apply to decisions made by the board of a
reciprocal insurance exchange:
If we look to the substance of the matter, it is clear that the
relationship between the directors of a reciprocal insurer and its
subscribers is identical in all significant ways to the relationship
between the directors of any business organization and the
organization’s investors or other nonmanaging participants—the
directors are entrusted with the governance and management of the
organization’s affairs. . . . Where the reason is the same, the rule
should be the same.
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Lee, 50 Cal. App. 4th at 713.
True argues that applying the rule from the corporate context that a board
of directors does not owe a fiduciary duty to individual shareholders to the legal
relationship between the board of USAA and its subscribers would result in the
USAA board being completely unaccountable. True asserts that the board
cannot owe a fiduciary duty to the membership as a whole because USAA is not
a distinct legal entity.
At common law, unincorporated associations were indeed not considered
to be separate legal entities, and had no existence apart from their individual
members. See Cox v. Thee Evergreen Church, 836 S.W.2d 167, 169 (Tex. 1992).
They could only hold property through the intervention of trustees, and
judgment could not be rendered against them, but rather only against their
members. Id. at 169–70. These rules were viewed as applying to reciprocal
insurance exchanges. See Reinmuth, supra, at 21 (“Since the exchange as an
unincorporated association was not a legal entity under common law and thus
could not be sued by name, any actions would have to be brought against the
individual subscribers.”); id. at 30 (“The traditional theory of a reciprocal asserts
that since the exchange is a mere place, it cannot own assets as an entity. This
concept is based on the supposition that in common law an unincorporated
association is not recognized as a separate legal entity and is therefore incapable
of holding legal title to assets.”).
However, in Texas, these common law rules have been modified by statute.
Under the chapter of the Texas civil statutes pertaining to unincorporated joint
stock companies, an unincorporated joint stock company or association doing
business in Texas may sue or be sued, and a judgment against it may be
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No. 08-50782
satisfied from the individual property of its members, although a judgment
creditor must first look to the joint property of the unincorporated entity. Tex.
Rev. Civ. Stat. Ann. arts. 6133–38 (Vernon 1970). Rule 28 of the Texas Rules of
Civil Procedure provides that “[a]ny . . . unincorporated association . . . may sue
or be sued in its . . . common name for the purpose of enforcing for or against it
a substantive right. . . .” Tex. R. Civ. P. 28. The Texas Supreme Court has
stated that “[t]here can be no doubt that, at least to the extent of obtaining and
enforcing judgments against them, rule 28 treats unincorporated associations
as legal entities,” although “[r]ule 28 generally does not affect substantive
rights.” Cox, 836 S.W.2d at 171 (citing Tex. R. Civ. P. 815); see also Darrett v.
Church of God In Christ No. 1, 381 S.W.2d 720, 722 (Tex. Civ. App. 1964)
(stating that rule 28 appears broad enough to give an unincorporated religious
association a “procedural right to bring an action in its common name to enforce
a substantive right”). Thus, an unincorporated business association does have
a separate legal existence under Texas law, at least for procedural purposes,
although the general common law rule that a judgment against an
unincorporated association may be satisfied from individual members remains
in effect.
The Texas reciprocal insurance exchange statute further modifies the
common law rule concerning the legal status of reciprocal insurance exchanges,
such that reciprocal insurance exchanges appear to exhibit more of the
characteristics of a separate legal entity than unincorporated business
associations generally. Not only may an exchange hold property, but the statute
actually imposes financial requirements on exchanges relating to the
maintenance of sufficient unencumbered surplus and reserves. See Tex. Ins.
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Code Ann. § 942.155; see also Reinmuth, supra, at 106 (“”[A]ll states specify that
the surplus be contributed to and be in the name of the exchange as an entity.”).
Exchanges are regulated as distinct entities, subject to a number of the same
insurance regulations as insurance companies generally. See Tex. Ins. Code
Ann. § 942.003. An exchange does not come into existence merely through the
agreement of private parties; a “declaration of subscribers” subject to the same
requirements as the articles of incorporation for an insurance corporation must
be filed with the state in order to form a reciprocal exchange. Id. §§ 822.051,
822.057–822.060, 942.003; see also Reinmuth, supra, at 83 (“[T]he reciprocal
differs from a typical unincorporated association in that, similar to a corporation,
it must be recognized and registered with the state before it can begin to operate
and function.”). Finally, if an exchange complies with the statutory financial
requirements relating to the maintenance of sufficient unencumbered surplus,
the individual liability of the subscribers may be limited to their annual
premiums. Tex. Ins. Code Ann. § 942.152.
We believe that under this statutory regime, USAA must be viewed as a
separate and distinct legal entity. It exists by virtue of a charter from the state;
it is regulated as an entity by the Texas insurance authorities; it can (and is
required to) hold property; it can sue, or be sued, as a legal entity; and any
judgment against it is satisfied from the exchange’s assets, with the liability of
individual subscribers limited to their annual premiums.2 A board of directors
2
As an unincorporated association, a reciprocal insurance exchange is considered to
have the citizenship of its members for diversity purposes in federal court. See Country Rock
Café, Inc. v. Truck Ins. Exch., 417 F. Supp. 2d 399, 403 (S.D.N.Y. 2006); Norton v. Gurley, No.
CIV. A. 00-1704, 2000 WL 1408168, at *1 (E.D. La. Sept. 25, 2000) (citing Carden v. Arkoma
Assocs., 494 U.S. 185, 195–196 (1990); Royal Ins. Co. of Am. v. Quinn-L Capital Corp., 3 F.3d
877, 882 (5th Cir. 1993)); Truck Ins. Exch. v. Dow Chem. Co., 331 F. Supp. 323, 324–25 (W.D.
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can owe a legal duty to such an entity. This result is in accordance with the
position taken by Professor Dennis F. Reinmuth, the author of the most
comprehensive academic work on reciprocal insurance exchanges, who has
stated that the view of the reciprocal as a legal non-entity “is not only
unrealistic, but it is substantially incorrect,” Reinmuth, supra, at 21, and that
reciprocals should generally be viewed as separate legal entities:
The traditional description of the reciprocal as a group of
individuals or firms exchanging private insurance contracts with
liability running between the individual members must be
abandoned. The courts have allowed the exchange to be sued in its
name and have permitted judgments to be levied against the
exchange without specifying how such judgments are to be allocated
among the subscribers. In so doing the courts have recognized that
the exchange is an entity in fact apart from the subscribers, with
assets in a “common fund” which can be applied to the satisfaction
of liabilities. Moreover, the courts have recognized that the
exchange as an “entity” can become insolvent.
Id. at 38. Professor Reinmuth has stated that “the exchange is now treated by
law as a kind of quasi-corporation.” Id. at 182.
The structural relationship between the board of USAA and its subscribers
is nearly identical to the structural relationship between the board of a
corporation and its shareholders, and similar interests and policy concerns are
implicated in both relationships. We are not persuaded by True’s argument that
it is inappropriate to draw the corporate analogy in this case. The USAA board
does not fall within the web of direct accountability inherent in the pure
Mo. 1971). However, this does not bear on whether a reciprocal insurance exchange is treated
as a separate legal entity under state law. See Lumbermen's Underwriting Alliance v. Mobil
Oil Corp., 612 F. Supp. 1166, 1169 (D. Idaho 1985) (“Even though state law might give an
unincorporated association the capacity to sue or be sued as an entity, the citizenship of each
of the members must still be considered for diversity purposes in federal court.”).
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reciprocal form, and USAA is in fact a separate and distinct legal entity under
Texas law to which the board can owe a fiduciary duty. Accordingly, we hold
that Texas corporations law provides the best guidance regarding whether the
board of directors of USAA owes a fiduciary duty to individual subscribers under
Texas law. See Kiepfer, 944 F.2d 1217–18 (looking to Texas corporations law to
fill in gaps in the statutory scheme for reciprocal insurance exchanges).
Applying that law in this case leads to the conclusion that the USAA directors
have a fiduciary duty only to the exchange, which represents the interests of the
subscribers as a whole, not to individual subscribers. See Gearhart Indus., Inc.,
741 F.2d at 721; Somers, --- S.W.3d ----, 2009 WL 793751, at *4; Cotten, 187
S.W.3d at 698; Hoggett, 971 S.W.2d at 488.
IV. Conclusion
We hold that there is no fiduciary or contractual relationship between
individual subscribers and the USAA board of directors, and therefore that True
has failed to state a claim for relief. The judgment of the district court is
AFFIRMED.
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