Restructuring

Contributed by Doron P. Kenter.

“For want of a message, the battle was lost. . .”

The Sixth Circuit Court of Appeals (applying Texas law) recently refused to recognize a binding mediation judgment allowing tort claims against Dow Corning prior to the commencement of Dow Corning’s long-running bankruptcy case.  Because Texas law requires all agreements regarding pending lawsuits to be memorialized in a writing (which the claimants had not obtained), the Sixth Circuit ruled that the mediator’s awards were unenforceable and that the tort claims at issue must be disallowed.
In In re Dow Corning, the court considered claims filed by four women who had filed suit against Dow in the early 1990s, alleging injury from silicone breast implants produced by Dow.  These four women were among those who opted out of a global settlement in connection with the multidistrict litigation against Dow.  To address the “opt outs,” Dow began to initiate a protocol for mediation of the remaining claims (dubbed the “Marshall Plan”).  The Marshall Plan contemplated that mediation would be binding on Dow, but not on any claimants submitting to the mediation.  Before the protocol could be officially implemented, the mediator awarded substantial damages to the four claimants.  Unfortunately for the claimants, Dow commenced its chapter 11 cases three months later, before it paid the claimants any portion of those awards and before it could formally implement the Marshall Plan.
After Dow commenced its chapter 11 cases, the four claimants filed proofs of claim against Dow, to which the company objected.  In 2004, the United States District Court for the Eastern District of Michigan held a bench trial regarding the claims, and in 2012, it issued an opinion allowing the claims (as awarded by the mediator).
On appeal, the Sixth Circuit observed that the “crux” of the issue involved Rule 11 of the Texas Rules of Civil Procedure, which provides that no agreement regarding a pending lawsuit may be enforced unless the agreement is “in writing, signed and filed with the papers as part of the record” or “made in open court and entered of record.”  The rule is based on a long-standing principle that recognizes that verbal agreements may be “misconstrued or forgotten” or may “beget misunderstandings and controversies.”  Though strict compliance with the rule is not always enforced (for example, courts have enforced agreements based a series of letters or other writings, even in the absence of formal, filed settlement agreements), the Sixth Circuit affirmed Texas’s commitment to the necessity of some form of writing evidencing the parties’ agreement.  In Dow, the court acknowledged that it had “no doubt that claimants suffered injury and that Dow desired to reach a settlement agreement with them,” but recognized that there was neither “written documentation” nor “unequivocal testimony” that Dow ever had actually agreed to be bound by the mediation awards prior to the formal adoption of the more comprehensive Marshall Plan.  Accordingly, the court reversed the district court and remanded the claims for further proceedings.  What is not immediately clear, however, is whether the four claimants will be able to pursue their claims through the ordinary claims allowance process—and, of what the result of that process will be for the four claimants.
Though the Sixth Circuit recognized the “regrettable” consequence of strict application of the Texas rules, it reinforced its commitment to certainty and finality of settlements, sending a clear message to litigants to be sure to memorialize their agreements, so as to avoid any possibility of confusion or misunderstanding, especially where—as in Dow Corning—disputes regarding any such settlement may extend for close to twenty years after the purported settlement is reached.  As the court noted, this was simply one of those “times when otherwise well-considered procedural rules result in hardship.”  Though the outcome was “regrettabl[e],” the court made it clear that its long-held rules and procedures must be followed, and for good reason.  We would imagine that the court might take comfort that a clear policy will inform future conduct, obviating the need for similar decisions in the future.