Contributed by Doron P. Kenter.
In its recent decision in In re Settlement Facility Dow Corning Trust, the Sixth Circuit adopted a new standard of review, which, though applicable in only limited circumstances, may provide an important guidepost in understanding district courts’ authority over matters arising from bankruptcy cases.
Dow Corning Trust’s origins begin in 1995, when Dow Corning Corporation commenced a case under chapter 11 of the Bankruptcy Code. In 1999, the bankruptcy court confirmed Dow Corning’s plan of reorganization. In 2001, Judge Hood withdrew the reference to the bankruptcy court, and has directly overseen the case since then. (Interestingly, the Sixth Circuit notes that Judge Hood has “presided over” the case since 1995, though she was not the “court of first resort” until 2001.) Dow Corning’s plan became effective in 2004, and since then, Judge Hood has overseen the administration of the Plan and the $1.95 billion fund established to fund settlements with claimants who opt to settle instead of litigating their claims.
At issue in two consolidated appeals were two of Judge Hood’s orders interpreting certain definitions contained in Dow Corning’s Plan. In considering the proper standard of review for assessing the district court’s interpretation of those provisions, the Sixth Circuit noted that it could not apply either of the two traditional standards of review. On the one hand, it could not review Judge Hood’s decisions for “abuse of discretion” because such a review only would apply if bankruptcy court had issued an order interpreting the plan it previously confirmed and because the district court’s decisions centered on interpretation of contract language (i.e., the Plan), which is not inherently discretionary. On the other hand, the Sixth Circuit could not review the district court’s decisions de novo (as it would review other appeals of bankruptcy decisions that had been subsequently appealed to the district court) because the district court did not issue those orders while sitting as an appellate court, but in its capacity as a court of first resort.
The Sixth Circuit, noting that Judge Hood was “much more familiar with [the] Plan – and with the parties’ expectations regarding it” than were the judges sitting on the Sixth Circuit, suggested that “a measure of deference” was in order. Judges Kethledge and Sutton suggested that the Sixth Circuit could apply a modified form of deference to the district court’s decisions if it decided (as a threshold matter) that the Plan language was ambiguous. In that event, review of available extrinsic evidence was appropriate. If the lower court had assessed extrinsic evidence in choosing among various reasonable interpretations of the Plan, then the Sixth Circuit would “defer in earnest” to the lower court’s choice.
Applying its deference standard to the Plan provisions before it, the Sixth Circuit concluded that the first definition at issue was ambiguous. Because the district court apparently had not assessed the parties’ extrinsic evidence on the meaning of the definition, the Sixth Circuit vacated the district court’s order with respect to the definition and remanded it to the district court so it could assess the necessary evidence. Following the district court’s assessment of extrinsic evidence, the Sixth Circuit stated it would defer to the district court’s decision.
As to the second definition on appeal (which had been deemed “unambiguous” by the district court), the Sixth Circuit reversed the district court, holding that the rules of English grammar clearly dictated the proper interpretation of the Plan, and that such language – though poorly drafted – must be read as Dow Corning suggested, rather than as the district court concluded.
Importantly, Chief Judge Batchelder (a former bankruptcy judge and district court judge) issued a strong dissent with respect to the standard of review urged by the majority, criticizing the majority for “convert[ing] the language of discretion to fit the task at hand” and for further confusing the proper standards of review in cases such as this. The dissent suggests that the court should not craft new standards of review where existing standards can be adequately applied. In this case, she reasoned that the ambiguity of the Plan was a matter of law, and should be reviewed de novo. Chief Judge Batchelder noted that once the appellate court concluded that the Plan was ambiguous as a matter of law, it should then have reviewed the factual issues – namely, the district court’s assessment of extrinsic evidence – for abuse of discretion. Rather than adopt the majority’s “earnest deference” standard and its apparent refusal to disturb the district court’s assessment of extrinsic evidence, the dissent suggested that the majority was simply daunted by the prospect of weighing the mounds of extrinsic evidence in the case. The dissent noted that “[f]ederal appellate judges are routinely called upon to review decisions of the district courts in cases where the record is extensive and complex.” Chief Judge Batchelder added, quite sharply, that “[h]aving sat as a bankruptcy judge, I am aware that bankruptcy cases can be complex, but not so much more so as to justify shirking our responsibility to provide the type of appellate review that we are responsible for under the Constitution and laws of the United States.” Accordingly, she declined the join the majority in its adoption of its new standard of review, which, in her view would only “serve to further confuse an area of law already beset with significant confusion.”
To be sure, the Settlement Facility Dow Corning Trust decision emerged from fairly unique facts and circumstances. It highlights some of the complexities of appellate review, particularly where bankruptcy issues are decided or interpreted by courts of general jurisdiction. As noted by Judge Batchelder, however, the majority opinion did not specify whether it was discarding existing standards of review or whether it was crafting a new one, potentially infusing more uncertainty in already complex legal landscape.