In re Dow Corning Corp., 04-1916.

• Citation: 419 F.3d 543
• Decision Date: 22 August 2005
• Docket Number: No. 04-1916.,04-1916.
• Parties: In re: DOW CORNING CORP., Debtor. Bear Stearns Government Securities, Inc., et al., Appellants, v. Dow Corning Corp., et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

419 F.3d 543

In re: DOW CORNING CORP., Debtor.

Bear Stearns Government Securities, Inc., et al., Appellants, v. Dow Corning Corp., et al., Appellees.

No. 04-1916.

United States Court of Appeals, Sixth Circuit.

Argued: July 27, 2005.

Decided and Filed: August 22, 2005.

COPYRIGHT MATERIAL OMITTED

ARGUED: Abraham Singer, Pepper Hamilton, Detroit, Michigan, for Appellants. David L. Ellerbe, Neligan, Tarpley, Stricklin, Andrews & Foley, Dallas, Texas, for Appellees. ON BRIEF: Abraham Singer, Mary K. Deon, Pepper Hamilton, Detroit, Michigan, for Appellants. David L. Ellerbe, Neligan, Tarpley, Stricklin, Andrews & Foley, Dallas, Texas, for Appellees.

Before: MOORE and COLE, Circuit Judges; and WISEMAN, District Judge.^*

OPINION

R. GUY COLE, Circuit Judge.

Twenty-seven Texas plaintiffs seeking recovery for injuries resulting from allegedly faulty breast implants engaged in settlement negotiations with the implants' manufacturer, Dow Corning Corp., a Michigan company. After the discussions reached an impasse over terms covering the consequences in the event settlement payments were not timely, Dow Corning suggested a clause requiring payments of $100 per day to each plaintiff for any time during which settlement payments were late. The plaintiffs agreed to this clause, and entered into the settlement agreement, later selling their right to settlement payments to Appellant Bear Stearns. When Dow Corning declared bankruptcy and began to miss payments under the settlement agreement, Bear Stearns attempted to enforce the clause via a bankruptcy claim. The district court, on Dow Corning's motion for summary judgment, held that the clause was a penalty unenforceable under Texas law, and also found that a condition precedent to the contractual provision of liquidated damages had not been met. Bear Stearns now appeals, arguing that the condition precedent was in fact met, and that Dow Corning should be estopped from asserting that the clause is a penalty. Because the clause is a penalty unenforceable under Texas law, and because Texas courts preclude parties from being estopped from asserting an illegality defense, we AFFIRM the decision below.

I.

Following revelations that many of Dow Corning's silicone-based breast implants were faulty, numerous suits were filed against Defendant-Appellee Dow Corning Corp. ("Dow Corning"). Twenty-seven Texas residents ("Plaintiffs") filed suit in Texas state court in 1994, alleging various claims against Dow Corning. Dow Corning found itself "under significant pressure" to settle these twenty-seven cases, especially since any findings of fact made in these cases (the "Texas cases") could have significant adverse effects upon Dow Corning's position in a related multi-district case and related global settlement discussions then pending in federal court in Alabama. Dow Corning was also motivated to settle because of its view that the Texas cases were filed in a "plaintiff-friendly" forum. Dow Corning thus hired Ken Feinberg, a noted expert in settlement practice, to engage in settlement negotiations with the Plaintiffs.

But for one sticking point, the negotiations went smoothly. Both parties agreed that Texas law would control the settlement agreement. Dow Corning would pay the Plaintiffs a total of $17 million over the course of several years, in a series of seven installments. This payment would be secured by an "Agreed Judgment" filed in Texas court, though the judgment would be enforced only if Dow Corning failed to make a timely settlement payment. Plaintiffs' counsel would be responsible for determining what portion of the $17 million each individual Plaintiff would receive. Further, if Dow Corning ever were late on an installment payment, the entire settlement amount would come due. However, near the end of negotiations, Plaintiffs' counsel insisted on a clause (the "no credit clause") which provided that if Dow Corning ever failed to make a timely payment, it would not receive credit against the judgment for previously made payments. For example, under this clause, if Dow Corning failed to make a required final payment of $200,000 to a particular Plaintiff, that Plaintiff would be able to enforce the "agreed judgment" against Dow Corning for the full settlement amount of $1,400,000, rather than merely for the $200,000 portion of the judgment remaining unpaid. This would occur despite the fact that the Plaintiff in this example would already have received $1,200,000 of the $1,400,000 due. Plaintiffs' counsel justified this clause by stating that it would provide a significant incentive for Dow Corning to pay scheduled payments on time.

Not wishing to place itself in a position where it could potentially be required to "double-pay" a significant portion of the settlement, Dow Corning steadfastly objected to the no credit clause. However, Dow Corning by its own admission at this time felt "a tremendous sense of urgency to finalize the settlement." Accordingly, Dow Corning's attorneys proposed replacing the no credit clause in each Plaintiff's agreement with language requiring a "penalty" of $100 to be paid for each day that Dow Corning was late in paying a particular Plaintiff. After insisting that all uses of "penalty" be changed to "liquidated damages," and after making some insignificant stylistic changes, Plaintiffs' attorneys agreed to insert the following language proposed by Dow Corning:

In the event that [Dow Corning] fails to make any payment in accordance with [the] Agreement, and Plaintiff must seek enforcement of the judgment to obtain the amounts due, then [Dow Corning] will pay to Plaintiff, as liquidated damages, the sum of One Hundred Dollars ($100.00) per day for each day that payment is not made from the date payment was due until the date Plaintiff receives the full amount due and owing under the terms of this agreement. These liquidated damages shall be in addition to the assessment of costs and interest as provided in the agreed judgment and the acceleration of installment payments as provided in [] the Agreement.

The Plaintiffs' attorneys noted at that time that if the new provision provided for a "penalty," the provision would not be enforceable under Texas law.

The parties agreed on this language, and inserted the clause into each settlement agreement. Dow Corning paid the first installment payment, totalling $4 million, on December 1, 1994. However, on May 15, 1995, Dow Corning filed for bankruptcy in the Eastern District of Michigan, and thereafter failed to make any further payments under the settlement agreement — the second installment having been due on July 1, 1995. All of the Plaintiffs timely filed claims in bankruptcy court for the amounts due under the settlement agreement. In February 1997, while the bankruptcy case was pending, the Plaintiffs all sold their claims to Appellant Bear Stearns Investment Products, Inc., and related entities (collectively, "Bear Stearns"). Bear Stearns was then substituted for the Plaintiffs in the bankruptcy case.

Years later, a reorganization plan was approved for Dow Corning. The plan included payment to Bear Stearns of the full remaining settlement amount of $13 million, plus post-petition interest of $9.6 million.¹ During bankruptcy proceedings, Bear Stearns also claimed liquidated damages in the amount of $8.75 million pursuant to the settlement agreement. Dow Corning filed an objection to this portion of Bear Stearns's claim, and the bankruptcy court, without any written findings, sustained the objection and disallowed the liquidated damages portion of the claim. Bear Stearns appealed to the district court. Since Dow Corning was fully solvent and had agreed to pay whatever the district court determined was due, the court allowed the confirmed plan to become effective while the liquidated damages appeal was pending. As a result, just after the plan's effective date, on June 1, 2004, Bear Stearns was paid the $22.6 million both parties agreed was due under the plan. Meanwhile, Bear Stearns and Dow Corning each had filed a motion for summary judgment in district court with regard to the additional liquidated damages. The district court denied Bear Stearns's motion, and granted summary judgment to Dow Corning, finding that the liquidated damages clause was a penalty unenforceable under Texas law, and that even if it were not, a condition precedent to any award of liquidated damages had not been met. The district court then certified the grant of summary judgment as final, under Fed.R.Civ.P. 54(b), since the ruling conclusively resolved all claims with regard to the liquidated damages clause. This timely appeal followed.

II.

A. Choice of Law and Standard of Review

Both parties agree that, pursuant to the settlement agreement's choice-of-law provision, the construction and enforcement of terms of the settlement agreement is governed by the laws of Texas. Though there is a circuit split over what choice-of-law provisions a federal court exercising bankruptcy jurisdiction should apply, compare, e.g., In re Vortex Fishing Sys., Inc., 277 F.3d 1057, 1069 (9th Cir.2002) (requiring use of federal choice-of-law principles) with, e.g., In re Gaston & Snow, 243 F.3d 599, 604-07 (2d Cir.2001) (describing this split in great detail and requiring use of the forum state's choice-of-law principles); see also, e.g., In re S.W. Equip. Rental Inc., No. CIV 1-90-62, 1992 WL 684872, at *9 n. 48 (E.D.Tenn. Jul.9, 1992), both Michigan choice-of-law rules and general equitable choice-of-law policies support enforcing parties' agreed-upon choice-of-law clauses absent any strong public policy concerns to the contrary. See, e.g., Mill's Pride, Inc. v. Cont'l Ins. Co., 300 F.3d 701, 705 (6th Cir.2002) ("Michigan choice of law rules ... require a court to balance the expectations of the parties to a contract with the interests of the states involved to determine which state's law to apply." (citations omitted)); Restatement (Seco...