Source: https://www.tkinsolvencyblog.com/2013/08/index.html
Timestamp: 2019-04-21 05:07:04+00:00

Document:
The Sixth Circuit’s recent opinion in Dow Corning Corp. v. Caffrey (In re Dow Corning Corp.), Case No. 12-1253 (6th Cir. July 29, 2013), demonstrates that Texas Rule of Civil Procedure 11 (“Rule 11”) is a substantive law that can affect parties’ property rights – even in a bankruptcy proceeding – when Texas law applies as applicable non-bankruptcy law.
In Dow Corning, the Sixth Circuit held that Rule 11 applied to preclude certain claimants from enforcing a mediation award in connection with a proceeding to allow claims against the Dow Corning Corporation (“Dow”) bankruptcy estate. According to the Sixth Circuit, “[r]egrettably, there are times when otherwise well-considered procedural rules result in hardship. This is one such time.” Id. at 1.
The claimants at issue (“Claimants”) were four women who alleged that they had been injured by silicone breast implants manufactured by Dow. In the early 1990’s, the Claimants filed suit against Dow in Harris County (Houston), Texas after “opting-out” of a global settlement. Facing potentially-large verdicts from Claimants and similarly-situated plaintiffs, Dow retained Kenneth Feinberg & Associates (“Feinberg”) with an eye to negotiating a “mini-global” settlement with all opt-out plaintiffs. Feinberg designed what was dubbed the “Marshall Plan,” which included a protocol to fix a dollar amount on claims. As conceived by the Marshall Plan, if a claimant agreed to mediation, the mediator would use the protocol to award damages that would be binding on Dow but not on the claimant. Id. at 2.
The Claimants all submitted to mediation and were awarded substantial damages by a mediator. However, although the parties were operating pursuant to the Marshall Plan, there was no written agreement governing the nature of the mediation, and no agreement was ever placed on the record in open court. Accordingly, Dow never paid the Claimants’ awards and, after seeking bankruptcy protection, it took the position that the mediation awards were unenforceable. The Claimants filed proofs of claim in the bankruptcy case to which Dow objected. The district court removed the claims from the bankruptcy court, held a bench trial in 2004, and issued an opinion allowing the claims in 2012. Id. at 2-3. Dow appealed.
Tex. R. Civ. P. 11. As the Sixth Circuit observed, Texas’ strong preference for written judgment is “longstanding.” See id. at 3-4 (quoting Birdwell v. Cox, 18 Tex. 535, 537 (1857) and Kennedy v. Hyde, 682 S.W.2d 525, 529 (Tex. 1984); citing Knapp Med. Ctr. v. De La Garza, 238 S.W.3d 767, 768-69 (Tex. 2007)).
Id. at 4-5 (quoting Massey v. Galvan, 822 S.W.2d 309, 318 (Tex. App.—Houston [14th Dist.] 1992, writ denied)).
According to the Sixth Circuit, the District Court erred in applying an equitable exception to Rule 11 based on Massey. “One thing is clear to us … the record contains neither written documentation nor unequivocal testimony to support a finding that Dow ever agreed to be bound by the mediation awards at issue regardless of the adoption of the Marshall Plan.” Id. at 6.
In Massey, written documentation made clear that both parties agreed to binding arbitration and the parties acknowledged in open court that a binding agreement existed. Id. at 6-7 (citing Massey, 822 S.W.2d at 313-14). In Dow Corning, on the other hand, the record could only support a finding that the agreement was never finalized. Id. at 6-7. To this point, the Sixth Circuit observed that “[t]he contradictory nature of much of the testimony and evidence [in Dow Corning] highlights why Texas courts strictly enforce the hurdles contained in Rule 11 except in rare instances: it promotes finality regarding the binding nature of agreements and, in the process, avoids the kind of costly litigation that this case represents.” Id. at 6.
In the end, the Claimants in Dow Corning never took the “ministerial steps necessary to render claimants’ agreements enforceable under the language of Rule 11.” Although the Sixth Circuit found this “regrettable,” the federal appeals court was bound to follow Texas law in determining the parties’ rights and thus reversed the District Court’s opinion. Id. at 6.
Although not specifically addressed in the Sixth Circuit’s opinion, it is well accepted that applicable “state law governs the substance of claims.” Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 450-51 (2007) (internal quotation omitted). The Claimants’ rights, thus, were determined by applicable state law, which, in Dow Corning, was Texas law.
Also not specifically addressed by the Sixth Circuit, Texas’ Rule 11 is a substantive rule of Texas law, notwithstanding that Texas has captioned the rule as being one of “procedure.” See Lefevre v. Keaty, 191 F.3d 596, 598 (5th Cir. 1999); Anderegg v. High Standard, Inc., 825 F.2d 77, 80 (5th Cir. 1987); Condit Chemical & Grain Co. v. Helena Chemical Corp., 789 F.2d 1101, 1102-03 (5th Cir. 1986). In this way, Rule 11 is analogous to the parol evidence rule – a substantive rule of contract interpretation despite its name. See Condit Chemical & Gran Co., 789 F.2d at 1102. Thus, in these circumstances Rule 11 operated as substantive law in federal court.
The Bankruptcy Court for the Western District of New York recently approved procedures for the sale of Norse Energy Corporation USA’s approximately 130,000 net acres of oil and gas leases in the Marcellus Shale, Utica Shale, and other formations. Norse Energy’s interests are located in Cattaraugus, Allegany, Madison, Chenango and Broome Counties, New York. The bid deadline is August 23, 2013 at 4:00 p.m. EST. The sale of the assets remains subject to final approval at a hearing to be held before the Bankruptcy Court on September 23, 2013.
In the interest of full disclosure, Thompson & Knight LLP represents the President of Norse Energy.
The order approving the sale procedures is available in W.D.N.Y. Bankruptcy Case No. 12-13685, at Docket No. 461. For a copy of the order approving the sale procedures, contact Mitchell Ayer (Mitchell.Ayer@tklaw.com) or Evelyn Breithaupt (Evelyn.Breithaupt@tklaw.com).

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