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From Products Liability Law Daily, January 29, 2015

Approval of payments to lower-priority Dow Corning breast-implant claimants reversed

By John W. Scanlan, J.D.

A district court’s approval of payments from a Dow Corning breast implant settlement fund to lower-priority claimants was reversed and remanded by the U.S. Court of Appeals for the Sixth Circuit in an unpublished decision. The lower court had applied the wrong standard for determining whether there were enough funds available to cover higher-priority claims if the lower-priority payments were made and had improperly ignored reports and testimony challenging the Independent Assessor’s methodologies (Dow Corning Corp.; Debtor’s Representatives; The Dow Chemical Co.; Corning, Inc. v. Claimants’ Advisory Committee; Finance Committee, January 27, 2015, Boggs, D.)

Background. After Dow Corning filed for Chapter 11 bankruptcy in 1995, the company established as part of its plan of reorganization a fund to settle product liability lawsuits related to breast implants. The Settlement and Fund Distribution Agreement (SFA), which became effective in 2004, provided for payments to claimants through 2019 of up to a total of $2.35 billion net present value (NPV). Claimants could settle through a “Settlement Facility,” which resolves the claims, or litigate their claims through a “Litigation Facility.” The SFA provides for four categories of payments: (1) First Priority Payments, (2) Settlement Fund Other Payments, (3) Second Priority Payments, and (4) Litigation Payments. The Second Priority Payments category includes three subcategories, the first of which is Premium Payments, which offers an extra 20-percent payment to approved and paid First Priority claimants who meet certain criteria and an extra 25 percent to approved and paid First Priority claimants who experienced an in-body implant rupture. Under the terms of the SFA, Premium Payments and other Second Priority Payments may be paid, even if all First Priority and Litigation Payments have not been made, if a district court determines that adequate provision has been made to assure the payment of the higher-priority claims.

In 2011, the Finance Committee, which is responsible for the financial management of the Settlement Facility, asked a district court to allow it to distribute 50 percent of historical and future Premium Payments before all First Priority and Litigation Payments had been distributed. The Committee provided an assessment from the Analysis Research Planning Corporation (ARPC), the SFA’s Independent Assessor, that $1.981 billion NPV was available in the Settlement Fund, that $1.83 billion would be needed to pay all First Priority claims, leaving $151 million NPV; a 50-percent distribution would cost $83 million NPV, with a cushion of $68 million NPV remaining in the fund. Although Dow Corning, the Debtor’s Representatives, Dow Chemical, and Corning, Inc. (the Appellants) opposed the recommendation, arguing that the ability to pay First Priority Payments must be “virtually guaranteed” before Second Priority Payments could be made, the district court instead adopted a less strict “adequate assurance” standard recommended by the Finance Committee and approved the payments. The Appellants appealed.

Standard of review. Although the agreement provided that appeals of a district court order regarding authorization of Second Priority Payments would be reviewed under an abuse-of-discretion standard, the Sixth Circuit declared that provision unenforceable. Instructing that parties cannot determine by agreement a court’s standard of review, it said that it would give significant deference to the district court’s evaluation of extrinsic evidence but would review its interpretation of Plan and SFA provisions de novo.

Adequate assurance vs. virtually guaranteed. Noting that it was impossible to impose an “absolute guarantee” standard of confidence, the Sixth Circuit found that “virtual guarantee” rather than “adequate assurance” was the correct way to describe the SFA’s required confidence standard. The district court’s reasons for rejecting the “virtual guarantee” were unpersuasive, the Sixth Circuit said. The “reasonably assured” language in the Premium Payments provision of the SFA applied only after it has been demonstrated that adequate provision has been made to assure payment of the First Priority and Litigation Payments. Further, the term “assure” provided context for the term “adequate provision,” not the other way around; under New York cases cited by the parties, the word “assure” in the context of making future payments meant guaranteeing that those payments would be made. This language was stricter than the “strong likelihood” or “more probable than not” levels of confidence that described adequate assurance, according to the court.

Opportunity to be heard. The district court’s refusal to consider reports and testimony provided by the Appellants was also reversed by the Sixth Circuit. The district court determined that the Appellants had already had the opportunity to challenge the Independent Assessor’s reports through the years, but the Sixth Circuit found that this did not satisfy their contractual right under the SFA to be heard with respect to the motion to distribute Second Priority Payments. An opportunity to be heard must be granted at a meaningful time in a meaningful manner; further, in this case it included the right to challenge the Independent Assessor’s projections. Under the SFA, the district court must make its decision based upon the Independent Assessor’s analysis and projections, but the projections were not immune to challenge.

The case is No. 14-1090.

Attorneys: Deborah E. Greenspan (Dickstein Shapiro), John Donley (Kirkland & Ellis), and Timothy J. Jordan (Garan Lucow Miller) for Debtor's Representatives, Dow Chemical Co., Corning, Inc., and Dow Corning Corp. Kyle R. Dufrane (Dykema Gossett) for Finance Committee. Jeffrey S. Trachtman (Kramer, Levin, Naftalis & Frankel) and Ernest H. Hornsby (Farmer, Price, Hornsby & Weatherford) for Claimants' Advisory Committee.

Companies: Dow Chemical Co.; Corning, Inc.; Dow Corning Corp.

MainStory: TopStory SettlementAgreementsNews DamagesNews MedicalDevicesNews KentuckyNews MichiganNews OhioNews TennesseeNews

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