On December 17, 2010, in In re Settlement Facility Dow Corning Trust (6th Cir., Case Nos. 09-1827/1830, Dec. 17, 2010) (PDF), a Sixth Circuit panel split over divergent arguments on two provisions present in a bankruptcy reorganization plan involving Dow Corning: 1) whether “tissue expanders” should be considered “breast implants” within the meaning of the plan, and 2) whether the term “total disability” should be construed to require claimants to be disabled in either “vocation” or “self-care”, or both categories.  All three panelists agreed that the term “total disability” requires claimants to show disability in both categories, but the panel split on the other matter, with the majority vacating the district court’s determination on “tissue expanders” and remanding for further examination of the factual record.

The ruling involves an issue stretching back to the mid-1990s: thousands of lawsuits brought against Dow Corning relating to the company’s breast implants.  The sheer weight of these lawsuits forced Dow Corning into Chapter 11 bankruptcy, and in 2004 a reorganization plan was confirmed.  Following a previous appeal (PDF) decided in 2006 by the Sixth Circuit, the district court ruled on the meaning of two provisions.  First, the district court determined that the term “breast implant” included within its definition “tissue expanders” — devices implanted in a body and gradually filled with saline in subsequent weeks.  Second, the district court determined that, in order to meet the definition of the term “total disability,” a claimant need only show disability as to “vocation” or “self-care,” but not to both.

Writing for himself and Judge Sutton, Judge Kethledge first addressed the standard of review, in doing so parting ways with Judge Batchelder, in dissent.  Recognizing that the district court judge had presided over the bankruptcy for 15 years, the majority attempted to “characterize” the “measure of deference” owed to her.  Ultimately, the majority ruled that, when determining which of the reasonable readings of an ambiguous provision in a bankruptcy plan was best, the district court must examine the extrinsic evidence.  Where the lower court “assessed extrinsic evidence in choosing among reasonable interpretations of the Plan, we will not disturb its choice.”

Applying this standard, the majority examined the definition of “breast implants” and found that, because the district court wrongly concluded the key provision was unambiguous, the district court failed to examine the extrinsic evidence offered by both parties.  Moreover, because the district court was not the same court that entered the plan’s confirmation order, the majority concluded that it had even greater need to examine the extrinsic evidence.  On these bases, the majority vacated the district court order, remanding for such examination to occur.  As to the definition of “total disability,” the majority found that the district court wrongly concluded that claimants need only show disability as to “vocation” or “self-care,” but not both.  Here, the majority reversed the district court outright, finding that claimants must show disability as to both categories in order to qualify under “total disability.”

Writing in dissent, Judge Batchelder took particular aim at the standard of review crafted by the majority.  Expressing concern that the majority’s effort only “mudd[ied] the waters” and would “inevitabl[y]” create a “flood of new litigation, with litigants attempting to define the boundaries of the majority opinion’s new standard,” Judge Batchelder wrote that the Court should instead have “simply restate[d] what was once plain — a district court’s legal conclusions are reviewed de novo, and its factual findings are reviewed for an abuse of discretion.”  In her judgment, the language of the majority opinion threatened to “further confuse an area of law already beset with significant confusion.”  Because she agreed with the majority on the definition of “total disability,” Judge Batchelder applied what she argued was the proper standard of review to the provision regarding “breast implants.”  She concluded that “[c]ommon sense and New York law compel the conclusion that the term ‘breast implant’ unambiguously excludes tissue expanders, as a matter of law.”  And she further concluded that, even had the provision been ambiguous, the extrinsic evidence “clearly favored” the conclusion that tissue expanders did not fall within the definition of “breast implant.”

Following issuance of the Court’s opinion, the claimants’ advisory committee decried the ruling and lamented the “gross injustice for Dow Corning claimants who have waited patiently for years to be compensated.”  At the time of this posting, Dow Corning had released no statement on the ruling.