In re: Dow Corning v.

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 05a0360p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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In re: DOW CORNING CORP.,
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Debtor.
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No. 04-1916
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BEAR STEARNS GOVERNMENT SECURITIES, INC., -
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Appellants, -
et al.,
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v.
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DOW CORNING CORP., et al., -
Appellees. -
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Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 01-71843—Denise Page Hood, District Judge.
Argued: July 27, 2005
Decided and Filed: August 22, 2005
Before: MOORE and COLE, Circuit Judges; and WISEMAN, District Judge.*
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COUNSEL
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.
*
The Honorable Thomas A. Wiseman, Jr., United States District Judge for the Middle District of Tennessee,
sitting by designation.
1
No. 04-1916 In re Dow Corning Page 2
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OPINION
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R. GUY COLE, JR., 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
No. 04-1916 In re Dow Corning Page 3
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 Stearns1of the full remaining settlement amount of $13 million, plus post-petition
interest of $9.6 million. 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.
1
Bear Stearns is also an appellant in another Dow Corning appeal currently pending before this Court. All
parties agree that the legal issues presented by the two appeals are effectively unrelated and that Dow Corning will pay
additional post-petition interest on all money due under the settlement agreement if such additional interest is awarded
to Bear Stearns as a result of the other appeal.
No. 04-1916 In re Dow Corning Page 4
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., Mills 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 (Second) of Conflicts of
Law § 302 (1971) (suggesting similar principles in the non-state-specific context). As we are aware
of no public policy disfavoring application of Texas law in the instant case, we agree with the parties
and the district court, and apply Texas law in determining the enforceability of the subject contract
terms.
Since the instant claims were brought in bankruptcy court pursuant to federal bankruptcy
jurisdiction, federal procedural rules apply. Therefore, we review the district court’s legal
conclusions de novo. In re Batie, 995 F.2d 85, 88 (6th Cir. 1993); In re Dow Corning Corp., 280
F.3d 648, 656 (6th Cir. 2002). In applying state law, we anticipate how the relevant state’s highest
court would rule in the case and are bound by controlling decisions of that court. Allstate Ins. Co.
v. Thrifty Rent-A-Car Sys., Inc., 249 F.3d 450, 454 (6th Cir. 2001). Intermediate state appellate
courts’ decisions are also viewed as persuasive unless it is shown that the state’s highest court would
decide the issue differently. Id.
Under federal procedural law, in deciding a motion for summary judgment in a bankruptcy
proceeding, this Court must determine if “the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of law.” Fed R. Civ P.
56(c); see also Fed. R. Bankr. P. 7056 (“Rule 56 F.R.Civ.P. applies in adversary proceedings.”).
As usual, we view the evidence in the light most favorable to the non-moving party. See, e.g.,
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-88 (1986). However, since
the instant appeal is from both the grant of summary judgment to Dow Corning and the denial of
summary judgment to Bear Stearns, it is appropriate to consider the evidence in the light most
favorable to each party.
Finally, under Texas law, the determination of whether a contract term is properly a
liquidated damages provision or instead an unenforceable penalty is purely a question of law. See,
e.g., Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 664 (Tex. 2005) (“Whether a contract term
is a liquidated damages provision is a question of law for the court to decide.”); S. Union Co. v. CSG
Sys., Inc., No. 03-04-00172-CV, 2005 WL 171349, at *4 (Tex. Ct. App. Jan. 27, 2005) (“Whether
the liquidated damages provision is enforceable is a question of law.”). “Sometimes, however,
factual issues must be resolved before the legal question can be decided. For example, to show that
a liquidated damages provision is unreasonable because the actual damages incurred were much less
than the amount contracted for, a defendant may be required to prove what the actual damages
were.” Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991).
No. 04-1916 In re Dow Corning Page 5
B. Liquidated Damages
Bear Stearns first argues that the $100 per day provision is a valid liquidated damages clause.
Under Texas law, a “liquidated damages” term is treated as a penalty, unenforceable for reasons of
public policy, except when all three of the following conditions are met:
First, [(1)] the anticipated damages for a breach must be difficult or
impossible to estimate. Also, [(2)] the amount of liquidated damages must be a
reasonable forecast of the amount necessary to render just compensation. In
addition, [(3)] ‘liquidated damages must not be disproportionate to actual damages,’
as measured at the time of the breach. Thus, if the liquidated damages are
disproportionate to the actual damages, the clause will not be enforced and recovery
will be limited to the actual damages proven.
Thanksgiving Tower Partners v. Anros Thanksgiving Partners, 64 F.3d 227, 232 (5th Cir. 1995)
(footnotes omitted) (quoting Baker v. Int’l Record Syndicate, 812 S.W.2d 53, 55 (Tex. Ct. App.
1991)). Further, “[t]he party seeking to prevent enforcement bears the burden of proof on these
[three] issues.” Id.; see also Fluid Concepts, Inc. v. DA Apartments Ltd. P’ship, 159 S.W.3d 226,
231 (Tex. Ct. App. 2005) (concluding that trial court had erred in granting summary judgment to
defendant where defendant had presented no evidence supporting denial of liquidated damages,
despite plaintiff’s failure to provide any proof in support of such damages). Accordingly, to defeat
Bear Stearns’s motion for summary judgment and to prevail on its own summary judgment motion,
Dow Corning bore the burden of proving that any one of the preceding conditions had not been met.
Finally, Texas law grants strong deference to enforcement of contract terms, including liquidated
damages terms, shown to be mutually bargained for by equally competent parties. S. Union, 2005
WL 171349, at *5 (citing Shel-al Corp. v. Am. Nat’l Ins. Co., 492 F.2d 87, 94 (5th Cir. 1974)). The
district court ruled against Bear Stearns, finding that none of the prongs of the liquidated damages
test were met.
1. Were Future Damages Stemming From Breach Difficult to Estimate?
Bear Stearns first argues that the district court erred when it determined that all liquidated
damages clauses in contracts for the payment of money are unenforceable penalties. The district
court concluded that since interest can be paid to offset any delay in receiving money due under a
contract, damages for such contracts will always be easy to estimate. For this proposition, the
district court relied significantly on language from Langever v. R.G. Smith & Co., 278 S.W. 178, 179
(Tex. Ct. App. 1925):
In determining the intention of the parties to such stipulation, certain well-recognized
rules of construction enter into the consideration, an important one of which is, the
certainty or uncertainty of the actual damages which a breach will occasion, and the
ease or difficulty of ascertaining or proving such damages; hence, in a case of a
contract for the payment of money simply, a stipulation to pay a fixed sum, in default
of performance, will be regarded as an agreement for a penalty and not as a covenant
for liquidated damages--the reason for this rule being that, for the nonpayment of
money, the law awards damages measured by interest, and hence there is no
difficulty in ascertaining the damages in such a case.
Id. While this passage from Langever, taken alone, is supportive of the district court’s holding, the
district court ignored the fact that this was only one factor to be considered under Texas law. The
plaintiff in Langever alleged that, due to non-payment on the contract at issue, he had lost significant
profits (as, presumably, he was intending to reinvest the money once received), and that the
liquidated damages term had been an attempt to estimate the result of his not having been paid.
No. 04-1916 In re Dow Corning Page 6
Despite the dicta cited by the district court in the instant case, the Langever court went on to state
first that, “Where it is certain that damages will flow, and where it is certain they cannot be
accurately measured, or where it appears their ascertainment, if possible, will be difficult, the best
reasons exist for respecting the agreement of the parties in advance upon a sum mutually
satisfactory.” Id. The Langever court then granted enforcement of the clause, despite its dicta,
noting that “Any effort to establish the actual damages for a breach of a contract such as the one
under consideration here would be attended with such unusual considerations and surrounded with
such uncertainty and difficulties as to take the case out of the usual class of cases of mere default
in the payment of money, and thus to afford fair grounds for sustaining an agreement for liquidated
damages.” Id.
Accordingly, Langever merely stands for Texas’s consistent law that liquidated damages
clauses in contracts for payment of money are unenforceable except when damages are particularly
difficult to estimate. Bear Stearns argues that the liquidated damages clauses in the instant case
were intended to compensate for difficulties encountered by the Plaintiffs were they not to receive
the settlement monies they were expecting to receive. According to Plaintiffs’ attorneys, such
damages specifically included losses sustained by the Plaintiffs’ inabilities to meet obligations they
had made based on the promise of Dow Corning to make payments under the settlement agreement.
Bear Stearns alleges that such difficulties would have been particularly difficult to estimate here,
because Plaintiffs’ difficulties included damages beyond the usual “lost investment opportunities”
and inabilities to make house and car payments. Rather, Bear Stearns asserts that the clause was also
intended to compensate for difficulties resulting from a failure to be able to meet future obligations
incurred in expectation of receiving settlement payments, including obligations such as future (and
inherently unpredictable) medical services required due to illness caused by the allegedly faulty
implants, and also Plaintiffs’ “decisions to discontinue working if they could afford to do so.”
On this prong, Dow Corning raises two arguments in addition to that relied upon by the
district court. First, Dow Corning argues that the items Bear Stearns claims would be “damages”
following non-payment are actually damages that the initial settlement itself had contemplated, and
thus the liquidated damages clause effectively would double-pay for these amounts. Bear Stearns
responds by noting that the liquidated damages provision was not intended to cover medical
expenses resulting from the faulty implants, but rather to compensate for additional costs associated
with receiving late payments from Dow Corning. We agree with Bear Stearns that this conclusion
is reasonable in light of Langever, which specifically allowed liquidated damages in a situation in
which future damages resulting from non-payment were likely to be more than the time-value of
monies owed under the original contract.
Dow Corning’s second argument is that the parties simply were not anticipating any
additional damages from non-payment, difficult to calculate or otherwise. Dow Corning cites to the
fact that the liquidated damages clause was initially proposed as a “penalty,” and that none of the
attorneys in the case from either side could remember any discussions regarding difficult-to-
calculate damages. In contrast, Bear Stearns notes that at least one of the Plaintiffs’ attorneys stated
specifically that “the liquidated damages provision was to recognize that [Plaintiffs] would have
losses sustained by their inability to meet the obligations that they had made based on the promise
of Dow Corning to make payments under this Agreement.” These duelling assertions, however, go
to the question of whether the provision was actually a just forecast of any damages, and not to
whether such damages, if contemplated, would be difficult to calculate. Dow Corning does not
argue that the damages resulting from non-payment of settlement monies, including inability to meet
future medical and other obligations, would be easy to calculate. Obviously, the twenty-seven
Plaintiffs would each face differing levels of such damages, and in this particular case, no party has
argued that the Plaintiffs’ medical or other obligations were uniform or predictable. Accordingly,
Dow Corning has failed to show that the anticipated damages would not be difficult to estimate.
No. 04-1916 In re Dow Corning Page 7
2. Was the Liquidated Damages Clause a Reasonable Forecast of Just Compensation for Such
Damages?
The district court also gave two reasons for concluding that Bear Stearns ought to lose on
prong two, regarding whether the amount of liquidated damages was a reasonable forecast of the
amount necessary to render just compensation. Unsurprisingly, Dow Corning agrees with both.
First, the district court found that the $100 per day simply was not a forecast of compensation for
any damages, but rather was initially intended as a penalty. Second, the district court concluded that
even if the Plaintiffs’ attorneys had intended this clause as compensation for damages, there was no
evidence that the likely amount of such damages was ever estimated at all or that it was compared
with $100 per day, nor was any evidence provided that any negotiations over what amount would
be reasonable compensation had ever occurred. The district court concluded that the clause thus was
not a “reasonable forecast of just compensation.”
Bear Stearns argues that the burden was on Dow Corning to prove that the clause was not
a reasonable forecast, and that Dow Corning simply has not presented any evidence that the clause
was not a reasonable forecast of damages. However, this argument both discounts the evidence Dow
Corning has presented and overstates Dow Corning’s burden. Dow Corning has presented evidence
that the parties did not discuss potential uncertain damages resulting from breach, and has also
presented evidence that the clause was initially proposed as a penalty untied to any potential
damages.
Bear Stearns argues that the district court unfairly shifted the burden of proof to Bear
Stearns. However, such a shifting was not improper in light of evidence presented by Dow Corning
that is probative of a lack of both intent to provide just compensation and the existence of any
consideration of any estimates of what just compensation would be. Bear Stearns’s only statement
to counter Dow Corning’s evidence of a lack of connection between the clause and any estimate of
damages is that “[g]iven the large number of individual Plaintiffs and the difficulty in estimating
each Plaintiff’s actual damages in the event of a breach by Dow, the $100 per day figure was a
reasonable estimate of those damages.” This argument may reasonably rebut one of Dow Corning’s
other arguments, that the damages were not reasonably predictive of damages potentially or actually
incurred by any one specific Plaintiff. Regardless, however, the fact that there are numerous
Plaintiffs or that each Plaintiff’s damages were uncertain does not logically imply that $100 per day
was a reasonable estimate of damages.
Bear Stearns further argues that “[h]aving proposed the $100 per day figure, Dow clearly
believed it was reasonable at the time.” However, such an inference cannot be made. When Dow
Corning proposed the $100 figure, the uncontradicted evidence shows that it intended the figure as
a penalty, and not as a reasonable estimation of some set of damages. Bear Stearns cites no evidence
tying the $100 figure to any of the types of damages it claims Plaintiffs were estimated to face post-
breach, while Dow Corning cites evidence probative of an absence of a concern for whether $100
was just compensation. For this reason alone, Bear Stearns’s arguments fail. See, e.g., Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986) (requiring a party defending against a motion for
summary judgment to provide more than a “scintilla” of evidence to support the conclusion that
there is a genuine issue of material fact for trial).
The district court also held that the $100 per day provision was not a reasonable estimate of
just compensation for the anticipated damages because such liquidated damages would constitute
double recovery for damages already compensated by the base settlement payments. See, e.g.,
Eberts v. Businesspeople Personnel Servs., Inc., 620 S.W.2d 861 (Tex. Ct. App. 1981) (disallowing
double recovery via liquidated damages); Robert G. Beneke & Co., Inc. v. Cole, 550 S.W.2d 321
(Tex. Ct. App. 1977) (same). However, Bear Stearns properly notes that the damages for which it
is claiming liquidated damages are not damages contemplated by the underlying contract, since the
No. 04-1916 In re Dow Corning Page 8
damages at issue here are those resulting from a breach of the settlement agreement itself (e.g.
difficulties or other costs resulting from inability to pay medical bills or other bills which Plaintiffs
had incurred relying on the availability of settlement money), and not those for which the settlement
payments are supposed to compensate the Plaintiffs (e.g. expenses resulting directly from potentially
faulty implants). Accordingly, the district court should not have concluded that enforcement of the
liquidated damages clause would constitute double recovery. Nonetheless, because Dow Corning
provided evidence that the provisions were not actually reasonable estimations of any anticipated
damages from breach, the second prong of the liquidated damages test, and thus the result of the
entire test, was properly resolved in Dow Corning’s favor.
3. Are the Liquidated Damages Disproportionate to the Actual Damages Incurred by Plaintiffs?
Because Dow Corning has met its burden of proving that the clause was not a reasonable
estimation of any anticipated damages, the entire three-part test must be resolved in its favor. See,
e.g., Baker, 812 S.W.2d at 55. Therefore, we need not determine whether the “liquidated damages”
under the clause would be disproportionate to any actual damages incurred by Plaintiffs.
C. Quasi-Estoppel and Unenforceable Liquidated Damages Clauses
Under Texas law, the illegality of a liquidated damages clause is an affirmative defense that
must be asserted by a defendant when it is not clear from the face of the agreement that the clause
is illegal. See, e.g., Phillips v. Phillips, 820 S.W.2d 785, 789-90 (Tex. 1991). Bear Stearns argues
that the doctrine of quasi-estoppel should prevent Dow Corning from being able to assert this
affirmative defense, and therefore that the liquidated damages clause should be enforced. Quasi-
estoppel is appropriate where “it would be unconscionable to allow a person to maintain a position
inconsistent with one to which he acquiesced, or from which he accepted a benefit.” Lopez v.
Muñoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 864 (Tex. 2000) (citing Atkinson Gas Co. v.
Albrecht, 878 S.W.2d 236, 240 (Tex. Ct. App. 1994)). Bear Stearns argues that since Dow Corning
proposed the clause in order to induce settlement with the Plaintiffs, thereby avoiding costly
litigation, Dow Corning cannot now assert that the clause is illegal. However, regardless of whether
quasi-estoppel would be appropriate here, Texas courts have clearly stated that one cannot be
estopped from arguing that a contract term is illegal for public policy reasons. See, e.g., In re
Kasschau, 11 S.W.3d 305, 312-14 (Tex. Ct. App. 1999); see also In re Calderon, 96 S.W.3d 711,
719-20 (Tex. Ct. App. 2003). Accordingly, under Texas law, Dow Corning simply cannot be
estopped from asserting the affirmative defense of illegality, even if quasi-estoppel would otherwise
be applicable. Because Dow Corning did indeed assert this defense, and because we conclude that
this defense has merit, Bear Stearns’s argument fails.
III.
Because we conclude that Dow Corning met its burden of showing that the liquidated
damages clause at issue is a penalty clause unenforceable under Texas law for reasons of public
policy, we need not address whether a condition precedent to enforcement of the clause was met.
We therefore AFFIRM both the district court’s denial of Bear Stearns’s summary judgment motion
and the grant of summary judgment to Dow Corning.