In re Old Carco Llc (f/K/A Chrysler Llc)

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York
Citation55 Bankr.Ct.Dec. 72,452 B.R. 100
Docket NumberNo. 09–50002 (AJG).,09–50002 (AJG).
PartiesIn re OLD CARCO LLC (f/k/a Chrysler LLC), et al.,1 Debtors.
Decision Date25 July 2011

452 B.R. 100
55 Bankr.Ct.Dec.
72

In re OLD CARCO LLC (f/k/a Chrysler LLC), et al.,1 Debtors.

No. 09–50002 (AJG).

United States Bankruptcy Court, S.D. New York.

July 25, 2011.


[452 B.R. 104]

Jones Day, By: Corinne Ball, Esq., Veerle Roovers, Esq., New York, NY, and By: Jeffrey B. Ellman, Esq., Atlanta, GA, for Old Carco Liquidation Trust.Fiscal Officer of Summit County, By: Regina M. VanVorous, Esq., Akron, OH, for Fiscal Officer of Summit County.

OPINION CONCERNING TAX CLAIM OBJECTION
ARTHUR J. GONZALEZ, Chief Judge.

Before the Court is the Amended Objection of Old Carco Liquidation Trust Seeking to Disallow or, in the Alternative, to Reclassify the Tax Claims of John A. Donofrio, Summit County Fiscal Officer, filed on May 12, 2010 (ECF No. 7023) (the “Amended Objection”), to which the Summit County Fiscal Officer (the “Fiscal Officer”) responded on May 25, 2010 by filing the Response to Old Carco Liquidation Trust's Objection to Claims of John A. Donofrio, Summit County Fiscal Officer (ECF No. 7096) (the “Amended Response”). The primary issue presented is whether the Fiscal Officer asserts valid claims based upon an alleged breach of two tax exemption agreements entered into by the parties. If these claims are valid, the secondary issue is whether the claims constitute priority tax claims under section 507(a)(8) of title 11 of the United States Code (the “Bankruptcy Code”).

The Court finds that the alleged breach occurred in June 2010 as a result of the closing of the Plant. The 1999 Agreement 2 expired by its terms prior to the alleged breach in June 2010. Because the 1999 Agreement was not in force at the time of the alleged breach, the 1999 Agreement Claim 3 should be disallowed and expunged. With respect to the 2000 Agreement, 4 the “change to economic conditions” clause in that agreement excused performance by Old Carco; accordingly, the 2000 Agreement Claim 5 should also be disallowed and expunged. Alternatively, even if Old Carco's alleged breach of the 2000 Agreement were not excused, the Court finds that the alleged breach is non-material in that Old Carco has substantially complied with its obligations under that agreement. Thus, under this alternative, Summit County would be entitled only to damages corresponding to the period of the tax exemption subsequent to the alleged breach. However, because Summit County had completely phased-out its personal

[452 B.R. 105]

property taxes prior to the alleged breach in June 2010, no amount would be due corresponding to the remaining term of the 2000 Agreement.6 Finally, even if the Court were to allow the 2000 Agreement Claim, in whole or in part, the Court finds the claim would not be a tax and, therefore, would not be entitled to priority under section 507(a)(8) of the Bankruptcy Code. The claim would instead be reclassified as a general unsecured claim.7

I. Jurisdiction

This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. § 1334 and Article VIII of the Plan. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

II. Background

On April 30, 2009 (the “Petition Date”), Old Carco LLC (f/k/a Chrysler LLC) (“Old Carco”) and twenty-four of its affiliated debtors and debtors in possession (the “Original Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On May 19, 2009, Alpha Holding LP (together with the Original Debtors, the “Debtors”) also filed a voluntary petition under chapter 11 of the Bankruptcy Code. The Debtors' chapter 11 cases have been consolidated for procedural purposes and are being administered jointly by the May 1, 2009 and May 26, 2009 orders of the Court. (ECF Nos. 97, 2188.)

Approximately ten years before the Petition Date, Old Carco,8 the City of Twinsburg, Ohio (“Twinsburg”) and the County of Summit, Ohio (“Summit County,” and together with Old Carco and Twinsburg, the “Parties”), entered into two tax exemption agreements relating to the Twinsburg stamping plant (the “Plant”).9 On June 21, 1999, the Parties entered into the first Summit County Enterprise Zone Agreement (the “1999 Agreement”). (Stip. 2 ¶ 1.) Under the 1999 Agreement, which, by its express terms would be governed by and construed in accordance with Ohio law, the Parties agreed that, in exchange for Old Carco investing in machinery and equipment in the Plant as well as for exercising “reasonable efforts” (Stip. 2 ¶ 2) to retain a number of full-time positions at the Plant, Twinsburg and Summit County would grant a fifty-percent tax exemption (the “Exemption”) “for eligible new tangible

[452 B.R. 106]

personal property acquired in conjunction with the Project.” 10 (Amend. Obj. Ex. A, 1999 Agreement 5 ¶ 5. Accord Stip. 2 ¶ 2.)

The Exemption was granted pursuant to section 5709.63 or section 5709.632 of the Ohio Code and applied to “eligible new tangible personal property acquired in conjunction with the Project” (1999 Agreement ¶ 5) over a period of ten years beginning “the first tax year for which the tangible personal property would first be taxable were that property not exempted from taxation.” ( Id.) In the Stipulation of Facts Related to Claim Numbers 28465 and 28466, Filed By John A. Donofrio, Summit County Fiscal Officer, which was so ordered by the Court on September 9, 2010 (the “Stipulation”) (ECF No. 7450), the Parties stipulated that Old Carco first claimed the Exemption provided for under the 1999 Agreement in the year 2000. (Stip. 2 ¶ 3.)

Under the 1999 Agreement, paragraph one provided that Old Carco would “make investments in stamping presses and ancillary equipment, conveyor and ancillary equipment, crane, assembly and ancillary equipment and other miscellaneous equipment related to the Project.” (1999 Agreement 3 ¶ 1. Accord Stip. 2 ¶ 2.) The same paragraph also provided that Old Carco's intent was to invest approximately $150,000,000 “plus or minus 10% in the Project.” (1999 Agreement 3 ¶ 1.) Furthermore, paragraph two of the 1999 Agreement provided that Old Carco would “use reasonable efforts to retain 465 full-time equivalent positions at the Plant....” (1999 Agreement 3 ¶ 2. Accord Stip. 2 ¶ 2.)

Paragraph six of the 1999 Agreement also required payment of an annual administrative fee to Summit County, and provided that the Parties agreed Old Carco would pay “an annual fee equal to the greater of one percent of the dollar value of incentives offered under the [A]greement or five hundred dollars ... [and] not exceed[ing] [t]wo [t]housand [f]ive hundred [d]ollars....” (1999 Agreement 6 ¶ 6. Accord Stip. 4 ¶ 20.)

Should Old Carco “materially fail[ ] to fulfill its obligations under [the] Agreement,” the City of Twinsburg and Summit County “may terminate or modify the exemptions from taxation granted under [the] Agreement and may require the repayment of the amount of taxes that would have been payable had the property not been exempted from taxation under [the] Agreement.” (1999 Agreement 7 ¶ 10.)

Twinsburg and Summit County also agreed to “perform such acts as are reasonably necessary or appropriate to ... maintain exemptions from taxation granted under [the] Agreement.” ( Id. at 6–7 ¶ 8.)

On December 15, 2000, the Parties entered into a second Enterprise Zone Agreement (the “2000 Agreement” and, together with the 1999 Agreement, the “Tax Exemption Agreements”). (Stip. 2 ¶ 6.)

The 2000 Agreement contained similar terms as the 1999 Agreement and, as stated

[452 B.R. 107]

by the Parties in the Stipulation, it provided that:

[I]n exchange for Old Carco's project ... to invest approximately $127,200,000 more in certain machinery and equipment to be used at the ... Plant and to use reasonable efforts to maintain 291 full-time employment positions at the ... Plant in connection with the 2000 Project, Old Carco would be entitled to a 50 percent Ohio personal property tax exemption for a ten-year period on eligible new tangible personal property utilized in conjunction with the 2000 Project.

(Stip. 2–3 ¶ 7. Accord Amend. Obj. Ex. B, 2000 Agreement 2 ¶ 1, 3 ¶ 2, 4 ¶ 5.)

The Parties stipulated that Old Carco “first claimed the ten-year tax exemption provided for under the 2000 Agreement in the year 2001.” (Stip. 3 ¶ 8.) The 2000 Agreement, which would also be governed by and construed in accordance with Ohio law (2000 Agreement 7 ¶ 16(B)), similarly provided for: (a) an annual administrative fee “equal to the greater of one percent of the dollar value of incentives ... or five hundred dollars ... [and] not exceed [ing] ... $2,500.00.” (2000 Agreement 4 ¶ 6; accord Stip. 4 ¶ 20); (b) a provision allowing Twinsburg and Summit County, in the event of a material breach by Old Carco, to “terminate or modify the exemptions from taxation ... and ... [to] require the repayment of the amount of taxes that would have been payable had the property not been exempted from taxation under th[e] [A]greement” (2000 Agreement 5 ¶ 10); and (c) a promise by Twinsburg and Summit County to “perform such acts as are reasonabl[y] necessary or appropriate to ... maintain exemptions from taxation granted under [the] Agreement.” ( Id. at ¶ 8.)

Both Tax Exemption Agreements contain a provision enumerating circumstances when Old Carco would not be considered in default. Specifically, paragraph 17(F) of the 1999 Agreement and paragraph 16(F) of the 2000 Agreement provide:

[Old Carco] shall not be considered ... in default in the performance of its obligations under this agreement as a result of any cause beyond its reasonable control, including but not limited to severe and unusual weather, acts of God, or explosion, riot, acts of civil disobedience or sabotage, change to economic conditions and productivity and technological changes, power failures or shortages, restraint by court order or order of public authority, action or omission by any government agency, labor strikes or other labor disturbances.

(1999 Agreement 11 ¶ 17(F); 2000 Agreement 7–8 ¶...

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