In re Old Carco LLC

• Decision Date: 19 February 2014
• Docket Number: Case No. 09–50002 (SMB) (Jointly Administered)
• Citation: 505 B.R. 151
• Parties: In re: Old Carco LLC (f/k/a Chrysler LLC), et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

505 B.R. 151

In re: Old Carco LLC (f/k/a Chrysler LLC), et al., Debtors.

Case No. 09–50002 (SMB) (Jointly Administered)

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

Filed February 19, 2014

Sullivan & Cromwell LLP, Attorneys for Chrysler Group LLC, 125 Broad Street, New York, NY 10004, Brian D. Glueckstein, Esq., Mark U. Schneiderman, Esq., Oded Zaluski, Esq., Of Counsel.

Lisa Madigan, Illinois Attorney General, Attorney for Illinois Department of Employment Security, 100 W. Randolph Street, Chicago, IL 60601, James D. Newbold, Assistant Attorney General, Of Counsel.

Gregory F. Zoeller, Indiana Attorney General, Attorney for Indiana Department of Workforce Development, 302 W. Washington Street, IGCS Fifth Floor, Indianapolis, IN 46204, Maricel E.V. Skiles, Assistant Attorney General, Of Counsel.

Bill Schuette, Michigan Attorney General, Attorneys for Michigan Unemployment Insurance Agency, Labor Division, P.O. Box 30736, Lansing, MI 48909, Dennis Raterink, Peter Kotula, George Constance, Assistant Attorneys General, Of Counsel.

Chapter 11

MEMORANDUM DECISION DENYING MOTION TO ENFORCE SALE ORDER WITHOUT PREJUDICE

STUART M. BERNSTEIN, United States Bankruptcy Judge:

Chrysler Group LLC (“New Chrysler”) seeks an order of this Court enforcing the Sale Order ¹ pursuant to which it purchased substantially all of the assets of Old Carco LLC f/k/a Chrysler LLC and Chrysler Motors LLC (collectively, “Old Carco”) free and clear of all liens, claims, interests, encumbrances and successor liability. ( Motion for Enforcement of the Court's Order (I) Authorizing the Sale of Substantially All of the Debtors' Assets Free and Clear of All Liens, Claims, Interests and Encumbrances, (II) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases in Connection Therewith and Related Procedures and (III) Granting Related Relief, dated October 18, 2013 (“ Motion”) (ECF Doc. # 8218).) The issue is whether the Sale Order prevents the relevant agencies within the states of Michigan, Illinois and Indiana (collectively, the “States”) from using Old Carco's experience rating to determine New Chrysler's unemployment insurance tax rate.

The Court does not reach the merits of the Motion. The Tax Injunction Act, 28 U.S.C. § 1341, deprives this Court of subject jurisdiction to provide the declaratory and/or injunctive relief that New Chrysler seeks, and it must pursue its arguments before the appropriate state fora.

BACKGROUND

A. The Bankruptcy and the Sale

On April 30, 2009, Old Carco filed a chapter 11 petition in this Court. ² In a well-publicized transaction, Old Carco entered into a Master Transaction Agreement (“MTA”) under which it agreed to sell substantially all of its assets free and clear of all claims and liabilities (other than “Assumed Liabilities”), whenever arising, to New Carco Acquisition LLC, later renamed Chrysler Group LLC ( i.e., New Chrysler). SeeShatzki v. Abrams, No. 1:09cv02046 LJO DLB, 2010 WL 148183, at *1 (E.D.Cal. Jan. 12, 2010); Cooper v. Daimler AG, No. 1:–09–CV–2507–RWS, 2009 WL 4730306, at *1 (N.D.Ga. Dec. 3, 2009); Ricks v. New Chrysler Group, LLC (In re Old Carco LLC), Adv. No. 12–09801(SMB), 2013 WL 1856330, at *2 (Bankr.S.D.N.Y. May 2, 2013). The transaction closed on June 10, 2009 (the “Closing Date”), Old Carco ceased operations and New Chrysler took over the operations of the “Chrysler” automotive business. Ricks, 2013 WL 1856330, at *2.

The Sale Order is a comprehensive document, but only a few of its provisions are germane. Initially, the Sale Order defined “Claims” broadly.³ In addition to the rights to payment identified in § 101(5),⁴ “Claims” under the Sale Order included:

liabilities, encumbrances, rights, remedies, restrictions and interests and encumbrances of any kind or nature whatsoever whether arising before or after the Petition Date, ... including all claims or rights based on any successor or transferee liability, ... (collectively, “Claims”) (other than certain liabilities that are expressly assumed or created by the Purchaser, as set forth in the Purchase Agreement or as described herein (collectively, the “ Assumed Liabilities”)).

(Sale Order at p. 2) (footnote omitted).

The Sale Order then enjoined a host of persons and entities, including, “governmental, tax and regulatory authorities,” from asserting “against the Purchaser or their successors in interest any Claim arising from, related to or in connection with the ownership, sale or operation of any Asset prior to the Closing, except for Assumed Liabilities.” (Sale Order at ¶ 12.) With certain exceptions that are not relevant, neither the Purchaser, its successors, assigns nor its affiliates would be liable for any Claim that “is assertable against the Debtors or is related to the Purchased Assets prior to the Closing Date,” and “[t]he Purchaser shall not be deemed ... to ... be a legal successor, or otherwise be deemed a successor to the Debtors....” (Sale Order at ¶ 35.) Except for the Assumed Liabilities, New Chrysler would not be liable for any claims or obligations arising from or related to the purchased assets, including “successor or vicarious liabilities ... [for] any obligations of the Debtors or their affiliates arising prior to the Closing, including, but not limited to, liabilities on account of any taxes arising, accruing or payable under, out of, in connection with, or in any way relating to the operation of the Purchased Assets prior to the Closing of the Sale Transaction.” (Sale Order at ¶ 39.)

The MTA and the Sale Order were binding and inured “to the benefit of, the Debtors, their estates, their creditors, the Purchaser, the respective affiliates, successors and assigns of each, and any affected third parties,” (Sale Order at ¶ 49), and the Court retained jurisdiction “to interpret, implement and enforce the terms and provisions of this Sale Order.” ( Id. at ¶ 59.) The sale closed on June 10, 2009 (the “Closing Date”), and by order dated April 23, 2010, the Court confirmed Old Carco's Second Amended Joint Plan of Liquidation. (ECF Doc. # 6875.)

B. Unemployment Insurance Tax Liabilities1. Introduction

All states require in-state employers to pay unemployment taxes as part of a federal-state scheme. See Federal Unemployment Tax Act (“FUTA”), 26 U.S.C. §§ 3301–3311. If a state's unemployment program meets applicable federal requirements, it receives a share of funds from the United States Government UnemploymentTrust Fund. To be eligible for federal funds, the Secretary of Labor must certify under 26 U.S.C. § 3304 that the law has been approved under FUTA. If the employer is located in a certified state with approved laws, it will be entitled to credits against FUTA taxes for taxes it paid under state unemployment tax laws. During the relevant period (2009–2013), the state unemployment insurance programs in Michigan, Indiana and Illinois were approved and certified in accordance with federal law.⁵

The computation of an employer's state unemployment tax rate attempts to match the predicted amount of unemployment benefits to be paid in the coming year with the funding necessary to pay those benefits. Steven J. Boyajian, The Transfer of Unemployment Insurance Experience Rates,Am. Bankr. Inst. J. 24, 24 (Sept. 2013). The prediction relies on the employer's historical claims experience typically for the preceding thirty-six months. In this case, each of the states computed a portion of the unemployment tax rate by dividing the benefits charged against the employer during the prior thirty-six months (or more) by the taxable wages for FUTA purposes during the same period. Thus, the greater the number of past unemployment insurance benefits paid to discharged workers, the higher the tax obligation going forward. This historical component will be referred to as the Experience Rating.

A new employer with no prior experience receives a relatively low tax rate. If, however, the new employer is deemed a “successor” to an old employer, the old employer's Experience Rating will be “transferred” to the new employer and used by the state in computing the new employer's unemployment insurance tax rate. The Michigan Unemployment Insurance Agency (“Michigan”), the Indiana Department of Workforce Development (“Indiana”) and Illinois Department of Employment Security (“Illinois”) determined that New Chrysler was a successor to Old Carco, and transferred Old Carco's Experience Rating to New Chrysler for the purpose of determining the New Chrysler's unemployment tax rate. ( Motion at ¶ 2.) As a result, between June 10, 2009 and June 30, 2013, New Chrysler paid more than $50 million above what it would have paid if New Chrysler had been treated as a new employer. ( Id. at ¶ 6.) The circumstances surrounding the determination of New Chrysler's unemployment tax rate are discussed immediately below.

2. Michigan

Under Michigan law, when a “transfer of business” occurs, “the commission shall assign the transferor's experience account, or a pro rata part of the account, to the transferee.” Mich. Comp. Laws § 421.22(c)(1). On June 3, 2009, New Chrysler submitted a UIA Employer e-Registration form to Michigan. ⁶ New Chrysler represented that it had acquired 90% of Old Carco's assets and Michigan business (products/services) and 100% of its organization (employees/payroll/personnel) and Michigan trade (customers/accounts). ( UIA Employer e-Registration at 3.) New Chrysler also stated that it was conducting the Michigan business that it acquired. One week later, New Chrysler submitted a Manual Employer Registration Questionnaire ( Michigan Questionnaire)⁷ in which it stated that it had acquired 100% of the Old Carco's assets, organization, trade and Michigan business. ( Michigan Questionnaire at 1.) It reiterated that it was conducting the business it had acquired, and although ownership was new, Old Carco's officers and management leaders would have similar roles in the transferee. ( Id.)

Michigan...