In re Old Carco LLC
| Decision Date | 08 October 2015 |
| Docket Number | Case No. 09–50002 SMB Jointly Administered |
| Citation | 538 B.R. 674 |
| Parties | In re: Old Carco LLC (f/k/a Chrysler LLC), et al., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
SULLIVAN & CROMWELL LLP, Attorneys for Chrysler Group LLC (n/k/a FCA U.S. LLC), 125 Broad Street, New York, N.Y. 10004, Brian D. Glueckstein, Esq., Mark U. Schneiderman, Esq., Mark S. Geiger, 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, Heather Crockett, Assistant Attorneys General, Of Counsel
By order dated December 1, 2014, the District Court remanded this matter to this Court to interpret the Sale Order1 pursuant to which the debtors (collectively, “Old Chrysler”) sold substantially all of their assets to their Purchaser (“New Chrysler”). See In re Old Carco LLC, No. 14–CV–2225 (JMF), 2014 WL 6790781 (S.D.N.Y. Dec. 1, 2014) (“Chrysler II ”). Specifically, the Court was directed to decide whether the Sale Order prohibited Michigan, Indiana and Illinois from using Old Chrysler's Experience Rating, defined below, in computing New Chrysler's unemployment insurance tax rate. The Court received supplemental memoranda from the parties.2 Michigan subsequently settled with New Chrysler, (see Stipulation to Dismiss Only Michigan Unemployment Insurance Agency, dated May 5, 2015 (ECF Doc. # 8395)), leaving only Indiana and Illinois, which this opinion will refer to collectively as the “States.”
For the reasons that follow, the Court concludes that the Sale Order bars the States from using Old Chrysler's Experience Rating to compute New Chrysler's unemployment insurance tax rate unless the “police and regulatory” exception in paragraph 23 of the Sale Order negates that prohibition. Paragraph 23 is ambiguous, and there appears to be extrinsic evidence that will aid the Court's interpretation. Accordingly, the Court will schedule a trial to determine the meaning of the “police and regulatory” exception.
The background to this contested matter is set forth at length in the Court's prior decision, In re Old Carco LLC, 505 B.R. 151 (Bankr.S.D.N.Y.2014) ( “Chrysler I ”), vacated & remanded, No. 14–CV–2225 (JMF), 2014 WL 6790781 (S.D.N.Y. Dec. 1, 2014) (“Chrysler II ”). The Court assumes familiarity with that decision, and highlights the facts germane to this opinion.
On June 1, 2009, the Bankruptcy Court signed the Sale Order approving the sale of substantially all of Old Chrysler's assets to New Chrysler. The Sale Order contained several provisions indicating that the transfer was free and clear of claims and interests in the assets and successor liability, and that neither the Purchasers nor the Purchased Assets would be liable for any Claims, other than Assumed Liabilities, or any Claims based on successor liability.3 The Sale Order included a finding of fact that the Purchaser would not have entered into the Purchase Agreement and would not consummate the transaction unless the purchase was “free and clear” of all Claims other than Assumed Liabilities. (Sale Order at ¶ AA.)
“Claims,” as used in the Sale Order, was a defined term. It included “liens, claims (as such term is defined by section 101(5) of the Bankruptcy Code ), 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.” (Sale Order at pp. 1–2.) (Emphasis added.) Thus, “Claims” was not limited to “claims” as defined in Bankruptcy Code § 101(5), and included interests.
The Sale Order included a broad injunction against efforts to enforce any Claims (other than Assumed Liabilities) against the Purchaser or the Purchased Assets:
Except as provided in the Purchase Agreement, all persons and entities (and their respective successors and assigns), including, but not limited to ... governmental, tax and regulatory authorities ... holding Claims ... arising under or out of, in connection with, or in any way relating to, the Debtors, the Purchased Assets, the operation of the Business prior to Closing or the transfer of the Purchased Assets to the Purchaser, are hereby forever barred, estopped and permanently enjoined from asserting such Claims against the Purchaser, its successors or assigns, its property or the Purchased Assets. No such persons or entities shall assert 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.) (Emphasis added.)
The Sale Order incorporated exceptions to its free and clear and successor liability provisions. Paragraph 44 excluded liabilities to a governmental unit under environmental statutes or regulations to which the owner or operator of the property would be subject after the date of the entry of the Sale Order.4 In addition, paragraph 23 excluded certain “police and regulatory” liabilities:
Nothing in this Sale Order or in the Purchase Agreement releases, nullifies or enjoins the enforcement of any liability to a governmental unit under police and regulatory statutes or regulations that any entity would be subject to as the owner or operator of property after the date of entry of this Sale Order.
Employers within a state must pay unemployment insurance taxes to that state at a rate computed in accordance with a formula developed by the state. The computation of the 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. The rate is based, in part, on the employer's historical claims paying experience, generally reaching back three years. Thus, the greater the number of past unemployment insurance benefits paid to discharged workers during the reach back period, the higher the tax obligation going forward.
This historical component is referred to as the “Experience Rating.” New employers with no Experience Rating enjoy relatively low contribution rates. 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 use of the predecessor's Experience Rating may result in higher contribution rates and greater tax liability.
Following the sale and transfer of the assets, New Chrysler registered as an employer in several states, including Illinois and Indiana. It completed forms indicating that it had acquired and was continuing the business of Old Chrysler. (See Indiana Memo, Ex. 1; Objection of Illinois Department of Employment Security to Motion of Chrysler Group LLC for Enforcement of Sale Order [Dkt. No. 3232], filed Nov. 21, 2013 (“Illinois Original Objection ”), Ex. B (ECF Doc. # 8247).) Based on the information in the forms, Indiana and Illinois determined that New Chrysler was a successor to Old Chrysler, (Indiana Memo, Ex. 3; see Illinois Original Objection, Ex. C), and used Old Chrysler's Experience Rating to compute New Chrysler's unemployment insurance tax rate. This rate was substantially higher than the new employer rate.
The States determined the tax rate each year for several years using the Old Chrysler Experience Rating, and New Chrysler paid the taxes at those rates. Although New Chrysler challenged the rate assessments on various grounds during this period, it did not raise the Sale Order as a prohibition on the use of Old Chrysler's Experience Rating until 2013. In that year, New Chrysler challenged the rate determination at the administrative level in both States contending that the Sale Order barred the use of Old Chrysler's Experience Rating. On January 6, 2015, Illinois denied New Chrysler's protest for the years 2009—2013 based on its failure to timely protest the original rate determinations. New Chrysler filed a statutory protest of the denials. (Illinois Memo at 7.) New Chrysler's protest and request for relief remains pending in Indiana. (See Indiana Memo at 2.)
In addition to challenging the assessments before the States' administrative agencies, Chrysler sought relief in this Court. In October 2013, it filed a motion to enforce the Sale Order and enjoin the States from using Old Chrysler's Experience Rating. (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 Oct. 18, 2013 (“Enforcement Motion ”) (ECF Doc. # 8218).) In Chrysler I , the Court concluded that the Tax Injunction Act, 28 U.S.C. § 1341, deprived the Court of subject matter jurisdiction to provide the declaratory and injunctive relief sought by New Chrysler.
The District Court reversed in Chrysler II. The States had received actual notice of the earlier proceedings culminating in the Sale Order. Chrysler II, 2014 WL 6790781, at *4. The Sale Order was, therefore, res judicata, and the Court's jurisdiction to issue (and hence, enforce) the Sale Order was not subject to collateral attack by the States. Id. at 5. The District Court remanded the matter to ...
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