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

• Decision Date: 06 December 2010
• Docket Number: Bankruptcy Nos. 10 Civ. 1231 (PKC),09–50002 (AJG).Adversary No. 09–00511.
• Citation: 442 B.R. 196
• Parties: In re OLD CARCO LLC (f/k/a Chrysler LLC), et al., Debtors.Old Carco LLC (f/k/a Chrysler LLC); Old Carco Motors LLC; Chrysler Group LLC; and Old Carco Liquidation Trust, Plaintiffs,v.John Kroger, Oregon Attorney General; Matthew Garrett, Director of Oregon Department of Transportation; Matthew Dunlap, Maine Secretary of State; John McCurry, Chairman of the Maine Motor Vehicles Franchise Board; Jesse White, Illinois Secretary of State; and Terrence M. O'Brien, Chairperson of Illinois Motor Vehicle Review Board, Defendants.
• Court: U.S. District Court — Southern District of New York

442 B.R. 196

In re OLD CARCO LLC (f/k/a Chrysler LLC), et al., Debtors.Old Carco LLC (f/k/a Chrysler LLC); Old Carco Motors LLC; Chrysler Group LLC; and Old Carco Liquidation Trust, Plaintiffs,

v.John Kroger, Oregon Attorney General; Matthew Garrett, Director of Oregon Department of Transportation; Matthew Dunlap, Maine Secretary of State; John McCurry, Chairman of the Maine Motor Vehicles Franchise Board; Jesse White, Illinois Secretary of State; and Terrence M. O'Brien, Chairperson of Illinois Motor Vehicle Review Board, Defendants.

Bankruptcy Nos. 10 Civ. 1231 (PKC)

09–50002 (AJG).Adversary No. 09–00511.

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

Dec. 6, 2010.

OPINION TEXT STARTS HEREWest CodenotesPreemptedS.H.A. 815 ILCS 710/4; 10 M.R.S.A. § 1174

Corinne Ball, Jones Day, New York City, for Plaintiffs.Ann W. Matthews, Raleigh, NC, James D. Newbold, Chicago, IL, Carolyn G. Wade, Salem, OR, Elizabeth J. Wyman, Augusta, ME, for Defendants.

MEMORANDUM AND ORDER

CASTEL, District Judge.

The plaintiffs in this action assert that certain state statutes directed toward the relationships between vehicle manufacturers and their dealership franchises violate the Supremacy Clause because they are contrary to provisions of the federal Bankruptcy Code, 11 U.S.C. § 101, et seq., as well as the orders of the bankruptcy court in In re Old Carco LLC (f/k/a Chrysler LLC), et al., Case No. 09–50002 (AJG) (the “Bankruptcy Court”). Separately, the plaintiffs contend that the statutes unlawfully interfere with the parties' reasonable contractual expectations, thereby violating the Contract Clause of the Constitution. In a Memorandum and Order dated March 26, 2010, this Court withdrew the automatic reference to the Bankruptcy Court, concluding that non-core issues of federal law predominated. (Docket # 9.) The plaintiffs move for summary judgment in their favor, and officials from the state of Illinois move to dismiss the Complaint.

For the reasons explained below, plaintiff's motion for summary judgment is granted as to the claim of preemption under the Supremacy Clause against the Illinois and Maine defendants. The summary judgment motion is denied as to the Oregon defendants. The motion to dismiss filed by the Illinois defendants also is denied. I do not reach the plaintiff's Contract Clause claim, as it is unnecessary to do so.

BACKGROUND

The facts of this case are largely undisputed. Except as noted, the facts asserted by the plaintiffs, as they are set forth below, are admitted by all defendants. Every reasonable inference is drawn in favor of the non-moving parties. Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir.1995).

Plaintiffs Old Carco and Old Carco Motors (collectively, the “Debtor Plaintiffs”) are, along with twenty-four of their affiliates, debtors in the above-captioned Chapter 11 bankruptcy proceedings. (Pl. 56.1 ¶ 1; Ill. 56.1 Opp. ¶ 1; Me. 56.1 Opp. ¶ 1; Or. 56.1 Opp. ¶ 1.) Old Carco formerly manufactured Chrysler, Jeep and Dodge brand vehicles, with Old Carco Motors acting as distributor to authorized dealers in the United States. (Pl. 56.1 202; Ill. 56.1 Opp. ¶ 2; Me. 56.1 Opp. ¶ 2; Or. 56.1 Opp. ¶ 2.) Plaintiff Chrysler Group LLC (“New Chrysler”) is a newly created entity that assumed certain liabilities of Chrysler debtors, including non-parties to this action. (Pl. 56.1 ¶ 4; Ill. 56.1 Opp. ¶ 4; Me. 56.1 Opp. ¶ 4; Or. 56.1 Opp. ¶ 4.) New Chrysler both manufactures and distributes the Chrysler, Jeep and Dodge vehicle brands. (Pl. 56.1 ¶ 4; Ill 56.1 Opp. ¶ 4; Me. 56.1 Opp. ¶ 4; Or. 56.1 Opp. ¶ 4.) It is not a debtor in the bankruptcy action.

Three separate rulings of the Bankruptcy Court are relevant to the preemption claim. Each of these rulings bears on the plaintiffs' obligations to vehicle dealership franchises, the state-law regimes that govern relations between manufacturers, distributors and dealers, and the nexus between the Bankruptcy Code and state dealer laws.

A. The Sale Opinion and the Sale Order.

The Debtor Plaintiffs entered into a purchase agreement with New Chrysler and Fiat S.p.A (“Fiat”) dated April 30, 2009 (the “Purchase Agreement”). (Pl. 56.1 ¶ 3; Ill. 56.1 Opp. ¶ 3; Me. 56.1 Opp. ¶ 3; Or. 56.1 Opp. ¶ 3.) As summarized in an opinion of the Bankruptcy Court approving the transaction, New Chrysler acquired the debtors' assets and liabilities for $2 billion, while Fiat acquired an ownership interest in New Chrysler and provided it with technological support. In re Chrysler, LLC, 405 B.R. 84, 92 (Bankr.S.D.N.Y.2009). On May 3, 2009, all Chrysler debtors filed a motion in the Bankruptcy Court for the approval of the Purchase Agreement. (Pl. 56.1 ¶ 12; Ill. 56.1 Opp. ¶ 12; Me. 56.1 Opp. ¶ 12; Or. 56.1 Opp. ¶ 12.) Several state attorneys general objected. (Pl. 56.1 ¶ 21; Ill. 56.1 Opp. ¶ 21; Me. 56.1 Opp.¶ 21; Or. 56.1 Opp. ¶ 21.) The Bankruptcy Court approved the Purchase Agreement and the underlying transaction in a written opinion (the “Sale Opinion”), which, among other things, concluded that if the transaction did not proceed, the debtors would likely be forced into immediate liquidation. In re Chrysler LLC, 405 B.R. at 96. The Sale Opinion was accompanied by a separate order that approved the transaction (the “Sale Order”). (Pl. 56.1 ¶¶ 13–14; Ill. 56.1 Opp. ¶¶ 13–14; Me. 56.1 Opp. ¶¶ 13–14; Or. 56.1 Opp. ¶¶ 13–14.) The Sale Opinion and Sale Order were affirmed by the United States Court of Appeals for the Second Circuit. See In re Chrysler, LLC, 592 F.3d 370, 372 (2d Cir.2010). (Pl. 56.1 ¶ 14; Ill. 56.1 Opp. ¶ 14; Me. 56.1 Opp. ¶ 14; Or. 56.1 Opp. ¶ 14.)

B. The Assumed Agreements and the Rejected Dealer Agreements.

Pursuant to the Purchase Agreement and the Sale Order, New Chrysler's “purchased assets” included assumed and assigned dealer agreements for Chrysler, Dodge and Jeep vehicle lines (the “Assumed Agreements”). (Pl. 56.1 ¶ 15; Ill. 56.1 Opp. ¶ 15; Me. 56.1 Opp. ¶ 15; Or. 56.1 Opp. ¶ 15.) Certain dealer agreements were not assumed by New Chrysler (the “Rejected Dealer Agreements”), and New Chrysler filed with the Bankruptcy Court a motion to confirm its assumption and rejection of the agreements. (Pl. 56.1 ¶¶ 16–17; Ill. 56.1 Opp. ¶¶ 16–17; Me. 56.1 Opp. ¶¶ 16–17; Or. 56.1 Opp. ¶¶ 16–17.) Again, certain state attorneys general objected to the motion and participated in the related hearings. (Pl. 56.1 ¶ 21; Ill. 56.1 Opp. 121; Me. 56.1 Opp. ¶ 21; Or. 56.1 Opp. ¶ 21.) In particular, defendant Jesse White, who is the Illinois Secretary of State, filed an “extensive objection,” and argued that Illinois laws, which were intended to protect the state's vehicle dealers, did not allow for the Rejected Dealer Agreements. (Pl. 56.1 ¶ 22; Ill. 56.1 Opp. ¶ 22; Me. 56.1 Opp. ¶ 22; Or. 56.1 Opp. ¶ 2.) White also argued that the section of the Bankruptcy Code permitting a bankruptcy court to reject executory contracts, 11 U.S.C. § 365, did not preempt the Illinois dealership laws. (Pl. 56.1 ¶ 22; Ill. 56.1 Opp. 122; Me. 56.1 Opp. ¶ 22; Or. 56.1 Opp. 122.)

On June 9, 2009, following argument and an evidentiary hearing, the Bankruptcy Court entered an order, pursuant to 11 U.S.C. §§ 105 and 365, that authorized the debtors' rejection of the executory contracts and unexpired leases with the Rejected Dealers (the “Rejection Order”). (Pl. 56.1 ¶ 17; Ill. 56.1 Opp. ¶ 17; Me. 56.1 Opp. ¶ 17; Or. 56.1 Opp. 17.) On June 19, 2009, the Bankruptcy Court issued an opinion explaining the basis for the Rejection Order, particularly as to the debtors' “persuasive showing” that the rejection of existing dealer contracts would benefit the estate and was the product of sound business judgment. In re Old Carco LLC, 406 B.R. 180, 192, 194–99 (Bankr.S.D.N.Y.2009).¹ The Bankruptcy Court held that while the state laws intended to grant protection to dealer franchises may have been adopted in the public interest, they did not account for the national interest embodied in federal bankruptcy laws, and were not adopted to protect the states' citizens from imminent threats to health or safety. Id. at 189–91. The Bankruptcy Court concluded that application of the state statutes would obstruct federal bankruptcy adjudication, specifically as to the Bankruptcy Court's power to reject executor contracts under 11 U.S.C. § 365, and that the state laws were preempted. Id. at 199–207.

C. Preemption of Rejected–Dealer Claims Brought Under State Law.

On August 13, 2009, the debtors and New Chrysler filed a joint motion in the Bankruptcy Court to enjoin legal actions brought by Rejected Dealers in Arkansas, Ohio and Wisconsin as contrary to the Sale Order, the Sale Opinion, the Rejection Order and the Rejection Opinion, as well as the Bankruptcy Code's automatic stay provision, 11 U.S.C. § 362. (Pl. 56.1 ¶ 25; Ill. 56.1 Opp. ¶ 25; Me. 56.1 Opp. ¶ 25; Or. 56.1 Opp. ¶ 25.) In an unpublished opinion dated August 31, 2009. the Bankruptcy Court held that the Sale Order barred the dealers' lawsuits, since the Sale Order “clearly prohibited any successor or transferee liabilities against New Chrysler.” (Compl. Ex. F at 5–6.) The Bankruptcy Court stated that “a crucial condition” of its approval of the Fiat transaction was that New Chrysler would not be required to assume all then-existing dealer agreements, and it concluded that the actions against New Chrysler brought pursuant to the state franchise laws were “enjoined by the Sale Order.” (Compl. Ex. F at 6.)

The Bankruptcy Court also held that the state franchise laws were “preempted by the Bankruptcy Code to the extent that the enforcement of such laws conflict with the terms of the Sale Order or the impact of the rejection of the rejected agreements.” (Compl. Ex. F at 7.) It noted that the Rejection Order stated that the Rejected Dealers “shall have no further rights (direct, indirect, contractual or otherwise) to act as an Authorized Dealer....” (Compl. Ex. F. at 7.) The dealers' legal actions, the Bankruptcy Court held,

are in direct conflict with the terms of the Rejection Order because the...