In re Old Carco LLC

• Decision Date: 19 June 2009
• Docket Number: No. 09-50002 (AJG).,09-50002 (AJG).
• Citation: 406 B.R. 180
• Parties: In re OLD CARCO LLC (f/k/a Chrysler LLC), et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

406 B.R. 180

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

No. 09-50002 (AJG).

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

June 19, 2009.

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A. Jeffrey Misler, Daniels & Kaplan, P.C., Kansas City, MO, Benjamin Rosenblum, Corinne Ball, Veerle Roovers, Jones Day, New York, NY, John E. Berg, Clark Hill PC, Detroit, MI, Lawrence V. Gelber, Schulte Roth & Zabel LLP, New York, NY, for debtors.

Andrew D. Velez-Rivera, Office of the U.S. Trustee, New York, NY, Susan D. Golden, Office of United States Trustee SDNY, New York, NY, for trustee.

David Chrysler Jeep, Llc, Neal D. Colton, Cozen O'Connor, Philadelphia, PA, for interim trustee.

OPINION REGARDING AUTHORIZATION OF REJECTION OF ALL EXECUTORY CONTRACTS AND UNEXPIRED LEASES WITH CERTAIN DOMESTIC DEALERS AND GRANTING CERTAIN RELATED RELIEF

ARTHUR J. GONZALEZ, Bankruptcy Judge.

In an order (the "Order")¹ dated June 9, 2009, the Bankruptcy Court granted the omnibus motion of Chrysler LLC, now known as Old Carco LLC, ("Chrysler") and certain of its affiliates, as debtors and debtors in possession (collectively with Chrysler, the "Debtors"), for an Order, Pursuant to Sections 105, 365 and 525² of the Bankruptcy Code and Bankruptcy Rule 6006, (A) Authorizing the Rejection of All Executory Contracts and Unexpired Leases With Certain Domestic Dealers and (B) Granting Certain Related Relief (the "Motion"),³ filed on May 14, 2009.

An evidentiary hearing was held before the Court on June 4, 2009, at which 15 witnesses testified at the hearing and an additional approximately 66 witnesses presented testimony by proffered declaration. At the close of the presentation of evidence on that date, the hearing was continued to June 9, 2009, at which legal arguments were presented. Several of the Debtors' employees, including Peter M. Grady ("Grady"), Director of Dealer Operations for Chrysler Motors, LLC, have made declarations to the Court, participated in depositions, and offered live testimony in various hearings regarding the Motion and its subject matter. The Debtors designated certain of this evidence into the record.⁴ Over two hundred objections, statements, correspondence, and other responses (collectively with all supplements, amendments, and joinders thereto, the "Objections," or in the singular, the "Objection") were filed in response to the Motion. The Committee of Chrysler Affected Dealers (the "CCAD") and other parties also designated certain evidence into the record. Additionally, the Debtors filed a consolidated reply (the "Reply") in response to the Objections.

The facts and circumstances of the Debtors' bankruptcy case have been extensively set forth in In re Chrysler LLC, 405 B.R. 84 (Bankr.S.D.N.Y.2009) and are incorporated, as further expanded upon by additional findings of fact relevant to the Motion, herein.

DISCUSSION

Business Judgment Standard

The Supreme Court has observed that the "fundamental purpose of reorganization is to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources. ... [T]he authority to reject an executory contract is vital to the basic purpose to a Chapter 11 reorganization, because rejection can release the debtor's estate from burdensome obligations that can impede a successful reorganization." NLRB v. Bildisco and Bildisco, 465 U.S. 513, 528, 104 S.Ct. 1188, 1197, 79 L.Ed.2d 482 (1984). In this case, substantially all of the Debtors' assets were sold pursuant to § 363, which is to be followed by a plan of reorganization setting forth, inter alia, a distribution scheme for the Debtors' estates, but that does not change the relevant analysis herein. See infra citations to In re G Survivor Corp., 171 B.R. 755, 759 (Bankr.S.D.N.Y.1994).

The business judgment standard is employed by courts in determining whether to permit a debtor to assume or reject a contract. See In re Penn Traffic Co., 524 F.3d 373, 383 (2d Cir.2008) (citing In re Orion Pictures Corp., 4 F.3d 1095, 1098 (2d Cir.1993)). This standard "presupposes that the estate will ... reject contracts whose performance would benefit the counterparty at the expense of the estate." Penn Traffic, 524 F.3d at 383; see also G Survivor Corp., 171 B.R. at 758 (noting that "the court for the most part must only determine that the rejection will likely benefit the estate" (citation omitted)). "Generally, absent a showing of bad faith, or an abuse of business discretion, the debtor's business judgment will not be altered." G Survivor, 171 B.R. at 757. Moreover, the business judgment standard "as applied to a bankrupt's decision to reject an executory contract because of perceived business advantage requires that the decision be accepted by courts unless it is shown that the bankrupt's decision was one taken in bad faith or in gross abuse of the bankruptcy retained business discretion." Id. at 758 (quoting In re Richmond Metal Finishers, Inc., 756 F.2d 1043, 1047 (4th Cir.1985)). A motion to assume or reject "should be considered a summary proceeding, intended to efficiently review the trustee's or debtor's decision to adhere to or reject a particular contract in the course of the swift administration of the bankruptcy estate. It is not the time or place for prolonged discovery or a lengthy trial with disputed issues." Orion, 4 F.3d at 1098-99.⁵

Nevertheless, some of the Objections implore the Court either to apply a heightened standard because of the existence of state statutes designed to protect automobile dealers and franchisees (the "Dealer Statutes," or in the singular, the "Dealer Statute")⁶ or to balance the equities by considering the harm to those impacted by the rejections, including the communities in which the dealers (the "Affected Dealers," or in the singular, the "Affected Dealer") with rejected dealer and site control agreements (collectively the "Rejected Agreements," or in the singular, the "Rejected Agreement") operate. Under the business judgment standard, "the effect of rejection on other entities is not a material fact to be weighed." In re Wheeling-Pittsburgh Steel Corp., 72 B.R. 845, 848 (Bankr.W.D.Pa.1987), but under a heightened standard or a balancing of the equities, such effect would be a fact to be weighed.

Many of the Affected Dealers cite Bildisco, 465 U.S. at 523-24, 104 S.Ct. 1188, where the Supreme Court held that the rejection of collective-bargaining agreements was subject to a somewhat stricter standard than business judgment even though there was no such indication in section 365(a). See id. The Supreme Court agreed with all of the Courts of Appeals that had considered that issue, concluding that Congress intended a higher standard than business judgment for rejection of collective-bargaining agreements because of, inter alia, the "special nature of a collective-bargaining contract, and the consequent `law of the shop' which it creates." Id. at 524, 526, 104 S.Ct. 1188 (citations omitted) (further noting "national labor policies of avoiding labor strife and encouraging collective bargaining" under the National Labor Relations Act ("NLRA")). The Supreme Court therefore adopted the test articulated by two Courts of Appeals under which the debtor would be permitted to reject a collective-bargaining agreement if the debtor could show that the collective-bargaining agreement burdened the estate, and that, after careful scrutiny, the equities balanced in favor of rejecting the labor contract. See id. at 526, 104 S.Ct. 1188. Even in this context, the Supreme Court delineated the boundaries of such balancing: "the Bankruptcy Court must focus on the ultimate goal of Chapter 11 when considering these equities. The Bankruptcy Code does not authorize free-wheeling consideration of every conceivable equity, but rather only how the equities relate to the success of the reorganization." Id. at 527, 104 S.Ct. 1188.⁷

The heightened standard articulated in Bildisco has been called the "public interest standard." See In re Pilgrim's Pride Corp., 403 B.R. 413, 421 fn. 19 (Bankr. N.D.Tex.2009). The Fifth Circuit applied this standard in Mirant, 378 F.3d at 525, concluding that "the business judgment normally applicable to rejection motions is more deferential than the public interest standard applicable in FERC [Federal Energy Regulatory Commission] proceedings to alter the terms of a contract within its jurisdiction. Use of the business judgment standard would be inappropriate in this case because it would not account for the public interest inherent in the transmission and sale of electricity." Id. (noting the purpose of FERC's power under the Federal Power Act ("FPA") as being the "protection of the public interest, as distinguished from the private interests of the utilities") (quoting Fed. Power Comm'n v. Sierra Pac. Power Co., 350 U.S. 348, 355, 76 S.Ct. 368, 100 L.Ed. 388 (1956)); but see In re Calpine Corp., 337 B.R. 27, 36 (S.D.N.Y.2006) (holding, contrary to Mirant's holding, that the court lacked jurisdiction to authorize rejection of certain power agreements because doing so would directly interfere with FERC's jurisdiction over various aspects of wholesale energy contracts, even though rejection constituted breach rather than modification or termination of the power agreements).

Critically, both the Bildisco and Mirant courts found that a heightened standard for contract rejection was warranted because the authority to reject under § 365(a) conflicted with the policies designed to protect the national public interest underlying other federal regulatory schemes. In this case, though, while policies designed to protect the public interest may, in part, underlie the Dealer Statutes, those statutes have been enacted by state legislatures, not Congress, and by their very terms protect the public interest of their respective states rather...