In Re: Old Carco LLC

Filing 30

MEMORANDUM OPINION AND ORDER. For the reasons stated in this Memorandum Opinion and Order, the Bankruptcy Court's Order denying New Chrysler's motion to enforce the Sale Order is VACATED and the matter is REMANDED to the Bankruptcy Court for further proceedings consistent with this Memorandum Opinion and Order. The Clerk of Court is directed to terminate Docket No. 5 and to close this case. (Signed by Judge Jesse M. Furman on 12/1/2014) (rjm)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE:
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OLD CARCO LLC
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(f/k/a CHRYSLER LLC), et al.
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12/01/2014

14-CV-2225 (JMF)
MEMORANDUM OPINION
AND ORDER

JESSE M. FURMAN, United States District Judge:
In this appeal, Chrysler Group LLC (“New Chrysler”) appeals from an order of the
United States Bankruptcy Court for the Southern District of New York (Stuart M. Bernstein,
B.J.), dated February 21, 2014, denying its motion to enforce the terms of a 2009 sale order
entered in connection with the bankruptcy of the automaker Old Carco LLC, formerly known as
Chrysler LLC. The Bankruptcy Court concluded that, in light of the Tax Injunction Act, 28
U.S.C. § 1341, it lacked subject-matter jurisdiction to consider New Chrysler’s motion. On
appeal, New Chrysler argues that, in doing so, the Bankruptcy Court erroneously entertained a
collateral attack on the 2009 sale order insofar as that order is res judicata even as to subjectmatter jurisdiction. In light of controlling Supreme Court precedent, this Court agrees.
Accordingly, the Bankruptcy Court’s order is vacated, and the case is remanded to the
Bankruptcy Court for further proceedings consistent with this Memorandum Opinion and Order.

BACKGROUND
On April 30, 2009, Chrysler LLC and several of its subsidiaries (together, “Old
Chrysler”) filed a Chapter 11 bankruptcy petition. (Voluntary Pet. (Bankr. Docket No. 1)). 1 On
June 1, 2009, the Honorable Arthur J. Gonzalez, the United States Bankruptcy Judge then
assigned to the case, entered an order (the “Sale Order”) approving the sale of Old Chrysler’s
assets to New Chrysler (then named “New CarCo LLC”) pursuant to Section 363 of the
Bankruptcy Code. (Bankr. Docket No. 3232). To the extent relevant here, the Sale Order
authorized the transfer of Old Chrysler’s assets “free and clear of all Claims” not otherwise
assumed under the agreement (Sale Order ¶ W), and acknowledged that New Chrysler “would
not consummate the Sale Transaction . . . if the sale of the purchased assets was not clear of all
Claims other than Assumed Liabilities, or if [New Chrysler] would, or in the future could, be
liable for any such Claims.” (Id. ¶ AA). It further enjoined entities including “governmental, tax
and regulatory authorities” from “asserting against [New Chrysler] . . . any Claim arising from,
related to or in connection with the ownership, sale or operation” of Old Chrysler assets. (Sale
Order ¶ 12). The sale closed on June 10, 2009. (Mem. Decision Denying Mot. To Enforce Sale
Order Without Prejudice (Bankr. Docket No. 8282) (“Mem. Op.”) 3).
On October 18, 2013, New Chrysler filed a motion seeking enforcement of the Sale
Order. (Mot. for Enforcement of the Court’s Order (Bankr. Docket No. 8218) (“Mot. for
Enforcement”)). New Chrysler alleged that the Michigan Unemployment Insurance Agency
(“Michigan UIA”), the Indiana Department of Workforce Development (“Indiana DWD”), and
the Illinois Department of Employment Security (“Illinois DES”) (collectively, the “Agencies”)

1

All citations to the Bankruptcy Court docket refer to the underlying Bankruptcy Court
case, In re Old Carco, LLC, 09-BR-50002 (SMB).

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had violated the Sale Order by deeming New Chrysler a successor to Old Chrysler for purposes
of calculating New Chrysler’s unemployment insurance tax rates — a decision that, according to
New Chrysler, had resulted in millions of dollars in overcharged unemployment insurance taxes.
(Mot. for Enforcement ¶¶ 5-6). Specifically, New Chrysler contended that, by approving the sale
of Old Chrysler’s assets “free and clear of any interest in such property” pursuant to Section
363(f) of the Bankruptcy Code, 11 U.S.C. § 363(f) (Sale Order ¶¶ W-BB), the Bankruptcy Court
had prohibited the Agencies from transferring Old Chrysler’s “experience ratings” — variables
used in calculating unemployment insurance taxes that are based on the extent to which former
employees have received unemployment insurance benefits — to New Chrysler. (Mot for
Enforcement ¶¶ 30-31, 40-41). In response, the Agencies took issue with both New Chrysler’s
interpretation of the Sale Order and the Bankruptcy Court’s jurisdiction to opine on the issue,
arguing, among other things, that the Bankruptcy Court was barred from reaching the merits of
the motion due to the Tax Injunction Act, 28 U.S.C. § 1341. (Bankr. Docket Nos. 8239, 8242,
8244, 8270; Dec. 12, 2013 Hr’g Tr. (Bankr. Docket No. 8273) 39:17-22).
In an opinion dated February 19, 2014, Judge Bernstein — to whom the case had been
reassigned (Bankr. Docket No. 8058) — ruled in favor of the Agencies on jurisdictional grounds.
(Mem. Op. 3). That is, the Bankruptcy Court declined to reach the merits of New Chrysler’s
motion, instead agreeing with the Agencies that the Tax Injunction Act deprived the Court of
subject-matter jurisdiction to hear the motion. (Id.). The Court did not dispute that it had
“bankruptcy jurisdiction to interpret and enforce the Sale Order” (Id. at 17), but nonetheless
concluded that the Tax Injunction Act imposed a separate jurisdictional hurdle, one that
prevented the Court from addressing the merits of New Chrysler’s motion. (Id. at 17-18). The
Court acknowledged New Chrysler’s argument that the Agencies’ invocation of the Tax

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Injunction Act was a collateral attack on the Sale Order itself, but — without citing Travelers
Indemnity Co. v. Bailey, 557 U.S. 137, 152 (2009), the principal case upon which New Chrysler
relied — nonetheless ruled that “the merits of [New] Chrysler’s argument [did] not affect the
Court’s conclusion that it lack[ed] jurisdiction to entertain it.” (Mem. Op. 17-18).
This appeal followed. (Bankr. Docket No. 8286).
DISCUSSION
On appeal, New Chrysler argues that the Bankruptcy Court erred in ruling that it lacked
jurisdiction to entertain its motion because, in doing so, the Bankruptcy Court failed to accord
proper res judicata effect to the Sale Order. (Opening Br. Appellant Chrysler Group LLC
(Docket No. 5) (“Chrysler Br.”) 9-13; Reply Br. Appellant Chrysler Group LLC (Docket No. 29)
2-4). As that argument raises a pure issue of law, this Court reviews the Bankruptcy Court’s
decision de novo. See, e.g., In re United States Lines, Inc., 318 F.3d 432, 435 (2d Cir. 2003); see
also, e.g., United States v. Vazquez-Alvarez, 760 F.3d 193, 196 (2d Cir. 2014) (per curiam)
(reviewing de novo the lower court’s failure to consider appellant’s motion to dismiss for lack of
subject-matter jurisdiction); Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 600 F.3d 190,
195 (2d Cir. 2010) (reviewing lower court’s application of res judicata principles de novo).
Under the doctrine of res judicata, also known as claim preclusion, a “final judgment on
the merits of an action precludes the parties or their privies from relitigating issues that were or
could have been raised in that action.” EDP Med. Computer Sys., Inc. v. United States, 480 F.3d
621, 624 (2d Cir. 2007) (internal quotation marks omitted); see also, e.g., Bank of India v. Trendi
Sportswear, Inc., 239 F.3d 428, 439 (2d Cir. 2000) (providing that res judicata bars a party from
relitigating issues when that party had a “full and fair opportunity” to litigate the issue in a prior
proceeding). Notably, preclusion applies even where “the judgment may have been wrong or

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rested on a legal principle subsequently overruled in another case.” Federated Dep’t Stores, Inc.
v. Moitie, 452 U.S. 394, 398 (1981); accord Laaman v. United States, 973 F.2d 107, 112 (2d Cir.
1992). The doctrine “protects against the expense and vexation attending multiple lawsuits,
conserves judicial resources, and fosters reliance on judicial action by minimizing the possibility
of inconsistent decisions.” In re Aiolova, 496 B.R. 123, 130 (Bankr. S.D.N.Y. 2013) (internal
quotation marks omitted). And it “applies with full force to matters decided by the bankruptcy
courts.” In re Adelphia Recovery Trust, 634 F.3d 678, 694 (2d Cir. 2011) (internal quotation
marks omitted). In fact, the Court of Appeals has stressed that principles of finality “are
particularly important in the bankruptcy context, where numerous contending claims and
interests are gathered, jostle, and are determined and released.” Corbett v. MacDonald Moving
Servs., Inc., 124 F.3d 82, 91 (2d Cir. 1997).
It is well established that “‘[e]ven subject-matter jurisdiction . . . may not be attacked
collaterally.’” Travelers, 557 U.S. at 152 (quoting Kontrick v. Ryan, 540 U.S. 443, 455, n.9
(2004)). Travelers, which reaffirmed that proposition, is instructive here. The case involved
review of a 2004 bankruptcy court order holding that claims brought by certain parties were
enjoined by orders the court had entered in 1986. On appeal, the Second Circuit acknowledged
that the bankruptcy court “had continuing jurisdiction to interpret and enforce its own 1986
orders” as well as “jurisdiction to clarify its prior orders.” In re Johns-Manville Corp., 517 F.3d
52, 60-61 (2d Cir. 2008). Nevertheless, the Court of Appeals held that, in clarifying its 1986
orders and holding that the claimants were barred by those orders from bringing their claims, the
bankruptcy court had gone too far because it lacked jurisdiction over the claims in the first
instance. Id. at 61. Specifically, the Court held that the bankruptcy court could not, in enforcing
its 1986 orders, “enjoin claims over which it had no jurisdiction,” id., and that “[t]he ancillary

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jurisdiction courts possess to enforce their own orders is itself limited by the jurisdictional limits
of the order sought to be enforced,” id. at 65 n.22 (internal quotation marks omitted).
The Supreme Court reversed. The question of whether the Bankruptcy Court had
subject-matter jurisdiction to enter its clarifying order, the Court determined, was an “easy” one,
as it clearly “had jurisdiction to interpret and enforce its own prior orders” and had “explicitly
retained jurisdiction” to enforce the 1986 orders. Travelers, 557 U.S. at 151. By going further
and reevaluating the Bankruptcy Court’s exercise of jurisdiction in 1986, however, the Second
Circuit had erred. On direct review from the 1986 orders, “the Court of Appeals would indeed
have been duty bound to consider whether the Bankruptcy Court had acted beyond its subjectmatter jurisdiction.” Id. at 148. “But once the 1986 Orders became final on direct review
(whether or not proper exercises of bankruptcy court jurisdiction and power),” the Court
explained, “they became res judicata to the parties and those in privity with them,” even as to
subject-matter jurisdiction. Id. at 152 (internal quotation marks omitted). “So long as [the
claimants] or those in privity with them were parties to the [original] proceeding, and were given
a fair chance to challenge the Bankruptcy Court’s subject-matter jurisdiction, they cannot
challenge it now by resisting enforcement of the 1986 Orders.” Id. at 153.
Travelers controls the outcome of this appeal. First, here, as there, the Sale Order was
final, and precluded any attack on the Bankruptcy Court’s subject-matter jurisdiction to enter the
order in the first instance. See In re Old Carco, 438 F. App’x 30, 31 (2d Cir. 2011) (summary
order) (holding that the Sale Order at issue in this case “is res judicata, even to claims that
challenge the bankruptcy court’s subject matter jurisdiction”). Second, here, as there, the
Bankruptcy Court plainly had jurisdiction to clarify and enforce its own order. Indeed, as in
Travelers, the Bankruptcy Court not only had inherent authority to do so, but also explicitly

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retained jurisdiction in the Sale Order to do so. (Sale Order ¶ 59). Finally, the Agencies’
argument that the Tax Injunction Act barred the Bankruptcy Court from clarifying or enforcing
the Sale Order was plainly an attack on its subject-matter jurisdiction. See, e.g., Arkansas v.
Farm Credit Servs. of Cent. Ark., 520 U.S. 821, 825 (1997) (describing the Tax Injunction Act as
jurisdictional); Entergy Nuclear Vermont Yankee, LLC v. Shumlin, 737 F.3d 228, 230 (2d Cir.
2013) (same). More to the point, it was not only an attack on the Bankruptcy Court’s jurisdiction
to issue a clarifying order, but it was also — or equally — an attack on its jurisdiction to enter
the Sale Order in the first instance, just as the claimants’ attack in Travelers was at bottom a
challenge to the Bankruptcy Court’s jurisdiction to enter the 1986 orders in the first instance. 2
In arguing otherwise, the Michigan UIA notes that the Sale Order “did not address
calculation of [New Chrysler’s] unemployment tax rate.” (Answering Br. of Appellee Mich.
Unemployment Ins. Agency (Docket No. 20) (“Mich. UIA Br.”) at 21). That argument,
however, “conflates the conclusion [the Bankruptcy Court] might reach after analysis of matters
before [it] — that certain claims ultimately might not be covered by the Sale Order — with [its]
jurisdiction to decide whether or not they are.” In re Motors Liquidation Co., 514 B.R. 377, 38283 (Bankr. S.D.N.Y. 2014). It is also immaterial; after Travelers, the relevant point is that, in
entering the Sale Order, the Bankruptcy Court held (if not explicitly, then implicitly) that it had
subject-matter jurisdiction to do so, and that determination is now res judicata.
The Agencies also attempt to reframe their challenge as an objection to the Bankruptcy
Court’s “ability to enforce prospective challenges” to the Sale Order rather than a challenge to
the Bankruptcy Court’s subject-matter jurisdiction in the first instance. (Br. Appellee Ind. Dep’t
2

As the Travelers Court noted, there are “rare situations in which subject-matter
jurisdiction is subject to collateral attack.” 557 U.S. at 153 n.6. Here, as in Travelers, no party
invokes the exceptions to the rule, and the Court “do[es] not see how any would apply.” Id.

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of Workforce Dev. (Docket No. 21) (“Indiana DWD Br.”) 8). But a similar argument failed to
carry the day in Travelers. See 557 U.S. at 165 (Stevens, J., dissenting) (arguing that
respondents were not collaterally attacking the court’s subject-matter jurisdiction because “[i]n
challenging the Bankruptcy Court’s 2004 order ‘clarifying’ the scope of the [1986 orders],
respondents were in fact timely appealing an order that rewrote the scope of the 1986 [orders]”)
(emphasis omitted). Additionally, the exact same argument was persuasively rejected by another
bankruptcy court in this Circuit in virtually identical circumstances. See In re USA United Fleet
Inc., 496 B.R. 79, 84 (Bankr. E.D.N.Y. 2013) (“The [state agency] does not dispute the Court
had jurisdiction to enter the sale order or that it retained jurisdiction to interpret, implement, and
enforce its terms. Under Travelers, the Court’s jurisdiction cannot now be attacked
collaterally.”); see also In re Tougher Indus., Inc., No. 06-BR-12960, 2013 WL 1276501, at *5
(Bankr. N.D.N.Y. Mar. 27, 2013) (holding, in virtually identical circumstances, that the Court
had jurisdiction to adjudicate a motion seeking clarification of a prior sale order because “[t]he
dispute before the court is based on purported rights established in the Sale Order[,] [m]ore
specifically, whether the right to assess . . . unemployment insurance tax liabilities based upon
the Debtors’ experience ratings was an interest avoided under the Sale Order, which was entered
by the court in exercise of its core jurisdiction”). 3
In light of the foregoing, so long as the Agencies or those in privity with them were
parties to the original bankruptcy proceeding, “and were given a fair chance to challenge the

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The Bankruptcy Court did not even cite Travelers, let alone discuss it. The Court did
discuss Tougher Industries and USA United Fleet, but chose to rely instead on United Taconite,
LLC v. Minnesota (In re Eveleth Mines, LLC), 318 B.R. 682 (B.A.P. 8th Cir. 2004), and Victory
Markets, Inc. v. NYS Unemployment Insurance (In re Victory Markets, Inc.), 263 B.R. 9 (Bankr.
N.D.N.Y. 2000). (Op. 15-17). Those two cases, however, pre-dated Travelers. Additionally,
neither involved a collateral attack on a bankruptcy court’s jurisdiction to enforce a sale order
under Section 363.
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Bankruptcy Court’s subject-matter jurisdiction,” they cannot challenge it now by resisting
enforcement of the Sale Order. Travelers, 557 U.S. at 153. Here, there is no real dispute that, as
creditors, the Agencies were parties and received actual notice of the Sale Order. (Aff. of
Mailing of Regina Amporfro (Bankr. Docket No. 930), Ex. B; see also Sale Order ¶ T (noting
that “a reasonable opportunity to object or be heard with respect to the Sale Motion and the relief
requested therein has been afforded to all interested persons and entities, including, but not
limited to . . . (xiv) all applicable state attorneys general, local environmental enforcement
agencies and local regulatory authorities; (xv) all applicable state and local taxing authorities”)).
Instead, the Agencies contend that they lacked a fair chance to challenge the Bankruptcy Court’s
subject-matter jurisdiction because they were not given adequate “notice of the relief requested.”
(Br. Appellee Ill. Dep’t of Emp’t Sec. (Docket No. 22) 8). Put another way, the Agencies argue
that they “had no reason or opportunity to challenge the [Sale O]rder based on subject matter
jurisdiction” because they believed, based on then-existing case law, that the term “interest” in
Section 363(f) could not be read to encompass a debtor’s “experience ratings.” (Indiana DWD
Br. 9-10 (citing In re Wolverine Radio, 930 F.2d 1132 (6th Cir. 1991)).
That argument fails for two reasons. First, the case to which the Agencies point — the
Sixth Circuit’s decision in Wolverine, which held that a debtor’s experience rating was not an
“interest” prohibited from transfer to a purchaser after a Section 363(f) bankruptcy order, see 930
F.2d at 1147 — was never binding law in this Circuit. Accordingly, the Agencies cannot hang
their hat on that case in making the definitive assertion that “the Sale Order did not contemplate
the inclusion of experience ratings as interests.” (Indiana DWD Br. 9). Second, and in any
event, it is well established that a judgment is final for res judicata purposes “even when the
prior ‘judgment . . . rested on a legal principle subsequently changed.’” Johnson v. Potter, 398

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F. App’x 644, 646 (2d Cir. 2010) (summary order) (quoting Moitie, 452 U.S. at 398). Thus,
even if Wolverine was controlling at the time that the Bankruptcy Court entered the Sale Order,
the Bankruptcy Court’s determination that it had subject-matter jurisdiction to enter the Sale
Order in the first instance would still be res judicata.
CONCLUSION
For the reasons stated above, the Bankruptcy Court’s Order denying New Chrysler’s
motion to enforce the Sale Order is VACATED and the matter is REMANDED to the
Bankruptcy Court for further proceedings consistent with this Memorandum Opinion and Order. 4
The Clerk of Court is directed to terminate Docket No. 5 and to close this case.
SO ORDERED.

Date: December 1, 2014
New York, New York

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The Court declines New Chrysler’s invitation to decide the merits of its motion to enforce
the Sale Order. (Chrysler Br. 4, 20-21). Instead, consistent with the “general rule . . . that a
federal appellate court does not consider an issue not passed on below,” In re Lionel Corp., 29
F.3d 88, 92 (2d Cir. 1994) (internal quotation marks omitted), the Court will leave the merits —
and the Agencies’ argument that New Chrysler’s motion is barred by the equitable principle of
laches (Mich. UIA Br. 11-13) — to the Bankruptcy Court to address in the first instance.

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