Old Carco LLC (formerly, Chrysler LLC) prevails in Second Circuit appeal by former dealers that attempted to deploy franchise laws to undo bankruptcy judge's orders
Clients Chrysler LLC
Jones Day represented Old Carco (formerly, Chrysler LLC) in an historic bankruptcy proceeding that, through asset sale to Chrysler Group LLC, aimed to prevent the destruction of one of the "Big Three" U.S. automakers and an iconic American brand. As all stakeholders had recognized, a key ingredient of the sale was Old Carco's streamlining of its sprawling dealer network, which meant rejection of certain dealership agreements that Chrysler Group did not want to acquire. The bankruptcy court in New York entered orders approving the sale and the dealer rejections.
While the rejected dealers raised numerous objections during the sale and rejection proceedings, they chose not to appeal the bankruptcy court's multiple orders resolving these matters. Instead, they brought collateral actions in state courts and administrative agencies, arguing that the bankruptcy court's sale and rejection orders violated state dealer franchise laws and thus were legally ineffective. Old Carco and Chrysler Group promptly filed a motion with the bankruptcy court to enforce the sale and rejection orders and enjoin the dealers' state proceedings. The bankruptcy court granted the enforcement motion, and the district court affirmed.
The dealers appealed to the Second Circuit. In a short but pointed opinion, the Second Circuit on September 19, 2011, affirmed the district court's opinion and explained that the dealers' arguments were precluded by the doctrines of issue and claim preclusion. Because the dealers had chosen not to appeal the bankruptcy court's sale and rejection orders, the orders became final. To the extent the dealers were challenging the validity and scope of the sale and rejection orders, they should have made such arguments by timely appealing the orders, not by commencing collateral proceedings. The bankruptcy court's sole task in resolving the enforcement motion was to interpret its own orders, a task to which the Second Circuit accords substantial deference. The Second Circuit thus deferred to the bankruptcy court's "learned" interpretation of its sale and rejection orders as squarely foreclosing the dealers' state law actions.