Old Carco LLC and RJM I, LLC, as Liquidation Trustee for Old Carco L

UNITED STATES BANKRUPTCY COURT 	FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------X
In re: 	:
: 	Chapter 11
OLD CARCO LLC 	:
(f/k/a CHRYSLER LLC), et al., 	: 	Case No. 09-50002 (SMB)
:
Debtors. 	: 	(Jointly Administered)
---------------------------------------------------------------X
MEMORANDUM DECISION DENYING MOTION TO
ENFORCE SALE ORDER WITHOUT PREJUDICE
A P P E A R A N C E S:
SULLIVAN & CROMWELL LLP
Attorneys for Chrysler Group LLC
125 Broad Street
New York, NY 10004
Brian D. Glueckstein, Esq.
Mark U. Schneiderman, Esq.
Oded Zaluski, 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
Illinois Attorney General
Attorney for Indiana Department of Workforce
Development
302 W. Washington Street, IGCS Fifth Floor
Indianapolis, IN 46204
Maricel E.V. Skiles
Assistant Attorney General
Of Counsel
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BILL SCHUETTE
Illinois Attorney General
Attorneys for Michigan Unemployment Insurance
Agency
Labor Division
P.O. Box 30736
Lansing, MI 48909
Dennis Raterink
Peter Kotula
George Constance
Assistant Attorneys General
Of Counsel
STUART M. BERNSTEIN
United States Bankruptcy Judge:
Chrysler Group LLC (“New Chrysler”) seeks an order of this Court enforcing the Sale
Order1 pursuant to which it purchased substantially all of the assets of Old Carco LLC f/k/a
Chrysler LLC and Chrysler Motors LLC (collectively, “Old Carco”) free and clear of all liens,
claims, interests, encumbrances and successor liability. (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 October 18, 2013 (“Motion”) (ECF Doc. #
8218).) The issue is whether the Sale Order prevents the relevant agencies within the states of
Michigan, Illinois and Indiana (collectively, the “States”) from using Old Carco’s experience rating
to determine New Chrysler’s unemployment insurance tax rate.
1 	The Sale Order refers to the 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 June 1, 2009. (ECF/Main Case Doc. # 3232.)
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The Court does not reach the merits of the Motion. The Tax Injunction Act, 28 U.S.C.
§ 1341, deprives this Court of subject jurisdiction to provide the declaratory and/or injunctive relief
that New Chrysler seeks, and it must pursue its arguments before the appropriate state fora.
BACKGROUND
A. 	The Bankruptcy and the Sale
On April 30, 2009, Old Carco filed a chapter 11 petition in this Court.2 In a well-
publicized transaction, Old Carco entered into a Master Transaction Agreement (“MTA”) under
which it agreed to sell substantially all of its assets free and clear of all claims and liabilities
(other than “Assumed Liabilities”), whenever arising, to New Carco Acquisition LLC, later
renamed Chrysler Group LLC ( i.e., New Chrysler). See Shatzki v. Abrams, No. 1:09cv02046
LJO DLB, 2010 WL 148183, at *1 (E.D. Cal. Jan. 12, 2010); Cooper v. Daimler AG, No. 1:-09-
CV-2507-RWS, 2009 WL 4730306, at *1 (N.D. Ga. Dec. 3, 2009); Ricks v. New Chrysler
Group, LLC (In re Old Carco LLC), Adv. No. 12-09801 (SMB), 2013 WL 1856330, at *2
(Bankr. S.D.N.Y. May 2, 2013). The transaction closed on June 10, 2009 (the “Closing Date”),
Old Carco ceased operations and New Chrysler took over the operations of the “Chrysler”
automotive business. Ricks, 2013 WL 1856330, at *2.
The Sale Order is a comprehensive document, but only a few of its provisions are
germane. Initially, the Sale Order defined “Claims” broadly.3 In addition to the rights to
payment identified in § 101(5),4 “Claims” under the Sale Order included:
2 	Numerous affiliates filed petitions and “Old Carco” refers to all of the debtors.
3 	Bankruptcy Code § 101(5) states:
(5) The term “claim” means–
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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, . . . (collectively, “Claims”) (other than certain liabilities that
are expressly assumed or created by the Purchaser, as set forth in the Purchase
Agreement or as described herein (collectively, the “Assumed Liabilities”).
(Sale Order at p. 2) (footnote omitted).
The Sale Order then enjoined a host of persons and entities, including, “governmental,
tax and regulatory authorities,” from asserting “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.) With
certain exceptions that are not relevant, neither the Purchaser, its successors, assigns nor its
affiliates would be liable for any Claim that “is assertable against the Debtors or is related to the
Purchased Assets prior to the Closing Date,” and “[t]he Purchaser shall not be deemed . . . to . . .
be a legal successor, or otherwise be deemed a successor to the Debtors . . . .” (Sale Order at ¶
35.) Except for the Assumed Liabilities, New Chrysler would not be liable for any claims or
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to
payment, whether or not such right to an equitable remedy is reduced to judgment, fixed,
contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
4 	Bankruptcy Code § 101(5) states:
(5) The term “claim” means–
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to
payment, whether or not such right to an equitable remedy is reduced to judgment, fixed,
contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
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obligations arising from or related to the purchased assets, including “successor or vicarious
liabilities . . . [for] any obligations of the Debtors or their affiliates arising prior to the Closing,
including, but not limited to, liabilities on account of any taxes arising, accruing or payable
under, out of, in connection with, or in any way relating to the operation of the Purchased Assets
prior to the Closing of the Sale Transaction.” (Sale Order at ¶ 39.)
The MTA and the Sale Order were binding and inured “ to the benefit of, the Debtors, their
estates, their creditors, the Purchaser, the respective affiliates, successors and assigns of each, and
any affected third parties,” (Sale Order at ¶ 49), and the Court retained jurisdiction “to interpret,
implement and enforce the terms and provisions of this Sale Order. (Id. at ¶ 59.) The sale closed on
June 10, 2009 (the “Closing Date”), and by order dated April 23, 2010, the Court confirmed Old
Carco’s Second Amended Joint Plan of Liquidation. (ECF Doc. # 6875.)
B. 	Unemployment Insurance Tax Liabilities
1. 	Introduction
All states require in-state employers to pay unemployment taxes as part of a federal-state
scheme. See Federal Unemployment Tax Act (“FUTA”), 26 U.S.C. §§ 3301–3311. If a state’s
unemployment program meets applicable federal requirements, it receives a share of funds from
the United States Government Unemployment Trust Fund. To be eligible for federal funds, the
Secretary of Labor must certify under 26 U.S.C. § 3304 that the law has been approved under
FUTA. If the employer is located in a certified state with approved laws, it will be entitled to
credits against FUTA taxes for taxes it paid under state unemployment tax laws. During the
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relevant period (2009-2013), the state unemployment insurance programs in Michigan, Indiana
and Illinois were approved and certified in accordance with federal law.5
The computation of an employer’s state unemployment 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. Steven J. Boyajian, The Transfer of Unemployment Insurance
Experience Rates, AM. BANKR. I NST . J. 24, 24 (Sept. 2013). The prediction relies on the
employer’s historical claims experience typically for the preceding thirty-six months. In this
case, each of the states computed a portion of the unemployment tax rate by dividing the benefits
charged against the employer during the prior thirty-six months (or more) by the taxable wages
for FUTA purposes during the same period. Thus, the greater the number of past unemployment
insurance benefits paid to discharged workers, the higher the tax obligation going forward. This
historical component will be referred to as the Experience Rating.
A new employer with no prior experience receives a relatively low tax rate. 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 Michigan Unemployment Insurance Agency
(“Michigan”), the Indiana Department of Workforce Development (“Indiana”) and Illinois
Department of Employment Security (“Illinois”) determined that New Chrysler was a successor
5 	See Federal-State Unemployment Compensation Program: Certifications for 2013 Under the Federal
Unemployment Tax Act, 78 Fed. Reg. 67,200, 67,200 (Nov. 8, 2013); Federal-State Unemployment Compensation
Program: Certifications for 2012 Under the Federal Unemployment Tax Act, 77 Fed. Reg. 66,482, 66,482 (Nov. 5,
2012); Federal-State Unemployment Compensation Program: Certifications for 2011 Under the Federal
Unemployment Tax Act, 76 Fed. Reg. 68,790, 68,790 (Nov. 7, 2011); Federal-State Unemployment Compensation
Program: Certifications for 2010 Under the Federal Unemployment Tax Act, 75 Fed. Reg. 68,001, 68,003 (Nov. 4,
2010); Federal-State Unemployment Compensation Program: Certifications for 2009 Under the Federal
Unemployment Tax Act, 74 Fed. Reg. 57,200, 57,202 (Nov. 4, 2009).
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to Old Carco, and transferred Old Carco’s Experience Rating to New Chrysler for the purpose of
determining the New Chrysler’s unemployment tax rate. (Motion at ¶ 2.) As a result, between
June 10, 2009 and June 30, 2013, New Chrysler paid more than $50 million above what it would
have paid if New Chrysler had been treated as a new employer. (Id. at ¶ 6.) The circumstances
surrounding the determination of New Chrysler’s unemployment tax rate are discussed
immediately below.
2. 	Michigan
Under Michigan law, when a “transfer of business” occurs, “the commission shall assign
the transferor's experience account, or a pro rata part of the account, to the transferee.” M ICH.
COMP . LAWS § 421.22(c)(1). On June 3, 2009, New Chrysler submitted a UIA Employer e-
Registration form to Michigan.6 New Chrysler represented that it had acquired 90% of Old
Carco’s assets and Michigan business (products/services) and 100% of its organization
(employees/payroll/personnel) and Michigan trade (customers/accounts). (UIA Employer e-
Registration at 3.) New Chrysler also stated that it was conducting the Michigan business that it
acquired. One week later, New Chrysler submitted a Manual Employer Registration
Questionnaire (Michigan Questionnaire)7 in which it stated that it had acquired 100% of the Old
Carco’s assets, organization, trade and Michigan business. (Michigan Questionnaire at 1.) It
reiterated that it was conducting the business it had acquired, and although ownership was new,
Old Carco’s officers and management leaders would have similar roles in the transferee. (Id.)
6 	A copy of the UIA Employer e-Registration is annexed as Exhibit 5 to the State of Michigan
Unemployment Insurance Agency’s Memorandum of Law in Support of Its Objections to Chrysler Group LLC’s
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 Nov. 20, 2013 (“Michigan Memo”). (ECF Doc. # 8241.)
7 	A copy of the Michigan Questionnaire is annexed as Exhibit 6 to the Michigan Memo.
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Michigan issued its Determination of Termination of Employer Status on July 27, 2007.8
Based on New Chrysler’s submissions, Michigan found that New Chrysler was a successor to
Old Carco. As a result, the latter’s Experience Rating was transferred to New Chrysler, and
instead of a new employer tax rate of 2.7%, Michigan assessed a tax rate of 10.2%. (Motion at
19.) Michigan reassessed the tax rate annually, and the Tax Rate Determination for each year
indicates that the “chargeable benefits component” of the tax determination (i.e. claims charged
divided by wages paid) considered the benefit charges and taxable payroll for the preceding 60
months for the 2010 and 2011 calendar year determinations and 48 months for the 2012
determination. (Declaration of Steven E. Grob in Support of Chrysler Group LLC’s 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 (“Grob Declaration”), Ex. E (ECF Doc. # 8219).) Starting in 2013, the reach back period
was only 36 months, and the computation of the “chargeable benefits component,” the most
significant factor in determining the tax rate, no longer considered Old Carco’s history.
The Determination of Termination of Employer Status became final unless New Chrysler
submitted a written application for review and redetermination within thirty days failing which
New Chrysler would be foreclosed from protesting the determination. (Determination of
Termination of Employer Status.) New Chrysler did not file a timely protest. Instead, on
February 25, 2010, it submitted a letter to Michigan seeking to rescind the Questionnaire and
8 	A copy of the Determination of Termination of Employer Status is attached as Exhibit 8 to the Michigan
Memo. Michigan simultaneously terminated Old Carco as an employer. (Michigan Memo, Ex. 7.)
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redetermine its tax rate (the “Michigan Redetermination Request”).9 Between then and
December 2012, New Chrysler and Michigan exchanged several communications, requests for
more information and submissions, all relating to New Chrysler’s contention that it was not a
successor to Old Carco. (See Denial of Request for Reconsideration and Redetermination, dated
May 16, 2013 (“Michigan Denial”), at 3-5).) 10 New Chrysler’s submissions did not mention the
Sale Order or argue that it precluded Michigan’s determination that it was a successor to Old
Carco.
On May 16, 2013, Michigan denied New Chrysler’s request to redetermine its
unemployment tax rate on two independent grounds. First, it lacked jurisdiction to entertain
New Chrysler’s late protest because New Chrysler had failed to show good cause as required by
Michigan law. (Id. at 7-8.) Second, even if it had jurisdiction, the evidence demonstrated that
New Chrysler was a successor to Old Carco. (Id. at 8-19.) The Michigan Denial informed New
Chrysler that the determination would become final unless New Chrysler filed a written appeal
before an Administrative Law Judge within 30 days. (Id. at 19.)
New Chrysler appealed the denial of its request for reconsideration on June 14, 2013.
(Appeal of Denial of Request for Reconsideration and Redetermination (“Michigan Appeal”).)11
In addition to asserting that it had shown good cause and was not a successor on the merits, New
Chrysler argued, for the first time, that the Sale Order enjoined Michigan from assessing
9 	A copy of the Michigan Redetermination Request is annexed as Exhibit 9 to the Michigan Memo.
10 	A copy of the Michigan Denial is annexed as Exhibit 10 to the Michigan Memo.
11 	A copy of the Michigan Appeal is annexed as Exhibit 11 to the Michigan Memo.
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unemployment taxes based on Old Carco’s Experience Rating. (Michigan Appeal at 4-5.) This
appeal is pending. (Motion at ¶ 21.)
3. 	Indiana
Indiana law provides with exceptions not relevant that when an “employer transfers all or
a portion of the employer’s trade or business (including the employer’s workforce) to another
employer . . . the successor employer shall . . . assume the position of the predecessor with
respect to all the resources and liabilities of the predecessor’s experience account.” I ND. CODE
§ 22-4-10-6(a). New Chrysler filed a Report to Determine Status and Report of Transfer –
Complete Sale on the Closing Date stating that it had acquired a “complete” organization, listed
the same business address as Old Carco, characterized the transfer as an “ACQUISITION,” and
in the “Remarks” section of the form, failed to check the box next to “Bankruptcy or other
proceedings.” New Chrysler also filed a Report of Transfer – Complete Sale that contained most
of the same information.12
Based upon these submissions, Indiana determined that New Chrysler was a successor to
Old Carco, and assumed the latter’s employment experience. (Notice of Complete Disposition of
Business to Disposer, dated Aug. 4, 2009.) 13 The form advised New Chrysler and Old Carco that
they had 15 days to file a written protest, which neither did. Accordingly, the determination that
12 	A copy of the Report to Determine Status and Report of Transfer – Complete Sale is annexed as Exhibit 1
to the Objection to Chrysler Group LLC’s 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, filed Nov. 21, 2013 and amended Dec. 20,
2013 (“Indiana Objection”). (ECF Doc. # 8267.) The Report of Transfer – Complete Sale signed by the same
person as the Report to Determine Status and Report of Transfer – Complete Sale. A copy of Old Carco’s filing is
annexed as Exhibit 2 to the Indiana Objection.
13 	A copy of the Notice of Complete Disposition of Business to Disposer is annexed as Exhibit 3 to the
Indiana Objection.
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New Chrysler was a successor under Indiana law became final. As a result of the determination,
Indiana assessed a 5.6% unemployment insurance tax rate instead of the new employer rate of
2.7%. (Motion at ¶ 22.) Because Indiana uses three years of prior experience, the last tax year
for which it considered Old Carco’s Experience Rating was 2013. (See Grob Declaration, Ex.
K.)
New Chrysler did not protest the 2009 decision until three-and-one-half years later. By
letter dated March 12, 2013, it argued that the Sale Order precluded the transfer of Old Carco’s
Experience Rating to New Chrysler.14 It also contended that New Chrysler was not a successor
under Indiana law and the transfer of the Experience Rating violated the “fresh start” policy of
the Bankruptcy Code. Based on its arguments, it sought refunds in connection with the
unemployment insurance taxes it paid for the years 2009 through 2012, and requested a tax rate
recalculation for 2013. The protest remains pending.
4. 	Illinois
Under Illinois law, “[w]henever any employing unit succeeds to substantially all of the
employing enterprises of another employing unit, then in determining contribution rates for any
calendar year, the experience rating record of the predecessor prior to the succession shall be
transferred to the successor.” 820 ILL . COMP . STAT . 405/1507(A). New Chrysler filed a Report
to Determine Succession on the Closing Date stating that it had acquired 100% of Old Carco’s
operations, employees, assets and business.15 Illinois issues an Annual Contribution Rate
14 	A copy of the March 12, 2013 protest letter is annexed as Exhibit 4 to the Indiana Objection.
15 	A copy of the Report to Determine Succession is annexed as Exhibit B to the 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 and amended Dec. 20, 2013 (“Illinois Objection”) (ECF Doc. # 8270).
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Determination each year, and has assessed Chrysler the maximum tax rate each for 2009 through
2013 in whole or in part due to Old Carco’s Experience Rating.16 Each Annual Contribution
Rate Determination advised New Chrysler that if it wanted to protest the determination, it had to
file a written protest within 15 days using the pre-printed form that accompanied the Annual
Contribution Rate Determination.
New Chrysler did not file any protest until January 2013. By letter dated January 31,
2013, New Chrysler raised the same three issues it raised with Indiana—the effect of the “free
and clear” provisions of the Sale Order, state law and the Bankruptcy Code’s “fresh start”
policy—to argue that Illinois incorrectly determined that it was a successor to Old Carco. In
addition, New Chrysler sought a refund of the excess unemployment insurance taxes paid during
2009 through 2012 and a recalculation of the 2013 tax rate. This matter remains pending.
C. 	New Chrysler’s Motion
New Chrysler filed the Motion seeking a determination that the Sale Order prevented the
States from transferring Old Carco’s Experience Rating to New Chrysler. It argues that the
Experience Rating is an “interest” that was cut off by the “free and clear” provisions of the Sale
Order, and the Sale Order prevented the States from treating New Chrysler as Old Carco’s
successor even if New Chrysler is a successor under each State’s law.
The States have raised a host of objections to the Motion, including jurisdictional
objections (sovereign immunity, lack of bankruptcy jurisdiction under 28 U.S.C. § 1334, the Tax
Injunction Act), objections relating to the validity of the Sale Order (lack of consent, lack of
16 	Copies of the Annual Contribution Rate Determination for the years 2009 through 2013 are annexed,
respectively as Exhibits C through G to the Illinois Objection.
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adequate protection, the Experience Rating is not an “interest”) as well as abstention, laches and
collateral estoppel. Because the jurisdictional objection based on the Tax Injunction Act is
dispositive, I begin and end there.17
DISCUSSION
The Tax Injunction Act, 28 U.S.C § 1341, provides:
The district courts shall not enjoin, suspend or restrain the assessment, levy or
collection of any tax under State law where a plain, speedy and efficient remedy
may be had in the courts of such State.
The Tax Injunction Act is intended to prevent a federal court from interfering with
ordinary procedural requirements imposed under state law and obstructing and avoiding potential
damage to a state’s budget particularly where the taxpayer faces the risk of insolvency. United
States v. Grace Brethren Church, 457 U.S. 393, 410 (1982); see Tully v. Griffin, Inc., 429 U.S.
68, 73 (1976) (The Tax Injunction Act “has its roots in equity practice, in principles of
federalism, and in recognition of the imperative need of a State to administer its own fiscal
operations.”) Although styled as an anti-injunction provision, the Tax Injunction Act also
prohibits actions for declaratory relief. Grace Brethren Church, 457 U.S. at 408.
While some courts have described it as a rule of abstention, United Taconite, L.L.C. v.
Minnesota (In re Eveleth Mines, L.L.C.), 318 B.R. 682, 688 (B.A.P. 8th Cir. 2004), the Tax
17 	If I were to reach the other jurisdictional challenges, I would reject them. Sovereign immunity does not bar
the Motion because the application to enforce the Sale Order is ancillary to the Court’s in rem jurisdiction to issue
the Sale Order. See Central Virginia Community College v. Katz, 546 U.S. 356, 371 (2006); Ace Am. Ins. Co. v.
DPH Holdings Corp. (In re DPH Holdings Corp.), 437 B.R. 88, 99 (S.D.N.Y. 2010), aff’d, 448 F. Appx. 134 (2d
Cir. 2011). Furthermore, the Court retains bankruptcy jurisdiction under 28 U.S.C. § 1334 to interpret its prior sale
order even when the dispute involves non-debtor third parties. Luan Inv. S.E. v. Franklin 145 Corp. (In re Petrie
Retail, Inc.), 304 F.3d 223, 229-30 (2d Cir.2002); Moelis & Co. LLC v. Wilmington Trust FSB (In re Gen. Growth
Props., Inc), 460 B.R. 592, 598 (Bankr. S.D.N.Y. 2011) (“A bankruptcy court always has jurisdiction to interpret its
own orders. It does not matter that the State Court Action is purportedly between two non-debtors . . . .”) (internal
citations omitted); Morgan Olson, LLC v. Frederico (In re Grumman Olson Indus., Inc.), 445 B.R. 243, 249 (Bankr.
S.D.N.Y. 2011), aff’d, 467 B.R. 694 (S.D.N.Y. 2012).
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Injunction Act deprives the federal court of subject matter jurisdiction. Arkansas v. Farm Credit
Servs. of Cent. Ark., 520 U.S. 821, 825 (1997) (“[T]he Tax Injunction Act as a ‘jurisdictional
rule’ and a ‘broad jurisdictional barrier.’”) (citation omitted); Grace Brethren Church, 457 U.S.
at 396 (The Tax Injunction Act “deprived the District Court of jurisdiction to hear these
challenges.”); Entergy Nuclear Vt. Yankee, LLC v. Shumlin, 737 F.3d 228, 230 (2d Cir. 2013)
(Tax Injunction Act deprived District Court of subject matter jurisdiction to hear plaintiff’s
challenge to Vermont’s Electrical Energy Generating Tax); Baltimore Cty., Maryland v.
Hechinger Liquidation Trust (In re Hechinger Inv. Co. of Delaware, Inc.), 335 F.3d 243, 247 n.1
(3d Cir. 2003) (Alito, J.) (“[A] determination that the Tax Injunction Act precludes a suit
deprives the federal courts of subject matter jurisdiction over that action.”) The burden rests on
the party invoking the Court’s subject matter jurisdiction to show facts to overcome the
jurisdictional bar of the Tax Injunction Act. Eveleth Mines, 318 B.R. at 690; see Chase
Manhattan Bank, N.A. v. City & Cty. of San Francisco, 121 F.3d 557, 560 (9th Cir. 1997)
(“[B]ecause Chase has not shown it lacks a plain, speedy and efficient remedy under state law,
the district court properly dismissed this suit as barred by the [Tax Injunction Act].”), cert.
denied, 524 U.S. 945 (1998). Michigan and Indiana raised the Tax Injunction Act as a bar to the
Motion, and although Illinois did not, an objection to subject matter jurisdiction cannot be
waived. Hechinger, 335 F.3d at 247 n.1. Accordingly, the same issue applies to each of the
States.
It is beyond cavil that the Tax Injunction Act extends to the collection of state
unemployment taxes. See Grace Brethren Church, 457 U.S. at 411 (Tax Injunction Act deprives
federal court of jurisdiction to declare California unemployment tax provision unconstitutional or
issue an injunction against state authorities unless the tax payer lacked a “plain, speedy and
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efficient remedy” in the state courts). In Victory Markets, Inc. v. N.Y.S. Unemployment
Insurance (In re Victory Markets, Inc.), 263 B.R. 9 (Bankr. N.D.N.Y. 2000), the bankruptcy
court faced the question squarely, and concluded that the Tax Injunction Act prevented the
bankruptcy court from enjoining a state from transferring the debtor’s Experience Rating to the
purchaser at a bankruptcy sale. Id. at 17.
New Chrysler argues that Victory Markets is inapposite, citing In re Tougher Indus., Inc.,
No. 06-12960, 2013 WL 1276501 (Bankr. N.D.N.Y. Mar. 27, 2013) in support. There, the
debtor sold its assets “free and clear of all liens, claims, encumbrances and interests, including,
but not limited to: . . . (ii) those relating to taxes arising under or out of, in connection with, or in
any way relating to the operation of the Assets prior to the Closing.” Id. at *2. The same
bankruptcy court (but a different judge) held that the Tax Injunction Act did not deprive it of
jurisdiction to construe the sale order as it related to the transfer of the debtor’s Experience
Rating because unlike Victory Markets, the order in Tougher transferred the debtor’s assets free
and clear of “‘any interest in such property’ pursuant to a sale under § 363(f).” Id. at *6.
New Chrysler also cites In USA United Fleet Inc., 496 B.R. 79 (Bankr. E.D.N.Y. 2013),
which relied on Tougher (in part) to reject a similar jurisdictional challenge by New York.
There, the bankruptcy court concluded that it had jurisdiction to interpret, implement and enforce
its own sale order, observed that the Tax Injunction Act was not relevant at the time of the sale,
implied that § 363(f) was the type of specific bankruptcy provision that permitted the court to
determine the state tax liability of the non-debtor buyer (citing Hechinger) and expressed the
concern that state’s position would allow it to sit out the sale hearing and then use the Tax
Injunction Act as a shield to undermine the bankruptcy court’s core jurisdiction to interpret its
sale order. Id. at 84.
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With respect, I disagree with Tougher and USA United Fleet. Neither the merits of the
purchaser’s position nor the existence of a “free and clear” sale order nor the bankruptcy court’s
jurisdiction to interpret and enforce its own sale order affect the jurisdictional analysis under the
Tax Injunction Act. United Taconite, L.L.C. v. Minnesota (In re Eveleth Mines, L.L.C.), 318
B.R. 682, 688 (B.A.P. 8th Cir. 2004), is directly on point. There, the debtor was a mining
company engaged in the production of taconite. United purchased the debtor’s assets, and the
sale order provided that United
shall not assume, and shall be deemed not to have assumed, . . . any taconite
production tax attributable to taconite ore or iron sulfides mined by Debtor, to the
mining of such taconite ore or iron sulfides by Debtor, or to the iron ore
concentrate produced by Debtor that has been or may in the future be assessed by
a Taxing authority for any period pursuant [to applicable Minnesota law].
Id. at 685.
Similar to the case with Experience Ratings, applicable Minnesota law calculated current
taxes by looking back to the prior three-year average of the total production of the facility. Id. at
686. Following the sale, the Minnesota taxing authority assessed taxes against United based, in
part, on the debtor's three-year average of its total production. See id. at 686. United argued that
it had purchased the debtor’s assets free and clear of any production tax that was based on the
debtor’s production, and that consequently, Minnesota’s formula resulted in an overcharge of
$5.4 million during the relevant three-year period. Id. at 686-87. United moved before the
bankruptcy court to enjoin Minnesota from collecting the tax from United that was calculated in
whole or in part based on the debtor’s prior operations. Id. at 686.
The court agreed that bankruptcy jurisdiction authorized the lower court to interpret its
own sale order. Id. at 687. Viewing the Tax Injunction Act as a rule of abstention rather than
jurisdiction, the court observed, however, that the issue was not whether the bankruptcy court
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had jurisdiction to enforce the sale order, but whether it should abstain from exercising it in
deference to the state tax procedures. Id. at 688; cf. McCrory Corp. v. Ohio, 212 B.R. 229, 233
(S.D.N.Y. 1997) (collateral effects on the bankruptcy case do not prevent the application of the
Tax Injunction Act). Concluding that none of the bankruptcy exceptions to the Tax Injunction
Act were applicable, and specifically, Bankruptcy Code § 363(f) did not override the provisions
of the Tax Injunction Act,18 Eveleth Mines, 318 B.R. at 688-90, the court held that the relief
sought by United would restrain the manner in which Minnesota assessed and collected the
taconite production tax, and consequently, was barred by the Tax Injunction Act. Id. at 690.
Chrysler responds that the States’ invocation of the Tax Injunction Act constitutes a
collateral attack on this Court’s subject matter jurisdiction to interpret and enforce its own Sale
Order (Chrysler Group LLC’s Omnibus Reply in Support of Its 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 Dec. 9, 2013, at ¶ 24 (ECF Doc. # 8528)), and
Michigan objected but did not raise jurisdictional issues or the Tax Injunction Act, its objections
were consensually resolved and the objection was withdrawn. (Id. at ¶ 25.) The Court agrees
that it has bankruptcy jurisdiction to interpret and enforce the Sale Order, but the States have
18 	A specific provision of the Bankruptcy Code that permits the bankruptcy court to adjudicate a state tax
claim or enjoin the tax assessment or collection activities by the state is an exception to the jurisdictional bar
imposed by the Tax Injunction Act. Goldberg v. Ellett (In re Ellett), 254 F.3d 1135, 1148 (9th Cir. 2001), cert.
denied, 534 U.S. 1127 (2002). The Eveleth Court catalogued several of these specific provisions, including 11
U.S.C. §§ 362(a), 505(a), 507(a), 523(a)(1), 524, and 1146(c) (now § 1146(a)), but concluded that nothing in
§ 363(f) contained a specific grant to determine the tax liability of a non-debtor. Eveleth Mines, 318 B.R. at 688.
As noted, USA United Fleet reached the opposite conclusion relying on a quote from Hechinger that did not address
Bankruptcy Code § 363(f).
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raised three jurisdictional hurdles, and bankruptcy jurisdiction is only one. If the States are
procedurally barred from arguing their positions because they failed to raise their jurisdictional
arguments at the time of the Sale Motion or object to the proposed order, Chrysler can raise this
argument in the state administrative or judicial process to the extent Chrysler is not procedurally
barred from doing so. But the merit of Chrysler’s argument does not affect the Court’s
conclusion that it lacks jurisdiction to entertain it.
Finally, the sole exception stated in the Tax Injunction Act—the absence of a “plain,
speedy and efficient remedy” in state court—does not apply. First, Chrysler does not contend
that the States do not provide a “plain, speedy and efficient” remedy, and has, therefore, failed to
sustain its burden of proof. Second, the States provide the type of remedies that satisfy the Tax
Injunction Act. “On its face, the ‘plain, speedy and efficient remedy’ exception appears to
require a state-court remedy that meets certain minimal procedural criteria.” Rosewell v. LaSalle
Nat’l Bank, 450 U.S. 503, 512 (1981). A remedy is “plain, speedy and efficient” if the taxpayer
has the right to maintain a suit to recover the tax (if already paid), assert his federal rights and
secure review by the Supreme Court. Rosewell, 450 U.S. at 513; Great Lakes Dredge & Dock
Co. v. Huffman, 319 U.S. 293, 300-30 (1943). The Supreme Court has admonished the lower
courts that the exception must be narrowly construed. Grace Brethren Church, 457 U.S. at 413;
Amos v. Glynn Cty. Bd. of Tax Assessors, 347 F.3d 1249, 1255 (11th Cir. 2003); see Tully, 429
U.S. at 74 (1976). Moreover, a party’s failure to properly invoke the state remedy does not
invalidate the remedy’s plainness, speediness or efficiency. Locklear v. Remington, 77 F. Appx.
594 (3d Cir. 2003) (“The state remedies are not deficient . . . merely because [the taxpayer]
failed to use the remedies properly and/or suffered adverse decisions in state court.”); Sacks
Bros. Loan Co. v. Cunningham, 578 F.2d 172 (7th Cir. 1978) (“[T]he application of Section
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1341 depends on whether a state remedy was at some time available to the taxpayer and the
taxpayer’s failure to win in state court or to use the remedy properly does not negate the
existence of the remedy.”); Aluminum Co. of Am. v. Dep’t of Treasury of State of Mich., 522 F.2d
1120, 1125 (6th Cir. 1975) (“A number of courts have squarely faced the issue of whether a
“plain, speedy and efficient remedy” which has been allowed to lapse satisfies the Tax Injunction
Act. These courts have unanimously concluded that failure to utilize a remedy does not render
that remedy insufficient under s 1341.”); see Ford Motor Credit Co. v. La. Tax Comm’n, 440
F.2d 675, 677 (5th Cir. 1971).
In this case, each State’s procedure is substantially similar, and involves a three step
process: an administrative determination of the contribution rate by the appropriate State agency,
see M ICH. COMP . LAWS §§ 421.21(a)(2), 421.32a(1); I ND. CODE §§ 22-4-11.5-7, 22-4-11.5-8;
820 I LL . COMP . STAT . 405/1509; eventually, a hearing before an administrative law judge or a
person with similar powers, see M ICH. COMP . L AWS § 421.33(1); I ND. CODE § 22-4-32-1; 820
I LL . COMP . STAT . 405/2200; and ultimately, judicial review. M ICH. COMP . LAWS § 421.38; I ND.
CODE § 22-4-32-9; 820 I LL . COMP . STAT . 405/2205. Although the administrative law judge’s
findings of fact are accorded substantial weight and in some cases preclusive weight, his
conclusions of law are reviewed de novo. See Jenkins v. Unemployment Ins. Agency/Director,
No. 309625, 2013 WL 967782, at *1 (Mich. Ct. App. Mar. 7, 2013 )(“We also review de novo
the interpretation of the meaning of a court order.”); Boulder Acquisition Corp. v. Unemployment
Ins. Appeals of Ind. Dep’t of Workforce Dev., 976 N.E.2d 1282, 1285 (Ind. Ct. App. 2012) (“We
apply a de novo standard of review to questions of law and will not defer to the LALJ’s legal
conclusions.”); Cohen Furniture Co. v. State Dept. of Emp’t Sec., 718 N.E.2d 1058, 1061 (Ill.
App. Ct. 1999) (“[A]dministrative agencies are not entitled to such deference on questions of law
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which are subject to de novo review.”). Furthermore, the reviewing court is empowered to
authorize the payment of a refund to the employer. See Seligman & Assocs., Inc. v. Michigan
Emp’t Sec. Comm’n, 417 N.W.2d 480, 483 (Mich. Ct. App. 1988); Boulder Acquisition, 976
N.E.2d at 1289; Marco v. Doherty, 657 N.E.2d 1165, 1168-69 (Ill. App. Ct. 1995). Thus, each
State provided a “plain, speedy and efficient remedy” that allowed New Chrysler to argue before
a state court that the Sale Order precluded the State from calculating its unemployment insurance
tax rate based on Old Carco’s Experience Rating and to recover a refund based on an incorrect
assessment.
Accordingly, the Court concludes that the Tax Injunction Act deprives it of subject matter
jurisdiction to decide the Motion. Submit order.
Dated: New York, New York
February 19, 2014
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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