FTE Automotive USA, Inc. v. Old Carco LLC et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
:
OLD CARCO LLC, 	: 	Chapter 11
(f/k/a Chrysler LLC), et al., 	: 	Case No. 09-50002 (SMB)
: 	(Jointly Administered)
Debtors. 	:
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FTE AUTOMOTIVE USA, INC. 	:
:
Plaintiff, 	: 	Adv. Proc. No. 14-02227 (SMB)
-- against -- 	:
:
OLD CARCO LLC (f/k/a Chrysler LLC) 	:
and OLD CARCO LIQUIDATION TRUST, 	:
:
Defendants. 	:
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MEMORANDUM DECISION GRANTING MOTION TO DISMISS
A P P E A R A N C E S:
KIRKLAND & ELLIS LLP
601 Lexington Avenue
New York, NY 10022
Jonathan S. Henes, Esq.
Joseph Serino Jr., Esq.
Christopher T. Greco, Esq.
Of Counsel
Attorneys for Plaintiff
JONES DAY
222 East 41st Street
New York, NY 10017
Corrine Ball, Esq.
Jeffrey B. Ellman, Esq.
Brett J. Berlin, Esq.
Of Counsel
Attorneys for Defendant Old Carco Liquidation Trust
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STUART M. BERNSTEIN
United States Bankruptcy Judge:
FTE Automotive US, Inc. (“FTE”) is a defendant in a class action currently pending in
the United States District Court for the Eastern District of Texas (the “Texas Action”). The class
representative in the Texas Action has asserted the rights of Old Carco LLC (f/k/a Chrysler LLC)
(“Old Chrysler”) and/or the Old Carco Liquidation Trust (the “Liquidation Trust”) to indemnity
from or insurance procured by FTE pursuant to a supplier agreement between FTE and Old
Chrysler (the “Supplier Agreement”). FTE initiated this adversary proceeding seeking a
declaration that it no longer owes any obligations to the defendants. The defendants moved to
dismiss the adversary proceeding, or in the alternative, asked the Court to abstain from
adjudicating the adversary proceeding or to exercise its discretion to refuse to entertain the
request for declaratory relief. For the following reasons, the Court grants the motion to dismiss,
or alternatively, refuses in the exercise of its discretion to grant declaratory relief.
BACKGROUND
The underlying facts are not in dispute. Prior to the commencement of the bankruptcy
case, Old Chrysler was engaged in the manufacture of automobiles. (Complaint at ¶ 9.) FTE
supplied hydraulic clutch actuation systems that were incorporated into Old Chrysler’s vehicles
pursuant to the Supplier Agreement. (Id. at ¶ 8.)
Old Chrysler and affiliated entities1 filed chapter 11 petitions in this Court on April 30,
2009 (the “Petition Date”), commencing the bankruptcy cases. Prior to the Petition Date, Old
Chrysler entered into an agreement with Fiat S.p.A. and New Carco Acquisition LLC
1 	Old Chrysler and related debtor entities are referred to collectively as “Old Chrysler.”
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(collectively, “New Chrysler”) to sell substantially all of Old Chrysler’s operating assets free and
clear of liens, claims, interests and encumbrances.2 In accordance with the procedures
established by the Court, 3 Old Chrysler provided notice of its intent to assume and assign the
Supplier Agreement with FTE to New Chrysler. (Complaint at ¶ 21.) The Court entered the
Sale Order on June 1, 2009, which approved the assumption and assignment of the Designated
Agreements to New Chrysler, (id. at ¶ 22), and on June 5, 2009, New Chrysler filed a notice
confirming that the Supplier Agreement was one of the Designated Agreements that was being
assumed and assigned to New Chrysler. (Id. at ¶ 23.)
The Court confirmed Old Chrysler’s Second Amended Joint Plan of Liquidation (“Plan”)
on April 23, 2010.4 The Plan, in Article III(E)(4), enjoined any holder of a claim against Old
Chrysler from “commencing, conducting or continuing in any manner, directly or indirectly, any
suit, action or other proceeding of any kind against a Debtor, its Estate, the Liquidation Trust…
(the “Plan Injunction”).” The Confirmation Order modified the Plan Injunction to allow the
holders of any tort claims to commence or continue litigation to pursue “applicable insurance”
and to name Old Chrysler as a nominal defendant in litigation solely for the purpose of collecting
2 	See Motion of Debtors and Debtors in Possession, Pursuant to Sections 105, 363 and 365 of the
Bankruptcy Code and Bankruptcy Rules 2002, 6004 and 6006, for (I) an Order (A) Approving Bidding Procedures
and Bidder Protections for the Sale of Substantially All of the Debtors’ Assets and (B) Scheduling a Final Sale
Hearing and Approving the Form and Manner of Notice Thereof; and (II) and Order (A) Authorizing the Sale of
Substantially All of the Debtors’ Assets, Free and Clear of Liens, Claims, Interests and Encumbrances, (B)
Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases in Connection
Therewith and Related Procedures, and (C) Granting Certain Related Relief, dated May 3, 2009 (“Sale Motion”), at
¶ 41 (ECF/Main Case Doc. # 190.) “ECF Doc. #___” refers to the docket in this adversary proceeding, and
“ECF/Main Case Doc. #___” refers to the docket in the bankruptcy case.
3 	A more detailed discussion of the entire sale process may be found in TRW v. Old Carco Liquidation Trust
(In re Old Carco LLC), Adv. P. No. 14-2055, 2015 WL 1744167 (Bankr. S.D.N.Y. Apr. 14, 2015) (“TRW”).
4 	Order Confirming Second Amended Joint Plan of Liquidation of Debtors and Debtors in Possession, as
Modified, dated Apr. 23, 2010 (“Confirmation Order”) (ECF/Main Case Doc. # 6875).) A copy of the Plan is
attached as Annex I to the Confirmation Order.
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the proceeds of any such insurance (the “Insurance Exception”). (Complaint at ¶ 18;
Confirmation Order at ¶ 30.) The Confirmation Order also authorized Old Chrysler to enter into
the “Liquidation Trust Agreement,”5 and transferred to and vested in the Liquidation Trust all of
the remaining property of the estate. (Id. at ¶ 23; accord Plan at Art. IV(A)(1), (D).)
A. 	The Texas Action
On March 26, 2014, Fernando Verde commenced the Texas Action against Old Chrysler,
the Liquidation Trust, FTE and others. Verde alleged that clutch safety devices manufactured
and sold by FTE to Old Chrysler and incorporated into certain manual transmission vehicles sold
by Old Chrysler between 1994 and 2008 were defective. (First Amended Complaint and Petition
for Class Certification (“Verde Complaint”), filed May 28, 2014, at ¶¶ 11-13.) 6 In Count I,
Verde asserted a breach of implied warranty of merchantability claim against Old Chrysler and
the Liquidation Trust as nominal defendants to recover any available insurance proceeds as
permitted by the Plan. (Id. at ¶¶ 27-33.) Verde later revealed his belief that FTE was obligated
to procure insurance for Old Chrysler’s benefit and indemnify Old Chrysler pursuant to the
parties’ Supplier Agreement. (Motion to Lift This Court’s Stay as to Old Carco, LLC at 38-39 of
43.) 7
In response to the Verde Complaint, the Liquidation Trust filed a notice of the Plan
Injunction and the Court’s Confirmation Order. (Complaint at ¶ 27.) By order dated August 13,
5 	A copy of the Form of Liquidation Trust Agreement is attached as Annex B-1 to the Notice of Filing of
Plan Exhibit X.A.93C and Revised Plan Exhibits X.A.142, X.A.143 and X.A.189. (ECF/Main Case Doc. # 6787).
6 	A copy of the Verde Complaint is attached as Exhibit A to the Complaint.
7 	A copy of Verde’s lift stay motion filed in the Texas District Court is annexed to Complaint as Exhibit C.
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2014, the magistrate judge stayed the Texas Action pending a further order of this Court
modifying or lifting the Plan Injunction. (Id.)8
B. 	This Adversary Proceeding
On September 8, 2014, FTE initiated this adversary proceeding against Old Chrysler and
the Liquidation Trust. The Complaint sought a declaratory judgment that the FTE did not owe
any obligations to either defendant under the Supplier Agreement, neither defendant had
enforceable rights under the Supplier Agreement, FTE was not required to provide liability
insurance to or indemnify Old Chrysler or the Liquidation Trust, and the insurance provision in
the Supplier Agreement was not “applicable insurance” under the Confirmation Order.
(Complaint at 10.)
The Liquidation Trust moved to dismiss the adversary proceeding for lack of subject
matter jurisdiction and for failure to state a claim. In the alternative, it asked the Court to abstain
or refuse to exercise its discretionary authority to grant declaratory relief. (See Motion of Old
Carco Liquidation Trust for the Entry of an Order (I) Dismissing This Adversary Proceeding For
(A) Lack of Subject Matter Jurisdiction and/or (B) Failure To State a Claim Upon Which Relief
Can Be Granted and/or (C) Failure to Join a Necessary Party, or (II) Abstaining From
Resolving This Adversary Proceeding or (III) Exercising Discretion Not to Grant Declaratory
Judgment (“Motion to Dismiss or Abstain”), dated Dec. 22, 2014 (ECF Doc. # 9).) Specifically,
the Liquidation Trust contended that there was no actual controversy between it and FTE; the
dispute was between FTE and Verde, who was not a party to this adversary proceeding. (Id. at
8 	A copy of the magistrate judge’s order is attached as Exhibit B to the Complaint. Verde thereafter moved
to lift the magistrate judge’s stay order. (Complaint at ¶ 28.) On March 13, 2015, the Texas District Court lifted the
stay with the Liquidation Trust’s consent. (Order, No. 6:14-cv-225 (E.D. Tex. Mar. 13, 2015) (KNM) (ECF Doc. #
135).).
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¶¶ 10-12.) The Liquidation Trust also asserted that this action fell outside of the scope of the
Court’s post-confirmation jurisdiction and that FTE’s failure to join Verde required dismissal.
(Id. at ¶¶ 13, 19.)
FTE responded that an actual controversy existed between the parties because the Texas
Action raised a question regarding their respective rights and obligations under the Supplier
Agreement. (Plaintiff’s Opposition to Defendant’s Motion to Dismiss or Abstain and Cross-
Motion for Summary Judgment (“FTE Response”), dated Jan. 12, 2015, at ¶ 13 (ECF Doc. #
14).)9 FTE also argued that Verde was not a necessary party to this action, (id. at ¶ 15), that the
Court had jurisdiction to interpret the Sale Order and its effect on the Supplier Agreement, (id. at
¶ 23), and that the Court should not decline to grant declaratory relief in the exercise of its
discretion. (Id. at ¶ 25.) The Liquidation Trust filed a reply reiterating that no actual controversy
existed between the Liquidation Trust and FTE. (Reply of Old Carco Liquidation Trust in
Support of Its Motion to Dismiss or to Abstain, dated Jan. 19, 2015 (ECF Doc. # 17).)
DISCUSSION
The Declaratory Judgment Act of 1934, 28 U.S.C. § 2201, provides in pertinent part:
(a) In a case of actual controversy within its jurisdiction ... any court of the United
States, upon the filing of an appropriate pleading, may declare the rights and other
legal relations of any interested party seeking such declaration, whether or not further
relief is or could be sought. Any such declaration shall have the force and effect of a
final judgment or decree and shall be reviewable as such.
The Declaratory Judgment Act “creates a means by which rights and obligations may be
adjudicated in cases involving an actual controversy that has not reached the stage at which
either party may seek a coercive remedy, or in which the party entitled to such a remedy fails to
9 	The Court stayed briefing on FTE’s cross-motion for summary judgment until resolution of the Motion to
Dismiss or Abstain. (Transcript of Hearing Held on Jan. 22, 2015 (“Jan. 22 Hearing Tr.”), at 23:20-22 (ECF Doc.
# 19).)
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sue for it.” United States v. Doherty, 786 F.2d 491, 498 (2d Cir. 1986) (internal quotations
omitted). Subject matter jurisdiction under the Declaratory Judgment Act is limited to an actual
controversy and is coextensive with the case or controversy standard embodied in Article III of
the Constitution. See Aetna Life Ins. of Hartford v. Haworth, 300 U.S. 227, 239-40 (1937)). An
actual controversy “must be a real and substantial controversy admitting of specific relief
through a decree of conclusive character, as distinguished from an opinion advising what the law
would be upon a hypothetical state of facts.” Id., 300 U.S. at 241. Often, the difference between
an abstract question and an actual controversy is “necessarily one of degree, and it would be
difficult, if it would be possible, to fashion a precise test for determining in every case whether
there is such a controversy.” Maryland Cas. Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273
(1941); Certain Underwriters at Lloyd’s, London v. St. Joe. Minerals Corp., 90 F.3d 671, 675
(2d Cir. 1996). “Basically, the question in each case is whether the facts alleged, under all
circumstances, show that there is a substantial controversy, between the parties having adverse
legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory
judgment.” Maryland Cas. Co., 312 U.S. at 273; accord Nike, Inc. v. Already, LLC, 663 F.3d 89,
95 (2d Cir. 2011); Kidder, Peabody & Co., Inc. v. Maxus Energy Corp., 925 F.2d 556, 562 (2d
Cir. 1991) (“Whether a real and immediate controversy exists in a particular case is a matter of
degree and must be determined on a case-by-case basis”) (citation omitted)). Furthermore, the
parties must possess a sufficient interest to insure that the dispute will be presented in an
adversary context. Choate v. United States, 413 F. Supp. 475, 480 (N.D. Okla. 1976). The party
seeking a declaratory judgment has the burden of proving that the Court has jurisdiction. E.R.
Squibb & Sons, Inc. v. Lloyd’s & Cos., 241 F.3d 154, 177 (2d Cir. 2001) (citing Cardinal Chem.
Co. v. Morton Int’l, Inc., 508 U.S. 83, 95 (1993))
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FTE has not met its burden of proving the existence of an actual controversy between it
and Old Chrysler or the Liquidation Trust regarding their respective rights under the Supplier
Agreement. Old Chrysler has gone out of business, and the remaining property in its estate
vested in the Liquidation Trust under the Plan. Hence, Old Chrysler has no further rights against
FTE, and whatever it had now belongs to the Liquidation Trust.
Although the Liquidation Trust might have rights against FTE if Old Chrysler retained
any rights against FTE relating to insurance or indemnity that vested in the Liquidation Trust
under the Plan, the dispute between the Liquidation Trust and FTE is neither immediate nor real.
The Liquidation has not asserted or threatened to assert a claim for indemnity or insurance and is
not likely ever to do so. It has repeatedly stated on the record that it is not participating in the
Texas Action and does not intend to take any action against FTE. (Motion to Dismiss or Abstain
at ¶ 10; Jan. 22 Hearing Tr. at 6:15-16 (“[W]e have no position. We’re not asserting any
rights.”).) In fact, the whole point of the Insurance Exception was to allow injured parties to
name the Liquidation Trust as a nominal party, obtain a judgment and access insurance that the
Liquidation Trust did not need.10 In short, the Liquidation Trust will not assert rights to
insurance or indemnity against FTE, has no interest in litigating those rights and there is no
necessity to declare the rights in this adversary proceeding. 11
10 	Unsecured creditors like Verde and the putative class will not receive any distribution under the Plan, see
TRW, 2015 WL 1744167, at *11 n. 26, and the Liquidation Trust will not require indemnification or insurance on
account of those claims.
11 The situation presented to the Court in this proceeding is far different from the actual controversy presented
in TRW. 	There, Masquat brought a class action contending that the Chrysler component manufactured by TRW
was defective. The Liquidation Trust assigned whatever rights to indemnity it had under Old Chrysler’s Supply
Agreements with TRW to Masquat, TRW filed an action solely against the Liquidation Trust to declare that the
Liquidation Trust had no right to indemnity, Masquat intervened in the adversary proceeding and moved to dismiss
the complaint. Here, the Liquidation has not taken any actions suggesting that it has rights against FTE, and Verde
is not before the Court.
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In addition, a declaration of rights in this adversary proceeding might not resolve
anything or amount to anything more than an advisory opinion. As the Liquidation Trust argues,
the actual dispute lies between Verde and FTE. Verde seeks to obtain a nominal judgment
against the Liquidation Trust and then enforce an indemnity obligation he believes that FTE
owes to the Liquidation Trust or recover the insurance proceeds he believes that FTE procured
for Old Chrysler’s benefit. A declaratory judgment in this adversary proceeding may not have
any preclusive effect in the Texas Action on Verde, whose rights are derivative of those of the
Liquidation Trust. The parties have not briefed this issue, and the Court does not decide it, but if
there is any chance that Verde will be bound, he is the party with the interest in litigating the
question.
FTE’s efforts to manufacture adversity fail. It posits that the Liquidation Trust’s refusal
to stipulate or agree that Old Chrysler’s rights against FTE were transferred to New Chrysler
coupled with its motion to dismiss is proof that the Liquidation Trust is siding with Verde and
agrees that FTE has an obligation to insure and/or indemnify with respect to any judgment
obtained by Verde against Old Chrysler. (FTE Response at ¶ 13.) The Liquidation Trust is
under no obligation to stipulate to a judgment to resolve an action that lacks jurisdiction to enter
the judgment in the first place. Moreover, the mere suggestion that such a stipulation would or
should be an appropriate resolution of this declaratory judgment action demonstrates the absence
of any true controversy or adversity. Accordingly, the Court concludes that it lacks subject
matter jurisdiction over FTE’s declaratory judgment action.
Even where subject matter jurisdiction exists, the Court has discretion to decide whether
to entertain a declaratory judgment action. Wilton v. Seven Falls Co., 515 U.S. 277, 282 (1995).
The factors that guide the exercise of the Court’s discretion include
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(1) whether the judgment will serve a useful purpose in clarifying or settling the
legal issues involved” and “(2) whether a judgment would finalize the controversy
and offer relief from uncertainty.” . . . Other circuits have added additional
factors: (3) “whether the proposed remedy is being used merely for ‘procedural
fencing’ or a ‘race to res judicata,’ ” (4) “whether the use of a declaratory
judgment would increase friction between sovereign legal systems or improperly
encroach on the domain of a state or foreign court,” and (5) “whether there is a
better or more effective remedy.”
Niagara Mohawk Power Corp. v. Hudson River-Black Water Regulating District, 673 F.3d 84,
105 (2d Cir. 2012) (quoting Dow Jones & Co. v. Harrods Ltd., 346 F.3d 357, 359-60 (2d Cir.
2003)); accord Chevron Corp. v. Naranjo, 667 F.3d 232, 246 (2d Cir. 2012).
All of the factors other than factor no. 4 weigh in favor of exercising the Court’s
discretion not to grant declaratory relief. For the reasons stated, a declaratory judgment will not
serve a useful purpose because the Liquidation Trust is not and will not assert an indemnity
claim against FTE. In addition, a declaratory judgment may not completely resolve the issue or
eliminate any uncertainty because Verde is not a party and may not be bound by the declaratory
judgment. In fact, it appears that the only reason that FTE brought this proceeding was to obtain
a ruling that it could use as precedent against Verde or preclude his claims in the Texas Action
and in a similar class action subsequently filed in Oklahoma. (FTE Response at ¶ 26 (“[A] ruling
by this Court would avoid potentially inconsistent rulings in other jurisdictions. . . . Absent a
ruling from this Court, both the Texas Action and the Oklahoma Action will require an
interpretation of the Sale Order’s effect on the Supplier Agreement between FTE and Old
Carco.”).) The better and more effective remedy would be to litigate the question in the court
where the true adversary parties are present, whether in Texas, Oklahoma or in this Court upon
transfer of the issue by the courts in which the litigation is pending. See, e.g., Burton v. Chrysler
Group, LLC, 492 B.R. 392 (Bankr. S.D.N.Y. 2013) (interpreting effect of the Sale Order
following transfer of the issue by the Delaware District Court to this Court). Consequently, this
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Court declines in the exercise of discretion to grant declaratory relief even if it had subject matter
jurisdiction to entertain the adversary proceeding.
The Complaint is, therefore, dismissed. The Court has considered the parties’ other
arguments and concludes that they have been rendered moot or lack merit. The parties are
directed to settle an appropriate order on notice.
Dated: New York, New York
May 27, 2015
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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