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In Re: Old Carco LLC (F/K/A Chrysler LLC) et al v. Daimler Ag

November 22, 2011

IN RE: OLD CARCO LLC (F/K/A CHRYSLER LLC) ET AL., THE LIQUIDATION TRUST,
APPELLANT,
v.
DAIMLER AG, ET AL., DEBTOR.
APPELLEES.



The opinion of the court was delivered by: Denise Cote, District Judge:

OPINION AND ORDER

In this adversary proceeding, appellant the Liquidation Trust ("Trust"), successor in interest to the Official Committee of Unsecured Creditors ("Creditors' Committee") of Old CarCo LLC f/k/a Chrysler LLC ("CarCo"), alleges that the appellees, Daimler AG, Daimler North America Corporation ("DNAC"), and Daimler Investments US Corporation ("DC Holding," and collectively with Daimler AG and DNAC, "Daimler"), stripped away valuable assets from CarCo prior to a complex restructuring that resulted in the sale of CarCo and other Chrysler entities to Cerberus Capital Management LP ("Cerberus"). The Trust therefore seeks to recover, as a constructive fraudulent conveyance, the value of the transferred assets that exceeds the value received by CarCo as part of the restructuring and sale transaction ("Chrysler Reorganization and Sale").

In an opinion dated May 12, 2011, Chief Judge Arthur J. Gonzalez of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") granted Daimler's motion to dismiss the Second Amended Complaint ("SAC"). In re Old CarCo LLC, 454 B.R. 38 (Bankr. S.D.N.Y. 2011) ("Bankruptcy Court Opinion"). The Trust appeals the Bankruptcy Court Opinion. For the following reasons, the Bankruptcy Court Opinion is affirmed.

BACKGROUND

The following facts, which are undisputed unless otherwise indicated, are taken from the SAC, the record on appeal, and the Bankruptcy Court Opinion. Only those facts relevant to the issues on appeal are discussed below.

I. The Reorganization of the Chrysler Companies

In 1998, Daimler AG acquired 100% of the equity of Chrysler

Corporation, the predecessor in interest to debtor CarCo.*fn1 The operations of the Chrysler Corporation were then combined with the operations of other Daimler AG-owned brands and integrated within single subsidiaries. In late 2006, Daimler AG decided to sell the operations previously acquired in its purchase of the Chrysler Corporation (the "Chrysler Companies").

The Chrysler Companies had two main components. The first, its manufacturing and sales business, consisted of CarCo and DaimlerChrysler Motors Corporation ("Motors") (together with CarCo, "Automotive"). The second component was its financial services business, including DaimlerChrysler Financial Services Americas LLC and DaimlerChrysler Financial Services Canada Inc. (collectively, "FinCo"). CarCo was a subsidiary of Motors, and FinCo, in turn, was a subsidiary of CarCo. FinCo provided financing for Chrysler dealerships and retail customer purchases and leases of Chrysler vehicles. Motors managed the distribution and sale of Chrysler vehicles manufactured by CarCo. Among other things, Motors purchased Chrysler vehicles and parts from CarCo and sold these vehicles and parts to Chrysler dealers. Motors also handled warranty administration, claims management on service contracts, and vehicle inspections. The separation of the two companies allowed the enterprise to shift the assessment of taxable income for sales and marketing services to states with lower income tax rates. The relationship between Motors and CarCo was governed by a Sales and Distribution Agreement (the "SDA") that either company could terminate upon six months' notice. Each company recorded the revenue and costs from the SDA as a trade receivable or payable on its respective books. By December 31, 2006, CarCo owed Motors approximately $11.6 billion under the SDA.

Pursuing its decision to sell the Chrysler Companies, Daimler AG hired JPMorgan Chase ("JPMorgan") and Ernst & Young LLP ("E&Y") to create a restructuring plan. This restructuring plan would separate the Daimler and Chrysler operations and spin off FinCo, the most valuable part of the Chrysler Companies. The ultimate goal of the restructuring plan, which involved only corporations wholly-owned by Daimler AG, was to allow Daimler AG to obtain the best price for its interest in the Chrysler Companies. A higher price would result from ensuring that FinCo's assets were not available to CarCo's creditors.

Daimler executed the restructuring plan in the spring and summer of 2007. As a result of the restructuring, FinCo became a stand-alone entity and was transferred from CarCo to a newly formed holding company, DaimlerChrysler Holding LLC ("Holding").

Daimler AG caused DC Holding to create Holding in order to provide a vehicle through which Daimler could sell a controlling interest in the Chrysler Companies, including FinCo.*fn2 Holding also became CarCo's parent, thereby converting the relationship between CarCo and FinCo from that of parent and subsidiary to that of sister companies under common ownership. The restructuring also involved the transfer of other assets from CarCo to companies controlled by Daimler AG. As consideration for the transfer of FinCo and these other assets, CarCo received all of the stock of Motors, as well as another entity, and a note from FinCo for $1.225 billion. Therefore, as a result of the restructuring, Holding was the direct or indirect holder of the equity interests of the various Chrysler Companies, including CarCo, FinCo, and Motors.

Daimler AG retained Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey") to value the consideration exchanged in the step of the reorganization plan involving the transfer of FinCo. In its valuation opinion, Houlihan Lokey valued FinCo and the related assets transferred by CarCo to Holding at $7.95 billion. With respect to the assets transferred to CarCo in that step of the restructuring plan, Houlihan Lokey valued Motors at $5.5 billion. CarCo also received a $1.225 billion note, which, added to the value assigned to Motors, totaled assets worth $6.725 billion. Therefore, on the face of this valuation opinion, there was a $1.225 billion "gap" between the assets transferred from CarCo and the consideration it was given.

II. Sale of the Chrysler Companies

Beginning around December 2006, Daimler AG initiated

efforts to solicit offers for the sale of Automotive (CarCo and Motors) and FinCo. CG Investor, LLC, an affiliate of Cerberus (which will also be referred to as "Cerberus") placed the highest bid. Certain Daimler entities executed an agreement (the "Contribution Agreement") with Cerberus to effectuate the sale of the Chrysler Companies. Daimler AG also executed the Contribution Agreement as guarantor of the performance of various Daimler entities that were participants to the Contribution Agreement. The fulfillment of all of the restructuring steps was a condition precedent to Cerberus's obligation to close on the Contribution Agreement. The Contribution Agreement closed on August 3, 2007.

Pursuant to the Contribution Agreement, Cerberus acquired 80.1% of the equity of Holding and, therefore, an indirect equity interest of an equal amount in the Chrysler Companies.

Daimler's equity interest was diluted to 19.9%. In exchange, Cerberus made an equity contribution to the Chrysler Companies of $7.2 billion. Of this amount, $1.212 billion was transferred through Holding to DC Holding for certain expenses incurred in connection with the Cerberus transaction; $3.45 billion was contributed to CarCo as equity ("Equity Contribution"); and $2.275 billion was contributed to FinCo as equity. FinCo used $1.243 billion of this contribution to pay the principal and interest on the note that it had previously issued to CarCo.

CarCo also received other elements of value in the Chrysler Reorganization and Sale. Cerberus obtained $12 billion in new debt financing for CarCo as consideration (the "Credit Facilities"). The Credit Facilities consisted of $10 billion from large commercial and investment banks, a $1.5 billion loan from an affiliate of Daimler, and a $0.5 billion loan from Cerberus. The receipt of new debt financing was also a condition to Cerberus's obligation to close on the Contribution Agreement. Other value received by CarCo included the cancellation by Daimler of approximately $2.7 billion (net) in intercompany debt; the direct repayment in cash of $920 million of intercompany debt by Daimler to CarCo (the "Daimler Debt Repayment"); the assignment of a $500 million tax refund; a $1 billion guarantee of CarCo's pension obligations (the "Daimler Pension Guarantee"); overseas distribution facilities, or National Sales Centers ("NSCs") that had been previously owned by Daimler; and 49 ancillary agreements, including joint development, intellectual property, information technology, supply and transition agreements, governing Daimler and CarCo's continuing operational relationship following the Chrysler Reorganization and Sale ("Ancillary Agreements").

III. Summary of Exchanged Assets

As a result of the combined steps of the Chrysler

Reorganization and Sale, it is undisputed, or the parties do not challenge for the purposes of this appeal, that CarCo transferred the following assets: the equity of FinCo, with a value of $7.95 billion; DC Vehiculos Commerciales/DC Tractocamiones ("Newco Truck"), with a value of $548 million; DC Financial Services Mexico ("Newco Services"), with a value of $383 million; and Chrysler's Auburn Hills Headquarters, with a value of $700 million. The total value of these assets (collectively, the "Transferred Assets") was $9.581 billion.

In consideration for these transfers, as a result of the combined steps of the Chrysler Reorganization and Sale, it is undisputed, or the parties do not challenge for the purposes of this appeal, that CarCo was given, at least*fn3 a $3.45 billion cash contribution from Cerberus; a note from FinCo valued at $1.225 billion; debt forgiveness from Daimler totaling $2.036 billion; 100% of the equity of Motors, with a value of at least $450 million;*fn4 tax indemnification worth $400 million; and a payment for the Auburn Hills Headquarters of $325 million. The total value of this consideration (collectively, "CarCo's Consideration") was $7.886 billion. Therefore, for the purposes of this appeal, the maximum "gap" between the assets CarCo transferred and the consideration it received was $1.695 billion (the "Consideration Gap").

IV. Procedural History

On April 30, 2009, CarCo and certain of its subsidiaries,

including Motors, filed for protection under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). This adversary proceeding commenced on August 17, 2009. The Creditors' Committee was permitted to take discovery pursuant to Fed. R. Bankr. P. 2004 from Daimler, E&Y, JPMorgan and Houlihan Lokey. On January 4, 2010 the Creditors' Committee filed an amended complaint (the "FAC"), and Daimler filed a motion to dismiss the FAC on March 5. On April 23, the Bankruptcy Court issued an order confirming the Second Amended Joint Plan of Liquidation ("Debtors' Plan"). The Debtors' Plan became effective on April 30. Pursuant to the Debtors' Plan, the Trust was formed. On May 5, the Bankruptcy Court issued an order substituting the Trust as plaintiff, in accordance with the terms of the Debtors' Plan.

In the July 27, 2010 opinion which set forth the basis for the Bankruptcy Court's August 3 dismissal of the FAC, the Bankruptcy Court concluded that the two parts of the Chrysler Reorganization and Sale -- the restructuring of the Chrysler Companies, and Daimler's ultimate sale of a controlling interest in the Chrysler Companies -- comprised one integrated transaction. Liquidation Trust v. Daimler AG, et al. (In re Old CarCo), 435 B.R. 169, 183--85 (Bankr. S.D.N.Y. 2010). Accordingly, the Bankruptcy Court concluded that the Trust's challenges to isolated elements of the restructuring could not state a claim for constructive fraudulent transfer. Id. at 187. Instead, the challenged transfers could only be properly valued in the context of the entire Chrysler Reorganization and Sale, including Cerberus's cash infusion into CarCo and other consideration conveyed to CarCo. Id. The Bankruptcy Court therefore afforded the Trust the opportunity to replead certain claims, but cautioned that, in any amended complaint, the Trust should "address the deficiencies in its allegations concerning the consideration that CarCo received in the single integrated transaction, including amplification as to all the assets received, as well as to clarify its position concerning the valuation of assets, both for the assessment of the consideration received in the integrated transaction and the insolvency analysis." Id. at 190.

On September 27, the Trust filed the SAC, alleging that even considering the entirety of the Chrysler Reorganization and Sale, CarCo's Consideration was not as valuable as the Transferred Assets. Although the Trust attributed some value to certain elements of CarCo's Consideration to which it had not ascribed any value in the FAC, it alleged in the SAC that the shortfall in value was still $1.695 billion. Therefore, as in the FAC, the Trust asserted claims for constructive fraudulent transfer. The Trust also alleged an unjust enrichment claim against ...


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