On December 1, 2014, the US District Court for the Southern District of New York in In re Old Carco LLC (f/k/a Chrysler LLC) vacated an order of the US Bankruptcy Court for the Southern District of New York which denied a motion to enforce the terms of a sale order entered under section 363(f) of the Bankruptcy Code, thereby reinforcing the authority of a bankruptcy court to interpret and enforce its own sale orders, if necessary to prevent creditors from asserting successor liability and other claims against purchasers (No. 14–CV–2225, (S.D.N.Y. Dec. 1, 2014)).

In 2009, Chrysler LLC and several of its subsidiaries (together, Old Chrysler) filed a Chapter 11 bankruptcy petition. The Bankruptcy Court entered a sale order (Sale Order) approving the section 363 sale of Old Chrysler's assets to New CarCo LLC (New Chrysler), which authorized the transfer of all of Old Chrysler's assets "free and clear of all Claims" not otherwise assumed under the agreement. The Sale Order also included provisions which enjoined “governmental, tax and regulatory authorities” from asserting against New Chrysler any claims arising from, related to or in connection with the ownership, sale or operation of Old Chrysler.

In 2013, New Chrysler filed a motion seeking enforcement of the Sale Order and alleged that three state agencies that ran unemployment insurance programs (Agencies) had violated the Sale Order by treating New Chrysler as a successor to Old Chrysler for purposes of calculating New Chrysler's unemployment insurance tax rates, costing it millions of dollars in overcharged unemployment insurance taxes. New Chrysler argued that by approving the asset sale "free and clear of any interest in such property" under section 363(f) of the Bankruptcy Code, the Bankruptcy Court prohibited the Agencies from transferring Old Chrysler's "experience ratings," which are variables used in calculating unemployment taxes, to New Chrysler. The Agencies disagreed with both:

In 2014, the Bankruptcy Court ruled in favor of the Agencies on jurisdictional grounds (see In re Old Carco LLC (f/k/a Chrysler LLC), 505 B.R. 151 (Bankr. S.D.N.Y. 2014)). Despite acknowledging that the Agencies collaterally attacked the Sale Order, which it had bankruptcy jurisdiction to interpret and enforce, the Bankruptcy Court concluded that the Tax Injunction Act imposed separate jurisdictional requirements that prevented it from addressing the merits of New Chrysler's motion.

New Chrysler appealed and argued that the Bankruptcy Court erred in ruling that it lacked jurisdiction to consider its motion and failed to give proper res judicata effect to the Sale Order.

The District Court vacated the Bankruptcy Court's order and held that the Bankruptcy Court had jurisdiction to consider New Chrysler's motion to enforce the Sale Order. However, it declined to decide the merits of New Chrysler's motion.

Citing the US Supreme Court's decision in Travelers Indemnity Co. v. Bailey, the District Court noted that a party that has adequate notice of the prior proceeding may not collaterally attack or question subject matter jurisdiction (557 U.S. 137, 152 (2009)). The District Court noted that here, as in Travelers:

The Agencies disagreed and argued that:

The District Court rejected the Agencies' first argument, explaining that it "conflated" the conclusion of the unemployment tax rate analysis with the Bankruptcy Court's jurisdiction to consider the issue. Further, it called the argument "immaterial" because after Travelers, in entering the Sale Order, the Bankruptcy Court held, either explicitly or implicitly, that it had subject matter jurisdiction to do so and that determination is now res judicata.

The District Court also rejected the Agencies' second argument, explaining that a similar argument failed in Travelers as well as under almost identical circumstances in In re USA United Fleet Inc. (see 496 B.R. 79, 84 (Bankr. E.D.N.Y. 2013)).

Therefore, the District Court ruled that because there was no dispute that the Agencies were parties to the original bankruptcy proceedings and received actual notice of the Sale Order, they were given a fair chance to challenge the Bankruptcy Court's subject matter jurisdiction, and they can not challenge it now by resisting enforcement of the Sale Order. However, the Agencies claimed 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." Because the Agencies did not believe, based on then-existing case law, that the term "interest" in section 363(f) extended to the debtor's experience ratings, the Agencies argued that they "had no reason or opportunity to challenge the Sale Order based on subject matter jurisdiction." The District Court rejected this argument because:

Therefore, the District Court vacated the Bankruptcy Court's Order denying New Chrysler's motion to enforce the Sale Order and remanded the matter to the Bankruptcy Court for further proceedings.

This decision reinforces the authority of a bankruptcy court to interpret and enforce its own sale orders, if necessary to prevent creditors from asserting successor liability and other claims against the purchaser. This decision should reassure potential investors considering acquiring a financially troubled company through a bankruptcy sale process.

For more information on section 363 sales, see Practice Notes, Buying Assets in a Section 363 Bankruptcy Sale: Overview and A Distressed Deal Buyer's Guide and Timeline of a Section 363 Sale.