## Facts

- Chrysler LLC (later renamed Old Carco LLC) filed for Chapter 11 protection during the 2008–09 financial crisis while pursuing a going-concern sale of substantially all operating assets to a new entity in a transaction involving Fiat.
- The reorganization plan depended on transferring a smaller, financially stronger domestic dealer network to the purchaser.
- The debtors moved under Bankruptcy Code §§ 105 and 365 and Rule 6006 to reject hundreds of executory dealer sales and service agreements and related unexpired leases with identified domestic dealerships.
- The debtors asserted, based on a multi-factor evaluation (including sales performance, market potential, facilities, and brand alignment), that the targeted dealers did not fit the future network and that rejection would reduce ongoing obligations and improve estate value.
- More than 200 dealers and related parties objected, arguing (among other things) lack of adequate business justification, bad faith or improper external pressure, deficiencies in the dealer-selection methodology, and that state dealer-protection statutes limited or barred the proposed action.
- After extensive notice and an evidentiary hearing with live testimony and written declarations, the court entered an order authorizing rejection and later issued an opinion explaining its findings and conclusions.

## Issues

1. Whether the debtors’ decision to reject the identified dealer agreements and leases should be approved under § 365(a) applying the business judgment standard.
2. Whether objections alleging bad faith, arbitrariness, or inadequate justification overcame the deference ordinarily given to a debtor’s rejection decision.
3. Whether state automobile dealer-protection statutes constrained or prevented rejection of the dealer agreements in bankruptcy.

## Decision

- The court authorized rejection of the identified executory dealer agreements and unexpired leases under § 365(a).
- The court overruled the dealers’ objections, finding the debtors made a persuasive showing that rejection would benefit the estate and reflected sound business judgment.
- The court rejected claims that the selection process or the decision to reject was arbitrary, capricious, or made in bad faith.
- The court concluded that state dealer-protection laws did not bar rejection to the extent they conflicted with the Bankruptcy Code’s rejection authority.

## Legal Principles

- Under § 365(a), a debtor may reject an executory contract or unexpired lease with court approval; the governing test is whether rejection is a reasonable exercise of the debtor’s business judgment and not the product of bad faith, whim, or caprice.
- A showing that rejection will benefit the estate generally warrants approval, and the court will not substitute its own judgment for the debtor’s absent proof of bad faith or irrationality.
- Rejection constitutes a breach as of the petition date and typically converts the counterparty’s rights into a prepetition damages claim, rather than rescinding the contract.
- When necessary to carry out bankruptcy objectives, federal bankruptcy law can preempt conflicting state-law restrictions that would otherwise limit a debtor’s ability to reject executory contracts.

## Conclusion

The bankruptcy court approved Chrysler’s mass rejection of selected domestic dealer franchise agreements and related leases because the record supported that the decision would benefit the estate and was a good-faith exercise of business judgment tied to the reorganization and asset-sale strategy, and because state franchise protections could not prevent rejection in bankruptcy.


In re Old Carco LLC, 406 B.R. 180 (Bankr. S.D.N.Y. 2009)