Grimstad et al v. FCA US LLC et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
: 	Chapter 11
OLD CARCO LLC, et al., 	:
: 	Case No. 09-50002 (SMB)
Debtors. 	:
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:
LYNN GRIMSTAD, et al., 	:
:
Plaintiffs, 	:
: 	Adv. Pro. No. 16-01204 (SMB)
– against – 	:
:
FCA US LLC, et al., 	:
:
Defendants. 	:
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MEMORANDUM DECISION GRANTING IN
PART AND DENYING IN PART MOTION TO
DISMISS FIRST AMENDED COMPLAINT
A P P E A R A N C E S:
A.O.E. LAW & ASSOCIATES
Attorneys for Plaintiffs
350 S. Figueroa St., Suite 189
Los Angeles, CA 90071
Sedoo A. Manu, Esq.
Of C0unsel
SULLIVAN & CROMWELL LLP
Attorneys for Defendant FCA US LLC
125 Broad Street
New York, NY 10004
Benjamin Robert Walker, Esq.
Of Counsel
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STUART M. BERNSTEIN
United States Bankruptcy Judge:
The Plaintiffs own vehicles that were manufactured and sold by the debtors,
collectively Old Carco LLC (“Old Carco”). After the Defendant FCA US LLC (“New
Chrysler”) purchased Old Carco’s assets and continued its operations, New Chrysler
recalled the vehicles, attempted to fix a pre-existing glitch, but according to the
Plaintiffs, made the situation worse. 1 The Plaintiffs sued, and following the transfer of
the lawsuit to this Court, New Chrysler moved to dismiss the Plaintiffs’ complaint
arguing that their claims were barred by the sale order discussed below. (FCA US LLC’s
Motion to Dismiss Plaintiff’s First Amended Complaint, dated Nov. 18, 2016 (the
“Motion”) (ECF Doc. # 12).) For the reasons that follow, the Motion is granted in part
and denied in part.
BACKGROUND2
On April 30, 2009, Old Carco filed chapter 11 petitions in this Court. Around the
same time, Old Carco and New Carco Acquisition LLC, later renamed FCA US LLC (i.e.,
New Chrysler), entered into a Master Transaction Agreement, dated Apr. 30, 2009
(the “MTA”) (ECF Main/Case Doc. # 3232-1), pursuant to which Old Carco agreed to
sell substantially all of their assets free and clear of all liens, claims, interests and
encumbrances (other than those expressly assumed) to New Chrysler (the “Sale”). The
Court approved the Sale on June 1, 2009, (see Order (I) Authorizing the Sale of
1 	A copy of the First Amended Class Action Complaint, dated Mar. 30, 2016 (“FAC”) (ECF Doc. # 1-
3) is attached as Exhibit A to the Notice of Removal, dated Apr. 22, 2016 (“Notice of Removal”) (ECF Doc.
# 1-2).
2 	“ECF Doc. # __” refers to documents filed on the electronic docket in this adversary proceeding,
while “ECF/Main Case Doc. # __” refers to documents filed on the electronic docket in the main
bankruptcy case, 09-50002 (SMB).
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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 (the “Sale Order”)
(ECF/Main Case Doc. # 3232)), and the transaction closed on June 10, 2009.
After the Sale, and on or before July 2013, New Chrysler discovered a defect in
certain Jeep vehicles with model years 2005 through 2010 (the “Vehicles”). 3 (FAC at
¶¶ 3, 20.) The defect related to the Final Drive Control Modules (“FDCM”) 4 installed in
the Vehicles by Old Carco, causing the Vehicles to shift into neutral unexpectedly and
without any driver input. (FAC, Ex. 2 (“Recall Notice”).) As a result, New Chrysler
conducted a recall, (the “N23 Recall”), and issued the Recall Notice to the Vehicle
owners. (FAC at ¶¶ 20, 24; see also Recall Notice & Ex. 3 (Customer Satisfaction
Notification P73).) The Recall Notice characterized the defect as an FDCM software
malfunction that caused the Vehicle to shift into neutral without driver input and could
cause the Vehicle to roll away while parked resulting in a crash. It stated that “Chrysler
will repair your vehicle free of charge (parts and labor). To do this, your dealer will
reprogram the Final Drive Control Module.”
3 	The parties do not dispute that the Vehicles were manufactured by Old Carco and not by New
Chrysler.
4 	The FDCM is a self-contained computing instrument consisting of, among other things, a circuit
board. (FAC at ¶¶ 22, 28.) According to New Chrysler, the purpose of the FDCM feature is to shut down a
Vehicle’s four wheel drive capabilities if the FDCM detects an errant electrical signal. (FCA UC LLC’s
Memorandum of Law in Support of Its Motion to Dismiss Plaintiff’s First Amended Complaint, dated
Nov. 18, 2016 (“FCA Brief”), at 8 (ECF Doc. # 12-2).)
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A. 	This Action
On April 1, 2016, the Plaintiffs filed a class action complaint against New Chrysler
in the Superior Court of California, County of Orange on behalf of “[a]ll persons in the
United States who purchased, own, or sold at a loss, WK Model Vehicles, which have
been reprogrammed by [New Chrysler’s] N23 Recall.” 5 (FAC at ¶ 47.) They contend, in
substance, that the software update installed by New Chrysler in connection with the
N23 Recall caused the “Service 4WD” light to illuminate and disabled certain four wheel
drive capabilities. (FAC at ¶¶ 20-38.) The Plaintiffs allege that the Vehicles were
manufactured with defect-prone FDCM hardware, (FAC at ¶¶ 21-22), and that New
Chrysler issued recall notices to Vehicle owners and performed software updates that
disabled certain functions of the Plaintiffs’ vehicles. (FAC at ¶¶ 24-27.) According to the
Plaintiffs, the proper course of action would have been to replace the FDCM hardware
entirely. (FAC at ¶ 25.) The FAC asserts eleven counts, two of which have since been
dismissed by the Plaintiffs. 6 The table below lists the remaining claims:
Count 	Claim 	Underlying Assertions
I 	Trespass to Chattel
New Chrysler disabled certain features of the
Plaintiffs’ vehicles without their consent
through the N23 Recall. (FAC at ¶¶ 70-90.)
II 	Conversion
New Chrysler disabled certain features of the
Plaintiffs’ vehicles without consent through the
N23 Recall. (FAC at ¶¶ 91-93.)
III 	Fraud
New Chrysler falsely notified the Plaintiffs that
it would repair their vehicles free of charge
while actually intending to gain access to the
5 	The Plaintiffs also propose a separate class for members in California. (FAC at ¶ 48.)
6 	The Plaintiffs voluntarily dismissed Counts IX (Strict Products Liability) and X (Implied
Warranty of Merchantability). (Notice of Dismissal of Ninth and Tenth Causes of Action in Plaintiff’s
First Amended Class Action Complaint Without Prejudice Pursuant to FRCP 41(a)(1)(A)(i), dated June
16, 2016 (ECF Doc. # 1-42).)
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vehicles and disable certain features without
making actual repairs. (FAC at ¶¶ 94-121.)
IV 	Fraudulent Concealment
New Chrysler actively concealed from the
Plaintiffs the disabling effect the N23 Recall
software update would have on certain features
of their vehicles. (FAC at ¶¶ 122-137.)
V Negligent
Misrepresentation
New Chrysler unreasonably failed to test the
functionality of the N23 Recall software update
adequately before representing that the update
would repair the Plaintiffs’ vehicles. (FAC at
¶¶ 138-145.)
VI 	Promissory Estoppel
New Chrysler promised to repair the Plaintiffs’
vehicles, which promise the Plaintiffs
reasonably relied upon to participate in the N23
Recall, but instead disabled certain features of
their vehicles. (FAC at ¶¶ 146-155.)
VII Unfair and Deceptive
Business Practices
New Chrysler, through ill-gotten gains from the
N23 Recall, was able to compete unfairly with
other automobile manufacturers and sellers by
charging lower prices for its goods and services.
(FAC at ¶¶ 156-180.)
VIII 	Negligence
New Chrysler, as a servicer, owed and breached
its duty to repair the Plaintiffs’ vehicles
properly. (FAC at ¶¶ 181-194.)
XI Declaratory and
Injunctive Relief
Plaintiffs seek a judicial declaration that New
Chrysler has not adequately fulfilled its recall
and other general commitments, and request
judicial supervision over the recall process.
(FAC at ¶¶ 225-231.)
New Chrysler removed the action on April 22, 2016 to the United States District
Court for the Central District of California, (Notice of Removal), and moved to dismiss
the case, (FCA US LLC’s Notice of Motion and Motion to Dismiss Plaintiffs’ First
Amended Class Action Complaint; Memorandum of Points and Authorities in Support,
dated May 27, 2016 (ECF Doc. # 1-33)), or alternatively, transfer the case to the United
States District Court for the Southern District of New York for reference to this Court.
(FCA US LLC’s Notice of Motion and Motion to Transfer; Memorandum of Points and
Authorities in Support, dated May 27, 2016 (ECF Doc. # 1-36).) The California District
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Court denied the motion to dismiss without prejudice, and granted the motion to
transfer for the limited purpose of interpreting the Sale Order. (Order Granting Motion
to Transfer, at 4 (ECF Doc. # 1-50).) It observed that neither party had cited any
authority regarding whether the limitations on liability in the Sale Order applied to “a
civil suit for liability stemming from actions taken in response to recall obligations of
parts and vehicles manufactured prior to the bankruptcy.” (Id. at 7.) Following the
transfer to the United States District Court for the Southern District of New York, the
matter was referred to this Court pursuant the Amended Standing Order of Reference,
12 Misc. 00032 (S.D.N.Y. Jan. 31, 2012).
New Chrysler filed the Motion in this Court on November 18, 2016 to dismiss the
FAC. The crux of New Chrysler’s argument is that the Plaintiffs’ claims are premised on
the existence of a pre-Sale manufacturing defect, and are therefore barred by the Sale
Order. Either New Chrysler did not have a duty to fix the defect, or if it did, it fulfilled
that. (FCA Brief at 10-13.) New Chrysler claims that its sole responsibility was to
comply with 49 U.S.C. §§ 30116 - 30120 of the National Traffic and Motor Vehicle Safety
Act (“NTMVSA”) as enforced by the National Highway Traffic Safety Administration
(“NHTSA”), and according to New Chrysler, the Plaintiffs do not dispute its compliance.
(FCA Brief at 1-2, 11, 14.)
In response, the Plaintiffs acknowledge the possible existence of a manufacturing
defect in the Vehicles, but deny that the manufacturing defect is a precondition to their
claims. (Plaintiffs Lynn Grimstad and Mara Manuel’s Opposition to Defendant FCA
US, LLC’s Motion to Dismiss Plaintiffs’ First Amended Complaint & Objection to the
Declaration of James Bielenda and Facts In Motion Not In Evidence; Declaration of
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Sedoo Manu, Esq., dated Dec. 22, 2016 (“Plaintiffs’ Brief”), at 12 (ECF Doc. # 13).)
Instead, their claims are solely based on New Chrysler’s independent tortious conduct—
not on any regulatory violations or assumed obligations to fix the Vehicles—and would
stand irrespective of any manufacturing defect. (Plaintiffs’ Brief at 6, 11-13.) They argue
that New Chrysler’s fault lies not in its failure to fix a purported pre-existing defect, but
in its disabling of features during the recall that were previously functioning in the
Vehicles. (Plaintiffs’ Brief at 5.) The recall post-dated the Sale, and the limitations on
New Chrysler’s liability in the Sale Order and the MTA do not bar the resulting tort
claims alleged in the FAC. (Plaintiffs’ Brief at 12-16.)
New Chrysler filed a reply reiterating its position that the Plaintiffs’ claims are
inextricably intertwined with and necessarily premised on a manufacturing defect.
(FCA US LLC’s Reply In Support of Its Motion to Dismiss Plaintiffs’ First Amended
Complaint, dated Jan. 17, 2017 (“FCA Reply”) (ECF Doc. # 14).) New Chrysler
emphasizes that it only conducted the N23 Recall pursuant to its obligations to the
NHTSA, and did not undertake any additional duties that would establish an
independent relationship with the Plaintiffs. (FCA Reply at 4-5.) Consequently, to the
extent the Plaintiffs are dissatisfied with the N23 Recall, New Chrysler contends that
their recourse is limited to lodging complaints with the NHTSA. (FCA Reply at 5.)
DISCUSSION
A. 	Standards Governing the Motion
To state a legally sufficient claim, “a complaint must contain sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted); accord Bell Atl. Corp. v.
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Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678; accord
Twombly, 550 U.S. at 556. In deciding the motion, “courts must consider the complaint
in its entirety, as well as other sources courts ordinarily examine when ruling on Rule
12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint
by reference, and matters of which a court may take judicial notice.” Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). A complaint is deemed to
include any written instrument attached to it as an exhibit, documents incorporated in it
by reference, and other documents “integral” to the complaint. Chambers v. Time
Warner, Inc., 282 F.3d 147, 152-53 (2d Cir. 2002) (quotations and citations omitted);
accord Int’l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir.
1995); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert.
denied, 503 U.S. 960 (1992).7
B. 	The Limits on New Chrysler’s Liability
The Court has previously examined the Sale at length and the extent to which
New Chrysler assumed the liabilities of Old Carco notwithstanding the “free and clear”
and “no successor liability” provisions in the Sale Order. E.g., Burton v. Chrysler
Group, LLC (In re Old Carco LLC), 492 B.R. 392, 396-98 (Bankr. S.D.N.Y. 2013)
7 	New Chrysler appended a declaration as evidentiary support for certain factual assertions made in
the Motion. (Declaration of James Bielenda in Support of FCA US LLC’s Motion to Dismiss Plaintiffs’
First Amended Complaint, dated Nov. 14, 2016 (“Bielenda Declaration”) (ECF Doc. # 12-2).) The Court
will not consider the Bielenda Declaration in light of the rules that govern the determination of the
Motion.
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(“Burton”); Ricks v. New Chrysler Group LLC (In re Old Carco LLC), Adv. Pro. No. 12–
09801 (SMB), 2013 WL 1856330, at *2-4 (Bankr. S.D.N.Y. May 2, 2013). Except for the
Assumed Liabilities under the MTA, and subject to certain additional limitations, New
Chrysler assumed Old Carco’s existing obligations and liabilities in three situations: (1)
the repair obligations imposed under the factory warranty and any extended warranties;
(2) products liability arising from “accidents”; and (3) liabilities under federal and state
lemon laws. Burton, 492 B.R. at 396-97.
In addition, New Chrysler acknowledged its obligation to comply with the
NTMVSA. (Sale Order at ¶ EE.) In particular, it
agreed to assume as Assumed Liabilities under the Purchase Agreement
and this Sale Order the Debtors’ notification, remedy and other obligations
under 49 U.S.C. §§ 30116 through 30120 of the NTMVSA relating to
vehicles manufactured by the Debtors prior to the Closing Date that have a
defect related to motor vehicle safety or do not to comply with applicable
motor vehicle safety standards prescribed under the NTMVSA. The
Purchaser shall not otherwise be liable for any failure by the Debtors to
comply with the provisions of the NTMVSA.
(Id.)
Paragraph EE referred to Old Carco’s recall obligations under the NTMVSA. The
referenced statutory provisions require New Chrysler, inter alia, to notify owners of
Chrysler vehicles that “the vehicle or equipment contains a defect related to motor
vehicle safety or does not comply with an applicable motor vehicle safety standard
prescribed under this chapter,” 49 U.S.C. § 30118(a); see §§ 30118(c), 30119, and
remedy the defect or noncompliance by repairing the defect, replacing the vehicle with a
comparable vehicle, or refunding an appropriate portion of the purchase price, leaving
the choice of the appropriate remedy to New Chrysler. 49 U.S.C. § 30120(a).
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At the outset, the duty to repair the defective FDCM was not an Assumed Liability
under the MTA, or within the three exceptions in the Sale Order noted earlier. The
Plaintiffs have not relied on any factory or extended warranties, their claims do not arise
from “accidents” within the meaning of the Sale Order, and they have not asserted
lemon law claims. To the contrary, they contend that their vehicles worked well until
New Chrysler executed the N23 Recall. (See Plaintiffs’ Brief at 5 (“Let it be perfectly
clear, that Plaintiffs and virtually 99.999% of Jeep owners did not ever have any roll-
away issues with their fully functional Jeeps prior to the N23 Recall.”).) Accordingly,
they cannot recover from New Chrysler for any defects in their vehicles that existed
prior to the Sale, or compel New Chrysler to fix those defects. The only relevant
obligations New Chrysler assumed with respect to the pre-existing defect was the duty to
remedy the safety defect or noncompliant condition in accordance with the NTMVSA.
Although, the Plaintiffs attempt to draw a bright line between claims based on a
pre-existing manufacturing defect that are barred by the Sale Order and post-Sale
claims arising from the N23 Recall that they say are not, their pleadings fudge the
distinction. The Plaintiffs repeatedly charge that New Chrysler failed to repair a pre-
existing defect that made the computer software susceptible to fracturing. The FAC
alleges in several places that “[r]ather than replace the affected hardware in the FDCM,
or replace the FDCM model itself with a revised model, Defendant opted for a relatively
inexpensive option, and it designed, developed, and implemented a software update to
upload to the existing, fracture prone, FDCMs.” (FAC at ¶ 25; accord ¶¶ 99, 158.) And
the third sentence in their brief sums up their claim in a similar way:
Plaintiffs allege that Defendant recalled class vehicles, and knowingly
performed a software patch to disable their four wheel low/lock and
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transfer case neutral capability, rather than correct a physical
susceptibility to fractures in their computers (which could cause an
inadvertent roll-away condition).
(Plaintiffs’ Brief at 1 (emphasis added).)
To be clear, New Chrysler did not assume an obligation under the Sale Order to
“replace the FDCM model itself with a revised model,” “correct a physical susceptibility
to fractures in their computers,” or more generally, fix the defect, and any such claim is
barred by the Sale Order. Instead, New Chrysler assumed obligations under the
NTMVSA to remedy safety defects and noncompliant conditions within the purview of
that law, and the method of remedying the defect ‒ repair, replace or refund ‒ was
within New Chrysler’s sole discretion. The NTMSVA, in this regard, does not give rise to
a private right of action. Handy v. General Motors Corp., 518 F.2d 786, 788 (9th Cir.
1975) (“Congress did not intend to create private rights of action in favor of individual
purchasers of motor vehicles when it adopted the comprehensive system of regulation to
be administered by the NHTSA.”); Rosen v. J.M. Auto Inc., No. 07-61234-CIV, 2008 WL
9901501, at *2 (S.D. Fla. Mar. 6, 2008) (“[T]here is no private right of action under the
Safety Act.”); Tires Prods. Liab. Litig. v. Bridgestone/Firestone, Inc. (In re
Bridgestone/Firestone, Inc.), 256 F. Supp. 2d 884, 900 (S.D. Ind. 2003) (“[E]very court
addressing this issue has held that the Safety Act does not provide a private right of
action.”). If New Chrysler satisfied its obligations under the NTMVSA, and undertook
no other duties post-Sale, it is not liable to the putative class for the defective FDCM
installed by Old Carco.
This does not, however, automatically exonerate New Chrysler from all of the
possible consequences of the recall work. For example, if New Chrysler dented,
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scratched or damaged a Vehicle in the course of the recall, the NTMSVA does not, I
would think, protect it from liability. Here, the thrust of the Plaintiffs’ claim is that New
Chrysler created a new defect when it disabled the four-wheel drive capabilities of their
Vehicles in order to remedy the pre-existing safety defect. The disabling act occurred
post-Sale. Furthermore, New Chrysler represented in the Recall Notice that it would
“repair the vehicle.” As a result, the owners delivered the Vehicles to New Chrysler to
perform the recall work. Whether the “repair” in the Recall Notice referred simply to
remedying the safety defect identified therein or implied that the Vehicle would
thereafter function as originally intended without the dangerous inadvertent shift to
neutral is unclear.
The parties have not addressed whether the disabling of the four-wheel drive
capability during the recall as alleged by the Plaintiffs gave rise to an independent claim
under non-bankruptcy law, or is barred by the NTMSVA. Moreover, such a question is
beyond the scope of the transfer order. I do not mean to suggest that such a claim is
cognizable, or that the Plaintiffs, as opposed to the Secretary of Transportation, would
have a right to assert it. Rather, I conclude that such a claim, if it exists, is not barred by
the Sale Order because the duty, if any, its breach and the resulting damage would have
arisen as a result of post-Sale conduct.
Accordingly, the FAC is dismissed to the extent that it alleges that New Chrysler
failed to fix a pre-Sale defect in the Vehicles, but is otherwise denied without prejudice
to the parties’ respective rights to raise the issues discussed above. Because the answers
to these questions do not implicate the Sale Order or the Old Carco bankruptcy, I
respectfully defer their resolution to the transferor court.
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Settle order on notice consistent with this opinion which includes a provision
remanding the civil action to the transferor court.
Dated: New York, New York
April 28, 2017
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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