Motors Liquidation Co. v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.)

576 B.R. 325

IN RE: MOTORS LIQUIDATION COMPANY, f/k/a General Motors Corporation, et al., Debtors.

Motors Liquidation Company Avoidance Action Trust, by and through the Wilmington Trust Company, solely in its capacity as Trust Administrator and Trustee, Plaintiff,

v.JPMorgan Chase Bank, N.A., et al., Defendants.

Case No. 09–50026 (MG) (Jointly Administered)

Adversary Proceeding Case No. 09–00504 (MG)

United States Bankruptcy Court, S.D. New York.

Signed September 26, 2017

As corrected October 4, 2017

WACHTELL, LIPTON, ROSEN & KATZ, Attorneys for Defendant and Cross–Claim Defendant JPMorgan Chase Bank, N.A., 51 West 52nd Street, New York, New York, 10019 By: Harold S. Novikoff, Esq., Marc Wolinsky, Esq., Amy R. Wolf, Esq., Emil A. Kleinhaus, Esq., Carrie M. Reilly, Esq., C. Lee Wilson, Esq., KELLEY DRYE & WARREN LLP, 101 Park Avenue, New York, New York 10178, By: John M. Callagy, Esq., Nicholas J. Panarella, Esq.,

BINDER & SCHWARTZ LLP, Attorneys for Plaintiff, 28 W. 44th Street, Suite 700, New York, New York 10036–4039, By: Eric B. Fisher, Esq., Neil S. Binder, Esq., Lindsay A. Bush, Esq., Lauren K. Handelsman, Esq.

MEMORANDUM OPINION REGARDING FIXTURE CLASSIFICATION AND VALUATION

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

TABLE OF CONTENTS

I. Introduction...339

A. Fixtures ...340

B. Valuation...341

II. Background...342

A. Brief History of Old GM...342

B. Events Leading to Bankruptcy...342

1. Term Loan Agreement and Collateral Agreement...342

2. Financial Difficulty at GM and the Automotive Industry Generally...344

3. Failed Efforts to Engage with the Private Market...344

4. Government Intervention...344

C. GM's Bankruptcy, the DIP Financing Order, and the 363 Sale...345

D. History of this Action...346

1. The Original Complaint and Summary Judgment Motions...346

2. The Amended Complaint...346

E. The Court's Site Visit to LDT and Warren Transmission...347

F. GM's eFAST Ledger...348

III. Factual Background Regarding Relevant GM Plants...348

A. GM Lansing Delta Township...348

1. The LDT Plant...348

2. The Eaton County Fixture Filing...350

B. Warren Transmission Plant Overview...350

C. The Lean Agile Flex System...352

D. Defiance Foundry Overview...352

E. MFD Pontiac and Powertrain Engineering...354

F. The Forty Representative Assets...355

1. Presses...355

2. Conveyor Systems...359

3. Robots...362

4. Assets Located at the Warren...364

5. Assets Located at the Defiance Foundry...368

6. Assets Located in the Paint Shop...372

7. Miscellaneous Assets Located at Lansing Delta Township...374

8. Miscellaneous Assets...376

9. The Central Utility System: Representative Asset No. 11...378

10. Assets the Trust Concedes are Fixtures...381

IV. Legal Standards Regarding Fixtures...382

A. Michigan's Three Part Fixture Test...382

1. Attachment...382

2. Adaptation...383

3. Intent...383

B. Ohio's Three–Part Fixture Test...385

1. Attachment...385

2. Adaptation...385

3. Intent...387

C. Burden of Proof...387

D. The Issue Whether, Under Ohio and Michigan law, in order to Satisfy the Adaptation Prong, the Asset in Question Benefits the Business or Realty...387

V. Conclusions of Law Regarding Preliminary Issues...389

A. The "Relatedness" of the MFD Pontiac and Powertrain Engineering Facilities...389

1. The Defendants' Contentions...389

2. The Plaintiff's Contentions...389

3. Discussion...389

4. Conclusion...390

B. The Timeliness of the Trust's Challenge to the Eaton–County Fixture Filing...390

1. The Defendants' Contentions...390

2. The Plaintiff's Contentions...391

3. Legal Standard...391

4. Discussion...392

5. Conclusion...394

VI. Guiding Principles in Fixture Determinations...395

A. Concrete Pits, Trenches, Slabs, or Specialized Foundations are Strong Indications that an Asset is a Fixture...395

B. An Asset's Integration With Other Assets and the Assembly Process...396

C. Where There is a Deficiency in Objective Evidence Regarding Assets That are No Longer In Place, Proving that an Asset is a Fixture Will Be Difficult...397

D. Preliminary Discussion...397

1. There is a Presumption of GM's Intent for Permanence...3972. Goesling's Movement of Assets is of Little Probative Value Here... 398

3. Goesling's Secondary Market Analysis is also of Little Probative Value... 399

4. Classification of Assets as Personal Property for Tax Purposes is of Little Probative Value...400

VII. Conclusions of Law Regarding the 40 Representative Assets...400

A. The Presses...400

1. The Leased Presses Are Not Fixtures...400

2. The Remaining Three Presses are Fixtures...401

B. The Conveyor Systems...402

1. The Modularity of the Conveyor Systems Does Not Suggest that the Conveyors are Not Fixtures...402

2. The Conveyors are Attached to the Realty...403

3. The Conveyors are Highly Integrated into the Assembly Process...403

C. The Robots...405

1. Representative Asset Nos. 39 and 12...405

2. Representative Asset No. 22...406

D. Individual Assets Located Off the Production Line...407

1. Representative Asset No. 8...407

2. Representative Asset No. 10...407

3. Representative Asset No. 19...408

E. The Warren Transmission Assets...408

1. Representative Asset No. 14...408

2. Representative Asset No. 24...409

3. Representative Asset No. 25...410

4. Representative Asset No. 36...410

5. Representative Asset No. 23...411

6. Representative Asset No. 1...411

F. The Paint Shop Assets...412

1. Representative Asset No. 5...413

2. Representative Asset No. 9...414

G. The Foundry Assets...414

1. Representative Asset No. 27...414

2. Representative Asset No. 38...414

3. Representative Asset No. 40...415

H. Representative Asset No. 15–The Soap, Mount and Inflate System...416

I. Miscellaneous Assets...416

1. Representative Asset No. 13...416

2. Representative Asset No. 34...417

3. Representative Asset No. 37–the Courtyard Enclosure...417

J. The CUC...418

1. GM was Permitted to Grant a Lien on its Residual Interest...418

2. The Structure Housing the CUC Assets is Real Property...419

3. The CUC Systems are Fixtures...419

K. The Software...420

L. Holding Furnace, Representative Asset No. 28...421

M. The Court Need Not Make a Determination on Assets that the Parties Concede are or are not Fixtures...422

VIII. Legal Standards: Valuation...422

A. Assets Must Be Valued According to Their Proposed Disposition as of the Valuation Date...423

1. Market Value Does Not Include the Amount of any Government Subsidy...424

B. The Cost Approach is Routinely Used by Courts to Value Collateral...424

C. The Bankruptcy Code Affords Significant Flexibility to the Court in Determining the Proper Method of Valuation...425

IX. Findings of Fact: Valuation...425

A. The KPMG Report...425

1. KPMG's Valuation Process...426

2. Defendants' Experts...432

3. Plaintiff's Experts...434

B. The Expert Appraisals...436

1. Goesling: Orderly Liquidation Value in Exchange...436

2. Chrappa: Fair Market Value in Continued Use with Assumed Earnings...440

3. Goesling: Orderly Liquidation Value in Place...441

C. KPMG's Final Values are a Reliable Valuation of the Assets that were Sold to New GM...442

D. Goesling's Orderly Liquidation Value in Exchange Analysis is a Reliable Valuation of the Assets that were not Sold to New GM...443

X. Conclusions of Law: Valuation...444

A. The Assets Sold to New GM Should be Valued According to a Going Concern Premise of Value...444

1. The Proposed Disposition or Use of the Representative Assets Was to Be Sold to New GM as Part of a Going Concern Business...444

2. The Public Policy Subsidy Should Be Excluded from the Valuation...445

3. The KPMG Final Fair Value Amounts Are the Best Available Valuation of the Assets Sold to New GM...449

B. The Assets Not Sold to New GM Should Be Valued According to Goesling's OLVIE Analysis...449

XI. Conclusion...450

Table A: Specific Conclusions of Value for Each Asset

I. INTRODUCTION ¹

The Defendants are a group of Old GM's creditors referred to as the Term Lenders, who initially held a security interest in approximately $1.5 billion of Old GM's assets, with a perfected security interest resulting from a UCC–1 Statement filed in Delaware. In earlier stages of this litigation (described below), the perfected security interest of the Term Lenders resulting from the Delaware UCC–1 filing was terminated when a UCC–3 Termination Statement was mistakenly filed in Delaware. Despite the filing of the UCC–3 Termination Statement in Delaware, the Defendants allege that, at the time of the 363 Sale they held a perfected security interest in over 200,000 fixtures at GM plants because of twenty-six Fixture Filings in counties where disputed assets were located. The Defendants argue that these fixtures should be valued according to their replacement cost new less depreciation, as part of a going-concern business. The Avoidance Action Trust, on behalf of Old GM's unsecured creditors, disputes whether most of these assets are indeed fixtures, and if they were, it argues that they should be valued at their liquidation value.

It is impractical, to say the least, to litigate issues with respect to each of the over 200,000 disputed assets. Therefore, in pretrial proceedings, the Court directed the parties to designate forty representative assets to be the subject of this trial. The Court indicated that it would issue an opinion regarding which assets are fixtures and how to value them. The parties agreed that after the issuance of this Opinion, they would attempt to settle as to the remaining disputed assets. In an effort to provide guidance to the parties in resolving the remaining disputes, the Court includes extensive factual detail in this Opinion. Where possible, the Court has articulated broad principles of both fixture and valuation law to serve as guiding principles for the more than 200,000 assets that remain in dispute.

A. Fixtures

The representative forty assets were located at General Motors facilities in Michigan and Ohio. Disputed assets were located in other states as well, but the disagreement between the Plaintiff and Defendants touches on the fundamental nature of manufacturing assets located at GM's plants: which ones were "fixtures" that remained subject to the Term Lenders' perfected security...