Interpretation ID: 2404y
Assistant General Counsel
Chrysler Motors Corporation
l2000 Chrysler Drive
Highland Park, MI 48288-l9l9
Dear Mr. Goldfarb:
This responds to your letter concerning the fuel economy implications of Chrysler's acquisition of American Motors Corporation (AMC). You stated that you were writing to obtain confirmation of Chrysler's "understanding" that fuel economy credits earned by AMC, for exceeding light truck standards in model years l984-86, are now available to Chrysler. You enclosed a memorandum of law explaining your position.
As discussed below, it is our opinion that even if Chrysler is considered the "successor" to AMC under the Motor Vehicle Information and Cost Savings Act, that fact would not result in the conclusion that credits earned, prior to the acquisition, by AMC for exceeding a fuel economy standard could be applied to shortfalls incurred by Chrysler's pre-acquisition fleet, under the three-year carryforward and carryback provisions of the Act and regulations. However, credits earned by AMC could be applied to the pre-acquisition AMC fleet and to the post-acquisition Chrysler/AMC fleet. Also, credits earned by post-acquisition Chrysler/AMC could be applied to the pre-acquisition Chrysler fleet and/or AMC fleet, provided that double counting does not take place. Other issues raised by your letter and legal memorandum are also addressed below.
Section 50l(8) of the Cost Savings Act defines "manufacturer" as follows:
The term "manufacturer" means any person engaged in the business of manufacturing automobiles. The Secretary shall prescribe rules for determining, in cases where more than one person is the manufacturer of an automobile, which person is to be treated as the manufacturer of such automobile for purposes of this part. Such term also includes any predecessor or successor of such a manufacturer to the extent provided under rules which the Secretary shall prescribe.
One issue raised by Chrysler's memorandum is whether Chrysler is the successor of AMC. The term "successor," as used in the definition of "manufacturer" quoted above, is not defined in the statute or in agency regulations. Under general principles of corporate law, the term "successor" ordinarily refers to a corporation which, through amalgamation, consolidation, or other legal succession, becomes invested with the rights and assumes the burdens of another corporation.
Based on our general understanding of Chrysler's acquisition of AMC, we have no reason to doubt your conclusion that Chrysler is the successor of AMC. However, your letter does not provide specific facts concerning the structure of Chrysler's acquisition of AMC or whether Chrysler is invested with the rights and has assumed the burdens of AMC. In the absence of such facts, we are unable to provide an opinion that Chrysler is the successor of AMC. However, for purposes of this letter, it will be assumed that a factual showing can be made that Chrysler is the successor to AMC.
It should be noted that the mere fact that one corporation acquires another corporation does not necessarily mean that the acquiring corporation is a "successor." In the context of the Cost Savings Act, manufacturer A may be wholly owned by manufacturer B, yet still be a manufacturer itself. Under sections 503(a) and (c), however, the automobiles of such related manufacturers would be combined for purposes of calculating average fuel economy.
Another issue raised by Chrysler's memorandum is whether Chrysler and AMC became the same manufacturer for fuel economy purposes for model year l987. According to the memorandum, Chrysler agreed to acquire AMC in the spring of l987, and the transaction closed on August 6, l987. The memorandum concludes that Chrysler and AMC became the same manufacturer for fuel economy purposes in model year l987.
Based on the above facts, it is our opinion that all of Chrysler's and AMC's vehicles should be treated as manufactured by the same manufacturer for model year l987. Fuel economy standards apply to passenger automobiles manufactured by a manufacturer, for a particular model year. See section 502(a)(l). Moreover, average fuel economy is calculated based on the total number of passenger automobiles manufactured in a given model year by a manufacturer. See section 503(a)(l). Under section 503(c), the term "passenger automobiles manufactured by a manufacturer" includes all automobiles manufactured by persons who control, are controlled by, or are under common control with, such manufacturer." Since Chrysler controlled AMC prior to the end of the l987 model year, and since fuel economy standards apply to particular model years as a whole and not to separate parts of a model year, it is our opinion that all of the vehicles produced by both Chrysler and AMC for model year l987 shall be treated as if manufactured by the same manufacturer, i.e., placed into one fleet. Otherwise, one or both of the manufacturers would have two separate CAFE values, pre-acquisition (or pre-control) and post-acquisition (or post-control), for the same model year.
We will now address generally the issue of how credits may be used where one manufacturer is the successor of another. In discussing the issue, we will refer to the following hypothetical example: A and B are both car manufacturers. After consolidation, A is the only surviving corporation and is invested with the rights and assumes the burdens of B. Thus, A is the "successor" of B.
While this example and subsequent discussion is for passenger automobiles, the relevant requirements concerning the earning and availability of credits are essentially identical for passenger automobile standards and light truck standards. Compare section 502(l)(1)(B) and 49 CFR Part 535, and see 45 FR 83233-36, December l8, l980. Thus, our analysis for passenger automobile standards is also relevant to light truck standards.
Section 502(l)(1)(B) states:
Whenever the average fuel economy of the passenger automobiles manufactured by a manufacturer in a particular model year exceeds an applicable average fuel economy standard . . ., such manufacturer shall be entitled to a credit calculated under subparagraph (C), which--
(i) shall be available to be taken into account with respect to the average fuel economy of that manufacturer for any of the three consecutive model years immediately prior to the model year in which such manufacturer exceeds such applicable average fuel economy standard, and
(ii) to the extent that such credit is not so taken into account pursuant to clause (i), shall be available to be taken into account with respect to the average fuel economy of that manufacturer for any of the three consecutive model years immediately following the model year in which such manufacturer exceeds such applicable average fuel economy standard.
We note first that credits earned by a particular manufacturer are only "available to be taken into account with respect to the average fuel economy of that manufacturer," for any of the three model years before, or after, the model year in which the credits are earned. (Emphasis added.) In the example set forth above, B is no longer a manufacturer under the Cost Savings Act. (Indeed, it is no longer a "person" under section 50l(8).) Thus, in the absence of some provision concerning "successors," any unused credits that B had earned prior to the consolidation would expire unused, since the only manufacturer to which they are available no longer exists. However, for some purposes B continues to exist as part of A, its "successor."
Section 50l(8)'s definition of "manufacturer" does not provide that the term "manufacturer" necessarily includes any precedessor or successor but instead provides that the term does so "to the extent provided under rules which the Secretary shall prescribe." This provision was added by the Automobile Fuel Efficiency Act of l980 as a conforming amendment to the section concerning modification of local content requirements to encourage domestic production of fuel efficient automobiles and not to the section concerning credits. The legislative history does not provide any indication as to why the provision was added, and, to date, NHTSA's administration of the statutory provisions concerning modification of the local content requirements has not turned up a situation for which such rules would be relevant. Should rules be issued under section 50l(8), NHTSA would do so by notice-and-comment rulemaking, taking account of the purposes of that section and the statutory scheme as a whole.
Notwithstanding the absence of rules, we do not believe that Congress intended to require the forfeit of a manufacturer's unused credits in a situation where that manufacturer's substance continues to exist as part of a "successor." Thus, taking account of section 50l(8) and the statutory scheme as a whole, we conclude that, in the example set forth above, B can be deemed as continuing to exist as part of A, from the time of succession.
This conclusion does not, however, permit the general integration of A's and B's credits and shortfalls. Under section 502(l)(1)(B), credits earned by a particular manufacturer are only "available to be taken into account with respect to the average fuel economy of that manufacturer." Since B's existence as part of A only dates from the time of succession, B is not the same manufacturer as A prior to the time of succession. Thus, any credits earned by B would only be available to offset A's shortfalls for the model years during which B exists as part of A, since it is only at that time that the credits earned by B and applied to A can be considered to be taken into account with respect to the average fuel economy of "that manufacturer." Similarly, the only credits earned by A which would be available to B would be those credits earned during the time when B exists as part of A.
The general integration of A's and B's credits would be inconsistent with the basic structure of section 502(l)(l). Assume, for example, that A and B are separate manufacturers for model years 1 through 6, and A is the successor of B for model year 7. If general integration of credits were permitted, credits earned by B in model year 4 could be applied to A's CAFE for model years l-6, as well as model year 7. However, the structure of section 502(l)(l) does not permit this result. Under paragraph (B)(i), any credits earned by B in model year 4 are available to be carried back with respect to B's CAFE for any of model years l, 2 and 3. To the extent that such credits are not so used, paragraph (B)(ii) makes those credits available to be carried forward with respect to B's CAFE for any of model years 5, 6 and 7. In order for credits earned by B in model year 4 to be applied to A's CAFE for model years l-6, B's credits would first have to be carried forward to model year 7 (the model year where A is B's successor) and then be carried back to model years l-6 (for application to A's CAFE), a process which has no statutory basis.
We will now apply the general analysis discussed above to the particular facts cited in Chrysler's letter. Prior to MY l987, Chrysler and AMC were two separate manufacturers. Chrysler acquired AMC during MY l987, and became the "successor" to AMC at that time. Under section 502(l)(1)(B), credits earned by a particular manufacturer are only "available to be taken into account with respect to the average fuel economy of that manufacturer." Since AMC's existence as part of Chrysler only dates from MY l987, AMC was not the same manufacturer as Chrysler prior to MY l987. Thus, any credits earned by AMC would only be available to Chrysler to offset CAFE shortfalls incurred in the model years during which AMC exists as part of Chrysler, i.e., MY l987 and thereafter, since it is only at that time that the credits earned by AMC and applied to Chrysler can be considered to be taken into account with respect to the average fuel economy of "that manufacturer." Similarly, the only credits earned by Chrysler which would be available to AMC would be those credits earned during the time when AMC exists as part of Chrysler, i.e., credits earned in MY l987 and thereafter.
Chrysler's memorandum argues that section 502(l) must mean more than that the predecessor's credits can be carried forward and used for the successor firm for l987 and subsequent years. The memorandum states:
"Manufacturer" is a defined term, and it must be read in light of its definition. The only satisfactory reading of this provision is that the reference to "that manufacturer" includes its predecessors and successors--that is, the successor firm may use the credits available to it for calculating its own fuel economy for l987 and subsequent model years or that of its predecessors, including pre-acquisition Chrysler, for the years before l987. On any other reading, the definition of "manufacturer" would be meaningless, and the term would mean different things in different places in the Act.
Chrysler also asserts that its approach would represent a "literal" reading of the Act, and that the agency should not seek to import into the carryover scheme a qualification on the use of credits that Congress did not impose.
We believe that Chrysler's analysis is incorrect since it does not take into account fundamental differences in the timing of the earning of the credits and of Chrysler's becoming a successor. Chrysler was not the successor to AMC during the model years prior to Chrysler's acquisition of AMC in which AMC earned credits. In MY l984, for example, Chrysler and AMC were two separate manufacturers.
In particular, Chrysler is incorrect in concluding that AMC's l984-l986 credits can be applied to Chrysler for model years before l987. Chrysler cannot succeed to rights greater than AMC possessed at the time of the acquisition. As of its acquisition in MY l987, AMC's "rights" as to its MY 1984 credits were to apply them to its own fleet in MY l981-l983 and l985-l986 (since it had no successor in that time period) and to apply them to itself/successor in MY l987.
In construing the Act, we believe that it is appropriate and necessary to read its provisions in the correct temporal context. Thus, we do not believe that the term "manufacturer" means different things in different places in the Act, but instead recognize that corporate relationships, and thus manufacturer identities, may differ for different model years.
Moreover, we believe that Chrysler's memorandum itself construes the term "manufacturer" differently in different parts of the Act. As indicated above, section 502(l)(l)(B) states that "whenever the average fuel economy of the passenger automobiles manufactured by a manufacturer in a particular model year exceeds an applicable average fuel economy standard . . ., such manufacturer shall be entitled to a credit . . . ." Emphasis added. In concluding that Chrysler is entitled to AMC's l984 credits, Chrysler's memorandum apparently reads "manufacturer" to mean "AMC only" the first time it is used in this section, and "AMC and its future successors" the second time it is used.
We also note that Chrysler's current position would lead to absurd results. For example, if the term "manufacturer" were consistently read to include future successors, Chrysler's acquisition of AMC would presumably require calculation of new CAFE values, for the combined Chrysler/AMC fleet, for each model year all the way back to the beginning of the CAFE program. See section 503(a)(l). Moreover, if a company which paid penalties in a particular model year were later acquired by another company which had earned credits in that same model year, but never used the credits, under Chrysler's retroactive successorship interpretation NHTSA could be required to refund those penalties, even if the acquisition took place ten or twenty years later. The Cost Savings Act was designed to encourage manufacturers to improve their CAFE performance; not to allow them to avoid penalties for non-compliance by acquiring companies that had, independently, earned credits in prior years.
Finally, we reject the argument that we are importing into the carryover scheme a qualification on the use of credits that Congress did not impose. Congress expressly chose to limit the ability to use credits to the manufacturer that exceeded an applicable average fuel economy standard and thereby earned the credits. Credits earned by AMC are only available to Chrysler for the model years during which AMC exists as part of Chrysler, since it is only at that time that the credits earned by AMC can be considered as being "taken into account with respect to the average fuel economy" of the manufacturer that earned them.
Sincerely,
Stephen P. Wood Acting Chief Counsel ref:CSA d:4/4/90