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From Banking and Finance Law Daily, January 22, 2015

JP Morgan loses secured collateral with erroneous filing

By Lisa M. Goolik, J.D.

Following a determination by the Delaware Supreme Court that a termination statement is effective so long as a secured lender reviews and knowingly approves the filing, the U.S. Court of Appeals for the Second Circuit has held that a termination statement that mistakenly identified for termination a security interest that JPMorgan Chase Bank, N.A. (JPMorgan) did not intend to terminate was effective to terminate the security interest. As a result, JPMorgan, serving as administrative agent for a syndicate of financial institutions, did not have a perfected security interest in the collateral, and the obligation was, therefore, unsecured (In re Motors Liquidation Company, Jan. 21, 2015, per curiam).

Background. The facts remain the same. The debtor, General Motors, had obtained approximately $300 million in financing from a syndicate of financial institutions. The obligation was secured by liens on 12 pieces of real estate. The lenders’ security interests were perfected by filing UCC-1 financing statements. JPMorgan served as administrative agent for the transaction and was identified on the filings as the secured party of record.

In September 2008, General Motors contacted its counsel, Mayer Brown LLP, and requested that Mayer Brown prepare the documents necessary for General Motors to repay the obligation and terminate the secured lenders’ interests in the property. An associate of the firm prepared UCC-3 termination statements to release the liens; however, the associate mistakenly included a UCC-3 termination statement releasing a lien securing an unrelated term loan facility. The documents were all executed and filed with the Delaware Secretary of State.

After General Motors filed for Chapter 11 reorganization, counsel to JPMorgan notified the Committee of Unsecured Lenders to inform it that a UCC-3 termination statement had been inadvertently filed relating to the term loan collateral. The Committee subsequently commenced an action against JPMorgan, seeking a determination that, despite the mistake, the UCC-3 was nonetheless effective to terminate the term loan security interest and that most of the indebtedness under the term loan was therefore unsecured.

The bankruptcy court concluded that the UCC-3 filing was unauthorized and therefore not effective to terminate the security interest and immediately certified the case for direct appeal to the Second Circuit.

Because the issue presented a matter of first impression under Delaware law, the Second Circuit certified the following question to the Delaware Supreme Court: “For a UCC-3 termination statement to effectively extinguish the perfected nature of a UCC-1 financing statement, is it enough that the secured lender review and knowingly approve for filing a UCC-3 purporting to extinguish the perfected security interest, or must the secured lender intend to terminate the particular security interest that is listed on the UCC-3? (see Banking and Finance Law Daily, June 18, 2014).

Delaware Supreme Court. The Delaware Supreme Court concluded that, so long as a secured lender reviews and knowingly approves for filing a UCC-3 termination statement purporting to extinguish a perfected security interest, the termination statement is effective (see Banking and Finance Law Daily, Oct. 20, 2014).

“The Delaware UCC contains no requirement that a secured party that authorizes a filing subjectively intends or otherwise understands the effect of the plain terms of its own filing,” wrote the court. Moreover, the court stated, sophisticated transacting parties should bear the burden of ensuring that a termination statement is accurate when filed.

“In the normal course of business, which is what the Delaware UCC embraces as appropriate policy, a party who causes a document to be executed and filed on its behalf is expected to understand what the filing says, the effect the filing will have, and that its own act of causing the document to be executed and filed will signal to others that the filing party subjectively intends for the filing to have the effect resulting from plain terms,” the court concluded.

Authorized filing. On the matter’s return to the Second Circuit, JPMorgan argued that because it never instructed anyone to file the UCC-3 in question, the termination statement was unauthorized and ineffective.

However, the Second Circuit wrote, what JPMorgan intended to accomplish was distinct from the actions it authorized to be taken on its behalf. Mayer Brown submitted all of the documents, including the UCC-3 termination at issue, to JPMorgan and its counsel for review. JPMorgan and its counsel made repeated manifestations to Mayer Brown demonstrating that JPMorgan and its counsel knew Mayer Brown was going to file the termination statement and that JPMorgan reviewed and assented to the filing of that statement. “Nothing more is needed,” the court concluded.

The case is No. 13-2187.

Attorneys: Norman M. Powell, Elena C. Norman, John J. Paschetto, and Richard J. Thomas (Young Conaway Stargatt & Taylor, LLP) and Eric B. Fisher, Jeffrey Rhodes, Barry N. Seidel, and Katie L. Weinstein (Dickstein Shapiro LLP) for the Official Committee of Unsecured Creditors of Motors Liquidation Company. Gregory P. Williams, Brock E. Czeschin, and Susan M. Hannigan (Richards, Layton & Finger, P.A.), John M. Callagy, Nicholas J. Panarella, Martin A. Krolewski (Kelley Drye & Warren LLP), and Steven O. Weise (Proskauer Rose LLP) for JPMorgan Chase Bank, N.A.

Companies: General Motors; JPMorgan Chase Bank, N.A.

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