By Paul Hodnefield, Esq.
In 2010, the Roswell Capital Partners case created quite a stir when a federal court stated that all termination statements were effective, even if filed by mistake or without authorization, because searchers had to be able to rely on the public record. The court went on to say that it was the secured party’s responsibility to monitor its filed UCC records for unauthorized terminations.
The Roswell decision left open the question of whether a secured party could have any control over its own financing statements. It appeared that anyone could effectively terminate a financing statement at any time and leave the lender unperfected.
Now, secured parties can breathe a bit easier. A recent court decision left little doubt that a termination statement has no effect unless the secured party of record authorized the filing. The case is In re: Motors Liquidation Company, 2013 Bankr. LEXIS 814 (Bankr. S.D.N.Y. March 1, 2013).
The debtor in this case was General Motors Corporation (“GM”). In 2001, GM borrowed $300 million from a syndicate of lenders to finance the acquisition of properties as party of a synthetic lease arrangement (the “Synthetic Lease”). JPMorgan Chase (“JPMC”) served as the administrative agent for the syndicate participants. JPMC filed several financing statements with various counties and with the Delaware Secretary of State to perfect the syndicate’s security interests.
In November 2006, GM and its Saturn Corporation subsidiary took out an unrelated term loan with an entirely different syndicate of lenders for $1.5 billion (the “Term Loan”). As with the Synthetic Lease, JPMC was named as administrative agent for the lenders in the Term Loan syndicate. The loan was secured by a security interest in all of GM’s equipment and fixtures at 42 facilities across the United States. When the loan closed, JPMC perfected the syndicate’s security interest by filing 28 financing statements, including two with the Delaware Secretary of State—one for GM and the other for Saturn Corporation.
In 2008, GM notified JPMC that it intended to pay off the outstanding balance of the Synthetic Lease. Lawyers for GM and JPMC drew up the “Synthetic Lease Termination Agreement” and created a closing checklist. The Termination Agreement provided that the administrative agent (JPMC) granted GM the authority to terminate the financing statements related to the Synthetic Lease.
The Debtor’s law firm conducted a search for financing statements filed against GM related to the Synthetic Lease. However, one of the disclosed financing statements was not in fact filed in connection with the Synthetic Lease. It was the financing statement filed with the Delaware Secretary of State to perfect the Term Loan security interest in GM’s assets. No one caught the error.
Later, the law firm prepared a batch of UCC3 termination statements for the Synthetic Lease. However, the batch also included a termination statement for the Delaware Term Loan financing statement that was included in the search results.
The law firm then sent the batch of termination statements to a third-party vendor for filing. The instructions provided to the vendor did not identify the unrelated termination statement as one of the records to be filed. Nevertheless, the vendor filed the unrelated termination statement along with the others. None of the parties involved in the transaction, nor their attorneys or vendors, ever intended to authorize the any filing related to the Term Loan.
On June 1, 2009, GM filed for bankruptcy. Only then did the parties realize that a termination statement had been filed for the financing statement related to the Term Loan. The Official Committee of Unsecured Creditors (the “Committee”) then filed an adversary action against the Term Loan syndicate of lenders asking the court to determine that the Term Loan financing statement had been terminated and, therefore, the debt should be treated as unsecured.
The court first reviewed the applicable UCC rules for effectiveness and concluded that a termination statement is effective only to the extent that the secured party has authorized it. Conversely, if the secured party did not authorize the filing, the termination statement is ineffective. Most importantly, the court noted that those rules applied “irrespective of the extent to which the public record tells the world that the initial financing statement is no longer in effect.”
The court then established that law other than UCC Article 9 would decide what constituted the required authorization. Taking direction from the official comments to Article 9, the court turned to the law of agency to determine whether JPMC had authorized the filing of the Term Loan termination statement. After a lengthy analysis of the law of agency applied to the facts, the court concluded that JPMC had not authorized the termination statement and therefore it was ineffective.
The Committee claimed that a termination statement, even if filed by mistake or without authorization, was nevertheless effective to terminate the security interest. To support its position, the Committee relied heavily on Roswell and several earlier cases decided prior to 2001, when Revised Article 9 took effect.
The court, however, refused to follow the cases cited by the Committee. The cases decided before 2001 all involved a situation where the secured party had itself signed and filed a termination statement. Thus, there was no issue regarding authorization, which was the issue before the court.
The court also declined to follow the post-2001 cases cited by the Committee because they relied on the old cases without addressing the changes to the UCC brought about by Revised Article 9. Most importantly, the court examined at length and then expressly rejected both the reasoning and holding in Roswell that has caused so much concern for secured parties.
According to the court, the Roswell court erroneously believed that notice filing applied only to financing statements, not termination statements. The term “financing statement,” as defined in Article 9, clearly includes not just the initial financing statement, but any filed record relating to the initial financing statement.
Moreover, the court pointed out that even if secured parties had a duty to monitor their UCC filings to protect against unauthorized terminations, there was nothing the party could do if it discovered one. That simply did not make sense. Consequently, the court did not agree with the Committee and ruled in favor of JPMC and the Term Loan syndicate.
The important thing to take away from this case is that the effect of a termination statement depends on the secured party’s authorization, not the mere act of filing. The Motors Liquidation case clarifies that nobody can effectively terminate a financing statement without the secured party’s consent.
That is not to suggest that secured parties no longer need to worry about unauthorized termination statements. They do. Unauthorized termination statements can lead to expensive legal fees when a debtor defaults or files for bankruptcy, even if the secured party prevails. Therefore, secured parties should continue to watch for unauthorized termination statements and, when one is discovered, file a UCC5 form to warn interested parties that the financing statement remains effective.
Motors Liquidation also offers an important lesson for those who search UCC records. Because effectiveness depends on authorization and not what the public record purports to say, searchers cannot reliably determine the status of an allegedly terminated financing statement based only on the search results. The searcher must verify with each secured party that they did, in fact, authorize the filing of the termination statement.
Paul Hodnefield is Associate General Counsel for Corporation Service Company (CSC) and a frequent speaker/writer on UCC search and filing issues. Please feel free to contact him with questions or comments at email@example.com or 800-927-9801, ext. 62375.
 Roswell Capital Partners LLC v. Alternative Construction Technologies, 2010 U.S. Dist. LEXIS 90695 (S.D.N.Y. Sept. 1, 2010).
 There is one narrow exception under UCC § 9-513 where the debtor is authorized to file an effective termination statement under certain circumstances if the secured party fails to respond to an authenticated demand.