In a long-anticipated decision, the United States Court of Appeals for the Second Circuit finally resolved a case where the issue was whether a termination statement filed by mistake was nevertheless effective. The stakes were high because the allegedly terminated financing statement perfected the security interest for a $1.5 billion loan.
Unfortunately for the secured party, the court found that the record was authorized despite being filed by mistake. Therefore, the termination statement was effective. The progress of this case through the federal and Delaware courts has been reported in prior Expert’s Corner articles. The latest and probably final decision on the issue is In re: Motors Liquidation Company, 2015 U.S. App. 859 (2nd Cir. Jan. 21, 2015).
In 2001, GM borrowed $300 million from a syndicate of lenders to finance the acquisition of properties as part 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 to perfect the syndicate’s security interests. JPMC was listed as the secured party of record on the financing statements.
In November 2006, GM took out an unrelated term loan for $1.5 billion (the “Term Loan”) with an entirely different syndicate of lenders. As with the Synthetic Lease, JPMC served as administrative agent for the lenders in the Term Loan syndicate. JPMC was listed as secured party on the financing statement it filed to perfect the Term Loan syndicate’s security interest.
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.
GM’s law firm compiled a list of the Synthetic Lease financing statements to terminate after GM paid off the obligation. Unfortunately, the list mistakenly included the financing statement JPMC filed to perfect the Term Loan security interest. Representatives of GM, its law firm, and the law firm representing JPMC all reviewed the termination list, but no one caught the error.
The law firm then prepared a batch of UCC3 termination statements for the Synthetic Lease and had them filed by a vendor. The batch included a termination statement for the Term Loan financing statement. None of the parties involved in the transaction, nor their attorneys or vendors, ever intended to authorize a termination statement related to the Term Loan.
Only after GM filed for bankruptcy in 2009 did the parties realize that a termination statement had been filed for 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 debt should be treated as unsecured.
The bankruptcy court ruled that JPMC had not authorized the filing of a termination statement for the Term Loan. Therefore, the termination statement was ineffective and JPMC remained perfected. However, the bankruptcy court certified the case for direct appeal to the United States Court of Appeals for the 2nd Circuit.
On appeal, The Circuit Court realized that it could not resolve the case without further guidance on the state law issue of authority, so it certified the following question to the Delaware Supreme Court:
Under UCC Article 9, as adopted into Delaware law by Del. Code Ann. tit. 6, art. 9, 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?
The Delaware Supreme Court responded that the applicable statute was unambiguous—it was enough for the secured party to authorize the filing of a termination statement. The argument that the record is effective only if the authorizing party understands the substantive terms of the filing and intends their effect runs contrary to the clear language of the statute. The court further found that it was fair to place the burden on the sophisticated parties to the transaction to ensure that the termination statement was accurate when filed.
Applying the Delaware Supreme Court’s response to the case, the Circuit Court drew a distinction between what JPMC tried to accomplish and what actions it authorized on its behalf. While JPMC never intended to terminate the Term Loan financing statement, it authorized the filing of a UCC3 termination statement that had that effect. JPMC had reviewed and assented to the filing of the termination statement. The Circuit Court therefore held that the termination statement was authorized and ordered the case remanded for partial summary judgment in favor of the Committee as to the termination of the Term Loan Financing Statement.
The takeaway from this case is that secured parties must carefully review any UCC record that they intend to authorize another party to file. The secured party will be held accountable for the actions of its agents, even if those actions result in mistakes. Lenders and their legal counsel should also review their policies and procedures for granting other parties authority to file UCC records and ensure that they are sufficient to prevent mistakes like those that occurred in Motors Liquidation.
Paul Hodnefield is Associate General Counsel for CSC and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at firstname.lastname@example.org or 800-927-9801, ext. 62375.