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Avoiding Collateral Damage: In re Motors Liquidation and the Effectiveness of UCC Termination Statements

Client Advisory

November 6, 2014

Introduction

The Uniform Commercial Code (the “UCC”) tells us that a financing statement ceases to be effective upon the filing of a termination statement if “the secured party of record authorizes the filing.”[1] A termination statement filed without authorization is ineffective.[2] 

But what does it mean to “authorize” the filing of a termination statement? Specifically, is consent (even mistaken consent) to the filing of a termination statement sufficient, or must the secured party actually intend to release the collateral identified in the termination statement? This is the most important issue litigated in Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A., et al.  (In re Motors Liquidation Company) (hereinafter, In re Motors Liquidation), and is an issue of immense consequence to all secured creditors. 

Facts

A. GM’s Two, Independent Financing Transactions

The case involved two distinct and wholly unrelated financing transactions entered into by General Motors (“GM”) – a Synthetic Lease and a Term Loan. Pursuant to the Synthetic Lease, GM obtained $300 million in financing from a syndicate of financial lenders, and granted security interests in certain real estate. Pursuant to the Term Loan, GM obtained $1.5 billion in financing from a different syndicate of lenders, and granted security interests on its fixtures and equipment at 42 factories. 

The security interests of the Synthetic Lease lenders and the Term Loan lenders were each perfected by the filing of UCC-1 financing statements. Financing statements securing the Synthetic Lease collateral were filed in the counties in which the underlying real estate was located and with the Delaware Secretary of State. The principal financing statement securing the Term Loan collateral (“Main Term Loan UCC-1”) was filed in Delaware, where GM was incorporated. JPMorgan Chase Bank, N.A. (“JPM”) served as administrative agent and secured party of record for both transactions.

B. Termination of Synthetic Lease

In 2008, GM sought to terminate the Synthetic Lease. Following a public lien search, GM’s counsel erroneously identified the Main Term Loan UCC-1 as one of the financing statements to be terminated. GM’s counsel thereafter drafted a termination statement to terminate the Main Term Loan UCC-1 (the “Main Term Loan Termination Statement”). 

JPM’s counsel reviewed, but did not object to, the draft documents from GM’s counsel, including the Main Term Loan Termination Statement. At the closing, GM’s counsel caused the Main Term Loan Termination Statement to be filed along with the termination statements for the Synthetic Lease financing statements.   

Litigation

A.      GM’s Bankruptcy Filing, Bankruptcy Court Decision and Appeal to Second Circuit

Upon filing for bankruptcy in 2009, GM discovered that it had mistakenly filed the Main Term Loan Termination Statement. Although GM provided an affidavit to the Unsecured Creditors’ Committee (the “Committee”) explaining that the filing of the Main Term Loan Termination Statement was in error, the Committee commenced an adversary proceeding seeking a determination that the Main Term Loan UCC-1 was nonetheless terminated. Both parties moved for summary judgment.

In their papers, JPM and the secured lenders argued that the Main Term Loan Termination Statement was not “authorized” because neither JPM nor GM intended to terminate the Main Term Loan UCC-1. The Committee argued that the relevant question was not whether JPM intended to terminate the Main Term Loan UCC-1, but whether it authorized the filing of the Main Term Loan Termination Statement, which JPM did by consenting to its filing.

The bankruptcy court ruled in JPM’s favor, finding that GM’s counsel as agent for JPM was not authorized to terminate the Main Term Loan UCC-1, and certified its judgment for direct appeal to the Second Circuit. [3] 

On appeal, the Second Circuit stated that the bankruptcy court’s analysis – focusing solely on GM’s counsel’s authority as agent for JPM – overlooked the threshold question: what constitutes “authorization” to terminate a financing statement under Delaware UCC law, i.e., is it enough that a secured creditor review and knowingly approve a termination statement for filing, or must the secured creditor intend to terminate the security interest that is listed on the termination statement?[4]   The Second Circuit certified this question to the Delaware Supreme Court as a question of first impression. 

B.         The Delaware Supreme Court’s Decision

The Delaware Supreme Court, in a decision filed October 17, 2014, held that pursuant to the “unambiguous” language of the statute, a termination statement is effective if the secured party “authorizes”, i.e., reviews and approves, its filing.[5] Contrary to JPM’s arguments, the statute does not require that the secured party actually intend to terminate the specific security interest. The court further noted that adopting JPM’s argument would relieve a party of the consequences of its mistaken filing, eliminate any incentive to ensure the accuracy of the financing statement and undermine the UCC’s bedrock policy of fostering ease and transparency in commercial transactions because it would require time-consuming and costly litigation to determine whether a secured creditor actually intended to terminate its financing statement.

Significantly, consistent with the question certified by the Second Circuit, the Delaware Supreme Court assumed that JPM itself reviewed and knowingly approved of the filing of the Main Term Loan Termination Statement. The case will now return to the Second Circuit to determine whether under traditional principles of agency law, GM’s counsel as agent for JPM had the requisite authority to file the Main Term Loan Termination Statement on behalf of JPM.  

Conclusion

Although the Delaware Supreme Court’s decision is only binding with respect to the interpretation of Delaware UCC law, because a large majority of companies are organized under, and governed by, Delaware laws, the impact of the decision will be far-reaching. Moreover, because the UCC is a uniform statute, state courts outside of Delaware faced with a similar issue may well look to the Delaware Supreme Court’s decision for guidance in interpreting its own state’s UCC law.   As such, all potential creditors are reminded that due diligence by a debtor should extend beyond a mere public lien search for termination statements. Instead, a creditor should also verify that the filing of the termination statement was authorized, either by confirming that it was filed by the secured party itself, or if a party other than the secured party filed the termination statement, confirming that the secured party consented to its filing.


For more information concerning the matters discussed in this publication, please contact the author Leonardo Trivigno (212-238-8724, trivigno@clm.com), James Gadsden (212-238-8607, gadsden@clm.com), Aaron Cahn (212-238-8629, cahn@clm.com), or your regular CL&M attorney.

Endnotes

[1] UCC § 9-509(d)(1); see also id. 9-513(d).  

[2] See id. at § 9-510(a). 

[3] 486 B.R. 596 (Bankr. S.D.N.Y. March 1, 2013).  

[4]The decision by the Second Circuit can be found on the court’s website: http://www.ca2.uscourts.gov.  

[5] The decision by the Delaware Supreme Court can be found on the court’s website: http://courts.delaware.gov/opinions/list.aspx?ag=supreme%20court



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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