The U.S. Court of Appeals for the Second Circuit issued an opinion on Jan. 21, 2015,[1] holding that a UCC-3 termination statement was effective to extinguish a security interest of up to as much as $1.5 billion, notwithstanding that the secured lender erroneously authorized the filing of the termination statement and did not intend to extinguish the security interest.
Loans, Security Interests and Errors
In 2001, General Motors obtained $300 million in financing from JPMorgan Chase Bank N.A. (JPMorgan) secured by liens on multiple assets, with JPMorgan again serving as administrative agent. JPMorgan and the other lenders took security interests in multiple General Motors assets and filed 28 UCC-1 financing statements, the most substantial of which was dubbed the Main Term Loan UCC-1.
In September 2008, the initial $300 million loan was nearing maturity. General Motors requested that its counsel, Mayer Brown LLP, prepare documents allowing JPMorgan to be repaid and the security interests be released. A Mayer Brown associate and paralegal prepared a closing checklist identifying the UCC-1s to be terminated. The checklist erroneously included the $1.5 billion Main Term Loan UCC-1. Mayer Brown subsequently prepared UCC-3 statements to terminate all the UCC-1s.
Review copies of the documents were provided to JPMorgan and its attorneys, Simpson Thacher & Bartlett LLP, as well as to General Motors. Nobody commented on or addressed the erroneous inclusion of a UCC-3 termination statement for the $1.5 billion Main Term Loan UCC-1. All three UCC-3s were consensually filed.
Bankruptcy and the Second Circuit
This matter came before the Second Circuit on an appeal from a bankruptcy court decision in the subsequent General Motors 2009 bankruptcy proceeding.[2] The bankruptcy court determined that the UCC-3 filing was unauthorized and that the Main Term Loan UCC-1 was not terminated. The General Motors creditors’ committee brought an action declaring that the UCC-3 termination statement effectively terminated the security interest created by the $1.5 billion Main Term Loan UCC-1, thereby rendering JPMorgan an unsecured creditor on par with other General Motors unsecured creditors. JPMorgan asserted that it was ineffective, as termination of the Main Term Loan UCC-1 was not authorized or intended by JPMorgan, Simpson Thacher or any party.
On appeal, the Second Circuit considered competing interpretations of UCC § 9-509(d)(1), which provides that a UCC-3 termination statement is only effective where “the secured party of record authorizes the filing.”[3] The Second Circuit considered the following two questions regarding authorization of the UCC-3 filing:
- Legally, what must a secured lender authorize for a UCC-3 to be effective (must it authorize the particular security interest specifically, or is authorization to file a UCC-3 which identifies the interest sufficient); and
- Factually, did JPMorgan here grant Mayer Brown the authority to terminate the Main Term Loan UCC-1 or alternately to file the UCC-3?
The first question was certified to the Delaware Supreme Court, which responded that a filing is effective whether or not the secured party understands the effect of the filing, provided the secured party authorizes the filing of a UCC-3. In light of this response, the Second Circuit disregarded JPMorgan’s intentions regarding the Main Term Loan UCC-1, instead looking to whether JPMorgan authorized Mayer Brown to file the UCC-3 terminating it. The Second Circuit held that although JPMorgan may not have intended the termination, it did authorize the filing of the UCC-3 termination statement, thereby terminating the Main Term Loan UCC-1. JPMorgan and Simpson Thacher had ample opportunities to correct the error, but failed to do so. JPMorgan essentially “reviewed and assented”[4] to the filing of the errant UCC-3.[5]
The Second Circuit reversed the bankruptcy court’s grant of summary judgment for JPMorgan and remanded with instructions to enter partial summary judgment for the creditors’ committee as to termination of the Main Term Loan UCC-1.
Takeaways
This opinion should serve as an object lesson for attorneys and secured parties. Attorneys should always take time to review documents prepared both internally and externally, even where the agreement is amicable. Secured parties should be especially cautious and review all paperwork when granting attorneys or other third parties authority to act on their behalf.
As highlighted here, a cursory review will not always uncover inadvertent errors. Best practices should include careful review of such important documents as UCC-3 termination statements.
[1] Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank N.A. (In re Motors Liquidation Co.), No. 13-2187, 2015 U.S. App. LEXIS 859 (2d Cir. Jan. 21, 2015).
[2] In 2009, General Motors filed for chapter 11 bankruptcy relief in the Southern District of New York, jointly administered under case no. 09-50026.
[3] Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank N.A., 2015 U.S. App. LEXIS 859 at *7.
[4] Id. at *14.
[5] A managing director at JPMorgan who was supervising the payoff received a copy of the closing checklist and draft UCC-3s, as did Simpson Thacher. Neither expressed any concerns, despite Simpson Thacher providing other comments. Simpson Thacher also signed an escrow agreement that referred to filing the UCC-3 termination statements.