An opinion in the wake of the $1.5 billion General Motors term loan debacle emphasizes the importance of drafting to ensure that a U.S. court will have jurisdiction over foreign entities if a dispute later arises.
In 2006, GM obtained a $1.5 billion term loan secured by manufacturing equipment. The auto maker also had a $300 million synthetic lease financing. JPMorgan Chase Bank NA was agent for both.
Before GM’s bankruptcy, an Austrian bank purchased a $10 million interest in the term loan through the secondary market.
The $1.5 Billion ‘Oops’
In October 2008, before its June 2009 chapter 11 filing, GM paid off the $300 million loan. Likely due to a mistake by an inexperienced lawyer or paralegal, the security interest for the $1.5 billion financing was terminated at the same time.
As part of the bankruptcy financing, GM repaid the $1.5 billion term loan in full, then believing it was a valid secured claim. The Austrian bank was repaid along with the other lenders.
Having discovered that the lien was terminated in error, GM’s unsecured creditors mounted a lawsuit to recover the $1.5 billion, which would be one of the largest assets for unsecured creditors under the auto maker’s chapter 11 plan. The lenders breathed a sigh of relief in March 2013 when the bankruptcy court decided that the lenders’ secured status survived, because neither GM nor JPMorgan intended to release the lien.
Following a direct appeal, the Second Circuit certified a question to the Delaware Supreme Court regarding the validity of the bank’s security interest under the Uniform Commercial Code. Delaware’s high court held that the security interest indeed had been terminated, leading the Second Circuit to remand the case to the bankruptcy court in January 2015 after declaring that the security interest was invalid.
The creditors’ committee had filed a timely complaint against JPMorgan as agent, also naming the some 500 beneficial owners of the debt as defendants. Until the validity of the security interest was finally determined in litigation with the agent alone, the bankruptcy court continually extended the time for the serving the complaint on the hundreds of beneficial debt owners.
A trust for GM creditors had taken over prosecution of the lawsuit. Using letters rogatory, the trust began the process of serving the complaint on the Austrian bank in June 2015. Service was finally completed in September 2016 as a consequence of delays occasioned by the U.S. Department of State.
The Austrian bank responded by filing a motion to dismiss for lack of personal jurisdiction. Bankruptcy Judge Martin Glenn denied the motion in an opinion on Feb. 16. The opinion is required reading for anyone interested in the technicalities of service abroad and long-arm jurisdiction over foreigners.
Specific Jurisdiction over the Austrian Bank
The Austrian bank said it had no offices, employees or property in the U.S. and did not do business anywhere in the U.S.
On the other hand, the term loan agreement said that every lender and their assignees consent to jurisdiction and venue in a state or federal court in New York. The lenders and their assignees also waived any objection to venue in New York. Judge Glenn held that the Austrian bank was an assignee.
Weighing the countervailing facts, Judge Glenn tackled a question of specific jurisdiction over a foreign defendant, a concept allowing the court to exercise personal jurisdiction by showing that the defendant “purposefully availed himself of the privilege of doing business in the forum state and that the defendant could foresee being haled into court there.”
For Judge Glenn, the consent to jurisdiction in the loan agreement was enough. He said that the Austrian bank “enjoyed the benefits and protection of New York law in connection with [the loan agreement] and should be held to the consent to jurisdiction and New York forum choice.”
The judge also held that the Austrian bank consented to jurisdiction because it knew about the financing order providing for the repayment of the loan and provisions calling for consent to jurisdiction.
Even if there were no consent, Judge Glenn concluded that the Austrian bank “established sufficient minimum contacts to support specific jurisdiction.” He recited how the foreign bank purchased its interest in the term loan from JPMorgan in New York, agreed that New York law governed the transaction, and consented to jurisdiction in New York.
For ABI’s discussion of other issues in the $1.5 billion litigation, click here.