Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JP Morgan Chase Bank

The dispute pending before the United States Court of Appeals for the Second Circuit centered on the effect of a UCC termination statement – a “UCC-3 termination statement” – filed with the Delaware Secretary of State on behalf of General Motors Corporation. That termination statement, by its plain terms, purported to extinguish a security interest on the assets of General Motors held by a syndicate of lenders, including JPMorgan Chase Bank, N.A. But neither JPMorgan nor General Motors subjectively intended to terminate the term loan security interest when General Motors filed the termination statement. General Motors’ counsel for a separate “synthetic lease” financing transaction, Mayer Brown LLP, had inadvertently included the term loan security interest on the termination statement that it filed in the process of unwinding the synthetic lease. According to JPMorgan, no one at General Motors, Mayer Brown, or Simpson Thatcher Bartlett LLP (JPMorgan’s counsel for the synthetic lease transaction) noticed this error, even though individuals at each organization reviewed the filing statement before the termination statement was filed. After General Motors filed for reorganization under Chapter 11 of the Bankruptcy Code, JPMorgan informed the unofficial committee of unsecured creditors that a UCC-3 termination statement relating to the term loan had been inadvertently filed. The Creditors Committee commenced a proceeding against JPMorgan in the United States Bankruptcy Court for the Southern District of New York seeking, among other things, a determination that the filing of the UCC-3 termination statement was effective to terminate the term loan security interest and thus render JPMorgan an unsecured creditor on par with the other General Motors unsecured creditors. JPMorgan contested that argument, asserting that it had not authorized the termination statement releasing the term loan security interest, and that the statement was erroneously filed because no one at General Motors, JPMorgan, or the law firms working on the synthetic lease transaction recognized that the unrelated term loan security interest had been included on the statement. On cross-motions for summary judgment, the Bankruptcy Court found for JPMorgan on various grounds, including that JPMorgan had not empowered Mayer Brown to act as its agent in releasing the term loan security interest in the sense that it had only authorized Mayer Brown to file an accurate termination statement that released security interests properly related to the synthetic lease transaction. The Second Circuit certified a question of Delaware law to the Supreme Court in order to resolve the appeal of this case before it: "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 answered under the assumption that the term "effectively extinguish" as used by the Second Circuit centered on whether reviewing the termination statement and knowingly approving it for filing had the effect specified in section 9-513 of the Delaware’s version of the Uniform Commercial Code (UCC), which is that “the financing statement to which the termination statement relates ceases to be effective." On that assumption, the Delaware Court answered that "the unambiguous provisions of Delaware’s UCC dictate that the answer is that 'it [is] enough that the secured lender review and knowingly approve for filing a UCC-3 purporting to extinguish the perfected security interest.'" Under the Delaware UCC, parties in commerce are entitled to rely upon a filing authorized by a secured lender and assume that the secured lender intends the plain consequences of its filing. View "Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JP Morgan Chase Bank" on Justia Law