July 10, 2014
It’s simple: Under the Uniform Commercial Code, a secured lender perfects its security interest by filing a UCC-1 financing statement. When the loan is paid off, the security interest is terminated by filing a UCC-3 termination statement.
What happens when things go wrong — really wrong — for example, in the Chapter 11 case of General Motors, where the mistake involves an enormous amount of money and is not discovered until after the bankruptcy filing?
That’s what Circuit Judge Richard C. Wesley of the 2d U.S. Circuit Court of Appeals wanted to know.
Judge Wesley concluded in Official Committee of Unsecured Creditors v. JP Morgan Chase Bank N.A. (In re Motors Liquidation Co., et al.), No. 13-2187, 2014 WL 2722711 (2d Cir. June 17, 2014), that in order to resolve the dispute, he would have to certify a question of first impression to the Delaware Supreme Court.
It all started when GM’s $300 million loan was coming due.
GM decided to pay it off and asked its lawyers to prepare the documentation, including the necessary UCC-3 termination statements. Instructions went from partner to associate to paralegal, who searched for UCC-1 financing statements recorded against GM in Delaware. The paralegal found two relevant UCC-1 financing statements plus a UCC-1 financing statement for an entirely unrelated $1.5 billion term loan facility that GM entered into five years after the $300 million loan.
It happened that for both loans, JP Morgan served as administrative agent and was identified as secured party of record.
Nobody at GM, its lawyers’ office, JPMorgan, or its lawyers’ office recognized that one of the UCC-1s identified for termination was for the $1.5 billion loan. In fact, JPMorgan’s lawyers told GM’s lawyers that they did a “nice job” in compiling the documentation.
After the $300 million loan was paid off, all three UCC-1 termination statements were recorded.
In GM’s bankruptcy case, the unsecured creditors’ committee filed suit against JPMorgan, seeking a determination that despite the mistake, the errant UCC-3 nonetheless terminated the UCC-1, rendering the $1.5 billion loan unsecured.
The bankruptcy court in New York ruled in JPMorgan’s favor.
The committee’s appeal, rather than go to the district court, went straight to the Second Circuit, where Judge Wesley decided to ask the Delaware Supreme Court this question:
“[F]or 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 Second Circuit, the parties and their lawyers await the Delaware Supreme Court’s answer.
Once it arrives, the appeals court will address the authorization provided by JPMorgan to GM’s lawyers.