Tuesday, April 21, 2015

Hey, Let's Be Careful Out There! (1) (Stephen Stapleton)

By Steve Stapleton

In 2001, General Motors (“GM”) obtained $300 million in financing under a lease financing transaction (the “2001 Lease”) from a syndicate of lenders for which JPMorgan acted as both administrative agent and the secured party of record.  The financing was secured by liens on twelve parcels of real property.

In 2006, GM entered into a separate term loan facility for $1.5 billion (the “2006 Loan”).  Again, JPMorgan was the administrative agent and secured party of record.  That loan was secured by financing statements filed of record on certain equipment and fixtures at 42 GM facilities.

In 2008, GM sought to pay off the 2001 Lease and instructed its lawyers to draw up the documents which necessarily included UCC-3 termination statements.  No one at GM’s law firm, nor anyone at JPMorgan’s firm, nor anyone internally at GM or JPMorgan realized that the termination statements erroneously included those which terminated the financing statements on the 2006 Loan.  GM repaid the amounts due on the 2001 Lease and the UCC-3’s were filed with the Delaware Secretary of State, including the one releasing the security interest on the 2006 Loan.

In 2009, GM filed for bankruptcy protection.  The Unsecured Creditors Committee thereafter filed an action against JPMorgan requesting that the bankruptcy court find that the UCC termination statement terminated the security interest related, not only to the 2001 Lease, but to the security interest collateralizing the 2006 Loan as well.  JPMorgan responded saying that neither it nor GM (nor their respective counsel) intended to terminate the 2006 security interest, the UCC-3 termination statement affecting the 2006 interest was filed in error and, as a result, was a nullity. The bankruptcy court agreed, concluding that because JPMorgan did not intend to terminate the 2006 security interest, the filing of the termination statement was ineffective.

On a direct appeal to the Second Circuit Court of Appeals, the Court certified the following question to the Delaware Supreme Court:

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 in the UCC-3?

The Delaware Supreme Court responded saying it is enough that the secured party authorize the filing; there is no independent requirement that the secured party “subjectively intends of otherwise understands the effect of the plain terms of its own filing.” (2)

Having reserved the question of whether in fact JPMorgan authorized the filing of the erroneous termination statement, the Second Circuit answered affirmatively.  Off. Comm. of Unsecured Creditors of Motors Liquidation Company v. JP Morgan Chase Bank, NA (In re Motors Liquidation Company), 2015 WL 252318 at *5.  The Second Circuit found that “although JPMorgan never intended to terminate the [2006 security interest], it authorized the filing of a UCC-3 termination statement that had that effect.”  Id.

The facts offered by the Second Circuit in its opinion revealed that the neither the associate assigned by the partner to draw up the termination documents nor the paralegal assigned by the associate to perform a UCC search for the UCC-1 financing statements were aware that only the first two UCC-1s were related to the 2001 Lease and the third unrelated UCC-1 pertained to the 2006 Loan.

The primary lesson here is painfully self-evident:  it’s manifestly axiomatic that counsel should ensure that UCC financing statements are accurate; that the termination statements match those financing statements that are to be terminated.  Lost in the obviousness of the lesson, however, is the remarkable lack of coordination among those in GM’s outside law firm, between its paralegal, the associate and the partner.

So, some advice, for what it’s worth:  invest a little bit of  time, every time -- even in the routine and mundane tasks  of the day -- to explain what needs to be done and why.  As the old saying goes, talk is cheap. Failing to talk can be expensive. Sometimes vastly expensive.

1.  Sergeant Phil Esterhaus, played by Michael Conrad, “Hill Street Blues,” 1981-1987.

2.  Inexplicably, the Delaware Supreme Court did not address UCC 1-103(b) which says the law of mistake is not eliminated under the UCC unless displaced by another provision.

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