Tuesday, September 15, 2015

Same As It Ever Was, Same As It Ever Was...1* (Stephen Stapleton)

By Steve Stapleton

    In May 2015, I wrote an article in this newsletter about the fallout attendant to a mistake associated with a term loan entered into between GM and JP Morgan in 2008 which, among other things, provided for the filing of UCC terminations statements as to certain previous loans.  See “Let’s Be Careful Out There,” Cowles & Thompson Newsletter, May 21, 2015.  Unfortunately for all concerned, the termination statements included the termination of loans which the parties did not intend to terminate.  A short synopsis follows:  

    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 Term Loan”) which 2006 Term loan was ultimately syndicated to more than 400 lenders, one of which was the Employees’ Retirement System of the City of Montgomery, Alabama (“Montgomery”).  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.  The termination statements were originally prepared by Mayer Brown, GM’s counsel, and sent to Simpson Thacher, JP Morgan’s counsel, for review.  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 Term Loan.

    GM filed for bankruptcy protection in 2009 and GM made payments to the 2006 Term Loan participants in accordance with the term of the Loan.  When the unsecured creditors committee discovered the filing of the termination statement it brought an adversary proceeding against JP Morgan and the loan participants alleging that the security interest collateralizing the 2006 Term Loan had been released by the erroneous filing of the termination statement.  The Second Circuit Court of Appeals, after certifying the issue to the Delaware Supreme Court, ultimately ruled in favor of the Committee.  The Committee thereafter initiated an action against the 2006 Term Loan participants, including Montgomery, to claw back the sums previously paid.

    When mistakes are made, there is an unfortunate inevitability to what follows.  On July 30, 2015, Montgomery filed a class action against both JP Morgan Chase and Simpson Thatcher and Bartlett, JP Morgan’s counsel. 2*  Montgomery alleges that JP Morgan had an affirmative obligation to inform Montgomery and the other 2006 Term Loan participants of the pendency of the adversary proceeding but instead took action that amounted to fraudulent concealment which effectively denied Montgomery any notice of the issue.  Thus Montgomery says, it had no knowledge of the adversary proceeding nor any knowledge of the erroneously filed UCC termination statement until it was sued by the GM creditors’ committee for a clawback of its payments under the 2006 Term Loan.

    As I said in my previous posting, it is manifestly axiomatic that counsel should ensure that UCC financing statements are accurate; that the termination statements match only the financing statements that are to be terminated.  As this case runs its course, however, Montgomery’s allegations, if true, point to a cover up.  It remains to be seen whether the actions of JP Morgan and its law firm are the cause of Montgomery’s losses or whether Montgomery is engaging in a post hoc fallacy.3*  Nevertheless, the allegations are reminiscent of other scenarios in which transparency is back burnered, in favor of a strategy that attempts to corral the damage.  You would think people might learn after so many lessons; but from Watergate to Deflate-gate, those strategies seem to inevitably fail.


1.  "Once in a Lifetime," written by Mike Curb, Tina Weymouth, Phoebe Esprit, Jerry Harrison, Chris Frantz, Brian Eno, Jerry H. Styner, Guy Hemric, David Byrne.  Copyright: Index Music Inc., E.G. Music Ltd., MCA Music Ltd., Warner-tamerlane Publishing Corp., WB Music Corp.

2.  The Employees’ Retirement System of the City of Montgomery v. JP Morgan Chase Bank, NA and Simpson Thacher & Bartlett LLP, Case No. 15-6002 (S.D.N.Y. July 30, 2015).

3.  Post hoc ergo propter hoc -  Latin: "after this, therefore because of this."

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