“A secured party is the master of its own termination statement,” or so said the Supreme Court of Delaware in ruling that a UCC-3 termination statement, which was filed by mistake and resulted in the termination of a $1.5 billion term loan, was effective because the filing was authorized by the secured parties involved. The Uniform Commercial Code (the “UCC”) tells us that a financing statement ceases to be effective upon the filing of a termination statement if “the secured party of record authorizes the filing.” UCC §§ 9-509(d)(1) and 9-513(d). A termination statement filed without authorization is ineffective. UCC § 9-510(a). But what does it mean to “authorize” the filing of a termination statement? Is consent to the filing of a termination statement sufficient even if mistaken, or must the secured party subjectively intend to release the collateral identified in the termination statement? This is the issue litigated in Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A., et al. (In re Motors Liquidation Company). Facts In October 2001, GM entered into a $300 million synthetic lease (the “Synthetic Lease”) as the borrower, with JPMorgan as the agent on behalf of several financial institutions. In connection with the Synthetic Lease, a financing statement (Form UCC-1) was filed with the Delaware Secretary of State listing JPMorgan as the secured party. In November 2006, GM and one of its then-subsidiaries entered into a $1.5 billion seven-year senior secured term loan facility as borrowers, with JPMorgan as the agent for the term lenders. The $1.5 billion term loan was unrelated to the Synthetic Lease. A separate financing statement was filed with the Delaware Secretary of State in connection with the $1.5 billion term loan listing JPMorgan as the secured party. In September 2008, GM notified JPMorgan of its intention to terminate the Synthetic Lease, and requested outside counsel prepare the necessary documents in connection with repayment of the outstanding amount of the Synthetic Lease and release of the security interest. After the termination documentation had been distributed to and reviewed by counsel for JPMorgan and GM, GM subsequently filed the UCC-termination statements (Form UCC-3s) following the repayment of the Synthetic Lease. One of the termination statements, which was distributed to counsel for JPMorgan prior to being filed, mistakenly listed the filing number of the $1.5 billion term loan UCC-1. The termination documentation was filed in the same form and the mistaken filing number was not discovered until June 2009, shortly after the commencement of the GM Chapter 11 case. While there was no material factual dispute that the parties only intended to terminate those UCC-1s filed in connection with the Synthetic Lease, the Unsecured Creditors’ Committee asserted that the erroneous UCC-3, although mistakenly identifying the financing statement perfecting the security interest for the $1.5 billion term loan, was still legally effective, rendering the term loan unperfected at the time of GM’s bankruptcy. Bankruptcy Court’s Ruling In the Bankruptcy Court, JPMorgan argued that the termination statement related to the $1.5 billion term loan was no authorized because neither JPMorgan nor GM intended to terminate the $1.5 billion term loan UCC-1. The Committee argued that the questions was not whether JPMorgan intended to terminate the $1.5 billion term loan UCC-1, but whether JPMorgan authorized the $1.5 billion term loan termination statement by consenting to the UCC-3 filing. The Bankruptcy Court sided with JPMorgan finding that GM’s counsel as agent for JPMorgan was not authorized to terminate the $1.5 billion term loan UCC-1. In re Motors Liquidation Company, 486 B.R. 596 (Bankr. S.D.N.Y. 2013). Appellate Court Punts The Committee appealed and the Bankruptcy Court certified its ruling directly to the Second Circuit, which certified the following question to the Delaware Supreme Court: “Under UCC Article 9, as adopted into Delaware Law by Del Cod Ann. Title 6, for a UCC-3 termination statement to effectively extinguish the perfected nature of the 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?” Delaware Supreme Court Ruling The Delaware Supreme Court analyzed sections 9-513, 9-510 and 9-509 of the UCC and determined that the Committee’s position was consistent with the unambiguous language of the statutes. The court stated, “[I]t is fair for sophisticated transacting parties to bear the burden of ensuring that a termination statement is accurate when filed.” The court further opined that, “[B]efore a secured party authorizes the filing of a termination statement, it ought to review the statement carefully and understand which security interests it is releasing and why. A secured party is the master of its own termination statement.” Therefore, in response to the certified question, the Delaware Supreme Court held that, “[F]or a termination statement to become effective under 9-509 and thus have the effect specified in 9-513 of the Delaware UCC, it is enough that the secured party authorizes the filing to be made, which is all that 9-510 requires. The Delaware UCC contains no requirement that a secured party that authorizes a filing subjectively intend or otherwise understand the effect of the plain terms of its own filing.” Second Circuit Ruling The Second Circuit recently ruled on the remaining issue – whether JPMorgan authorized the filing of the $1.5 billion term loan UCC-3 termination statement. In re Motors Liquidation Co., 2015 WL 252318, at *4 (2nd Cir. 2015). JPMorgan took the position that it never instructed anyone to file the UCC-3 and therefore the termination statement was unauthorized and ineffective. The Second Circuit disagreed, finding that although JPMorgan never intended to terminate the $1.5 billion term loan UCC-1, its repeated manifestations to an agent evidenced that JPMorgan reviewed and assented to the filing of UCC-3 termination statement. Based upon these findings, the Second Circuit ruled that JPMorgan authorized the filing. Takeaway This case stands as a stark reminder that secured parties and their counsel must carefully review the accuracy of all financing statements, termination statements and amendments they file. Although preparing these documents may be routine and even perceived as ministerial, an error can have disastrous consequences. Be the master of your termination statement. For questions, please contact Donald H. Cram at dhc@severson.com