“A secured party is the master of its own termination statement,” or so says 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 (“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.” A termination statement filed without authorization is ineffective.

But what does it mean to “authorize” the filing of a termination statement? Specifically, is consent (even mistaken consent) to the filing of a termination statement sufficient, or must the secured party subjectively intend to release the collateral identified in the termination statement? This is the most important issue litigated in Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A., et al. (In re Motors Liquidation Company), 103 A.3d 1010 (Del. 2014), and is an issue of immense consequence to all secured creditors.

Facts. In October 2001, GM entered into a $300 million synthetic lease (the “Synthetic Lease”) as the borrower, with JPMorgan as the administrative agent on behalf of a syndicate of banks and financial institutions. In connection with the Synthetic Lease, a financing statement on Form UCC-1 was filed with the Delaware Secretary of State listing JPMorgan as the secured party and covering any personal property relating to JPMorgan’s security interests in twelve parcels of real property that secured the Synthetic Lease. 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 administrative agent for the term lenders. The $1.5 billion term loan was “wholly unrelated” to the Synthetic Lease. A separate financing statement on Form UCC-1 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 transaction, and requested that its outside counsel prepare the necessary documents in connection with repayment of the outstanding amount of the Synthetic Lease and release of the security interest on the related collateral. After the termination documentation had been distributed to and reviewed by counsel for JPMorgan and GM, GM subsequently filed the UCC-termination statements, including the unrelated UCC-3, following the repayment of the Synthetic Lease. Significantly, one of the termination statements, which was distributed to counsel for JPMorgan prior to being filed, mistakenly listed the filing number of the 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 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. The bankruptcy court ruled in JPMorgan’s favor, finding that because neither JPMorgan nor GM intended the legal consequences of the UCC-3 termination statement, the UCC-3 filing was not authorized and therefore was not effective to terminate the term loan security interest. 103 A.3d at 1013.

Appellate Court Punts. The Creditor’s Committee appealed to the Second Circuit Court of Appeal, which 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 on the UCC-3?” Id. at 1011.

Delaware Supreme Court Ruling. In answering the question, the Delaware Supreme Court analyzed Sections 9-513 (Effect of Filing a Termination Statement), 9-510 (Authority to File) and 9-509 (Persons Entitled to File Certain Amendments), finding that the unambiguous language of the statutes promotes sound policy. 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.” 103 A.3d at 1015. The court further provided 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.” Id. at 1016.

Therefore, in response to the certified question before it, the Delaware Supreme Court held that, “for a termination statement to become effective under § 9-509 and thus to 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 intends or otherwise understands the effect of the plain terms of its own filing.” Id. at 1017-18.

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 (2d Cir. Jan. 21, 2015). JPMorgan maintained its 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 even though 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 the UCC-3 termination statement. Based upon these manifestations, 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. Even if the debtor agrees that a mistake in a filing was inadvertent, competing lien holders and other creditors will be unforgiving and valuable rights will likely be lost.

Accordingly, lenders and their counsel need to be very cautious in reviewing UCC-3s and should take the extra time to verify that the proper security interests are reflected in the termination statements. Even more so, lenders should be proactive and make it a practice to prepare their own UCC-3 termination statements, so as to reduce the chance of unintended security interests being mistakenly included. In either case, do not minimize the importance of what is commonly deemed a ministerial act. Make it a practice to pay careful attention to termination statements.

For more information about bankruptcy law generally or termination statements specifically, contact Donald H. Cram at dhc@severson.com.