In our recent post, “Review Twice, File Once, Review Again; UCC-3 Termination Intent Irrelevant,”we described how the Delaware Supreme Court set forth how a secured party’s lien can be terminated without the requisite intent, so long as the secured party authorized the filing of the UCC-3 termination statement. This decision underscores how important it is to make sure UCC-3 termination statement filings are accurate and reflect the true intent of the parties. Essentially, the court will not inquire further about the secured party’s subjective intent if the face of the filing is clear.
In In re Motors Liquidation Co., No. 325, 2014, 2014 WL 5305937 (Del. Oct. 17, 2014), in responding to a certified question from the Second Circuit Court of Appeals, the Delaware Supreme Court’s decision focused on the secured party’s authorization: “Under the Delaware UCC, parties in commerce are entitled to rely upon a filing authorized by a secured lender and assume that the secured lender intends the plain consequences of its filing” (emphasis added). The most salient facts and background are provided in the previous blog post.
Subsequently, the Second Circuit Court of Appeals considered whether the evidence supported a determination that JPMorgan, the secured party, had authorized the filing of the UCC-3 termination statement. JPMorgan argued that it could not have authorized the filing as it never intended to terminate its security interest nor instructed anyone to do so. In response, the Creditors’ Committee argued “authorization” as contemplated in the UCC relates only to the act of the filing itself, not the secured party’s subjective intent. Therefore, because JPMorgan approved the filing, it “authorized” it, even if it did so mistakenly.
In its opinion, the Second Circuit addressed two questions: First, must the secured lender authorize termination of the particular security interest or whether authorization to file the UCC-3 termination statement is sufficient. The Second Circuit deferred to the Delaware Supreme Court’s analysis of UCC §9-509, which as stated above does not account for the subjective intent or understanding of the secured lender, so long as the secured party authorizes the filing to be made—all that is required under UCC § 9-510. Secondly, did the secured lender grant proper authority to file the UCC-3 statement or terminate the interest in question (the lien securing the term loan that neither party intended to terminate). In JPMorgan’s view, it never instructed its lawyers to terminate the specific security interest which was inadvertently terminated by the filing of the UCC-3 termination statement. JPMorgan argued that by describing an unintended security interest, the agent’s act exceeded the scope of its authority. But the Court disagreed, finding that what JPMorgan intended to accomplish was distinct from what it authorized on its behalf. No one at GM, its counsel, JPMorgan or its counsel, noticed the error. JPMorgan’s review and its counsel’s sign off constituted “actual authority” for GM’s counsel to file the UCC-3 termination statement on behalf of GM. “Actual authority . . . is created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf.” JPMorgan and its counsel repeatedly confirmed to GM’s counsel that they knew GM would file the UCC-3 termination statement on its behalf. And as the Court succinctly stated, “[n]othing more is needed.”
The import of this decision is that JPMorgan presumably received millions of dollars of interest payments (including post-petition interest) from GM on its $1.5 billion term loan facility, in addition to the recovery on account of the principal amount of the loan. Undoubtedly, the funds remitted for interest, as well as a significant portion of the principal distribution, will largely inure to the benefit of GM’s general unsecured creditors. However, the disgorgement received by the GM estate may also potentially be saddled by claims from the Federal government arising from subsidies funded to GM from federal bail-out programs, and subsequent settlements with the government that were premised on JPMorgan’s claim being secured. It remains to be seen which constituencies will claim a stake, but in any event, JPMorgan will be participating as what it now is: a general unsecured creditor entitled to no special treatment with respect to its term loan.