A lender cannot rely on its subjective intent in claiming that an otherwise properly filed UCC termination is ineffective, according to a recent decision by the United States Court of Appeals for the Second Circuit. Put another way, if a lender authorizes a termination statement, the termination is valid upon filing such UCC-3 even if the authorization was mistakenly given. While this result is not surprising, it does put lenders (and their counsel) on notice to be diligent in reviewing and authorizing the filing of UCC termination statements.

The Facts of the Motors Liquidation Case

In Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Company, et. al.), the Bankruptcy Court for the Southern District of New York looked at two unrelated secured financings for General Motors.

  • In 2001, GM entered into a "synthetic lease" financing transaction by which it obtained $300 million in financing from a syndicate of lenders, with JPMorgan as the administrative agent. The synthetic lease was secured by certain real estate, and UCC financing statements were filed to perfect that security interest. Those financing statements named JPMorgan as secured party on behalf of the lenders.
  • In 2006, GM entered into a $1.5 billion term loan facility with another syndicate of lenders, but with, again, JPMorgan acting as agent for the lenders. The term loan was secured by GM's equipment and fixtures at certain facilities. Financing statements were also filed against those assets, with JPMorgan named as the secured party on behalf of the lenders.

It bears repeating that these facilities were unrelated financings, despite the fact that JPMorgan served as agent for both facilities.

In 2008, GM decided to pay off the synthetic lease and instructed its counsel to prepare documentation to memorialize the termination and the release of the liens securing the synthetic lease. Counsel did so, and accordingly prepared UCC-3 termination statements. Among those termination statements was one that covered a financing statement filed under the term loan facility. In fact, this specific UCC-3 would terminate the most significant UCC financing statement in respect of the term loan facility. This was unintentional on the part of GM's counsel, as the associate and paralegal working on the synthetic lease payoff were not aware there was a separate secured term loan facility. The closing documents (including the termination statement for the term loan facility) were sent to JPMorgan and its counsel, neither of which commented on the termination statement covering the term loan facility. JPMorgan signed a payoff letter in addition to an escrow agreement that instructed an escrow agent to file these UCC-3 termination statements after the payoff amounts were received. On October 30, 2008, this is precisely what happened.

The mistake went unnoticed until 2009, when GM filed for bankruptcy. At that time, the Committee of Unsecured Creditors in the case asked the Bankruptcy Court to rule that JPMorgan was an unsecured creditor on account of the termination of the financing statement perfecting its term loan lien. JPMorgan argued that the UCC-3 was unauthorized and ineffective as its intent was to terminate only the financing statements covering the synthetic lease.

What the UCC Says

The parties' disagreement centered on UCC § 9-509(d), which describes who may file an amendment (which includes termination) to a financing statement. Specifically, clause (1) says that such amendment may be filed "only if the secured party of record authorizes the filing." As there was no question that JPMorgan was the secured party of record, the question was whether it had authorized the filing. JPMorgan said "No": It did not intend to terminate the security interest covering the synthetic lease, nor did it ask anyone to do so on its behalf. The Committee countered that intent is irrelevant; rather, the crucial point is that JPMorgan did in fact authorize the filing of this specific termination statement.The Bankruptcy Court agreed with JPMorgan that the filing of the UCC-3 termination statement was unauthorized and thus ineffective.The Committee appealed.

The resolution to this dispute hinged on interpretation of state law - namely, the Delaware UCC. Accordingly, the United States Court of Appeals for the Second Circuit certified to the Delaware Supreme Court the following question: "[I]s 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?" The Delaware Supreme Court unequivocally supported the first proposition and rejected the second: "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." The court then went on to explain that to allow lenders to invalidate mistaken filings would be to undermine the "incentive to ensure the accuracy of the information contained in their UCC filings."

With that, the United States Court of Appeals for the Second Circuit had only to answer the question of whether JPMorgan did in fact provide such authorization. The court agreed with JPMorgan about its intent, noting that the termination agreement in connection with the payoff authorized GM "to file a termination of any existing Financing Statement relating to the Properties [of the Synthetic Lease]." However, the court distinguished this general authorization from the specific authorization JPMorgan and its counsel gave to filing a particular financing statement. The court pointed out that JPMorgan and its counsel had copies of the UCC-3 terminations (including the one that covers assets securing the term loan), which they knew would be filed upon closing the transaction. "Nothing more is needed," the United States Court of Appeals for the Second Circuit concluded.

Motors Liquidation Lesson

Fortunately, lenders (and their counsel) can avoid this outcome. Yes, security agreements typically contain general authorizations allowing the borrower, upon repayment in full, to file termination statements that are limited to the pledged collateral under such security agreement. However, this in itself does not protect lenders, as In re Motors Liquidation Company makes clear: A specific authorization to file a termination statement overrides such general authorization. A lender cannot assume that a debtor-prepared termination statement is correct, and subjective intent will not undo that termination. Fortunately, the measures lenders can take to avoid this outcome are simple:

  • Each UCC-3 should be checked against the initial filing.
  • Lenders could insist that their counsel, and not the debtors' lawyers, prepare UCC-3 termination statements

Even simpler, the lesson here is diligence. A basic further step of reviewing the UCC-1 that was being terminated would have avoided the result in this case. In the words of the court, nothing more is needed.