The Delaware Supreme Court ruled last fall that a UCC termination statement inadvertently releasing collateral on a $1.5 billion term loan was valid. The creditor could not later claim it did not intend to include the collateral in its release of other collateral with regard to a different credit facility. Official Committee of Unsecured Creditors v. JPMorgan Chase Bank, NA (Del. 2014).
The termination statement clearly stated that the security interest on the assets of General Motors held by JPMorgan, among other lenders, was released. But neither the creditors nor General Motors “subjectively intended” to terminate the security interest. The UCC-3 termination statement was intended to apply only to the assets securing another credit facility, not an unrelated term loan. When JPMorgan discovered the mistake it informed the unsecured creditors committee in the General Motors Chapter 11 bankruptcy that the termination statement was filed inadvertently and did not terminate the term loan security interest. The unsecured creditors cried foul and went to court.
JPMorgan claimed that while it authorized the filing (as well as read and approved it) the authorization did not make the filing effective with respect to errors it might contain. The unsecured creditors committee took the position that a termination statement authorized by the secured creditor is effective upon filing regardless of errors.
The applicable provisions of the Delaware UCC (identical language appears in the Iowa UCC) say that the filing of a termination statement by an authorized person has the effect of terminating the financing statement to which it relates. A terminated financing statement ceases to be effective upon this filing. The effectiveness is not subject to the accuracy of the statement.
It makes sense to place the burden of the accuracy of a termination statement on the creditor. To do otherwise would mean that subsequent creditors could not rely on a filed termination statement when making its credit decisions.
The takeaway from this case is obvious. Make sure your termination statements are accurate. And this rule extends to reliance on previously filed financing statements. Make sure there have not been any intervening events that might make the financing statement ineffective. In other words, it’s the little things that will get you down.