In a ruling of much consequence to secured lenders everywhere, the Delaware Supreme Court held in Motors Liquidations v. JPMorgan Chase Bank that filing an incorrect UCC-3 termination statement can be a costly mistake.
THE UCC-3 TERMINATION STATEMENT
Under the Uniform Commercial Code (the UCC), a security interest in personal property of a debtor is perfected by filing a UCC-1 financing statement (now called a UCC initial financing statement) with the applicable state filing office. This action creates a security interest in favor of the lender, and if the debtor defaults under the lending arrangement, the secured lender can foreclose on the property of the debtor to recover amounts owed to it by the debtor. When the debtor has satisfied all amounts owed to the lender, a UCC-3 termination statement (now called a UCC termination statement) is routinely filed to terminate the security interest perfected by the UCC-1 financing statement.
THE CASE: MOTORS LIQUIDATIONS V. JPMORGAN CHASE BANK
General Motors Corporation (GM) entered into two separate secured lending transactions, both with JPMorgan Chase Bank as administrative agent. The first was a $300 million “synthetic lease” financing transaction. The second was a $1.5 billion term loan facility. The synthetic lease and the term loan facility were each secured by different assets of GM. The security interests in these assets were properly perfected by filing UCC-1 financing statements.
GM eventually repaid the amounts owing under the synthetic lease. GM directed its outside counsel to wind down the transaction, including terminating the perfected security interest related to that transaction by preparing UCC-3 termination statements. The term loan facility was to remain in full force and effect and to continue to be secured.
Unfortunately, GM’s counsel inadvertently included the term loan facility security interest on one of the UCC-3 termination statements filed in connection with the synthetic lease. Neither GM nor JPMorgan intended to terminate the term loan facility security interest.
Despite review by both GM’s and JPMorgan’s counsel, the error went unnoticed until GM filed for bankruptcy in 2009. The unsecured creditors of GM sought a determination that because of the erroneous termination statement, the term loan facility was unsecured and JPMorgan should be treated as an unsecured creditor during the bankruptcy proceedings. JPMorgan argued that the termination statement was ineffective because JPMorgan did not intend for the term loan facility security interest to be terminated and thus remained a secured lender under the term loan facility.
The $1.5 billion issue that came before the Court was to determine the effect of the termination statement that unintentionally terminated the term loan facility security interest. In other words, did the intent of the parties matter when terminating a security interest or would the court look only to what was actually filed? Was JPMorgan really an unsecured creditor on a $1.5 billion term loan facility because of an oversight in preparing the UCC-3 termination statement?
The Court concluded in no uncertain terms that the UCC-3 termination statement was effective to terminate all security interests listed on the form, including those relating to the term loan, regardless of the parties’ intent. The Court focused on the plain language of Section 9-513: “upon the filing of a termination statement with the filing office, the financing statement to which the termination statement relates ceases to be effective.” Finding no language relating to the intent of the parties, the Court held that the only requirement for termination is that the secured lender authorizes the filing of the statement. Stating that “a secured party is the master of its own termination statement,” the court concluded that “it is fair for sophisticated parties to bear the burden of ensuring that a termination statement is accurate when filed.”
Secured lenders (and their counsel) must carefully review all UCC termination statements before filing and must be certain that what is included on the filing is correct. Because Section 9-513 has been adopted in substantially the same form in most states, a court will likely rule that the filing terminates all security interests listed on the form, even if the parties intend a different result.