On October 17, the Delaware Supreme Court held that JP Morgan (JPM) terminated its security interest in all of the collateral provided by General Motors (GM) in support of a $1.5 billion loan, despite neither party intending that result, when it authorized the filing of a termination statement to its existing Uniform Commercial Code (UCC) financing statement. The Delaware Supreme Court stated that under Delaware law, the UCC requires only that a secured party authorize the filing of an amendment or termination statement, not that it otherwise understand the intent or the effect of such a filing. This holding places the burden on the secured party to understand the effects of its filings and to bear the consequences of any mistakes.
Since 2001, the Article 9 of the UCC, as adopted in Delaware, only requires that a secured party authorize, not authenticate, the filing of any amendment or termination of its existing financing statements. Unlike authentication, which is defined in Article 9 of the UCC, authorization has no such definition. Therefore, what it takes to authorize a filing in Delaware was an open question. Does a secured party need only to authorize the filing of an amendment or termination of its existing financing statement as drafted, or must the secured party actually intend the consequences of that filing in order for such authorization to be effective? In other words, can a secured party avoid the effect of a statement filed in error by proving that it did not intend the effect of that filing?
The answer to this question became all too important to JPM when GM filed for Chapter 11 reorganization under the U.S. Bankruptcy Code in 2009. JPM had acted as administrative agent for two loans to GM: a $300 million “synthetic lease” loan and a $1.5 billion term loan. In 2008, GM decided to pay off the $300 million loan and asked JPM for authorization to file a termination statement with respect to the existing UCC financing statements filed to perfect its security interests in the collateral for the $300 million loan. Despite review by both parties and their legal counsel, a mistake in the UCC amendment, which terminated the interests of JPM in all collateral for both loans, went unnoticed until JPM sought priority over unsecured lenders in the GM bankruptcy proceedings.
In a series of proceedings and appeals, the question eventually came before the Delaware Supreme Court, and its answer was a resounding no. The court held that under the Delaware UCC, a secured party must deal with the effects of the plain language of the filings it authorizes, regardless of its intention in making those filings. The court stated that other parties are entitled to rely on that plain language in determining the priority of secured lenders.
What does this ruling mean for secured parties? Secured parties should exercise caution in authorizing the filing of UCC amendment and termination statements, particularly those drafted by the borrower or any other person. These UCC amendments and termination statements should be read carefully and thoroughly to ensure that the interests being amended or terminated reflect only the changes that the parties intend to make before authorization and filing. At least in Delaware, the new rule of thumb for secured parties is filer beware.