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ALERT:Beware UCC-1 Termination Pitfalls

January 16, 2015

On October 17, 2014, the Supreme Court of the State of Delaware, in Official Comm. Of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A. held that a UCC-3 termination statement that is reviewed and knowingly approved for filing by a secured party effectively extinguishes all of that party’s perfected security interests, regardless of the secured party’s subjective intent.[1] The ruling arises out of a dispute in the General Motors bankruptcy case involving a UCC-3 termination statement which inadvertently extinguished more liens than intended.
General Motors (now, Motors Liquidation Company) (“GM”) entered into two separate financing transactions, the “Synthetic Lease” and the “Term Loan,” with JPMorgan Chase Bank, N.A. (“JPMorgan”). In 2008, UCC-3s were prepared to terminate JPMorgan’s lien in connection with the Synthetic Lease. Although counsel for the parties reviewed the UCC-3s before they were filed, neither noticed that one of the UCC-3s inadvertently included language releasing JPMorgan’s lien securing the $1.5 billion Term Loan. During GM’s Chapter 11 bankruptcy proceedings, the Unsecured Creditor’s Committee (the “Committee”) argued that this mistakenly filed UCC-3 was effective and the $1.5 billion Term Loan was unsecured. The issue went to the Delaware Supreme Court for decision.
The Delaware Supreme Court Decision
The Delaware Supreme Court held that the language of the Delaware UCC was clear: a UCC-3 termination statement is effective if the secured party of record “authorized” the filing to be made. Once a UCC-3 termination statement is filed, the UCC-1 financing statement to which it relates ceases to be effective, notwithstanding the subjective intent of the secured party. Citing public policy considerations, the Court reasoned it was fair that sophisticated parties bear the burden of ensuring that its filings are accurate. The UCC system is designed to promote efficiency by “permitting parties to rely in good faith on the plain terms of authorized public filings.” A holding that based the effectiveness of UCC filings on subjective intent “would disrupt and undermine the secured lending markets.” In other words, if the Court embraced JPMorgan’s theory, “no creditor could ever be sure that a UCC-3 filing it truly effective, even where the secured party itself authorized the filing, unless a court determined after costly litigation that the filing was in fact subjectively intended.”
Practical Implications
The Delaware Supreme Court’s decision highlights the importance of having a strong review process for UCC filings. Because Pennsylvania’s statutory language in the relevant sections is nearly identical to Delaware’s UCC, a Pennsylvania court faced with a similar issue may look to this decision for guidance in interpreting its own UCC law.
Secured parties and their counsel should continue to carefully and closely scrutinize any UCC-1 financing statements and UCC-3 termination statements or amendments before they are filed. This case is also an important reminder to exercise caution before granting blanket authorizations to file termination statements. Finally, this case highlights the importance of conducting regular reviews of UCC filings to ensure that security interests remain perfected.

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