Livingston on Unauthorized Filing of Termination Statements under U.C.C. Article 9

Livingston on Unauthorized Filing of Termination Statements under U.C.C. Article 9

 In a recent bankruptcy case, the secured creditors, to their horror, found that they erroneously allowed the debtor to file a termination statement although the debtor still owed millions of dollars on the associated transaction. A sympathetic court, however, applying traditional common law principles of agency, held that the filing of the termination statement was unauthorized and therefore legally ineffective.

Excerpt:

At the start of a secured transaction, the secured party will always want to file a properly filled out financing statement in the correct location to ensure perfection of its security interest in the agreed upon collateral. Because of the simplification of the filing rules in the 2001 revisions to Article 9 (Secured Transactions) of the Uniform Commercial Code, secured parties can readily achieve perfection in most cases. See U.C.C. §§ 9-301, 9-501, 9-502 (Official Text 2009) (setting forth the rules for perfection by filing). In the best of all possible worlds, the debtor will pay back the loan and will then ask the secured party to terminate the filed financing statement if the parties do not contemplate a future lending transaction involving the same collateral. Under Article 9, the debtor may demand that the secured party either file a termination statement itself or send a termination statement to the debtor for filing. U.C.C. § 9-513 (c). In a recent bankruptcy case, the secured creditors, to their horror, found that they erroneously allowed the debtor to file a termination statement although the debtor still owed millions of dollars on the associated transaction. Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JP Morgan Chase Bank, N.A. (In re Motors Liquidation Co.) (hereinafter Motors), 486 B.R. 596 (Bankr. S.D.N.Y. 2013) [an enhanced version of this opinion is available to lexis.com subscribers]. A sympathetic court, however, applying traditional common law principles of agency, held that the filing of the termination statement was unauthorized and therefore legally ineffective. 486 B.R. at 647-48.

In Motors, General Motors Corporation ("GM") was being reorganized under Chapter 11 of the Bankruptcy Code. The Official Committee of Unsecured Creditors (the "Committee") filed an adversary proceeding, seeking a declaration that a financing statement filed by certain secured creditors of GM in November 2006 had been terminated in October 2008, before the filing of the Chapter 11 petition. Motors, 486 B.R. at 602-03. If the financing statement had been terminated, the underlying security interest in GM's assets would have become unperfected and thus subject to avoidance by the debtor-in-possession in the Chapter 11 proceeding. The secured and unsecured creditors were fighting over almost $1.5 billion of the debtor's assets. 486 B.R. at 603.

Before the filing of the October 2008 termination statement, the secured lenders, which were represented at all times by an agent, JP Morgan, clearly had validly perfected security interests in the equipment and fixtures at forty-two GM facilities throughout the US. Motors, 486 B.R. at 603 n. 6. In September 2008, GM informed its attorneys that it wished to repay the amount due in an unrelated secured transaction to the same lenders (the "Synthetic Lease"). 486 B.R. at 607. The attorneys then prepared various documents to effect the repayment and the termination of the financing statements associated with the Synthetic Lease. By error, the termination statements ("UCC-3s") referenced not only the financing statements associated with the Synthetic Lease but also the financing statement associated with the $1.5 billion loan (the "Term Loan"), which GM did not intend to repay at that time. 486 B.R. at 610. JP Morgan, as the secured parties' agent, reviewed the proffered documents, including the UCC-3 termination statements, and did not voice any objection. 486 B.R. at 612. GM paid off its obligation under the Synthetic Lease, and the termination statements were duly filed. 486 B.R. at 614.

 Access the full version of this article with your lexis.com ID. Additional fees may be incurred.

If you do not have a lexis.com ID, you can purchase this commentary and additional Emerging Issues Commentaries from the LexisNexis Store.

Lexis.com subscribers can access the complete set of Emerging Issues Analyses for Commercial (UCC) Law and the Commercial (UCC) Area of Law page.

For more information about LexisNexis products and solutions connect with us through our corporate site.