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.
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.
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