In a previous article, we explained how the unsecured creditors committee in the bankruptcy case of Old GM is suing Old GM’s lender – JPM (as agent for a syndicate of lenders) – to recover $1.5 billion that had been paid to JPM during the bankruptcy case. Below we trace the technical legal framework for terminating a security interest under the UCC, which is key to understanding the case. We also describe how the Delaware Supreme Court was brought into the act to determine what “authorizes” means, and the current status of the case.
To recap, before the bankruptcy case, JPM lent $1.5 billion to Old GM under a Term Loan agreement. Old GM’s repayment of the funds was secured by all of its assets. JPM caused a UCC-1 financing statement to be filed in Delaware to perfect its security interest. Prior to the bankruptcy case, JPM inadvertently caused the filing of a UCC-3 termination statement in Delaware which, on its face, terminated the Term Loan UCC-1. The Committee, having acquired the trustee’s strong-arm powers and asserting that the filed UCC-3 left JPM unperfected, seeks to claw back the $1.5 billion paid to JPM, which would be a great boon to unsecured creditors.
The filing of a UCC-1 financing statement perfects the secured party’s security interest in the collateral identified (leaving aside legalities irrelevant to this case). Here is the technical legal basis for termination of a UCC-1 financing statement. UCC § 9-513 provides that a UCC-1 financing statement ceases to be effective when a UCC-3 termination statement is filed. [i] UCC § 9-510 provides that “[a] filed record is effective only to the extent that it was filed by a person that may file it under Section 9-509.” Ok, on to UCC § 9-509(d), which provides that “[a] person may file an amendment . . . only if: (1) the secured party of record authorizes the filing . . .” (emphasis added). We highlight “authorizes” because that is the verb on which the fate of $1.5 billion turns.
The bankruptcy court granted summary judgment to JPM, letting JPM off the hook by ruling that the termination statement did not effect a termination of the Term Loan UCC-1. The Committee appealed to the Second Circuit Court of Appeals. The Second Circuit identified two questions on which the appeal rests. The first question is what must a secured lender authorize for a UCC-3 termination statement to be effective? Does it suffice that the secured lender authorized the act of filing the particular UCC-3 (which sets forth what is terminated), or must the secured lender also authorize the effect of the act of filing — the termination of the UCC-1 set forth on the UCC? This sounds abstruse. Otherwise put, is JPM saying “file this UCC-3” sufficient to mean that JPM authorized whatever was written on the UCC-3? Or must JPM have meant to terminate each UCC-1 listed on the UCC-3? JPM argues that it did not “authorize” the filing of the UCC-3 in part because it did not intend for the UCC-1 listed on the UCC-3 to be terminated.
The Second Circuit certified this question to the Supreme Court of Delaware. Why that court? Because Delaware is the state whose uniform commercial code provisions provide the law to be applied in the case. The Delaware Supreme Court responded that for a termination statement to be effective under UCC § 509 and thus to have the effect specified by UCC § 513, it is enough that the secured party authorizes the filing to be made, which is all that UCC § 510 requires. Whether JPM intended the effect of the filing of the UCC (termination of perfection of its security interest) is not relevant.
So, the Second Circuit will adopt that rule and resolve the first question against JPM. The second question remains: did JPM grant to GM’s attorneys the authority either to terminate the Term Loan UCC-1 or to file the UCC-3 that identified the Term Loan UCC-1 for termination? That question turns on agency concepts, among other legal rules, plus a host of facts. The appeal proceeds before the Second Circuit.[i] A word about the UCC. The Uniform Commercial Code is a model law that has been adopted by each state (sometimes with changes made to particular provisions) and made a part each state’s statutes. The UCC-1 and UCC-3 in question in the Official Committee of Unsecured Creditors v. JP Morgan Chase Bank, N.A. case were filed in Delaware, which is the state of incorporation of the borrower (Old GM). So where we say UCC § ___, we refer to the model law provision, which would be identical but with a different denomination in the appropriate state.
Mr. Cahill is counsel with Lowis & Gellen LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’ committees, potential purchasers and others through bankruptcy cases, out-of-court workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has substantial mega-case experience at national law firms representing very large debtors, and has counseled and…
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