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Yes, Law Firm, You Were JPM’s Agent in Losing $1.5 Billion – Mistaken Termination Statements Still Effective

The Second Circuit has spoken:

“We conclude that although the termination statement mistakenly identified for termination of a security interest that the lender did not intend to terminate, the secured lender authorized the filing of the document, and the termination statement was effective to terminate the security interest.”[i]

As a result, JPMorgan Chase & Co. (“JPM”) is out $1.5 billion and two immense international law firms and their respective malpractice insurers are likely having unpleasant discussions.

In a previous article, we explained how the unsecured creditors committee (the “Committee”) in the bankruptcy case of Old GM acquired the “strong-arm power” to sue Old GM’s lender – JPM, as agent for a syndicate of lenders – to invalidate the perfection of the JPM lien which underlay its claim to the $1.5 billion that had been paid to JPM by Old GM at the outset of the Old GM case.[ii]  In a second article, we sketched the technical legal framework for terminating a security interest under the UCC.[iii]  In the same article, we discussed the Delaware Supreme Court’s opinion (requested by the Second Circuit) that where a secured party of record authorizes the filing of a UCC-3 termination statement, then that filing is effective regardless of whether the secured party intends or understands the effect of that filing.

To recap, before the Old GM bankruptcy case, JPM lent $1.5 billion to Old GM under a term loan agreement (the “Term Loan”).  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.  Later, but also before the bankruptcy case, JPM inadvertently caused the filing of a UCC-3 termination statement in Delaware which, on its face, terminated the UCC-1 pertaining to the Term Loan and the collateral securing it. The Committee, having acquired the trustee’s strong-arm powers and asserting that the UCC-3 left JPM unperfected, sought to claw back the $1.5 billion paid to JPM, to be distributed to unsecured creditors. The Committee lost before the bankruptcy court, but has appealed successfully to the Second Circuit.

The Second Circuit adopted the Delaware Supreme Court’s stated view that where a party did not mean to terminate a UCC-1, the termination statement filed by the party nevertheless terminates the UCC-1 if that is what the termination statement says.  Thus, it is clear that what a party intends to accomplish does not control when the the clear language of a a termination statement it filed says otherwise.  The Second Circuit was left only to consider the proposition that in filing the UCC-3, the law firm that did the filing was not acting as JPM’s agent.  That is, the central question before the Court was: what exactly did JPM authorize to be done on its behalf.

Mayer Brown LLP was counsel for Old GM.  Old GM and JPM wanted Old GM to repay amounts due that were secured by synthetic leases, whereupon JPM would file termination statements with respect to UCC-1 financing statements that had perfected JPM’s security interests in synthetic leases.  The agreement between the parties empowered Old GM to file such termination statements.  Mayer Brown prepared a Closing Checklist, draft UCC-3 termination statements, and an Escrow Agreement, all aimed at unwinding the synthetic lease obligation of Old GM.  Copies of the documents were sent by Mayer Brown to Old GM, JPM, and Simpson Thacher & Bartlett LLP (JPM’s counsel in connection with the synthetic lease transaction) for review.  No one at Old GM, JPM, or either law firm noticed the UCC-3 that marked for death the perfection of JPM’s security interest in the $1.5 billion main term loan.

Per UCC § 9-509(d)(1), a termination statement is effective only if “the secured party authorizes the filing.”  So, did JPM authorize agents to file the UCC-3?  Yes, it did, ruled the Second Circuit.  The documents all referred to the offending UCC-3 termination statement.  JPM received everything and there was no evidence that it expressed misgivings about the UCC-3.  Emails established that each document had been signed off on by counsel for JPM.  The Court concluded its legal discussion as follows: “JPMorgan and Simpson Thacher’s repeated manifestations to Mayer Brown show that JPMorgan and its counsel knew that, upon the closing of the Synthetic Lease transaction, Mayer Brown was going to file the termination statement that identified the Main Term Loan UCC-1 for termination and that JPMorgan reviewed and assented to the filing of that statement.  Nothing more is needed.”

The opinion strengthens the reliance parties may reasonably place upon UCC-3 termination statements.  It follows that the ruling reduces the costs to new lenders (or other secured parties) for relying upon UCC-3 termination statements as they file UCC-1s to perfect their new interests in the same collateral.  The lower costs should benefit both future lenders and future borrowers. The opinion raises the costs of preparing UCC-3s, but probably only slightly, because preparers of UCC-3s should have command of all relevant facts, and are reasonably expected to be more precise and meticulous than parties and lawyers in this sorry episode.[iv]  One surmises, though, that Old GM’s unsecured creditors, their collective recovery having been enhanced by $1.5 billion, are not weeping.

[i]    Official Committee of Unsecured Creditors v. JP Morgan Chase Bank, N.A. (In re Motors Liquidation Co., Case No. 13-2187 (2d Cir. Jan. 21, 2015).

[ii]   “What Else Can a Creditors Committee Do?  Maybe Reap $1.5 Billion for Unsecured Creditors (Lender Beware),” Commercial Bankruptcy Litigation (Oct. 24, 2014), visited at https://www.dailydac.com/commercialbankruptcy/litigation/articles/what-else-can-a-creditors-committee-do-maybe-reap-1-5-billion-for-unsecured-creditors-lender-beware.

[iii]  “You Do Not Have to Mean It: Authorizing the Filing of a Mistaken Termination Statement Suffices to End Perfection of the Security Interest [Committee (re Old GM) v. JPM],” Commercial Bankruptcy Litigation (Nov. 7, 2014), visited at: https://www.dailydac.com/commercialbankruptcy/litigation/articles/you-do-not-have-to-mean-it-authorizing-the-filing-of-a-mistaken-termination-statement-suffices-to-end-perfection-of-the-security-interest-committee-re-old-gm-v-jpm.

[iv]   “There but for the grace of God, plus my OCD, go I,” many honest lawyers are saying to themselves.

About Christopher M. Cahill

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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