Article 9 of the Uniform Commercial Code (UCC) is notoriously unforgiving. It is well-known, even among nonspecialists, that completing UCC forms requires attention to the minutest details. A recent opinion authored by Chief Justice Strine on behalf of the Delaware Supreme Court is a quintessential example of how minor mistakes can result in harsh consequences under the UCC. In Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A. (In re: Motors Liquidation Company), (No. 325, 2014, 2014 WL 5305937 (Del. Oct. 17, 2014)), the Delaware Supreme Court held that a UCC-3 termination statement was authorized and effective notwithstanding the undisputed facts that the secured party prepared the UCC-3 termination statement by mistake and did not intend to terminate the underlying perfected security interest. The Supreme Court ruled that, based on the plain meaning of the statute, a filed UCC-3 termination statement is effective if the secured party of record authorizes the filing, and under the UCC, authorization to file a UCC-3 termination statement does not depend on the secured party's subjective intent or its understanding of the effect of such filing. Although the Court's holding may not be substantively remarkable, this case stands as a cautionary lesson to secured lenders to make certain that their UCC filings are accurate because courts are unwilling to save them from their own mistakes, even when those mistakes could have harsh consequences. This case should also encourage practitioners to document UCC filing authorizations more consistently and thoroughly as a preventative measure against inadvertent and potentially severe results.
Factual and Procedural Background
The dispute underlying this case began with UCC-1 financing statements filed pursuant to two entirely separate and unrelated credit facilities in favor of General Motors Corporation. Under each credit facility, JPMorgan Chase Bank, N.A., acted as administrative agent for a different syndicate of lenders. The first credit facility involved a $300 million synthetic lease financing. In connection with that transaction, two UCC-1 financing statements identifying JPMorgan as administrative agent were filed with the Secretary of State of the State of Delaware. The second credit facility was a $1.5 billion term loan in favor of General Motors. As a part of that transaction, a UCC-1 financing statement was filed with the Delaware Secretary of State which also identified JPMorgan as administrative agent.
When the time came to unwind the synthetic lease facility, General Motors' attorneys prepared the necessary documentation, which properly included UCC-3 terminations statements to terminate the perfected nature of the security interests in the collateral securing the synthetic lease facility. However, in addition to preparing UCC-3 termination statements related to the synthetic lease, General Motors' attorneys mistakenly prepared a UCC-3 termination statement that would terminate the term loan UCC-1. The erroneous UCC-3 was reviewed by General Motors' attorneys and JPMorgan's attorneys and the error was not discovered. As a result, the erroneous UCC-3 was filed and became a part of the public record.
When General Motors later filed for bankruptcy, the erroneous UCC-3 termination statement was discovered. The committee for unsecured creditors (the "Creditors Committee") brought an action in the Bankruptcy Court for the Southern District of New York seeking a determination that the term loan UCC-1 had been effectively terminated by the erroneously filed UCC-3 and that the security interest in the collateral underlying the term loan facility was unperfected. If correct, the Creditors Committee's assertion would mean that the erroneous UCC-3 had caused the term loan to become unsecured and the term loan lenders' $1.5 billion claim against General Motors would have lost priority over General Motors' unsecured creditors. The bankruptcy court, however, disagreed with the Creditors Committee and determined that the UCC-3 did not effectively terminate the term loan UCC-1 because the UCC-3 was not properly authorized. The Creditors Committee appealed the bankruptcy court's holding to the Second Circuit Court of Appeals.
On appeal, the Second Circuit ruled that resolution of the case involved a two-step analysis. First, a determination of what constitutes "authorization" under the UCC and second, whether JPMorgan provided the requisite authorization. The first issue was a matter of statutory interpretation and an issue of first impression, and for those reasons, the Second Circuit certified the question to the Delaware Supreme Court. The Second Circuit's ruling on the second issue will follow the determination of the first issue.
The Delaware Supreme Court narrowly construed the issue presented to it, and endeavored to determine whether “authorization” under the UCC requires the secured party only to approve the filing of the UCC-3 termination or must it also intend the consequences that flow from the filing of the UCC-3. The Supreme Court sided with the Creditors Committee and held that the erroneous UCC-3 was effective to terminate the term loan UCC-1. The Supreme Court reasoned that under the UCC, "it is enough that the secured party authorizes the filing to be made" because the UCC "contains no requirement that a secured party that authorizes a filing subjectively intends or otherwise understands the effect of the plain terms of its own filing."
Supreme Court's Reasoning
The Supreme Court set forth two lines of reasoning that led to its holding. The first "and most important consideration" was the statutory language governing the effectiveness of a UCC-3 termination statement. The Supreme Court found that the statutory language was unambiguous and supported the Creditors Committee's position that the UCC-3 termination was effective. Second, the Supreme Court asserted that its holding was consistent with the policy underlying the UCC. The UCC, it noted, is a system of notice filing, and for the sake of efficiency and consistency, lenders should be able "to rely in good faith on the plain terms of authorized public filings."
Plain Meaning of UCC
The Supreme Court's statutory analysis focused on sections 9-513(d), 9-510(a), and 9-509(d)(1) of the UCC. When read together, these sections state that upon the filing of a UCC-3 termination that is authorized by the secured party, the UCC-1 financing statement to which the UCC-3 termination relates ceases to be effective. The Supreme Court determined that these three sections are unambiguous and do not require a secured party to intend the consequences of a UCC-3 termination in order to properly authorize such a filing. The Creditor's Committee persuasively argued that the Delaware General Assembly could have, but did not, include a statutory "safety valve" for secured parties who do not intend the effect of their filings.
UCC Public Policy
The Supreme Court's second line of reasoning was that its holding is supported by the policy underlying the UCC, namely the promotion of certainty and efficiency in commercial transactions. The Court wrote that:
[t]o hold that parties cannot rely upon authorized filings unless the secured party subjectively understood the effect of its own action would disrupt and undermine the secured lending markets. It is not clear to us how an inquiring party would find out whether a secured party understood and intended the consequences of its own filing.
Interestingly, the Court recognized a certain level of inefficiency under the UCC when it noted that the UCC filing system "contemplates that later lenders may need to conduct diligence to determine that a filing was authorized by the secured party of record."
Conclusion and Practice Points
The Supreme Court's holding in this case provides a practical resolution to this issue of first impression. The lesson for secured parties is that great care must be taken in the preparation of UCC forms. In transactions involving sophisticated parties, it is reasonable for those parties to bear the burden of ensuring the accuracy of their filings. The Supreme Court's holding properly holds a secured party accountable for filings that it makes, even if those filings have results which are unintended and harsh.
In light of the Delaware Supreme Court's holding, the Second Circuit next will determine whether JPMorgan provided the requisite authorization for the erroneous UCC-3. While we await that decision, it is worth considering whether and how UCC filing authorizations are documented. In many financing transactions, there are no stand-alone UCC authorization documents, and when UCC filing authorizations are separately documented, they are often general statements authorizing the lender to file the "appropriate" UCC forms. With the benefit of hindsight, it is fair to say that JPMorgan should have drafted UCC filings authorizations which would have authorized only UCC-3 terminations related to the synthetic lease transaction. Perhaps the diligence required by this extra layer of documentation would have the added benefit of making it more likely that practitioners would avoid drafting an erroneous UCC-3 termination in the first place.