April 30, 2015 Top Story

Law Firm Mistakenly Wipes Out Security for $1.5 Billion Loan

Court finds intent to release security interest is not required under the UCC

Andrew J. Kennedy

The U.S. Court of Appeals for the Second Circuit has held that a law firm’s mistaken filing of a UCC document was effective—even where there was no intent to terminate the underlying lien. In re Motors Liquidation Co. As a result, the mistakenly filed document eliminated the security that a syndicate of lenders had on a $1.5 billion loan to General Motors. General Motors later went bankrupt. The decision, which suggests strict liability in filing UCC documents, serves as a stark warning for lawyers to thoroughly check the work of others.

The Synthetic Lease and Term Loan

In 2001, General Motors entered into a synthetic lease in which it obtained $300 million from a syndicate of lenders led by JP Morgan. Five years later—in an entirely separate transaction—General Motors entered into a term loan for $1.5 billion. JP Morgan again served as administrative agent for the syndicate for the term loan. Both transactions were secured, which required UCC-1s to be filed.

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