Down below is an article concerning UCC filings and Financing Statements. Discuss using your knowledge of the UCC and financing statements.

Note GM went bankrupt in 2009. This was still being litigated in 2015...

Please answer the following questions:

1. What did the court rely on to come to its decision?
2. Do you agree with the court decision?
3. Should there be a remedy for these lawyers who probably are facing malpractice?

Filer beware: a lesson on the UCC3 termination statement

In a ruling of much consequence to secured lenders everywhere, the Delaware Supreme Court held in Motors Liquidations v. JPMorgan Chase Bank that filing an incorrect UCC3 termination statement can be a costly mistake.

THE UCC3 TERMINATION STATEMENT

Under the Uniform Commercial Code (the UCC), a security interest in personal property of a debtor is perfected by filing a UCC1 financing statement (now called a UCC initial financing statement) with the applicable state filing office. This action creates a security interest in favor of the lender, and if the debtor defaults under the lending arrangement, the secured lender can foreclose on the property of the debtor to recover amounts owed to it by the debtor. When the debtor has satisfied all amounts owed to the lender, a UCC3 termination statement (now called a UCC termination statement) is routinely filed to terminate the security interest perfected by the UCC1 financing statement

THE CASE: MOTORS LIQUIDATIONS V. JPMORGAN CHASE BANK

General Motors Corporation (GM) entered into two separate secured lending transactions, both with JPMorgan Chase Bank as administrative agent. The first was a $300 million synthetic lease financing transaction. The second was a $1.5 billion term loan facility. The synthetic lease and the term loan facility were each secured by different assets of GM. The security interests in these assets were properly perfected by filing UCC1 financing statements. GM eventually repaid the amounts owing under the synthetic lease. GM directed its outside counsel to wind down the transaction, including terminating the perfected security interest related to that transaction by preparing UCC3 termination statements. The term loan facility was to remain in full force and effect and to continue to be secured. Unfortunately, GMs counsel inadvertently included the term loan facility security interest on one of the UCC3 termination statements filed in connection with the synthetic lease. Neither GM nor JPMorgan intended to terminate the term loan facility security interest. Despite review by both GMs and JPMorgans counsel, the error went unnoticed until GM filed for bankruptcy in 2009. The unsecured creditors of GM sought a determination that because of the erroneous termination statement, the term loan facility was unsecured and JPMorgan should be treated as an unsecured creditor during the bankruptcy proceedings. JPMorgan argued that the termination statement was ineffective because JPMorgan did not intend for the term loan facility security interest to be terminated and thus remained a secured lender under the term loan facility.

THE RULING

The $1.5 billion issue that came before the Court was to determine the effect of the termination statement that unintentionally terminated the term loan facility security interest. In other words, did the intent of the parties matter when terminating a security interest or would the court look only to what was actually filed? Was JPMorgan really an unsecured creditor on a $1.5 billion term loan facility because of an oversight in preparing the UCC3 termination statement? The Court concluded in no uncertain terms that the UCC3 termination statement was effective to terminate all security interests listed on the form, including those relating to the term loan, regardless of the parties intent. The Court focused on the plain language of Section 9513: upon the filing of a termination statement with the filing office, the financing statement to which the termination statement relates ceases to be effective. Finding no language relating to the intent of the parties, the Court held that the only requirement for termination is that the secured lender authorizes the filing of the statement. Stating that a secured party is the master of its own termination statement, the court concluded that it is fair for sophisticated parties to bear the burden of ensuring that a termination statement is accurate when filed.

TAKEAWAY

Secured lenders (and their counsel) must carefully review all UCC termination statements before filing and must be certain that what is included on the filing is correct. Because Section 9513 has been adopted in substantially the same form in most states, a court will likely rule that the filing terminates all security interests listed on the form, even if the parties intend a different result.