In what is many times considered a ministerial task, the careful preparation and review of UCC-3 termination statements in transactions between debtors and lenders should not be taken lightly. Secured creditors and their professionals would be wise to make sure that the identification of security interests to be terminated in any filing is completely accurate, and does not include security interests not intended to be released. Neglecting to carefully review UCC-3 termination statements could have a disastrous affect, as illustrated by the recent decision of the Delaware Supreme Court, which effectively converted a $1.5 billion dollar secured loan to an unsecured loan.
On October 17, 2014, the Delaware Supreme Court issued an opinion in response to a certified question of the Second Circuit Court of Appeals in the matter of Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JP Morgan Chase Bank, N.A., 2014 WL 5305937 (Del. Supr.). The Court was asked to interpret whether, under Article 9 of the UCC, a UCC-3 termination statement is effective to extinguish a perfected financing statement if the secured creditor reviewed and knowingly approved the UCC-3 for filing, or must the secured creditor also have intended to terminate the particular security interests identified in the UCC-3. The Court held that the subjective intent or the understanding of the secured creditor as to the security interests being terminated is not a requirement to the effectiveness of a UCC-3; all that is required is the authorization of the secured lender for the filing of the termination statement.
In the above case, prior to its bankruptcy filing in 2009, General Motors (“GM”) filed a UCC-3 that was prepared by its own counsel and then reviewed by the lenders and their legal counsel. The UCC-3 mistakenly included security interests related to a $1.5 billion term loan that was not intended to be terminated by the UCC-3. However, none of GM, the lender group, nor any of their respective legal counsel discovered the error and the termination statement was filed.
In the course of GM’s bankruptcy proceeding, the Official Committee of Unsecured Creditors discovered the error and filed an adversary proceeding against the lender group seeking a ruling from the bankruptcy court that the security interests of the lender group were extinguished by the prior filed UCC-3, rendering the claims of the lender group unsecured. The bankruptcy court ruled in favor of the lender group on the basis that all the parties, including GM, did not intend the legal consequences of the UCC-3, and therefore the UCC-3 was not authorized by the lender group. Accordingly, the UCC-3 was not effective to terminate the security interests of the lender group based on the term loan.
On appeal, the Second Circuit certified to the Delaware Supreme Court the question as to what constitutes “authorization” for purposes of the effectiveness of a UCC-3 termination statement under the Uniform Commercial Code as adopted in Delaware. The Delaware Court held that the clear and unambiguous meaning of UCC 9-509, 9-510 and 9-13 mandated the position that the subjective intent of the lender group was irrelevant, and that all the UCC required was for the lender group to have authorized the filing of the UCC-3. Additionally, from a public policy standpoint, the Court believed that “if 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” (2014 WL 5305937, at *4), and should therefore not be considered.
While the Second Circuit has not issued its final opinion in this matter, it is likely to adopt the holding of the Delaware Supreme Court with respect to the irrelevance of subjective intent of the secured party when authorizing the filing of a UCC-3 termination statement. Accordingly, lenders and their counsel need to be very cautious in reviewing UCC-3’s and should take the extra time to verify that the proper security interests are reflected in the termination statement. Even more so, lenders should be proactive and make it a practice to prepare their own UCC-3 termination statements, so as to reduce the chance of unintended security interests being mistakenly included. In either case, do not minimize the importance of what is commonly deemed a ministerial act. Make it a practice to pay careful attention to termination statements.
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