When terminating a financing statement, it is necessary to be certain that other financing statements are not unintentionally released, according to an opinion last week of the Second Circuit Court of Appeals. The effect of not being careful in that case was to render a one and one-half billion dollar syndicated financing unsecured by the equipment and other personal property covered by the financing statement.
The opinion, Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JP Morgan Chase Bank, N.A. (In re Motors Liquidation Co.), No. 13-2187 (2d Cir. Jan. 21, 2015), addresses whether a lender authorized the filing of a UCC termination statement that was prepared and filed by counsel for the debtor and to which counsel for the lender appeared to assent. The lender and debtor did not intend for that particular financing statement to be terminated. The intention was to terminate financing statements related to a separate credit facility. The technical issue under the Uniform Commercial Code provision governing termination of financing statements is whether “the secured party authorizes the filing.” In this case, the unintended termination statement was included in the document package for the termination of an earlier credit facility. In bankruptcy, counsel for the unsecured creditors committee argued that the property covered by the mistakenly terminated financing statement was not collateral of the lender because of the termination. The Bankruptcy Court ruled in favor of the lender because the financing statement was not intended to be released; that is, the lender did not intend to release the collateral covered by the financing statement that was terminated. The Bankruptcy Court concluded that, because the lender did not intend to terminate the security interest in dispute, the termination statement was unauthorized and thus ineffective.
On appeal, the Second Circuit split the issue into two questions: (1) what must a secured lender authorize for a UCC-3 termination statement to be effective; and (2) did the lender in the instant case grant the required authority to the borrower’s law firm that filed the UCC-3 termination statement in dispute?
The Second Circuit certified the first question of state UCC law to the Delaware Supreme Court. The Delaware Supreme Court held that whether a filing was “authorized” must be determined mechanically regardless of the subjective intent. The Delaware Supreme Court pointed to the plain language of the statute—which requires only that the secured party of record authorize the filing and not that it understand and intend the substantive terms of the filing—and policy considerations—that it is fair for sophisticated parties to bear the burden of ensuring an accurate termination statement—to reach its conclusion. Thus, intent is irrelevant in determining the effectiveness of a UCC termination statement.
In answering the second question, the Second Circuit reviewed the relevant facts regarding the termination statement. The debtor’s law firm prepared the documents and both the lender and its counsel received copies for review. The comment of the lender’s counsel was “Nice job on the documents. My only comment, unless I am missing something, ... ” Subsequently debtor’s counsel drafted an escrow agreement that included instructions for filing the unintended termination statement and emailed it to lender’s counsel for review, who responded that “it was fine.” The Second Circuit concluded that although the lender did not intend to release the particular financing statement, the actions of lender’s counsel authorized its release. Thus, a financing statement covering all equipment and fixtures at all 42 GM plants in the U.S. securing a $1.5 Billion syndicated credit facility was terminated, and the collateral security was lost in the subsequent bankruptcy. These rulings do not change the standards with respect to unauthorized terminations.
On this precedent, it is crucial that lenders and their counsel carefully confirm the information in a UCC termination statement before authorizing a borrower, or a new lender, to file the termination statement. On the other hand, this precedent supports the right of a subsequent secured party to rely on the UCC record in determining whether a prior filed financing statement remains outstanding. The test is whether the termination statement was authorized, not intended.