Bylined Articles

Secured Lender's Intent Irrelevant to Termination Statement's Effect

By Christopher M. Winter
November 5, 2014
Delaware Business Court Insider

Chris WintersThe subjective intent of a secured lender is not relevant to a determination of whether a termination statement was effective under the Delaware Uniform Commercial Code (UCC) to terminate the secured lender's perfected security interest, the Delaware Supreme Court has ruled.

The Delaware Supreme Court considered the issue as a question certified to it by the U.S. Court of Appeals for the Second Circuit in In re Motors Liquidation, 755 F.3d 78, 86 (2d Cir. 2014). The opinion serves as a reminder (and cautionary tale) for agents, lenders and their counsel to closely scrutinize not only transaction documents, but also financing statements and termination statements being filed as part of a closing.

The dispute related to the security interest of certain term loan lenders in the assets of General Motors Corp. The termination statement at issue by its own clear terms purported to terminate a financing statement that had previously perfected a security interest in the assets of General Motors held by a syndicate of term loan lenders including JPMorgan Chase Bank N.A. as a lender and administrative agent.

Counsel for GM, with respect to a synthetic lease financing arrangement, prepared termination statements (Form UCC-3s) as part of the unwinding of the synthetic lease and inadvertently prepared a termination statement for the financing statement providing for the term loan lenders' security interest. Counsel for GM and JPMorgan in the synthetic lease transaction reviewed the termination statements and, according to the court, did not notice or object to the termination statement terminating the term loan financing statement. Under the certified question, the Delaware Supreme Court was asked to assume that JPMorgan itself reviewed the termination statement and knowingly approved its filing (even if it had no intention to terminate the term loan financing statement).

After GM filed for bankruptcy, a committee of unsecured creditors filed suit in the New York bankruptcy court for a determination that the filed termination statement terminated the term loan perfected security interest in the assets of GM. The bankruptcy court ruled in favor of the term loan lenders, finding that "neither JPMorgan nor General Motors intended the legal consequences of the UCC-3 termination statement." Thus, the filing of the termination statement "was not authorized and therefore was not effective." On appeal to the Second Circuit, the certified question was presented to the Delaware Supreme Court.

The Delaware Supreme Court held that approval of the termination statement by JPMorgan, whether JPMorgan subjectively understood the content of the termination statement and the legal effect of its filing, was adequate authorization and makes the filing effective. "Under the Delaware UCC, parties in commerce are entitled to rely upon a filing authorized by a secured lender and assume that the secured lender intends the plain consequences of its filing," the court said.

The court reasoned that it would be "strange and inefficient" to have the effectiveness of a termination statement dependent on whether a secured lender "subjectively understood the terms of its own filing and the effect that the filing would have on the security interests the filing's own words address."

Christopher M. Winter, a partner with Duane Morris, is a Delaware business lawyer who focuses his practice on Chapter 11 bankruptcy law and proceedings, commercial and corporate finance and transactions, and Delaware corporate and alternative entity law.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.