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Motors Liquidation Co. v. JP Morgan Chase Bank, N.A.

Court of Appeals for the Second Circuit
2015 WL 252318, 85 U.C.C. Rep. Serv. 2d (West) 592, 777 F.3d 100 (2015)
ELI5:

Rule of Law:

Under UCC Article 9, a UCC-3 termination statement is effective to release a security interest if the secured party authorizes the act of filing the statement, even if the secured party did not subjectively intend to terminate the specific security interest listed due to a clerical error.


Facts:

  • General Motors (GM) entered into a 'Synthetic Lease' financing transaction with a syndicate of lenders led by JPMorgan Chase Bank (JPMorgan), secured by real estate.
  • Five years later, GM obtained a separate, unrelated $1.5 billion 'Term Loan' from a different syndicate, also with JPMorgan as agent, secured by equipment and fixtures; this was perfected by filing UCC-1 financing statements, including the 'Main Term Loan UCC-1'.
  • When the Synthetic Lease neared maturity, GM asked its counsel, Mayer Brown, to prepare documents to pay off the lease and release the associated security interests.
  • A Mayer Brown partner instructed an associate to draft the termination documents; a paralegal ran a search for UCC-1s to be terminated and inadvertently included the Main Term Loan UCC-1 (related to the $1.5 billion loan) alongside the Synthetic Lease UCC-1s.
  • Mayer Brown prepared a Closing Checklist and draft UCC-3 termination statements that erroneously included the termination of the Main Term Loan UCC-1.
  • Copies of these documents were circulated to JPMorgan and its counsel, Simpson Thacher & Bartlett, for review.
  • No one at GM, Mayer Brown, JPMorgan, or Simpson Thacher noticed the error; JPMorgan's counsel emailed Mayer Brown saying 'Nice job on the documents' and approved the Escrow Agreement.
  • On the closing date, the erroneous UCC-3 termination statement was filed with the Delaware Secretary of State, purporting to terminate the security interest for the $1.5 billion Term Loan.

Procedural Posture:

  • The Committee of Unsecured Creditors commenced an action against JPMorgan in the United States Bankruptcy Court for the Southern District of New York.
  • The Committee sought a determination that the UCC-3 filing was effective, rendering JPMorgan an unsecured creditor for the Term Loan.
  • The Bankruptcy Court granted summary judgment in favor of JPMorgan, ruling the filing was unauthorized and ineffective.
  • The Committee appealed to the United States Court of Appeals for the Second Circuit.
  • The Second Circuit certified a question of law regarding the definition of 'authorization' under the UCC to the Delaware Supreme Court.
  • The Delaware Supreme Court answered the certified question, stating subjective intent is not required for authorization.

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Issue:

Is a UCC-3 termination statement effective to release a security interest under the Uniform Commercial Code when the secured party reviews and approves the document for filing but lacks the subjective intent to terminate the specific interest identified due to an inadvertent mistake?


Opinions:

Majority - Per Curiam

Yes, the termination statement is effective because the UCC requires only that the secured party authorize the act of filing, not that they subjectively understand or intend the specific legal outcome of that filing. Relying on the answer provided by the Delaware Supreme Court to a certified question, the court reasoned that the statute (UCC § 9-509) is unambiguous. It focuses on whether the secured party authorized the filing to be made. If parties could avoid the consequences of their filings by claiming a lack of subjective intent, the reliability of the public record would be undermined, and there would be no incentive to ensure accuracy. Applying agency law principles, the court found that JPMorgan manifested assent to Mayer Brown's actions. By reviewing the drafts and the Closing Checklist and responding with approval ('Nice job,' signing the Escrow Agreement), JPMorgan granted actual authority to Mayer Brown to file the specific documents in the package. Consequently, even though JPMorgan did not intend to release the Term Loan, they authorized the filing that did exactly that.



Analysis:

This decision establishes a strict liability standard for secured parties regarding UCC filings. It confirms that the commercial world relies on the objective act of filing rather than the private intent of the parties. For legal practitioners and financial institutions, this creates a heavy burden of due diligence; 'clerical error' is effectively removed as a defense against third parties (like the unsecured creditors here) once a document is reviewed and approved for filing. The court emphasizes that the sophisticated nature of the parties (major banks and law firms) reinforces the need for accuracy, as they are in the best position to prevent such costly mistakes.

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