On October 17, 2014, the Supreme Court of the State of Delaware, in Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A. (In re: Motors Liquidation Company), held that a UCC-3 termination statement (UCC-3) that is reviewed and knowingly approved for filing by a secured lender effectively extinguishes the lender's perfected security interest, regardless of the lender's subjective intent (No. 325, 2014, (Del. Oct. 17, 2014)).

Motors Liquidation Company, formerly known as General Motors Corporation (GM) entered into two separate financing transactions with JPMorgan Chase Bank, N.A. (JPMorgan) acting as agent for two different lending syndicates:

In 2008, GM decided to repay the amounts due under the Synthetic Lease. GM's counsel was asked to prepare the documents necessary for JPMorgan and the lenders to release their security interest in the collateral securing GM's obligations under the Synthetic Lease. GM's counsel prepared three UCC-3s and these were reviewed by JPMorgan's counsel before they were filed. The parties did not notice, however, that one of the UCC-3s filed terminated a UCC-1 financing statement (UCC-1) that had been filed in connection with the Term Loan. None of the parties intended to terminate the UCC-1 related to the Term Loan.

After GM entered a Chapter 11 bankruptcy proceeding in 2009, JPMorgan informed the unsecured creditor's committee (Creditor's Committee) that a UCC-3 relating to the Term Loan had been inadvertently filed. The Creditor's Committee filed a proceeding in the Bankruptcy Court for the Southern District of New York seeking a determination that the UCC-3 in question was effective to terminate the Term Loan security interest and it therefore rendered JPMorgan an unsecured creditor on par with the other unsecured creditors of GM.

The Bankruptcy Court found that the UCC-3 did not release JPMorgan's security interest relating to the Term Loan (see Legal Update, In re Motors Liquidation: UCC-3 Termination Statement Requires Authorization to be Effective). Since JPMorgan had given GM's counsel authority to release only the security interest relating to the Synthetic Lease, the court reasoned, then the filing of the UCC-3 was not authorized. The court found that none of the parties had intended that the security interest be released for the Term loan, and therefore it held that the UCC-3 was ineffective to terminate the UCC-1 relating to the Term Loan.

The Creditor's Committee appealed to the Second Circuit, arguing, among other things, that:

JPMorgan responded by arguing that a party may authorize the filing of a specific document, but that this authorization does not cause the UCC-3 to be effective if it contains errors which result in the release of a security interest that the party did not subjectively intend to release.

The Second Circuit certified a narrow question to the Delaware Supreme Court, asking that court only whether, for a UCC-3 to effectively extinguish the perfected nature of a UCC-1, it is enough that the secured lender review and knowingly approve for filing a UCC-3 purporting to extinguish the perfected security interest, or must the secured lender intend to terminate the particular security interest that is listed on the UCC-3.

Addressing the narrow question certified to it, the Delaware Supreme Court held that for a UCC-3 to become effective under Section 9-509 of the Delaware UCC and have the effect specified in Section 9-513 of the Delaware UCC, it was enough that the secured party authorized the filing to be made. The court refused to address the additional issue, raised by JPMorgan, as to whether GM and its counsel was authorized to act as JPMorgan's agent in filing the UCC-3.

The court turned first to the plain language of the Section 9-513 of the Delaware UCC (Del. Code Ann. tit. 6, § 9-513), which states that "upon the filing of a termination statement with the filing office, the financing statement to which the termination statement relates ceases to be effective" except as provided in Section 9-510. Section 9-510 of the Delaware UCC (Del. Code Ann. tit. 6, § 9-510) requires that the termination statement be filed by a person authorized under Section 9-509 of the Delaware UCC (Del. Code Ann. tit. 6, § 9-509), which requires simply that the filing be authorized by the secured party of record. In other words, if the secured party authorizes the filing of the UCC-3, then the UCC-3 is effective upon filing. Since JPMorgan had authorized the filing of the UCC-3 at issue, it effectively terminated the security interests described therein.

The court cited policy considerations to support its conclusion. The court reasoned that it is fair that sophisticated parties should be charged with determining the accuracy of the UCC-1s and UCC-3s they file. To base the effectiveness of a UCC-3 on the filing party's subjective belief about what it contains would be strange and inefficient. Moreover, had the Delaware General Assembly intended to incorporate elements of intent or subjective belief into the UCC termination process, it could have easily done so in the statute.

Lastly, the court noted that the notice filing system under the UCC is intended to create certainty in the market place, allowing parties to rely in good faith on the plain terms of authorized public filings. If subjective intent was taken into account to determine the effectiveness of a UCC-3, it would disrupt and undermine the secured lending market.

The court will transmit its opinion to the Second Circuit, where the case will continue.

The Delaware Supreme Court adhered to the plain language of the Delaware UCC. A UCC-3 that is authorized and filed does exactly what it purports to do and subjective elements, such as the secured party's intent, are excluded from consideration. This result supports commercial certainty in secured lending transactions.

Secured parties and their counsel should continue to exercise care when reviewing any UCC-3 termination statements or amendments before they are filed. They should have systems in place to ensure that only changes that are intended to be made are made to UCC-1s.