On March 1, 2013, the US Bankruptcy Court for the Southern District of New York held in Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Company) that a UCC-3 termination statement (UCC-3) that was filed without authorization did not affect the lender's secured claim.

JPMorgan acted as an agent for two lending syndicates in two wholly-unrelated transactions with Motors Liquidation Company, formerly known as General Motors Corporation (GM):

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 properties securing GM's obligations under the Synthetic Lease. These documents included UCC-3s to terminate the UCC-1 financing statements (UCC-1s) filed in connection with the Synthetic Lease.

GM's counsel conducted a UCC search against GM and identified three UCC-1s on the Synthetic Lease closing checklist to be terminated. However, one of the UCC-1s on the checklist did not relate to the Synthetic Lease, but instead related to collateral for the Term Loan. GM's counsel prepared the UCC-3s, including the UCC-3 that terminated the Term Loan UCC-1 (Unrelated UCC-3). JPMorgan's counsel reviewed the draft UCC-3s that GM's counsel had prepared, including the Unrelated UCC-3, and did not object to their filing. After amounts due under the Synthetic Lease were repaid, GM's counsel arranged for the UCC-3s to be filed.

The mistaken filing of the Unrelated UCC-3 was not discovered until after GM filed its Chapter 11 petition in 2009. The Official Committee of Unsecured Creditors moved for summary judgment in part seeking a ruling that the principal lien securing the Term Loan was terminated, making most of the $1.5 billion in debt under the Term Loan now unsecured. JPMorgan also moved for summary judgment, seeking a ruling that because it did not provide authorization to GM to terminate its principal lien, the UCC-1 and its resulting lien were still in place.

At issue before the Court are the UCC's express requirement for authorization to terminate a UCC-1, and what is required to constitute the requisite authorization. The Court must determine if, despite the parties' intentions, the UCC-1 relating to the Term Loan had been terminated by the filing of the Unrelated UCC-3 so that the lien at issue securing the Term Loan was no longer perfected.

The UCC does not require a secured party to execute a UCC-3. Instead, the UCC-3 may be filed by anyone as long as the filing is authorized by the secured party (UCC § 9-509(d)). Therefore, the termination of a UCC-1 is ineffective unless authorized by the secured party (UCC § 9-510). However, the term "authorized" is not defined in the UCC. To determine whether authorization has been granted, the court must look to non-UCC agency law.

The Court granted JPMorgan's motion for summary judgment because the facts conclusively established that JPMorgan intended only to grant authority to GM to terminate the UCC-1s relating to the Synthetic Lease and that GM believed this to be the scope of the authority as well. The Court rejected the Committee's argument that the Unrelated UCC-3 terminated the Term Loan UCC-1, despite the parties' intentions. The Court noted:

The Court turned to agency law to determine whether JPMorgan had authorized GM to file the Unrelated UCC-3 on its behalf. It found that neither GM nor JPMorgan intended, or believed, that their documents would affect anything other than termination of the UCC-1s associated with the Synthetic Lease. Therefore, even though the Unrelated UCC-3 was filed, because it was unauthorized, it was ineffective to terminate the Term Loan UCC-1. The UCC-1 for the Term Loan remained in place and JPMorgan and the lenders remained perfected.

This case highlights that when an agent knows that a lender does not intend to terminate a UCC-1, the lender's failure to object to the filing of a UCC-3 does not constitute the required authorization to an agent to file the UCC-3. To avoid these issues, counsel should always be careful to check and verify UCC search results to ensure the correct UCC-3s are prepared and filed.

For more on UCC-1s and UCC-3s, see Practice Notes: