On January 21, 2015, the US Court of Appeals for the Second Circuit, in Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A. (In re: Motors Liquidation Company), reversed an order of the US Bankruptcy Court for the Southern District of New York, and ruled that although a UCC-3 termination statement (UCC-3) mistakenly identified for termination a security interest that the lenders did not intend to terminate, JPMorgan authorized the filing of the UCC-3, and the UCC-3 was effective to terminate the security interest (, (2d Cir, Jan. 21, 2015)).

The dispute involved the unintentional release of a lien on General Motors Corporation (GM) fixtures and equipment. At the end of 2008, GM was preparing to pay off a $300 million financing and had the Mayer Brown law firm ready the documents. The firm accidentally included a lien that secured the $1.5 billion loan in the list of security interests it terminated after the $300 million was repaid. After GM filed for bankruptcy protection in 2009, the unsecured creditor's committee (Creditor's Committee) asked a judge to rule that, because of the mistake, the $1.5 billion syndicated loan administered by JPMorgan was unsecured. JPMorgan argued that the loan's security interest was unintentionally terminated and was therefore still in effect. US Bankruptcy Judge Robert Gerber sided with JPMorgan in 2013. He said that, while it was "initially tempting" to doom lenders to "live with their mistakes," he found JPMorgan had not expressly authorized the termination of the loan's security interest (see Legal Update, In re Motors Liquidation: UCC-3 Termination Statement Requires Authorization to be Effective).

The Creditor's Committee appealed to the US Court of Appeals for the Second Circuit, and the Second Circuit certified a narrow question to the Delaware Supreme Court. 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 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)) (see Legal Update, In re Motors Liquidation: No Intent Required for UCC-3 Termination Statement to be Effective).

The Second Circuit reversed Gerber's ruling. The three judge panel found that, while "JPMorgan never intended to terminate the main term loan" security interest, the bank had effectively given its authorization. The appeals court noted that the filings ending the security interest were reviewed by the JPMorgan managing director responsible for the $1.5 billion loan and the law firm JPMorgan hired for the paperwork, Simpson Thacher & Bartlett. "JPMorgan reviewed and assented to the filing of that statement. Nothing more is needed," the opinion said.

This decision provides a reminder that some mistakes cannot be undone, and that authorization can be valid even if the proper intent was not present. Practitioners should be increasingly attentive to detail when reviewing UCC searches and drafting UCC-3s. In addition, secured parties should take care when authorizing third parties to file UCC-3s.

This Update is based on material provided by the Accelus service Compliance Complete (http://accelus.thomsonreuters.com/products/accelus-compliance-complete), which provides regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges.