Second Circuit To Lenders: Get Your UCC Filings Right

INTRODUCTION

On January 21, 2015, the U.S. Court of Appeals for the Second Circuit issued an opinion regarding a mistaken UCC-3 termination statement that all loan market participants should consider carefully. The Second Circuit held that a secured party's lack of intent to terminate a properly filed UCC-1 financing statement, which perfected its lien granted in connection with a secured financing, is not sufficient to deem ineffective the filing of a UCC-3 termination statement with respect thereto. Even absent the intent to terminate, the actions of the secured party and its lawyers prior to the filing of the UCC-3 termination statement were, in this case, sufficient as a legal matter to form the requisite authority to file under Article 9 of the Uniform Commercial Code (the "UCC"). As a result of the Second Circuit's ruling, a $1.5 billion prepetition financing does not have a perfected security interest on the intended collateral, and the secured creditor may not be repaid in full as part of the debtors' bankruptcy. For general unsecured creditors, the secured creditor's error created a significant source of additional distributable value, potentially improving their recoveries on their prepetition claims.

On February 4, 2015, the secured party filed a petition with the Second Circuit seeking a rehearing en banc. We anticipate that it will take at least one month for the Second Circuit to rule on the secured party's rehearing request.

UNDERLYING COURT DECISIONS

Bankruptcy Court

This matter dates back to the summer of 2009 when the official committee of unsecured creditors (the "Committee") in the Chapter 11 bankruptcy cases of General Motors Corporation et al. (collectively, "GM") commenced an adversary proceeding in the U.S. Bankruptcy Court for the Southern District of New York against JPMorgan Chase Bank, N.A., as agent ("JPM") and members of a term loan lending syndicate. The Committee sought a determination from the Bankruptcy Court that a lien securing a 2006 $1.5 billion syndicated term loan (the "Term Loan") to GM was not perfected as a matter law because the UCC-1 financing statement that perfected JPM's lien granted under the Term Loan had been properly terminated prior to the commencement of GM's bankruptcy cases.1

Prior to entering into the Term Loan, GM was also a party to a synthetic lease (the "Synthetic Lease"), and JPM was also the administrative agent for the Synthetic Lease and identified on the associated UCC-1s as...