Secured Lender's Intent Irrelevant To Termination Statement's Effect

The subjective intent of a secured lender is not relevant to a determination of whether a termination statement was effective under the Delaware Uniform Commercial Code (UCC) to terminate the secured lender's perfected security interest, the Delaware Supreme Court has ruled.

The Delaware Supreme Court considered the issue as a question certified to it by the U.S. Court of Appeals for the Second Circuit in In re Motors Liquidation, 755 F.3d 78, 86 (2d Cir. 2014). The opinion serves as a reminder (and cautionary tale) for agents, lenders and their counsel to closely scrutinize not only transaction documents, but also financing statements and termination statements being filed as part of a closing.

The dispute related to the security interest of certain term loan lenders in the assets of General Motors Corp. The termination statement at issue by its own clear terms purported to terminate a financing statement that had previously perfected a security interest in the assets of General Motors held by a syndicate of term loan lenders including JPMorgan Chase Bank N.A. as a lender and administrative agent.

Counsel for GM, with respect to a synthetic lease financing arrangement, prepared termination statements (Form UCC-3s) as part of the unwinding of the synthetic lease and inadvertently prepared a termination statement for the financing statement providing for the term loan lenders' security interest. Counsel for GM and JPMorgan in the synthetic lease transaction reviewed the termination statements and, according to the court, did not notice or object to the termination statement terminating the term loan financing statement. Under the certified question, the Delaware Supreme Court was asked to assume that JPMorgan itself reviewed the termination statement and knowingly approved its filing (even if it had no intention to terminate the term loan financing statement).

After GM filed for bankruptcy, a committee of unsecured creditors filed suit in the New York bankruptcy court for a determination that the filed termination statement terminated the term loan perfected security interest...