Tales Of The GM Bankruptcy: Erroneous UCC-3 Termination Statement Results In Loss Of Secured Interest On $1.5 Billion Term Loan

The Second Circuit Court of Appeals recently determined that JPMorgan released its security interest on a $1.5 billion term loan by virtue of the mistaken filing of a UCC-3 termination statement. After concluding that both the borrowers and lenders had reviewed drafts, including review by their counsel, the Second Circuit concluded that erroneous termination statement was filed with actual authority. Official Committee of Unsecured Creditors v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), Appeal No. 13-2187 (2d Cir. Jan. 21, 2013)(Second Circuit Decision). A copy of the decision can be found here.

In October 2011, General Motors (GM) entered into a "synthetic lease financing transaction" (the Synthetic Lease) by which it obtained approximately $300 million of financing from a syndicate of lenders for which JPMorgan was the administrative agent and secured party of record listed on the UCC-1 financing statements. The Synthetic Lease was secured by liens on real property. Id. at 3. Five years later, GM entered into an unrelated term loan facility (the Term Loan) for approximately $1.5 billion in financing from a syndicate of lenders for which JPMorgan was again the administrative agent and secured party of record. The Term Loan was secured by a large number of GM's assets, including its equipment and fixtures. Id. at 3-4. In connection with the Term Loan, twenty-eight UCC-1 financing statements were filed across the country to perfect the lenders' security interests, including one filed with the Delaware Secretary of State (the Main Term Loan UCC-1). Id. at 4.

In September 2008, GM contacted Mayer Brown LLP, its counsel for the Synthetic Lease, in order to facilitate repayment of the Synthetic Lease and release of the lenders' interest in the GM collateral. Id. at 4. A paralegal at Mayer Brown performed a search and prepared a list of financing statements for termination that inadvertently included the Main Term Loan UCC-1 despite that it was not related to repayment of the Synthetic Lease and should not be terminated. Id. at 5.

Copies of the closing checklist and draft UCC-3 termination statements were circulated to GM, Mayer Brown, JPMorgan and JPMorgan's counsel Simpson Thatcher & Bartlett LLP, but the error went unnoticed. On October 30, 2008, GM repaid the Synthetic Lease and the erroneous UCC-3 identifying the Main Term Loan UCC-1 was filed with the Delaware Secretary of State. Id. at 6. The mistake was not uncovered until...