A stressed man reviewing termination statements
ComplianceFinanceFebruary 27, 2017

The master of its own termination statement: The case of unsecured creditors

With an opinion that contains the classic line, “A secured party is the master of its own termination statement,” the Delaware Supreme Court held on Oct. 17, 2014, that a UCC-3 termination statement, which was filed by mistake and resulted in the termination of a $1.5 billion term loan, was effective because the filing was authorized by the secured parties involved.

The facts involve two separate transactions between General Motors (GM) and a group of lenders that included JPMorgan Chase Bank, NA (JPMorgan). The first transaction was a synthetic lease, while the second was a $1.5 billion syndicated term loan unrelated to the synthetic lease. Both transactions occurred before GM declared bankruptcy.

Then, prior to its bankruptcy filing, GM filed a UCC-3 termination statement intending to terminate only the synthetic lease transaction. However, the termination statement inadvertently included the syndicated term loan. While inclusion of the term loan was clearly a mistake, the termination statement was prepared by GM’s counsel, and reviewed by JPMorgan and JPMorgan’s legal counsel prior to filing. None of the parties reviewing the filing caught the mistake.

After GM’s bankruptcy filing, the Official Creditor’s Committee sought to have the lender’s security interest terminated, thereby leaving the lenders unsecured. During the bankruptcy proceeding, JPMorgan argued that it had not authorized the filing and that its authority to terminate the interest extended only to the synthetic lease transaction. The Bankruptcy Court agreed and found that JPMorgan had not authorized its legal counsel to act as its agent in terminating any interests beyond the synthetic lease and therefore the termination statement was only effective against that collateral.

The Creditor’s Committee appealed to the Second Circuit Court, which certified the following question to the Delaware Supreme Court:
“Under UCC Article 9, as adopted into Delaware Law by Del Cod Ann. Title 6, for a UCC-3 termination statement to effectively extinguish the perfected nature of the UCC-1 financing statement, is it enough that the secured lender review and knowingly approve for filing a UCC-3 purporting to extinguish the perfected security interest, or must the secured lender intend to terminate the particular security interest that is listed on the UCC-3?”

In answering the question, the Delaware Supreme Court analyzed sections 9-513 (Effect of Filing a Termination Statement), 9-510 (Authority to File) and 9-509 (Persons Entitled to File Certain Amendments), finding that the unambiguous language of the statutes promotes sound policy.

The court stated, “It is fair for sophisticated transacting parties to bear the burden of ensuring that a termination statement is accurate when filed.” The court further provided that, “Before a secured party authorizes the filing of a termination statement, it ought to review the statement carefully and understand which security interests it is releasing and why. A secured party is the master of its own termination statement.”

Therefore, in response to the certified question before it, the Delaware Supreme Court held that, “For a termination statement to become effective under 9-509 and thus have the effect specified in 9-513 of the Delaware UCC, it is enough that the secured party authorizes the filing to be made, which is all that 9-510 requires. The Delaware UCC contains no requirement that a secured party that authorizes a filing subjectively intends or otherwise understand the effect of the plain terms of its own filing.”

As a result, the $1.5 billion syndicated term loan was effectively terminated.

The Delaware Supreme Court has left it to the Second Circuit to consider remaining questions specific to the facts of the case. As of the time we write this, that court has yet to rule.

Robb Zurek
Senior Marketing Manager
Robb Zurek is Senior Marketing Manager for Wolters Kluwer Lien Solutions. Zurek’s primary focus is thought leadership, and content and demand generation. He creates and implements key marketing initiatives to position the company as an industry leader in providing lien management, risk management, and life-of-loan services.