A “UCC-3 Termination Statement” is commonly used in secured transactions by a secured party to put the world on notice that the perfected security interest referenced in the UCC-3 filing is terminated. 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. held that even if both the grantor and grantee of a perfected lien did not intend for the UCC-3 termination statement to terminate the referenced security interest, and its filing was simply a mistake, the secured creditor will be held to the impact of its filing and its security interest will be deemed terminated. See In re Motors Liquidation Company, No. 325, 2014, 2014 WL 5305937 (Del. Oct. 17, 2014).

Motors Liquidation Company—the successor of General Motors Corporation (“GM”)—entered into two financing arrangements with JPMorgan Chase Bank, N.A. (“JPMorgan”): (1) a synthetic lease and (2) a $1.5 billion syndicated term loan (the “Term Loan”).  In GM’s pending chapter 11 cases, the unsecured creditors’ committee (the “Creditor Committee”) claimed JPMorgan and other holders of the syndicated Term Loan extinguished the security interest granted by GM by the filing of a UCC-3 termination statement that referenced the UCC-1 financing statement describing the collateral for both the syndicated lease and Term Loan.  The net result of the termination of JPMorgan’s security interest was that claims related to the Term Loan must share pari passu (pro rata) with the unsecured claimholders.

JPMorgan had “reviewed” the UCC-3 termination statement before GM arranged for its filing. In response to the Creditor Committee’s assertions, both JPMorgan and GM argued that the UCC-3 contained errors; therefore, neither GM nor JPMorgan intended the legal consequences of the UCC-3 termination statement. The UCC-3 termination statement was intended only to cover the syndicated lease.

The Bankruptcy Court for the Southern District of New York ruled that the Term Loan lien was not released, agreeing with JPMorgan that the UCC-3 termination statement was invalid as there was no proper “authorization”—a statutory prerequisite to file the UCC-3 termination statement.

The Creditors Committee appealed to the Second Circuit, arguing that applicable state law—Delaware’s version of the UCC (Del. Code Ann. tit. 6 § 9-513) — did not extend authority to mistakes and intent, but simply contemplated the filing of the UCC-3 termination statement itself. In other words, so long as there was authority to file, the UCC-3 termination statement had the legal effect of extinguishing the perfected security interest.

JPMorgan argued, among other things, that authorization was not the issue, but rather, whether an inadvertent or erroneous filing rendered the UCC-3 termination statement void.

The Delaware Supreme Court, answering the specific question certified to it by the Second Circuit—whether knowingly approving the filing of the UCC-3 termination statement is satisfactory to extinguish a perfected security interest, or “must the secured lender ‘intend’ to terminate the particular security interest”—looked at the plain words of the statute, which only contemplate authorization to file, but does not contemplate mistake or intent.

The Delaware Supreme Court stated that, “Under the Delaware UCC, parties in commerce are entitled to rely upon a filing authorized by a secured lender and assume that the secured lender intends the plain consequences of its filing . . . . The unambiguous language [of the Delaware UCC] promotes sound policy.  It is fair for sophisticated transacting parties to bear the burden of ensuring that a termination statement is accurate when filed.”

Therefore, it is critical to read, proofread, review and review again. Lawyers are carpenters of the law, and, as they say, measure twice, cut once. Here, the wood was worth $1.5 billion.