11 March 2013

Unsettling News for UCC Searchers

Warning: Inside secured transactions baseball.

Back in my practice days I reviewed many a set of Uniform Commercial Code financing statements. Financing statements (commonly known as UCC-1's) are the means by which secured creditors let the world know that they have a security interest in a borrower's personal property assets (equipment, inventory, accounts, and the like). Recording mortgages and deeds of trust serve the same purpose in the world of real estate.

Secured creditors later file a "termination statement" after a borrower has paid off the loan. It is the presence of a termination statement that lets later potential lenders know that no one else has an interest in a prospective borrower's asset. Thus, the later lender itself can take a security interest in those assets knowing that it will have recourse to them if the borrower fails to pay.

So far, so good, one might think. Simply look at the public records and make a lending decision. Not so fast, according the Bankruptcy Court in the Old GM bankruptcy case (In re Motors Liquidation Co., 2013 WL 772862 (Bankr. S.D.N.Y.)). The presence of a termination statement does not necessarily mean that the the initial financing statement to which it relates has actually been terminated.

How could that be the case, you ask? If the secured creditor did not authorize the filing, the court answered. And how could a financing statement get filed when the secured creditor didn't "authorize" it? Here's where the case gets interesting.

The lender (actually a group of lenders led by JPMorgan Chase) authorized its borrower, General Motors, to file a termination statement with respect to a relatively small ($300 million!) transaction that GM was paying off. However, the termination statement that counsel for GM filed referred to a an initial financing statement that secured a $1.5 billion (that's billion with a "b") loan that GM was not paying. It wasn't simply that the lawyers for GM got the wrong number on the termination statement, they had sent it over to JPMorgan's lawyers for review and they missed it. The bankruptcy court nonetheless held that JPMorgan Chase had not "authorized" termination of the security interest with respect to the bigger loan.

I found the court's reasoning tendentious and believe it would not have been as solicitous of the secured creditor (or its law firm) had the loan been for several factors of ten less than this one. But what are searchers now to do when confronted with termination statements? Apparently if this court is to be believed, they count for nothing; the searching creditor (or its attorneys) must go one step further and contact the earlier perhaps-terminated secured creditor and ask if it actually intended to terminate the initial financing statement. I suspect that, until now, most other folks never went this other time (and money) consuming and almost (but not quite always) useless step.

The plaintiff who sought to set aside JPMorgan's claim to the proceed of the liquidation of its Old GM collateral has appealed. I look forward to what the Second Circuit has to say.

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