CVN will broadcast live from the Delaware Supreme Court Wednesday as it hears arguments striking to the heart of what’s needed to terminate a security interest under that state’s uniform commercial code. In Re Motors Liquidation Co., et al.
The case’s central question stems from two secured transactions, a synthetic lease and a $1.5 billion term loan, taken out by General Motors, with J.P. Morgan as the secured party of record. Both transactions were secured by UCC-1 financing statements. However, when the parties filed UCC-3 forms to repay the synthetic lease, one of those forms mistakenly listed the term loan.
After GM filed for Chapter 11 bankruptcy, the mistake was uncovered. J.P. Morgan argued that it did not intend to terminate the security interest in the term loan so the termination of the security interest in that loan was invalid. However, the Committee for Unsecured Creditors claimed that the completion of the UCC-3 for the term loan dissolved much of the security interest in that loan, regardless of intent. Last June, the U.S. Court of Appeals for the Second Circuit submitted the issue to the Delaware Supreme Court, asking whether intent was required to terminate a security interest under Delaware’s version of the UCC.
The Delaware Supreme Court’s decision will stretch far beyond GM’s bankruptcy. A decision against J.P. Morgan will affect the review of future UCC transactions and will raise potential defenses in similar UCC cases.