Delaware Supreme Court Justices question Eric Fisher, representing creditors of Motors Liquidation Co., on whether a creditor bears the consequences of a mistake on an otherwise properly filed statement terminating a security interest under the state’s UCC. Creditor J.P. Morgan filed a UCC-3 security termination statement that mistakenly listed a nearly $1.5 billion loan to GM, which became Motors Liquidation Co. in bankruptcy. Click here if you are unable to watch the video.
J.P. Morgan's counsel told the Delaware Supreme Court yesterday that a federal judge certified the wrong question when seeking to determine whether the state's Uniform Commercial Code may have terminated the bank's security interest in a $1.5 billion loan owed by the former General Motors. In Re Motor Liquidation Co.
J.P. Morgan attorney Gregory Williams said that the U.S. Second Circuit Court of Appeals erred in certifying to the Delaware Supreme Court the question of whether simply filing a UCC-3 termination statement was enough to terminate a security interest, while reserving for itself the question of whether the termination statement, which listed the wrong loan, was actually authorized. "I think the Second Circuit... is creating two questions where there is one," Williams told the Delaware court. "The question is, was there authority to file the amendment?"
Williams argued that, under agency principles, a representative for J.P. Morgan lacked the authority to file a termination statement that contained the wrong loan number and that the filing should be considered "unauthorized" and ineffective under Delaware's UCC.
The proceedings before the Delaware Supreme Court stemmed from a bankruptcy dispute involving the assets of the Motors Liquidation Co., known as General Motors before its bankruptcy. Prior to the bankruptcy proceedings, J.P. Morgan filed a UCC-3 termination statement through a representative, believing it was releasing its security interest in one loan to GM, but mistakenly listing a much larger, $1.5 billion loan. The mistake was not discovered until after GM's bankruptcy. Plaintiff, the creditors committee for Motor Liquidation Works, contended that the UCC-3 statement terminated J.P. Morgan's security interest in the loan it listed, while the defendant bank argued that the termination statement was considered "unauthorized" and ineffective because of the mistake.
Finding no direct precedent for the issue, the Second Circuit Court of Appeals asked the Delaware Supreme Court specifically what was required to terminate a security under the state's UCC.
During Williams's argument Wednesday, Chief Justice Leo Strine, Jr. appeared reluctant to move beyond that specific question. When Williams began to argue agency principles of authority, Strine noted that the federal court had reserved that issue for its own judgment. "Are you asking us to give something (to the federal appellate court) that is more polenta and less cornbread?" Strine asked.
"Sometimes, Your Honor, the answer doesn't easily fit into boxes that the questioner sets forth. And that's this case," Williams responded.
The statute at issue, Del. UCC Code sec. 9-509(d)(1), provides that the termination of a financing statement is allowable only if "the secured party of record authorizes the filing." Vice Chancellor J. Travis Laster, emphasizing that the provision is part of a notice statute, appeared more amenable to Williams's argument. "It seems to me what you perceive the Second Circuit to have done is split two inextricably linked concepts, Laster said. "By splitting these two things, the Second Circuit created a filing concept that has greater dignity than the act contemplated."
However, Eric Fisher, representing the creditors' committee, argued that, under the statute's plain language, J.P. Morgan's filing of the UCC-3 statement was sufficient to terminate the security interest of whatever loan was listed on that document, regardless of its intent. Fisher said the UCC's language and analogous case law were clear as to the statute's effect: "When it comes to authorized filings, if you're the secured lender and you authorize your filing, you're stuck with the mistakes," Fisher said.
Vice Chancellor Laster appeared concerned that Fisher's interpretation would inappropriately expand the powers of the statute and diminish a prospective creditor's responsibility to perform due diligence during the loan approval process. "Doesn't (Fisher's argument) turn the statute, which is a notice statute, that's supposed to trigger a due diligence obligation, into the equivalent of a real property recording statute where the recordation has these effects?"
However, Chief Justice Strine appeared more sympathetic to Fisher's plain-language interpretation. After asking what it means to "really mean something," when filing the document, Strine said, "I'm being only a little bit flippant to say that there's a lot of debate out there about linguistics and what people really meant," Strine explained. "I think your point is the UCC wasn't intended for that. The point is be careful about your filings. Yes, you've got to inquire to make sure that the party whose interests were at stake actually authorized the filing, but you're allowed to rely on them to be the master of their own document."
Because of the sheer number of UCC security filings within Delaware, the court's decision will likely impact creditors' procedures in filing UCC amendments as well as due diligence prior to subsequent credit decisions.