We’re going to take it way back to 2006 when GM entered into a term loan for about $1.5 billion in financing with JPMorgan.
The loan was secured by a first-priority interest in equipment, fixtures, etc., and proceeds at 42 GM facilities across the country.
To follow standard procedures, JPMorgan also filed Fixture Filing Statements. To refresh:
What is a fixture filing? A fixture filing is “the filing of a financing statement covering goods that are or are to become fixtures and satisfying Section 9-502(a) and (b). The term includes the filing of a financing statement covering goods of a transmitting utility which are or are to become fixtures.” – Article 9-102(40). To further clarify what a fixture is, it would be anything that is “so related to a particular real property”.
Along with the Fixture Filing Statements, additional UCCs were filed in various
jurisdictions to perfect the lender’s security interests, including one filed with the Delaware Secretary of State (Main Term Loan UCC-1).
Counsel for GM inadvertently included the Main Term Loan UCC-1 in a list of financing statements that needed to be terminated. Unfortunately, this error continued to roll through JPMorgan and their council unnoticed until GM’s filing for bankruptcy in 2009.
GM Liquidation decision during the bankruptcy proceedings, JPMorgan argued that the termination was unintentionally and unknowingly filed, and since it was unauthorized, it was, therefore, ineffective. Parties then sought a court determination whether the termination was effective and if JPMorgan was essentially an unsecured creditor.
After being appealed, the DE Supreme Court was given the question whether the filing of a termination statement is effective to terminate the security interest regardless of the filer’s intent.
The Second Circuit found that actual authority/intent existed since BOTH the secured party and counsel were aware of the list of termination statements to be filed and that JPMorgan not only reviewed but assented to all the terminations listed.
“Actual authority . . . is created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf.”
The inadvertently filed Termination statement resulted in the loss of perfected secured interest for JPMorgan on the $1.5 billion term loan.
If the assets are considered equipment, JPMorgan may be out of luck, on the other hand, if the assets qualify as fixtures, then prior fixture filings and mortgages recorded at the local level could protect the lender.
The Bankruptcy Court, in a nearly 80-page decision, held:
“…the Court is unable to agree that there is a general principle of law that ‘UCC Filings that Mistakenly Terminate a Security Interest Are Legally Effective.’ The question is rather whether they have been authorized…[and here] the requisite authority was lacking.”
On February 4, 2015, JPMorgan filed a Petition for Rehearing En Banc, asking the Second Circuit Court of Appeals to rehear/reconsider the appeal on the grounds that the decision is a departure from existing agency law:
“that one may be an agent for one purpose does not make him or her an agent for every purpose.”
In closing, this is a great lesson for anyone dealing with lending. Be sure to check, and double check everything you are signing, and entrust those who are handling very important documents.