Delaware Supreme Court Holds Secured Party Accountable for Filing of UCC Forms

Berger Harris partner and Business Law Basics co-blogger Chris Messa has published a piece in Business Law Today entitled "Delaware Supreme Court Holds Secured Party Accountable for Filing of UCC Forms," which is introduced as follows:

Article 9 of the Uniform Commercial Code (UCC) is notoriously unforgiving. It is well-known, even among nonspecialists, that completing UCC forms requires attention to the minutest details. A recent opinion authored by Chief Justice Strine on behalf of the Delaware Supreme Court is a quintessential example of how minor mistakes can result in harsh consequences under the UCC. In Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A. (In re: Motors Liquidation Company), (No. 325, 2014, 2014 WL 5305937 (Del. Oct. 17, 2014)), the Delaware Supreme Court held that a UCC-3 termination statement was authorized and effective notwithstanding the undisputed facts that the secured party prepared the UCC-3 termination statement by mistake and did not intend to terminate the underlying perfected security interest. The Supreme Court ruled that, based on the plain meaning of the statute, a filed UCC-3 termination statement is effective if the secured party of record authorizes the filing, and under the UCC, authorization to file a UCC-3 termination statement does not depend on the secured party's subjective intent or its understanding of the effect of such filing. Although the Court's holding may not be substantively remarkable, this case stands as a cautionary lesson to secured lenders to make certain that their UCC filings are accurate because courts are unwilling to save them from their own mistakes, even when those mistakes could have harsh consequences. This case should also encourage practitioners to document UCC filing authorizations more consistently and thoroughly as a preventative measure against inadvertent and potentially severe results.

It is worth noting that since publication of the article, the U.S. Court of Appeals for the Second Circuit, which certified the question of law to the Delaware Supreme Court, issued a ruling holding that an erroneous filing would be upheld and serve to extinguish the secured interest, and would not be treated as "unauthorized" under the UCC.  In In re Motors Liquidation Co., No. 13-2187 (Jan. 21, 2015), the Second Circuilt held:

In JPMorgan’s view, it never instructed anyone to file the UCC–3 in question, and the termination statement was therefore unauthorized and ineffective. JPMorgan reasons that it authorized General Motors only to terminate security interests related to the Synthetic Lease; that it instructed Simpson Thacher and Mayer Brown only to take actions to accomplish that objective; and that therefore Mayer Brown must have exceeded the scope of its authority when it filed the UCC–3 purporting to terminate the Main Term Loan UCC–1.

JPMorgan’s and General Motors’ aims throughout the Synthetic Lease transaction were clear: General Motors would repay the Synthetic Lease, and JPMorgan would terminate its related UCC–1 security interests in General Motors’ properties. The Synthetic Lease Termination Agreement provided that, upon General Motors’ repayment of the amount due under the Synthetic Lease, General Motors would be authorized “to file a termination of any existing Financing Statement relating to the Properties [of the Synthetic Lease].” J.A. 2151. And, to represent its interests in the transaction, JPMorgan relied on Simpson Thacher, its counsel for matters related to the Synthetic Lease. No one at JPMorgan, Simpson Thacher, General Motors, or Mayer Brown took action intending to affect the Term Loan.

What JPMorgan intended to accomplish, however, is a distinct question from what actions it authorized to be taken on its behalf. Mayer Brown prepared a Closing Checklist, draft UCC–3 termination statements, and an Escrow Agreement, all aimed at unwinding the Synthetic Lease but tainted by one crucial error: The documents included a UCC–3 termination statement that erroneously identified for termination a security interest related not to the Synthetic Lease but to the Term Loan. The critical question in this case is whether JPMorgan “authorize[d] [Mayer Brown] to file” that termination statement.

After Mayer Brown prepared the Closing Checklist and draft UCC–3 termination statements, copies were sent for review to a Managing Director at JPMorgan who supervised the Synthetic Lease payoff and who had signed the Term Loan documents on JPMorgan’s behalf. Mayer Brown also sent copies of the Closing Checklist and draft UCC–3 termination statements to JPMorgan’s counsel, Simpson Thacher, to ensure that the parties to the transaction agreed as to the documents required to complete the Synthetic Lease payoff transaction. Neither directly nor through its counsel did JPMorgan express any concerns about the draft UCC–3 termination statements or about the Closing Checklist. A Simpson Thacher attorney responded simply as follows: “Nice job on the documents. My only comment, unless I am missing something, is that all references to JPMorgan Chase Bank, as Administrative Agent for the Investors should not include the reference ‘for the Investors.’ “ J.A. 921.

After preparing the closing documents and circulating them for review, Mayer Brown drafted an Escrow Agreement that instructed the parties’ escrow agent how to proceed with the closing. Among other things, the Escrow Agreement specified that the parties would deliver to the escrow agent the set of three UCC–3 termination statements (individually identified by UCC–1 financing statement file number) that would be filed to terminate the security interests that General Motors’ Synthetic Lease lenders held in its properties. The Escrow Agreement provided that once General Motors repaid the amount due on the Synthetic Lease, the escrow agent would forward copies of the UCC–3 termination statements to General Motors’ counsel for filing. When Mayer Brown e-mailed a draft of the Escrow Agreement to JPMorgan’s counsel for review, the same Simpson Thacher attorney responded that “it was fine” and signed the agreement.

From these facts it is clear that although JPMorgan never intended to terminate the Main Term Loan UCC–1, it authorized the filing of a UCC–3 termination statement that had that effect. “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.” Restatement (Third) of Agency § 3.01 (2006); accord Demarco v. Edens, 390 F.2d 836, 844 (2d Cir.1968). JPMorgan and Simpson Thacher’s repeated manifestations to Mayer Brown show that JPMorgan and its counsel knew that, upon the closing of the Synthetic Lease transaction, Mayer Brown was going to file the termination statement that identified the Main Term Loan UCC–1 for termination and that JPMorgan reviewed and assented to the filing of that statement. Nothing more is needed.

Id.  Practitioners and businesspeople alike would be well advised to take great care with any form to be filed in connection with a security interest. In many cases, even filings made in error can have great impact on parties' rights and interests.