FREE MEMBERSHIP Includes » ABL Advisor eNews + iData Blasts | JOIN NOW ABLAdvisor Gray ABLAdvisor Blue
 
Skip Navigation LinksHome / Articles / Read Article

Print

#Ouch: The $1.5 Billion Mistake You Don’t Want to Make!

Date: Apr 01, 2015 @ 07:00 AM
Filed Under: Legal Issues

The first half of 2015 was important for lenders not only because of what happened in the markets, but also because of what happened in the courts. On January 21, 2015 the United States Court of Appeals for the Second Circuit issued its decision on the infamous “GM Case” (1.) and left lenders and their legal counsel thinking “Ouch, we can’t make that same mistake!”

What’s the mistake everyone’s talking about?

JPMorgan Chase and its counsel inadvertently released a UCC-1 financing statement securing $1.5 billion in debt owed to a syndicate of lenders, leaving the lenders as unsecured creditors in General Motor’s bankruptcy proceeding.

How did that happen?

In 2001, General Motors entered into a secured $300 million synthetic lease with JPM, as agent. GM subsequently entered into a secured $1.5 billion term loan facility with JPM, again as agent. Both liens were perfected by recorded UCC-1 financing statements.

Then, in 2008, GM paid-off the synthetic lease and asked its counsel to prepare UCC-3 termination statements to release JPM’s filings related to the synthetic lease. GM’s counsel prepared three termination statements and distributed copies to each of GM, JPM and JPM’s counsel for review. JPM’s counsel approved the termination statements, which were later filed.

What all parties failed to realize at the time was that the UCC-3s inadvertently terminated the financing statement securing the $1.5 billion term loan (in addition to the $300 million synthetic lease).

It was not until GM filed for bankruptcy in 2009 that the mistake was discovered (and seized upon). The Committee of Unsecured Creditors quickly filed suit to take advantage of the mistake and tear down JPM from the ranks of a secured creditor to that of unsecured party in the bankruptcy proceedings.

JPM and its counsel argued that the termination of the financing statement perfecting its lien on the term loan was unintentional. The court held, however, that “although the termination statement mistakenly identified for termination a security interest that the lender did not intend to terminate, the secured lender authorized the filing of the document, and the termination statement was effective to terminate the security interest.” In other words, a secured party’s subjective intent when filing or approving a termination statement is irrelevant.

The scary (but predictable) result was that JPM became an unsecured creditor with respect to the $1.5 billion term loan.

What’s the lesson?

The lesson to lenders and their counsel is to pay very close attention to financing statements and termination statements! A simple mistake can be the difference between being a secured creditor and being an unsecured creditor.

How can I prevent this from happing to me?

A recent article in the American Bar Association Commercial Law Newsletter (authored by my colleagues at Buchalter Nemer) suggests a few practical tips for avoiding the pitfalls of filing termination statements.

  • Use the Optional Description Fields on the Financing Statements:  "Secured parties should utilize the optional reference portion on the bottom of UCC-1 financing statements. One option is for [law] firms to indicate the client and matter reference number on every UCC-1 financing statement that it drafts and files, in order to have standard reference points that everyone in the firm can utilize to double check the specific transaction with respect to which the UCC-1 financing statement was created. Additional detail could also be added to this portion of the UCC-1 in situations where there is a greater possibility for confusion; for example, the addition of either “Synthetic Lease” or “Term Loan” in the GM case. This would be an ideal way for others within the firm who happen upon a transaction they are not familiar with, to confirm that the security interests being terminated are associated with the correct transaction.”
  • Implement a Thorough Review Process:  “In addition, the simple act of institutionalizing a thorough review process could avoid such mistakes. As attorneys, we are often subject to multiple pressing deadlines, and that can lead to a lack of ownership of documents and to reviews that are not as intensive as they could be. At times, we may even rush because we expect someone else involved in the transaction to take a more careful look at the documents before they are considered final. Using the example at hand, we can understand why someone with intimate knowledge of the deal needs to take responsibility for a final, thorough review. UCC-1 financing statements include a lot of important information that could be easily overlooked by someone unfamiliar with a matter. Only being able to understand where the secured party and debtor are listed is not enough; many times there are multiple filing dates associated with multiple transactions, and it is reasonable to see how mistakes like this get made. Establishing (i) an “owner of the document” and (ii) standard best practices for the review of particular documents can ensure that careless mistakes are avoided.”

Endnote:
(1.)  (Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A. (In re: Motors Liquidation Company)

Shadi Enos
Associate | Buchalter Nemer
Shadi J. Enos is an associate in the Buchalter Nemer's Bank & Finance Group, practicing in the areas of commercial lending and corporate finance.
Comments From Our Members

Jeffrey Bilus
Clearly in this instance the adage, "do not sweat the small stuff does not apply."
4.2.2015 @ 8:00 AM
You must be an ABL Advisor member to post comments. Login or Join Now.