In a recent decision, a U.S. Court of Appeals held that the filing of a UCC-3 termination statement in a relatively simple payoff transaction between General Motors and a lender was still considered “authorized,” despite the lender’s argument that it had not intended to terminate its security interest. The error took the lender from a secured creditor on a $1.5 billion deal and turned it into an unsecured creditor in the General Motors bankruptcy case. This case serves as a harsh reminder of the importance of carefully reviewing all filings, no matter how routine.
In 2001, General Motors entered into a lease-financing transaction to obtain $300 million from a syndicate of lenders, led by a primary lender. To secure the lease, the primary lender filed UCC-1 financing statements relating to 12 pieces of real estate, naming itself as the secured party. Five years later, General Motors obtained an unrelated term loan for $1.5 billion from a different syndicate of lenders that also included the same primary lender. To secure the term loan, the primary lender filed another UCC-1 financing statement.
In 2008, General Motors decided to repay the lease. General Motors’ counsel prepared the documents to terminate the security interests associated with the lease. To prepare the documents, General Motors’ counsel performed a UCC search, which revealed three financing statements: two for the lease to be paid off, and one for the term loan, which was not being paid off. Unaware that one of the financing statements applied to the term loan and not the lease – a fact that is not apparent on the face of the financing statement – General Motors’ counsel prepared three UCC-3 termination statements to terminate all three financing statements. The lender and its counsel reviewed and approved the UCC-3 termination statements, and they were filed when the lease was paid off. The error went unnoticed by all parties until one year later, when General Motors filed bankruptcy.
General Motors’ Bankruptcy
General Motors’ committee of unsecured creditors sought a determination that the lender had lost its security interest because of the UCC-3 termination statement relating to the term loan. The lender argued that it was still secured because it had not intended to release the security interests related to the term loan, and it therefore had not “authorized” General Motors’ counsel to file the UCC-3 termination statement. The U.S. Court of Appeals for the Second Circuit did not agree. Although the Court recognized that “unauthorized” terminations are not effective, it concluded that the lender had “authorized” the filing of a UCC-3 termination statement, relying in part on the Delaware Supreme Court’s opinion that subjective intent is not a factor in determining whether a secured party has “authorized” a filing. As a result, the lender’s security interest was terminated and the lender is now an unsecured creditor on the $1.5 billion term loan.
Lessons for Lenders
Before filing or authorizing the filing of a UCC-3 termination statement or preparing a payoff letter, it is important to carefully review the entire lending relationship to ensure that the payoff letter and termination statements accurately reflect the parties’ intent.