A $1.5 Billion Clerical Error

In 2001, General Motors obtained a $300 million loan from a group of lenders that included J. P. Morgan Chase Bank. J. P. Morgan obtained a security interest in real estate owned by GM. J. P. Morgan then perfected its security interest by properly filing two separate UCC-1 financing statements, making it a secured lender. 

In 2003, General Motors needed another $1.5 billion. GM borrowed the money from a different group of lenders that also included J.P. Morgan. This time, J.P. Morgan obtained a security interest in a significant portion of GM's equipment and fixtures at forty-two facilities throughout the United States. Again, J.P. Morgan perfected its security interest by properly filing one UCC-1 financing statement, making it a secured lender for purposes of the larger loan.

In 2008, GM decided to pay off the $300 million dollar loan. GM contacted its attorneys at Mayer Brown LLP to prepare documents that would release the liens on GM's real estate once the loan was paid off. Apparently, a partner at Mayer Brown assigned this work to an associate, who then assigned the work to a paralegal. The paralegal obtained a UCC lien search which revealed all three UCC-1s, the two for the $300 million loan and the one for the $1.5 billion loan.

You can probably guess what happened next. Mayer Brown prepared a closing checklist and proposed UCC termination statements for all three liens. The closing checklist and draft documents were circulated to J.P. Morgan and its counsel, Simpson Thacher & Bartlett LLP. No one who reviewed the documents noticed anything out of the ordinary. After the $300 million loan was paid in full, all three UCC termination statements were filed with the Delaware Secretary of State, including a termination statement on the $1.5 billion loan.

In 2009, GM filed bankruptcy. As part of the scramble for assets, the Official Committee of Unsecured Creditors discovered that J. P. Morgan was not secured on the $1.5 billion like it thought it was. The Committee then filed suit to declare J. P. Morgan unsecured. J. P. Morgan argued that the UCC termination statement was ineffective because UCC Section 9-509(d)(1) provides that termination statements are only effective if "the secured party authorizes the filing." J. P. Morgan argued that it could not have "authorized" the filing of the release on the $1.5 billion loan because it did not intend to terminate that security interest, nor did it instruct anyone else to do so on its behalf.

The case eventually made it to the Second Circuit Court of Appeals. The Second Circuit pointed out that what J. P. Morgan intended to accomplish was not the relevant issue when determining whether it "authorized" the filing. The relevant inquiry was what actions J. P. Morgan had authorized to be taken on its behalf. The Court found that J. P. Morgan, directly and through counsel, had plenty of opportunities to review the closing documents. Each time, it consented to the closing checklist and all three UCC termination statements. Therefore, the incorrect UCC termination statement was effective because it was "authorized" by the secured party as required by the Uniform Commercial Code.

The Second Circuit's opinion can be found HERE.