On April 13, 2015, the Second Circuit denied rehearing on its earlier decision giving effect to the filing of a UCC termination statement mistakenly identifying a security interest that JPMorgan, as administrative agent for a $1.5 billion loan to General Motors Corp. (“GM”), did not intend to terminate.
The official committee of unsecured creditors appointed in GM’s bankruptcy initially brought an action against JPMorgan asserting that GM’s $1.5 billion debt obligation became a prepetition unsecured claim due to the inadvertent inclusion of a UCC form terminating the security interest relating to the $1.5 billion loan among a number of other unrelated UCC filings. The documents were reviewed by JPMorgan’s counsel prior to filing, but no one caught the mistake.
Judge Robert E. Gerber of the Bankruptcy Court for the Southern District of New York initially sided with JPMorgan, holding that pursuant to Delaware law, the inadvertent UCC filing was unauthorized and therefore unenforceable. On appeal, the Second Circuit submitted a certified question to the Delaware Supreme Court to resolve the state law question of whether a secured lender must explicitly authorize the termination of the particular security interest identified in the UCC filing for termination, or whether it is enough that the secured lender authorized the act of filing the UCC statement to that effect. The Delaware Supreme Court held that subjective factors such as JPMorgan’s intent or knowledge were irrelevant to the question of enforceability of the filing. Under Delaware law, therefore, JPMorgan’s authorization of filing of the UCC form was sufficient to eliminate its rights in the underlying collateral, whether or not it understood the filing to impact such collateral rights.
The Second Circuit was therefore left with the simpler question of whether JPMorgan authorized the filing of the mistaken UCC termination statement, which it answered in the affirmative. JPMorgan argued that it had only instructed its counsel to take actions to terminate security interests not related to the $1.5 billion loan, and that counsel had therefore exceeded the scope of authority by filing the erroneous UCC statement. The court noted that what JPMorgan intended to accomplish was a distinct question from what actions it had authorized on its behalf. Actual authority, the court quoted, “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 court held that JPMorgan’s and its counsel’s repeated communications with GM’s counsel constituted manifestations of assent to the filing of the UCC statement, and that nothing further was required.