Filed UCC Termination Statement Binding on Lender Even If Mistaken

In a recent case, a lender made several financings of a borrower. The borrower paid off one financing, and the lender authorized the filing of a termination statement to release its security interest in a particular asset that secured that particular financing. The termination statement was worded, however, so as to release the lender’s security interest in all the borrower’s assets, even those securing a loan not yet paid off. The error remained unnoticed until the borrower entered bankruptcy. The borrower was General Motors, and the loan that became unsecured was $1.5 billion in amount!

In Official Committee of Unsecured Creditors v. JP Morgan Chase Bank, the Delaware Supreme Court ruled that once a secured lender reviews and knowingly approves for filing a termination statement, that filing will be effective even if the lender did not intend to terminate a security interest listed on the termination statement.

What is interesting is that neither the lender (a loan syndicate led by JP Morgan Chase Bank) nor the borrower (General Motors) nor either of the two giant law firms (one representing the lender and the other representing the borrower) caught this error.

According to a comment posted by Professor Dan Schechter, Loyola Law School, Los Angeles, in his Commercial Finance Newsletter, published on Westlaw:

We may never know how this particular error crept into the termination statement in this case; but I have seen many other similar disasters in which a junior lawyer (or even a paralegal) is given the task of preparing the first draft of a key document.  A senior lawyer with intimate knowledge of the client’s business affairs is then supposed to review the document before the document is put into final form.  But the busy senior fails to take enough time to check thoroughly, on the unfortunate assumption that the matter was routine.

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