JPMORGAN’S UNFORTUNATE
LOSS OF $1.5 BILLION
SECURITY INTERESTS VERSUS A
BANKRUPTCY DISCHARGE
By Christine M. Kieta
Law Office of Christine M. Kieta, PC
J
PMorgan
Chase
Bank
(“JPMorgan”) just lost $1.5
billion – not million – through
an error that left most of a loan to
General Motors (“GM”) unsecured
by any collateral. You don’t have
to be a lawyer to appreciate
the magnitude of that mistake.
When GM paid off a smaller
loan (a paltry $300 million) from
JPMorgan one of the law firms had
to file a termination statement to
release the lien in the collateral that
secured repayment of that loan. A
paralegal for one of their law firms
mistakenly included a different lien
that secured a different loan for
$1.5 billion. That’s a big mistake.
An unsympathetic 2nd Circuit Court
of Appeals pointed out that “[n]o one
at General Motors, Mayer Brown,
JPMorgan, or its counsel, Simpson,
Thacher & Bartlett, noticed the
error.”1 Worse yet the incorrect
documents were sent to each
organization – and their outside
counsel – for review. Translation:
everyone reviewed the mistake,
1
38
Id.
CONSUMER BANKRUPTCY JOURNAL
and everyone failed to catch this?
Ouch.
I.
What In The World Are
Secured Transactions, And Why
Should Every Lawyer And Every
Business Know The Area?
Secured transactions are about
exciting as a piece of paper. But
they touch almost every person
and every business that has
debt. Sometimes it is secured.
Sometimes it is discharged. So
what happened to JPMorgan?
JPMorgan made loans to GM
and took collateral to secure
repayment of those loans. This
was supposed to do two things: 1)
guarantee repayment of the loans;
and 2) guarantee that the balance
owed on each loan would not be
discharged in a bankruptcy at least
up to the value of the collateral
which creditor can take in lieu of
repayment. Article 9 of the Uniform
Commercial Code (“UCC”), which
is adopted individually by each
State, governs security interests in
collateral guaranteeing repayment.
This is the murky area where it is
Winter 2015
easy to make mistakes and that
ultimately cost JPMorgan a ton of
money.
To have an enforceable lien (which
is called a security interest under
the UCC2) the creditor must do two
things. First, it must ensure that its
security interest actually attaches to
the collateral (a three step process
under 9-203(a) and (b)).3 Second, it
must tell the world about its security
interest in that collateral which
protects it from other creditors who
may claim an interest in it especially
in a bankruptcy. This is called
‘perfecting’ the security interest.4
The most common method of
perfecting a security interest –
which is what JPMorgan did for
both loans – is by filing a financing
statement with the applicable state
office. For GM, it was Delaware
because that is the state in which it
is incorporated. The paralegal who
prepared the termination statement
2
3
4
§ 1-201(b)(35)
§9-102
§9-308 has 4 methods for
perfection: filing a financing statement,
possession, control, and automatic.
National Association of Consumer Bankruptcy Attorneys