JPMORGAN’S UNFORTUNATE LOSS
to terminate the security interest
in the smaller loan accidentally
included an extra security interest
that secured much of the $1.5
billion loan. Both organizations
and their outside counsel reviewed
this document before it was filed
with the Delaware Secretary of
State. When it was filed, JPMorgan
released its security interest in the
collateral.
II.
A Whopping
Bankruptcy
I.O.U.
In
Naturally, having a $1.5 billion
claim against a bankruptcy estate
without having a security interest
in any collateral securing that claim
leaves a creditor in a remarkably
unenvied position known as an
unsecured creditor. The unsecured
creditor usually gets repaid only a
small percent if any of the actual
debt.
Trying to stave off that
position, JPMorgan claimed that
the termination statement that
purportedly discharged its security
interest was ineffective because it
authorized it mistakenly. It argued
reviewing the termination statement
before it was filed, seeing the
mistake before it was effective, and
approving the document containing
that mistake does not make the filing
itself effective. Instead, the creditor
must intend for the specific security
interests listed in the termination
statement to be released despite
what the termination statement
actually says.
If that sounds
unconvincing, that’s because it is.
But the Bankruptcy court for
the Southern District of New
York accepted it and held that
the termination statement was
ineffective as to that financing
statement.5 On appeal, the 2nd
Circuit Court of Appeals disagreed
and even asked the Delaware
Supreme Court to weigh in by
answering one of the questions
before it through a certified question.
Essentially, does Delaware law
require a creditor to authorize only
filing the termination statement
which happens to extinguish the
listed security interests, or does it
have to intend to extinguish each
listed security interest.6
value is sufficient to cover the
debt. Any amount owed beyond
the collateral’s value is treated as
unsecured. This also means – to the
benefit of the rest of the unsecured
creditors – that property in the
bankruptcy estate may be available
to pay off their claims if it turns out
that the property is unencumbered
or non-exempt. At best, JPMorgan
is sharing its collateral with GM’s
other unsecured creditors but still
getting paid at least some of what
it was owed. At worst, JPMorgan
is left with an unsecured I.O.U. that
will likely be discharged.
“If parties could be relieved from
the legal consequences of their
mistaken filings, they would have
little incentive to ensure the accuracy
of their information contained in their
UCC filings,”7 sayeth the Delaware
Supreme Court. Well, it’s tough to
argue with that. Just consider the
ramifications of every organization
that would claim a mistake in the
wake of finding out that it could be
more secured.
That left JPMorgan grappling with
§ 506(a)(1) of the bankruptcy
code which states that a secured
loan is reaffirmed if the collateral’s
5
Unsecured Creditors of Motors
Liquidation Co. v. JPMorgan Chase Bank,
N.A. (In re Motors Liquidation Co.), 486
B.R. 596 (Bankr. S.D.N.Y. 2013).
6
Official Committee of Unsecured
Creditors of Motors Liquidation Co. v. JP
Morgan Chase Bank, N.A. (In re Motors
Liquidation Co.) 755 F.3d 78 (2nd Cir.,
2014).
7
Official Comm. of Unsecured
Creditors of Motors Liquidation Co., 2014
WL 5305937 at 3-4.
National Association of Consumer Bankruptcy Attorneys
Winter 2015
CONSUMER BANKRUPTCY JOURNAL
39