16 Hoosier Banker March 2015 LENDING / CREDIT Section 9-509(d)(1) of the Uniform Commercial Code (UCC) provides that a UCC-3 termination statement is effective only if “the secured party of record authorizes the filing.” Interpreting this language, the Delaware Supreme Court held that a UCC-3 termination statement was authorized by and effective against a secured party, despite the undisputed fact that the termination statement was prepared by mistake, and the secured party did not intend to release its security interest.* This case presents a cautionary tale to lenders to take great care in the preparation and filing of UCC documents. Factual and Procedural Background The lending institution (Lender), as administrative agent for a syndicate of lenders, made two separate and unrelated loans to an automotive company (Borrower): • The first was a $300 million loan made in October 2001 related to a synthetic lease financing transaction (Loan 1). To perfect its security interest in the collateral granted by the Borrower to secure Loan 1 (primarily real estate), the Lender filed two UCC-1 financing statements with the Delaware Secretary of State. • The second was a $1.5 billion term loan made five years later (Loan 2). To perfect its security interest in the collateral granted by the Borrower to secure Loan 2 (primarily equipment and fixtures at 42 facilities of the automotive company), the Lender filed a third UCC-1 financing statement with the Delaware Secretary of State. In September 2008, the Borrower informed its counsel that it intended to repay Loan 1 and requested its counsel to prepare all documents necessary for the Lender to be repaid and to release the collateral securing Loan 1. A closing checklist was prepared by counsel for the Borrower that erroneously identified all three UCC-1s filed in Delaware, including the UCC-1 for Loan 2, to be terminated as part of the closing. In addition, the Borrower’s counsel prepared draft UCC-3 termination statements for all UCC-1s filed in Delaware, including the UCC-1 for Loan 2. Although copies of the closing checklist and draft UCC-3 termination statements were circulated to the Borrower, the Lender and both of their counsels, the mistake was not discovered. An escrow agreement was drafted as part of the closing authorizing the escrow agent to terminate all three UCC-1s, including the UCC-1 for Loan 2, once the Borrower repaid the amount due on Loan 1. The escrow agreement was approved by the Lender’s counsel and signed. On Oct. 30, 2008, the Borrower repaid Loan 1; all three UCC-1s filed in Delaware, including the UCC-1 for Loan 2, were terminated. The mistake went unnoticed until the Borrower filed a chapter 11 bankruptcy petition in 2009, after which the Lender notified the unsecured creditors’ committee of the Borrower (Committee) that the UCC-3 termination statement related to Loan 2 had been inadvertently filed. The Lender explained that it had intended to terminate only liens related to Loan 1 and stated that the filing was therefore unauthorized and ineffective under the UCC. On July 31, 2009, the Committee commenced an adversary proceeding against the Lender seeking a determination that, despite the error, About the Author Whitney L. Mosby is a partner with Bingham Greenebaum Doll LLP. She joined the firm in 2002 and specializes in bankruptcy and creditor/debtor rights. A volunteer and supporter of Coburn Place, Mosby is a graduate of Indiana University, where she earned undergraduate and JD degrees. The author can be reached at 317-968-5469, email: WMosby@ bgdlegal.com. Bingham Greenebaum Doll LLP is an associate member of the Indiana Bankers Association. Lender Beware: Secured Party Held Accountable for Mistaken Release of Financing Statement
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