Accidental Filing of UCC Termination Statements – Can the Mistake be Fixed?
When a loan is paid off, one of the next steps may be for the lender to release its security interests in the borrower’s collateral. This is most often done by using a form UCC-3. By checking the box marked “Termination” the secured party states that the specified financing statement is no longer effective. Anyone who searches that borrower’s UCC records thereafter will see that the lender’s filing has been terminated.
This article talks about accidental filings of termination statements—when that termination statement is filed by mistake. Does the lender’s security interest cease to exist, or can that mistake be “undone”?
The question comes up more than you might think. Unfortunately, the courts don’t agree on the effect of a mistakenly filed termination statement. Two recent cases illustrate the point, and each one should cause lenders to look at their filing procedures more carefully.
In one case, which arose in connection with the General Motors bankruptcy, the lawyer for JPMorgan Chase Bank authorized the GM lawyer to file a UCC termination statement on a $1.5 billion loan—by mistake. The parties had documented a payoff, so the lawyer for the Bank looked at the UCC-3, told the borrower to go ahead and file the termination statement, and the borrower’s lawyer did just that.
The problem was that those two lawyers weren’t working on that $1.5 billion loan transaction, but rather on a completely different transaction involving a real estate lease. Same lender (Chase) and same borrower (GM), but different debts.
JPMorgan Chase Bank did not catch the mistake until after GM filed bankruptcy a few months later. In a bankruptcy case, security interests that are not perfected as of the filing of the bankruptcy, can be set aside by the court. As a result, the lender can find itself unsecured.
A lawsuit in the bankruptcy court raised the question of whether a mistakenly filed termination statement is “authorized” and therefore effective.
The court held that although the termination statement was filed with permission of the Bank, that permission was given by mistake, because it referred to the wrong underlying financing statement. The termination statement was therefore not “authorized.”
The court pointed out that prior to 2001, UCC termination statements could only be filed if they were signed by the secured party. However, since its 2001 amendment, Article 9 no longer requires the execution of a UCC-3 by the secured party. Instead, it may be filed without any signature, and by anyone, provided that the filing has been “authorized” by the secured party. Importantly, said the court, “there now is no automatic consequence by reason of the filing of a termination statement. The fact that a termination statement has been filed does not by itself mean that the initial statement came to an end. It all depends on whether the termination of the underlying initial financing statement was authorized. If the requisite authorization was lacking, the termination was ineffective.”
The court found that because it was filed by mistake, it was not authorized, and therefore Chase did not lose its security interest.
Compare that outcome to another recent case involving Hickory Printing Group, Inc. There, the lender also mistakenly filed a UCC-3 termination and accidentally terminated the Bank’s security interest. One difference in that case was that although the Bank had two loans (a line of credit and a term loan), they were cross-collateralized against the same collateral, using one UCC financing statement. When the term loan was paid off, the bank filed a termination statement, not realizing that it was effectively terminating its security interest with respect to collateral for the line of credit. Once again, the Debtor filed bankruptcy not long afterward.
Unlike the GM court, the Court in Hickory Printing found that although the Bank did not intend to terminate its collateral for the term loan, the filing of the termination statement was “authorized” and therefore effective. The court also found that even though not long afterward the Bank filed a “correction” statement attempting to remedy its mistake, that statement did not resurrect the security interest.
What lessons can lenders learn from these cases?
First, make sure that you have a policy and procedure in place that will minimize the chances of accidental or incorrect filings. For example, you may want to require at least one other bank officer or lawyer, other than the bank’s UCC preparer, to check them before filing. Lenders may want to make notations in the file or on your system when the borrower has more than one loan, to minimize the risk that other loans are not inadvertently affected by a payoff.
Second, if you are using a lawyer or title company to process a closing where the lender is to be paid off, make sure the written instructions to that lawyer or title company only authorize the termination of specific financing statements pertaining to that particular loan.
Finally, if you are relying, for a new loan, on collateral that once was the subject of some other lender’s UCC, a phone call or e-mail to that lender seeking written verification that the loan has been paid off and the collateral is no longer encumbered, might be in order. If that lender accidentally terminated its UCC, it is better to find that out before you make that loan.