ucc3 financing amendment and termination statements: avoiding...

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UCC3 Financing Amendment and

Termination Statements: Avoiding

Loss of Lien Perfection or Priority

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, AUGUST 9, 2016

Jeffrey A. Wurst, Partner, Ruskin Moscou Faltischek, Uniondale, N.Y.

R. Marshall Grodner, Member, McGlinchey Stafford, Baton Rouge, La.

Jason I. Miller, Blank Rome, New York

Supplementary Materials

UCC3 Financing Amendment and Termination Statements: Avoiding Loss of Lien Perfection or Priority

Presented By Strafford PublicationsAugust 9, 2016

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UCC3 Financing Amendment and Termination Statements:

Avoiding Loss of Lien Perfection or Priority

Table of Contents

Unintended Consequences: JP Morgan’s Costly Mistake…………..……………...………3

What’s In a UCC Name Requirement………………..……………………………….…...….5

General Motors Bankruptcy Decision…………………………………………………….......7

General Motors Delaware Supreme Court Decision……………………………………….85

General Motors Second Circuit Decision……………………………………………………99

AEG Liquidation Trust v Toobroo NY LLC………………………………………………...114

Roswell Capital Partners LLC v Alternative Construction Technologies………….……154

Hickory Printing Group, Inc. …………………………………………………………..……164

Four County Bank v Tidewater Equipment Co………………………………….…..….…191

I.R. Toranto v Dzikowski……………………………………………………….……………201

Camtech Precision Mfg…………………………………………………………………..….209

A.R. Evans Company, Inc………………………………………………………………..….220

Carl Lee Jackson…………………………………………………………………..…………232

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but with one particular UCC-1 financing statement filed with the Secretary of State of Delaware. The Main UCC-1 covered, among other things, all of the equipment and fixtures at 42 GM facilities.

In September 2008, the synthetic lease was nearing maturity, and GM asked its counsel, Mayer Brown, to prepare documents necessary for JPMorgan and its syndicate to be repaid and release the security inter-ests held to secure GM’s obligations. In its decision, the Second Circuit details how GM’s lawyers prepared the release and terminated the synthetic lease. In a throw-the-associate-under-the-bus explanation1, the partner at Mayer Brown assigned the work to an associate who, with the help of a paralegal, searched the records of UCC-1 financing statements recorded against GM in the state of Delaware. They identified three UCC-1s but did not realize that only two were related to the synthetic lease and the third was related to the term loan. They prepared a closing checklist and draft UCC-3 termination state-ments for three security interests they identified on the closing checklist; that is, not only the UCC’s perfecting the synthetic lease, but also those perfecting the term loan.

The error was not picked up by the partner at Mayer Brown. In fact, when JPMorgan and its counsel, Simpson Thatcher & Bartlett, received the closing checklist and draft UCC-3 termination statements, they also neglected to pick up the error. As a result, on October 30, 2008, GM repaid the amounts due on the synthetic lease, and Mayer Brown filed all three UCC-3 termination state-ments with the Delaware Secretary of State — including the UCC-3 that erroneously terminated the Main UCC-1.

Bankruptcy Court GM filed for Chapter 11 protection with the U.S. Bankruptcy Court for the Southern District of New York on June 1, 2009. As we all recall, the U.S. Treasury stepped up and provided GM with a $33 billion DIP financing facility which helped satisfy the $1.5 billion term loan owed by GM to JPMorgan.

Following the commencement of proceedings, JPMorgan informed the Committee of Unsecured

1 That is this author’s terminology, not that of the court.

D uring its active operating period, the bankruptcy of General Motors made headlines daily if, for nothing else, its magnitude. The GM bankruptcy

continues to warrant our attention. The latest develop-ments came in January, when JPMorgan lost a court battle with GM’s creditors’ committee regarding the mistaken termination of the UCC securing a $1.5 billion loan.

The committee brought an action for a determination that JPMorgan had relinquished its rights to collateral securing the loan. On January 21, 2015, the U.S. Court of Appeals for the Second Circuit reversed the decision of the Bankruptcy Court for the Southern District of New York (Gerber, U.S.B.J.), which held that a UCC-3 termina-tion statement filed by mistake was unauthorized and not effective to terminate the secured lender’s interest in the debtor’s property. The story that follows should leave you, at the very least, scratching your head.

HistoryIn October 2001, JPMorgan Chase Bank, as administrative agent, provided a $300 million financing to GM by way of a synthetic lease, secured by liens. UCC-1 financing statements were filed on behalf of JPMorgan, as adminis-trative agent, and as the secured party of record. In 2006, JPMorgan also served as the administrative agent and secured party of record on behalf of a completely different syndicate of lenders with regard to the term loan to GM in the approximate amount of $1.5 billion. This term loan was perfected by the filing of UCC-1 financing statements,

Unintended Consequence —JPMorgan’s Costly MistakeBY JEFFREY A. WURST

In January, JPMorgan Chase lost a court battle with General Motors’ creditors’ committee regarding the

accidental termination of JPMorgan’s UCC securing a $1.5 billion loan. Ruskin Moscou Faltischek attorney

Jeffrey A. Wurst dissects the court cases surrounding the notorious GM bankruptcy and resulting fallout

from JPMorgan’s costly mistake.

JEFFREY A. WURST Senior Partner, Ruskin Moscou Faltischek

LEGAL LINES

In its decision, the Second Circuit details how GM’s lawyers prepared the release and terminated the synthetic lease. In a throw-the-associate-under-the-bus explanation, the partner at Mayer Brown assigned the work to an associate who, with the help of a paralegal, searched the records of UCC-1 financing statements recorded against GM in the state of Delaware.

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MAR 2015 • abfJournal • 53

amendment other than an amendment that adds collateral covered by a financing statement or an amendment that adds a debtor to a financing statement only if: (1) the secured party of record authorizes the filing…”).

The Delaware court concluded:…for a termination statement to become effective under §9-509 and thus to have the effect specified in §9-513 of the Delaware UCC, it is enough that the secured party autho-rizes the filing to be made, which is all that §9-510 requires. The Delaware UCC contains no requirement that a secured party that authorizes a filing subjectively intends or other-wise understands the effect of the plain terms of its own filing.

Second Circuit Decision In reaching its conclusion, the Second Circuit quoted the Delaware Supreme Court:

Even if the statute were ambiguous, we would be reluctant to embrace JPMorgan’s proposition. Before a secured party authorizes the filing of a termination statement, it ought to review the statement carefully and understand which security interests it is releasing and why…. If parties could be relieved from the legal consequences of their mistaken filings, they would have little incentive to ensure the accu-racy of the information contained in their UCC filings.

Having concluded that JP Morgan had authorized the UCC-3 termina-tion statement, the court turned to the question of whether Mayer Brown had authority under agency law to effect the filing. From these facts it is clear that, although JPMorgan never intended to terminate the Main Term

Loan UCC‐1, it authorized the filing of a UCC‐3 termination statement that had that effect. “Actual authority . . . is created by a principal’s manifesta-tion to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf.” JPMorgan and Simpson Thacher’s repeated manifestations to Mayer Brown show that JPMorgan and its counsel knew that, upon the closing of the synthetic lease transaction, Mayer Brown was going to file the termi-nation statement identifying the Main Term Loan UCC‐1 for termination, and JPMorgan reviewed/assented to the filing of that statement.

Petition for Rehearing En Banc On February 4, 2015, JPMorgan filed a Petition for Rehearing En Banc, asking the Second Circuit Court of Appeals to rehear/reconsider the appeal on the grounds that the decision is a departure from existing agency law: “that one may be an agent for one purpose does not make him or her an agent for every purpose.”

Watch these pages and abfjournal.com for developments on this important litigation. The take-away: Know what you are authorizing when you put your signature on a document, and do not rely solely on others. This case may result in an extremely expensive lesson for JPMorgan and Simpson Thatcher. Let it be a lesson to the rest of us as well. abfj

JEFFREY A. WURST is a senior partner and the chair of the Financial Services, Banking & Bankruptcy Department at Ruskin Moscou Faltischek, P.C., Uniondale, NY. He can be reached at 516-663-6535 or at [email protected].

Creditors that a UCC-3 termination statement relating to the term loan had inadvertently been filed, and that they had only intended to terminate liens related to the synthetic lease. They claimed the “inadvertent filing” was unauthorized and ineffective. Notwithstanding, the Committee commenced an adversary proceeding against JPMorgan seeking a determination that, despite the error, the UCC-3 termination statement was effective to termi-nate JPMorgan’s security interest in assets securing the term loan and, as a result, JPMorgan was an unsecured creditor on par with the other GM unsecured creditors.

The bankruptcy court, in a nearly 80-page deci-sion, held: “…the Court is unable to agree that there is a general principle of law that ‘UCC Filings that Mistakenly Terminate a Security Interest Are Legally Effective.’ The question is rather whether they have been authorized…[and here] the requisite authority was lacking.” Thus, the bankruptcy court concluded the UCC-3 filing was unauthorized and, therefore, not effec-tive to terminate the security interest securing the term loan. In the same document the court certified a direct appeal to the court of appeals.2

An AppealThe Second Circuit considered the appeal and identi-fied two questions: 1) what a secured lender must autho-rize for the filing of a termination statement, which it identified as an issue of statutory interpretation; and 2) whether under agency law JPMorgan granted authority for the filing of the termination statement. Inasmuch as the Uniform Commercial Code is state (not federal) law, and despite the code being substantially the same state to state, questions of state law were at issue. GM was a Delaware corporation, and the UCC financing statement at issue was filed in Delaware, so the Second Circuit needed a ruling on Delaware law. Accordingly the Second Circuit Court of Appeals certified the following question to the Delaware Supreme Court:

Under UCC Article 9, as adopted into Delaware law by Del. Code Ann. Tit. 6, Art. 9, for a UCC-3 termination statement to effectively extinguish the perfected nature of a UCC-1 financing statement, is it enough that the secured lender review and knowingly approve for filing a UCC-3 purporting to extinguish the perfected security interest, or must the secured lender intend to terminate the particular secu-rity interest listed on the UCC-3?

Delaware Supreme CourtIn considering the question, the Delaware Supreme Court focused on the statutory construction of: UCC 9-513 (d) (“Except as otherwise provided in Section 9-510, upon the filing of a termination statement with the filing office, the financing statement to which the termination state-ment relates ceases to be effective”); 9-510 (“A filed record is effective only to the extent that it was filed by a person that may file it”) and 9-509(d)(1) (“A person may file an

2 The normal course would have been to first appeal to the District Court and then appeal its decision to the Circuit Court. On rare occasions when it is apparent that a matter will need to be adjudicated by the Circuit Court, lower courts certify the matter for a direct appeal, saving signifi-cant time and expense in achieving a final resolution.

The take-away: Know what you are authorizing when you put your signature to a document, and do not rely solely on others. This case may result in an extremely expensive lesson for JPMorgan and Simpson Thatcher.

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LEGALlines

an all-asset filing. Simple? It may seem so, but § 9-504, which deals with the financing statement, must not be confused with § 9-108, which deals with the sufficiency of description in which a security interest is granted.

For a security interest to attach, three components must be met under § 9-203(b):

1. Value must be given.

2. The debtor must have rights in the collateral.

3. The security agreement must have a granting clause with a description (in most cases).

However, that description in the security agreement is not as simple as the one in the financing statement. For guidance, we look to § 9-108, which requires a “reasonable description.” So isn’t “all assets” reason-able enough? Nope! Section 9-108(c) specifically provides that a super generic description is not sufficient. This section contends that simply stating “all of the debtor’s assets” or “all of the debtor’s personal prop-erty” does not reasonably identify the collateral. So, for the purpose of granting a security interest, we must still specify the type of collateral whether it is accounts, contract rights or another specific type.

When A Name Must Be SpecificThough the collateral description on the financing state-ment can be generic, the debtor’s name must be precise. Section 9-503 requires that the name of the debtor appearing on the financing statement be the name that appears on the public record in the state where the debtor is organized (usually the Secretary of State). In

A rose by any other name would smell as sweet. “Romeo and Juliet,” Act II Scene II

Shakespeare may not be of a like mind with the Uniform Commercial Code when it comes to names. In fact, the UCC is a bit schizophrenic itself on that subject. In the almost 15 years since the complete overhaul of Article 9, name issues continue to arise and confuse.

Many of us celebrated the new § 9-504 of revised Article 9, which simplified the collateral description to be included on the UCC-1 Financing Statement. Remember the old way? Collateral descriptions went on for pages. Sometimes the collateral description merely said, “See attached.” Then the filing office lost the attachments. Let’s be grateful those days are gone. Since revised Article 9 became effective in July 2001, § 9-504 merely requires “an indication that the financing statement covers all assets or all personal property” for

What’s In a UCC Name Requirement? When to Use Specific and Generic Names BY JEFFREY A. WURST

Revisions in the Unified Commercial Code have made collateral descriptions on financial statements simpler. But there are times when only specific names will do. Attorney Jeffrey Wurst explains when a generic name will suffice and when a specific name is critical to ensure a security interest.

JEFFREY A. WURST Partner, Ruskin Moscou Faltischek, P.C.

Though the collateral description on the financing statement can be generic, the debtor’s name must be precise. Section 9-503 requires that the name of the debtor appearing on the financing statement be the name that appears on the public record in the state where the debtor is organized (usually the Secretary of State). In other words, the name on the financing statement must exactly match the certificate of incorporation or similar document on file with the home state.

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identify the rights assigned.” The court considered that § 9-406 does not describe with specificity the requisites of notice. It went on to observe that case law held that notice via a telephone call actually received was suffi-cient but “bare actual notice” was not. Another Texas appeals court held that actual notice of an assignment “embraces those things that a reasonably diligent inquiry and exercise of the means of information at hand would have disclosed.” It also noted that where “an obligor has such knowledge of facts as is sufficient

to put him on inquiry about an assignment, he is not entitled to rely only on statements made to him by the assignor after receiving such information.”

The Court of Appeals cited another Texas court that said, “The only requirement is that the notice reason-ably identify the rights of the assignee and reasonably demands payment to the assignee. What is ‘reasonable’ must be determined by the particular facts of each case.”

The court went on to conclude that despite the patent errors in the notification, the evidence raised a genuine issue of material fact as to whether the noti-fication reasonably identified the rights assigned. The Court of Appeals reversed the summary judgment and remanded the matter back to the trial court for further proceedings, leaving it to the trial court to determine whether the notification was reasonable notice.

So what are the take-aways?1. Be certain that the debtor’s name is correct

in a financing statement, but a reasonable identification of the debtor will suffice in a notification.

2. Specifically describe the collateral in a security agreement, but all assets are reasonable in a financing statement and a notification letter.

Simple errors can be costly, while avoiding them is inexpensive. Avoid having to be reminded:

What’s done cannot be undone. “Macbeth,” Act V Scene 1. abfj

JEFFREY A. WURST is a partner at Ruskin Moscou Faltischek, P.C. in Uniondale, NY where he chairs the firm’s Financial Services, Banking and Bankruptcy Department.

other words, the name on the financing statement must exactly match the certificate of incorporation or similar document on file with the home state. For example, a filing against CW Mining Company is insufficient to perfect against the assets of C.W. Mining Company. So, in naming a debtor on a financing statement, a rose by any other name is unperfected.

Financing statements and security agreements are not the only place where a collateral description comes into play. UCC § 9-406 contains one of the most fundamental rights of an asset-based lender or factor: the right to place account debtors on notification. That notification may be given by the secured party or by the debtor and is often given by the debtor at the onset of the lending or factoring relationship, when they are all on good terms. (After default, notification under § 9-607 is given by the secured party.) Notification under § 9-406 is ineffective “if it does not reasonably identify the rights assigned.” This section does not prohibit super generic descriptions.

The U.S. Court of Appeals in Dallas recently considered the reasonableness of the rights identified in TemPay v. Tanintco. TemPay is a factor, and Tanintco is an account debtor of A-1 Source Group, TemPay’s factored client. The lawsuit did not dispute that the notification letter sent by TemPay was directed to “Tangent” instead of Tanintco, nor that it was directed to the “accounts payable manager,” even though Tanintco did not have such a position. It does not dispute that the letter instructed the account debtor to pay “A-1 Source Group, LLC” instead of TemPay and identified “A-1 Source Group, LLC” as the assignor when the correct name of the company was “A-1 Source Group, Inc.” The letter does stipulate that the notification instruc-tion could only be changed in writing from TemPay. Notwithstanding, Tanintco made payments on its account for a year despite the notification letter errors.

Tanintco subsequently ceased making payments, and TemPay sued, ultimately bringing a motion for summary judgment. Tanintco brought a cross-motion for summary, in part, claiming that TemPay’s notifica-tion was ineffective as a matter of law. The court denied TemPay’s motion and granted Tanintco’s cross-motion rendering a take nothing judgment on TemPay’s claims against Tanintco. TemPay appealed the ruling.

The Court of Appeals noted that § 9-406 provides: “. . . an account debtor . . . may discharge its obligations by paying the assignor until, but not after, the account debtor receives a notification . . . that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notifica-tion, the account debtor may discharge its obligation by paying the assignee and may not discharge the obliga-tion by paying the assignor.”

When Is Notice Effective?The court also noted that § 9-406 expressly provides that notice is “ineffective” if it “does not reasonably

The Court of Appeals noted that § 9-406 provides: “. . . an account debtor . . . may discharge its obligations by paying the assignor until, but not after, the account debtor receives a notification . . . that the amount due or to become due has been assigned and that payment is to be made to the assignee.”

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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: MOTORS LIQUIDATION COMPANY, f/k/a GENERAL MOTORS CORPORATION, et al., Debtors.

: : : : : : :

Chapter 11 Case Case No. 09-50026 (REG) (Jointly Administered)

OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF MOTORS LIQUIDATION COMPANY, Plaintiff,

against JPMORGAN CHASE BANK, N.A., et al., Defendants.

: : : : : : : : : : : : :

Adversary Proceeding Case No. 09-00504 (REG)

DECISION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

APPEARANCES: DICKSTEIN SHAPIRO LLP Counsel for the Official Committee of Unsecured Creditors of Motors Liquidation Company 1633 Broadway New York, New York 10019-6708 By: Barry N. Seidel, Esq. Eric B. Fisher, Esq. (argued) Katie L. Cooperman, Esq. KELLEY DRYE & WARREN LLP Counsel for Defendant JPMorgan Chase Bank, N.A. 101 Park Avenue New York, New York 10178 By: John M. Callagy, Esq. (argued) Nicholas J. Panarella, Esq. Martin A. Krolewski, Esq.

09-00504-reg Doc 74-1 Filed 03/01/13 Entered 03/01/13 15:02:16 Exhibit Decision on Cross-Motions for Summary Judgment Pg 1 of 78

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Table of Contents

Introduction ..................................................................................................................................... 1 Facts ................................................................................................................................................ 6

A. Synthetic Lease Origination ................................................................................................... 6 B. Term Loan Origination........................................................................................................... 7 C. Synthetic Lease Termination .................................................................................................. 8

1. The Synthetic Lease Termination Agreement .................................................................... 9 2. The Synthetic Lease Closing Checklist ............................................................................ 12 3. The Unrelated UCC-3 ....................................................................................................... 14 4. The Synthetic Lease Escrow Agreement .......................................................................... 16 5. The Synthetic Lease Transaction Payoff .......................................................................... 20 6. GM’s Understanding ......................................................................................................... 20

D. Subsequent Events ............................................................................................................... 21 Discussion ..................................................................................................................................... 22 I. Summary Judgment Standards ................................................................................................. 22 II. Choice of Law ......................................................................................................................... 23 III. Effectiveness of the Unrelated UCC-3 .................................................................................. 24

A. The Requirement for Authorization .................................................................................... 26 B. Was Authorization Granted? ............................................................................................... 30

1. Actual Authority .............................................................................................................. 31 2. Apparent Authority ........................................................................................................... 53 3. Ratification ........................................................................................................................ 55

C. The Committee’s Other Arguments .................................................................................... 57 1. Implied Authority.......................................................................................................... 57 2. “UCC Filings that Mistakenly Terminate a Security Interest Are Legally Effective.” 59

IV. Certification to Circuit ........................................................................................................... 72 Conclusion .................................................................................................................................... 74


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ROBERT E. GERBER UNITED STATES BANKRUPTCY JUDGE:

In this adversary proceeding under the umbrella of the chapter 11 case of Motors

Liquidation Company, formerly known as General Motors Corporation (“GM”), plaintiff

Official Committee of Unsecured Creditors (the “Committee”)1 seeks a determination that the

principal lien securing a syndicated $1.5 billion term loan (the “Term Loan”) that had been

made to GM in November 2006 was terminated in October 2008, before the filing of GM’s

chapter 11 case—thereby making most of the $1.5 billion in indebtedness under the Term Loan

unsecured. The defendants are the syndicate members who together made the Term Loan (the

“Lenders”) and JPMorgan Chase Bank, N.A. (“JPMorgan”), the agent under the facility.2

The action presents issues as to Uniform Commercial Code (“UCC”) filings that are

commonly used in secured financings: a UCC-1 initial financing statement (“UCC-1”), with

which a security interest can be perfected, and a UCC-3 financing statement amendment

(“UCC-3”), with which, among other things,3 the effectiveness of an earlier UCC-1 may be

1 When GM’s Plan of Reorganization (the “Plan”) was confirmed, after this adversary proceeding was commenced, the Committee’s right to pursue this litigation devolved to one of several trusts created under the Plan—the “Avoidance Action Trust.” For simplicity, the Court continues to refer to the plaintiff here as the Committee.

While the Committee continues as plaintiff, there is a controversy, not yet resolved, as to the rights to any proceeds of this litigation. Although the United States Treasury (“Treasury”) disclaimed a lien on the litigation proceeds when it extended its DIP financing, Treasury later contended that it could nevertheless reach those proceeds ahead of GM’s unsecured creditors by reason of Treasury’s rights to a “superpriority” claim. This Court’s determination in favor of the Committee as to that contention, on cross-motions for summary judgment in a separate adversary proceeding (brought by the Committee to address unsecured creditors’ tax needs at the time, and to avoid prosecuting an action that if successful but benefitting someone else would be contrary to unsecured creditor interests), was later vacated on ripeness grounds by a judge of the district court. See Official Comm. of Unsecured Creditors v. U.S. Dept. of the Treasury (In re Motors Liquidation Co.), 460 B.R. 603 (Bankr. S.D.N.Y. 2011), vacated on ripeness grounds, 475 B.R. 347 (S.D.N.Y. 2012). But unless this Court’s determinations with respect to the present controversy, discussed below, are later reversed, neither Treasury nor GM’s unsecured creditors will have litigation proceeds to claim, and that controversy will now turn out to be moot.

2 Appearances by the Lenders in this adversary proceeding were deferred while threshold issues, addressed in this decision, were addressed.

3 Other things can include the continuation of an earlier initial financing statement, the assignment of a security interest, or the deletion of identified collateral. But one of the boxes that can be checked on a


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brought to an end. Here, in connection with the payoff of a GM “synthetic lease” (the

“Synthetic Lease”), which was one-tenth of the size of the Term Loan and wholly unrelated to

it,4 the batch of several UCC-3s to be filed to terminate liens on Synthetic Lease collateral (and

which thereafter were filed) mistakenly included one UCC-3 (the “Unrelated UCC-3”) which

would terminate a UCC-1—referenced only by its 8-digit filing number—that did not have any

connection to the Synthetic Lease.5 The UCC-1 was instead the principal UCC-1 securing the

Term Loan (the “Main Term Loan UCC-1”).6

Without dispute, all of GM and its counsel (who drafted and caused to be filed the

Unrelated UCC-3) and JPMorgan and its counsel (who were provided draft documents before the

Unrelated UCC-3 was filed) were aware of the UCC-1 filing numbers shown on the various draft

UCC-3s in connection with the Synthetic Lease payoff (including the Unrelated UCC-3). But

none were aware of their potential significance. None of the counsel on the Synthetic Lease

UCC-3 (Box 2, “Termination”) can provide for the effectiveness of an initial financing statement to be wholly brought to an end. When UCC-3 filings so provide, they are normally referred to as “termination statements.” See n.72 below.

4 Neither the terms of the Synthetic Lease, nor the nature of synthetic leases generally, is relevant to the controversy here—except insofar as it is important to recognize, and agreed by the parties, that the Synthetic Lease financing was wholly unrelated to the Term Loan, and that the only thing they had in common was that UCC-1s were filed with respect to each.

By way of background only, a synthetic lease is a financing transaction under which an asset (most commonly real property) is acquired not by its user but a by a separate entity (often a special purpose vehicle) which then leases the asset to the ultimate user. A synthetic lease has been described as:

A lease which is arranged so that it is not shown as a liability on a company's balance sheet but as an expense on the income statement. The item or asset being leased is owned by a special purpose vehicle (SPV) which then leases it to the company. The SPV is usually owned by the company.

Reuters Financial Glossary, available at http://glossary.reuters.com/index.php?title=Synthetic_Lease (last viewed 2/28/2013).

5 An image of the Unrelated UCC-3 is attached to this decision as Appendix A. 6 The Main Term Loan UCC-1 was not the only initial financing statement that had been filed when the

Term Loan was put in place. The Term Loan documentation also included UCC-1 filings relating to fixtures, and one relating to assets of one-time GM subsidiary, Saturn. But the Main Term Loan UCC-1, which covered, among other things, all of the equipment and fixtures at 42 GM facilities, was by far the most important of them.


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financing, or the counsel on the Term Loan (which at least for JPMorgan was different), or their

respective clients, knew that the UCC-1 filing number shown on the Unrelated UCC-3 was

actually that of a UCC-1 for the Term Loan. And without dispute, neither the borrower nor the

lenders on the Synthetic Lease financing, nor the borrower nor the Lenders on the Term Loan,

intended to affect the Term Loan in any way.

But because the UCC-1 whose filing number was referenced in the Unrelated UCC-3

related to the Term Loan, and not the Synthetic Lease, the Court must decide, notwithstanding

the absence of anyone’s intention to affect the Term Loan, whether the perfection of the principal

lien securing the Term Loan nevertheless came to an end.

Both sides move for summary judgment, in whole or in part.7 Arguing that UCC filings

are effective even when mistaken (and that a secured party’s acquiescence in the filing of a

UCC-3 making reference to a specified initial financing statement by file number alone,

irrespective of intent, is sufficient to constitute any necessary authority), the Committee moves

for summary judgment in part,8 seeking a ruling that the Unrelated UCC-3, notwithstanding the

parties’ intentions, brought the Main Term Loan UCC-1 to an end. JPMorgan moves for

summary judgment in full, seeking a ruling to the opposite effect—that JPMorgan’s

authorization to terminate the Main Term Loan UCC-1 was required under the UCC; that

JPMorgan did not provide the required authorization; and thus that the Main Term Loan UCC-1,

and JPMorgan’s resulting lien, remained in place.

7 References to the briefs on the Committee’s motion appear here as Comm. Partial SJ Br.__; JPMorgan Partial SJ Opp.__; and Comm. Partial SJ Reply __ (ECF ## 26, 48, and 55, respectively). References to the briefs on JPMorgan’s motion appear here as JPMorgan SJ Br.__; Comm. SJ Opp.__; and JPMorgan SJ Reply __ (ECF ## 29, 45, and 56, respectively).

8 The Committee moves for partial summary judgment only, recognizing that other UCC-1s with respect to the Term Loan remained in place, covering some other collateral as to which JPMorgan and the Lenders would remain secured. But while the value of the other collateral would need to be determined at a later time, the consequences of invalidation of the Main Term Loan UCC-1 are enormous, and the Committee’s desire to secure even partial summary judgment under the present circumstances is understandable.


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* * *

It is initially tempting to regard the consequences of all UCC filings the same and as

absolute (or, as one court put it, though under an earlier statutory regime, “dramatic and final”),9

or to speak, in general terms, of parties living with their mistakes—with the result that JPMorgan

and the Lenders would suffer the consequences of this extraordinary set of events. But having

focused on the changes in UCC Article 9 that were put in place in 2001, and the more thoughtful

caselaw and commentary, the Court believes that it cannot view the matter in such simplistic

terms. The issues instead turn on the UCC’s express requirement for authorization to terminate

an initial financing statement, and on what is required to constitute the requisite authorization.

Under the present Article 9, a UCC termination statement is not necessarily “dramatic and final.”

And all mistakes are not the same. That a termination statement filing was made is only the

start—and not the end—of the judicial inquiry.

Under Article 9 of the UCC as it was amended in 2001, the termination of a UCC-1 is

ineffective unless it has been authorized. The issue here presented—which the UCC then leaves

to caselaw—is what is required to constitute “authorization” for the filing of a termination

statement when someone other than the secured party files the termination statement on the

secured party’s behalf.10

9 Crestar Bank v. Neal (In re Kitchin Equip. Co. of Virginia, Inc.), 960 F.2d 1242, 1247 (4th Cir. 1992) (“Kitchin Equipment”). While the holding in Kitchin Equipment (a 2-1 decision) was not necessarily incorrect (since Kitchin Equipment involved action by the secured creditor itself, and did not involve a secured creditor’s authorization of acts by another), Kitchin Equipment’s very general statements can no longer be regarded as applicable to situations requiring secured creditor authorization after the 2001 amendments to UCC Article 9. Similarly, statements in later caselaw that quoted Kitchin Equipment without considering the effect of the 2001 amendments are of questionable reliability. See discussion beginning at page 60 below.

10 In much of its argument, the Committee states the issue differently—speaking in terms of the effects of mistakes and contending that UCC filings that mistakenly terminate security interests are legally effective. See Comm. Partial SJ Br. 11-14; Comm. SJ Opp. 4; Comm. Partial SJ Reply 15-16. For reasons addressed below, the Court believes that under the UCC as amended in 2001, that misstates the issue.


12

As principles underlying the determination of the motions here, the Court concludes, for

reasons set forth below:

(1) When an agent acts on behalf of a secured lender principal to terminate

an initial financing statement with respect to a financing, to be effective the

termination must be authorized by the secured lender principal; and

(2) to determine whether authorization has been granted, the court must

consider indicia identified in non-UCC agency law—including (importantly here)

that to be so authorized, the agent must believe (and though the distinction does

not matter under the facts here, reasonably believe) that the principal intended for

the agent to terminate the initial financing statement for that particular financing.

A matching of file numbers by itself is not enough when other indicia lead to a contrary

conclusion. And when the agent knows that the secured creditor principal does not intend to

bring an initial financing statement to an end (by reason of one or more of the documents that

embody the authorization, or by other means), and the agent itself believes that it was not so

authorized, the requisite authorization cannot be found.

Applying those principles to the undisputed facts here, the lack of the requisite belief on

the part of GM that it was authorized to terminate the Main Term Loan UCC-1 is ultimately

conclusive—though the remaining indicia lead to the same conclusion. The undisputed facts

here (including, most significantly, the statements in the document the parties used to embody

the nature and scope of JPMorgan’s authorization, and the consistent testimony of all of the

personnel acting for JPMorgan and GM) conclusively establish that JPMorgan intended to grant,

and granted, authority to GM to terminate UCC-1s only with respect to the Synthetic Lease. As

importantly or more so, this was GM’s belief as well. While it is undisputed that JPMorgan


13

knew in advance of GM’s counsel’s intent to file a UCC-3 which showed the “Initial Financing

Statement File #” of a UCC-1 that in fact was the initial financing statement on the Term Loan

(and JPMorgan at least arguably consented to the filing), in the absence of belief by GM that

actions to terminate the Main Term Loan UCC-1 were authorized, the Court cannot find that

JPMorgan authorized the termination of the initial financing statement for that unrelated facility.

Accordingly, JPMorgan’s motion for summary judgment must be granted, and the

Committee’s motion for partial summary judgment must be denied. The bases for the Court’s

decision follow.

Facts11

Though the parties advance diametrically opposed legal conclusions, the material facts

are not in dispute.12

A. Synthetic Lease Origination

In October 2001, GM entered into the Synthetic Lease, by which GM obtained up to

approximately $300 million in financing from a syndicate of financial institutions. The proceeds

were used for the acquisition of (and construction on) several pieces of real estate. The Synthetic

Lease was documented by, among other things, a Participation Agreement dated as of October

31, 2001 (the “Participation Agreement”).13

11 To avoid further lengthening this decision, record citations are limited to quotations and the most significant matters. The parties’ very detailed and often very technical presentations of the facts in their affidavits and Rule 7056-1 Statements have been compressed and restated to more clearly tell the story.

12 Being mindful of the Second Circuit’s admonitions that summary judgment should be awarded sparingly when matters involving state of mind are involved, see, e.g., Patrick v. LeFevre, 745 F.2d 153, 159 (2d Cir. 1984), the Court considered whether it should deny summary judgment in favor of each side for that reason. Neither side contended that such was necessary or even appropriate here, and ultimately the Court agrees. Here, there is no issue as to the principal’s and agent’s states of mind. The beliefs of all of the participants involved on behalf of both sides to the transaction at the time—each of JPMorgan and GM—were confirmed by affidavit, deposition testimony, or both. There was nothing in the record to support a contrary conclusion.

13 Parties to the Participation Agreement were GM, as Lessee (and Construction Agent); Auto Facilities Real Estate Trust 2001-1 (the “Trust”), as Lessor; Wilmington Trust Company (“Wilmington Trust”), as


14

GM’s obligations under the Synthetic Lease were secured by liens on an original

12 pieces of real estate (the “Properties”) identified in the Synthetic Lease documentation. To

perfect security interests in the Properties, UCC-1s were filed in the counties in which such

Properties were located. UCC-1s were also filed with the Delaware Secretary of State.

JPMorgan was one of the backup facility banks, and, as noted (and more importantly for

the purposes of this controversy), the administrative agent for the Synthetic Lease. JPMorgan’s

Richard W. Duker (“Duker”) acted on behalf of JPMorgan with respect to it.

In connection with the Synthetic Lease, GM was represented by the law firm of Mayer

Brown LLP (“Mayer Brown”), and JPMorgan was represented by the law firm of Simpson

Thacher & Bartlett LLP (“Simpson Thacher”).

B. Term Loan Origination

About five years later, in November 2006, GM and its then-subsidiary Saturn

Corporation (“Saturn”) entered into a 7-year senior secured term loan facility—the Term

Loan—from a different syndicate of financial institutions. Once more, JPMorgan was

administrative agent.

The Term Loan provided GM with approximately $1.5 billion in financing. It was a

transaction wholly unrelated to the Synthetic Lease.

In connection with the Term Loan, JPMorgan was represented by law firms different

from that which had acted for JPMorgan in connection with the Synthetic Lease. This time,

JPMorgan was represented by Cravath Swaine & Moore and, later, Morgan, Lewis & Bockius

(“Morgan Lewis”).

Trustee; certain named entities, as “Investors”; other named entities, as “Backup Facility Banks”; an entity called “Relationship Funding Company, LLC”; and Chase Manhattan Bank (to which JPMorgan was successor), as Administrative Agent.


15

Documents executed in connection with the Term Loan included a “Term Loan

Agreement” and a “Collateral Agreement.” Duker, who was also involved in the Synthetic

Lease transaction, was a signatory to the Term Loan Agreement on behalf of JPMorgan as

administrative agent.

Under the Collateral Agreement, the Lenders took security interests in a massive amount

of collateral (“Term Loan Collateral”)—including, among other things, all of GM’s equipment

and fixtures at 42 facilities throughout the United States. Upon the closing of the Term Loan,

JPMorgan caused the filing of a total of 28 UCC-1 initial financing statements to perfect the

Lenders’ security interests in the Term Loan Collateral—two of which (one for GM and one for

Saturn)14 were filed with the Delaware Secretary of State. The one filed in Delaware for GM—

i.e., the Main Term Loan UCC-1—bore filing number “6416808 4.”

C. Synthetic Lease Termination

The Synthetic Lease would mature on October 31, 2008, approximately seven years after

it was put in place.

In an email dated September 30, 2008, a GM representative informed Robert Gordon

(“Gordon”), a real estate partner at Mayer Brown, GM’s counsel, who was then responsible for

the Synthetic Lease, that GM planned to repay the amount due under the Synthetic Lease. GM

requested that Mayer Brown “prepare the documents necessary for [JPMorgan and the Lenders]

to be paid off for the obligations on that synthetic lease and to release their interest in those

properties.”15 Gordon assigned this work to Ryan Green (“Green”), a Mayer Brown real estate

associate. Green was to draft the documents necessary for “the termination and payoff of the

14 The other 26 were localized fixture filings, in the various counties in the United States where fixture collateral was located.

15 Gordon Dep. 6 (Callagy Decl. Exh. 4); 9/30/08 Sundaram Email (Callagy Decl. Exh. 12).


16

synthetic lease.”16 Gordon also asked Green to “put together [a] checklist draft”—referring to a

checklist of the required documents for the release and transfer of the Synthetic Lease Properties,

including “an initial draft of a brief checklist of required documents for the release and

transfer.”17

The documents prepared by Green included three documents and one batch of UCC-3s:

(1) an agreement with respect to the termination of Synthetic Lease

obligations and related documentation (the “Synthetic Lease Termination

Agreement”);

(2) a closing checklist (the “Synthetic Lease Closing Checklist”);

(3) UCC-3s, and

(4) a letter agreement embodying instructions to an escrow agent with

respect to the Synthetic Lease termination (the “Synthetic Lease Escrow

Agreement”).

The next day, October 1, GM likewise informed JPMorgan’s Duker of GM’s intent to

pay off the amounts due under the Synthetic Lease. As of that time, the balance to be repaid on

the Synthetic Lease was about $150 million.

1. The Synthetic Lease Termination Agreement

Two weeks later, on October 15, 2008, Green circulated the Synthetic Lease Termination

Agreement to Simpson Thacher, among others, in draft form.

The Synthetic Lease Termination Agreement stated, among other things (as circulated on

October 15, and also in its final form), that the Administrative Agent (JPMorgan) and Lessor (the

Trust) were thereby releasing all of their liens against the “Properties” that had been created by

16 Gordon Dep. 12. 17 10/1/08 Gordon Email (Callagy Decl. Exh. 12).


17

the operative agreements which were coming to an end, and that they acknowledged that such

liens were released. The Synthetic Lease Termination Agreement then went on to provide, as

relevant here:

(ii) [T]he Administrative Agent and the Lessor do hereby …

(x) [sic.; seemingly should be z] authorize Lessee to file a termination of any existing Financing Statement relating to the Properties.18

Importantly, the words “Financing Statement” and “Properties” as used in the quoted

language were capitalized defined terms. The next paragraph of the Synthetic Lease Termination

Agreement told the reader where to look for definitions of capitalized terms that did not

otherwise appear. It referred the reader to an earlier document, defined as the “Participation

Agreement,” that had been entered into back in October 2001 when the Synthetic Lease was put

into place.

The Participation Agreement, in turn, listed the 12 particular pieces of real property that

originally were collateral under the Synthetic Lease.19 Annex A to the Participation Agreement

18 Synthetic Lease Termination Agreement (Duker Aff. Exh. L) (reformatted for readability). The second paragraph of the Synthetic Lease Termination Agreement, which was paraphrased in the preceding paragraph, and from which the quoted language was taken, stated in full:

In consideration of ONE DOLLAR ($1.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby confessed and acknowledged, the undersigned, each of which is a party to one or more of the agreements identified as the Operative Agreements, hereby agree that (i) each of such Operative Agreements and any Commitment thereunder is hereby terminated and is discharged and of no further force or effect as of the date hereof, and (ii) the Administrative Agent and the Lessor do hereby (x) release all of their Liens and Lessor Liens against the Properties created by the Operative Agreements, (y) acknowledge that such Liens and Lessor Liens are forever released, satisfied and discharged and (x) [sic.; seemingly should be z] authorize Lessee to file a termination of any existing Financing Statements relating to the Properties.

Id. (emphasis added). 19 See 1/6/2003 Participation Agreement First Amendment (Duker Aff. Exh. E) at JPMCB-STB-00000918-

920 exh. A (six warehouses in Bolingbrook, IL; Reno, NV; Denver, CO; Ontario, CA; Brandon, MS; and


18

(captioned “Rules of Usage and Definitions”) provided definitions for the key words “Financing

Statements”20 and “Properties”21—later referred to as the “Financing Statements” and

“Properties” in the Synthetic Lease Termination Agreement’s second subparagraph (x).

Charlotte, NC, respectively; a transmission parts distribution center in Indianapolis, IN; two parking decks in Detroit, MI; an engine plant in Flint, MI; an office building in Grand Blanc, MI; and a vacant parcel of land in Detroit, MI).

20 Annex A provided:

“Financing Statements” means, collectively, the Lessor Financing Statements and the Lessee Financing Statements.

Participation Agreement Annex A (Duker Aff. Exh. B) at 17 (emphasis by italics added; underlining, to signify defined terms that would thereafter be used, in original). It additionally provided definitions for the two terms used there:

“Lessor Financing Statements” means UCC financing statements made by Lessor, as debtor, and Administrative Agent, as secured party, appropriately completed and executed for filing in the appropriate state and county offices in the State where the applicable Property is located and the State of Delaware.

Id. at 26 (underlining, to signify defined terms that would thereafter be used, in original).

“Lessee Financing Statements” means UCC financing statements made by Lessee, as debtor, and Lessor, as secured party, appropriately completed and executed for filing in the appropriate state and county offices in the State in which each Property is located and the State of Delaware, as the same shall be assigned to the Administrative Agent on behalf of the Secured Parties pursuant to such Lessee Financing Statements.

Id. (underlining, to signify defined terms that would thereafter be used, in original). It should be recalled that as used in the Participation Agreement, the “Lessor” was Auto Facilities Real Estate Trust 2001-1; the “Lessee” was GM, and the Administrative Agent was Chase, the predecessor to JPMorgan. Id. at 3, 26.

21 Annex A provided:

“Property” or “Properties” means either individually or collectively, as the case may be, each parcel of Land (including all Appurtenant Rights attached thereto) or, in the case of Land subject to a Ground Lease, the ground leasehold estate to be acquired by the Lessor pursuant to the provisions of the Participation Agreement, as more particularly described in the Requisition and the Memorandum of Lease and Supplement with respect to such Land, together with all of the Improvements at any time located on or under such Land, or multiple parcels of Land with Improvements, as the context may require.

Id. at 35 (emphasis by italics added; underlining, to signify defined terms that would thereafter be used, in original).


19

The Synthetic Lease Termination Agreement was later executed by GM, JPMorgan and

the other parties to the Synthetic Lease termination on or about October 30, 2008, the effective

date of the closing of the payoff.

2. The Synthetic Lease Closing Checklist

With assistance from his colleagues at Mayer Brown, Green drafted a closing checklist.

It was entitled:

CLOSING CHECKLIST General Motors: Release of Properties from JPMorgan

Chase Synthetic Lease CLOSING DATE: October 31, 2008.22

The word “Properties” as used in the Closing Checklist title was capitalized, but because it was

part of a title, it is unclear whether “Properties” as used there was intended to be as defined in the

Participation Agreement, which was the underlying source for definitions in the Synthetic Lease

Termination Agreement. But whether or not it was so intended, it still specified what

“Properties” were covered: properties from “JPMorgan Chase Synthetic Lease,” as contrasted to

any others.

In order to determine what types of documents should be included on the Synthetic Lease

Closing Checklist, Green “looked through a copy of the participation agreement. That’s the

main document for the [Synthetic Lease] and it contained a description of how to unwind and the

relevant documents.”23 The record indicates, without dispute, that Green’s intent—and only

intent—was to list the documents that would release Synthetic Lease facility collateral.

22 Synthetic Lease Closing Checklist, 10/15/08 Green Email Attachment (Callagy Decl. Exh. 15). 23 Green Dep. 8 (Callagy Decl. Exh. 2).


20

The Synthetic Lease Closing Checklist listed several dozen closing documents relating to

the Properties, including various UCC-1s that needed to be terminated for each property.24

Under Section 5 of the Synthetic Lease Closing Checklist, entitled “General Documentation,”

three UCC-1s that had been filed in Delaware were listed for termination:

Termination of UCCs (central, DE filings) Blanket-type financing statements as to real Property and related collateral located in Marion County, Indiana (file number 2092532 5, file date 4/12/02 and file number 2092526 7, file date 4/12/02)) financing statement as to equipment, fixtures and related collateral located at certain U.S. manufacturing facilities (file number 6416808 4, file date 11/30/06).25

The three UCC-1 filing numbers listed on the Synthetic Lease Closing Checklist were

derived from a UCC search Green had requested that a Mayer Brown paralegal, Michael

Perlowski, perform. Working from a prior search for UCC-1 financing statements recorded

against GM (and without knowledge of the underlying transactions that had involved those

filings, or, for that matter, the purpose of his undertaking),26 Perlowski identified several UCC-1

financing statements in response to Green’s request. Perlowski was not aware of the specific

transaction on which Green was working.27 Two of the UCC-1 financing statements Green

listed on the Synthetic Lease Closing Checklist had been filed in connection with the Synthetic

Lease. But the third UCC-1 financing statement he listed, with filing number 6416808 4, did not

relate to the Synthetic Lease transaction. Instead, this third UCC-1 financing statement, bearing

file number 6416808 4, was the Main Term Loan UCC-1.

24 Synthetic Lease Closing Checklist. 25 Id. at 4. 26 Perlowski Dep. 10-11, 40-41 (Callagy Decl. Exh. 1). 27 Id.


21

Green circulated a draft of the Synthetic Lease Closing Checklist to GM as well as

Simpson Thacher, counsel for JPMorgan, on October 15, 2008. That same day, Duker of

JPMorgan received drafts of the Synthetic Lease Closing Checklist from GM and Simpson

Thacher. Green circulated updated, but largely similar, drafts of the Synthetic Lease Closing

Checklist to Simpson Thacher, among others, later on October 15, and again on October 21,

2008. The subject lines for each of Green’s e-mails attaching the drafts of the Synthetic Lease

Closing Checklist stated that they related to the “GM/JPMorgan Chase - Synthetic Lease.”28

The drafts of the Synthetic Lease Closing Checklist identified the Main Term Loan

UCC-1 as a “financing statement as to equipment, fixtures and related collateral located at

certain U.S. manufacturing facilities (file number 6416808 4, file date 11/30/06).” They made

no mention of the words “Term Loan.” The “file date 11/30/06” appearing adjacent to “file

number 6416808 4” on the Synthetic Lease Closing Checklist substantially corresponds to the

November 29, 2006 date of the Term Loan Agreement, though no one involved recognized that

at the time, because everyone believed they were working on the Synthetic Lease transaction.

No one at Mayer Brown involved in drafting the Synthetic Lease Closing Checklist and no one at

Simpson Thacher or JPMorgan who reviewed and/or received the Synthetic Lease Closing

Checklist recognized that “file number 6416808 4, file date 11/30/06” was unrelated to the

Synthetic Lease.

3. The Unrelated UCC-3

Another Mayer Brown paralegal, Stewart Gonshorek (“Gonshorek”), was tasked with

drafting the UCC-3 termination statements for the unwinding of the Synthetic Lease. One of the

UCC-3s that he drafted was the Unrelated UCC-3.

28 10/15/2008 Sundaram Email (Callagy Decl. Exh. 13); 10/15/2008 Merjian Email (Callagy Decl. Exh. 15); 10/15/2008 Merjian Ledyard Email (Callagy Decl. Exh. 16); 10/21/2008 Merjian Ledyard Email (Callagy Decl. Exh. 17).


22

Under section 10 of a draft of the Unrelated UCC-3, a section entitled “OPTIONAL

FILER REFERENCE DATA”, Gonshorek typed in “Matter No. 00652500.”29 “Matter No.

00652500” was an internal Mayer Brown client-matter number, relating exclusively to Mayer

Brown’s representation of GM in connection with the Synthetic Lease and its repayment.

Gonshorek prepared the Unrelated UCC-3 to “terminate the UCC in connection with the

synthetic lease becoming unwound.”30 But the Unrelated UCC-3 showed, on its Line 1a, under

“INITIAL FINANCING STATEMENT FILE #,” “6416808 4 on 11.30.06.”31 The “Initial Financing

Statement File #” was that of the Main Term Loan UCC-1.

But the Unrelated UCC-3 never used the words “Term Loan,” or any synonym for such.

Further down on the Unrelated UCC-3, it had a Line 9, “NAME OF SECURED PARTY OF

RECORD AUTHORIZING THIS AMENDMENT,”32 on which “JPMORGAN CHASE BANK, AS

ADMINISTRATIVE AGENT,” was typed in. But the Unrelated UCC-3 did not have a granting

clause—i.e., a clause by which authorization was granted—nor did it have a place for signature

by JPMorgan, the party said to have authorized the amendment.

While the UCC-3 Gonshorek prepared referenced the Main Term Loan UCC-1 by its

filing number and date (6416808 4 on 11.30.06), Gonshorek intended to terminate only a UCC

financing statement related to the Synthetic Lease.33 The Committee does not contend (nor did it

introduce evidence) to the contrary.

29 Draft Unrelated UCC-3 Email Attachment (Callagy Decl. Exh. 16) at JPMCB-STB-00000206. 30 Gonshorek Dep. 20. 31 Unrelated UCC-3 (Fisher Decl. Exh. X). 32 Id. The remainder of Line 9 continued: “(name of assignor, if this is an Assignment). If this is an

Amendment authorized by a Debtor which adds collateral or adds the authorizing Debtor, or if this is a Termination authorized by a Debtor, check here [ ] and enter name of DEBTOR authorizing this Amendment.”

33 Gonshorek Dep. 20.


23

On Wednesday, October 15, 2008, Green circulated by email to Simpson Thacher’s

Merjian and counsel for Wilmington Trust, among others (and along with an updated checklist

and drafts of most of the other closing documents), the draft UCC-3 termination statements that

had been prepared by Gonshorek—including the draft Unrelated UCC-3.

The subject line of Green’s e-mail enclosing the draft documents was “GM/JPMorgan

Chase - Synthetic Lease (Auto Facilities Real Estate Trust 2001-1)”;34 the documents attached to

Green’s email included nearly a hundred pages of draft documents, including ten draft UCC-3

termination statements. But Green did not attach copies of any of the UCC-1 initial financing

statements whose file numbers corresponded to the file numbers referenced on the ten draft

UCC-3s that were circulated. Nor, once again, did anything in Green’s email or enclosures

mention the words “Term Loan.”

Green had concluded his October 15 email with a line “Please contact me with any

questions or comments you may have.” On Friday, October 17, 2008, Simpson Thacher’s

Merjian responded, also by email, stating “Nice job on the documents” before continuing with

“[m]y only comment,” and going on to state what that comment (which did not relate to the

UCC-3s) was.35

4. The Synthetic Lease Escrow Agreement

Incident to the Synthetic Lease repayment, the parties utilized LandAmerica (the “Title

Company”) to serve as an escrow agent, recording agent and title insurance issuer. As a general

matter, the Title Company would receive payment from GM and documents executed by the

various parties, after which the Title Company would act in accordance with written instructions

34 10/15/2008 Merjian Ledyard Email. 35 10/17/2008 Merjian Email (Fisher Decl. Exh. T).


24

(executed by counsel for GM, JPMorgan, and the Trust)36 calling for the Title Company to close

the transaction, cause the documents it had received to be recorded and delivered, and disburse

the funds in accordance with the instructions it had received.

The instructions were embodied in the Synthetic Lease Escrow Agreement, which in each

of its draft and final form37 was an 8-page letter agreement addressed to LandAmerica, which

was likewise referred to as “the Title Company,” as a defined term, in the Synthetic Lease

Escrow Agreement.

On October 24, 2008, by email addressed to the Title Company’s William Wineman;

Simpson Thacher’s Mardi Merjian, and counsel for Wilmington Trust (the trustee for the Trust),

Green circulated a draft of the Synthetic Lease Escrow Agreement, seeking review and any

comments.38 The subject line of that email stated: “RE: GM/JPMorgan Chase - Synthetic Lease

(Auto Facilities Real Estate Trust 2001-1).”39 As Mayer Brown’s Gordon testified, the purpose

of the Synthetic Lease Escrow Agreement was to arrange for the payoff of the Synthetic Lease.40

Again as a general matter, the Synthetic Lease Escrow Agreement listed 47 different

documents that would be delivered to the Title Company (defined in that letter as “Escrow

Documents”), which, after conditions precedent to closing were satisfied, would be delivered,

36 Signatures by counsel for GM, JPMorgan and the Trust were followed by a signature block for the Title Company, in a different form. It said:

The undersigned acknowledges receipt of these recording instructions and agrees to proceed in strict accordance therewith.

(block caps in original converted to ordinary text for readability). 37 So far as the Court can tell, there were no material differences in the Synthetic Lease Escrow Agreement as

between its draft as initially circulated by GM counsel Mayer Brown and its execution version. If there were any changes at all, in fact, neither the Committee nor JPMorgan has called the Court’s attention to them.

38 Synthetic Lease Escrow Agreement, 10/24/2008 Wineman Email Attachment (Callagy Decl. Exh. 18). 39 Id. 40 Gordon Dep. 20.


25

recorded or otherwise handled by the Title Company in accordance with the instructions set forth

in the Synthetic Lease Escrow Agreement.

The “Re” line of the Synthetic Lease Escrow Agreement was very lengthy, running on

for 15 lines. It described the Synthetic Lease Escrow Agreement’s subject as:

Termination of that certain Participation Agreement dated as of October 31, 2001, among General Motors Corporation (“GM”), as Lessee and Construction Agent, Auto Facilities Real Estate Trust 2001-1 (“Trust”), as Lessor, Wilmington Trust Company (“Trustee”), as Trustee, the Persons named therein as Investors, the Persons named therein as Backup Facility Banks, Relationship Funding Company, LLC, and JPMorgan Chase Bank (“Agent”), as Administrative Agent, as amended (the “Participation Agreement”) and release of all liens related thereto including liens relating to the following properties: (i) the SPO Headquarters Building located in Grand Blanc, Michigan (the “Grand Blanc Property”); (ii) the GM Powertrain L6 Engine Plant in Flint, Michigan (the “Flint Property”); (iii) the Franklin Deck in Detroit, Michigan (the “Franklin Deck”); (iv) the River East Parking Deck in Detroit, Michigan (the “River East Deck”); and (v) Parcel 6/C in Detroit, Michigan (“Parcel 6/C”) (the Grand Blanc Property, the Flint Property, the Franklin Deck, the River East Deck and Parcel 6/C herein are each a “Property” and, collectively, the “Properties”).41

Specifically, it provided that its undersigned attorneys represented GM, the Agent,

JPMorgan, and the Trustee in connection with that transaction, and that the Title Company had

agreed to issue title insurance policies with respect to the Properties. It further stated that “[t]his

letter constitutes escrow and recording instructions in connection with the Transaction.”42

It then listed the 47 documents or categories of documents that were being delivered to

the Title Company, of which the second was “Termination of UCC Financing Statements (File

41 Synthetic Lease Escrow Agreement at 1 (bold face, for defined terms, in original; emphasis by italics added).

42 Id.


26

Numbers 2092532 5, 2092526 7, and 6416808 4) (the “General UCC Terminations”).”43 The

Synthetic Lease Escrow Agreement then continued:

When all of the conditions precedent to closing set forth in Section A below have been met, you are instructed to close this transaction and disburse the Funds (as defined below) as directed in Section B below and to release from escrow and deliver, record or to otherwise handle the Escrow Documents in accordance with Section C below.44

The third of the General UCC Terminations (relating to UCC financing statement

6416808 4) was the Unrelated UCC-3, which referenced the Main Term Loan UCC-1. But while

the Unrelated UCC-3 was listed as one of the documents to be delivered to the Title Company, it

was not listed as one of the documents to be recorded.45 Rather, the Title Company was

instructed to deliver it (along with others) to GM’s counsel, Mayer Brown. 46

When asked if he had any comments to the draft Synthetic Lease Escrow Agreement

circulated on October 24, 2008, Simpson Thacher’s Merjian replied “it was fine.”47

43 Id. (bold face, for defined term, in original). 44 Id. at 4. 45 See id. at 5-6. Section C began:

As soon as possible after the release of the Funds pursuant to Section B above, you are instructed to record (or file, as applicable) the documents below (the “Recording Documents”) with the appropriate recording office in the applicable state in the following order as to each Property:

Id. at 5 (bold face, for defined term, in original). It then listed the Recording Documents, which were 23 of the 47 documents that were to be delivered to the Title Company. Neither the Unrelated UCC-3, nor any of the other General UCC Terminations, was one of those Recording Documents.

46 Id. at 6 (as set forth at the beginning of Section D, “Immediately following closing, any extra original documents and copies of all Escrow Documents shall be forward to the counsel for GM, except for those documents which have been forwarded to the recorder’s office (in which case certified copies of the foregoing shall be forwarded to the counsel for GM).”).

47 10/27/2008 Merjian Email (Fisher Decl. Exh. V).


27

5. The Synthetic Lease Transaction Payoff

GM repaid the amount due on the Synthetic Lease transaction on October 30, 2008.

Thereafter, but on the same day, Mayer Brown transmitted the Unrelated UCC-3 to a third-party

vendor to cause the filing of the Unrelated UCC-3 with the Delaware Secretary of State. The

Unrelated UCC-3 had no place for a signature by JPMorgan, and it was not signed by

JPMorgan.48

6. GM’s Understanding

Each of the participants on the GM side understood that he was acting only with respect

to the Synthetic Lease. None had the understanding that he or she was acting with respect to the

Term Loan, or was authorized to do so. Gordon stated, in a declaration, that “GM was not

authorized by the Termination Agreement to terminate any financing statement related to the

Term Loan Agreement,”49 and testified to the same effect at his deposition.50 Gordon’s more

junior colleague at Mayer Brown, Green, had the same belief.51

Similarly, GM’s Debra Homic Hoge (the GM business person with responsibility for the

Synthetic Lease), stated that GM was not authorized by the Synthetic Lease Termination

Agreement, nor did GM believe it had any authority, to terminate any UCC-1 related to the Term

Loan. She further stated that GM had not granted Mayer Brown authority to do so.52

Every deponent in this adversary proceeding (on the JPMorgan side or the GM side) first

learned that the Unrelated UCC-3 actually related to the Term Loan only in June 2009, after GM

48 See Appendix A. 49 Gordon Aff., 6/19/09 Email Attachment (Callagy Decl. Exh. 11). 50 See Gordon Dep. 66. 51 See Green Dep. 99. 52 Hoge Aff. ¶ 11.


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had filed its chapter 11 petition. Before that time, none of them even realized that they had a

filed a UCC-3 relating to the Term Loan.53

D. Subsequent Events

GM filed its chapter 11 case on June 1, 2009. Approximately two weeks later, Morgan

Lewis (which by this time was acting for JPMorgan in connection with the Term Loan and the

GM bankruptcy) discovered that Mayer Brown had caused a UCC-3 termination statement to be

filed in October 2008 related to the Term Loan.

About three weeks after GM’s chapter 11 case was filed, this Court gave final approval to

GM’s preliminarily approved postpetition financing, commonly referred to in the bankruptcy

community as “DIP Financing.” The approval was documented in a lengthy order, dated June

25, 2009 (the “DIP Financing Order”). Among many other things, the DIP Financing Order

authorized the repayment of the Term Loan.

On June 30, 2009, as authorized under the DIP Financing Order, the amount then

outstanding under the Term Loan (just under $1.5 billion, viz., $1,481,656,507.70) was repaid

out of the proceeds of the $33 billion in DIP financing.54 After the repayment, JPMorgan

authorized the filing of UCC-3s with respect to the Term Loan, including one with respect to the

Main Term Loan UCC-1.

One month later, the Committee filed its complaint in this adversary proceeding.

53 See Green Dep. 88-89; Perlowski Dep. 40-41; Gonshorek Dep. 47-48; Hoge Aff. ¶ 12. 54 To the extent that the Committee might be successful in this adversary proceeding, the amount paid to

JPMorgan and the Lenders would be subject to recapture, as provided in the final DIP Financing Order when the payoff of the Term Loan was authorized. In that event, after the return of the amount previously paid on what was thought to be a duly secured claim, the Lenders would still have a claim for the Term Loan debt, but would have only an unsecured claim, sharing pari passu with the many billions of dollars of other unsecured claims in GM’s chapter 11 case.


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Discussion

I.

Summary Judgment Standards

Summary judgment is appropriate “if the movant shows that there is no genuine dispute

as to any material fact and the movant is entitled to judgment as a matter of law.”55 The moving

party bears the initial burden of showing that the undisputed facts entitle it to judgment as a

matter of law.56 Then, if the movant carries this initial burden, the non-moving party must set

forth specific facts to show that there are triable issues of fact, and cannot rely on pleadings

containing mere allegations or denials.57

In determining a summary judgment motion, it is well settled that the court should not

weigh the evidence or determine the truth of any matter, and must resolve all ambiguities and

draw all reasonable inferences against the moving party.58 A fact is material if it “might affect

the outcome of the suit under the governing law.”59 An issue of fact is genuine if “the evidence

55 FED. R. CIV. P. 56(a), made applicable to this adversary proceeding by FED. R. BANKR. P. 7056; see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). The Court notes that Rule 56 was amended in December 2010. By order of the Supreme Court, the amendment governs “insofar as just and practicable, [in] all proceedings . . . pending.” Supreme Court Order of April 28, 2010. The amended Rule applies to this motion, but the Court also notes that the substantive standard for summary judgment has not been altered. Advisory Committee Notes to December 2010 Amendment to Rule 56 (“The standard for granting summary judgment remains unchanged.”).

56 See Rodriguez v. City of New York, 72 F.3d 1051, 1060-61 (2d Cir. 1995); Ferrostaal, Inc. v. Union Pacific R.R. Co., 109 F. Supp. 2d 146, 148 (S.D.N.Y. 2000) (“The initial burden rests on the moving party to demonstrate the absence of a genuine issue of material fact . . . .”).

57 See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986); Kittay v. Peter D. Leibowits Co., Inc. (In re Duke & Benedict, Inc.), 265 B.R. 524, 529 (Bankr. S.D.N.Y. 2001) (“[T]he nonmoving party must set forth specific facts that show triable issues, and cannot rely on pleadings containing mere allegations or denials.”).

58 See Matsushita, 475 U.S. at 587 (summary judgment is appropriate “[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party”); Virgin Atlantic Airways Ltd. v. British Airways PLC, 257 F.3d 256, 262 (2d Cir. 2001); Lovejoy-Wilson v. NOCO Motor Fuel, Inc., 263 F.3d 208, 212 (2d Cir. 2001) (“We . . . constru[e] the evidence in the light most favorable to the non-moving party.”).

59 See Anderson, 477 U.S. at 248, 1 S.Ct. 2505.


30

is such that a reasonable jury could return a verdict for the nonmoving party.”60 The standards

for determining a summary judgment motion apply equally to cases, like the instant one, in

which each side moves for summary judgment.61

II.

Choice of Law

Choice of law is not a material concern here.

The issues here are governed, at least in the first instance, by the Uniform Commercial

Code, which does not differ in its content as between Delaware and New York—the two states

whose law JPMorgan and the Committee have principally addressed.62 Under UCC

§ 1-102(2)(c) (as enacted in each state), one of the “[u]nderlying purposes” of the UCC is to

“make uniform the law among the various jurisdictions.” Thus both sides agree, as does the

Court, that while strictly speaking, it is the Delaware version63 of the UCC that applies here, the

Court can (and should) look to decisions from any state or federal courts considering comparable

provisions, without regard to the jurisdictions in which those courts sit.

60 Id. 61 Bronx Household of Faith v. Board of Educ. Of City of New York, 492 F.3d 89, 96 (2d Cir. 2007) (citing

Morales v. Quintel Entm’t, Inc., 249 F.3d 115, 121 (2d Cir. 2001)); In re Magnesium Corp. of America, 460 B.R. 360, 364-66 (Bankr. S.D.N.Y. 2011) (also considering cross-motions for summary judgment).

62 The Main Term Loan UCC-1 and the Unrelated UCC-3 were each filed in Delaware, as was required because GM was a Delaware corporation, which thus was deemed to be “located” in Delaware by reason of its organization there under UCC §§ 9-301 and 9-307. Thus, strictly speaking, Delaware law governs the perfection of JPMorgan’ security interest, the effect of perfection or nonperfection, and the priority of JPMorgan’s security interest in collateral. See UCC § 9-301(1).

The Term Loan documentation had a New York choice of law provision. But while it would govern matters of enforcement or interpretation of that agreement as between JPMorgan and GM, it would not govern the matters just described.

63 6 Del. C. § 9-101 et seq. It became effective in Delaware on July 1, 2001, the day that had been recommended as the effective date by the National Conference of Commissioners on Uniform State Laws, which was also the day (presumably for that reason) that the revised Article 9 became effective in New York.


31

Similarly, as intended by the UCC’s drafters,64 law other than UCC Article 9—here,

principles of agency—must be applied interstitially to fill gaps in the statute. Once again, the

Court believes that strictly speaking, the law of Delaware is the most appropriate to use to fill

gaps in the Delaware UCC—particularly since the purpose of that use is to determine the

effectiveness of termination statements, and continuing validity of initial financing statements,

filed in Delaware. But the two sides here have relied principally on cases decided under New

York law and on discussion of generally accepted legal principles, such as those in various

versions of the Restatement of Agency. More importantly, they have not identified any respects

in which the Delaware law of agency differs from that of any other jurisdiction in which a court

considered similar issues. Thus the Court considers whatever caselaw is available—from a

variety of jurisdictions around the country—from any courts that have addressed similar issues,

or are asserted to have done so.

III.

Effectiveness of the Unrelated UCC-3

It is undisputed that JPMorgan, on behalf of its lending syndicate, at least initially had a

duly perfected security interest with respect to its collateral—including, as relevant here, all of

the equipment and fixtures at the 42 GM properties covered under the Main Term Loan UCC-1.

Thus, if that duly perfected security interest did not come to an end, JPMorgan and the Lenders

continued to have a security interest in all of those assets as of the time GM filed its chapter 11

case—the time at which the Lenders’ continued rights to their secured status is measured.65 The

64 See n.83 below. 65 The Committee properly notes (Comm. Partial SJ Br. 10) that if a security interest is unperfected as of the

time of the petition, it will be trumped by the statutory lien of a trustee or debtor in possession under section 544 of the Bankruptcy Code. But that is not debated by JPMorgan. The issue here is rather whether or not the Lenders’ previously perfected lien remained so.


32

Court here must decide whether the perfection of JPMorgan’s Term Loan security interest came

to an end before that time.

In that connection, JPMorgan does not dispute that a termination statement that referred

to the Main Term Loan UCC-1 by number was filed. JPMorgan also recognizes that each of GM

and JPMorgan knew or was on notice of the initial financing statement filing number to which

the Unrelated UCC-3 referred, though neither was aware that it actually related to the Main Term

Loan UCC-1.

But conversely, the Committee does not dispute that neither of the counsel for GM or

JPMorgan, nor either of their respective clients, intended to terminate the Main Term Loan

UCC-1, or would have filed (or permitted to be filed) the Unrelated UCC-3 if they had known

that the filing of that document would have any effect on the Main Term Loan UCC-1.66 The

Committee effectively bases its argument on the contention (one of law) that JPMorgan’s and

GM’s undisputed intent does not matter.

Determination of the issues here starts with interpretation of the Uniform Commercial

Code, whose Article 9 governs security interests. Article 9 was amended in 2001, in respects

highly relevant here. Since its 2001 amendment, Article 9 no longer requires the execution of a

UCC-3 termination statement by the secured party. Instead, such a filing may be made without

any signature, and by anyone, provided that the filing has been authorized by the secured party.

Importantly, 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

66 See Comm. SJ Opp. 12 (“Of course, if JPMorgan had analyzed and appreciated the consequences of the UCC filing, it never would have permitted Old GM’s counsel to cause the Term Loan Termination Statement to be filed.”).


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initial financing statement was authorized. If the requisite authorization was lacking, the

termination was ineffective.

Since the termination statement here was filed not by JPMorgan, but by GM on

JPMorgan’s behalf, the resolution of this controversy turns on whether GM was authorized, as

part of the payoff of the Synthetic Lease, to terminate JPMorgan’s security interest on the

unrelated Term Loan. On the undisputed facts, the Court concludes that GM’s authority to

terminate initial financing statements was limited to the measures that related to the paid off

Synthetic Lease, and that JPMorgan did not authorize the release of its security interest on the

wholly unrelated Term Loan.

A. The Requirement for Authorization

After the 2001 amendments to the Uniform Commercial Code, three sections of UCC

Article 9, which came into being in 2001,67 are particularly relevant. The first,

UCC § 9-509(d),68 provides, in relevant part:

(d) Person entitled to file certain amendments. — A person may file an amendment other than an amendment that adds collateral covered by a financing statement or an amendment that adds a debtor to a financing statement only if:

(1) the secured party of record authorizes the filing; or

(2) [inapplicable under the facts here].

The second, UCC § 9-510(a),69 provides:

67 See Harry C. Sigman, The Filing System Under Revised Article 9, 73 Am. Bankr. L.J. 61, 70-71 (1999) (“Sigman”).

68 6 Del. C. § 9-509(d). 69 6 Del. C. § 9-510(a).


34

(a) Filed record effective if authorized. — A filed record is effective only to the extent that it was filed by a person that may file it under Section 9-509.

The third, UCC § 9-513(d),70 provides in relevant part:

(d) Effect of filing termination statement. — Except as otherwise provided in Section 9-510, upon the filing of a termination statement with the filing office, the financing statement to which the termination statement relates ceases to be effective.71

Thus, under UCC § 9-513(d), the filing of a termination statement generally causes the

initial financing statement to which the termination statement relates to no longer be effective.

But because UCC § 9-513’s effect is “except as otherwise provided in [UCC §] 9-510,” one must

then look to UCC § 9-510, which requires one to look to § 9-509 to ascertain whether there has

been authorization.

A termination statement (filed by means of a UCC-3) is one kind of financing

statement—one that is an amendment to an initial financing statement (filed by UCC-1).72

70 6 Del. C. § 9-513(d). 71 (emphasis added). 72 UCC § 9-102(39) (6 Del. C. § 9-102(39)), one of UCC Article 9’s many definitions, defines a “financing

statement.” That section provides:

“Financing statement” means a record or records composed of an initial financing statement and any filed record relating to the initial financing statement.

(emphasis added). Similarly, UCC § 9-102(79) (6 Del. C. § 9-102(79)), another of UCC Article 9’s definitions, defines a “termination statement.” That section provides:

“Termination statement” means an amendment of a financing statement which:

(A) identifies, by its file number, the initial financing statement to which it relates; and

(B) indicates either that it is a termination statement or that the identified financing statement is no longer effective.

Failures to focus on the distinction between an “initial financing statement” and a “financing statement,” and on the fact that a “termination statement” is one kind of a “financing statement,” have introduced error into the caselaw, most significantly in one of the cases relied upon by the Committee, Roswell Capital Partners LLC v. Alternative Construction Technologies, 2010 U.S. Dist. LEXIS 90695, 2010 WL 3452378


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UCC §§ 9-509(d), 9-510(a) and 9-513(d) thus collectively provide that a termination statement is

effective only to the extent that the secured party of record authorizes it—and that if the

termination statement has not been duly authorized, it is ineffective.73 And that is so irrespective

of the extent to which the public records tell the world that the initial financing statement is no

longer in effect.74

As Harry Sigman, one of the members of the drafting committee for Revised Article 9,

explained:

Revised Article 9 makes explicit another concept that is implicit under current law—the fact that a filing is on the public record doesn’t guarantee that it is effective. For example, … a termination statement that bears a forged

(S.D.N.Y. Sep. 1, 2010), aff’d by summary order on other grounds, 436 Fed. Appx. 34 (2d Cir. 2011) (“Roswell”). See discussion at page 69 below.

73 See, in addition to UCC §§ 9-509 and 9-510, Official Comment 3 to UCC § 9-502, as enacted in Delaware and elsewhere. It provides, in relevant part:

The fact that this Article does not require that an authenticating symbol be contained in the public record does not mean that all filings are authorized. Rather, Section 9-509(a) entitles a person to file an initial financing statement, an amendment that adds collateral, or an amendment that adds a debtor only if the debtor authorizes the filing, and Section 9-509(d) entitles a person other than the debtor [sic.; query whether it should say “secured party of record”] to file a termination statement only if the secured party of record authorizes the filing. Of course, a filing has legal effect only to the extent it is authorized. See Section 9-510.

6 Del. C. § 9-502 cmt 3 (emphasis added). 74 In its opening brief on its motion for partial summary judgment, the Committee argues that “the filing of a

termination statement renders ineffective the financing statement to which the termination relates and causes the subject lien to become unperfected.” Comm. Partial SJ Br. 9. For its failure to address the critical requirement of authorization, and the exception expressly articulated in UCC § 9-513(d), that statement is an overly general, and consequentially inaccurate, statement of the present law. See discussion at page 60 below.

Pre-2001 caselaw that the Committee argues supports such a generalization, see, e.g., In re Silvernail Mirror & Glass, Inc., 142 B.R. 987 (Bankr. M.D. Fla. 1992) (“Silvernail”), analyzed the issues under a different statutory scheme, and cannot be relied on in instances where the changes in the UCC matter. Language in other post-2001 decisions upon which the Committee relies, Peoples Bank of Kentucky, Inc. v. U.S. Bank, N.A. (In re S.J.. Cox Enterprises, Inc.), 2009 Bankr. LEXIS 4573, 2009 WL 939573 (Bankr. E.D. Ky. Mar. 4, 2009) (“S.J. Cox”), and Roswell, each of which quoted or cited the pre-2001 decisions while failing to consider their continuing vitality in light of the 2001 changes in the UCC, suffer from the same deficiency. For further discussion of the Court’s belief that it should not rely on these cases, see page 60 et seq. below.


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secured party signature is not effective simply because it gets onto the public record. Revised Article 9 states that a filed record is “effective” only to the extent that its filing is authorized.75

Similarly, as stated in a treatise on the UCC:

A filed record, whether it is an initial financing statement or an amendment, is effective only if it is filed by a person who may file it under the rules of revised Section 9-509 [Rev]. Except in the case of agricultural liens, only a filer who is authorized by the right party may file a record. In the case of an initial financing statement or an amendment adding collateral or adding a debtor, the authorization (actual or deemed) must come from the debtor. In the case of other amendments, authorization must come from the secured party of record.

The fate of a record filed by someone other than a person given the power to do so under revised Section 9-509 [Rev] is quite clear. Such a filing is ineffective. Thus, if a secured party files an initial financing statement without actual or deemed authorization of the debtor, that financing statement is ineffective. The same is true for a termination statement not authorized by the secured party of record.76

After the Uniform Law Commissioners and the American Law Institute (“ALI”)

promulgated the revised Article 9 of the UCC that was enacted in 2001, they formed a review

committee in 2008 to consider whether further changes or clarifications should be made.77 In

connection with proposed further amendments to UCC Article 9 (one of which, by means of

amendment to UCC § 9-518, would allow secured parties to file an optional, and non-binding,

“information statement” providing notice that one who filed a termination statement or other

financing statement lacked authority to do so), the Uniform Law Commissioners and ALI noted,

75 Sigman, n.67 above, 73 Am. Bankr. L.J. at 71. 76 Hawkland’s Uniform Commercial Code Series (“Hawkland”) § 9-510:2 [Rev] (2012) (emphasis added).

Roswell has language, arguably dictum, to the contrary. For a discussion of this Court’s inability to agree with Roswell in this and other respects, see the discussion beginning at page 64 below.

77 See their report, reprinted in Hawkland Art. 9 [Rev.] App. C.


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in a proposed addition to the Official Comment to UCC § 9-518, that it would have “no legal

effect.” “Its sole purpose [was] to provide some limited public notice that the efficacy of a filed

record is disputed.”78 They observed that because it would have “no legal effect, a secured party

of record—even one who is aware of the unauthorized filing of a record—[had] no duty to file

one.” They went on to say:

If the person that filed the record was not entitled to do so, the filed record is ineffective, regardless of whether the secured party of record files an information statement. Likewise, if the person that filed the record was entitled to do so, the filed record is effective, even if the secured party of record files an information statement.79

And they concluded:

Just as searchers bear the burden of determining whether the filing of [an] initial financing statement was authorized, searchers bear the burden of determining whether the filing of every subsequent record was authorized.80

B. Was Authorization Granted?

It is clear, then, that a filed record is effective only to the extent its filing is authorized.

But the critical term “authorizes” is not defined in the UCC—in the “Definitions and Index of

Definitions” section of Article 9 (UCC § 9-102),81 the “General Definitions” at the beginning of

the UCC (UCC § 1-201)82 which generally apply to all of the UCC’s Articles, or anywhere else.

That was not inadvertent. The drafters were aware that the Revised Article 9 would be silent

with respect to what constitutes the required authorization (and any standards for determining

78 Id. 79 Id. (italics in original, used to indicate an addition, deleted). 80 Id. (italics in original, used to indicate an addition, deleted; apparent omitted text added in brackets). 81 6 Del. C. § 9-102. 82 6 Del. C. § 1-201.


38

that issue), and contemplated that law outside UCC Article 9 would decide it.83 Thus textual

analysis, with which the Court normally begins any matter of statutory construction, is of limited

utility here.

With “authorizes” not having been statutorily defined, the Court turns, as the drafters of

the UCC contemplated, to the principal area of the law addressing situations where one is

authorized to act on behalf of another—the law of agency.84 Analysis of authority to act in

agency law has traditionally involved consideration of “actual” authority; “apparent” authority;85

and “ratification” of the agent’s acts. Though under the facts here, the latter two of those

doctrines are inapplicable, the Court considers them in turn.

1. Actual Authority

As articulated in caselaw, “[a]ctual authority exists when an agent has the power ‘to do

an act or to conduct a transaction on account of the principal which, with respect to the principal,

83 See Official Comment 3 to UCC § 9-509 (6 Del. C. § 9-509 cmt 3) (“Law other than this Article, including the law with respect to ratification of past acts, generally determines whether a person has the requisite authority to file a record under this section.”); accord UCC § 9-502 cmt 3 (6 Del. C. § 9-502 cmt 3) (same).

In that connection, a third provision of the UCC—one of its “General Provisions,” which did not come into place in 2001, but rather has been in place since its inception—is consistent with the consideration of agency law to decide when appropriate authority has been granted. That provision, UCC § 1-103(b) (6 Del. C. § 1-103(b)) provides, in relevant part:

Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause supplement its provisions.

(emphasis added). 84 Neither the Committee nor JPMorgan suggests that there is any relevant statutory law in this regard. The

principles emerge from caselaw, and caselaw-driven authorities such as the Restatement of Agency. 85 Another type, “implied” authority, which is a species of actual authority, is discussed at page 58 below.


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he is privileged to do because of the principal’s manifestation to him.’”86 Likewise, as set forth

in the current Restatement:

An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act.87

Actual authority is created by “direct manifestations” of that grant of authority which

come from the principal to the agent.88 “[T]he extent of the agent's actual authority is interpreted

in the light of all the circumstances attending these manifestations, including the customs of

business, the subject matter, any formal agreement between the parties, and the facts of which

both parties are aware.”89

86 Hidden Brook Air, Inc. v. Thabet Aviation Intern., Inc., 241 F. Supp. 2d. 246, 260 (S.D.N.Y. 2002) (“Hidden Brook Air”) (under New York law) (quoting Minskoff v. American Exp. Travel Related Servs. Co., 98 F.3d 703, 708 (2d Cir. 1996) (making reference to the 1958 Restatement (Second) of Agency (the “Restatement Second”), and thus general principles of law)).

87 Restatement (Third) of Agency (“Restatement”) § 2.01 (2006); see also id. § 3.01 (“Actual authority, as defined in § 2.01, is created by a principal's manifestation to an agent that, as reasonably understood by the agent, expresses the principal's assent that the agent take action on the principal's behalf.”).

88 Demarco v. Edens, 390 F.2d 836, 844 (2d Cir. 1968) (“Demarco”); Peltz v. SHB Commodities, Inc., 115 F.3d 1082, 1088 (2d Cir. 1997) (“Peltz”) (quoting Demarco); Highland Capital Management LP v. Schneider, 607 F.3d 322, 327 (2d Cir. 2010) (“Highland Capital Management”) (quoting Peltz). Though Demarco and the approximately ten other decisions with identical language all appear to have been decided under New York law, the Court has no reason to believe that Delaware law would be any different in this respect.

See also Restatement Second § 7 (cited by Demarco court) (“Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him.”) (emphasis added); Restatement § 1.03 (“A person manifests assent or intention through written or spoken words or other conduct.”); id. cmt a (“Actual authority as defined in § 2.01 requires a manifestation from the principal to the agent. The scope of actual authority, addressed in § 2.02, is based upon, although not wholly defined by, the principal’s manifestation to the agent. A manifestation of assent by the principal is requisite to creating actual authority under § 3.01.”).

89 Demarco, 390 F.2d at 844; Peltz, 115 F.3d at 1088 (quoting Demarco); Highland Capital Management, 607 F.3d at 327 (quoting Peltz).


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Importantly for reasons that follow, “[t]he focal point for determining whether an agent

acted with actual authority is the agent’s reasonable understanding at the time the agent takes

action.”90 As stated in the current Restatement:

An agent does not have actual authority to do an act if the agent does not reasonably believe that the principal has consented to its commission. … Lack of actual authority is established by showing either that the agent did not believe, or could not reasonably have believed, that the principal's grant of actual authority encompassed the act in question. This standard requires that the agent's belief be reasonable, an objective standard, and that the agent actually hold the belief, a subjective standard.91

Thus (presumably because of the requirement that the agent actually hold the belief, a

subjective standard),92 testimony of the alleged agent concerning the agent’s belief as to his or

her authority is a common means to prove or disprove the existence and scope of authority.

Cases in this district and elsewhere have repeatedly considered the agent’s testimony as to his

understanding of his authority in determining whether actual authority existed.93

90 Restatement, § 2.01 cmt c. 91 Restatement, § 2.02 cmt e. 92 Id. 93 See Merex A.G. v. Fairchild Weston Systems, Inc., 810 F.Supp. 1356, 1369 (S.D.N.Y. 1993), aff’d by

summary order, 54 F.3d 765 (2d Cir.), cert. denied, 516 U.S. 915 (1995) (court relied on testimony of alleged agent, a market manager, when he stated that he informed the plaintiff Merex that he had no authority to bind the defendant Fairchild); Playboy Enterprises, Inc. v. Dumas, 960 F.Supp. 710, 721 (S.D.N.Y. 1997) (“There is no evidence suggesting that any of the [accountant agents alleged to have been authorized in the transaction in question] believed that it had the authority to bind Nagel to a work for hire agreement. In fact, what evidence there is shows that the agents believed that such action was outside of the limited scope of their agency.”); Yolton v. El Paso Tennessee Pipeline Co., 668 F.Supp.2d 1023, 1041 (E.D. Mich. 2009) (relying on testimony by union representative that he knew that the union lacked the authority to modify employees’ vested retirement benefits); Big Bear Import Brokers, Inc. v. LAI Games Sales, Inc., 2010 U.S. Dist. LEXIS 18604, at *12, 2010 WL 729208, at *4 (D. Ariz. Mar. 2, 2010) (defendant LAI introduced undisputed evidence that agent Hughes did not have authority to enter into purchase agreement, and that at the time he signed it, he knew he did not have such authority, based on Hughes’ admission that “he had a feeling that he was not allowed to enter the purchase agreement”); Lone Star Heat Treating Co. v. Liberty Mutual Fire Insurance Co., 233 S.W.3d 524, 531 (Tex. Civ. App. 14th Dist. 2007) (on summary judgment motion, relying on uncontroverted affidavit of employee when he swore that nobody had told him that he was authorized to take actions in question).

In another case, Opp v. Wheaton Van Lines, Inc., 231 F.3d 1060 (7th Cir. 2000), where there was an issue as to whether one Richard Opp had authority to act as an agent, the Seventh Circuit found significant the


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Here the Committee argues that JPMorgan (through its counsel, Simpson Thacher)

granted actual authority to GM (through GM’s counsel, Mayer Brown) to terminate the Main

Term Loan UCC-1, as a consequence of JPMorgan’s alleged authorization to file the Unrelated

UCC-3. The Committee bases its actual authority arguments, in substance, on the

communications between JPMorgan and its counsel, on the one hand, and GM and its counsel,

on the other, that took place before the Unrelated UCC-3 was filed. Upon consideration of those

communications, however—with a focus on the manifestations of the authority JPMorgan

granted to GM (and, in particular, “the customs of business, the subject matter, any formal

agreement between the parties, and the facts of which both parties are aware”),94 and, to a lesser

extent, on the caselaw—the Court concludes that JPMorgan did not grant actual authority to

terminate the Main Term Loan UCC-1.

(a) The Authority Indicia

The underlying facts—as contrasted to conclusions that flow from them—are not in

dispute. The parties agree, as does the Court, that the documents that are most significant in

analyzing JPMorgan’s manifestations of the authority it gave to GM are four particular

documents:

absence of any testimony from Mr. Opp. See id. at 1064-65 (“And the record contains no testimony from Mr. Opp. Because the record provides no counter-affidavits that establish an explicit agency relationship between Ms. and Mr. Opp, we must accept Ms. Opp’s affidavit as true and conclude that she never explicitly granted Mr. Opp the authority to limit the carriers’ liability.”).

Thus the Court must overrule the Committee’s objection to the statements in affidavits and deposition testimony of Mayer Brown and GM personnel that they were not authorized to terminate the Main Term Loan UCC-1. The Committee’s objection, premised on the contention that each was expressing an impermissible legal conclusion, mischaracterizes the statements’ substance. Though the Mayer Brown and GM personnel sometimes spoke in conclusory terms, each was in substance expressing his or her understanding or belief that Mayer Brown and GM personnel had not been so authorized. That is exactly what the Restatement says should be the factual predicate for the “subjective standard” prong of the legal conclusion. See page 33 & n.91 above (“Lack of actual authority is established by showing … that the agent did not believe … that the principal's grant of actual authority encompassed the act in question. This standard requires that … the agent actually hold the belief, a subjective standard.”). With the witnesses providing their understandings and beliefs, the Court can draw its own legal conclusions.

94 See page 32 & nn. 88-89 above.


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(1) the Synthetic Lease Termination Agreement;

(2) the Synthetic Lease Closing Checklist;

(3) the Unrelated UCC-3; and

(4) the Synthetic Lease Escrow Agreement.

With respect to each of these documents, the Court considers it appropriate to ask two

questions: was it an authorization, and, if so, an authorization of what? With respect to the first

and fourth of those documents (the Synthetic Lease Termination Agreement and the Synthetic

Lease Escrow Agreement), the Court finds a grant of authorization to do something.95 But with

respect to each of the four documents (including the first and the fourth), the Court finds no grant

of authority to terminate the Main Term Loan UCC-1 (nor does it find a failure to object to any

such document to be an authorization), and the Court finds the lack of the requisite authority to

be particularly clear when the totality of the surrounding circumstances is considered.

(1) The Synthetic Lease Termination Agreement

Of the four key documents, the Synthetic Lease Termination Agreement was by far the

most specific in defining the nature of GM’s authority to file termination statements. That

agreement, which is quoted in full above,96 stated, in its most significant part:

the Administrative Agent and the Lessor do hereby . . . authorize Lessee to file a termination of any existing Financing Statements relating to the Properties.

That plainly is an authorization. It also tells the reader exactly what has been authorized.

The key words “Financing Statements” and “Properties” in the preceding quoted

language were capitalized and defined terms. They took their meaning from the Participation

95 With respect to the other two documents (the Synthetic Lease Closing Checklist and the Unrelated UCC-3), the Court cannot even find that.

96 See n.18 above.


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Agreement, entered into back in October 2001, which had listed the particular pieces of real

property that originally were collateral under the Synthetic Lease.

“Properties” as there used thus meant the Properties (as defined in the Participation

Agreement) that were still collateral under the Synthetic Lease.97 “Properties” as there used did

not include the very different collateral for the Term Loan. Similarly, “Financing Statements,”

by reason of the defined terms in the Participation Agreement, referred to the “Lessor Financing

Statements” and “Lessee Financing Statements” that had been filed in connection with the

Synthetic Lease, which had been executed by the “Lessor” (the Auto Facilities Real Estate Trust

2001-1); the “Lessee” (GM); and the “Administrative Agent” (JPMorgan).98 Once again, they

did not include unrelated initial financing statements (most significantly, the Main Term Loan

UCC-1) with respect to the Term Loan, nor any that had been filed with respect to any other

financing.

The Synthetic Lease Termination Agreement can be read in only one way: that

Administrative Agent JPMorgan authorized Lessee GM to file terminations of existing financing

statements only with respect to the specific properties that were the subject of the Synthetic

Lease. The Synthetic Lease Termination Agreement plainly was an authorization to terminate

initial financing statements—but only those that it specified. It was not an authorization to bring

the Main Term Loan UCC-1 to an end.

(2) The Synthetic Lease Closing Checklist

The second of the four potentially relevant documents is the Synthetic Lease Closing

Checklist—a six-page listing of several dozen documents, prepared by GM’s counsel Mayer

Brown, that would be executed in connection with the payoff of the Synthetic Lease, some of

97 See n.21 above. 98 See n.20 above, quoting the original definitions.


44

which would also be filed. The Court is satisfied that personnel from Simpson Thacher and

JPMorgan received and reviewed the Synthetic Lease Closing Checklist, and voiced no objection

to it. But the Court cannot find an authorization on the part of JPMorgan, by reason of that

receipt, review, or failure to protest, to file or terminate anything, and especially cannot find an

authorization to terminate the Main Term Loan UCC-1.

Preliminarily, the Synthetic Lease Closing Checklist did not say that it was, nor was it, an

authorization to do anything. It did not by its terms invite or call for (or even mention) an

authorization from JPMorgan with respect to the documents that were listed upon it, and

JPMorgan did not execute it. In each of these respects, it was quite different than the Synthetic

Lease Termination Agreement discussed above. Plainly, the Synthetic Lease Closing Checklist

was sent to Simpson Thacher and JPMorgan for comment. And one can infer that if Simpson

Thacher or JPMorgan had any objection or protest (or even comments), Mayer Brown would

refrain from action, at least pending further discussion. But the Synthetic Lease Closing

Checklist did not purport to be, nor was it, an authorization of any kind.

Because the Court cannot find the Synthetic Lease Closing Checklist to be an

authorization at all, the Court need not address the second question that must be asked: “an

authorization of what?” If the Court were required to answer that question, however, it would

answer it in the same way that it answered that question for the Synthetic Lease Termination

Agreement, as discussed above.

The Synthetic Lease Closing Checklist identified itself as relating to the “Release of

Properties from JPMorgan Chase Synthetic Lease.” It made no mention of the Term Loan, nor

of any financing other than the Synthetic Lease. Assuming, arguendo, that failure to protest to


45

the filing of the listed documents could be deemed to be an authorization, it could only be read as

an authorization for what it described—the properties remaining under the Synthetic Lease.

For those same reasons, the Court is unpersuaded that Simpson Thacher’s Merjian’s

statement, “Nice job on the documents,” preceding the one comment he had relating to Synthetic

Lease matters, should be deemed to be an authorization of any kind, or, if one reaches the issue,

an authorization to terminate the Main Term Loan UCC-1.

It is true, of course, that embodied in the Synthetic Lease Closing Checklist was the

number of a UCC-1 which those involved with this case now know to be the Main Term Loan

UCC-1. But nobody knew that at the time. Nobody knew that the Main Term Loan UCC-1

would be affected in any way—or more importantly, intended by the Synthetic Lease Closing

Checklist to achieve such an end.

It also is true, of course, that by reference to each UCC-1 filing number that was

mentioned in the Synthetic Lease Closing Checklist, one could find the original UCC-1 to which

the checklist referred; then discern to what the UCC-1 related; and then decide whether or not to

authorize the termination of that UCC-1, even if it related to a wholly unrelated transaction. But

the failure to have engaged in such an exercise cannot be found to be an authorization.

(3) The Unrelated UCC-3 Itself

The third of the four documents potentially relevant to this inquiry is the draft of the

UCC-3 itself. Based on the content of the draft Unrelated UCC-3; its delivery to Simpson

Thacher and JPMorgan before its filing; and Simpson Thacher’s asserted approval of it (or at

least Simpson Thacher’s failure to object to its filing), the Committee contends that the


46

Unrelated UCC-3 itself constitutes authorization for the termination of the Main Term Loan

UCC-1.99

Once again, however, the Court cannot find an authorization here, or conclude, assuming

arguendo that the draft UCC-3 was an authorization, that it was an authorization to terminate the

Main Term Loan UCC-1. With respect to the first of those issues, the UCC-3 did not call for the

signature of the secured party principal. Nor did it have a granting clause or use granting

language—such as the “hereby … authorize” which appears in the Synthetic Lease Termination

Agreement. GM’s filling in of a box listing JPMorgan as “Secured Party of Record Authorizing

this Amendment” could not reasonably be regarded as a substitute for this. Nor could the

UCC-3, executed solely by GM, reasonably be deemed to be a grant of authority by JPMorgan.

Then, assuming arguendo that the draft UCC-3 could be deemed to be an authorization of

something, it cannot be found to be an authorization to terminate the Main Term Loan UCC-1.

The Unrelated UCC-3 did not, as the Committee argues, “indicate[]that the effectiveness of the

Term Loan Financing Statement is terminated….”100 It made no reference to the Term Loan

other than as might be ascertained by looking at the number listed under “Initial Financing

Statement File #” and then following through on an inquiry to discern the file number’s

significance.101

99 See Comm. Partial SJ Br. 14 (“The draft of the Term Loan Termination Statement [i.e., the Unrelated UCC-3] indicated that the effectiveness of the Term Loan Financing Statement is terminated and identified JPMorgan as the secured party of record authorizing the termination.”).

100 See n.99 above. 101 Addressing one of the important premises for its arguments here, the Committee argues that:

In this case, the Term Loan Termination Statement [i.e., the Unrelated UCC-3] stated unambiguously that the Term Loan Financing Statement was terminated with respect to the security interest of JPMorgan, the secured party of record authorizing its filing.

See Comm. Partial SJ Br. 13. But that is not quite correct. The words “Term Loan Financing Statement” or “Term Loan” never appeared on the Unrelated UCC-3. The Committee’s argument rests on what might


47

Since a draft of the Unrelated UCC-3 was included amongst the documents that were sent

to Simpson Thacher, the Court is inclined to agree with the Committee that when Simpson

Thacher’s Merjian stated, “Nice job on the documents,” just preceding the one comment he had

relating to Synthetic Lease matters, the Unrelated UCC-3 was covered under that remark to no

lesser degree than the other documents in the pile. But for the reasons above, that generalized

remark still cannot be deemed to be an authorization of any kind, or, if one reaches the issue, an

authorization to terminate the Main Term Loan UCC-1. In the absence of an indication that

Merjian knew that there was a document that could affect the Main Term Loan UCC-1 in the

batch he received, or that Merjian intended that a UCC-3 in that batch terminate the Main Term

Loan UCC-1—and, of course, when neither JPMorgan nor GM had the belief that the Main

Term Loan UCC-1 would be affected in any way—the Court cannot find Merjian’s comment to

constitute an authorization to terminate that wholly unrelated document.

(4) The Synthetic Lease Escrow Agreement

The fourth and last of the documents that are asserted to have potential relevance is the

Synthetic Lease Escrow Agreement. As with the Synthetic Lease Termination Agreement, the

Synthetic Lease Closing Checklist, and the Unrelated UCC-3, the Court considers this document

at two levels: again, whether was it an authorization at all, and, if so, an authorization of what.

At the first level, the Court concludes that the Synthetic Lease Escrow Agreement was

indeed an authorization—to authorize the Title Company to act to implement the letter’s joint

directions. But the Synthetic Lease Escrow Agreement was not a grant of an authorization to file

UCC-3s. The Court so concludes because (1) the UCC-3s were not amongst the documents that

were to be recorded or filed under that agreement, and (2) it was the intention of JPMorgan, GM,

have been learned in the multi-step inquiry process if any of Simpson Thacher, JPMorgan, Mayer Brown or GM had engaged in one.


48

and the other parties to the Synthetic Lease Termination Agreement to embody any authorization

JPMorgan might grant within that document instead.

At the second level, the Court concludes, once again, that assuming, arguendo, that the

Synthetic Lease Escrow Agreement was intended to constitute a second (and seemingly

redundant) basis for authority to terminate UCC-1s, the Synthetic Lease Escrow Agreement was

an authorization to terminate UCC-1s only with respect to the Synthetic Lease. It still could not

be regarded as an authorization to terminate the Main Term Loan UCC-1.

Here, with respect to whether the Synthetic Lease Escrow Agreement was an

authorization at all, the Court concludes that it was—though to the Title Company, not to GM or

Mayer Brown. In fact, Mayer Brown, on behalf of GM, was one of the three entities granting the

authorization—not the entity being authorized.

With respect to what the Synthetic Lease Escrow Agreement authorized, it authorized the

Title Company to record or file specified documents (i.e., the 23 Recording Documents),102 but

not all of the 47 Escrow Documents.103 The remainder (which included the Unrelated UCC-3)

were simply to be returned to Mayer Brown.104

Significantly, the Synthetic Lease Escrow Agreement, which by its terms gave

instructions to the Title Company, did not give Mayer Brown instructions or authority to do

anything. Nor, especially, did it give Mayer Brown any instructions concerning what Mayer

Brown should do with the Escrow Documents that the Title Company would not file, but instead

would only forward to Mayer Brown—including, as relevant here, the Unrelated UCC-3.105

102 See n.45 above. 103 See page 19 above. 104 See n.46 above. 105 In its briefing and at oral argument on these motions, see Comm. SJ Opp. 6 n.6, Comm. Partial SJ Reply

11, and Arg. Tr. at 31-32 (ECF #63), the Committee asked rhetorically, in substance, if the remainder of the


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Finally, the Synthetic Lease Escrow Agreement described itself as relating to the

Participation Agreement, i.e., to the Synthetic Lease.106 It made no mention of the Term Loan.

For all of these reasons, the Court cannot find the Synthetic Lease Escrow Agreement to

be a source of authority for GM or Mayer Brown to have filed anything, including, especially,

anything affecting the Term Loan.

(5) “All Circumstances Attending [Principal’s] Manifestations” to Agent

As noted above,107 actual authority is created by “direct manifestations” coming from the

principal to the agent. “[T]he extent of the agent’s actual authority is interpreted in the light of

all the circumstances attending these manifestations, including the customs of business, the

subject matter, any formal agreement between the parties, and the facts of which both parties are

aware.”108 The direct manifestations, and all of the circumstances attending them, likewise cause

this Court to conclude that termination of the Main Term Loan UCC-1 was not authorized.

When the Unrelated UCC-3 was filed, there was one, and only one, “direct

manifestation[]” of the authority granted to GM by JPMorgan here. That was the Synthetic

Lease Termination Agreement, the only document embodying a grant of authority to GM. The

“direct manifestation[]” of GM’s authority to terminate initial financing statements (which

granted authority with respect to the “Financing Statements” relating to the “Properties,” each of

which was a defined term in the Synthetic Lease Termination Agreement), came from the

Escrow Documents were not being returned for filing, what were they returned for? Certainly the filing of at least some of them was foreseeable—though many more documents were to be returned than were, or could be, filed. But the fact remains that the Synthetic Lease Escrow Agreement embodied no authority for GM to do anything with respect to documents so returned, whether the filing of any of them was foreseeable or not.

106 See nn. 38 and 39 above. 107 See page 32, above. 108 Demarco, 390 F.2d at 844; accord Peltz, 115 F.3d at 1088; Highland Capital Management, 607 F.3d at

327.


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Synthetic Lease Termination Agreement, and nowhere else. Having provided the necessary

grant of authority in one place (in very express terms), there was no need to express it again, and

the Court can find no evidence of an intent to say it again, either in the same terms or different

ones. The other asserted manifestations of authority to GM, as argued by the Committee, were

not at all “direct,” if they could be regarded as manifestations at all.

The Court then considers “the customs of business, the subject matter, any formal

agreement between the parties, and the facts of which both parties were aware.” No expert

testimony, or other evidence, was offered as to the “customs of business,” so the Court lacks

evidence of that character upon which to rely. But there is a fair amount of evidence in the

record as to the remaining factors, as to which there are no disputed issues of fact, and it all

points the same way.

The “subject matter” of the transaction was, as nearly every relevant document expressly

stated, the termination of the Synthetic Lease. In all of the emails and underlying documents,

there was no mention, before the filing of the Unrelated UCC-3, of the Term Loan or of any

intent to affect the Term Loan in any way. The affidavits and deposition testimony were wholly

consistent. Nobody at GM, JPMorgan, Mayer Brown or Simpson Thacher ever regarded the

subject matter of the transaction as anything other than the Synthetic Lease. The Committee

effectively asks the Court to conclude that JPMorgan granted authorization to GM to take action

with respect to a wholly different subject matter—a wholly unrelated $1.5 billion loan—without

any of the participants in the Synthetic Lease payoff ever mentioning that along the way.

Looking at any “formal agreement between the parties,” the Court comes to the same

conclusion. The only formal agreement between the parties with respect to authority to file the

Unrelated UCC-3, as discussed above in the Court’s discussion of direct manifestations from


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principal to agent, was the Synthetic Lease Termination Agreement—with respect to which the

grant of authority was explicit, and equally explicit with respect to what it covered. Other

documents relied upon by the Committee as sources of authorization here were not agreements.

They provide no basis for the Court to conclude that JPMorgan and GM agreed to trump or

supplement the one formal agreement between the parties that expressly addressed the matter of

authority.109

Other, earlier, formal agreements between the parties reinforce that conclusion. When

the Term Loan was put into place in 2006, its documentation had provisions to protect the liens

securing the Term Loan. Under one such provision, the Term Loan Collateral could not be

eliminated unless the Term Loan was fully paid off.110 Under another, GM covenanted to

maintain the perfection of the security interests in the Term Loan Collateral.111 And under

another, the Term Loan Lenders’ perfected security interests could not be released “without the

written consent of each Lender.”112 These too were elements of formal agreements between the

parties that must be considered when determining whether JPMorgan authorized the termination

109 The Committee asserts that the Synthetic Lease Termination Agreement does not say that it is the sole source of authority to GM, and that it lacked an integration clause—and thus that the Committee is not foreclosed from relying on other documents as sources of authority. Comm. SJ Opp. 9 n.9; Comm. Partial SJ Reply 14-15. The Court agrees with the Committee that it is not so foreclosed, and has assumed, consistent with Demarco, Peltz and similar cases, that if there were any other formal agreements likewise speaking to a grant of authority, the Court should consider them as well. For these reasons, the Court has reviewed, with some care, what the Synthetic Lease Closing Checklist, the Unrelated UCC-3, and the Synthetic Lease Escrow Agreement said (even though not all of them were agreements between JPMorgan and GM), along with earlier formal agreements between JPMorgan and GM. Ultimately, however, the documents that the Committee wishes the Court to consider fall considerably short of granting additional or different authority, especially when two of the three of them are not agreements at all. Also, when considering the circumstances in the aggregate, it is appropriate to give the most specific document the greatest weight.

110 Collateral Agreement § 7.13 (Duker Aff. Exh. H). 111 Collateral Agreement § 4.03. 112 Term Loan Agreement § 10.01 (Duker Aff. Exh. G).


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of the Lenders’ Term Loan liens as a consequence of the inferences the Committee asks the

Court to draw here.

Consideration of “the facts of which both parties are aware” likewise supports

JPMorgan’s contention that it did not grant authority to terminate the Main Term Loan UCC-1.

Here neither principal (JPMorgan) nor agent (GM) believed or understood that JPMorgan

authorized GM to terminate the Main Term Loan UCC-1. Their understandings were to the

contrary. Nor were they even aware that a UCC-3 referencing an initial financing statement for

the Term Loan had been filed until long after the Unrelated UCC-3’s filing, or of any extrinsic

facts that would cause either to believe that GM should be terminating the Main Term Loan

UCC-1. As an additional one of the factors to be considered under Demarco, Peltz, and similar

cases, “the facts of which both parties were aware” require the Court to conclude that no

authorization was given.

Finally consideration of all of the circumstances in the aggregate compels a finding that

authority to terminate the Main Term Loan UCC-1 was not granted. Stepping back from the

more detailed analysis above, the Court sees the transaction as the payoff of a real estate

financing under which the parties intended to bring the real estate financing liens to an end,

without any intention to affect anything else. Neither GM nor JPMorgan intended, or believed,

that their documents would affect anything else—and, more to the point, thought JPMorgan had

authorized GM to affect anything else. A document now known to have related to the unrelated

Term Loan was mistakenly filed by Mayer Brown. Even with delivery of a draft of that

document to Simpson Thacher in advance, and Simpson Thacher’s failure to protest, the

mistaken filing by Mayer Brown of that document—in the absence of recognition by either

Mayer Brown or Simpson Thacher that the initial financing statement filing number appearing


53

on it would, upon further investigation, lead to a reference to the Term Loan—does not equate to

an authorization by JPMorgan or Simpson Thacher for the termination of JPMorgan’s Term

Loan liens. This too compels a ruling by this Court that when authorizing termination of

UCC-1s with respect to the Synthetic Lease, JPMorgan did not give actual authority to GM to

terminate the Main Term Loan UCC-1.

(6) Understanding of the Agent

There is, in addition, one more reason why the Court cannot find termination of the Main

Term Loan UCC-1 to have been authorized. That is the understanding of the agent.

As discussed above,113 an agent does not have actual authority to do an act if the agent

does not reasonably believe that the principal has consented to its commission. Here no one on

the GM side had any belief, reasonable or otherwise, that GM had been authorized to terminate

JPMorgan’s security interests with respect to the Term Loan.

If Mayer Brown or GM had actually believed that either had been authorized by

JPMorgan to terminate a wholly unrelated $1.5 billion financing, this would be a different case,

requiring the Court to then consider whether such a belief was reasonable.114 But that is not an

issue here, because every individual on the GM side unequivocally expressed his or her belief

that GM had not been so authorized. And because, as the Restatement makes clear, a belief (and

indeed, a reasonable belief) by the agent that he or she has been authorized is essential to a

finding of actual authority—and that is lacking here—the Court cannot find that GM or Mayer

113 See page 33 & n.91 above. 114 See Restatement § 2.02 cmt e. Though under the facts here, any such belief, if it existed, would be absurd,

the Court is uncertain whether the absurdity of the agent’s belief can be decided on a summary judgment motion when reasonableness is at issue. That issue need not be decided here, of course, because those on the GM side did not have a belief that JPMorgan had authorized the termination of its security interest on the unrelated Term Loan, reasonable or otherwise.


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Brown had actual authorization. Quite apart from the conclusion that flows from the multi-

indicia analysis dictated by Demarco, Peltz and similar cases, that is ultimately conclusive.115

* * *

For all of these reasons, the Court concludes that GM and Mayer Brown lacked actual

authority to cause JPMorgan’s Main Term Loan UCC-1 to come to an end.116

(b) Helpful Caselaw

Because the consideration of indicia of a grant of authority is fact-driven, caselaw dealing

with grants of authority in connection with the filing of other UCC-3s is not as helpful as it

otherwise might be. But there are a few cases worthy of consideration.

In the Negus-Sons bankruptcy case,117 the bankruptcy court held that secured party

authorization was required to file a UCC-3, and that this authorization had been provided. The

Eight Circuit Bankruptcy Appellate Panel, and then the Eighth Circuit, affirmed—finding that

the bankruptcy court’s decision was “supported by the record,” though “the strongest basis for

affirming” was an alternate one, that the secured party was paid off with respect to the remainder

of its collateral.

115 Here the “actual authority” that the Committee asks the Court to find is ultimately based on the results of an investigative process that never happened. It is not based on anything JPMorgan said or signed, or that GM believed. It rather is the result of a logical syllogism resulting from Simpson Thacher’s failure to protest when it saw GM’s draft UCC-3 listing a particular initial financing statement filing number, when if Simpson Thacher, Mayer Brown, or either of their clients had investigated and tracked down the referenced UCC-1, and then investigated further to ascertain the financing to which that UCC-1 related, they would have discovered that the UCC-1 in question related not to the Synthetic Lease but rather to the Term Loan. That is not a proxy for actual authority, which requires the reasonable belief by the agent that it has been authorized to act in the respect at issue.

116 The Committee also relies on “implied authority,” which is a species of actual authority. Because the Committee asserts this as a separate contention, the Court considers it as such, and deals with it below. See page 58 below.

117 See Lange v. Mutual of Omaha Bank (In re Negus-Sons, Inc.), 2011 Bankr. LEXIS 2378, 2011 WL 2470478 (Bankr. D. Neb. June 20, 2011) (“Negus-Sons-Bankruptcy”), aff'd, 460 B.R. 754 (B.A.P. 8th Cir. 2011) (“Negus-Sons-BAP”), aff’d on opinion of BAP, 701 F.3d 534 (8th Cir. 2012) (per curiam).


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There a secured party, Mutual of Omaha Bank (the “Bank”), had liens on a variety of

collateral, some of which the Bank intended to keep and some of which it intended to release.

But a Bank employee carelessly placed language in a loan payoff letter provided to a new lender,

Wells Fargo Equipment Finance, stating that “[u]pon receipt of payoff all liens will be

released.”118 Based on this language, and its earlier request for authorization for a release of the

security interest “in all the collateral,” Wells Fargo Equipment Finance filed a termination

statement on the Bank’s behalf. While the Bank claimed that it intended only to release its

security interest in the collateral for which payment was received, the bankruptcy court ruled that

the broad language in the Bank’s responding letter authorized the filing of the termination

statement.119

The bankruptcy court’s decision in Negus-Sons-Bankruptcy, which the BAP implicitly

found not to be clearly erroneous,120 is in any event easily distinguishable. The bankruptcy court

118 Negus-Sons-Bankruptcy, 2011 Bankr. LEXIS 2378, at *12, 2011 WL 2470478, at *5 (emphasis added). 119 The Bank contended that its authorization was more limited, referring only to its equipment collateral and

not its entire security interest. See 2011 Bankr. LEXIS 2378, at *9-10, 2011 WL 2470478, at *4. The Negus-Sons-Bankruptcy court found that contention inconsistent with the request from Wells Fargo Finance to which the Bank was responding. The request provided, in relevant part:

This letter is to confirm that upon receipt of funds from Wells Fargo Equipment Finance, Inc. for the entire payoff of all accounts that you agree to terminate your security interest in all the collateral with all the companies listed above and forward all titles to the following address:

...

We have prepared an amendment to your UCC filing(s) to effectuate these terminations. Please indicate your consent to the filing of these amendments, and your authorization for us to file them on your behalf, by signing in the space provided below....

Id. (emphasis added). 120 The BAP stated that “[t]he record supports the bankruptcy court’s determination that Wells Fargo had the

authority to terminate [the] financing statements.” Negus-Sons-BAP, 460 B.R. at 757. But it went on to say that it could affirm on the basis that the termination of the financing statements was unnecessary, because of payment in full of the remaining indebtedness before the bankruptcy, taking pains to say “we can affirm on any ground supported by the record.” Id. at 757 n.9. And it later found that the alternative ground was “the strongest basis for affirming the bankruptcy court’s determination that Mutual of Omaha no longer has a security interest in the Property.” Id. at 758. It is fair to infer that the B.A.P. found the


56

found that authorization to terminate the liens with respect “to all of the collateral with all the

companies listed above” was sought, and that authorization for the release of “all liens” was

expressly granted by the Bank. The Bank did not limit its release of liens to those on particular

assets.121

But while not fully on point as a factual matter (and while they engage in a factual

analysis somewhat less structured than the one this Court has undertaken, pursuant to Demarco,

Peltz and similar cases) the decisions by the bankruptcy and district courts in the A.F. Evans

bankruptcy122 are nevertheless instructive. The bankruptcy court in A.F. Evans-Bankruptcy

understandably started with the statutory scheme of UCC §§ 9-509(d), 9-510 and 9-513. It then

engaged in a fact-driven analysis to ascertain whether the requisite authority had been granted—

ultimately concluding that authority to terminate the liens on two items of collateral did not

extend to a third, even though a termination statement that covered the third as well had been

filed. The A.F. Evans-District court affirmed.

The A.F. Evans cases involved a situation, like this one, in which a creditors’ committee,

on behalf of the debtor’s unsecured creditor community, was jousting with a secured lender over

the validity of the secured lender’s lien. As here, the secured creditor City National Bank (“City

bankruptcy court’s factual finding of authority not to be clearly erroneous, but not to have been strongly supported.

The BAP also stated that in light of its rulings, it did “not need to address the more general question of whether unauthorized termination statements are effective,” id. at 757, though it went on to say that it was hesitant to endorse the holding in Roswell, which “appears to be contrary to the plain language of the Uniform Commercial Code.” Id. at 757 n.10; see also this Court’s discussion of Roswell, beginning at page 64 below.

121 Other cases involving termination of UCC-1s by entities acting (albeit without authority) on behalf of secured lenders, S.J. Cox and Roswell, are in this Court’s view erroneously decided, and thus are inappropriate for discussion in this context. The Court addresses them below, in the context in which the Committee relies upon them, beginning at pages 61 and 64, respectively.

122 See Official Committee of Unsecured Creditors v. City National Bank, N.A. (In re A.F. Evans Co.), 2009 Bankr. LEXIS 2473, 2009 WL 2821510 (Bankr. N.D. Cal. July 14, 2009) (“A.F. Evans-Bankruptcy”), aff’d 2011 U.S. Dist. LEXIS 51628, 2011 WL 1832963 (N.D. Cal. May 13, 2011) (“A.F. Evans-District”).


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Bank”) originally had a lien on the debtor’s interests in three partnerships. When interests in

two of the partnerships were sold, the debtor had asked City Bank to release its liens on those

two partnership interests (in exchange for a cash payment to City Bank), leaving only the third

under City Bank’s original lien. City Bank agreed. To facilitate the closing of the sale of those

two partnerships, the debtor there (analogous to GM here) sent City Bank (analogous to

JPMorgan here) proposed escrow instructions directed to the debtor and to a title company, First

American Title Insurance Co. (“First American”), along with two proposed UCC-3s checking

the box for deletion of collateral (the two partnerships being sold) but not the box for

termination. The proposed instructions (analogous in many respects to the Synthetic Lease

Termination Agreement here) included an exhibit containing a description of the collateral to be

released upon payment to City Bank. The descriptions were limited to the two partnerships

being sold, and did not include any reference to the third.123

City Bank then caused the instructions to be sent to First American, accompanied by

those two UCC-3s, which, again, would release collateral from the scope of the original UCC-1

but not terminate it. But thereafter, someone (presumably at First American, though no finding

was made as to who the “someone” was) mistakenly checked an additional box on the UCC-3s,

this time the box providing for termination,124 and caused the UCC-3s to be filed. The A.F.

Evans creditors’ committee then argued, as here, that the filing of the UCC-3s with their

“termination” box checked caused City Bank to lose its priority as a secured lender.

123 See 2009 Bankr. LEXIS 2473, at *2-3, 2009 WL 2821510, at *1. 124 See 2009 Bankr. LEXIS 2473, at *5, 2009 WL 2821510, at *2.


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The A.F. Evans-Bankruptcy court rejected that contention. After going through

California’s versions of UCC §§ 9-509(d), 9-510(a) and 9-513(d),125 it recognized that the

termination of City Bank’s security interest would be effective only to the extent such had been

authorized. It then recognized, as this Court has, that in “determining what a secured party did or

did not authorize” within the meaning of UCC 9-509(d), “law other than the Commercial Code

may determine the issue.”126 And it did not quarrel with the general agency principle that

principals are bound by the acts of their agents acting within the scope of their authority, and that

First American had the authority to act with respect to the two partnerships with respect to which

City Bank had agreed to release its liens. But the A.F. Evans-Bankruptcy court found that

terminating City Bank’s lien on the third partnership was beyond the scope of the authority City

Bank had granted. It followed from this that City Bank “was not bound by First American’s

unauthorized modification to the UCC-3, if indeed the modification was by First American.”127

As the Committee here correctly observes, A.F. Evans-Bankruptcy is not the same as this

case in the respect that the documents City Bank reviewed and approved in that case showed

nothing wrong, and were changed thereafter. But in a key respect, it is highly relevant to what

we have here. The A.F. Evans-Bankruptcy court did not equate the authority City Bank had

granted to file UCC-3s with respect to identified collateral (two of the three partnerships) to

authority to make filings generally. Rather, it measured the agent First American’s authority by

looking at the exact authority that City Bank had granted, and found authority to that extent and

125 See 2009 Bankr. LEXIS 2473, at *6, 2009 WL 2821510, at *3. The California versions of those provisions, Cal. Comm. Code §§ 9509(d), 9510(a), and 9513(d), were the standard uniform provisions, identical except in numbering to those in Delaware.

126 2009 Bankr. LEXIS 2473, at *8, 2009 WL 2821510, at *3, citing the Official Comment to UCC § 9-509, quoted above at n.83.

127 2009 Bankr. LEXIS 2473, at *10, 2009 WL 2821510, at *4.


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nothing more. As the A.F. Evans-Bankruptcy court explained (referring to City Bank by the

acronym “CNB”):

Therefore, First American was not CNB’s agent, except for the limited purpose of handling the closing of the escrow for the debtor's sale to the buyer of the Westgate and Greenery partnership interests. And First American was not acting within the scope of its very limited authority from CNB when it recorded a UCC–3 Amendment statement in a form other than that which CNB had authorized.128

The decision in A.F. Evans-District, which expressly dealt with this contention on appeal,

and affirmed the bankruptcy court with respect to it, was to the same effect. On appeal, the A.F.

Evans creditors’ committee argued that City Bank gave First American broad authorization to

file any ‘appropriate amendments’ to City Bank’s UCC-1, and that First American was acting as

City Bank’s agent in all matters relating to City Bank’s security interest in the debtor’s

property.129 But the A.F. Evans-District court looked at the context in which the grant of

authority had been given, and in particular, City Bank’s release with respect to those two

particular partnerships.130 It concluded that “[t]he bankruptcy court reasonably construed such

instruction to mean that the only “appropriate amendments” authorized by CNB were

amendments that relinquished CNB’s interest in the two properties identified therein.”131

128 Id. (emphasis added). 129 A.F. Evans-District, 2011 U.S. Dist. LEXIS 51628, at *13-14, 2011 WL 1832963, at *5. 130 Id. (“City National Bank hereby releases all of its right, title and interest in [Westgate and Greenery] and

authorizes the filing of appropriate amendments to [the] UCC Financing Statement….”). 131 Id. (emphasis added).


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As applied to this case, each of A.F. Evans-Bankruptcy and A.F. Evans-District support

finding authority for GM to terminate UCC-1s with respect to the “Properties”—i.e. the

“Properties” that were the subject of the Synthetic Lease—but not for anything else.132

2. Apparent Authority

Apparent authority is different from actual authority. Apparent authority arises from the

written or spoken words or other conduct which, reasonably interpreted, cause a third party to

believe that the principal consents to have an act done on the principal’s behalf by the person

purporting to act for him.133 As stated in the Restatement:

Apparent authority is the power held by an agent or other actor to affect a principal's legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestations.134

Apparent authority does not in itself carry the consequences of actual authority with respect to

the rights and duties that apply to the relationship between agent and principal.135

Unlike actual authority, which considers manifestations from the principal to the agent

from the perspective of the agent, apparent authority considers the conduct of the principal, and

132 A.F. Evans-Bankruptcy is also noteworthy for its view that it should not rely on two decisions upon which the Committee relies here, by the Ninth Circuit BAP and Ninth Circuit, respectively, in Koehring Co. v. Nolden (In re Pacific Trencher & Equipment, Inc.), 27 B.R. 167 (B.A.P. 9th Cir. 1983) (“Pacific Trencher”), aff’d 735 F.2d 362 (9th Cir. 1984). While the A.F. Evans-Bankruptcy court found the Pacific Trencher decisions distinguishable because in A.F. Evans, boxes that had been checked on the UCC-3s sent mixed signals, the A.F. Evans-Bankruptcy court also found the Pacific Trencher decisions distinguishable (consistent with this Court’s views as to those cases, see page 61 below) that the mistake in Pacific Trencher was made by the secured party itself (and did not involve an unauthorized act by an agent), and that the Pacific Trencher cases were decided prior to the 2001 UCC amendments’ enactment of UCC §§ 9-509 and 9-510, which specifically address the effect of an unauthorized filing. See A.F. Evans-Bankruptcy, 2009 Bankr. LEXIS 2473, at *11-13, 2009 WL 2821510, at *5.

133 Hidden Brook Air, 241 F. Supp. 2d. at 261. 134 Restatement § 2.03. 135 Id. cmt a.


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as the principal’s conduct is interpreted by a third party.136 “Essential to the creation of apparent

authority are words or conduct of the principal, communicated to a third party, that give rise to

the appearance and belief that the agent possesses authority to enter into a transaction.”137 The

agent cannot by his own acts imbue himself with apparent authority.138

As with manifestations of actual authority made to agents,139 a principal’s manifestations

of apparent authority made to third parties must be understood in context.140 Apparent authority

may result under any set of circumstances under which it is reasonable for a third party to believe

that an agent has authority, so long as the belief is traceable to manifestations of the principal.141

Importantly, the inquiry requires the belief of an actual third party, who has acted in

reasonable reliance on the principal’s representations as to the agent’s authority.142

Here the Court finds the doctrine of apparent authority simply to be inapplicable. There

here were no statements to third parties with respect to the Term Loan upon which a finding of

apparent authority could be made.

136 Minskoff v. American Exp. Travel Related Services Co., Inc., 98 F.3d 703, 708 (2d Cir. 1996) (“Apparent authority, then, is normally created through the words and conduct of the principal as they are interpreted by a third party, and cannot be established by the actions or representations of the agent.”).

137 Hallock v. State of New York, 64 N.Y.2d 224, 231, 474 N.E.2d 1178 (1984) (“Hallock”); FDIC v. Providence College, 115 F.3d 136, 140 (2d Cir. 1997) (“Providence College”) (quoting Hallock).

138 Hallock, 64 N.Y.2d at 231. 139 See page 32 & n.89 above. 140 Restatement § 2.03 cmt c (“A principal’s conduct does not occur in a vacuum. A third party’s reasonable

understanding of the principal’s conduct will reflect general business custom as well as usage that is particular to the principal’s industry and prior dealings between the parties.”).

141 Restatement § 2.03 cmt c. 142 See Providence College, 115 F.3d at 140 (“The inquiry therefore centers on the ‘words or conduct of the

principal … communicated to a third party … that give rise to the appearance and belief that the agent … possesses authority to enter into a transaction ….’”) (quoting Hallock); In re Kollel Mateh Efraim, LLC, 334 B.R. 554, 560 (Bankr. S.D.N.Y. 2005) (“Apparent authority consists of two elements: (1) a manifestation by the principal that the agent has authority and (2) reasonable reliance on that manifestation by the person dealing with the agent.”).

Though the distinction ultimately does not matter here, it also is the case that the third party must rely on manifestations as to the existence of authority from the principal—not the agent. See Hallock, 64 N.Y.2d at 230 (“The agent cannot by his own acts imbue himself with apparent authority.”).


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3. Ratification

The Committee further contends that the filing of the Unrelated UCC-3 was ratified by

JPMorgan,143 and hence that the termination of the Main Term Loan UCC-1 should be held to

have been valid under the agency doctrine of ratification. Once more, however, the Court is

unable to agree.

As set forth in the Restatement, “ratification is the affirmance of a prior act done by

another, whereby the act is given effect as if done by an agent acting with actual authority.”144 A

person ratifies an act by (a) manifesting assent that the act shall affect the person's legal relations,

or (b) conduct that justifies a reasonable assumption that the person so consents.145 While

silence may, in some circumstances, act as the ratification of a prior act, “[t]he intent required for

ratification ‘must be clearly established and may not be inferred from doubtful or equivocal acts

or language.’”146

Additionally, an important prerequisite to a finding of ratification is full knowledge by

the principal of the facts relevant to whether the transaction should be ratified. As stated in the

Restatement, “[a] person is not bound by a ratification made without knowledge of material facts

involved in the original act when the person was unaware of such lack of knowledge.”147

Ratification requires that the principal have actual knowledge of material facts.148 As stated by

143 Comm. SJ Opp. 18-19; Comm. Partial SJ Reply 13. 144 Restatement § 4.01(1); see also Holm v. C.M.P. Sheet Metal, Inc., 89 A.D.2d 229, 232, 455 N.Y.S.2d 429,

432 (4th Dept. 1982) (“Holm”) (“Ratification is the express or implied adoption of the acts of another by one for whom the other assumes to be acting, but without authority.”).

145 Restatement § 4.01(2). 146 Adelphia Recovery Trust v. HSBC Bank USA, 634 F.3d 678, 693-94 (2d Cir. 2011) (under New York law)

(citing Chemical Bank, 169 F.3d at 128) (under New York law). 147 Restatement § 4.06 148 Id. cmt b. This actual knowledge is in contrast to “notice” as used in the Restatement, which includes not

just knowledge of a fact, but also reason to know the fact, having received an effective notification of the


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New York’s Appellate Division, Fourth Department, “[t]he act of ratification, whether express or

implied, must be performed with full knowledge of the material facts relating to the transaction,

and the assent must be clearly established and may not be inferred from doubtful or equivocal

acts or language.”149 Many federal court decisions in this circuit and district, some applying

New York law and others applying general principles of common law, similarly note the

knowledge requirement, with some affirmatively emphasizing it.150

Then, the Second Circuit has required the acceptance of the benefits of a transaction as an

additional element beyond the requisite knowledge.151

Here three elements necessary to establish a ratification by JPMorgan are missing. First,

since ratification requires affirmance of a “prior act,”152 no facts here establish that JPMorgan

did anything to affirm any of the key prior acts (most significantly, the filing of the Unrelated

UCC-3, and any termination of the Main Term Loan UCC-1) after such acts took place.

fact, or there existing circumstances under which a person “should know” the fact to fulfill a duty owed to another person. See Restatement § 1.04(4).

149 Holm, 89 A.D.2d at 233, 455 N.Y.S.2d at 432. 150 See, e.g., Rodonich v. House Wreckers Union Local 95, 817 F.2d 967, 973 (2d Cir. 1987) (“Under general

principles of common law, “ratification can only occur when the principal, having knowledge of the material facts involved in a transaction, evidences an intention to ratify it.”) (emphasis added); Banque Arabe Et Internationale D’Investissement v. Maryland Nat. Bank, 850 F.Supp. 1199, 1213 (S.D.N.Y. 1994) (“To ratify the unauthorized act of an agent, a principal must have full and complete knowledge of all the material facts of the transaction.”) (emphasis added); Prisco v. State of New York, 804 F.Supp. 518, 523 (S.D.N.Y. 1992) (“Ratification of the acts of an agent only occurs where the principal has full knowledge of all material facts and takes some action to affirm the agent's actions.”) (emphasis added); Cooperative Agricole Groupement De Producteurs Bovins De L’ouest v. Banesto Banking Corp., 1989 U.S. Dist. LEXIS 8368, at *50, 1989 WL 82454, at *16 (S.D.N.Y. July 19, 1989) (“Cooperative Agricole”) (“Ratification requires knowledge by the principal of the material facts of a transaction, coupled with the retention of benefits. … In other words, ratification requires acceptance by the principal of the benefits of an agent's acts, with full knowledge of the facts, in circumstances indicating an intention to adopt the unauthorized arrangement.”) (emphasis added), aff'd without opinion, 904 F.2d 35 (2d Cir. 1990); Orix Credit Alliance v. Phillips-Mahnen, Inc., 1993 U.S. Dist. LEXIS 7071, at *73, 1993 WL 183766, at *4 (S.D.N.Y. May 26, 1993) (“Orix”) (“[R]atification occurs when a principal, having knowledge of the material facts in a transaction, evidences an intention to affirm or adopt the transaction of his agent through his acts or words.”) (emphasis added).

151 See Monarch Insurance Co. of Ohio v. Insurance Corp. of Ireland Ltd., 835 F.2d 32, 36 (2d Cir. 1987); see also Cooperative Agricole, 1989 U.S. Dist. LEXIS, at * 50, 1989 WL 82454, at *16.

152 Restatement § 4.01(1).


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Secondly, the knowledge requirement here has not been satisfied. Assuming, arguendo,

that JPMorgan engaged in the necessary affirmance, it did so without knowledge of what it had

done, and even without knowledge that it “was unaware of such lack of knowledge.”153 As of

the time of the filing of GM’s chapter 11 case, nobody at Simpson Thacher or JPMorgan (or

though it does not matter with respect to this requirement, Mayer Brown or GM) knew that a

termination statement with respect to the Term Loan had been filed. In fact, lacking such

knowledge, JPMorgan and GM acted thereafter (including, most significantly, by effecting the

paydown of the Term Loan, which was appropriate if, but only if, the Term Loan was then

secured) believing that the Term Loan was fully secured.

Third, the acceptance of benefits requirement also has not been satisfied here. While

JPMorgan benefitted from GM’s fulfillment of its duties under the Synthetic Lease, there was no

comparable benefit at the time with respect to the Term Loan.

Thus the Court is unable to find a ratification here.

C. The Committee’s Other Arguments

The Court then considers other arguments put forward by the Committee to the extent

they have not been addressed above.

1. Implied Authority

In one of its briefs,154 the Committee further argues that GM “implicitly” authorized the

filing of the Unrelated UCC-3, and thus that GM had “implied” authority to terminate the Main

Term Loan UCC-1. The Court is unable to agree.

Implied authority is a species of actual authority, the latter of which can be express or

implied.155 Express authority is “[a]uthority delegated to [an] agent by words which expressly

153 Restatement § 4.06. 154 See Comm. SJ Opp. 11.


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authorize him to do a delegable act.”156 It is “authority distinctly, plainly expressed, orally or in

writing.”157 Implied authority, by contrast, is not expressly granted. Rather, it exists when

necessary or appropriate to accomplish the agent’s express responsibilities, or when the agent

reasonably believes that the action in question is required to accomplish the principal’s

objectives. As explained in the Restatement:

“Implied authority” is often used to mean actual authority either (1) to do what is necessary, usual, and proper to accomplish or perform an agent’s express responsibilities or (2) to act in a manner in which an agent believes the principal wishes the agent to act based on the agent’s reasonable interpretation of the principal’s manifestation in light of the principal’s objectives and other facts known to the agent.158

Here, by way of example, after JPMorgan had authorized GM to file UCC-3s with

respect to the Synthetic Lease Properties, GM or its counsel had implied authority to retain and

direct a UCC filing service to file the Synthetic Lease Properties’ UCC-3s. But GM did not have

implied authority to do tasks other than those that were appropriate to accomplish the tasks, with

155 See Nationwide Life Ins. Co. v. Hearst/ABC-Viacom Entertainment Services, 1996 U.S. Dist. LEXIS 6729, at *22, 1996 WL 263008, at *8 (S.D.N.Y. May 17, 1996) (“Nationwide”); Hidden Brook Air, 241 F.Supp.2d at 260.

156 Nationwide, 1996 U.S. Dist. LEXIS 6729, at *22, 1996 WL 263008, at *8. 157 Id. (quoting 1979 version of Black’s Law Dictionary); Hidden Brook Air, 241 F.Supp.2d at 261 (same,

quoting Nationwide). 158 Restatement § 2.01 cmt b. The two circumstances are not mutually exclusive. Id.; see also Vig v. Deka

Realty Corp., 143 A.D.2d 185, 187, 531 N.Y.S.2d 633, 634 (2d Dept. 1988), leave to appeal denied, 73 N.Y.2d 708, 540 N.Y.S.2d 1003 (1989) (“While the president of a corporation may have implied authority to do necessary acts within the scope of his usual and ordinary duties, he does not possess such authority as to unusual or extraordinary events.”) (emphasis added).

A few decisions, sometimes relying on the 1958 Restatement Second, which preceded the present Restatement, describe implied authority as existing “where the acts or representations of a principal lend the appearance of authority to the agent.” See Nationwide, 1996 U.S. Dist. LEXIS 6729, at *22-23, 1996 WL 263008, at *8. That definition, in the Court’s view, is imprecise and overly broad, inappropriately blending separate concepts that (coupled with other factors, most significantly instilling a belief in a third party) define implied authority, on the one hand, and apparent authority, on the other. Particularly since the issuance of the present Restatement, “implied authority,” as the quotations from the present Restatement make clear, is better thought of as the additional authority necessary to implement actual authority otherwise granted, or that the agent reasonably believes to exist.


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respect to the Synthetic Lease Properties, for which GM had been expressly authorized—i.e., to

implement the authority GM had otherwise been granted. GM was not authorized to act except

with respect to the Synthetic Lease Properties, and filing the Unrelated UCC-3 was not

“necessary,” “usual” or “proper” to bring the UCC-1s with respect to the Synthetic Lease

Properties to an end.159

Similarly, if GM had reasonably believed that it was expressly authorized to bring the

Main Term Loan UCC-1 to an end, GM likely, if not plainly, would have had implied authority

to take measures to accomplish that end. But again, GM did not have such a belief. There was

no actual authority—even authority that GM perceived to exist—to terminate the Main Term

Loan UCC-1. For these reasons, the Court cannot find the implied authority doctrine to be

applicable here.

2. “UCC Filings that Mistakenly Terminate a Security Interest Are Legally Effective.”

Recurring themes in the Committee’s briefs are very broad statements (in one instance, as

a topic heading)160 that “the filing of a termination statement renders ineffective the financing

statement to which the termination relates and causes the subject lien to become unperfected,”161

and, especially, that “UCC filings that mistakenly terminate a security interest are legally

159 At the end of its implied authority argument, the Committee states that “this case concerns an uncontested agency relationship between JPMorgan and Old GM, pursuant to which Old GM was authorized to make UCC filings on behalf of JPMorgan.” Comm. SJ Opp. 15 n.12. That statement, while technically true, suffers from its excessive breadth, and a failure to state other uncontested, and critical, facts. GM was authorized “to make UCC filings” only with respect to the “Financing Statements” relating to the “Properties”—which, as discussed above, were those with respect to the Synthetic Lease alone. See the Synthetic Lease Termination Agreement and its definitional cross-references, quoted at nn.18-21 above.

160 See Comm. Partial SJ Br. 11-14 (“Even If Mistaken, The Term Loan Termination Statement is Legally Effective”); see also Comm. SJ Opp. 4 (“JPMorgan acknowledges, as it must, the consistent authority holding that UCC filings that mistakenly terminate a security interest are legally effective.”); Comm. Partial SJ Reply 15-16 (“[A] termination statement that is filed by mistake, like the Term Loan Termination Statement at issue in this case, is legally effective.”).

161 Comm. Partial SJ Br. at 9.


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effective.”162 Broad statements of that character are unhelpful, and by their excessive breadth

unsatisfactorily describe the applicable law.

Because the Committee’s contentions rest on (1) cases involving entities that made the

UCC filings themselves; (2) cases that predated the 2001 amendments to UCC Article 9; and

(3) cases that while decided after the 2001 amendments to the UCC, relied on the earlier

authority without focusing on the fact that the UCC had changed (or some combination of those

deficiencies), the Court is not in a position to accept the Committee’s broad statements as

properly descriptive of the law, or to consider the underlying cases as relevant to the controversy

here.

In the first category are the cases relied upon by the Committee involving erroneous

filings by the secured party itself—the Fourth Circuit’s decision in Kitchin Equipment;163 the

Ninth Circuit BAP’s and Ninth Circuit’s decisions in Pacific Trencher;164 the bankruptcy court

decisions in Silvernail,165 York Chemical,166 and Hampton;167 and the decision of the Kansas

Court of Appeals in J.I. Case.168 In each of these, under the UCC’s pre-2001 statutory scheme,

the secured party had itself signed the termination statement and caused it to be filed.169

162 See n.160 above. 163 See n.9 above. 164 See n.132 above. 165 See n.74 above. 166 Rock Hill National Bank v. York Chemical Industries, Inc. (In re York Chemical Industries, Inc.), 30 B.R.

583 (Bankr. D. S.C. 1983) (“York Chemical”). 167 In re Hampton, 2001 Bankr. LEXIS 2060, 2001 WL 1860362 (Bankr. M.D. Ga. Jan. 2, 2001)

(“Hampton”). 168 J.I. Case Credit Corp. v. Foos, 11 Kan. App. 2d 185, 717 P.2d 1064 (1986) (“J.I. Case”). 169 See Kitchin Equipment, 960 F.2d at 1244-46; Pacific Trencher, 27 B.R. at 168; Silvernail, 142 B.R. at 988-

90; York Chemical, 30 B.R. at 585; Hampton, 2001 Bankr. LEXIS 2060, at *2 & n.1, 2001 WL 1860362, at *1 & n.1; J.I. Case, 11 Kan. App. 2d at 186, 717 P.2d at 1065-66.


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In the second category—cases that predated the 2001 amendments—are each of the

above as well. Because they were decided under the pre-2001 statutory scheme (and also

because the termination statements were filed by the secured parties themselves), none had

occasion to consider the authorization requirement.

In the third category are Roswell and S.J. Cox.170 The events they addressed took place

after the 2001 amendments to the UCC, but they quoted language from the earlier cases in the

first two categories without addressing the changes in the UCC. Though they involved the filing

of termination statements by agents, they decided those cases as if they were governed by the

former statutory scheme, and this Court respectfully must decline to follow them.

S.J. Cox, a 2009 bankruptcy court decision, involved an adversary proceeding for

wrongful termination of an initial financing statement, under the post-2001 statutory scheme.

Here, unlike the earlier cases discussed above (where the termination statement had been filed by

the secured party), a termination statement potentially ending an entity’s security interest in the

debtor’s farm equipment was filed by someone else—by an employee of “Kentucky Bank”

(previously known as “Peoples Bank of Sandy Hook, Kentucky”) with respect to the plaintiff

Peoples Bank of Kentucky, Inc., a different entity.171 The plaintiff Peoples Bank of Kentucky

sued Kentucky Bank for wrongfully terminating the former’s initial financing statement, and the

S.J. Cox court ruled in the plaintiff’s favor172—seemingly accepting defendant Kentucky Bank’s

first argument that “priority among the Movants must be determined before its liability can be

170 See n.74 above. 171 2009 Bankr. LEXIS 4573, at *1-2, 2009 WL 939573, at *1. 172 2009 Bankr. LEXIS 4573, at *15, 2009 WL 939573, at *6.


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established,” but then rejecting Kentucky Bank’s second argument that Peoples Bank’s first

priority status was unaffected by the supposed “‘release’ of the [initial] Financing Statement.”173

This Court agrees with the S.J. Cox court that the filing of a termination statement there

was unauthorized. And this Court also agrees that priority among the respective secured

creditors had to be determined before deciding whether one of them was civilly liable for

wrongful termination of another’s security interest—and thus that it was necessary to determine

whether the plaintiff Peoples Bank’s first priority interest was affected at all. But this Court

cannot agree with the remainder of the S.J. Cox conclusions, and especially its analysis.

Puzzlingly, the S.J. Cox court, when first considering the “Effect of termination of the

Financing Statement,”174 quoted and considered the Kentucky equivalents of UCC §§ 9-

509(a)175 (a provision that addresses who may file an initial financing statement, an amendment

that adds collateral, and an amendment that adds a debtor, but which does not involve

terminations of initial financing statements at all); 9-511 (addressing who is a secured party of

record); and 9-513 (addressing a secured party’s duty to cause a termination statement to be filed

after no obligations from the debtor to the secured party remain)—and those alone. Oddly, the

S.J. Cox court never mentioned the Kentucky equivalents of UCC §§ 9-509(d) and 9-510(a),176

quoted and addressed at length starting at page 26 above, two of the three provisions that address

the requirement for authorization for financing statement amendments177—and that provide,

expressly, that amendments may be filed only when the secured party of record authorizes them,

173 2009 Bankr. LEXIS 4573, at *13-14, 2009 WL 939573, at *5 (quotation marks surrounding “release” in original).

174 2009 Bankr. LEXIS 4573, at *8, 2009 WL 939573 at *3. 175 Ky. Rev. Stat. § 355.9-509(1). 176 Ky. Rev. Stat. §§ 355.9-509(4) and 355.9-510, respectively. 177 It did quote UCC § 9-513, Ky. Rev. Stat. § 355.9-513, in part, including quotation of UCC § 9-513(d), Ky.

Rev. Stat. § 355.9-513(4), but failed to take note of the clause at the beginning of that subsection, “[e]xcept as otherwise provided in KRS 355.9-510 [UCC§ 9-510].”


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and that amendments are effective only to the extent that they have been filed by a person who

has been so authorized.

Additionally (perhaps by reason of its failure to consider UCC §§ 9-509(d) and 9-510),

the S.J. Cox court incorrectly stated that “these provisions” (presumably the provisions of the

UCC that it had quoted) “make it clear that the only party authorized to file a termination

statement is the secured party of record.”178 And the S.J. Cox court went on with a broad

statement, in reliance on Silvernail and Kitchin, that “[t]he termination of a financing statement,

even if mistaken, releases the secured creditor’s lien against the debtor’s property”179—without

noting that each of Silvernail and Kitchin involved a termination by the secured creditor itself

(and not a third party); that the UCC had been amended in 2001 after Silvernail and Kitchin; and

that UCC §§ 9-509(d) and 9-510 made authorization a sine qua non to a valid termination. The

S.J. Cox court proceeded to reach the conclusions it did by reliance on the very different

Silvernail and Kitchin, including Kitchin’s broad (and now overly broad) statement that a

termination statement’s “effect on a security interest is dramatic and final.”

The S.J. Cox court concluded that a cause of action had been established for unauthorized

termination of a UCC-1 when, because the termination was unauthorized, it should have held

that there was no termination at all.180

Puzzlingly, the Committee here contends that S.J. Cox is “on point” and relies on it.181

But for the reasons stated above, the Court does not believe that it should do so.

178 S.J. Cox, 2009 Bankr. LEXIS 4573, at *10-11, 2009 WL 939573, at *4. 179 2009 Bankr. LEXIS 4573, at *11, 2009 WL 939573 at *4. 180 Likewise, a UCC treatise has observed that S.J. Cox was incorrectly decided. See Hawkland § 9-509:4

[Rev] n0.50 (“court seems to hold, incorrectly, that the filing actually terminated the financing statement”). 181 See Comm. Partial SJ Reply 17-18.


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Roswell, in contrast, plainly reached the right bottom line, and indeed was affirmed (on

the first of its two rationales) by the Second Circuit.182 But in articulating a second rationale for

its decision, the Roswell court expressed thoughts with which this Court, once again, cannot

agree.

Roswell involved an action by several secured lenders, for whom Roswell Capital

Partners was collateral agent (the “Roswell Lenders”), to foreclose on the assets of their

borrower Alternative Construction Technology, Inc. (referred to in the decision by the acronym

“ACT”). The Roswell Lenders’ effort to foreclose was opposed not by their borrower ACT, but

rather by assertedly secured competing lenders—an individual, James Beshara, and his sole

proprietorship, JMB Associates (referred to in the decision by the acronym “JMB,” but here, for

greater clarity, as the “JMB Lenders”).183

The JMB Lenders extended secured credit to ACT, with respect to which they had duly

filed UCC-1s, but thereafter (in June 2006) they exercised a contractual right to convert their

debt into equity, and took equity in their borrower ACT instead.184 After the value of the equity

had gone down, in July 2008, the JMB Lenders exercised another contractual right they had, to

return their shares and reinstate the debt obligation. But in the meantime (in July 2007), one or

more UCC-3s were filed by ACT185 to terminate the JMB Lenders’ earlier security interest, and

the Roswell Lenders extended their secured credit and filed UCC-1s after the filing of those

UCC-3s.

182 Though the second rationale was addressed by each side in its briefing to the Second Circuit, the Circuit did not speak to the second rationale, upon which the Committee here relies.

183 Roswell, 2010 U.S. Dist. LEXIS 90695, at *1, 2010 WL 3452378, at *1. 184 2010 U.S. Dist. LEXIS 90695, at *5-8, 2010 WL 3452378, at *2-3. 185 2010 U.S. Dist. LEXIS 90695, at *21, 2010 WL 3452378, at *7.


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The Roswell court ruled that the equity conversion extinguished the JMB Lenders’

security interest, and with it, the JMB Lenders’ lien.186 When the JMB Lenders’ debt was

extinguished after the conversion to equity, there was no longer an obligation to secure. And a

“security interest [could not] exist without a debt.”187 That conclusion was affirmed by a

summary order of the Second Circuit, which stated, in its succinct decision, that “because the

equity conversion extinguished the debt obligation, and a security interest cannot survive the

debt's extinguishment, when JMB converted its debt to equity shares in ACT, any security

interest it had in the collateral was also extinguished.”188

But in a portion of its decision that was not endorsed by the Circuit on appeal, the

Roswell court went on to set forth a second rationale for its conclusion, which was unnecessary

to support Roswell’s plainly correct result.189 The Committee relies on that second rationale.

But that rationale included several elements with which this Court cannot agree.

In the second part of its legal analysis, captioned “JMB’s UCC-1 Financing Statement is

Ineffective,” the Roswell court considered an additional contention by the Roswell Lenders: that

ACT’s filing of a UCC-3 termination statement had canceled the JMB Lenders’ previously filed

UCC-1s. Deciding the matter with reference to the Florida UCC (which conformed to the UCC

186 2010 U.S. Dist. LEXIS 90695, at *18-19, 2010 WL 3452378, at *6. 187 2010 U.S. Dist. LEXIS 90695, at *18, 2010 WL 3452378, at *6. 188 Roswell Capital Partners LLC. v. Beshara, 436 Fed. Appx. 34, 35-36 (2d Cir. 2011). 189 The discussion of the second rationale began “[w]hile JMB’s failure to show that it had any enforceable

security interest in the Collateral at the time the Plaintiffs filed their UCC-1 financing statements in July 2007 permits summary judgment to be awarded to the Plaintiffs, the parties dispute as well the validity and effect of ACT’s filing … of the UCC-3.” Roswell, 2010 U.S. Dist. LEXIS 90695, at *21, 2010 WL 3452378, at *7. That would at least arguably suggest that the second rationale was dictum. See Willis Management (Vermont), Ltd. v. United States, 652 F.3d 236, 243 (2d Cir. 2011) (a statement in a footnote in an earlier Second Circuit opinion “was not essential to the Court’s holding because it was offered in the alternative and therefore it is dictum that is not binding on us”).

Roswell’s second rationale has been described in a UCC treatise as “troubling dictum.” Hawkland § 9-510:2 [Rev] at n.1.50. But the Court does not need to decide whether or not it was dictum, because district court decisions are not binding on bankruptcy courts, except with respect to any district court mandate pursuant to an appeal.


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generally), the Roswell court rejected the JMB Lenders’ contention “that the termination

statement was ineffective because [the JMB Lenders] did not authorize ACT to file it.”190 The

Roswell court stated, in that connection:

Even if the termination statement was not authorized by JMB, it nonetheless extinguished any perfected security interest JMB had in the Collateral.191

And it declined to consider a factual argument with respect to whether authorization was lacking,

stating that:

This argument need not be considered given that even if the UCC-3 termination statement was unauthorized, it nonetheless extinguished any perfected security interest JMB held in the Collateral after the conversion.192

Unlike the court in S.J. Cox, the Roswell court made reference to the proper statutory

provisions, including the Florida equivalents of UCC §§ 9-509 and 9-510,193 discussed at length

above. But it then proceeded with a caselaw-driven analysis without reference to what textual

analysis of those two provisions (along with UCC § 9-513, which the Roswell court did not

address) would require. In that connection, it relied on S.J. Cox (which had been issued in

reliance on the wrong provisions of the UCC, and which had ignored UCC §§ 9-509(d) and

9-510), and on Kitchin Equipment, Silvernail and Pacific Trencher (each of which, as noted

above, involved filings by the secured party itself, and was decided under the pre-2001 statutory

scheme).

More specifically, the Roswell court repeated S.J. Cox’s statements (each based on pre-

2001 law) that “[t]he termination of a financing statement, even if mistaken, releases the secured

190 Roswell, 2010 U.S. Dist. LEXIS 90695, at *21, 2010 WL 3452378, at *7. 191 2010 U.S. Dist. LEXIS 90695, at *25, 2010 WL 3452378, at *8. 192 2010 U.S. Dist. LEXIS 90695, at *25 n.15, 2010 WL 3452378, at *8 n.15. 193 Fla. Stat. §§ 679.509 and 679.510, respectively.


74

creditor’s lien against the debtor’s property,”194 and that a “termination statement’s effect on a

security interest is dramatic and final.” And it went on to say that:

This clear rule accords with the policy of the UCC. Potential creditors must be able to rely on termination statements filed in the public record, even if they were filed in error or without authorization.195

It thereafter continued with the statements quoted above to the effect that even if the UCC-3

termination statement was unauthorized, it nonetheless extinguished any perfected security

interest the JMB Lenders had in their collateral.

Like others,196 this Court is unable to agree. These conclusions cannot be squared with

the provisions of UCC §§ 9-509(d), 9-510 and 9-513(d), and UCC § 9-502’s Official Comment

3, which provides that a “filing has legal effect only to the extent it is authorized.”

The Roswell court further stated that “[t]he UCC therefore places the burden of

monitoring for potentially erroneous UCC–3 filings on existing creditors, who are aware of the

true state of affairs as to their security interests, rather than potential creditors who will not be in

a position know whether a termination statement was authorized or not.”197 And it rejected, in a

footnote, the JMB Lenders’ argument that because the UCC adopted “notice filing”—a system

contemplating further inquiry to determine the scope of a security agreement—subsequent

194 2010 U.S. Dist. LEXIS 90695, at *22-23, 2010 WL 3452378, at *7 (emphasis in original). 195 Id. (emphasis added). 196 See Negus-Sons-BAP, 460 B.R. 754, 757 n.10 (“We are also hesitant to endorse the holding in [Roswell],

relied on by the Trustee, that a termination statement filed by a third party is effective regardless of whether it was authorized. … Roswell’s holding appears to be contrary to the plain language of the Uniform Commercial Code.”); AEG Liquidation Trust v. Toobro N.Y. LLC, 32 Misc. 3d 1202(A), 2011 N.Y. Misc. LEXIS 3041, at *27 n.1, 2011 WL 2535035, at *9 n.1 (Sup. Ct. N.Y. Co. Commer. Div. Jun. 24, 2011) (“Toobro”) (“For these reasons [which are discussed beginning at page 70 below], the court declines to follow the SDNY Court’s analysis in Roswell Capital.”); Hawkland § 9-510:2 [Rev] at n.1.50 (describing Roswell conclusions as “troubling,” though regarding them as dictum).

197 2010 U.S. Dist. LEXIS 90695, at *23-24, 2010 WL 3452378, at *7.


75

lenders like the Roswell Lenders would have to further investigate the filing of the UCC-3

termination statement to determine the true status of the JMB Lenders’ security interests.

However in this respect also, the Court cannot agree. “Notice filing” is indeed the regime

under the UCC, as recognized in the UCC’s Official Comments,198 and less directly by the

Second Circuit in its Credit Bancorp decision.199 As Official Comment 2 makes clear,

documents of record may be insufficient to ascertain “the complete state of affairs,” but UCC

Article 9 only requires information sufficient to engage in further inquiry. When the

authorization underlying a previously filed termination statement matters to a subsequent lender

(as it usually will), the lender can simply include any necessary further inquiry as part of its due

diligence.200

198 As stated in Official Comment 2 to UCC § 9-502, which addresses the sufficiency of a financing statement:

This section adopts the system of “notice filing.” …

The notice itself indicates merely that a person may have a security interest in the collateral indicated. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs.

199 SEC v. Credit Bancorp, Ltd., 386 F.3d 438, 454 (2d Cir. 2004) (“Credit Bancorp”). 200 Roswell was cited approvingly with respect to “notice filing” in a recent North Carolina case, Ward v. Bank

of Granite (In re Hickory Printing Group, Inc., 479 B.R. 388 (Bankr. W.D. N.C. 2012) (“Hickory Printing”). This Court would not differ with the Hickory Printing result that is most relevant here (i.e., that the filing of a UCC-3 by the secured lender’s employee was authorized, and thus that it terminated the bank’s security interest in debtor collateral) since the Hickory Printing court considered UCC §§ 9-509(d), 9-510(a), and 9-513(d) as part of its analysis; the UCC-3 was filed by an employee of the secured creditor itself; and the secured creditor admitted that the UCC-3 filing was authorized. See 479 B.R. at 396-97 (bank’s employee “filed hundreds of termination statements, followed her normal (and apparently approved) procedures when filing the Termination Statement, and intended to terminate the Original Financing Statement”; “by the summary judgment hearing, the Bank was willing to concede that, while it was a mistake, the Termination Statement was authorized”). However, the Court cannot concur with Hickory Printing’s endorsement of Roswell’s “notice filing” analysis, see id. at 398, and its endorsement of Roswell’s statements as to burdens on the part of secured creditors to maintain their perfected liens, see id. at 404, for the reasons stated above. Nor can the Court agree with the overly broad language in Hickory Printing based on Kitchin Equipment, Pacific Trencher, York Chemical, and Silvernail.

In cases like Hickory Printing (but unlike the one here) where the UCC-3 is filed by the secured party itself, and not by a debtor or other third party (and thus where authorization is not at issue), pre-2001 cases may still have vitality. But they do not support the “notice filing” conclusions the Roswell court reached, and the Hickory Printing court endorsed.


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Then, the Roswell court believed, erroneously in this Court’s view, that notice filing

applies only to UCC-1s. Rejecting the JMB Lenders’ contentions (based on the UCC’s Official

Comments and Credit Bancorp), that because the UCC had adopted notice filing, the Roswell

Lenders were required to further investigate the filing of the UCC-3, the Roswell court stated:

The problem with JMB's argument is that Credit Bancorp and the Official Comments refer only to “financing statements,” and not to termination statements.201

But the Court believes the Roswell conclusion that flowed from that to be incorrect. As noted

above,202 a “termination statement ” is one kind of a “financing statement.” The term “financing

statement,” as defined in UCC § 9-102(39), includes not just an “initial financing statement”203

(which may be what the Roswell court had in mind), but also “any filed record relating to the

initial financing statement.”

Finally, if there were a duty on the part of secured lenders to monitor their UCC filings to

protect them from improper termination, one must ask what would a secured lender do if it

discovered anything? By then, under the Roswell rationale, termination of the secured lender’s

security interest—which by Roswell’s reasoning would have taken place even if unauthorized—

would already have transpired.204

201 2010 U.S. Dist. LEXIS 90695, at *24 n.14, 2010 WL 3452378, at *7 n.14. 202 See page 28 & n.72 above. 203 Emphasis added. 204 The Roswell court seemed to believe that a provision of the UCC imposing civil liability for unauthorized

filings, see UCC § 9-625, Fla. Stat. § 679.625, would provide a satisfactory remedy for unauthorized termination. See 2010 U.S. Dist. LEXIS 90695, at *22, 2010 WL 3452378, at *7. This is in substance a policy view rather than an element of statutory interpretation or application, but to the extent it is relevant, the Court is reluctant to agree with it. More than a few of the disputes in federal district courts and the commercial divisions of state courts, and a huge number of the disputes in bankruptcy courts, are disputes between creditors jousting for priority. Each of Roswell, Toobro, Negus-Sons and this case is a good example. In many cases, the debtor or other unauthorized filer would be unable to make the secured lender whole for the resulting damages if an unauthorized filing were deemed to be effective, leaving the secured lender without an effective remedy. Each of Roswell, Negus-Sons and this case is a good example of that as well.


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The concerns this Court voiced with respect to Roswell’s second rationale were shared in

Toobro. In relevant part, in the context of a New York CPLR 3211 motion to dismiss, Toobro

too involved a need to determine the relative priority of two competing secured lenders, there

American Equities Group Inc. (referred to in the decision as “AEG,” but referred to here, for

greater clarity, as “American Equities”) and Signature Bank—each of which had extended

credit to Ahava Diary Products Corp. (“Ahava Dairy”), initially in 1996 (under a secured

factoring agreement) in the case of American Equities,205 and in 2005 in the case of Signature

Bank.206 Each lender had duly filed UCC-1s. But in between those two dates, in 2002, an

“unknown party,”207 allegedly without authorization and knowledge of American Equities, had

filed UCC-3s purporting to terminate the first lender American Equities’ liens. The Toobro court

was required to determine the lenders’ respective priorities.

The Toobro court did so by reference to UCC §§ 9-509(d) and 9-510.208 It ruled, based

on the allegation that “AEG as the secured party did not authorize the filing of the termination

statements,”209 that “the termination statements … were ineffective under Section 9-510.”210

Thus the financing statements to which they related remained in effect.211

The Toobro court then addressed Roswell, in a lengthy footnote, disagreeing with Roswell

for much the same reasons this Court has done so.212 The Toobro court noted that the cases

205 2011 N.Y. Misc. LEXIS 3041, at *3-4, 2011 WL 2535035, at *1. 206 2011 N.Y. Misc. LEXIS 3041, at *4, 2011 WL 2535035, at *3. 207 2011 N.Y. Misc. LEXIS 3041, at *5, 2011 WL 2535035, at *2. 208 2011 N.Y. Misc. LEXIS 3041, at *19-27, 2011 WL 2535035, at *8-9. 209 2011 N.Y. Misc. LEXIS 3041, at *19-27, 2011 WL 2535035, at *9. 210 2011 N.Y. Misc. LEXIS 3041, at *24, 2011 WL 2535035, at *9. 211 2011 N.Y. Misc. LEXIS 3041, at *24, 2011 WL 2535035, at *9. 212 2011 N.Y. Misc. LEXIS 3041, at *25 n.1, 2011 WL 2535035, at *9 n.1.


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Roswell cited in support of its analysis were interpreting earlier versions of Article 9.213 It also

differed with Roswell’s “notice filing” analysis, for the same reasons this Court does.214 It then

closed this element of its discussion by saying that for these reasons, it “declines to follow” the

Roswell analysis.215

* * *

For these reasons, the Court is unable to agree that there is a general principle of law that

“UCC Filings that Mistakenly Terminate a Security Interest Are Legally Effective.” The

question is rather whether they have been authorized. That issue must be addressed in the

manner this Court addressed it above. For the reasons there set forth, the requisite authority was

lacking.216

213 Id. 214 The Toobro court stated, in this connection:

In Roswell Capital, the SDNY court considered but distinguished the “notice filing” comment of UCC § 9–502 stating that it “refer[s] only to financing statements,’ and not to termination statements.” See 2010 LEXIS 90695 *24, n. 14. This distinction is inconsistent with the definitions of “financing statement” and “termination statement” under Article 9. See UCC §§ 9–102(39), (79). … Since a termination statement is a record “relating to the initial financing statement,” it is part of a “financing statement” as this term is defined by the UCC. See UCC § 9–102(39). Consequently, the “notice filing” comment of UCC § 9–502 applies to termination statements.

Id. 215 Id. Toobro’s holding was approved in a UCC treatise. See Hawkland § 9-510:2 at n.1.50 (“court correctly

held that termination statement filed by a person not authorized to do so by secured party was ineffective to terminate financing statement even though it might mislead searchers; court declined to follow troubling dictum to the contrary in [Roswell]”).

216 The Court need not lengthen this decision further by specifically addressing any of the other contentions raised by the Committee on these motions. The Court has canvassed them and satisfied itself that no material points other than those it has specifically addressed were raised and require discussion. To the extent those points were not expressly addressed in this decision, they must be rejected.

Similarly, in light of its conclusions, the Court does not need to address JPMorgan’s constructive trust argument, or any of the other bases upon which JPMorgan asserted that it should prevail.


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IV.

Certification to Circuit

On rare occasions, a direct appeal from a bankruptcy court to the court of appeals makes

sense. In the Court’s view, this is one of those occasions where the Circuit might want to

consider that as an option.

In that connection, 28 U.S.C. § 158 grants a court of appeals jurisdiction to hear appeals

from final judgments of the bankruptcy court under certain circumstances. First the bankruptcy

court (acting on its own motion or on the request of a party to the judgment), or all the appellants

and appellees acting jointly, must certify that—

(i) the judgment, order, or decree involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States, or involves a matter of public importance;

(ii) the judgment, order, or decree involves a question of law requiring resolution of conflicting decisions; or

(iii) an immediate appeal from the judgment, order, or decree may materially advance the progress of the case or proceeding in which the appeal is taken….217

Then the court of appeals decides whether it wishes to hear the direct appeal.218

In this case, the Court considers each of the three bases for a certification to be present.

With respect to the first prong, the decision here is one of law based on undisputed facts,

presented to the Court on cross motions for summary judgment, as to which there is no

217 28 U.S.C. § 158(d). 218 Id.; see also In re General Motors Corp., 409 B.R. 24, 27 (Bankr. S.D.N.Y. 2009) (the “Sale Appeal

Certification Decision”) (“The Circuit does not have to take the appeal, however, and can decide whether or not to do so in the exercise of its discretion.”).


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controlling decision by the Second Circuit (or any Circuit), the Delaware Supreme Court, the

New York Court of Appeals, or the highest court of any other state. Though the size of the

amount in controversy here, and its effect upon thousands of GM creditors, may be regarded as

personal to them, the underlying legal issues are important, as are their potential effect, going

forward, on secured lending.

With respect to the second prong, available authorities, while helpful to a point, came

nowhere close to addressing a factual situation of this nature. The issues were complicated by

broad language in the caselaw, much of which, in this Court’s view, should no longer be

regarded as having validity in cases involving UCC filings by an entity other than the secured

party. Though the Court believes that the authorities may be harmonized, in part, and many may

be distinguished on their facts, broad language in many of those cases required resolution of

conflicting decisions. The Court has declined to follow the reasoning of the second rationale of

Roswell, which, if it were regarded as anything other than dictum, would result in a conflict

between lower courts in the Second Circuit.

With respect to the third prong, the Court believes that an immediate appeal from the

judgment in this adversary proceeding is likely to advance the progress of the GM case. The

outcome of this controversy may have a material impact on unsecured creditor distributions, and

will obviously have a material effect on secured creditor distributions. A second level of appeal

(which would otherwise be likely, given the stakes of the controversy) would have a foreseeable

adverse effect on the timing and finality of creditor distributions.219

219 In one of its earlier decisions in the GM case, see the Sale Appeal Certification Decision, 409 B.R. at 27-29, this Court denied certification to the Circuit of its order approving GM’s section 363 sale after this Court’s decision in In re General Motors Corp., 407 B.R. 463 (Bankr. S.D.N.Y. 2009) (the “363 Sale Decision”), stay pending appeal denied, 2009 WL 2033079 (S.D.N.Y. 2009) (Kaplan, J.), appeal dismissed and aff'd, 428 B.R. 43 (S.D.N.Y. 2010) (Buchwald, J.) and 430 B.R. 65 (S.D.N.Y. 2010) (Sweet, J.), appeal dismissed, No. 10–4882–bk (2d Cir. July 28, 2011)—even though, as the subsequent history of the 363 Sale Decision indicates, it ultimately did go up to the Circuit.


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Conclusion

The Court concludes, based on the undisputed facts and under the applicable law, that

JPMorgan did not authorize the termination of the UCC-1 with respect to the Term Loan, and

that anything JPMorgan said or did in connection with the payoff of the Synthetic Lease was not

effective in bringing the UCC-1 securing the Term Loan to come to an end.

JPMorgan’s motion for summary judgment is granted. The Committee’s motion for

partial summary judgment is denied. Pursuant to Fed. R. Civ. P. 58 (made applicable to this

adversary proceeding by Fed. R. Bankr. P. 7058), the Court is today entering a separate

standalone judgment consistent with its first ruling, denying the relief sought by the Committee

in its complaint. The Court is also today entering an order with respect to the underlying cross-

motions, which includes a decretal paragraph, consistent with the Court’s second ruling, denying

the Committee’s motion for partial summary judgment.

The Court is certifying its judgment for direct appeal to the Second Circuit.

Dated: New York, New York s/Robert E. Gerber March 1, 2013 United States Bankruptcy Judge

This Court did so because while GM’s well-being and that of its suppliers, as a business matter, had substantial public importance, the legal issues were not particularly debatable. The 363 Sale Decision was a straightforward application of controlling authority in the Second Circuit (if not also elsewhere)—including five published decisions of the Second Circuit on the 363 Sale issue, and the Circuit’s oral affirmance of Chrysler (on a direct appeal) on the successor liability issue. See Sale Appeal Certification Decision, 409 B.R. at 28-29; 363 Sale Decision, 407 B.R. at 489 & n.39.

Here, by contrast, the Court had much less in the way of available caselaw—and none from the Circuit—with which to work. Also, though the Court is mindful of its earlier statement in the Sale Appeal Certification Decision that appellate courts “review judgments, not statements in opinions,” 409 B.R. at 28, and its view that this should be taken into account when deciding whether the necessary conflict exists to warrant certification, here both sides, and the Court, were required to work with statements in the conflicting authority for lack of any better alternative.


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Appendix A


83

09-00504-reg Doc 27-24 Filed 07/01/10 Entered 07/01/10 13:00:37 Exhibit X Pg 2 of 2


84

IN THE SUPREME COURT OF THE STATE OF DELAWARE

OFFICIAL COMMITTEE OF §

UNSECURED CREDITORS OF MOTORS §

LIQUIDATION COMPANY, § No. 325, 2014

§

Plaintiff-Appellant, § Certification of Question of

§ Law from the United States

v. § Court of Appeals for the

§ Second Circuit

JPMORGAN CHASE BANK, N.A., § C.A. No. 13-2187-bk

Individually and as Administrative Agent §

for various lenders party to the Term Loan §

Agreement described herein, §

§

Defendant-Appellee. §

Submitted: October 8, 2014

Decided: October 17, 2014

Before STRINE, Chief Justice; HOLLAND and RIDGELY, Justices; LASTER,

Vice Chancellor; and COONIN, Judge, constituting the Court en Banc.

Upon Certification of Question of Law from the United States Court of Appeals for

the Second Circuit. CERTIFIED QUESTION ANSWERED.

Norman M. Powell, Esquire, Elena C. Norman, Esquire, John J. Paschetto,

Esquire, Richard J. Thomas, Esquire, Young Conaway Stargatt & Taylor, LLP,

Wilmington, Delaware; Eric B. Fisher, Esquire (argued), Barry N. Seidel, Esquire,

Katie L. Weinstein, Esquire, Dickstein Shapiro LLP, New York, New York;

Jeffrey Rhodes, Esquire, Dickstein Shapiro LLP, Washington, District of

Columbia, for Plaintiff-Appellant.

Gregory P. Williams, Esquire (argued), Brock E. Czeschin, Esquire, Susan M.

Hannigan, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware; John

M. Callagy, Esquire, Nicholas J. Panarella, Esquire, Martin A. Krolewski, Esquire,

Kelley Drye & Warren LLP, New York, New York; Steven O. Weise, Esquire,

Proskauer Rose LLP, Los Angeles, California, for Defendant-Appellee.

Sitting by designation under Del. Const. art. IV, § 12.

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Francis A. Monaco, Jr., Esquire, Ryan C. Cicoski, Esquire, Womble Carlyle

Sandridge & Rice LLP, Wilmington, Delaware; Richard M. Kohn, Esquire,

Jonathan N. Helfat, Esquire, Commercial Finance Association, for Amicus Curiae

Commercial Finance Association.

STRINE, Chief Justice:

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1

I. INTRODUCTION

The United States Court of Appeals for the Second Circuit (“Second Circuit”) has

certified the following question of law important to a dispute pending before it:

Under UCC Article 9, as adopted into Delaware law by Del. Code Ann.

tit. 6, art. 9, for a UCC-3 termination statement to effectively extinguish

the perfected nature of a UCC-1 financing statement, is it enough that

the secured lender review and knowingly approve for filing a UCC-3

purporting to extinguish the perfected security interest, or must the

secured lender intend to terminate the particular security interest that is

listed on the UCC-3?1

We more precisely answer by assuming that by the term “effectively extinguish,”

the Second Circuit asks whether reviewing the termination statement and knowingly

approving it for filing has the effect specified in § 9-513 of the Delaware’s version of the

Uniform Commercial Code (“UCC”), which is that “the financing statement to which the

termination statement relates ceases to be effective.”2 Based on that understanding and

for reasons we explain more fully, the unambiguous provisions of Delaware’s UCC

dictate that the answer is that “it [is] enough that the secured lender review and

knowingly approve for filing a UCC-3 purporting to extinguish the perfected security

interest.”3 Under the Delaware UCC, parties in commerce are entitled to rely upon a

filing authorized by a secured lender and assume that the secured lender intends the plain

consequences of its filing.

1 In re: Motors Liquidation Co., 755 F.3d 78, 86 (2d Cir. 2014).

2 6 Del. C. § 9-513(d).

3 Id.

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2

II. THE EVENTS LEADING TO THE CERTIFIED QUESTION

The dispute pending before the Second Circuit turns on the effect of a UCC

termination statement – a “UCC-3 termination statement” – filed with the Delaware

Secretary of State on behalf of General Motors Corporation.4 That termination statement,

by its plain terms, purported to extinguish a security interest on the assets of General

Motors (“term loan security interest”) held by a syndicate of lenders, including JPMorgan

Chase Bank, N.A. (“JPMorgan”). But neither JPMorgan nor General Motors subjectively

intended to terminate the term loan security interest when General Motors filed the

termination statement. General Motors’ counsel for a separate “synthetic lease”

financing transaction, Mayer Brown LLP, had inadvertently included the term loan

security interest on the termination statement that it filed in the process of unwinding the

synthetic lease. According to JPMorgan, no one at General Motors, Mayer Brown, or

Simpson Thatcher Bartlett LLP (JPMorgan’s counsel for the synthetic lease transaction)

noticed this error, even though individuals at each organization reviewed the filing

statement before the termination statement was filed on October 30, 2008. Under the

stipulated question, we are also to assume that JPMorgan itself reviewed the termination

statement and knowingly approved its filing.

After General Motors filed for reorganization under Chapter 11 of the Bankruptcy

Code, JPMorgan informed the unofficial committee of unsecured creditors (“Creditors

Committee”) that a UCC-3 termination statement relating to the term loan had been

4 These factual details are taken from the Second Circuit’s opinion certifying the question of law

to this Court and from the appendices submitted by the parties.

88

3

inadvertently filed. On July 31, 2009, the Creditors Committee commenced a proceeding

against JPMorgan in the United States Bankruptcy Court for the Southern District of New

York (the “Bankruptcy Court”), seeking, among other things, a determination that the

filing of the UCC-3 termination statement was effective to terminate the term loan

security interest and thus render JPMorgan an unsecured creditor on par with the other

General Motors unsecured creditors. JPMorgan contested that argument, asserting that it

had not authorized the termination statement releasing the term loan security interest, and

that the statement was erroneously filed because no one at General Motors, JPMorgan, or

the law firms working on the synthetic lease transaction recognized that the unrelated

term loan security interest had been included on the statement.

On cross-motions for summary judgment, the Bankruptcy Court found for

JPMorgan on various grounds, including that JPMorgan had not empowered Mayer

Brown to act as its agent in releasing the term loan security interest in the sense that it

had only authorized Mayer Brown to file an accurate termination statement that released

security interests properly related to the synthetic lease transaction.5 Because neither

JPMorgan nor General Motors intended the legal consequences of the UCC-3 termination

statement, the Bankruptcy Court found that the UCC-3 filing was not authorized and

therefore was not effective to terminate the term loan security interest.6

The Creditors Committee appealed to the Second Circuit, arguing, among other

things, that Mayer Brown was authorized as JPMorgan’s agent to file the UCC-3

5 Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank,

N.A. (In re Motors Liquidation Co.), 486 B.R. 596, 606 (Bankr. S.D.N.Y. 2013). 6 Id.

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termination statement. Most pertinent for present purposes, the Creditors Committee

argued that the only issue is whether JPMorgan had authorized the filing of the UCC-3

termination statement. So long as JPMorgan had authorized the statement to be filed, the

termination of all identified security interests, including the term loan security interest,

would be effective.

The Creditors Committee also contended that JPMorgan’s argument that a party

can authorize a filing and then later claim that it had not authorized the filing because it

failed to catch an error in the statement is inconsistent with the plain language of § 9-513

of Delaware’s UCC. That language states in pertinent part that “upon the filing of a

termination statement with the filing office, the financing statement to which the

termination statement relates ceases to be effective.”7

By contrast, JPMorgan took the position that a party may authorize a specific

document to be filed on its behalf, but that such authorization does not cause the

termination statement to be effective if errors in the statement resulted in the release of a

security interest that the party did not subjectively intend to release.

The Second Circuit has indicated that it would be helpful to have an answer from

this Court regarding this aspect of the parties’ dispute. That answer may avoid any need

for the Second Circuit to address the parties’ disagreement as to whether Mayer Brown

was authorized to act as JPMorgan’s agent to file the UCC-3 termination statement, or

provide some useful clarity if the agency issue must be addressed. Accordingly, the

Second Circuit has certified the following question:

7 6 Del. C. § 9-513(d).

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Under UCC Article 9, as adopted into Delaware law by Del. Code Ann.

tit. 6, art. 9, for a UCC-3 termination statement to effectively extinguish

the perfected nature of a UCC-1 financing statement, is it enough that

the secured lender review and knowingly approve for filing a UCC-3

purporting to extinguish the perfected security interest, or must the

secured lender intend to terminate the particular security interest that is

listed on the UCC-3?8

The question is precise, and we read it as asking us to assume what it literally says, which

is that the secured party of record has itself reviewed and knowingly approved the

termination statement for filing. In its briefs and at oral argument, JPMorgan attempted

to reframe the certified question by asking us to consider the issues of agency law that

come into play whenever an entity, such as JPMorgan, acts through agents, be they

employees, outside lawyers, or UCC-filing-service representatives. JPMorgan argued

about whether a filing would be authorized if a secured party granted authority to an

agent to file a termination statement for one security interest but not another, but the

agent mistakenly filed a termination statement for both. That is not the question we have

been asked to address, and the Second Circuit has said it will consider the fact-based

question of whether Mayer Brown had authority as JPMorgan’s agent to file the

termination statement after it receives our answer to its more precise question. The

question certified to us assumes that the secured party of record “review[d] and

knowingly approve[d] [the termination statement] for filing.” We will answer the

question as our judicial colleagues have framed it.

8 In re: Motors Liquidation Co., 755 F.3d 78, 86 (2d Cir. 2014).

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III. ANALYSIS

“The most important consideration for a court in interpreting a statute is the words

the General Assembly used in writing it.”9 The provisions of Delaware’s UCC that are

relevant to and support our conclusion are succinct. Section 9-513 of the UCC states:

(d) Effect of filing termination statement. Except as otherwise provided

in Section 9-510, upon the filing of a termination statement with the

filing office, the financing statement to which the termination statement

relates ceases to be effective.10

In turn, § 9-510 makes plain that a termination statement is effective only if the

statement was filed by a person who is entitled to do so under § 9-509:

(a) Filed record effective if authorized. A filed record is effective only

to the extent that it was filed by a person that may file it under Section

9-509.11

The final step in the relevant statutory chain is § 9-509(d)(1), which addresses who

may file amendments, which include termination statements:12

(d) Person entitled to file certain amendments. A person may file an

amendment other than an amendment that adds collateral covered by a

financing statement or an amendment that adds a debtor to a financing

statement only if:

(1) the secured party of record authorizes the filing; or

(2) [circumstances inapplicable to the facts of this case].13

“[U]nambiguous statutes are not subject to judicial interpretation.”14

The

unambiguous terms of these UCC provisions make clear that if a “secured party of record

9 Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 950 (Del. Ch. 2013).

10 6 Del. C. § 9-513(d).

11 6 Del. C. § 9-509(a).

12 See 6 Del. C. § 9-102(a)(80) (defining a “termination statement” as an “amendment of a

financing statement”). 13

6 Del. C. § 9-509(d)(1).

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authorizes the filing [of a termination statement],”15

then the filing is “effective”16

“upon

the filing of a termination statement with the filing office.”17

At that time, “the statement

to which the termination statement relates ceases to be effective.”18

In other words, for a

termination statement to have the effect specified under § 9-513 of the Delaware UCC, it

is enough that the secured party authorizes the filing. JPMorgan’s argument that a filing

is only effective if the authorizing party understands the filing’s substantive terms and

intends their effect is contrary to § 9-509, which only requires that “the secured party of

record authorize[] the filing.”19

This unambiguous language promotes sound policy. It is fair for sophisticated

transacting parties to bear the burden of ensuring that a termination statement is accurate

when filed.20

It would be strange and inefficient for the UCC to make the effectiveness

of a termination statement depend on whether the secured party subjectively understood

14

Leatherbury v. Greenspun, D.O., 939 A.2d 1284, 1288 (Del. 2007). 15

6 Del. C. § 9-509(d)(1). 16

6 Del. C. § 9-510(a). 17

6 Del. C. § 9-513(d). 18

Id. 19

See also U.C.C. § 9-518 cmt. (“If the person that filed the record was not entitled to do so, the

filed record is ineffective, regardless of whether the secured party of record files an information

statement. Likewise, if the person that filed the record was entitled to do so, the filed record is

effective, even if the secured party of record files an information statement.”). 20

See, e.g., Graham v. State Farm Mut. Auto. Ins. Co., 1989 WL 12233, at *2 (Del. Super. Jan.

26, 1989) (“[F]ailure to read a contract in the absence of fraud is an unavailing excuse or defense

and cannot justify an avoidance, modification or nullification of the contract or any provision

thereof.”) (internal citation omitted); Hicks v. Soroka, 188 A.2d 133, 140–41 (Del. Super. 1963)

(“If one voluntarily shuts his eyes when to open them is to see, such a one is guilty of an act of

folly (in dealing at arm’s length with another) to his own injury; and the affairs of men could not

go on if courts were being called upon to rip up transactions of that sort.”) (internal citation

omitted).

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the terms of its own filing and the effect that the filing would have on the security

interests the filing’s own words address.21

As a matter of ordinary course, parties who sign contracts and other binding

documents, or authorize someone else to execute those documents on their behalf, are

bound by the obligations that those documents contain.22

Certainly, there are doctrines

that allow parties who sign documents they do not understand to escape the consequences

21

See, e.g., ACF 2006 Corp. v. Merritt, 2013 WL 466603, at *4 (W.D. Okla. Feb. 7, 2013),

(“Although strict adherence to the [UCC] requirements may at times lead to harsh results, efforts

by courts to fashion equitable solutions for mitigation of hardships experienced by creditors in

the literal application of statutory filing requirements may have the undesirable effect of

reducing the degree of reliance the market place should be able to place on the [UCC]

provisions. The inevitable harm doubtless would be more serious to commerce than the

occasional harshness from strict obedience.”) (citation omitted), aff’d, 557 F. App’x 747 (10th

Cir. 2014); In re Silvernail Mirror & Glass, Inc., 142 B.R. 987, 989 (M.D. Florida 2013) (“The

Termination Statement gave all indications to the world that [the creditor] was terminating its

security interest in all its collateral. The filing of a Termination Statement is a method of making

the record reflect the true state of affairs so that fewer inquiries will have to be made by persons

who consult the public records. . . . [E]ven if [a] Termination Statement did not reflect the

parties’ true intent, it would be materially misleading to a potential creditor relying on the public

records [to ignore the statement] and therefore [it] should not be set aside.”). 22

See 11 SAMUEL WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS

§ 31.5 (4th ed. 2003) (“As a general principle, all adults are presumed to be capable of managing

their own affairs, and the question whether a bargain is smart or foolish, or economically

efficient or disastrous, is not ordinarily a legitimate subject of judicial inquiry. If freedom of

contract means anything, it means that parties may make even foolish bargains and should be

held to the terms of their agreements. A contract is not a non-binding statement of the parties’

preferences; rather, it is an attempt by market participants to allocate risks and opportunities.

[The court’s role] is not to redistribute these risks and opportunities as [it sees] fit, but to enforce

the allocation the parties have agreed upon. While the parties to a contract often request the

courts, under the guise of interpretation or construction, to give their agreement a meaning which

cannot be found in their written understanding, based entirely on direct evidence of intention,

and often on hindsight, the courts properly and steadfastly reiterate the well-established principle

that it is not the function of the judiciary to change the obligations of a contract which the parties

have seen fit to make. . . . Unless the contract is voidable due to mistake, fraud,

unconscionability, or another invalidating cause, or invalid in whole or in part due to illegality or

another violation of public policy, the court must enforce it as drafted by the parties, according to

the terms employed. . . .”).

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in certain circumstances, such as mutual mistake or reformation.23

But as the Creditors

Committee points out, had the General Assembly wished to give secured parties who

authorize filings a safety valve against their own failure to comprehend the terms of their

filings, it could have written § 9-509(d)(1) to state, for example, that “a person may file

[a termination statement] . . . only if . . . the secured party of record authorizes the filing

and intends to terminate the security interests identified in that filing.” Or the General

Assembly could have provided that the secured party must “authorize and understand the

filing.” The General Assembly did not write the statute in either way, and it would be

improper for us to engraft such a condition on § 9-509, especially when the statutory

language is unambiguous.24

Even if the statute were ambiguous, we would be reluctant to embrace JPMorgan’s

proposition. Before a secured party authorizes the filing of a termination statement, it

ought to review the statement carefully and understand which security interests it is

releasing and why. A secured party is the master of its own termination statement; it

works no unfairness to expect the secured party to review a termination statement

carefully and only file the statement once it is sure that the statement is correct.25

If

23

See e.g., id. § 70.106 (4th ed. 2003) (“A contract may be rescinded where there is a clear, bona

fide, mutual mistake regarding a material fact or law.”); id. § 70.20-21 (“Reformation of a

written instrument is available where, because of a mutual mistake of fact, the instrument fails to

express the real agreement between the parties.”). 24

See Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 560 (Del. 2002) (“[T]his court should be chary

about reading words into a statute that the General Assembly could have easily added itself.”)

(quoting HMG/Courtland Props., Inc. v. Gray, 729 A.2d 300, 306 (Del. Ch. 1999)). 25

If a party files a termination statement that is inaccurate, it may follow the procedure

established by the UCC to correct the record. Section 9-518 of Delaware’s UCC authorizes a

person to file an “information statement” (or a “correction statement” under the UCC) if the

person believes that the existing record is inaccurate or a statement has been wrongly filed.

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parties could be relieved from the legal consequences of their mistaken filings, they

would have little incentive to ensure the accuracy of the information contained in their

UCC filings.

We recognize that the UCC is a system of notice filing and that such a system

contemplates that later lenders may need to conduct diligence to determine that a filing

was authorized by the secured party of record. But consistent with the purpose of setting

up a notice system, one of the most important roles the UCC plays is facilitating the

efficient procession of commerce by permitting parties to rely in good faith on the plain

terms of authorized public filings.26

The UCC thus enables the crafting of contractual

arrangements that generate wealth and the investment of capital in commercial enterprise

because parties are able to rely on a clear and predicable set of rules to govern their

transactions.27

To hold that parties cannot rely upon authorized filings unless the secured party

subjectively understood the effect of its own action would disrupt and undermine the

6 Del. C. § 9-518. The information statement has no legal effect in terms of restoring the filing

statement. But it does give public notice that the erroneously filed record is unreliable. See id.;

11 ANDERSON U.C.C. § 9-518:5 (3d. ed. 2013). To restore the security interest its mistaken

filing released, the secured party must perfect the security interest anew by filing a new financing

statement. See, e.g., U.S. v. Lincoln Sav. Bank (In re Commercial Millwright), 245 B.R. 597,

601 (Bankr. N.D. Iowa 1999). 26

See, e.g., WEST’S ALR DIGEST SECURED TRANSACTIONS § 82.1 (2014) (“The purpose of the

filing requirements for perfection of security interests is to guarantee that third parties will have

notice of existing security interests in collateral, thus protecting credit transactions.”); U.S. v.

Lincoln Sav. Bank (In re Commercial Millwright), 245 B.R. 597, 601 (Bankr. N. D. Iowa 1999)

(“Perfection is intended to protect outside parties by providing clear notice.”). 27

See, e.g., In re Hickory Printing Group, Inc., 479 B.R. 388, 397 (Bankr. W.D.N.C. 2012)

(“Lenders are bound by the effects of UCC termination statements, even when such termination

statements are filed in error, because the entire purpose of the UCC system is to provide public

notice of secured interests without requiring the parties to look behind or beyond the four corners

of the public filing.”).

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secured lending markets. It is not clear to us how an inquiring party would find out

whether a secured party understood and intended the consequences of its own filing. In

the normal course of business, which is what the Delaware UCC embraces as appropriate

policy, a party who causes a document to be executed and filed on its behalf is expected

to understand what the filing says, the effect the filing will have, and that its own act of

causing the document to be executed and filed will signal to others that the filing party

subjectively intends for the filing to have the effect resulting from plain terms.28

If we

were to embrace JPMorgan’s theory, no creditor could ever be sure that a UCC-3 filing is

truly effective, even where the secured party itself authorized the filing, unless a court

determined after costly litigation that the filing was in fact subjectively intended.

It therefore may not be coincidental that JPMorgan did not confront the language

of the UCC directly, but instead devoted most of its answering brief and the bulk of its

presentation during oral argument to addressing a question that is not before us. In its

brief, JPMorgan dilated mostly on whether General Motors (and its counsel Mayer

Brown) was authorized to act as JPMorgan’s agent in filing the UCC-3 Termination

Statement.29

But the Second Circuit has asked us to assume that the secured party

itself—JPMorgan—“review[ed] and knowingly approved for filing a UCC-3 purporting

28

See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 157 (1981) (“Generally, one who assents

to a writing is presumed to know its contents and cannot escape being bound by its terms merely

by contending that he did not read them; his assent is deemed to cover unknown as well as

known terms.”); see also In re Lortz, 344 B.R. 579, 585 (Bankr. C.D. Ill. 2006) (“As with all

perfection laws, which focus on third party perceptions and clarity and certainty of notice, the

intent of the secured party is not relevant to questions of perfection and errors can be fatal.”); In

re Clean Burn Fuels, LLC, 492 B.R. 445, 465 (Bankr. M.D.N.C. 2013) (“The [UCC] permits

third parties to rely on the record to determine whether a perfected security interest exists.”). 29

See Answering Br. at 18-24.

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12

to extinguish the perfected security interest.” We accept that assumption and refuse

JPMorgan’s invitation to answer a separate, fact-laden question that is not properly

before us. As the Second Circuit made clear, it will address that issue itself after it

receives the answer to the narrow question put to us.

Thus, for the reasons we have articulated, for a termination statement to become

effective under § 9-509 and thus to have the effect specified in § 9-513 of the Delaware

UCC, it is enough that the secured party authorizes the filing to be made, which is all that

§ 9-510 requires. The Delaware UCC contains no requirement that a secured party that

authorizes a filing subjectively intends or otherwise understands the effect of the plain

terms of its own filing. The Clerk is directed to transmit this opinion to the Second

Circuit.

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13‐2187

In Re: Motors Liquidation Co.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term, 2013

(Argued: March 25, 2014 Question Certified: June 17, 2014

Question Answered: October 17, 2014 Appeal Decided: January 21, 2015)

Docket No. 13‐2187

In Re: MOTORS LIQUIDATION COMPANY, et al.,

Debtor,

OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF MOTORS

LIQUIDATION COMPANY,

Plaintiff‐Appellant,

‐v.‐

JP MORGAN CHASE BANK, N.A., individually and as Administrative Agent

for various lenders party to the Term Loan Agreement described herein,

Defendant‐Appellee.

Before:

WINTER, WESLEY, AND CARNEY, Circuit Judges.

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2

Direct appeal pursuant to 28 U.S.C. § 158(d)(2) from an order of the United States

Bankruptcy Court for the Southern District of New York (Gerber, U.S.B.J.)

holding that a mistaken UCC‐3 termination statement was unauthorized and

therefore not effective to terminate a secured lender’s interest in a debtor’s

property. We conclude that although the termination statement mistakenly

identified for termination a security interest that the lender did not intend to

terminate, the secured lender authorized the filing of the document, and the

termination statement was effective to terminate the security interest.

REVERSED and REMANDED.

ERIC B. FISHER (Barry N. Seidel, Katie L. Weinstein, Jeffrey

Rhodes, on the brief), Dickstein Shapiro LLP, New York, NY,

for Plaintiff‐Appellant.

JOHN M. CALLAGY (Nicholas J. Panarella, Martin A. Krolewski,

on the brief), Kelley Drye & Warren LLP, New York, NY, for

Defendant‐Appellee.

PER CURIAM:

We assume familiarity with our prior certification opinion, 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 (2d Cir. 2014), and the resulting

decision of the Delaware Supreme Court, Official Committee of Unsecured Creditors

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3

of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A., ___ A.3d ___, 2014 WL

5305937 (Del. Oct. 17, 2014). We restate the most salient facts.1

BACKGROUND

In October 2001, General Motors entered into a synthetic lease financing

transaction (the “Synthetic Lease”), by which it obtained approximately $300

million in financing from a syndicate of lenders including JPMorgan Chase Bank,

N.A. (“JPMorgan”). General Motors’ obligation to repay the Synthetic Lease was

secured by liens on twelve pieces of real estate. JPMorgan served as

administrative agent for the Synthetic Lease and was identified on the UCC‐1

financing statements as the secured party of record.

Five years later, General Motors entered into a separate term loan facility

(the “Term Loan”). The Term Loan was entirely unrelated to the Synthetic Lease

and provided General Motors with approximately $1.5 billion in financing from

a different syndicate of lenders. To secure the loan, the lenders took security

interests in a large number of General Motors’ assets, including all of General

Motors’ equipment and fixtures at forty‐two facilities throughout the United

1 These undisputed facts are drawn from the record and from the Bankruptcy Court’s

decision below, Official Comm. of 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).

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States. JPMorgan again served as administrative agent and secured party of

record for the Term Loan and caused the filing of twenty‐eight UCC‐1 financing

statements around the country to perfect the lenders’ security interests in the

collateral. One such financing statement, the “Main Term Loan UCC‐1,” was

filed with the Delaware Secretary of State and bore file number “6416808 4.” It

“covered, among other things, all of the equipment and fixtures at 42 GM

facilities, [and] was by far the most important” of the financing statements filed

in connection with the Term Loan. Official Comm. of Unsecured Creditors of Motors

Liquidation Co. v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), 486 B.R.

596, 603 n.6 (Bankr. S.D.N.Y. 2013).

In September 2008, as the Synthetic Lease was nearing maturity, General

Motors contacted Mayer Brown LLP, its counsel responsible for the Synthetic

Lease, and explained that it planned to repay the amount due. General Motors

requested that Mayer Brown prepare the documents necessary for JPMorgan and

the lenders to be repaid and to release the interests the lenders held in General

Motors’ property.

A Mayer Brown partner assigned the work to an associate and instructed

him to prepare a closing checklist and drafts of the documents required to pay

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off the Synthetic Lease and to terminate the lenders’ security interests in General

Motors’ property relating to the Synthetic Lease. One of the steps required to

unwind the Synthetic Lease was to create a list of security interests held by

General Motors’ lenders that would need to be terminated. To prepare the list,

the Mayer Brown associate asked a paralegal who was unfamiliar with the

transaction or the purpose of the request to perform a search for UCC‐1 financing

statements that had been recorded against General Motors in Delaware. The

paralegal’s search identified three UCC‐1s, numbered 2092532 5, 2092526 7, and

6416808 4. Neither the paralegal nor the associate realized that only the first two

of the UCC‐1s were related to the Synthetic Lease. The third, UCC‐1 number

6416808 4, related instead to the Term Loan.

When Mayer Brown prepared a Closing Checklist of the actions required

to unwind the Synthetic Lease, it identified the Main Term Loan UCC‐1 for

termination alongside the security interests that actually did need to be

terminated. And when Mayer Brown prepared draft UCC‐3 statements to

terminate the three security interests identified in the Closing Checklist, it

prepared a UCC‐3 statement to terminate the Main Term Loan UCC‐1 as well as

those related to the Synthetic Lease.

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6

No one at General Motors, Mayer Brown, JPMorgan, or its counsel,

Simpson Thacher & Bartlett LLP, noticed the error, even though copies of the

Closing Checklist and draft UCC‐3 termination statements were sent to

individuals at each organization for review. On October 30, 2008, General

Motors repaid the amount due on the Synthetic Lease. All three UCC‐3s were

filed with the Delaware Secretary of State, including the UCC‐3 that erroneously

identified for termination the Main Term Loan UCC‐1, which was entirely

unrelated to the Synthetic Lease.

A. General Motors’ Chapter 11 Bankruptcy Filing

The mistake went unnoticed until General Motors’ bankruptcy in 2009.

After General Motors filed for chapter 11 reorganization, JPMorgan informed the

Committee of Unsecured Creditors (the “Committee”) that a UCC‐3 termination

statement relating to the Term Loan had been inadvertently filed in October

2008. JPMorgan explained that it had intended to terminate only liens related to

the Synthetic Lease and stated that the filing was therefore unauthorized and

ineffective.

On July 31, 2009, the Committee commenced the underlying action against

JPMorgan in the United States Bankruptcy Court for the Southern District of

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New York. The Committee sought a determination that, despite the error, the

UCC‐3 termination statement was effective to terminate the Term Loan security

interest and render JPMorgan an unsecured creditor on par with the other

General Motors unsecured creditors. JPMorgan disagreed, reasoning that the

UCC‐3 termination statement was unauthorized and therefore ineffective

because no one at JPMorgan, General Motors, or their law firms had intended

that the Term Loan security interest be terminated. On cross‐motions for

summary judgment, the Bankruptcy Court concluded that the UCC‐3 filing was

unauthorized and therefore not effective to terminate the Term Loan security

interest. In re Motors Liquidation Co., 486 B.R. at 647–48.

B. Prior Certification Opinion

On appeal to this Court, the parties offered competing interpretations of

UCC § 9‐509(d)(1), which provides that a UCC‐3 termination statement is

effective only if “the secured party of record authorizes the filing.” JPMorgan

reasoned that it cannot have “authorize[d] the filing” of the UCC‐3 that

identified the Main Term Loan UCC‐1 for termination because JPMorgan neither

intended to terminate the security interest nor instructed anyone else to do so on

its behalf. In response, the Committee contended that focusing on the parties’

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8

goal misses the point. It interpreted UCC § 9‐509(d)(1) to require only that the

secured lender authorize the act of filing a particular UCC‐3 termination

statement, not that the lender subjectively intend to terminate the particular

security interest identified for termination on that UCC‐3. The Committee

further argued that even if JPMorgan never intentionally instructed anyone to

terminate the Main Term Loan UCC‐1, JPMorgan did literally “authorize[] the

filing”—even if mistakenly—of a UCC‐3 termination statement that had that

effect.

In our prior certification opinion we recognized that this appeal presents

two closely related questions. First, what precisely must a secured lender of

record authorize for a UCC‐3 termination statement to be effective: “Must the

secured lender authorize the termination of the particular security interest that

the UCC‐3 identifies for termination, or is it enough that the secured lender

authorize the act of filing a UCC‐3 statement that has that effect?” In re Motors

Liquidation Co., 755 F.3d at 84. Second, “[d]id JPMorgan grant to Mayer Brown

the relevant authority—that is, alternatively, authority either to terminate the

Main Term Loan UCC‐1 or to file the UCC‐3 statement that identified that

interest for termination?” Id.

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9

Recognizing that the first question—what is it that the UCC requires a

secured lender to authorize—seemed likely to recur and presented a significant

issue of Delaware state law, we certified to the Delaware Supreme Court the

following question:

Under UCC Article 9, as adopted into Delaware law by Del. Code

Ann. tit. 6, art. 9, for a UCC‐3 termination statement to effectively

extinguish the perfected nature of a UCC‐1 financing statement, is it

enough that the secured lender review and knowingly approve for

filing a UCC‐3 purporting to extinguish the perfected security

interest, or must the secured lender intend to terminate the

particular security interest that is listed on the UCC‐3?

Id. at 86. The second question—whether JPMorgan granted the relevant

authority—we reserved for ourselves, explaining that “[t]he Delaware Supreme

Court’s clarification as to the sense in which a secured party of record must

authorize a UCC‐3 filing will enable us to address . . . whether JPMorgan in fact

provided that authorization.” Id. at 86–87.

C. The Delaware Supreme Court’s Answer

In a speedy and thorough reply, the Delaware Supreme Court answered

the certified question, explaining that if the secured party of record authorizes

the filing of a UCC‐3 termination statement, then that filing is effective regardless

of whether the secured party subjectively intends or understands the effect of

that filing:

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[F]or a termination statement to become effective under § 9‐509 and

thus to have the effect specified in § 9‐513 of the Delaware UCC, it is

enough that the secured party authorizes the filing to be made,

which is all that § 9‐510 requires. The Delaware UCC contains no

requirement that a secured party that authorizes a filing subjectively

intends or otherwise understands the effect of the plain terms of its

own filing.

Official Comm. of Unsecured Creditors of Motors Liquidation Co., 2014 WL 5305937,

at *5. That conclusion, explained the court, follows both from the unambiguous

terms of the UCC and from sound policy considerations:

JPMorgan’s argument that a filing is only effective if the authorizing

party understands the filing’s substantive terms and intends their

effect is contrary to § 9‐509, which only requires that “the secured

party of record authorize[ ] the filing.”

. . .

Even if the statute were ambiguous, we would be reluctant to

embrace JPMorgan’s proposition. Before a secured party authorizes

the filing of a termination statement, it ought to review the

statement carefully and understand which security interests it is

releasing and why. . . . If parties could be relieved from the legal

consequences of their mistaken filings, they would have little

incentive to ensure the accuracy of the information contained in

their UCC filings.

Id. at *3–4 (first alteration in original) (footnote omitted).

DISCUSSION

The Delaware Supreme Court has explained the sense in which a secured

party must “authorize[] the filing” of a UCC‐3 termination statement. What

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remains is to answer the question we reserved for ourselves in our prior

certification opinion: Did JPMorgan authorize the filing of the UCC‐3

termination statement that mistakenly identified for termination the Main Term

Loan UCC‐1?

In JPMorgan’s view, it never instructed anyone to file the UCC‐3 in

question, and the termination statement was therefore unauthorized and

ineffective. JPMorgan reasons that it authorized General Motors only to

terminate security interests related to the Synthetic Lease; that it instructed

Simpson Thacher and Mayer Brown only to take actions to accomplish that

objective; and that therefore Mayer Brown must have exceeded the scope of its

authority when it filed the UCC‐3 purporting to terminate the Main Term Loan

UCC‐1.

JPMorgan’s and General Motors’ aims throughout the Synthetic Lease

transaction were clear: General Motors would repay the Synthetic Lease, and

JPMorgan would terminate its related UCC‐1 security interests in General

Motors’ properties. The Synthetic Lease Termination Agreement provided that,

upon General Motors’ repayment of the amount due under the Synthetic Lease,

General Motors would be authorized “to file a termination of any existing

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Financing Statement relating to the Properties [of the Synthetic Lease].” J.A.

2151. And, to represent its interests in the transaction, JPMorgan relied on

Simpson Thacher, its counsel for matters related to the Synthetic Lease. No one

at JPMorgan, Simpson Thacher, General Motors, or Mayer Brown took action

intending to affect the Term Loan.

What JPMorgan intended to accomplish, however, is a distinct question

from what actions it authorized to be taken on its behalf. Mayer Brown prepared

a Closing Checklist, draft UCC‐3 termination statements, and an Escrow

Agreement, all aimed at unwinding the Synthetic Lease but tainted by one

crucial error: The documents included a UCC‐3 termination statement that

erroneously identified for termination a security interest related not to the

Synthetic Lease but to the Term Loan. The critical question in this case is

whether JPMorgan “authorize[d] [Mayer Brown] to file” that termination

statement.

After Mayer Brown prepared the Closing Checklist and draft UCC‐3

termination statements, copies were sent for review to a Managing Director at

JPMorgan who supervised the Synthetic Lease payoff and who had signed the

Term Loan documents on JPMorgan’s behalf. Mayer Brown also sent copies of

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the Closing Checklist and draft UCC‐3 termination statements to JPMorgan’s

counsel, Simpson Thacher, to ensure that the parties to the transaction agreed as

to the documents required to complete the Synthetic Lease payoff transaction.

Neither directly nor through its counsel did JPMorgan express any concerns

about the draft UCC‐3 termination statements or about the Closing Checklist. A

Simpson Thacher attorney responded simply as follows: “Nice job on the

documents. My only comment, unless I am missing something, is that all

references to JPMorgan Chase Bank, as Administrative Agent for the Investors

should not include the reference ‘for the Investors.’” J.A. 921.

After preparing the closing documents and circulating them for review,

Mayer Brown drafted an Escrow Agreement that instructed the parties’ escrow

agent how to proceed with the closing. Among other things, the Escrow

Agreement specified that the parties would deliver to the escrow agent the set of

three UCC‐3 termination statements (individually identified by UCC‐1 financing

statement file number) that would be filed to terminate the security interests that

General Motors’ Synthetic Lease lenders held in its properties. The Escrow

Agreement provided that once General Motors repaid the amount due on the

Synthetic Lease, the escrow agent would forward copies of the UCC‐3

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termination statements to General Motors’ counsel for filing. When Mayer

Brown e‐mailed a draft of the Escrow Agreement to JPMorgan’s counsel for

review, the same Simpson Thacher attorney responded that “it was fine” and

signed the agreement.

From these facts it is clear that although JPMorgan never intended to

terminate the Main Term Loan UCC‐1, it authorized the filing of a UCC‐3

termination statement that had that effect. “Actual authority . . . is created by a

principal’s manifestation to an agent that, as reasonably understood by the agent,

expresses the principal’s assent that the agent take action on the principal’s

behalf.” Restatement (Third) of Agency § 3.01 (2006); accord Demarco v. Edens, 390

F.2d 836, 844 (2d Cir. 1968). JPMorgan and Simpson Thacher’s repeated

manifestations to Mayer Brown show that JPMorgan and its counsel knew that,

upon the closing of the Synthetic Lease transaction, Mayer Brown was going to

file the termination statement that identified the Main Term Loan UCC‐1 for

termination and that JPMorgan reviewed and assented to the filing of that

statement. Nothing more is needed.

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CONCLUSION

For the foregoing reasons, we REVERSE the Bankruptcy Court’s grant of

summary judgment for the Defendant and REMAND with instructions to the

Bankruptcy Court to enter partial summary judgment for the Plaintiff as to the

termination of the Main Term Loan UCC‐1.

113

FILED: NEW YORK COUNTY CLERK 06/27/2011 INDEX NO. 650680/2010

NYSCEF DOC. NO. 25 RECEIVED NYSCEF: 06/27/2011

114

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------- ROSWELL CAPITAL PARTNERS LLC, et al.,

Plaintiffs,

-v- ALTERNATIVE CONSTRUCTION TECHNOLOGIES, et al.,

Defendants. ----------------------------------------

X : : : : : : : : : X

08 Civ. 10647 (DLC)

OPINION & ORDER

APPEARANCES: For Plaintiffs: Douglas A. Rappaport Brian T. Carney Akin Gump Strauss Hauer & Feld, LLP One Bryant Park New York, NY 10036 For Defendants JMB Associates of Ohio, LLC, JMB Associates, and James Beshara: Mark J. Lawless 250 W. 57th Street, #1316 New York, NY 10107 Edward Bearman Martin Grusin 780 Ridge Lake Blvd, Suite 202 Memphis, TN 38120 DENISE COTE, District Judge:

Plaintiffs BridgePointe Master Fund Ltd., CAMHZN Master

LDC, and CAMOFI Master LDC (collectively, the “Lenders”), and

Roswell Capital Partners, LLC, as Collateral Agent for the

Lenders (“Roswell,” and together with the Lenders, the

Case 1:08-cv-10647-DLC Document 154 Filed 09/01/10 Page 1 of 23

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“Plaintiffs”) bring this action to foreclose on the assets of

defendant Alternative Construction Technology, Inc. (“ACT”), a

Florida-based manufacturer of “green” construction materials.

Defendants James Beshara (“Beshara”) and his sole

proprietorship, JMB Associates (collectively, “JMB”), claim to

have a perfected security interest in ACT’s assets senior to

that of the Plaintiffs. Plaintiffs contend that JMB has no

valid security interest in ACT’s assets. On May 12, 2010, the

Plaintiffs moved for summary judgment. For the following

reasons, the motion is granted.

BACKGROUND

Much of the factual background concerning this litigation

is set forth in the January 30, 2009 Opinion granting

Plaintiffs’ application for preliminary injunctive relief, see

Roswell Capital Partners, LLC v. Alt. Constr. Techs., Inc., No.

08 Civ. 10647(DLC), 2009 WL 222348 (S.D.N.Y. Jan. 30, 2009)

(“Roswell I”), and the July 20, 2009 Opinion granting final

judgment in favor of Plaintiffs. See Roswell Capital Partners,

LLC v. Alt. Constr. Techs., Inc., 638 F. Supp. 2d 360 (S.D.N.Y.

2009) (“Roswell II”). The following facts are relevant to the

instant matter and are not in dispute unless otherwise

indicated.


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1. JMB’s Security Interest

JMB’s purported security interest in ACT’s assets is

predicated on two loans that JMB made to ACT in 2005. As

described below, these two loans resulted in the issuance of

notes, which were ultimately converted into ACT common stock

issued to JMB.

The 2005 loans were documented by two “Secured Convertible

Promissory Notes” dated February 22 and June 30, 2005 (the “2005

Notes”). The 2005 Notes cumulatively reflect a principal debt

of $630,000, due and payable on July 1, 2006, and bear interest

at 18% per year. Each of the 2005 Notes indicates that its

obligations are secured by collateral described in a Uniform

Commercial Code (“UCC”) financing statement (“UCC-1”) attached

as an exhibit to the note. Although there is no UCC-1 attached

to the 2005 Notes, it is undisputed that a UCC-1 financing

statement in favor of JMB was filed on July 8, 2005.

In 2006, the 2005 Notes were “cancelled and void[ed]” and

“replace[d]” by an “Amended and Restated Convertible Promissory

Note” dated June 1, 2006 (the “2006 Note”).1 The 2006 Note has a

1 The 2006 Note actually states that it “replaces and amends the Amended and Restated Convertible Promissory Notes ($380,000 and $250,000) dated March 14, 2006 originally delivered by [ACT] to [JMB] (the ‘First Amended Note’). The First Amended Note is now cancelled and void.” While this purported “First Amended Note” has not been introduced into evidence, a letter dated March 14, 2006, from Gina Bennett, ACT’s Chief Compliance Officer (“Bennett”), to Beshara, indicates that Beshara agreed to “grant


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principal amount of $630,000, due and payable on December 31,

2006.2 Section 3 of the 2006 Note, entitled “Securities,” states

in full: “It is understood that JMB Associates has filed a UCC-

1 against the assets of [ACT] as identified in the Exhibit B.

[ACT] shall be required to seek the endorsement of JMB

Associates prior to the removal of the UCC-1 upon payment.”3

Although there is no Exhibit B attached to the 2006 Note, it is

undisputed that a UCC-1 financing statement in favor of JMB was

filed on May 8, 2006.4

Section 1.2 of the 2006 Note provides that the Note could

be paid by check or wire, “or converted into equity of the

Company at the option of the Payee [JMB].” Section 1.4 contains

a mandatory conversion provision that states that the note “will

extensions” to payments due on the 2005 Notes to June 1, 2006. The fact that the 2005 Notes were extinguished, however, is confirmed by ACT’s December 31, 2006 Form 10-KSB filing. In “Note 6” of the 10-KSB, a schedule listing all of ACT’s outstanding notes payable, the two Notes due July 1, 2006 and bearing interest at 18% per year are listed as having a balance of “zero” as of December 31, 2006. 2 The 2006 Note originally named “JMB Associates” as Payee, but contains a handwritten notation substituting “James Beshara” individually. 3 The earlier March 14, 2006 letter from Bennett to Beshara had provided that “[u]pon payment of all outstanding monies (interest and principal) to Mr. Beshara et al the UCC-1 filings will be canceled.” (Emphasis added.) 4 The May 8, 2006 UCC-1 financing statement indicates that it documents a “[f]irst lien on Pentane Bulk Storage and Meter Pentane Metering Machine” and a “[s]econd lien” on other assets of ACT. This is the same collateral covered by the earlier July 8, 2005 UCC-1 financing statement.


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be converted into [315,000] Shares of Common Stock [of ACT] at

any time, but no later than the company’s active trading on the

OTC Bulletin Board (‘Next Round’), plus an additional amount for

interest conversion.” (Emphasis added.)

Despite the mandatory conversion requirement, JMB contends

that it had the right to return the shares and reinstate the

debt obligation, a right that it exercised in 2008. The right

to unwind the conversion from debt to equity is addressed in §

1.4, which provides:

It is understood by both parties in the event the Payee [JMB] elects to convert into equity stock prior to the selling of shares by the Payee [JMB], in order to breakeven [sic] with this convertible promissory note, the stock price falls below $2.00 per share, the Payee [JMB] has the right at its sole discretion to unwind the transaction.

The 2006 Note provides that Florida law shall govern without

regard to choice of law principles.

2. The 2006 Note is Converted into ACT Common Stock

The entirety of ACT’s debt to JMB represented by the 2006

Note was converted to stock. On September 22, 2006 ACT filed a

Form SB-2 (the “2006 SB-2”) to publicly register its common

stock with the Securities and Exchange Commission (“SEC”). The

2006 SB-2 acknowledged $630,000 in principal and $136,933 in


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accrued interest owed to JMB pursuant to the 2006 Note.5 The

2006 SB-2 states that JMB’s debt and accumulated interest “will

be converted into common stock of [ACT] during an initial SB-2

filing process.” (Emphasis added.) The amounts owed by ACT to

JMB are also included in a chart listing all of ACT’s

outstanding convertible debt as of June 30, 2006, that “is being

converted to equity as part of this registration.” (Emphasis

added.)

JMB’s intention to convert the 2006 Note into shares of ACT

common stock is documented in a letter dated September 27, 2006,

from Beshara to Michael Hawkins, the chief executive officer of

ACT (“Hawkins”). The letter states:

This letter is to officially notify [ACT] of my desire to convert, as provided for in the loan documents, [$630,000] and [$136,993] in interest that [ACT] owes to JMB & Associates, as of June 30, 2006, to common shares of [ACT] at the stated conversion rate of $2.00 per share.

In response, Hawkins wrote a letter to Beshara dated October 1,

2006, confirming the conversion.

In accordance with the terms of the 2006 Note, the 2006 SB-

2 filing, and the September 27, 2006 letter from Beshara to

Hawkins, JMB’s debt was converted into ACT common stock. ACT

issued a stock certificate, dated September 26, 2006, for 5 The 2006 SB-2 does not refer specifically to the 2006 Note, but rather describes JMB’s debt as being secured by the 2005 Notes. As discussed above, however, the 2005 Notes were extinguished and replaced by the 2006 Note as of June 1, 2006.


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396,761 shares to JMB, representing principal and interest owed

under the 2006 Note. The stock certificate was received by

Beshara’s stockbroker on JMB’s behalf. On April 2, 2007, the

day before ACT stock began trading publicly,6 ACT issued JMB an

additional 31,632 shares, representing additional accrued

interest on JBM’s loan.7

Thus, as of April 3, 2007, the first day ACT’s stock traded

publicly, JMB’s debt had been converted into approximately

428,393 shares of ACT common stock. Based on that day’s closing

price of $5.30 per share, JMB’s shares were worth approximately

$2,270,483. After ACT’s stock began trading publicly in April

2007, JMB, through Beshara’s stockbroker, sold approximately

115,000 shares of ACT stock. It is unclear at what prices JMB

sold these shares.8

6 The delay between the registration of ACT’s stock with the SEC on September 22, 2006, and the first day of trading on April 3, 2007, was apparently due to the need to obtain approval from the Financial Industry Regulatory Authority (“FINRA”). 7 Interest on the $630,000 owed by ACT to JMB presumably continued to accrue since ACT’s shares were illiquid between the date of the SEC registration and the actual commencement of trading. 8 On its first day of trading, ACT’s stock closed at $5.30 per share. The stock peaked at $8.00 per share on August 31, 2007. The stock first dropped below $2.00 on June 6, 2008, when it closed at $1.90. By July 2008, the stock was trading at between $0.63 and $0.95 per share. It currently trades at $0.02 per share.


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3. The Lenders’ Secured Interest

Pursuant to a series of contracts (the “Funding

Documents”), Plaintiffs provided ACT with more than $6 million

in two rounds of financing, the first in 2007 (the “2007

Funding”) and the second in 2008 (the “2008 Funding,” and

collectively, the “Fundings”). See Roswell I, 2009 WL 222348,

at *2-*4. An express condition of the Fundings was that

Plaintiffs would hold a senior secured priority interest in all

of the assets of ACT (the “Collateral”). Accordingly,

Plaintiffs’ due diligence leading up to the 2007 Funding was

focused on, among other things, ACT’s other debt obligations.

In connection with their due diligence, Plaintiffs

reviewed, among other things, ACT’s SEC filings, including the

2006 SB-2 which indicated that once ACT’s stock was registered,

whatever debt JMB held in ACT would be converted into equity.

On June 28, 2007, Hawkins sent an e-mail to Plaintiffs in

response to a due diligence inquiry concerning JMB. Hawkins

indicated that JMB “is the 2% per month note holder we will be

taking out. [JMB’s] total investment at one time was about $1.5

million. Remaining balance of notes is $450[,000], the rest has

been converted into stock.” (Emphasis added.) Accordingly, the

schedules to the Funding Documents on which ACT listed all of

its outstanding indebtedness, other contracts, and any liens or


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encumbrances on ACT’s assets did not include the 2006 Note.9

These schedules are consistent with ACT’s December 31, 2006 Form

10-KSB, which indicated that the 2005 Notes had been

extinguished and which did not include the 2006 Note among ACT’s

outstanding notes payable.

In connection with the Fundings, the Plaintiffs and ACT

executed two security agreements, the first dated June 30, 2007

(the “2007 Security Agreement”) and the second dated May 8, 2008

(the “2008 Security Agreement”) (collectively, the “Security

Agreements”). Each of the Security Agreements granted the

Lenders “a continuing and perfected security interest in” the

Collateral. Roswell I, 2009 WL 222348, at *3, *5. In addition,

the Security Agreements provided that the Lenders held a senior

secured priority position over the Collateral and that ACT

otherwise owned the Collateral “free and clear of any liens,

security interests, encumbrances, [or] rights or claims of

others.” On July 5, 2007, shortly after the 2007 Funding

closed, the Lenders filed UCC-1 financing statements with the

9 The schedule of ACT’s indebtedness as of March 31, 2007 listed only three Notes possibly connected to JMB: (1) a $200,000 note payable to “Antoinette Pace & James Beshara” due June 2007; (2) a $101,500 Note payable to “Edward Beshara” due June 2007; and (3) a $117,702 Note payable to “Antoinette Pace” due June 2007. The sum of the outstanding balances on these Notes roughly corresponds to the $450,000 referenced in Hawkins’ June 28, 2007 e-mail to Plaintiffs. JMB does not contend that any of these Notes represents the 2006 Note on which JMB’s purported security interest in the Collateral is predicated.


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Florida Secretary of State to perfect their senior secured

priority interest in the Collateral.10

In addition, prior to the filing of Plaintiffs’ UCC-1

financing statements and the closing of the 2007 Funding,

Plaintiffs confirmed with ACT that UCC-3 termination statements11

were filed to cancel any prior UCC-1 financing statements

regarding the Collateral. On July 2, 2007, Tom Amon (“Amon”),

ACT’s in-house counsel at the time, sent an e-mail to Bradford

Hathorn (“Hathorn”), Roswell’s chief legal counsel, to confirm

that UCC-3 termination statements were being filed with respect

to any previously secured ACT debt. Indeed, they were filed

that very day. Amon sent another e-mail to Hathorn later on

July 2 that stated that UCC-3 termination statements had been

filed with the Florida Secretary of State, including one for

JMB’s UCC-1 financing statement. The July 2, 2007 UCC-3 filing

terminating JMB’s security interest was reported on the Florida

Secured Transaction Registry.

10 An amendment to one of the Lenders’ UCC-1 statements was filed on September 26, 2007. 11 A UCC-3 termination statement provides creditors and other interested parties with notice of the cancellation of previously existing security interests. See Fla. Stat. § 679.513.


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4. JMB “Returns” 315,000 Shares of ACT Stock

In July 2008, approximately one year after the closing of

the 2007 Funding, JMB returned 315,000 shares of ACT stock to

Hawkins. In August 2008, Hawkins sent JMB a “receipt” for the

returned 315,000 shares. JMB contends that by returning the ACT

stock, JMB exercised its right to “unwind” the earlier debt-to-

equity conversion and thereby “reconstituted” the $630,000 debt

owed by ACT to JMB pursuant to the 2006 Note.

5. ACT Defaults and Final Judgments are Entered

After the Fundings, ACT defaulted on and otherwise breached

the terms of the Funding Documents by, among other things,

failing to meet its payment obligations and using loan proceeds

for unauthorized purposes. See Roswell I, 2009 WL 222348, at

*9. After Plaintiffs accelerated the payment obligations under

the Funding Documents, as they were authorized to do, ACT was

unable to repay its obligations. Id.

On December 9, 2008, Plaintiffs commenced this litigation

against ACT seeking damages and injunctive relief. In an Order

dated December 9, 2008, Plaintiffs were granted a temporary

restraining order to prevent the dissipation of the Collateral

by ACT’s management. On January 30, 2009, a consolidated

preliminary injunction hearing and trial on the merits was held.

At the conclusion of the hearing, a preliminary injunction was


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issued to (1) preserve ACT’s assets comprising the Collateral,

and (2) enforce Plaintiffs’ rights to control and possess the

Collateral in accordance with the terms of the Funding Documents

and Security Agreements. Id. at *18.

Permanent injunctions and final judgments were entered on

March 26, 2009 (concerning the 2007 Funding) and on August 26,

2009 (concerning the 2008 Funding) (collectively, the

“Judgments”). Pursuant to the Judgments, the Plaintiffs were

entitled to “possess, operate, control, foreclose on and

otherwise exercise the rights and remedies with respect to the

Collateral of a senior secured creditor upon default pursuant to

the [2007 and 2008] Funding agreements, the Uniform Commercial

Code, and other governing law.” Plaintiffs have since taken

possession of ACT’s assets and are presently operating ACT’s

former business through a limited liability company doing

business as “Green Product Technologies.”

6. Plaintiffs’ Attempt to Foreclose on the Collateral

After entry of the judgment relating to the 2007 Funding,

Plaintiffs sought to foreclose on the Collateral. Plaintiffs

moved to amend the complaint to join third parties who purported

to hold security interests in the Collateral, including JMB. By

Order dated May 7, 2009, Plaintiffs’ motion to amend the

complaint to join four junior creditors, including JMB, was


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granted. See Roswell Capital Partners, LLC v. Alt. Constr.

Techs., Inc., No. 08 Civ. 10647(DLC)(DFE), 2009 WL 1357226, at

*1 (S.D.N.Y. May 7, 2009) (Eaton, MJ).12

Plaintiffs resolved the claims of three of the four junior

creditors, with each conceding Plaintiffs’ senior secured rights

to the Collateral. JMB, however, disputes the seniority of

Plaintiffs’ security interest. On October 28, 2009, Beshara and

JMB Associates filed Answers which assert that JMB holds “a

security interest in the assets of [ACT] . . . that is prior to

any interest of the Plaintiffs” and that “secures a debt that is

unsatisfied.”

After the completion of discovery concerning JMB’s

purported security interest in the Collateral, Plaintiffs moved

for summary judgment on May 12, 2010. The motion became fully

submitted on June 11.

DISCUSSION

Summary judgment may not be granted unless all of the

submissions taken together “show that there is no genuine issue

as to any material fact and that the movant is entitled to

judgment as a matter of law.” Fed. R. Civ. P. 56(c). The 12 The complaint was amended to add “JMB & Associates of Ohio, LLC” an entity in which Beshara has an interest, but which JMB contends is not relevant to this matter. On September 3, 2009, Plaintiffs and JMB entered into a stipulation naming Beshara and JMB Associates as defendants in this action.


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moving party bears the burden of demonstrating “the absence of a

genuine issue of material fact.” Celotex Corp. v. Catrett, 477

U.S. 317, 323 (1986). In making this determination, the court

must “construe all evidence in the light most favorable to the

nonmoving party, drawing all inferences and resolving all

ambiguities in its favor.” Dickerson v. Napolitano, 604 F.3d

732, 740 (2d Cir. 2010).

Once the moving party has asserted facts showing that the

non-movant’s claims cannot be sustained, the opposing party must

“set out specific facts showing a genuine issue for trial,” and

cannot “rely merely on allegations or denials” contained in the

pleadings. Fed. R. Civ. P. 56(e); see also Wright v. Goord, 554

F.3d 255, 266 (2d Cir. 2009). “A party may not rely on mere

speculation or conjecture as to the true nature of the facts to

overcome a motion for summary judgment,” as “[m]ere conclusory

allegations or denials cannot by themselves create a genuine

issue of material fact where none would otherwise exist.” Hicks

v. Baines, 593 F.3d 159, 166 (2d Cir. 2010) (citation omitted).

Only disputes over material facts -- “facts that might affect

the outcome of the suit under the governing law” -- will

properly preclude the entry of summary judgment. Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see also

Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475

U.S. 574, 586 (1986) (stating that the nonmoving party “must do


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more than simply show that there is some metaphysical doubt as

to the material facts”).

1. The Equity Conversion Extinguished JMB’s Security Interest

JMB claims that it has a perfected security interest in the

Collateral that is senior to Plaintiffs’ perfected security

interest. The Florida UCC13 defines a “security interest” as “an

interest in personal property or fixtures which secures payment

or performance of an obligation.” Fla. Stat. § 671.201(37)

(2010) (emphasis added). A security interest is legally

enforceable or “perfected” if (1) the secured party possesses

collateral or the debtor has signed a security agreement

containing a description of the collateral; (2) value has been

given by the secured party; and (3) the debtor has rights in the

collateral. Fla. Stat. § 679.2031; Gibson v. Resolution Trust

Corp., 51 F.3d 1016, 1023 (11th Cir. 1995). By definition,

13 The parties assume that Florida law applies, but do not address directly the choice-of-law issue. “Federal courts sitting in diversity look to the choice-of-law rules of the forum state.” Int’l Bus. Machs. Corp. v. Liberty Mut. Ins. Co., 363 F.3d 137, 143 (2d Cir. 2004). “New York courts honor choice of law provisions in security agreements so long as the chosen state has some relation to the agreement.” See, e.g., Wachovia Bank Nat. Ass'n v. EnCap Golf Holdings, LLC, 690 F. Supp. 2d 311, 332 n.4 (S.D.N.Y. 2010). Because the 2006 Note provides that Florida law governs, and there is no dispute that Florida has some relation to the 2006 Note given that ACT’s assets are located there, it is appropriate to apply Florida law.


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then, a valid security interest depends on the continuing

existence of an “obligation.” Where the underlying debt has

been extinguished, a security interest is no longer enforceable.

See Gibson, 51 F.3d at 1023; Advanced Aviation, Inc. v. Vann (In

re Advanced Aviation, Inc.), 101 B.R. 310, 313 (Bankr. M.D. Fla.

1989); Fowler, White, Burnett, Hurly, Banick & Strickfoot, P.A.

v. Ricciardelli (In re G.O. Harris Fin. Corp.), 51 B.R. 100,

103-04 (Bankr. S.D. Fla. 1985). Put simply, “a security

interest cannot exist without a debt.” Air Transp. Leasing v.

Belize Airways Ltd. (In re Belize Airways, Ltd.), 7 B.R. 604,

607 (Bankr. S.D. Fla. 1980).

In this case, any security interest held by JMB in the

Collateral pursuant to the 2006 Note was extinguished when the

underlying obligation was converted into ACT common stock. By

converting JMB’s debt into equity, ACT satisfied its obligation

under the 2006 Note and thus, JMB’s security interest was no

longer enforceable. JMB’s shares of ACT stock, which were

valued at over $2.2 million after the first day of trading in

April 2007, were more than sufficient to satisfy ACT’s

obligation. JMB does not contend that it was unable to sell its

shares of ACT stock, or provide any other explanation for why

the conversion did not pay off ACT’s debt. Accordingly, JMB’s

assertion of a continuing perfected security interest in the

Collateral is unsustainable.


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JMB does not dispute that its debt was converted into

equity. Instead, JMB contends that the “unwind provision” in

the 2006 Note provided it with a perpetual right to cancel the

conversion if the price of ACT’s stock dropped below $2.00 per

share, and thereby to resurrect its security interest in the

Collateral. JMB contends that it exercised its right to unwind

the conversion when it returned 315,000 shares of ACT stock to

Hawkins in July 2008 –- after it had already sold some of its

shares, and approximately one year after the 2007 Funding closed

and the Plaintiffs filed their UCC-1 financing statements with

the Florida Secretary of State to perfect their senior secured

priority interest in the Collateral.

JMB’s argument is without merit. JMB provides no legal

authority to support the proposition that the unwind provision

could resurrect a security interest for which the underlying

obligation was fully satisfied over a year earlier. JMB’s

suggestion that its UCC-1 financing statement somehow preserved

its security interest in perpetuity because of the unwind

provision in the 2006 Note is unavailing. The 2006 Note does

not state that JMB’s security interest in ACT’s assets would

survive conversion of its debt into equity. Further, a

financing statement alone does not constitute a security

agreement without any reference to another document that gives

rise to an obligation. See In re N. Redington Beach Assocs.,


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Ltd., 97 B.R. 90, 92 (Bankr. M.D. Fla. 1989). Notwithstanding

the unwind provision, JMB has offered no evidence of any

continuing obligation owed to it by ACT as of the time the

Plaintiffs filed their UCC-1 financing statements, and therefore

JMB has failed to show that it has any enforceable security

interest in the Collateral.

2. JMB’s UCC-1 Financing Statement is Ineffective

While JMB’s failure to show that it had any enforceable

security interest in the Collateral at the time the Plaintiffs

filed their UCC-1 financing statements in July 2007 permits

summary judgment to be awarded to the Plaintiffs, the parties

dispute as well the validity and effect of ACT’s filing on July

2, 2007 of the UCC-3 termination statement canceling JMB’s

financing statement. The Plaintiffs contend that any perfected

security interest retained by JMB after the conversion was

cancelled by ACT’s filing of a UCC-3 termination statement. JMB

does not dispute that a UCC-3 termination statement was filed as

to its UCC-1 financing statement, but argues that the

termination statement was ineffective because JMB did not

authorize ACT to file it. JMB points to language in the 2006

Note that requires ACT “to seek the endorsement of JMB

Associates prior to the removal of the UCC-1 upon payment.”


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The Florida UCC provides, in pertinent part, that “[e]xcept

as otherwise provided in [Fla. Stat.] § 679.510, upon the filing

of a termination statement with the filing office, the financing

statement to which the termination statement relates ceases to

be effective.” Fla. Stat. § 679.513(4) (emphasis added).

Section 679.510, in turn, provides that “[a] filed record is

effective only to the extent that it was filed by a person who

may file it under [Fla. Stat.] § 679.509.” Id. § 679.510(a).

Under § 679.509, a termination statement may be filed by any

“person” if “[t]he secured party of record authorizes the

filing.” Id. § 679.509(3)(a). In the event an unauthorized

termination statement is filed, a secured party may seek damages

for the extent of its loss. See id. § 679.625(2) (“[A] person

is liable for damages in the amount of any loss caused by a

failure to comply with this chapter . . ..”); see also id. §

679-5021 cmt. 3 (“Section 9-625 provides a remedy for

unauthorized filings. Making an unauthorized filing also may

give rise to civil or criminal liability under other law.”).

“The termination of a financing statement, even if

mistaken, releases the secured creditor’s lien against the

debtor’s property.” Peoples Bank of Ky., Inc. v. U.S. Bank,

N.A. (In re S.J. Cox Enters., Inc.), No. 08-5066, Bankr. No. 07-

50705, 2009 WL 939573, at *4 (Bankr. E.D. Ky. Mar. 4, 2009)

(citing Crestar Bank v. Neal (In re Kitchin Equip. Co. of Va.,


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Inc.), 960 F.2d 1242, 1245 (4th Cir. 1992)) (emphasis added);

see also In re Silvernail Mirror & Glass, Inc., 142 B.R. 987,

989 (Bankr. M.D. Fla. 1992) (“[B]y virtue of the filing of the

UCC-3 Termination Statement, [the creditor’s] interests in all

collateral covered by the UCC-1 Financing Statement was

extinguished.”). “[A] termination statement’s effect on a

security interest is dramatic and final.” Peoples Bank, 2009 WL

939573, at *5 (citation omitted).

This clear rule accords with the policy of the UCC.

Potential creditors must be able to rely on termination

statements filed in the public record, even if they were filed

in error or without authorization. See Silvernail, 142 B.R. at

989 (“[E]ven if [a] Termination Statement did not reflect the

parties’ true intent, it would be materially misleading to a

potential creditor relying on the public records and therefore

should not be set aside.” (citing Koehring Co. v. Nolden (In re

Pac. Trencher and Equip., Inc.), 735 F.2d 362 (9th Cir. 1984))).

As noted by the court in Crestar Bank, 960 F.2d 1242, setting

aside termination statements filed in error would “place in

jeopardy liens acquired by other creditors in reliance on [such]

termination statements.” Id. at 1246. The UCC therefore places

the burden of monitoring for potentially erroneous UCC-3 filings

on existing creditors, who are aware of the true state of

affairs as to their security interests, rather than potential


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creditors who will not be in a position know whether a

termination statement was authorized or not.14

Here, it is undisputed that the Florida Secured Transaction

Registry reflects that JMB’s 2006 UCC-1 financing statement was

terminated by the filing of a UCC-3 on July 2, 2007. Even if

the termination statement was not authorized by JMB15, it

nonetheless extinguished any perfected security interest JMB had

in the Collateral. Following this termination, Plaintiffs

14 JMB argues that because the UCC has adopted “notice filing,” a system which contemplates further inquiry to determine the scope of a security agreement, Plaintiffs were required to further investigate the filing of the UCC-3 termination statement to determine the true status of JMB’s security interest. JMB relies on S.E.C. v. Credit Bancorp, Ltd., 386 F.3d 438 (2d Cir. 2004), and the Official Comments to UCC § 9-502. The problem with JMB’s argument is that Credit Bancorp and the Official Comments refer only to “financing statements,” and not to termination statements. See Credit Bancorp, 386 F.3d at 454; Fla. Stat. § 679.5021 cmt. 2; see also Crestar Bank, 960 F.2d at 1247 (discussing UCC § 9-402, § 9-502’s predecessor). There is no suggestion in Fla. Stat. § 679.513, which governs termination statements, or the comments thereto, that a prospective creditor must make further inquiry to a formerly secured party of the kind contemplated in UCC § 9-502. 15 Plaintiffs suggest that JMB authorized the filing of the UCC-3 termination statement pursuant to the March 14, 2006 letter agreement between JMB and ACT. The March 14, 2006 letter provides, in pertinent part: “Upon payment of all outstanding monies . . . the UCC-1 filings will be canceled.” (Emphasis added.) Because the conversion of JMB’s debt into ACT stock no later than April 3, 2007, satisfied all principal and interest due under the 2006 Note, Plaintiffs contend that ACT was authorized to terminate JMB’s UCC-1 financing statement. This argument need not be considered given that even if the UCC-3 termination statement was unauthorized, it nonetheless extinguished any perfected security interest JMB held in the Collateral after the conversion.


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perfected their security interest in the Collateral by filing

UCC-1 financing statements with the Florida Secretary of State

on July 5, 2007. This gave Plaintiffs a perfected security

interest in the Collateral senior to whatever security interest

JMB may have still had at that point.

Finally, even if JMB had a right to return some of its ACT

common stock in July 2008 and resurrect at least some portion of

the debt that ACT had previously owed JMB, that act could not

have given JMB a security interest senior to the interest that

Plaintiffs obtained by filing their UCC-1 financing statements

on July 5, 2007. At the very most, JMB was entitled to file a

UCC-1 financing statement in July 2008. Notably, JMB never

filed a financing statement in July 2008 when it returned some

ACT stock, or at anytime thereafter. Furthermore, JMB did not

assert that the July 2, 2007 UCC-3 termination statement was

“unauthorized” until this litigation -- years after the

termination statement and the Plaintiffs’ UCC-1 financing

statements were filed. Nothing in the law required ACT or any

of its creditors to be held hostage to JMB’s whims from the time

JMB converted its debt into ACT stock until JMB returned a

portion of the stock almost two years later. Having filed the

termination statement, ACT was entitled to raise additional


162


163

UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA

Charlotte Division

In re: ) ) HICKORY PRINTING GROUP, INC., ) Case Number: 10-51051 ) Chapter 7

Debtor. ) __________________________________________) ) JAMES T. WARD, SR., Trustee for Hickory ) Adversary Proceeding No. 11-03130 Printing Group, Inc., ) )

Plaintiff, ) )

v. ) ) BANK OF GRANITE and HICKORY ) PRINTING SOLUTIONS, LLC, ) )

Defendants. ) __________________________________________)

ORDER GRANTING PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT AS TO PHASE 1 ISSUES AND

DENYING DEFENDANTS’ CROSS-MOTION

In this action, Plaintiff James T. Ward, Sr. (“Plaintiff”), Chapter 7 Trustee for Debtor

Hickory Printing Group, Inc. (the “Debtor”), seeks to avoid under a variety of theories a security

interest held by Defendant Bank of Granite (the “Bank”) in the Debtor’s inventory and accounts

_____________________________J. Craig Whitley

United States Bankruptcy Judge

Steven T. Salata

Clerk, U.S. Bankruptcy CourtWestern District of North Carolina

Jul 23 2012

FILED & JUDGMENT ENTERED

Case 11-03130 Doc 33 Filed 07/23/12 Entered 07/23/12 14:31:03 Desc Main Document Page 1 of 27

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receivable (the “Collateral”). The Trustee maintains that shortly before bankruptcy the Bank (1)

re-perfected a security interest in the Debtor’s inventory and accounts receivable, and (2) its

underlying loan was paid off when the Debtor’s business was sold to Defendant Hickory Printing

Solutions, LLC (“Solutions”) shortly before bankruptcy. He seeks to recover $4,945,421 from

the Defendants under Section 550, as the value of the alleged voidable transfers.

The Bank and Solutions deny these assertions. They maintain that the Bank’s security

interest was re-perfected long before bankruptcy and is not avoidable. They further maintain that

the sale to Solutions was the only viable option available to the Debtor, a distressed corporation.

The parties have agreed to phased discovery in the action. The first phase of discovery

was limited to the factual and legal issues relating to certain UCC filings made by the Bank, as

alleged in paragraphs 13, 14 and 20 of Plaintiff’s Complaint (“Phase 1”). See Compl. ¶¶ 13-14,

20, ECF No. 1.1

After conducting Phase 1 discovery, the Plaintiff filed a Motion for Partial Summary

Judgment pursuant to Fed. R. Bankr. P. 7056. In the Defendants’ Brief in Opposition to

Trustee’s Motion,2 they also request partial summary judgment in their favor. A hearing on

these filings was held on February 16, 2012. Both sides agree that the salient facts are not in

dispute, and the decision is one of law. Each has extensively briefed the legal issues.

STATEMENT OF POSITIONS

I. Trustee’s Position

In the current motion, the Trustee seeks partial summary judgment on Phase 1 issues.

Specifically, he asks this Court to rule that:

1 See Consent Substitute Pre-Trial Order entered by this Court on August 17, 2011. 2 Defendants have not formally moved for summary judgment, but both sides approached the hearing as if they had. Rule 56(f) is broad enough to treat their request as a countermotion for summary judgment.


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a. The Bank’s original security interest in the Collateral was terminated by the Bank

filing a Termination Statement on December 1, 2008.

b. The Bank’s subsequent filing of a Correction Statement on November 10, 2009, did

not alter the effectiveness of the prior Termination Statement, and, as a matter of law, did not

revive the Bank’s perfected security interest; therefore, even after Bank of Granite filed its

Correction Statement, its Lien remained unperfected.

c. The Bank’s filing of a New Financing Statement on May 27, 2010, re-perfected a

security interest in the Debtor’s property and was a transfer of the Debtor’s property under the

Code.

II. The Bank’s and Solutions’ Position

The Bank and Solutions make several counter arguments. First, the Defendants maintain

that the Termination Statement was filed by the Bank in error, and the record should be reformed

to reflect this fact. Second, the November 2009, filing that the Trustee (and the form) deem a

“Correction Statement” was not really a correction statement, but was instead a part of the

Bank’s Financing Statement. According to the Defendants, the November 10, 2009, filing

prevented the earlier Termination Statement from being seriously misleading. The combined

effect of the Original Financing Statement, the Termination Statement, and the “Correction

Statement” was to provide record notice to the world of the Bank’s security interest in the

Debtor’s accounts receivable and inventory. In short, Defendants argue the Bank’s security

interest was perfected at all times after November 10, 2009, and was not avoidable. According

to the Bank, the proper remedy in this case is not to invalidate the Bank’s perfected security

interest, but to reform the “Correction Statement” to reflect the Bank’s and the Debtor’s intent.


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III. Holding

As a matter of law, the Bank’s perfected Lien on the Collateral was terminated by its

filing of a Termination Statement in December 2008. The subsequent filing of a Correction

Statement by the Bank did not alter the effectiveness of the Termination Statement and was

entirely ineffective in reversing the effect of the Termination Statement. Therefore, between

December 1, 2008, and May 27, 2010—even after Bank of Granite filed its Correction Statement

on November 10, 2009—its Lien remained unperfected. Because the Bank’s Lien was

unperfected as of May 27, 2010 (the date the Bank filed a new financing statement), that New

Financing Statement constituted a transfer of an interest of the Debtor in property.

STATEMENT OF UNDISPUTED FACTS I. Background.3 A. The Parties. The Bank is a community bank with its principal place of business in

Granite Falls, North Carolina. Until its demise in 2010, the Debtor was a commercial printing

business located in Conover, North Carolina, and a longstanding customer of the Bank. Compl.

¶ 9, ECF No. 1. Solutions is a North Carolina limited liability corporation with an office in

Conover, Catawba County, North Carolina. Id. at ¶ 6. As described infra, Solutions purchased

all of the Debtor’s assets in 2010. Four months later, an involuntary bankruptcy case was filed

against the Debtor by unsecured creditors who were not repaid in the sale transaction.

B. The Line of Credit. The Bank’s lending relationship with the Debtor dates back to

June 4, 1997, when the Bank provided the Debtor with a $3 million Revolving Line of Credit

(the “Line of Credit”). The Line of Credit (loan number 425304) was originally secured by the

Debtor’s accounts receivable and inventory (the “Collateral”). The Bank originally perfected its

3 All of the following facts are undisputed either by virtue of admissions in the Defendants’ answers or by virtue of the testimony of the Bank’s employees.


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security interest in the Collateral (the “Lien”) with respect to the Line of Credit by filing a UCC

Financing Statement on June 9, 1997, with the North Carolina Secretary of State, reference

number 001470676 (the “Original Financing Statement”). Compl. ¶ 12, ECF No. 1; Answer of

Bank of Granite ¶ 12, ECF No. 10.

The Bank twice filed continuation statements for the Original Financing Statement, in

February 2002 and June 2007. Ward Exs. 2, 3, ECF No. 20-1.4 Until late 2009, the Line of

Credit was regularly renewed by Bank of Granite, eventually reaching a maximum loan amount

of $3.3 million.

II. The Bank Made a Second Loan to the Debtor Secured by the Same Collateral as the Line of Credit. In October of 2008, the Debtor requested a short-term loan from the Bank in the amount

of $600,000, also to be secured by the Collateral. Oct. 2008 Letter, ECF No. 30-3.5 The Bank

made the short-term loan, which was assigned loan number 1008555 (the “555 Loan”). Because

the Bank already had a financing statement for the collateral on file with the Secretary of State’s

Office, it did not file another financing statement for the short-term loan. See Compl. Ex. 2, ECF

No. 1-2. The Debtor received the proceeds of the 555 Loan on October 22, 2008.

When made, the 555 Loan was entered into the Bank’s computer system for tracking

purposes by Lending Services Specialist Natasha Dula in conformance with the Bank’s usual

practices. Deposition of Natasha Dula (“Dula Dep.”) 22-23, ECF No. 24.6

4 Transcripts of the depositions taken in Phase 1 of this proceeding, along with Plaintiff’s consecutively numbered exhibits to those depositions, are attached to Plaintiff’s Motion. These exhibits will hereafter be referred to as “Ward Ex. __.” 5 Although the Note for the 555 Loan reflects that the loan was secured by inventory and equipment (rather than inventory and accounts receivable), this was a mistake and would have been corrected had the loan not already been paid off by the time the error was discovered. Dula Dep. 35-38, ECF No. 24; Ward Ex. 14, ECF No. 24. 6 As a Lending Services Specialist, Ms. Dula’s duties included inputting “new loans, modifications, letters of credit and renewals accurately . . . [and] review[ing] renewals and verify[ing] information for accuracy,” among many other responsibilities. Ward Ex. 11, ECF No. 24. When working on loan renewals that were “cross-collateralized,”


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The Debtor received the proceeds of the 555 Loan on October 22, 2008. A mere six days

later, on October 28, 2008, the Debtor repaid the 555 Loan. See Ward Ex. 23, ECF No. 20-10.

III. In December 2008, the Bank Terminated its Perfected Lien on the Debtor’s Inventory and Accounts Receivable. On December 1, 2008, Bank of Granite filed a UCC-3 Termination Statement, which was

assigned reference number 20080105478G (the “Termination Statement”). Ward Ex. 6, ECF

No. 20-7. The Termination Statement specifically identifies the Original Financing Statement

making reference to it through “reference number” 001470676, and the termination box is

checked, indicating that “[e]ffectiveness of the Financing Statement identified above is

terminated with respect to security interest(s) of the Secured Party authorizing the Termination

Statement.” Id. The Termination Statement effected the termination of the Original Financing

Statement and rendered the Lien unperfected.

In November and December 2008, Tiffany Smith served as the Bank’s Loan Collateral

Processor. Smith Dep. 12-13, ECF No. 20-1. As a Loan Collateral Processor, Ms. Smith’s

duties included “[m]aintain[ing] responsibility for the accuracy and accessibility of the Bank’s

credit files [and] [a]ssur[ing] that all documentation and information [was] filed properly . . . .”

Ward Ex. 1, ECF No. 20-1. Ms. Smith prepared the Termination Statement and submitted it to

the Secretary of State on behalf of Bank of Granite. Ward Ex. 6, ECF No. 20-7. At the time she

filed it, Ms. Smith intended to terminate the Original Financing Statement. See Smith Dep. 78-

79, ECF No. 20-1.

In preparing and filing the Termination Statement for Bank of Granite, Ms. Smith

followed the regular practice that she had used to file hundreds of termination statements

throughout her tenure as the Bank’s Loan Collateral Processor. As a first step, she reviewed all Ms. Dula would research the status of the Bank’s collateral using the Secretary of State’s website. Dula Dep. 39-41, ECF No. 24.


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recently paid-off loans and determined which loans required the release of collateral. Smith Dep.

98, 33-42, ECF No. 20-1. Ms. Smith received a “history report,” which listed all paid-off loans,

each day that she was in the office. Id. at 33-36. Her practice was to confirm that the loans on

that list had been paid off for at least ten (10) days and then pull the physical loan files for each

paid-off loan to determine which filings were required. Id. For loans that were not secured by

real estate, such as the 555 Loan, Ms. Smith would then prepare a UCC termination statement to

cancel any UCC filings on record for the collateral, unless she found “a message on the system

stating that it was cross-collateralized with another loan or loans.” Id. at 36. The Bank’s

computer system did not generate an alert message of this type for the 555 Loan. Id. at 72.

Because the 555 Loan had been satisfied, the Collateral Tracking field had disappeared from the

computer system. See Dula Dep. 30-31, ECF No. 24

Ms. Smith made required UCC cancellation filings on behalf of the Bank by mail or

using the Secretary of State’s website. Smith Dep. 40, 78, ECF No. 20-1. Indeed, Ms. Smith

filed several hundred termination statements for the Bank during the eight years that she worked

as Loan Collateral Processor, from 2001 to 2009. See Ward Ex. 4; Smith Dep. 12-13, ECF No.

20-1. As a general rule, no officer or other employee of the Bank reviewed Ms. Smith’s work as

the Bank’s Loan Collateral Processor before she filed UCC documents with the Secretary of

State’s office. Smith Dep. 40, ECF No. 20-1. Ms. Smith testified that she filed the Termination

Statement at issue here by mailing it to the Secretary of State. Id. at 78. She was authorized to

make this and other UCC filings, Deposition of Beverly Fry (“Fry Dep.”) 58-59, ECF No. 20-11,

and was never told that she was not authorized to file financing statement terminations, Smith

Dep. 98, ECF No. 20-1.


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No written policies or procedures governed the Bank’s filing of termination statements or

the release of collateral in December 2008. Smith Dep. 41, 67, ECF No. 20-1; Fry Dep. 49, ECF

No. 20-11. Rather, the practices and procedures were informal, as outlined above, and Ms.

Smith followed the applicable procedures accurately. The Bank first adopted written procedures

for the release of collateral in September 2009, well after the Termination Statement was filed.

Fry Dep. 48-50, ECF No. 20-11; Ward Ex. 7, at 1, 4, ECF No. 20-7.

IV. Rather than File a New Financing Statement, the Bank Attempted to “Undo” the Termination Statement by Filing a Correction Statement.

In November of 2009, Bank executives met with representatives of the Debtor to discuss

a renewal of the Line of Credit. In working on that renewal, Ms. Dula accessed the Secretary of

State’s website and discovered that the Bank had terminated the Original Financing Statement,

which secured the Line of Credit. Dula Dep. 39-40, ECF No. 24. It is notable that Ms. Dula

herself testified that the Original Financing Statement had been terminated. Id. at 39 (“since the

loans are cross-collateralized, I was trying to make sure that we had UCCs in the file that we

needed. So I went to the Secretary of State to get those, and I realized that it had been

terminated.”); see also Deposition of Carolyn Teague (“Teague Dep.”) 20, ECF No. 20-9. Ms.

Dula consulted her colleague Carolyn Teague, and together they decided to call the Secretary of

State’s Office to find out what action they could take given the termination. Dula Dep. 40-41,

ECF No. 24. They did not consult anyone else about what to do. The Bank did not contact its

lawyers to obtain any legal advice, and Ms. Dula and Ms. Teague did not review the Secretary of

State’s regulations governing UCC filings.7 Teague Dep. 24-25, ECF No. 20-9.

7 The North Carolina Secretary of State has issued comprehensive administrative regulations for the filing of UCC financing statements, termination statements and other documents. 18 N.C. Admin. Code 05B. Those regulations have the force of law, and the Court must take judicial notice of them. See So. Ry. Co. v. O’Boyle Tank Lines, Inc., 318 S.E.2d 872, 877 (1984).


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Although unable to recall to whom she spoke, Ms. Teague testified that when she called

the Secretary of State’s Office, she asked the employee of the Secretary of State who answered

the phone how the Bank could “reinstate” the terminated UCC. Id. at 20-21. Ms. Teague claims

that she was told that she could file a correction statement. Id. at 21. Someone at the Secretary

of State’s office apparently faxed a UCC-5 correction statement form to Ms. Teague. Id. at 22.

That form is not available on-line.8

Ms. Teague and Ms. Dula filled out the form together. Teague Dep. 22, ECF No. 20-9;

Dula Dep. 42-43, ECF No. 24. They faxed the completed form to the Secretary of State and also

mailed it in with a filing fee payment. Dula Dep. 42, ECF No. 24. The form was accepted for

filing by the Secretary of State on November 10, 2009 (the “Correction Statement”). Ward Ex.

15, ECF No. 24. Ms. Teague testified that when she prepared the Correction Statement, she

reviewed it and was careful to ensure that the statement was accurate and complete. Teague

Dep. 22-23, ECF No. 20-9.

The face of the Correction Statement states that “[t]he filing of this statement does not

amend any UCC record[,]” and also provides that it “is for information purposes only.” Ward

Ex. 15, ECF No. 24. The Correction Statement states that the Termination Statement was “IN

ERROR.” Id. The Correction Statement does not provide an explanation for why or how the

Termination Statement was “IN ERROR,” does not assert that the Termination Statement was

the result of an unauthorized filing, and does not offer any other explanation for the filing of the

Correction Statement. Id.

Although Ms. Smith was not in the office when Ms. Dula learned that the Original

Financing Statement had been terminated, Ms. Teague quickly informed Ms. Smith about the

8 See North Carolina Secretary of State, http://www.secretary.state.nc.us/ucc/uccforms.aspx (last visited May 25, 2012).


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filing of the Correction Statement. Smith Dep. 82-86, Doc 20-1; Ward Ex. 9, ECF 20-7. On

November 6, 2009, Ms. Teague emailed to her superiors an explanation of what had happened.

Ward Ex. 9, ECF No. 20-7. Ms. Teague forwarded her email to Ms. Smith. Id. In her email to

her superiors, Ms. Teague asserted that there had been both an alert message indicating the cross-

collateralization of the 555 Loan and a note in the Collateral Tracking field. Id. When she

returned to the office, Ms. Smith investigated and confirmed that there had not been any alert

message in the computer system for the 555 Loan. Smith Dep. 88-89, ECF No. 20-1. She

explained this in a November 10, 2009, email to Mark Stephens and Beverly Fry, two of her

superiors. Ward Ex. 9, ECF No. 20-7. Her email also noted that it was not possible to see the

Collateral Tracking field, because the loan had been paid off. Id.; Smith Dep. 89-90, ECF No.

20-1.

V. Just Before the Debtor Transferred its Assets to Defendant Hickory Printing Solutions, LLC, the Bank Filed a New Financing Statement with Respect to the Same Collateral.

As its financial condition deteriorated in 2009, the Debtor worked with investment

banking firm Anderson LeNeave & Co. (“Anderson LeNeave”) to find investment capital.

Through Anderson LeNeave the Debtor began negotiating with Consolidated Graphics, Inc.

(“CGX”), regarding a stock sale transaction pursuant to which CGX would purchase all of the

Debtor’s stock. A Letter of Intent to that effect was executed on March 1, 2010, and approved

by the Debtor’s Board of Directors on March 9, 2010. By mid-May 2010, however, CGX had

determined that it would not purchase the Debtor’s stock but would structure its takeover of the

Debtors’ business through a combination of a collateral assignment and purchase agreement. A

subsidiary of CGX, Defendant Solutions, was created for the purpose of accepting the transfer of

the Debtor’s assets and assuming certain limited debt obligations of the Debtor.


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On May 27, 2010, the eve of the transaction between Solutions and the Debtor, the Bank

filed a new UCC Financing Statement (the “New Financing Statement”) under file reference

20100042561B, which asserted a security interest in the Collateral. Compl. Ex. 10, ECF No. 1;

Answer of Bank of Granite ¶ 20, ECF No. 10. The New Financing Statement contained an

attachment, denominated as Attachment B, which offered an after-the-fact explanation for filing

the New Financing Statement. In this attachment, the Bank stated:

The Bank of Granite (the “Secured Party”) and Hickory Printing Group, Inc. (the “Debtor”) entered into a Security Agreement and filed a UCC-1 financing statement (File No. 001470676) for Loan No. 425304 on June 9, 1997. Continuation statements were filed in 2002 and 2007. A Termination Statement was erroneously filed on December 1, 2008, followed by a Correction Statement filed on November 10, 2009, which corrected the wrongfully filed Termination Statement. The Secured Party believes that the original Security Agreement and financing statement are still valid, active and in force. The Secured Party is filing this UCC-1 in an abundance of caution to further memorialize and give notice of the Secured Party’s interest in the collateral covered herein.

Compl. Ex. 10, ECF No. 1-10.

One day after the New Financing Statement was filed, on May 28, 2010, the transaction

with Solutions closed. As part of that transaction, the Bank assigned the Line of Credit and the

security interest asserted therein, among other debts and rights, to Solutions in exchange for a

cash payment and other consideration. Compl. ¶ 22, ECF No. 1; Answer of Bank of Granite

¶ 22, ECF No. 10.

DISCUSSION

Summary judgment is appropriate if “the movant shows that there is no genuine dispute

as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.

56(a) (made applicable to this adversary proceeding by Fed. R. Bankr. P. 7056). The movant is

to identify “the pleadings, depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any,” that it believes show there is no genuine issue as to any


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material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the movant has

established that there is an absence of any genuine issue of material fact, the burden shifts to the

non-movant to present some evidence of a genuine issue of material fact. See Fed. R. Civ. P.

56(c); Celotex, 477 U.S. 317.

Applying this standard, Plaintiff is entitled to partial summary judgment in his favor.

I. The Termination Statement Rendered the Lien Unperfected as of December 1, 2008.

Under North Carolina law, the filing of a termination statement renders ineffective the

financing statement to which the termination relates and causes the subject lien to become

unperfected. See N.C. Gen. Stat. §§ 25-9-510, -513. The filing of a termination statement

“releases the secured creditor’s lien against the debtor’s property.” Crestar Bank v. Neal (In re

Kitchin Equip. Co. of Va., Inc.), 960 F.2d 1242, 1245 (4th Cir. 1992); see In re Kerner Printing

Co., Inc., 178 B.R. 363, 369-70 (Bankr. S.D.N.Y. 1995) (bank’s lien became unperfected upon

filing of termination statement); Rock Hill Nat’l Bank v. York Chem. Indus., Inc. (In re York

Chem. Indus., Inc.), 30 B.R. 583, 585 (Bankr. D.S.C. 1983) (termination of financing statement

rendered security interest unperfected).

Subsection 25-9-513(d) of the North Carolina General Statutes provides as follows:

(d) Effect of filing termination statement. Except as otherwise provided in G.S. 25-9-510, upon the filing of a termination statement with the filing office, the financing statement to which the termination statement relates ceases to be effective. . . .

N.C. Gen. Stat. § 25-9-513(d). The exception identified in the introductory clause to Section 25-

9-513(c) of the North Carolina General Statutes is not applicable to the facts in this case.

Section 25-9-510(a) provides that “[a] filed record is effective only to the extent that it

was filed by a person that may file it under G.S. 25-9-509.” N.C. Gen. Stat. § 25-9-510(a).


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Section 25-9-509 in turn provides that “[a] person may file an amendment . . . only if: (1) [t]he

secured party of record authorizes the filing . . . .” N.C. Gen. Stat. § 25-9-509(d)(1).9

Thus, provided that the Termination Statement was authorized to be filed, it terminated

the effectiveness of the Original Financing Statement. The Termination Statement, filed on

December 1, 2008, clearly stated that the Original Financing Statement was terminated with

respect to the Bank’s security interest in the Collateral, and the Bank was the secured party of

record authorizing its filing. Termination Statement, ECF No. 1-3. Accordingly, on December

1, 2008, the Lien became unperfected.

As to authorization for the filing, Ms. Smith filed hundreds of termination statements,

followed her normal (and apparently approved) procedures when filing the Termination

Statement, and intended to terminate the Original Financing Statement.

In its responses to written discovery, the Bank originally argued that the Termination

Statement was not authorized. See, e.g., Bank of Granite’s Resp. to Trustee’s Interrog. No. 8,

attached to Plaintiff’s Motion (“Bank of Granite states that Tiffany Smith, who filed the

‘Termination Statement,’ did not have authority to file a UCC financing statement amendment

on December 1, 2008[,] with respect to Loan No. 425304. During that time period, she only had

authority to process Loan No. 1008555, which had been paid out on October 28, 2008. Ms.

Smith mailed the ‘Termination Statement’ to the North Carolina Secretary of State because she

mistakenly believed that the ‘Termination Statement’ related only to Loan No. 1008555.”).

However, by the summary judgment hearing, the Bank was willing to concede that, while it was

a mistake, the Termination Statement was authorized.

The Official Comments to U.C.C. § 9-509 provide that “[a]s long as the appropriate

person authorizes the filing . . . it is insignificant whether the secured party or another person 9 The second clause of Section 25-9-509(d) is not applicable here.


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files any given record. The question of authorization is one for the court, not the filing office.”

U.C.C. § 9-509 cmt. 2.

There is no doubt that the appropriate person authorized the filing. Ms. Smith was

authorized to file termination statements as part of her duties at Bank of Granite. Fry Dep. 58-

59. It was her job to make such filings when she determined that they were appropriate. Smith

Dep. 40. She followed her normal procedures, which were the Bank’s procedures in 2008, to

determine whether the Bank should release the Collateral by filing a termination statement

relating to the Original Financing Statement and then, in fact, filed the Termination Statement

doing just that on behalf of the Bank. While Ms. Smith may or may not have made a mistake in

filing the Termination Statement (given that the Bank still had a loan outstanding), her mistake in

no way implies lack of authorization to file the Termination Statement with the Secretary of

State. Under these circumstances, the Termination Statement is effective as a matter of law.

II. Even if the Bank Made an Error, the Termination Statement is Legally Effective to Release the Lien.

While the Bank maintains that the Termination Statement was mistakenly filed, it does

not contend that its mistake rendered the Termination Statement ineffective. At hearing, the

Bank admitted that perfection of its Lien was terminated upon the filing of the Termination

Statement. The parties thus appear to be in agreement on this point, if little else.

Even if it is factually true that the Bank filed the Termination Statement “in error,” the

United States Court of Appeals for the Fourth Circuit has expressly found that a mistake in the

filing of a termination statement makes no legal difference. In re Kitchin Equip. Co., 960 F.2d

1242 (holding that a bankruptcy trustee could avoid a lien under Section 544(a) of the

Bankruptcy Code because the effect of a termination statement “on a secured interest is dramatic

and final[,]” even though the box marked “termination” had been checked in error). Lenders are


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bound by the effects of UCC termination statements, even when such termination statements are

filed in error, because the entire purpose of the UCC system is to provide public notice of

secured interests without requiring parties to look behind or beyond the four corners of the public

filing. See id. That legal analysis is conclusive and binding here.

Other federal courts have also come to this precise conclusion on facts analogous to those

presented in this case. See generally In re Pac. Trencher & Equip., Inc., 27 B.R. 167, 168

(B.A.P. 9th Cir. 1983) (holding that “pursuant to clearly articulated authority,” the creditor’s

“prior U.C.C. filings lost even marginal sufficiency upon the filing of a termination statement,

albeit erroneous, and that in turn effected a lapse in perfection . . . .”), aff’d, 735 F.2d 362 (9th

Cir. 1984); In re York Chem. Indus., Inc., 30 B.R. at 586 (creditor’s “lien was unperfected as to

the debtor in possession” because creditor had “terminated its financing statement—albeit

unintentionally and inadvertently”); In re Silvernail Mirror and Glass, Inc., 142 B.R. 987, 989

(Bankr. M.D. Fla. 1992) (noting that “[t]he Termination Statement gave all indications to the

world that [the creditor] was terminating its security interest in all its collateral. The filing of a

Termination Statement is a method of making the record reflect the true state of affairs so that

fewer inquiries will have to be made by persons who consult the public records”).

Most recently, the District Court for the Southern District of New York had occasion to

reaffirm this line of authority. Roswell Capital Partners LLC v. Alt. Const. Techs., 2010 WL

3452378, at *7 (S.D.N.Y. Sept. 1, 2010) (concluding under Florida UCC that a creditor’s

contention that termination statement was unauthorized was irrelevant because even a mistaken

filing of a termination statement renders a lien unperfected), aff’d, 2011 WL 3849613 (2d Cir.

Sept. 1, 2011). Relying on Kitchin, Silvernail, and In re Pac. Trencher & Equip., among other

authorities, the court reaffirmed that a termination statement’s effect is harsh and final. Id. The


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court noted that this “clear rule accords with the policy of the UCC. Potential creditors must be

able to rely on termination statements filed in the public record, even if they were filed in error

or without authorization.” Id. For this reason, the UCC “places the burden of monitoring for

potentially erroneous UCC-3 filings on existing creditors, who are aware of the true state of

affairs as to their security interests, rather than potential creditors who will not be in a position

[to] know whether a termination statement was authorized or not.” Id.

In the present case, the Termination Statement stated unambiguously that the Original

Financing Statement was terminated with respect to the security interest of the Bank—the

secured party of record which authorized its filing. The Termination Statement was prepared

and filed by the Bank’s Loan Collateral Processor, whose job it was to determine when to make

such filings releasing collateral and make them. As a matter of law, even if mistaken, the

Termination Statement was legally effective. Upon its filing, the Lien became unperfected.

III. The Correction Statement Did Not Reinstate the Effectiveness of the Original Financing Statement or Alter the Effectiveness of the Termination Statement.

The Bank contends that its November 2009 filing10, the UCC-5 Correction Statement,

corrected the record and, in effect, reinstated the effectiveness of the Original Financing

Statement as of November 10, 2009.

The Bank’s analysis begins with the contention that the November 10, 2009, Correction

Statement filing was not actually a correction statement because under N.C. Gen. Stat. § 25-9-

518(a), only borrowers or debtors may file correction statements.

Secondly, the Bank notes that the new Article 9 focuses on the substance of the

information placed of record as opposed to the form in which it has been placed. It reaches this

10 The Bank is careful to refer to this filing by its filing date, not the name it had when it was filed or by the official form number (UCC-5), which it used. For clarity, the Court will use the name originally employed, the “Correction Statement,” and discuss its legal effects hereafter.


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conclusion by looking to N.C. Gen. Stat. § 25-9-102(a)(72), which defines “record” as

“information that is inscribed on a tangible medium or that is stored in an electronic or other

medium and is retrievable in perceivable form.”11 The Official Comment notes that “[w]hatever

is filed in the Article 9 filing system, including financing statements, continuation statements,

and termination statements, . . . would fall within the definition.”

Article 9 defines “financing statement” as “a record or records composed of an initial

financing statement and any filed record relating to the initial financing statement” in N.C. Gen.

Stat. § 25-9-102(a)(39). Thus, according to the Bank’s interpretation, one must read the entire

file to understand what constitutes the “financing statement.”

Because the November 10, 2009, Correction Statement expressly references the Bank’s

original 1997 Financing Statement and “relates to” the initial Financing Statement, the Bank

contends that the Correction Statement became part of the Bank’s “Financing Statement” by

virtue of N.C. Gen. Stat. § 25-9-102(a)(39). According to the Bank, from and after November

10, 2009, the record reflected a “Financing Statement” consisting of the Bank’s original 1997

filing, the two Continuation Statements, the Termination Statement, and the “Correction

Statement.” All were properly indexed under the Debtor’s correct name, and a searcher would

have located all of them.

The Bank argues this amalgamated “Financing Statement” was sufficient to perfect its

security interest throughout the period its loan was outstanding, despite the Termination

Statement, because it provided the information required by N.C. Gen. Stat. § 25-9-502(a): (1) the

name of the debtor, (2) the name of the secured party or its representative, and (3) an indication

of the collateral covered by the financing statement. Official Comment 2 interprets the section as

11 The Bank finds this broad definition of “record” especially helpful to its cause because the current definition is not in the 1972 version of the statute, under which Kitchin and other cases the Plaintiff cites to were decided.


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adopting a “notice filing” system: “The notice itself indicates merely that a person may have a

security interest in the collateral indicated. Further inquiry from the parties concerned will be

necessary to disclose the complete state of affairs.” N.C. Gen. Stat. § 25-9-502 cmt. 2. The

Bank contends that any creditors searching UCC filings after November 10, 2009, for entries

indexed under the Debtor’s name would have located not only the erroneously filed Termination

Statement, but also the November 10, 2009, Correction Statement, which immediately follows in

the filing chain. This, it contends, would put them on notice that the Termination Statement had

been filed in error and require further inquiry by those creditors to disclose the circumstances of

the existing security interest.

At hearing, the Bank referenced the AEG Liquidation Trust case, in which a New York

state court applied the “notice filing” principle recognized under UCC § 9-502 not just to

financing statements, but termination statements as well. AEG Liquidation Trust v. Toobro N.Y.

LLC, 2011 WL 2535035 at *9 n.1 (N.Y. Sup. 2011). The Bank extends the inquiry notice

principle to any statement put on the record under the 1998 version of the UCC—not just UCC-1

financing statements.12

In further support of its contention that one must interpret the entire record to determine

whether a security interest is properly perfected, the Bank also cites the Commercial Millwright

case. See Statement of Supplemental Authority, ECF No. 32-1. In Commercial Millwright, an

Iowa Bankruptcy Court noted that “[t]here is authority for the proposition that two individually

insufficient filings of various types can be construed together to satisfy the requirements of a

12 It appears the notice inquiry principle was extended beyond application to a UCC-1 in the AEG Liquidation Trust case, but the extension does not appear to go as far as the Bank would like it to. In that case, the Court only extended notice filing to termination statements, by concluding that the termination statement is part of the financing statement through analysis of their respective definitions: a financing statement includes “any filed record relating to the initial financing statement[,]”and a termination statement “identifies . . . the initial financing statement to which it relates . . . .” AEG Liquidation Trust, 2011 WL 2535035 at *9 n.1 (citing U.C.C. § 9-102(39) & (79)) (emphasis added). The same analysis is not as clear when applied to correction statements.


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financing statement.” U.S. v. Lincoln Savings Bank (In re Commercial Millwright), 245 B.R.

597, 601 (Bankr. N.D. Iowa 1999) (citing In re APF Indus., Inc., 112 B.R. 446, 448 (Bankr.

M.D. Fla. 1990); In re Waldick Aero-Space Devices, Inc., 71 B.R. 932, 937 (D. N.J. 1987);

Miami Valley Production Credit Ass’n v. Kimley, 536 N.E.2d 1182, 1185 (1987); In re Heger,

133 B.R. 612, 616 (Bankr. S.D. Ohio 1991)). The Bank would have this Court apply this “tape

and baling wire” approach in this case, to reach the conclusion that the Bank’s November 10,

2009, Correction Statement that was not a Correction Statement should be construed together

with all of the other documents in the file to satisfy the requirements of perfection—meaning to

nullify the termination of that security interest caused by the earlier filed Termination Statement.

That is much more weight than tape and baling wire can hold.

The Court in Commercial Millwright goes on to say: “However, there is also authority

that after a financing statement has lapsed for failure to file a continuation statement within five

years, nothing remained to be continued and a subsequently filed continuation statement was,

therefore, ineffective.” In re Commercial Millwright, 245 B.R. at 601 (citing In re Ellingson

Motors, Inc., 139 B.R. 919, 924 (Bankr. D. Neb. 1991). Additionally, the Court noted that

perfection is supposed to “protect outside parties by providing clear notice.” In re Commercial

Millwright, 245 B.R. at 602. But in that case, the series of filings created confusion:

A new financing statement was necessary to perfect the Bank’s new, postconfirmation security interest in property of the reorganized Debtor. The Bank failed to file a new financing statement. The March 1994 continuation statement combined with the April 1989 financing may not have been misleading to the parties involved. However, for those individuals for whom such notice is intended, these documents were seriously misleading and therefore ineffective to perfect the Bank’s postconfirmation security interest.

Id. at 603.


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This case is similar to the Commerical Millwright case in that a new financing statement

was necessary to re-perfect the Bank’s security interest; the old Financing Statement had already

been terminated, and it could not legally be revived with the document filed November 10, 2009.

Filing a document entitled “Correction Statement”—regardless of whether the Bank intended it

to be a correction statement or something else—and expecting that document to satisfy the

requirements for perfection is grossly confusing to those individuals for whom notice is intended,

especially since the statute specifically states that the record is not affected by a correction

statement. N.C. Gen. Stat. § 25-9-518(c).

Even if the November 10, 2009, Correction Statement was capable of affecting the

record, the intent of that document is unclear. By merely stating the Financing Statement was

“TERMINATED IN ERROR,” it is ambiguous whether the Bank was claiming that perfection

should reach back to the date of the termination error, or whether re-perfection was taking place

upon the filing of the “Correction Statement” on November 10, 2009. The Bank has since

informed the Court that it claims re-perfection did not occur until November 10, 2009; however,

an individual’s review of the record would not necessarily result in such an assumption. As

discussed above, an individual reviewing the record would most likely assume the “Correction

Statement” did not have any effect on the record under the statute, leading to the conclusion that

the Bank no longer had a perfected security interest. Section 25-9-506(a) provides that “[a]

financing statement substantially satisfying the requirements of this Part is effective, even if it

has minor errors or omissions, unless the errors or omissions make the financing statement

seriously misleading.” N.C. Gen. Stat. § 25-9-506(a). The record appears to be seriously

misleading.


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The Bank doggedly asserts that the Financing Statement is not in fact seriously

misleading under N.C. Gen. Stat. § 25-9-506(a) by reference to the Bonds case. Bonds holds

that errors in a financing statement that do not mislead the searcher as to the possible existence

of a security interest do not destroy the efficacy of the financing statement. In re Bonds Distrib.

Co., 39 F. App’x 895 (4th Cir. 2002). In that case, the Fourth Circuit sought to predict how the

Supreme Court of North Carolina would decide whether the secured party’s failure to include the

address of the secured party on the financing statement rendered the financing statement

misleading and thus ineffective. The Court ultimately found that the financing statement was

effective despite the omission because future creditors were still put “on notice that [the secured

party] had a security interest in [the Debtor’s] assets.” Id. at 899.

The facts of Bonds are quite different from this case. Omitting a secured creditor’s

address on a financing statement (as the secured party did in Bonds) is not comparable to filing a

correction statement in an attempt to undo an erroneously filed termination statement. As noted

above, it is not clear that a creditor seeing the Correction Statement in the record would be on

notice that the Bank has a perfected security interest in the Debtor’s Collateral.

Finally, the Bank asserts that the proper remedy in this case would be for the Court to

employ its equitable powers to reform the November 10, 2009, filing to reflect the Bank’s and

Debtor’s intent that the Bank have and maintain a perfected security interest in the Debtor’s

accounts receivable and inventory.

Such relief is unavailable for several reasons.

As an initial matter, the Correction Statement was ineffective to nullify the Termination

Statement and to revive the Financing Statement because the Uniform Commercial Code, North

Carolina statutes, and the Secretary of State’s regulations explicitly state that correction


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statements have no effect on a filed record. Indeed, N.C. Gen. Stat. § 25-9-518(c) states, in full:

“Record not affected by correction statement. The filing of a correction statement does not affect

the effectiveness of an initial financing statement or other filed record.” The regulations repeat

this admonition. 18 N.C. Admin. Code 05B.0308 (“The filing of a correction statement shall

have no effect upon the status of the financing statement or any party to the financing

statement.”).13 Even the Correction Statement filed by the Bank states on its face that “The filing

of this Statement does not amend any UCC record. This Statement is for informational purposes

only.” Correction Statement, ECF No. 31-2.

Whereas the Bank now contends the UCC-5 Correction Statement it filed is not actually a

correction statement, but something else, it is in fact a correction statement—but one that is

ineffective, for several reasons. Words have meaning. It was the Bank’s decision to file the

document entitled “Correction Statement” in the first place. It cannot now claim that it was not

filing a correction statement. Admittedly, the Bank erred in filing such a document. N.C. Gen.

Stat. § 25-9-518 only authorizes debtors to file correction statements. Subsection (a) of N.C.

Gen. Stat. § 25-9-518 explicitly states: “A person may file in the filing office a correction

statement with respect to a record indexed there under the person’s name if the person believes

that the record is inaccurate or was wrongfully filed.” N.C. Gen. Stat. § 25-9-518(a). That

clause authorizes a debtor, under whose name a record is indexed, to file a correction statement.

Id. Records are not indexed under the secured creditor’s name. N.C. Gen. Stat. § 25-9-

519(c)(1). Therefore, a creditor is not authorized to file a correction statement.14 That

13 Indeed, the regulation dealing with filing errors underscores that a correction statement cannot correct an error—an amendment is required to affect the record: “An error by a filer is the responsibility of such filer. It may be corrected by filing an amendment or a correction statement may disclose it.” 18 N.C. Admin. Code 05B.0406(b). 14 The 2010 amendments to U.C.C. § 9-518, specifically subsections (c) & (d)—which have not been adopted in North Carolina—grant “an aggrieved secured party of record” the right already held by debtors to “express the belief that a UCC financing statement is inaccurate or unauthorized.” The amendments “recognize that sometimes a person files a termination statement without being entitled to do so. The termination statement could be filed


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conclusion is supported by the Official Comment to Section 9-518(a), which states in the first

sentences: “Former Article 9 did not afford a nonjudicial means for a debtor to correct a

financing statement or other record that was inaccurate or wrongfully filed. Subsection (a)

affords the debtor the right to file a correction statement.” N.C. Gen. Stat. § 25-9-518 cmt. 2

(emphasis added).

The Official Comment further explains that the mechanism of filing a correction

statement is designed to permit an aggrieved person, i.e., the debtor, the opportunity to state its

position on the record, analogous to the remedy provided by the Fair Credit Reporting Act. Id.15

But Section 9-518 “do[es] not permit an aggrieved person to change the legal effect of the public

record. Thus, although the filed correction statement becomes part of the ‘financing statement,’

as defined in Section 9-102, the filing does not affect the effectiveness of the initial financing

statement or any other filed record.”16 Id. In this case, the Correction Statement was not filed by

the Debtor, but by the Bank. Obviously, the Bank was wrong in attempting to use a correction

statement to revive its perfected security interest. The Correction Statement did not comply with

this provision of North Carolina’s version of the UCC, rendering it a nullity. maliciously, or by error of a competing secured creditor who mistakenly believes that the other creditor has been paid off. A secured party is not required to file an information statement to dispute the record, but it does have the right to provide some limited public notice that the efficacy of the termination statement is disputed.” Barkley Clark & Barbara Clark, The Law of Secured Transactions Under the Uniform Commercial Code ¶ 16.02[6] (2012). North Carolina has not adopted these amendments, but even if it had adopted them, it is not clear that the amendments would make the Bank’s correction statement effective. As the commentator noted, the amendments seem to envision a scenario in which a termination statement was filed by someone not entitled to do so. The Bank in this case was entitled to file the termination statement; it just did so in error. 15 The case law that has addressed the effect of a correction statement confirms that the purpose of a correction statement is to allow a debtor to address the issue of “bogus” filings by placing something in the public record when the debtor contests a financing statement. Brown v. Thompson, 2009 WL 997509 (N.Y. Sup. Ct. 2009) (explaining the ability to file a correction statement provides a remedy to a victim of an illegal or bogus UCC financing statement); McDaniel v. 162 Columbia Heights Housing Corp., 863 N.Y.S.2d 346 (N.Y. Sup. Ct. 2008) (explaining that § 9-518 of the U.C.C. provides a “non[-]judicial means for a debtor to correct a financing statement [that] was inaccurate or wrongfully filed.” However, a correction statement will not affect the effectiveness of the initial financing statement). 16The provisions in N.C. Gen. Stat. § 25-9-518 that authorize the Secretary of State to correct the record also support this conclusion. Under certain circumstances not applicable here, the Secretary of State may correct the record when a correction statement is filed. No such request was made here because there was no basis for claiming that the Termination Statement should not have been accepted for filing. See N.C. Gen. Stat. §§ 25-9-516, -518(b1).


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The Correction Statement is also ineffective because it does not comply with subsection

(b)(3) of N.C. Gen. Stat. § 25-9-518. That provision provides that the Correction Statement must

provide a “basis” for the person’s (in actuality, the debtor’s) belief that “the record is inaccurate

and indicate the manner in which the person believes the record should be amended . . . or

provide the basis for the person’s belief that the record was wrongfully filed.” N.C. Gen. Stat.

§ 25-9-518(b)(3). This provision plainly requires more than a statement that the record was

wrongfully filed or filed in error. It explicitly requires that the person provide the “basis” for the

belief that the record is inaccurate or that the record was wrongfully filed. Id. Here, the Bank’s

Correction Statement merely says, in conclusory terms and without elaboration,

“TERMINATED IN ERROR.” The Correction Statement provides no explanation for why any

person (let alone the debtor) believed that to be the case, nor does it indicate how the record

should be corrected. In sum, the Correction Statement is a nullity and had no effect on the

Termination Statement. It is of no use to the Bank.

As to the Bank’s contention that the Correction Statement somehow put the world on

notice of its Lien, see Attachment B to New Financing Statement, Compl. Ex. 10, ECF No. 1-10,

the Court would simply point out that allowing a correction statement’s supposed “notice to the

world” to “undo” the legal effects of a termination statement would allow it to do what the UCC

and North Carolina law explicitly say a correction statement cannot do, namely “affect the

effectiveness of . . . [a] filed record.” N.C. Gen. Stat. § 25-9-518(c). As the Official Comment

explains, the very purpose behind the correction statements is to afford debtors who are

“aggrieved” by a UCC filing a remedy similar to that provided in the Fair Credit Reporting Act.

N.C. Gen. Stat. § 25-9-518 cmt. 2. A correction statement is designed to give notice to the world

of a debtor’s position with respect to a UCC filing by a creditor. Nothing in N.C. Gen. Stat.


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§ 25-9-518 provides authority for the Bank’s argument that the world received notice of its Lien

upon the filing of the Correction Statement. Moreover, any creditor who searched the filing

chain for the Original Financing Statement would have seen the Termination Statement. A

subsequently-filed correction statement, having no legal effect and designed to be used by

debtors, could not be understood to have any effect on that termination. Furthermore, the UCC

puts the burden of maintaining a perfected lien on the Bank—and no one else—which is

precisely the point made by the Court in Roswell Capital Partners (discussed above). Roswell

Capital Partners, 2010 WL 3452378, at *7.

For the foregoing reasons, the Correction Statement is of no legal effect. The Bank’s

Lien remained unperfected after the filing of the November 10, 2009, Correction Statement.

IV. Because the Bank’s Lien was Unperfected after the Filing of the Correction Statement, the Filing of a New Financing Statement Constitutes a Transfer of an Interest of the Debtor in Property. The Defendants deny that the filing of the New Financing Statement constituted a

transfer of an interest of the Debtor in property. Compare Compl. ¶ 34, ECF No. 1, with Answer

of Bank of Granite ¶ 34, ECF No. 10. Their denial appears to be founded on the assertion that

the Original Financing Statement had been reinstated by the filing of the Correction Statement.

As demonstrated above, this contention is wrong as a matter of law. There is little question that,

for bankruptcy purposes, the filing of the New Financing Statement constituted a transfer of an

interest in property of the Debtor under the Code. See 11 U.S.C. §§ 547(e), 548(d).

Accordingly, the Trustee is entitled to summary judgment as to that issue.

Under 11 U.S.C. § 547, the perfection of a security interest is a transfer subject to

avoidance. See 11 U.S.C. § 101(54). A transfer, for purposes of bankruptcy law, is defined very

broadly, and includes “the creation of a lien” as well as “each mode, direct or indirect, absolute


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or conditional, voluntary or involuntary, of disposing of or parting with property or an interest in

property.” 11 U.S.C. § 101(54)(A) & (D). It follows, therefore, that because the Original

Financing Statement became ineffective upon filing of the Termination Statement and resulted in

an unperfected Lien, the re-perfection of the Lien qualifies as a transfer under bankruptcy law.

Taken to its logical conclusion, and one which is widely accepted,17 when a creditor re-perfects

its security interest in a debtor’s property after the original perfection has lapsed, the re-

perfection of the security interest potentially constitutes a preferential transfer of property,

avoidable under 11 U.S.C. § 547(b).

For the purposes of 11 U.S.C. § 547, a transfer is deemed made as of the date of the

perfection of the security interest, and not on the date on which it was created except where

perfection occurs within thirty days of creation. 11 U.S.C. § 547(e)(2)(B). When there is a gap

in perfection, perfection is not continuous, and the date of perfection is the date of filing of the

latter financing statement. N.C. Gen. Stat. § 25-9-308(c); U.C.C. § 9-308 cmt. 4, example 1.

Thus, the filing of the New Financing Statement does not relate back to the date of the filing of

the Original Financing Statement. As stated in the Official Comment to U.C.C. § 9-308, the

“security interest would be vulnerable to any interests arising during the gap period which under

Section 9-317 take priority over an unperfected security interest.” U.C.C. § 9-308 cmt. 4,

example 1.

A transfer of interest of the Debtor in property took place on the date that the Lien was

potentially re-perfected—the day the New Financing Statement was filed. See 11 U.S.C.

17 Blasbalg v. Tarro, 158 B.R. 555, 565 (D. R.I. 1993) (citing In re Karisda, Inc., 90 B.R. 196 (Bankr. D.S.C. 1988)). See also Provident Hosp. & Training Ass'n v. GMAC Mortg. Co. of Pa., 79 B.R. 374, 378–79 (Bankr. N.D. Ill. 1987) (as applied to 11 U.S.C. § 547, where the perfection of a security interest lapses, a transfer is deemed to have occurred at time of re-perfection); In re Abell, 66 B.R. 375, 381-82 (Bankr. N.D. Miss. 1986) (when a perfected security interest lapses, a transfer under 11 U.S.C. § 547 occurs upon the date of filing of the second financing statement).


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§547(e)(2)(B). Section 547(e)(1)(B) further defines the concept of perfection by stating that a

“transfer of a fixture or property other than real property is perfected when a creditor on a simple

contract cannot acquire a judicial lien that is superior to the interest of the transferee.” 11 U.S.C.

§ 547(e)(1)(B). In order to determine when a creditor cannot acquire a judicial lien superior to

the transferee’s interest, a court must look to applicable state law. See Howard Thornton Ford,

Inc. v. Fitzpatrick, 892 F.2d 1230, 1232 (5th Cir. 1990); Long v. Joe Romania Chevrolet, Inc.,

175 B.R. 56, 60–61 (B.A.P. 9th Cir. 1994). North Carolina law is clear. N.C. Gen. Stat. § 25-9-

317(a)(2) provides that a lien creditor has priority over an unperfected security interest.

Here, the Bank’s Lien became unperfected as a consequence of its filing of the

Termination Statement. It remained unperfected until the filing of the New Financing Statement,

i.e., within the 90-day period preceding bankruptcy. Prior to the date of the New Financing

Statement, any other creditor could have acquired a judicial lien superior to the Bank’s interest.

As a result, the filing of the New Financing Statement was a transfer of an interest of the Debtor

in property because it constituted perfection of an unperfected security interest.

BASED ON THE FOREGOING, partial summary judgment as to phase one issues is

GRANTED in favor of the Plaintiff and DENIED as to the Defendants.

SO ORDERED. This Order has been signed electronically. United States Bankruptcy Court The Judge’s signature and Court’s seal appear at the top of the Order.


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THIRD DIVISIONBARNES, P. J.,

BOGGS and BRANCH, JJ.

NOTICE: Motions for reconsideration must bephysically received in our clerk’s office within tendays of the date of decision to be deemed timely filed.

http://www.gaappeals.us/rules/

March 30, 2015

In the Court of Appeals of Georgia

A14A1677. THE FOUR COUNTY BANK v. TIDEWATEREQUIPMENT CO.

BRANCH, Judge.

In June 2003 and November 2005 respectively, appellant The Four County

Bank (“the Bank”) provided financing for the purchase of two different pieces of

foresting equipment by Shepherd Brothers Timber Company, LLC (“Shepherd”). The

Bank perfected its security interests in both pieces of equipment by filing financing

statements in Wilkinson County Superior Court. While the Bank’s original financing

statements were still effective, Shepherd sold both pieces of equipment to appellee

Tidewater Equipment Company (“Tidewater”), which later resold them. In October

2008 and March 2011, more than five years after the filing of each of the original

financing statements, the Bank attempted to file continuation statements as to the

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equipment. After Shepherd declared bankruptcy, the Bank sued Tidewater to recover

the equipment or its value. On appeal from the trial court’s grant of summary

judgment to Tidewater, the Bank argues that Tidewater is liable for the value of the

equipment because Tidewater should have known of the Bank’s perfected security

interest at the time Tidewater resold the equipment. We disagree and affirm.

Although we view the record in favor of the Bank as the non-movant, the

relevant facts are not in dispute. The Bank filed a purchase money financing

statement as to Shepherd’s 2003 Tigercat Cutter on June 5, 2003, and a purchase

money financing statement as to Shepherd’s 2005 Tigercat Skidder, a piece of

construction equipment, on November 18, 2005. On August 30, 2007, Tidewater

accepted the Cutter from Shepherd as a trade-in worth $52,500 towards Shepherd’s

purchase of a new piece of equipment; Tidewater resold the used Cutter to a third

party the same day. On June 26, 2008, Tidewater accepted the Skidder from Shepherd

as a trade-in worth at least $47,000 towards Shepherd’s purchase of a second new

piece of equipment; Tidewater sold the used Skidder to a third party on May 9, 2009.

Tidewater did not perform any lien search before accepting the Tigercats, neither of

which were required to have a motor vehicle title. The Bank did not receive any

proceeds from either sale.

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On October 31, 2008, the Bank filed a second financing statement as to the

Cutter; on March 10, 2011, the Bank filed a second financing statement as to the

Skidder. Shepherd filed for bankruptcy in the Middle District of Georgia on March

16, 2011. In September 2012, the Bank sued Tidewater for trover and conversion.

Both sides moved for summary judgment, which the trial court granted to Tidewater

because the Bank had failed to file timely continuation statements and because

Tidewater lacked actual knowledge of the Bank’s security interests. This appeal

followed.

1. The Bank first asserts that the trial court erred when it granted Tidewater

summary judgment because the Bank’s security interests were perfected at the time

Tidewater took possession of the equipment. We disagree.

OCGA § 11-9-515, Georgia’s version of Article 9, Section 515 of the Uniform

Commercial Code (UCC), provides in relevant part as follows:

(a) Five-year effectiveness. Except as otherwise provided in subsection

(d) of this Code section [concerning the effects of filing continuation

statements], a filed financing statement is effective for a period of five

years after the date of filing or until the twentieth day after any earlier

maturity date required to be specified on the filed financing statement.

(b) Lapse and continuation of financing statement. The effectiveness of

a filed financing statement lapses on the expiration of the period of its

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effectiveness unless before the lapse a continuation statement is filed

pursuant to subsection (c) of this Code section. Upon lapse, a financing

statement ceases to be effective and any security interest or agricultural

lien that was perfected by the financing statement becomes unperfected,

unless the security interest is perfected otherwise. If the security interest

or agricultural lien becomes unperfected upon lapse, it is deemed never

to have been perfected as against a purchaser of the collateral for

value.

(c) When continuation statement may be filed. A continuation statement

may be filed only within six months before the expiration of the

five-year period specified in subsection (a) of this Code section or the

occurrence of any earlier maturity date required to be specified on a filed

financing statement.

(Emphasis supplied.)1

1 UCC Article 9, former Section 403 (2), codified at former OCGA § 11-9-403(2), provided that with exceptions not applicable here,

a filed financing statement is effective for a period of five years from thedate of filing. . . . [T]he effectiveness of a filed financing statementlapses on the . . . expiration of the five-year period . . . unless acontinuation statement is filed prior to the lapse. . . . Upon lapse thesecurity interest becomes unperfected, unless it is perfected withoutfiling. If the security interest becomes unperfected upon lapse, it isdeemed to have been unperfected as against a person who became apurchaser or lien creditor before lapse.

(Emphasis supplied.)Former OCGA § 11-9-403 was superseded by Article 9’s new Section 515,

codified at OCGA § 11-9-515, on July 1, 2001. See Ga. L. 2001, p. 362, § 1. As the2002 editors’ comment to Section 515 notes, “[t]he deemed retroactive unperfectionapplies only with respect to purchasers for value; unlike former Section 9-403 (2), itdoes not apply with respect to lien creditors.” Comment, Uniform Commercial Code

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Here, although the Bank had perfected its security interests in both pieces of

equipment by filing financing statements which remained effective at the time

Tidewater took possession of the equipment, the Bank failed to file continuation

statements in the “six months before the expiration of the five-year period” running

from the date of each original financing statement. OCGA § 9-11-515 (c). OCGA §

11-9-515 (b) provides, moreover, that once each of the Bank’s security interests had

lapsed for failure to file a timely continuation statement, those interests “bec[ame]

unperfected upon lapse,” and were “deemed never to have been perfected as against

a purchaser of the collateral for value.” (Emphasis supplied.) It follows that even

though the Bank’s security interests in the equipment were perfected in the first

instance by the filing of the original financing statements, and though they remained

so throughout Tidewater’s possession and disposition of the equipment, those same

security interests were deemed never to have been perfected as against a purchaser

for value when the Bank failed to file timely continuation statements. See Kubota

§ 9-515, n. 3. The Bank has not asserted that Tidewater could be held a lien creditorsuch that the “deemed retroactive unperfection” of the Bank’s previous securityinterest would not occur here. The new version of the statute also imposes “a newburden on the secured party: to be sure that a financing statement does not lapseduring the debtor’s bankruptcy.” Id., n. 4. It is this burden that the Bank has failed tocarry.

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Tractor Corp. v. C & S Nat. Bank, 198 Ga. App. 830, 831 (2) (403 SE2d 218) (1991)

(a security interest that lapsed due to the secured party’s failure to file a continuation

statement was deemed unperfected “‘as against a person who became a purchaser .

. . before lapse,’” quoting former OCGA § 11-9-403 (2)); see also Thermal Supply v.

Big Sky Beef, 346 Mont. 341, 347 (195 P3d 1227) (2008) (under UCC Article 9,

Section 515, to hold that “any perfected security interest” a secured creditor “may

have held at the time it initiated” its suit against the debtor “lapsed due to [the

creditor’s] failure to timely file a continuation statement”); LB Folding Co. v. Gergel-

Kellem Corp., 94 Ohio App. 3d 511, 516 (641 NE2d 222) (1994) (under UCC former

Article 9, Section 403 (2), a lapse of creditor’s security interest related back to time

of purchase by purchaser for value, whose interest was superior to that of the

previously secured creditor).

2. The only question remaining is thus whether Tidewater was a “purchaser for

value” such that it took possession of the equipment free of the Bank’s security

interests once they lapsed. OCGA § 9-11-515 (b). The Bank asserts that because

Tidewater could have discovered the Bank’s then-perfected security interests on file

in the local superior court at the time it purchased each of the Tigercats, Tidewater

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(a) was not a “purchaser for value” and (b) should be held liable for converting the

equipment to its own use. We disagree.

(a) OCGA § 11-9-317 (b) provides that with exceptions not argued as applying

here,

a buyer, other than a secured party, of tangible chattel paper, tangible

documents, goods, instruments, or a certificated security takes free of a

security interest or agricultural lien if the buyer gives value and

receives delivery of the collateral without knowledge of the security

interest or agricultural lien and before it is perfected.

(Emphasis supplied.) See LB Folding, 94 Ohio App. 3d at 516 (interest of purchaser

for value without actual knowledge was superior to secured creditor who failed to file

a continuation statement). The UCC’s general provisions also specify that “[a] person

‘knows’ or has ‘knowledge’ of a fact when the person has actual knowledge of it.”

OCGA § 11-1-201 (25); see also Bank of Dawson v. Worth Gin Co., 295 Ga. App.

256, 258 (671 SE2d 279) (2008) (under Georgia’s version of the UCC, a person has

“knowledge” of a fact “when he has actual knowledge of it”) (punctuation and

footnote omitted).

The Bank’s arguments for a judicially crafted exception to the UCC’s actual

knowledge requirement have no basis in Georgia law. The Bank concedes that neither

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piece of equipment ever had a motor vehicle title that would have provided Tidewater

with actual notice of anyone holding a security interest on the title’s face, and we

have been cited no evidence that Tidewater ever had any other “actual knowledge”

of the existence of the Bank’s security interest, OCGA § 11-1-201 (25). Rather, with

no such evidence, Tidewater accepted both pieces of equipment in exchange for

credit towards Shepard’s new purchases, with the result that Tidewater “takes free”

of that security interest as a “buyer” who gave value, in the form of credit, for both

Tigercats. OCGA § 11-9-317 (b); see also LB Folding, 94 Ohio App. 3d at 519 (when

creditor’s security interest became “unperfected” as to a prelapse purchaser for value,

the purchaser’s “right to the collateral” was rendered “superior to” the creditor’s).

(b) Further, because Tidewater took the equipment as a purchaser for value

“free and clear of the [Bank’s] previously secured interest,” Tidewater cannot be said

to have wrongfully converted the equipment to its own use. See Hanley Implement

Co. v. Riesterer Equip., 150 Wis. 2d 161, 170 (1989) (under former Article 9, Section

403 (2), a creditor who failed to file a continuation statement was deemed never to

have perfected its security interest as against a prelapse purchaser, with the result that

the purchaser could not be held to have converted the property). The Bank’s citations

to cases involving converters rather than purchasers for value are thus inapposite.

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3. The Bank’s last argument against what it perceives as the “harsh” result we

have reached is that in light of the UCC’s requirement that all parties to secured

transactions like the one at issue here are bound to act in good faith, Tidewater should

have performed a search for a financing statement before selling either of the

Tigercats. See OCGA § 11-1-203 (“Every contract or duty within this title imposes

an obligation of good faith in its performance or enforcement”). We disagree, for two

reasons. First, as we have already explained, in the absence of any evidence that

either piece of equipment at issue was or should have been registered as a motor

vehicle, and without any actual knowledge of any existing security interests in the

Tigercats, Tidewater had no duty to investigate whether such interests existed.

Second, and as other courts have noted as they held security interests to have been

deemed unperfected for failure to file a timely continuation statement:

“Although strict adherence to the Code requirements may at times lead

to harsh results, efforts by courts to fashion equitable solutions for

mitigation of hardships experienced by creditors in the literal application

of statutory filing requirements may have the undesirable effect of

reducing the degree of reliance the market place should be able to place

on the Code provisions. The inevitable harm doubtless would be more

serious to commerce than the occasional harshness from strict

obedience.”

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Thermal Supply, 346 Mont. at 347, quoting Sec. Nat. Bank & Trust Co. of Norman

v. Dentsply Professional Plan, 1980 Okla. 136 (617 P2d 1340, 1343 (I)) (1980)

(applying former Article 9, Section 403 (2)).

For all these reasons, the trial court did not err when it granted Tidewater

summary judgment as to the Bank’s claims. We thus need not reach the Bank’s

contention that it should have been granted summary judgment.

Judgment affirmed. Barnes, P. J., and Boggs, J., concur.

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Case 9:07-cv-80882-AJ Document 10 Entered on FLSD Docket 12/19/2007 Page 1 of 8

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF FLORIDA

CASE NO. 11-80419-CIV-MARRA

In re:

CAMTECH PRECISIONMANUFACTURING, INC., et al.,

Debtor._____________________________________/

REGIONS BANK,

Appellant/Defendant,

vs.

OFFICIAL COMMITTEE OF UNSECUREDCREDITORS,

Appellee/Defendants.

______________________________________/

OPINION AND ORDER

This cause is before the Court on appeal by Appellant Regions Bank’s (“Regions”) of the

Order Granting Plaintiff’s Motion for Summary Judgment and the accompanying Opinion of

Chief Bankruptcy Judge Paul G. Hyman, entered on January 31, 2011. The Court has carefully

considered the appeal, the briefs of Appellants and Appellee The Official Committee of

Unsecured Creditors (“The Committee”), the entire record on appeal, and is otherwise fully

advised in the premises.

I. Background

This following facts, which are not disputed by any of the parties, are based upon the

order on review, the parties’ respective statement of facts in their appellate briefs, and the

Case 9:11-cv-80419-KAM Document 28 Entered on FLSD Docket 03/30/2012 Page 1 of 11

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appellate record.

This matter stems from the joint administration of the bankruptcy cases of Camtech

Precision Manufacturing, Inc. (“Camtech”), R & J National Enterprises, Inc. (“R & J”), and

Avstar Fuel Systems, Inc. (“Avstar Fuel”) (collectively referred to as “Debtors”). Camtech, a

New York corporation authorized to do business in Florida, and Avstar Fuel, a Florida

corporation, entered into various lending arrangements with Regions and Regions’ predecessors.

On September 21, 2007, Regions filed six UCC-1 Financing Statements, three with the

Florida Secured Transactions Registry and three with the State of New York. All of the forms,

including those filed with the State of New York, were filed on a “State of Florida Uniform

Commercial Code Financing Statement Form” (“Main Florida UCC Form”). On October 17,

2007, Regions filed two additional forms with the State of New York on forms titled “State of

Florida Uniform Commercial Code Financing Statement Amendment Form” (“Florida UCC

Amendment Form”), a form that solicits the same information as the Main Florida UCC Form.

Box “1” of both forms prompts filers to identify the “debtor” and Box “2” prompts filers

to identify an “Additional Debtor.” Both Box 1 and Box 2 instruct the filer to “INSERT ONLY

ONE DEBTOR NAME.” For all eight of the forms filed, Regions listed “R & J” as the debtor in

Box 1 and “Avstar Aircraft Accessories, Inc,” an affiliated entity not part of the underlying

bankruptcy, as an additional debtor in Box 2. Each of the forms also referred to an attached

exhibit in the box requiring a description of the covered collateral (Box 4). Although not

referenced anywhere on the main form, the second page of each of the UCC forms contained a

plain paper attachment which states that Debtors Camtech and Avstar Fuel are “additional

debtors.” The third page served as the exhibit describing the collateral referenced in Box 4 of the


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main form.

Each of the Debtors filed voluntary Chapter 11 petitions on May 10, 2010. The

Committee was appointed by the United States Trustee on June 4, 2010, and granted standing to

prosecute this action by an Agreed Order entered on August 3, 2010. In the proceedings below

Regions asserted a perfected security interest in substantially all of the Debtors’ personal

property in connection with a term loan and a revolving line of credit, the total amount being

$4,153,137.79. On June 22, 2010, the Bankruptcy Court issued an Agreed Cash Collateral Order

that authorized the Debtors to pay Regions $20,910.00 per month.

The Committee filed a Motion for Summary Judgment on October 27, 2010. The motion

asserted that Regions failed to properly perfect its security interest in the assets of Camtech and

Avstar Fuel. The Committee therefore sought a determination that Regions was an unsecured,

rather than a secured, debtor and that all payments made pursuant to the Agreed Cash Collateral

Order should be disgorged. The parties stipulated that a search of both the Florida Secured

Transaction Registry and the State of New York Department of Corporations did not disclose an

indexed UCC-1 financing statement naming Regions a secured party for either Avstar Fuel or

Camtech. In response to The Committee’s motion for summary judgment, Regions attached the

affidavit of Steven C. Elkin, the Florida attorney that prepared and filed all of the UCC financing

statements in question. The affidavit provided that Elkin’s office confirmed with both the State

of Florida and the State of New York that he did not need to use a specific form to list additional

debtors.

The Bankruptcy Court held that: (1) The UCC Forms did not perfect Regions’ asserted

security interest in the assets of Camtech and Avstar Fuel; and (2) Regions’ filing error caused


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the financing statements to be seriously misleading and ineffective. Based on these conclusions

of law, the Bankruptcy Court granted The Committee’s Motion for Summary Judgment, declared

Regions to be an unsecured rather than a secured creditor, and ordered Regions to disgorge all

payments made pursuant to the Agreed Cash Collateral Order. Regions now appeals that Order.

II. Legal Standard

The Court reviews the Bankruptcy Court’s factual findings for clear error and its legal

conclusions de novo. In re Globe Manufacturing Corp., 567 F.3d 1291, 1296 (11 Cir. 2009); Inth

re Club Assoc., 951 F.2d 1223, 1228-29 (11 Cir. 1992). Because the order on review was ath

grant of summary judgment, the Court will review the order de novo.

III. Discussion

Regions asserts that the Bankruptcy Court erred in two ways: (1) by holding the liens in

questions were not perfected; and (2) by disregarding genuine issues of material fact as to

whether the Florida and New York filing offices made indexing errors. For the reasons discussed

below, the Court agrees with Regions.

Florida and New York have adopted variations of Revised Article 9 of the Uniform

Commercial Code (“UCC”). See N.Y. U.C.C. § 9-101 et seq. (effective July 1, 2001); Fla. Stat.

§ 679.1011 et seq. (effective January 1, 2002). Section 9-521 of the UCC, titled “Uniform Form

of Written Financing Statement and Amendment,” provides that “A filing office that accepts

written records may not refuse to accept a written initial financing statement in [the form

articulated in this section].” New York and Florida have codified variations of section 9-521 of

the UCC. Section 9-521 of New York’s Uniform Commercial Code provides:


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Uniform Form of Written Financing Statement; Amendment; andCooperative Addendum

(a) Initial financing statement form. A filing office that accepts written records maynot refuse to accept a written initial financing statement in the form promulgatedby the department of state except for a reason as set forth in Section 9-516(b).

(b) Amendment form. A filing office that accepts written records may not refuse toaccept a written financing statement amendment in the form promulgated by thedepartment of state except for a reason as set forth in Section 9-516(b).

(c) Cooperative addendum form. A filing office that accepts written records maynot refuse to accept a written cooperative addendum in the form promulgated bythe department of state except for a reason as set forth in Section 9-516(b).

Florida also authorizes its Secretary of State to create forms, but the Florida statute does

not contain the same language which expressly precludes the rejection of written financing

statements that use authorized forms:

Uniform form of written financing statement and amendment - TheSecretary of State shall develop or approve acceptable forms for use in filingunder this chapter. Such forms must be in accord with the requirements ofFlorida law, including s. 201.22. The secretary may, if he or she finds that suchforms meet these requirements, approve the use of a standard national form forthis purpose.

§ 679.521, Fla. Stat. Although not expressly stated in the statute, Official Comment 2 to that

statute articulates a safe-harbor provision that provides “A filing office that accepts written

communications may not reject, on grounds of form or format, a filing using these forms.”

Although both states statutorily empower their Secretary of State to create approved

forms and New York articulates express protections to those that use such a form, neither state

requires filers to use any particular form. This fact is acknowledged in the Bankruptcy Court’s

Order Granting Summary Judgment. Order at 11 (“Regions correctly points out that there is no

statutory requirement to use an approved additional party form when listing additional debtors on


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N.Y. U.C.C. section 9-502 also includes a fourth requirement governing cooperative1

interests.

6

a financing statement.”)

In view of this fact, the Court examines what each states does require of a party seeking

to file a financing statement with the appropriate state agency. Both states have adopted UCC

section 9-502, which articulates the requirements for a UCC financing statement to be sufficient:

Contents of Financing Statement; Record of Mortgage as FinancingStatement; Time of Filing Financing Statement.

(a) Sufficiency of Financing StatementSubject to subsection (b) [which governs real-property-related financingstatements], a financing statement is sufficient only if it:

(1) provides the name of the debtor;(2) provides the name of the secured party or a representative of the secured

party; and(3) indicates the collateral covered by the financing statement.

Fla. Stat. § 679.5021; N.Y. U.C.C. 9-502.1

Both states have also fully adopted UCC section 9-503, which provides:

Name of Debtor and Secured Party

(1) A financing statement sufficiently provides the name of the debtor:(a) If the debtor is a registered organization, only if the financing statementprovides the name of the debtor indicated on the public record of thedebtor’s jurisdiction of organization which shows the debtor to have beenorganized;

Fla. Stat. § 679.5031; N.Y. U.C.C. 9-503.

Here, The Committee has failed to set forth any evidence that would establish that the

financing statements in question did not contain sufficient information to meet the statutory

requirements of both Florida and New York law. Accordingly, for purposes of reviewing the

underlying order on summary judgment, the Court proceeds on the assumption that Appellant


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Although Appellant urges this Court to compare the names listed in the disputed UCC2

financing statements with the Florida Department of Corporations and the New York Departmentof State, Division of Corporations, State Records and Uniform Commercial Code Database, theCourt declines to do so at this time. The Court is simply proceeding on the basis that becauseAppellee, as the moving party, has failed to set forth any evidence that challenges the accuracy ofthe names listed in the underlying UCC financing statements, it is not entitled to summaryjudgment on this issue of sufficiency.

7

filed legally “sufficient” financing statement as defined by both Florida and New York law. See2

Fla. Stat. § 679.5021; N.Y. U.C.C. 9-502.

A “sufficient” financing statement, however, is not automatically perfected. Florida and

New York both provide that “A financing statement substantially complying with the

requirements of this part is effective, even if it has minor errors or omissions, unless the errors or

omissions make the financing statement seriously misleading.” Fla. Stat. § 679.5061(1); N.Y.

U.C.C. 9-506(a) (emphasis supplied). Both states also provide that “If a search of the records of

the filing office under the debtor’s correct name, using the filing office’s standard search logic, if

any, would disclose a financing statement that fails sufficiently to provide the name of the debtor

in accordance with [UCC section 9-503], the name provided does not make the financing

statement seriously misleading.” Fla. Stat. § 679.5061(3); N.Y. U.C.C. 9-506(c).

UCC section 9-506 clearly establishes that if a search of the records under the debtor’s

correct name does disclose a financing statement for the debtor, even if the name provided in the

financing statement is in some manner deficient, the name provided does not make the financing

statement misleading. At issue here is whether a financing statement is “seriously misleading,”

as a matter of law, under circumstances where the result of a search of the records of the filing

office does not disclose a filing statement related to the debtor. The Bankruptcy Court answered

this question in the affirmative, and although not relied on by the Bankruptcy Court, so has the


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The Third Circuit was reviewing New Jersey’s version of UCC section 9-506(c), who,3

like Florida and New York, adopted an unaltered version of UCC section 9-506(c).

Both the Florida and New York codifications of UCC section 9-517 are identical both in4

the text and in the comments.

8

United States Court of Appeals for the Third Circuit. In In re Jersey Tractor Trailer Training

Inc., 580 F.3d 147, 158 (3 Cir. 2009), the court stated that revised U.C.C. § 9–506(c) “narrowsrd 3

the responsibility of a reasonable searcher, providing that a misfiled financing statement will be

considered seriously misleading unless ‘a search of the records of the filing office under the

debtor's correct name, using the filing office’s standard search logic, if any, would disclose [the

misfiled] financing statement. . . .”

The interpretation given to section 9-506(c) by the Bankruptcy Court and the Third

Circuit effectively rewrites the provision to read “if a search of the records of the filing office

under the debtor’s correct name, using the filing office’s standard search logic, if any, would not

disclose a financing statement for the debtor, the financing statement is seriously misleading.”

Obviously, if the state legislatures of Florida and New York wished to render the legal

effectiveness of a financing statement dependent on whether a search under the debtor’s name

would or would not disclose the financing statement, they could have done so. Under this

reading of the statute, a correct and properly completed, but misfiled, financing statement would

be legally ineffective if a search of the records did not disclose the financing statement, even if

the misfiling was not attributable to the filer. This reading of the statute nullifies section

679.517, Florida Statutes, and N.Y. U.C.C. section 9-517, both of which provide that “The

failure of the filing office to index a record correctly does not affect the effectiveness of the filed

record.” This Court’s interpretation of those statutes is further supported by Official Comment 24


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Evidence could have been presented either from the individuals who actually filed the5

financing statements, or if they could not be determined or located, evidence from representatives

9

to both those statutes, which provides:

Effectiveness of Mis-Indexed Records. This section provides that the filingoffice's error in mis-indexing a record does not render ineffective an otherwiseeffective record. As did former Section 9-401, this section imposes the risk offiling-office error on those who search the files rather than on those who file.

Here, Regions not only asserts that its financing statement was not seriously misleading,

but in its Answer to The Committee’s Complaint it set forth an affirmative defense that the non-

disclosure was based on a filing error by the respective filing offices. See DE 2-3 at 43. “When

the movant seeks a final judgment, he must seek to establish the existence or nonexistence of

enough essential elements of a claim and its related defenses and avoidances to permit full

disposition of the claim as a matter of law, as [Rule 56] provides.” Martin B. Louis, Federal

Summary Judgment Doctrine: A Critical Analysis, 83 Yale L.J. 745, 747 (1974)). As the moving

party, in order for The Committee to prevail on summary judgment, it must come forward with

evidence to defeat or overcome Regions’ affirmative defense. See Clark v. Coats & Clark, Inc.,

929 F.2d 604, 608 (11 Cir. 1991). Until the moving party meets its burden, the non-movingth

party, here Regions, has no burden to come forward and demonstrate a material question of fact.

Id.

In its Statement of Undisputed Facts in the Motion for Summary Judgment filed below,

The Committee has not presented any evidence to overcome or defeat Regions’ affirmative

defense of a filing or indexing error by the respective filing offices of New York and Florida.

See DE 2-3 at pp. 46-50. Nor was there any record evidence that the financing statements were

considered by the filing offices to be defective, erroneous or seriously misleading. 5


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of those offices who could testify about the standard practices or procedures used when filingfinancing statements in the format used in this case.

10

The Bankruptcy Court concluded, as a matter of law, that the failure to use approved

forms and the failure to list the debtor in the debtor box on the form used rendered the filing

“seriously misleading.” This Court concludes that such a finding was a question of fact which

could not be determined as a matter of law on this record. The Bankruptcy Court also resolved

other factual questions in favor of the moving party despite the lack of any record evidence to

support the findings. For example, the Bankruptcy Court concluded that “Had the additional

debtor information been submitted using an approved standard form . . . or had there been a

direction in the additional debtor box on the first page of the UCC-1 form to look at the

attachment for additional debtor information, the result here would be different.” Order at 11.

This is a factual finding which refutes Regions indexing error affirmative defense. Yet, The

Committee, which was the moving party, never presented evidence to overcome the defense, and

there was no record evidence to support the Bankruptcy Court’s finding. The Bankruptcy Court

further concluded that

the New York filing office treated Regions’ unapproved additional debtorattachment in accordance with Rule 143-1.4(c). . . . Under Rule 143-1.4(c) theNew York filing office was permitted to, and apparently did, treat the additionaldebtor information contained in “such non-approved exhibit, schedule orattachment as not having been provided in the UCC document” . . . Therefore, theadditional debtors Camtech and Avstar Fuel, listed on an unreferenced andunapproved attachment, were treated as not having been provided in the UCCdocument pursuant to the rule, and consequently, the financing statement was notindexed under the names of those entites. The New York UCCs, having neitherused the approved additional party form, nor having contained any direction tolook beyond the first page of the UCC-1 for additional debtor information, wereseriously misleading with respect to additional debtors Camtech and Avstar Fuel.

Order at 12-13 (emphasis supplied). These were also factual findings which could not be


218

11

determined as a matter of law on the record below.

Because the Bankruptcy Court erroneously granted summary judgment despite the

existence of genuine questions of material fact, the Order of the Bankruptcy Court is

REVERSED.

V. Conclusion

Based upon the foregoing, it is ORDERED AND ADJUDGED that the decision on

appeal of Bankruptcy Judge Paul G. Hyman is REVERSED and REMANDED for further

proceedings consistent with this Order. This case is CLOSED, and all pending motions are

DENIED as moot.

DONE AND ORDERED in Chambers at West Palm Beach, Florida this 30 day ofth

March, 2012.

______________________________________KENNETH A. MARRAUnited States District Judge


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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

1300 Clay Street (2d fl.)

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Memorandum Decision



In re No. 09-41727 EDJ Chapter 11A.F. EVANS COMPANY, INC., Debtor./

MEMORANDUM DECISION - MOTION REQUIRING DEBTOR TO REMIT SALES PROCEEDS

A. Introduction

City National Bank (“CNB”) has moved for an order requiring

A.F. Evans Company, Inc., the above debtor (the “debtor”), to remit

to it 87.5% of the proceeds the debtor realized from the court

approved sale of its partnership interest in AFE-Pioneer Associates,

LP (“AFE-Pioneer”). Pursuant to a court approved cash collateral

stipulation between CNB and the debtor, CNB is entitled to the

remittance if, at the date of the debtor’s chapter 11 petition

herein, it held a valid, perfected, security interest in the

debtor’s partnership interest in AFE-Pioneer.

CNB’s motion is opposed by the Official Committee of Unsecured

Signed: July 14, 2009

________________________________________EDWARD D. JELLEN

U.S. Bankruptcy Judge________________________________________

Entered on Docket July 14, 2009GLORIA L. FRANKLIN, CLERK U.S BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA

Case: 09-41727 Doc# 200 Filed: 07/14/09 Entered: 07/14/09 15:11:07 Page 1 of 12

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2 Memorandum Decision

Creditors (the “Committee”), which contends that any security

interest CNB may have had in the debtor’s partnership interest in

AFE-Pioneer is avoidable or had been terminated by the date of the

debtor’s chapter 11 petition. Alternatively, the Committee contends

that genuine issues of material fact are present, and that the court

should set an evidentiary hearing to resolve such issues.

The court holds that at the date of the debtor’s chapter 11

petition herein, CNB held a valid, perfected, security interest in

the debtor’s partnership interest in AFE-Pioneer. The court has

therefore granted CNB’s motion by order filed July 9, 2009.

B. Facts

Except as hereafter noted, the facts are undisputed. Prior to

the filing of debtor’s chapter 11 petition herein, CNB financed

debtor’s operations through a revolving line of credit. The line

was secured by a security interest in substantially all the debtor’s

personal property, including the debtor’s partnership interest in

AFE-Pioneer.

On August 9, 2004, CNB perfected its security interest in the

debtor’s personal property by filing a UCC-1 financing statement

with the California Secretary of State. In December 2008, the

debtor wished to sell two partnership interests, not at issue

herein, in partnerships called Westgate Housing Associates, L.P.

(“Westgate”) and Greenery Housing Associates, L.P. (“Greenery”). To

facilitate the sale, the debtor requested CNB to release its

perfected security interest in the two partnership interests in

consideration of a payment of $37,500 at the closing of each of the


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two sale escrows. The request did not extend to the debtor’s

interest in AFE-Pioneer.

To facilitate the closing, the debtor sent CNB proposed escrow

instructions, for Westgate and Greenery, respectively, directed to

the debtor and First American Title Insurance Co. (“First

American”), and two proposed UCC-3 Amendment statements. The

proposed instructions included an exhibit containing a description

of the collateral to be released upon payment to CNB of the agreed

upon sums. These descriptions were limited to Westgate and Greenery

and did not include any reference to AFE-Pioneer.

The proposed UCC-3 Amendment statements that the debtor sent to

CNB provided for deletion of Westgate and Greenery from the

collateral covered by CNB’s UCC-1 financing statement. The official

UCC-3 form includes a blank box, box no. 2, which a filer can check

if a filer wishes to terminate the entirety of a prior security

interest. Significantly, the termination boxes in the proposed

forms the debtor submitted to CNB were not checked.

On January 8, 2009, CNB caused the two signed letters of escrow

instruction, accompanied by two UCC-3 Amendment statements, to be

submitted to First American. The letters and the two UCC-3

Amendment statements were in the exact form proposed by the debtor,

without any check mark in box no. 2.

The escrows for the sale of debtor’s interests in Westgate and

Greenery closed, and two UCC-3 Amendment statements were recorded on

January 28, 2009 in connection with the closings. These UCC-3

statements both referenced CNB’s original UCC-1 financing statement,


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and included an “X” in box no. 2. Box no. 2 reads as follows:

Termination: Effectiveness of the financing statementidentified above is terminated with respect to securityinterest(s) of the Secured Party authorizing thisTermination Statement.

In addition, both UCC-3 Amendment statements included a

checkmark under box no. 8, headed “Collateral Change.” In box no.

8, if selected, a filer can check one of four smaller boxes

indicating whether the collateral described in box 8 is being

deleted, added, restated, or assigned. On each of the two UCC-3

Amendment statements at issue herein, the “describe collateral

deleted” option had been checked, followed by a description of the

debtor’s interest in, respectively, Westgate and Greenery. The

verbiage of the descriptions was identical to that set forth in

CNB’s letters of instructions dated January 8, 2009.

CNB contends that someone, without authority, checked the

termination boxes in the UCC-3 Amendment statements after CNB had

transmitted them with its escrow instructions to First American, and

that its security interest was not terminated except to the extent

of Westgate and Greenery. The Committee does not so concede.

In any event, after CNB discovered what had been recorded, it

filed two more UCC-3 Amendment statements on February 6, 2009, which

stated that CNB had not authorized the termination of its security

interests in any assets of the debtor other than Westgate and

Greenery.

On May 5, 2009, the debtor filed its voluntary chapter 11

petition herein. Thereafter, this court approved a stipulation


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1California enacted numerous amendments to Division 9 of theCalifornia Commercial Code (Secured Transactions), effective July1, 2001. Unless otherwise noted, all further section referencesherein are to the California Commercial Code as so amended.


between the debtor and CNB, which in essence, required the debtor to

remit to CNB 87.5% of the proceeds of various assets, when sold,

subject to the right of the Committee to object based on any alleged

defects in CNB’s security interest. On March 12, 2009, the debtor

filed a motion seeking court authority to sell its interest in AFE-

Pioneer. The court granted the motion, subject to the debtor’s

obligation to remit 87.5% of the proceeds to CNB, and subject to the

Committee’s right to object to the remittance.

The sale of AFE-Pioneer has closed. CNB has filed a motion for

an order compelling the debtor to remit to it 87.5% of the sales

proceeds. The Committee has filed an objection, contending that the

above-described UCC-3 Amendment statements recorded January 28, 2009

operated to terminate CNB’s security interests in the debtor’s

property, including its partnership interests in AFE-Pioneer. CNB

disagrees.

C. Discussion

California Commercial Code § 9513(d) (West 2002)1 provides:

Except as otherwise provided in Section 9510, upon thefiling of a termination statement with the filing office,the financing statement to which the termination statementrelates ceases to be effective.

Section 9510(a) provides:

A filed record is effective only to the extent that it wasfiled by a person that may file it under Section 9509.


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Section 9509(d) provides:

A person may file an amendment other than an amendmentthat adds collateral covered by a financing statement oran amendment that adds a debtor to a financing statementonly if either of the following conditions is satisfied: (1) The secured party of record authorizes the filing . . .

The Committee argues in reliance on § 9513(d) that the filing

of the UCC-3 Amendment statements with the termination boxes checked

terminated CNB’s security interest.

The Committee further argues with reference to §§ 9510(a) and

9509(d) that, as a matter of general agency law, a principal, here

CNB, is bound by the acts of its agents acting within the scope of

the agent’s authority. Goddard v. Metropolitan Trust Co. of

California, 82 F.2d 902 (9th Cir. 1936). The Committee

further argues that First American was CNB’s agent for purposes of

the AFE-Pioneer partnership sale, and accordingly, that even if

First American checked the termination boxes in error, CNB is bound

by that mistake and is therefore deemed to have authorized First

American to terminate its security interest in all the debtor’s

personal property.

The court takes no issue with the general proposition that a

principal is bound by the acts of an agent acting within the scope

of the agent’s authority. Nor does the court disagree that, for

purposes of determining what a secured party did or did not

authorize within the meaning of § 9509(d), law other than the

Commercial Code may determine the issue. See Uniform Commercial

Code, official comment to § 9-509.

/////


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However, the court does take issue with the applicability of

the foregoing principles to the undisputed facts present here.

First of all, according to the uncontroverted declaration of

Jerry McDermott, a Vice President of CNB, First American was not

acting within the scope of its authority when and if it attempted to

terminate CNB’s security interest in any assets other than Westgate

and Greenery. According to Mr. McDermott’s Declaration dated June

11, 2009, the escrow instructions and UCC-3 Amendment statements

that the debtor requested CNB to submit, and which CNB did submit,

to First American in order to release its security interest in

Westgate and Greenery, had only the “delete collateral” boxes

checked, followed by a description of Westgate or Greenery, and did

not have the termination boxes checked. Declaration of Jerry

McDermott filed June 12, 2009, Paragraphs 8 and 9. Clearly, CNB did

not, in fact, authorize First American to terminate its security

interest as to assets other than Westgate and Greenery.

Moreover, according to Mr. McDermott:

CNB had no input and no influence regarding establishingan escrow for the Westgate-Greenery transactions at FirstAmerican Title Insurance Company. The escrow wasestablished by the Debtor or by the purchaser of theWestgate-Greenery partnership interests prior topreparation by the Debtor of the escrow instructions andenclosures that I was provided by [the debtor]. . . .

Declaration of Jerry McDermott filed June 12, 2009, Paragraph 7.

CNB was not involved in any way with the selection of theescrow agent, has not engaged or employed the escrowagent, and has not had any contact whatsoever with theescrow agent (either in writing or verbally) with regardto the filing of the subject financing statement

/////


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2Given this conclusion, the court need not address theeffect, if any, of the UCC-3 Amendment statements CNB filed onFebruary 6, 2009.


amendments or the Westgate-Greenery sale, excpdt for mydelivery of the escrow instructions and their enclosuresas described in Paragraphs 6 and 7 above.

Declaration of Jerry McDermott filed June 12, 2009, Paragraph 12.

Therefore, First American was not CNB’s agent, except for the

limited purpose of handling the closing of the escrow for the

debtor’s sale to the buyer of the Westgate and Greenery partnership

interests. And First American was not acting within the scope of

its very limited authority from CNB when it recorded a UCC-3

Amendment statement in a form other than that which CNB had

authorized.

It follows that CNB was not bound by First American’s

unauthorized modification to the UCC-3, if indeed the modification

was by First American. Sections 9509(d) and 9510(a). See also,

Montgomery v. Bank of America Nat. Trust and Savings Ass’n., 85

Cal.App.2d 559 (1948) (a party to an escrow was not bound by the

escrow holder’s unauthorized alteration of a deed, which deed was

rendered void by the alteration).2

The Committee cites In re Pacific Trencher & Equipment, Inc.,

735 F.2d 362 (9th Cir. 1984) as authority to the contrary. In

Pacific Trencher, the secured party had filed a UCC form with the

apparent intention of releasing its security interest in certain,

but not all, of the debtor’s assets. Unfortunately for the secured


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party, it mistakenly checked the “termination” box rather than the

“release” box. The termination box read “The Secured Party

certifies that the Secured Party no longer claims a security

interest under the Financing Statement bearing the file number shown

above.”

The lower courts held that the filing of the termination

statement terminated the secured party’s security interest. On

appeal to the Ninth Circuit, the secured party argued that it should

be entitled to reform the termination statement, or alternatively,

that the termination statement should be construed as a partial

termination of its security interest, based on the collateral

description that the secured party had included in the form. The

Ninth Circuit rejected these arguments, noting “Given the language

of this form, there is no possibility of construing a partial

termination of items listed in a financing statement.” Id. at 364.

Pacific Trencher is distinguishable for several reasons.

First, the error in Pacific Trencher was the secured party’s error,

and did not involve an unauthorized act by an escrow agent. This is

particularly significant because the Ninth Circuit decided Pacific

Trencher prior to the enactment of §§ 9509 and 9510, which

specifically address the affect of an unauthorized UCC filing. One

treatise noted as follows with respect to the purpose of these

provisions:

Revised Section 9-510(a) also addresses a related, butdistinct, problem. What is the status of a record thatwas filed by a person entitled to file by revised Section9-509 but the content of which goes beyond that which wasauthorized? . . . Revised Section 9-5l0(a) provides that a


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filed record is effective only to the extent that it wasfiled by a person entitled to do so under revised Section9-509. As the comment makes clear, the "only to theextent" language is present to nullify records to theextent that they go beyond the actual or deemedauthorization that entitled the filer to file them.

9B Hawkland's Uniform Commercial Code Series (West 2001), at pp.

Rev. Art. 9-794 - Rev. Art. 9-795, §9-509:4.

In addition, the UCC form at issue in Pacific Trencher had only

one box, the termination box, checked. The Ninth Circuit opined on

that basis that the form could not reasonably be construed to effect

a partial termination of the secured party’s security interest.

Here, however, each of the UCC-3 forms at issue had two boxes

checked - the termination box plus the release of collateral box.

Clearly, checking a release of collateral box would be superfluous

in a case where a secured party wished to terminate a security

interest in its entirety. Thus, the ambiguity here is patent,

whereas the form at issue in Pacific Trencher was unambiguous.

The presence of this ambiguity is material because of

§ 9506(a), which provides:

A financing statement substantially satisfying therequirements of this part is effective, even if it hasminor errors or omissions, unless the errors or omissionsmake the financing statement seriously misleading.

Under this provision, the test of whether an error is not seriously

misleading is “whether it would indicate to an interested third

party the possible existence of prior encumbrances on the

collateral.” In re Munger, 495 F.2d 511, 512 (9th Cir. 1974).

Here, CNB’s financing statements, as amended by the UCC-3 Amendment


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3In addition, given the fact that a single UCC-1 filing canbe terminated only once, the redundancy of two UCC-3 Amendmentstatements being filed with box 2 checked, each describingdifferent collateral in box 8, would have raised an additionalred flag to any person searching the records.


statements, each with two conflicting boxes checked, would raise a

red flag for any person conducting a search alerting such person of

the possibility that a full termination may not have been intended.3

D. Conclusion

For the foregoing reasons, the court has issued its order

granting CNB’s motion.

**END OF ORDER**


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COURT SERVICE LIST

Chris D. Kuhner, Esq.Kornfield, Nyberg, Bendes & Kuhner, P.C.1999 Harrison Street, Suite 2675Oakland, CA 94612

Maxim B. Litvak, Esq.Pachulski, Stang, Ziehl & Jones150 California Street, 15th FloorSan Francisco, CA 94111-4500

Frank T. Pepler, Esq.Pepler Mastromonaco LLP100 First Street, 25th FloorSan Francisco, CA 94105

Office of the U.S. Trustee1301 Clay Street, Suite 690-NOakland, CA 94612


231

IN THE UNITED STATES BANKRUPTCY COURTFOR THE DISTRICT OF KANSAS

In Re:

CARL LEE JACKSON,

DEBTOR.

CASE NO. 05-15181CHAPTER 7

CARL B. DAVIS, Trustee,

PLAINTIFF,

v. ADV. NO. 06-5101

EMPRISE BANK andCARL LEE JACKSON,

DEFENDANTS.

MEMORANDUM AND ORDER DENYING COMPLAINT FOR AVOIDANCE OF NON-PERFECTED SECURITY INTEREST

SO ORDERED.

SIGNED this 09 day of February, 2007.

________________________________________Dale L. Somers

UNITED STATES BANKRUPTCY JUDGE

____________________________________________________________

Case 06-05101 Doc# 28 Filed 02/09/07 Page 1 of 18 232

1 This case was filed before October 17, 2005, when most provisions of the Bankruptcy AbusePrevention and Consumer Protection Act of 2005 become effective. All statutory references to theBankruptcy Code are to 11 U.S.C. §§ 101 - 1330 (2004), unless otherwise specified. All references to theFederal Rules of Bankruptcy Procedure are to Fed. R. Bankr. P. (2004), unless otherwise specified.

2 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and theStanding Order of the United States District Court for the District of Kansas that exercised authorityconferred by § 157(a) to refer to the District’s Bankruptcy judges all matters under the Bankruptcy Codeand all proceedings arising under the Code or arising in or related to a case under the Code, effective July10, 1984. A complaint to avoid a lien is a core proceeding which this Court may hear and determine asprovided in 28 U.S.C. § 157(b)(2)(K). There is no objection to venue or jurisdiction over the parties.

2

This is an action by the Chapter 7 Trustee to avoid a lien in a mobile home pursuant to 11

U.S.C. § 5441 because it allegedly was unperfected on the date of filing. The Plaintiff Trustee,

Carl B. Davis (hereafter "Trustee"), appears by Carl B. Davis, Davis & Jack, L.L.C. Defendant,

Emprise Bank (hereafter "Emprise"), appears by Karl R. Swartz, Morris, Laing, Evans, Brock &

Kennedy, Chartered. Defendant Debtor, Carl Lee Jackson (hereafter "Debtor"), does not appear.

The Court has jurisdiction.2

The Trustee's Complaint for Avoidance of Non-Perfected Security Interest concerns a

lien claimed by Emprise in Debtor's 1995 Champion Mobile Home (hereafter the "Mobile

Home"), which is located on Debtor's exempt homestead property in LaHarpe, Kansas. The

Trustee alleges the lien is unperfected because, due to transfers and refinancings of the initial

purchase money loan, Emprise is not entitled to rely upon the Notice of Security Interest

prepared and filed by the initial lender. Emprise asserts that its interest is perfected. The parties

have submitted a Joint Stipulation of Facts, supported by attached copies of loan documents, and

submitted briefs on lien perfection and related issues. The Court, having considered these

matters, is now ready to rule and, for the reasons stated below, finds the lien perfected and

unavoidable.


3 The stipulation states that a copy of a security agreement is attached, but the Court finds themortgage and NOSI, but not a security agreement.

4 The February 15, 1998 note form also included a security agreement portion, but no collateralwas described.

3

FINDINGS OF FACT.

As its findings of fact, the Court adopts the parties' stipulation, that is summarized as

follows. On December 29, 1994, Debtor and his wife obtained a purchase money loan in the

amount of $30,468.00 from Humboldt National Bank (hereafter “Humboldt”) for the acquisition

of the Mobile Home. The home was delivered to Debtor and is located on his homestead

property. The note provided for 35 regular monthly payments and a final balloon payment of

$27,721.43 due on January 4, 1998. The note was secured by a real estate mortgage3 on the

homestead property, including all "appurtenances and all the estate, title and interest" of the

Debtor and his wife in the described premises. The mortgage was filed of record with the

Registrar of Deeds of Allen County on January 12, 1998, and a Notice of Security Interest

(NOSI), describing the Mobile Home and showing the name and address of Humboldt as the

secured party and of the Debtor, was properly completed and mailed or delivered to the Kansas

Division of Motor Vehicles on December 29, 1994.

On February 15, 1998, Debtor refinanced with Humboldt the balloon payment which

became due for the 1994 loan. The new note was in the amount of $27,598 and provided for 60

monthly payments and a balloon of $16,581.45 due on February 4, 2003. It stated the purpose is

a loan for “renewal of primary residence” and provided it is secured by the mortgage dated

December 29, 1994.4 On June 7, 1999, Debtor executed an extension agreement with First


4

Commercial Bank, f/k/a/ Humboldt National Bank that specified the next payment date and

extended the maturity of the February 15, 1998 note from February 4, 2003 to March 30, 2003.

By succession or mergers and/or name changes, First Commercial Bank became

Enterprise Bank. Effective April 4, 2003, Emprise acquired the February 15, 1998 note, as

extended, from Enterprise Bank. The Assignment and Assumption of Loans agreement between

Enterprise and Emprise provided, in part:

Seller [Enterprise] hereby grants, assigns, sells and conveys untoBuyer [Emprise] the Loans [including those described on exhibitA] together with all of Seller’s right, title, interest and estate in, toand under (i) the indebtedness represented or evidenced therebyand all monies now owing or accrued or that may hereafter becomedue or owing in respect thereof; (ii) all powers, covenants, liens,claims, or encumbrances held by or benefiting [sic] Seller inconnection therewith; (iii) all notes, security agreements, controlagreements, chattel paper, mortgages, hypothecation agreements,pledge agreements, assignments, pledged collateral, title insurancepolicies, financing statements and other collateral or loandocuments that evidence, secure, insure, protect or otherwise relatein any way to the Loans (collectively the “Loan Documents”);

The February 5, 1998 note is described on Exhibit A.

On March 30, 2003, the balloon payment on the extended February 5, 1998 note became

due. On May 19, 2003, Debtor executed and delivered to Emprise a promissory note for

$15,968.65. The proceeds from the May 2003 note satisfied the balloon due on the extension of

the 1998 note. The 2003 note states it is secured by the Real Estate Mortgage dated December

29, 1994 and a security agreement dated May 19, 2003. The security agreement describes the

collateral as the Mobile Home. Emprise Bank filed a UCC-1 with the Register of Deeds of Allen

County but did not file a NOSI with the Division of Motor Vehicles of the Kansas Department of

Revenue or a real estate mortgage. The real estate mortgage recorded by Humboldt on January


5

12, 1998 has not been released or satisfied and continues to be of record in the Register of Deeds

office as the first mortgage.

Debtor never filed an Application for Registration of the Mobile Home with the Division

of Motor Vehicles, and the Division of Motor Vehicles has never issued a Certificate of Title for

the Mobile Home. Neither the title nor the requirement to issue a title to the Mobile Home has

been eliminated under the procedure described in K.S.A. 58-4214(b).

Debtor filed for relief under Chapter 7 on August 20, 2005. He claimed the real property

on which the Mobil Home is located as his homestead, stating a value of $15,000 and subject to

a lien of $10,079 in favor of Emprise. No objections were filed. The Debtor’s homestead is

exempt. The Allen County Appraiser has established the value of the land at $630.00 and the

Mobile Home at $21,000 for ad valorem real property tax purposes. Emprise Bank filed a proof

of claim for $9,637.57.

The Trustee filed this lien avoidance action on February 3, 2006. An agreed order was

entered providing as follows: Debtor would continue to make payments directly to Emprise;

Emprise would account to the Court for all post-petition payments; Emprise was permitted to

apply all post-petition payments to the debt on a conditional basis, pending resolution of the

adversary proceeding; and, in the event of a final decision avoiding Emprise’s lien on the Mobile

Home, Emprise would promptly turn over the to the Trustee the payments to which he is entitled

under the Court’s order. Since the date of filing, Debtor has continued to make his monthly

payments to Emprise.


5 Morris v. CIT Group/Equipment Financing, Inc. (In re Charles), 323 F.3d 841, 842-43 (10thCir. 2003).

6 K.S.A. 2005 Supp. 84–9–102(52).

6

ANALYSIS.

A. Nature of the Controversy.

Trustee seeks to avoid the Emprise’s lien on the Mobile Home pursuant to § 544(a)(2),

which provides:

(a) The trustee shall have, as of the commencement of the case,and without regard to any knowledge of the trustee or any creditor,the rights and powers of . . .

***(2) a creditor that extends credit to the debtor at the time of thecommencement of the case, and obtains, at such time and withrespect to such credit, an execution against the debtor that isreturned unsatisfied at such time, whether or not such a creditorexists;

Controlling law is succinctly stated by the Tenth Circuit as follows:

Section 544(a) of the Bankruptcy Code “confers on a trustee inbankruptcy the same rights that an ideal hypothetical lien claimantwithout notice possesses as of the date bankruptcy petition isfiled.” Pearson v. Salina Coffee House, Inc., 831 F.2d 1531, 1532 (10thCir. 1987). Consequently, “[s]ection 544(a) allows the trustee toavoid any unperfected liens on property belonging to thebankruptcy estate.” Id. The determination of whether a creditor’ssecurity interest is unperfected, and therefore avoidable undersection 544(a) is controlled by state law. Id. at 1533.5

A lien creditor, as defined by Kansas law, includes a “creditor that has acquired a lien on the

property involved by attachment, levy, or the like” and “a trustee in bankruptcy from the date of

the filing of the petition.”6 Article 9 of the Kansas UCC provides a security interest is


7 K.S.A. 2005 Supp. 84–9–317(a).

8 The parties agree that on the date of filing Emprise had a perfected mortgage on the homesteadreal property, and the Trustee does not seek to avoid that interest. The Trustee seeks to avoid only thealleged lien on the Mobile Home.

9 K.S.A. 2005 Supp. 84-9-311(a)(2). This was also the law prior to the enactment of revisedArticle 9 in 2000. K.S.A. 84-9-302 (3)(c) (Furse 1996) (providing a vehicle, except a vehicle held asinventory, subject to a statute which requires indication on a certificate of title can be perfected only bypresentation for registration of the documents appropriate under such statute).

10 Beneficial Finance Co. of Kansas, Inc. v. Schroeder, 12 Kan. App.2d 150, 737 P.2d 52 (1987)rev. denied July 16, 1987.

7

subordinate to the rights of a person that becomes a lien creditor before the security interest is

perfected.7

In this case, therefore, the right of the Trustee to avoid Emprise’s lien on the Mobile

Home8 is determined by whether the bank had a lien on the home securing the May 2003 note on

the date of filing, August 20, 2005, and, if so, whether that lien was perfected. The parties agree

Emprise had a lien. The determinative issue is therefore whether that lien was perfected.

Emprise contends that the NOSI prepared and filed by Humboldt perfects its lien. The Trustee

contends that after the refinancings, change of creditors, and passage of time, the NOSI is no

longer effective.

Perfection of most security interests is governed by the Kansas version of Article 9 of the

Uniform Commercial Code. The filing of a financing statement perfects a lien in most personal

property. However, as to property subject to the certificate of title laws of Kansas, “the filing of

a financing statement is not necessary or effective to perfect a security interest.”9 Prior to 1991,

the exclusive means for perfection of a lien in a mobile home was pursuant to the certificate of

title laws applicable to vehicles.10 In 1991, the Kansas legislature enacted the Kansas


11 K.S.A. 1991 Supp. 58-4201, et seq.

12 Morris v. Trible (In re Trible), 290 B.R. 838 (Bankr. D. Kan. 2003).

13 K.S.A. 58-4202(g) (Furse 2005).

8

manufactured home act,11 and it now provides the exclusive method for perfecting a lien in a

mobile home.12 The current subsection of Kansas manufactured housing act addressing

perfection of purchase money liens in mobile homes provides:

(g) Upon sale and delivery to the purchaser of every manufacturedhome or mobile home subject to a purchase money securityinterest, as provided for in article 9 of chapter 84 of the KansasStatutes Annotated, and amendments thereto, the dealer or securedparty may complete a notice of security interest and, when socompleted, the purchaser shall execute the notice, in a formprescribed by the director, describing the manufactured home ormobile home and showing the name and address of the securedparty and of the debtor and such other information as the directormay require. The dealer or secured party may, within 10 days ofthe sale and delivery, mail or deliver the notice of security interest,together with a fee of $2.50, to the division. The notice of securityinterest shall be retained by the division, until it receives anapplication for a certificate of title to the manufactured home ormobile home and a certificate of title is issued. The certificate oftitle shall indicate any security interest in the manufactured homeor mobile home. Upon issuance of the certificate of title, thedivision shall mail or deliver confirmation of the receipt of thenotice of security interest, the date of the certificate of title isissued and the security interest indicated, to the secured party atthe address shown on the notice of security interest. The propercompletion and timely mailing or delivery of a notice of securityinterest by a dealer or secured party shall perfect a security interestin the manufactured home or mobile home, described on the date of such mailing or delivery. 13


14 Compare K.S.A. 1991 Supp. 58-4204(e) with K.S.A. 58-4204(g) (Furse 2005).

15 In re Trible, 290 B.R. at 843; K.S.A. 58-4202 (Furse 2005).

16 The mortgage required the borrower to insure the improvements for $28,966.75, theamount of the purchase money loan for the Mobile Home.

9

The subsection has not been materially amended since its enactment in 1991.14 If a loan is not

for purchase money, the exclusive method of perfection is the notation of the lien on the

certificate of title.15

The Trustee and Emprise agree that Humboldt’s1994 note for the purchase of the Mobile

Home was secured by a perfected purchase money security interest in the Mobile Home. The

parties have stipulated that the 1994 note was a purchase money note for acquisition of the

Mobile Home, and the note states it is for purchase of the Mobile Home. The bank’s mortgage

granted it a lien in the described real property where the Mobile Home was installed, with all

appurtenances.16 The bank properly completed and mailed or otherwise delivered to the Kansas

Division of Motor Vehicles a NOSI. A certificate of title was never issued, so the lien is not

noted on a title to the Mobile Home.

The Court concludes, based upon the following analysis, that perfection of the lien

continued when Humboldt refinanced the balloon in 1998, when the 1998 note was extended by

First Commercial, when the 1998 note was acquired by Emprise, and when the balloon of the

1998 note was refinanced by Emprise. The Debtor’s obligation never lost its character as a

purchase money obligation, and the NOSI which perfected Humboldt’s security interest in 1994

never lost it effectiveness.


17 K.S.A. 84-9-107(b) (Furse 1996).

18 In re Gibson, 16 B.R. 257, 264-269 (Bankr. D. Kan. 1981).

19 K.S.A. 2005 Supp. 84-9-103(a)(1).

20 K.S.A. 2005 Supp. 84-9-103(a)(2).

21 K.S.A. 2005 Supp. 84-9-103(f)(3).

10

B. The Purchase Money Character of the Obligation was not Lost throughRefinancings.

The obligation of the Debtor never lost its purchase money character. A purchase money

security interest was defined by Article 9 prior to the 2000 amendments as an interest “taken by

a person who by making advances or incurring an obligation gives value to enable the debtor to

acquire rights in or the use of the collateral if such value is in fact so used.”17 This version of

Article 9, has been construed to mean that purchase money status is not lost when a loan is

renewed or consolidated, unless a novation is intended.18 Revised Article 9 in K.S.A. 84-9-

103(f) similarly defines a purchase money security interest. Purchase money collateral is

defined to mean goods that secure a purchase money obligation incurred with respect to that

collateral.19 A purchase money obligation is defined as “an obligation of an obligor incurred as

all or part of the price of the collateral or for value given to enable the debtor to acquire rights in

or the use of the collateral if the value is in fact so used.”20 Revised Article 9 expressly provides

that a “purchase money security interest does not lose its status as such, even if . . . the purchase

money obligation has been renewed, refinanced, consolidated, or restructured.”21

Hence, if the 1998 and 2003 notes were refinancings or renewals of the balloon payment

of the initial 1994 note, the purchase money status of the obligation continued as to the 2003


22 In re Gibson, 16 B.R. at 262.

23 Farmers Sate Bank of Oakley v. Cooper, 227 Kan. 547, 608 P.2d 929 (1980).

24 See In re Gibson, 16 B.R. at 264-269.

11

note held by Emprise. Notes are routinely paid by renewal or refinancing. Former Chief Judge

Pusateri described the process as follows:

Renewal of a note occurs as a regular business practice amongsellers, finance companies and lending institutions. Briefly, theprocess involves an existing note that is “paid by renewal” or“flipped.” The “new” or renewed note incorporates the balancestill owing on the old note. Sometimes the renewal note merelyextends the time of payment for the amount due on the old note.Other times a number of old notes are “consolidated” into one“new” note. Another practice is to renew an old note and give anadditional cash advance in the renewal note, sometimes taking anadditional security interest in new or different collateral. Thevariations are numerous, but in each instance, the paying of the oldnote by execution of a renewal note is generally just abookkeeping procedure.22

Upon renewal, the lender is generally entitled to the same rights and remedies as available on the

original note.23

The stipulated facts establish that the 2003 Emprise note was a refinancing or renewal of

the 1994 Humboldt purchase money obligation. The proceeds of the 1994 note were used to

purchase the Mobile Home. Each of the subsequent notes was merely a revised method for the

payment of the original advancement, there were no additional funds distributed to the Debtor

which could have been used for any other purpose. An advancement that is a purchase money

obligation retains its status until the purchase price of the property is paid.24


25 K.S.A. 2005 Supp. 84-9-703(a).

12

C. The Change of Lenders did not cause the Purchase Money Status of theObligation to be Lost.

The change of lenders also did not cause the obligation to change status. There are two

changes to consider. First it is stipulated that Humboldt became known as First Commercial

Bank and then by a succession of mergers or name changes, First Commercial Bank became

Enterprise Bank. The Trustee does not assert these changes impacted the status of the

obligation. The second change is the acquisition by Emprise of the February 5, 1998 note with

Humboldt, as extended in 1999 by Enterprise, as part of a transaction whereby Emprise acquired

a book of loans from Enterprise. As quoted above, the Assignment and Assumption Agreement

provided that Emprise succeeded to all rights of Enterprise Bank relating to the note, including

all monies owed, all liens, and all loan documents. Nothing about the assignment changed the

purchase money status.

D. The 1994 NOSI was Effective in 2005.

The December 1994 NOSI perfected the lien in the Mobile Home when the purchase

money loan was originated. There has been no change in law concerning the method of

perfection. Article 9, both before and after the adoption of the revised code, provides that the

exclusive method of perfection is compliance with the applicable title law. Revised Article 9

provides for continuity of perfection as to security interests that were enforceable immediately

prior to the effective date of the revision if applicable requirements for enforceability and

perfection under Revised Article 9 were satisfied without any further action.25 Here, because the

purchase money lien was perfected by the NOSI prior to Revised Article 9 and perfection under


26 K.S.A. 58-4204(g) (Furse 2005).

27 Id.

28 This fact distinguishes this case from Morris v. Boeing Wichita Credit Union (In re Hicks), No.03-16625; Adv. No. 04-5072 (Bankr. D. Kan. Sept. 14, 2005), rev’d on other grounds, 2006 WL 1764119(D. Kan. June 27, 2006), where a NOSI was found ineffective because the certificate of title was issuedwithout the notation of the lien.

29 K.S.A. 2005 Supp. 84-9-311(c).

13

Revised Article 9 was by NOSI, the change in law did not require the secured creditors to take

any action for perfection to continue.

The applicable title statute was not materially amended between 1994 and the date of

filing of the petition. It unambiguously provides that a NOSI will perfect a lien until the

certificate of title is issued. The statute states: “The proper completion and mailing or delivery

of a notice of security interest by a dealer or secured party shall perfect a security interest in the

manufactured home or mobile home, described on the date of such mailing or delivery.” 26 It

further requires the department to retain the NOSI “until it receives an application for a

certificate of title to the manufactured home or mobile home and a certificate of title is issued.”27

There is no provision that places a time limit upon the effectiveness of the NOSI, other than the

issuance of the certificate of title, and the parties stipulated that no title has been issued.28

Although Article 9 places a time limit upon the effectiveness of a filed financing statement, those

provisions do not apply when perfection is pursuant to title statutes. These title statutes govern

duration and renewal of perfection.29

The assignment of the 1998 loan to Emprise did not cause the NOSI to become

ineffective. As examined above, the obligation retained its purchase money status. The

assignment provided that Emprise succeeded to all the rights on Enterprise in the 1998 note,


30 Patrons State Bank & Trust Co. v. Shapiro, 215 Kan. 856, 528 P.2d 1198 (1974); Army Nat’lBank v. Equity Developers, Inc., 245 Kan. 3, 774 P.2d 919 (1989).

31 Robinson v. Campbell, 60 Kan. 60, 55 Pac. 276 (1898).

32 K.S.A. 2005 Supp. 84-9-310(c) (effective July 1, 2001); see also K.S.A. 84-9-302(2) (Furse1996).

33 K.S.A. 2005 Supp. 84-9-310, Official Comment ¶ 4; K.S.A. 84-9-302 (Furse 1996), OfficialUCC Comment, ¶ 10.

14

including all liens and loan documents. Under Kansas common law, an assignment passes all of

the assignor’s title and interest.30 For example, Kansas has long held that the assignment of a

note ordinarily operates as an assignment of a mortgage made to secure the note.31 Under

Revised Article 9, if a secured party assigns a perfected security interest, no filing is required to

continue the perfected status against creditors of and transferees of the original debtor.32 The

provision applies to perfection under the title laws.33 Because the 1998 note, as extended in

1999, was secured by a perfected lien in the Mobile Home when assigned to Emprise, the

perfection continued for the benefit of the assignee. The 1994 NOSI remained effective when

the bankruptcy was filed.

E. The Refinancings of the Balloon Payments were not Novations.

The Trustee contends that either when the balloon payment was refinanced by Humboldt

in February 1998 or by Emprise in March 2003, the purchase money character of the loan

ceased, so these subsequent notes were no longer perfected by the NOSI. The Trustee contends

the 2003 note was not a renewal, refinancing, consolidation or restructuring of the purchase

money obligation as contemplated by K.S.A. 84-9-103(f). He must therefore be contending that

the 2003 note was a novation. Novation is the substitution of an new debt for an existing debt


34 Davenport v. Dickson, 211 Kan. 306, 310, 507 P.2d 301 (1973).

35 Id.

36 Id.

15

which is thereby extinguished in a novation.34 The controlling element is the intention of the

parties, and absent a clear and definite intention of the part of all concerned to extinguish the old

obligation by substituting a new one, there is no novation.35 Under Kansas law, a novation is

never presumed, and the burden is upon the party asserting a novation to establish its existence.36

The factual basis for the Trustee’s position is the following: (1) In 2003, the balloon

payment under the 1999 extension agreement became due; (2) the Debtor signed a new note and

security agreement with Emprise extending the time of payment of the balloon; (3) the new

security agreement did not state the loan was for purchase money; (4) the old Humboldt note was

satisfied by the proceeds of the Emprise note; (5) the old Humboldt note and security agreement

were cancelled and sent to the Debtor; and (6) Emprise is a different lender and entity than

Humboldt. The Court finds these circumstances insufficient to evidence a novation.

First, the fact that the balloon was due does not evidence a novation. Consumer notes

frequently have balloon payments, which are renewed or refinanced by the same lender without

there being a novation. Second, the execution of a new note is required when there is a renewal,

as well as when there is a novation. A new security agreement, even one pledging new

collateral, is consistent with renewal or refinancing. As to Emprise, the new security agreement

provided the bank with documentation for its records that linked the mortgage initially taken by

Humboldt and the Mobile Home to the new note. Third, a new security agreement need not state

that it is for a purchase money loan; whether an obligation is for purchase money is determined


37 In re Luke, No. 03-14067; Adv. No. 03-5323 (Bankr. D. Kan. Nov. 18, 2004).

16

by the facts of the transaction, not the agreement of the parties. Fourth, the purpose of a renewal

as well as a novation is to satisfy the obligation being renewed by the proceeds of the new note.

Fifth the stipulation of facts, which is the only evidence before the Court, does not state that an

old Humboldt note or any security agreement were cancelled and sent to the Debtor. Sixth, the

fact that Emprise is a different entity than Humboldt is irrelevant since Emprise was assigned the

Humboldt note and succeeded to all of the prior lender’s rights and interests. Emprise was the

successor of Humboldt and Enterprise, so for purposes of considering whether the 2003 note was

a renewal, refinancing, or novation, Emprise should be considered to be the same lender as those

previously holding the obligation.

F. Emprise has no Duty to Require the Issuance of a Title.

The Trustee also contends the NOSI should be held ineffective to perfect the security

interest because the lenders financing the balloons should have required or requested the

issuance of certificate of title. He cites In re Luke,37 a case where the trustee prevailed on his

claim of lien avoidance against a creditor, unrelated to the initial lender, who refinanced a loan

secured by a lien in a vehicle. Unlike this case, a balloon was not refinanced by the initial lender

or a lender related to the initial lender. Rather, the unrelated new lender sent a check to the

original lender and requested release of its lien and the initial perfection documents were not left

in place. The debtor filed his petition for relief before the lien was released, and the new

lender’s attempts to re-perfect were taken post-petition. In holding for the trustee, the court

reviewed the various actions the creditor should have taken to accomplish perfection. The case

has not applicability here.


38 K.S.A. 58-4204a.

39 Redmomd MHC Financial Services, Inc. v. MHC Financial Services, Inc. (In re Barker), No. 04-21434; Adv. No. 4-6132 (Jan. 9, 2007).

40 K.S.A. 2005 Supp. 8-135d.

17

G. Under the Facts Presented, the Availability of an Electronic Title does notChange the Court’s Analysis.

The Department of Revenue after January 1, 2003 was required by statute38 to create and

maintain an electronic title for mobile homes. In the Trustee’s view that electronic title for the

Mobile Home should qualify as the issuance of a title for purposes of requiring a person

acquiring a security interest in a mobile home subsequent to the issuance of the certificate of title

to take steps to have its lien noted on a newly issued title. The Court rejects this argument.

First, there is nothing in the stipulation indicating that an electronic title was created or, if it was,

that lien was omitted. Second, Judge Berger has recently rejected the reverse side of this

argument as applied to motor vehicles.39 He held that the statute providing for electronic titles40

does not create an alternative means for perfection of a PMSI in a motor vehicle. This Court

also finds that the addition of electronic titles does not change the statutory rule that a timely

NOSI is effective to perfect purchase money security interest in a mobile home until the

certificate of title is applied for and issued.

CONCLUSION.

The Court therefore holds that the 2003 note, like the initial 1994 note, was a purchase

money obligation, secured by a perfected security interest in the Mobile Home by virtue of the

1994 NOSI. Accordingly, the Trustee’s complaint to avoid Emprise’s lien is denied.


18

The foregoing constitute Findings of Fact and Conclusions of Law under Rule 7052 of

the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil

Procedure. A judgment based upon this ruling will be entered on a separate document as

required by Federal Rule of Bankruptcy Procedure 9021 and Federal Rule of Civil Procedure 58.

IT IS SO ORDERED.

###


1b. This FINANCING STATEMENT AMENDMENT is to be filed [for record](or recorded) in the REAL ESTATE RECORDSFiler: attach Amendment Addendum (Form UCC3Ad) and provide Debtor’s name in item 13

THE ABOVE SPACE IS FOR FILING OFFICE USE ONLY

RESTATE covered collateral ASSIGN collateral

Check one of these three boxes to:

FIRST PERSONAL NAME SUFFIXADDITIONAL NAME(S)/INITIAL(S)OR

A. NAME & PHONE OF CONTACT AT FILER (optional)

1a. INITIAL FINANCING STATEMENT FILE NUMBER

PARTY INFORMATION CHANGE:

ASSIGNMENT (full or partial): Provide name of Assignee in item 7a or 7b, and address of Assignee in item 7c and name of Assignor in item 9For partial assignment, complete items 7 and 9 and also indicate affected collateral in item 8

TERMINATION: Effectiveness of the Financing Statement identified above is terminated with respect to the security interest(s) of Secured Party authorizing this TerminationStatement

CONTINUATION: Effectiveness of the Financing Statement identified above with respect to the security interest(s) of Secured Party authorizing this Continuation Statement iscontinued for the additional period provided by applicable law

2.

3.

4.

6b. INDIVIDUAL'S SURNAME

6a. ORGANIZATION'S NAME

DELETE name: Give record nameto be deleted in item 6a or 6b

6. CURRENT RECORD INFORMATION: Complete for Party Information Change - provide only one name (6a or 6b)

7. CHANGED OR ADDED INFORMATION: Complete for Assignment or Party Information Change - provide only one name (7a or 7b) (use exact, full name; do not omit, modify, or abbreviate any part of the Debtor’s name)

8.

UCC FINANCING STATEMENT AMENDMENTFOLLOW INSTRUCTIONS

ADD name: Complete item7a or 7b, and item 7c

OR FIRST PERSONAL NAME ADDITIONAL NAME(S)/INITIAL(S) SUFFIX



10. OPTIONAL FILER REFERENCE DATA:

9. NAME OF SECURED PARTY OF RECORD AUTHORIZING THIS AMENDMENT: Provide only one name (9a or 9b) (name of Assignor, if this is an Assignment)If this is an Amendment authorized by a DEBTOR, check here and provide name of authorizing Debtor

B. E-MAIL CONTACT AT FILER (optional)

C. SEND ACKNOWLEDGMENT TO: (Name and Address)

CHANGE name and/or address: Completeitem 6a or 6b; and item 7a or 7b and item 7cDebtor or Secured Party of record

Check one of these two boxes: AND

This Change affects

5.

ADD collateral DELETE collateralCOLLATERAL CHANGE: Also check one of these four boxes:

OR


POSTAL CODECITY7c. MAILING ADDRESS


INDIVIDUAL'S FIRST PERSONAL NAME

INDIVIDUAL'S ADDITIONAL NAME(S)/INITIAL(S)

STATE

SUFFIX

COUNTRY

Indicate collateral:

FILING OFFICE COPY — UCC FINANCING STATEMENT AMENDMENT (Form UCC3) (Rev. 04/20/11)

Instructions for UCC Financing Statement Amendment (Form UCC3)

Please type or laser-print this form. Be sure it is completely legible. Read and follow all Instructions, especially Instruction 1a; correct file number ofinitial financing statement is crucial.

Fill in form very carefully; mistakes may have important legal consequences. If you have questions, consult your attorney. The filing office cannot givelegal advice.

Send completed form and any attachments to the filing office, with the required fee.

ITEM INSTRUCTIONS

A and B. To assist filing offices that might wish to communicate with filer, filer may provide information in item A and item B. These items are optional.C. Complete item C if filer desires an acknowledgment sent to them. If filing in a filing office that returns an acknowledgment copy furnished by filer,

present simultaneously with this form the Acknowledgment Copy or a carbon or other copy of this form for use as an acknowledgment copy.

Always complete items 1a and 9.

1a. File Number. Enter file number of initial financing statement to which this Amendment relates. Enter only one file number. In some states, thefile number is not unique; in those states, also enter in item 1a, after the file number, the date that the initial financing statement was filed.

1b. If this Amendment is to be filed in the real estate records or in any other filing office where the name of current Debtor is required for indexing purposes,check the box in item 1b and enter Debtor name in item 13 of Amendment Addendum (Form UCC3Ad). Complete item 13 in accordance withinstructions on Amendment Addendum (Form UCC3Ad). If Debtor does not have an interest of record, enter the name and address of the recordowner in item 16 of Amendment Addendum (Form UCC3Ad).

Note: Show purpose of this Amendment by checking box 2, 3, 4, 5, or 8 (in items 5 and 8 you must check additional boxes); also complete items 6, 7,and/or 8 as appropriate. Some, but not all filing offices accept multiple actions on an Amendment. Filing offices that accept multiple actions may chargean additional fee. Some filing offices that accept multiple actions may only index one of the actions requested. Consult the administrative rules of thedesignated filing office to determine the extent to which multiple actions will be accepted, indexed, and the applicable filing fees for multiple actions.

2. Termination. To terminate the effectiveness of the identified financing statement with respect to the security interest(s) of authorizing SecuredParty, check box in item 2. See Instruction 9 below.

3. Assignment. To assign (1) some or all of Assignor’s right to amend the identified financing statement, or (2) the Assignor’s right to amend theidentified financing statement with respect to some (but not all) of the collateral covered by the identified financing statement: Check box in item3 and enter name of Assignee in item 7a or 7b; always enter the Assignee’s mailing address in item 7c. Also enter name of Assignor in item 9. Ifassignment affects the right to amend the financing statement with respect to some (but not all) of the collateral covered by the identified financingstatement, check the ASSIGN collateral box and indicate the particular collateral covered in item 8.

4. Continuation. To continue the effectiveness of the identified financing statement with respect to the security interest(s) of authorizing SecuredParty, check box in item 4. See Instruction 9 below.

5-7. Party Information Change. To indicate a party information change, check this box; also check additional boxes (as applicable) and complete items5, 6, and/or 7 as appropriate.

To change the name and/or address of a party (items 5, 6, and 7): Check box in item 5 to indicate whether this Amendment relates to a Debtor orSecured Party of record; and check the CHANGE name and/or mailing address box in item 5 and enter name of affected party (current record name)in item 6a or 6b; and repeat or enter the new name in item 7a or 7b; always enter the party’s mailing address in item 7c.

To add a party (items 5 and 7): Check box in item 5 to indicate whether this Amendment relates to a Debtor or Secured Party of record; and checkthe ADD name box in item 5 and enter the added party’s name in item 7a or 7b; always enter the party’s mailing address in item 7c. For additionalDebtors or Secured Parties, attach Amendment Additional Party (Form UCC3AP), using correct name format.

To delete a party (items 5 and 6): Check box in item 5 to indicate whether this Amendment relates to a Debtor or Secured Party of record; and checkthe DELETE name box in item 5 and enter the deleted party’s name in item 6a or 6b.

8. Collateral Change. To indicate a collateral change, check this box; also check additional box (as applicable) and describe the change in item 8.If space in item 8 is insufficient, continue collateral description in item 14 of Amendment Addendum (Form UCC3Ad). Do not include social securitynumbers or other personally identifiable information.

To add collateral: Check the ADD collateral box in item 8 and indicate the additional collateral.

To delete collateral: Check the DELETE collateral box in item 8 and indicate the deleted collateral. A partial release is a DELETE collateral change.

To restate covered collateral description: Check the RESTATE covered collateral box in item 8 and indicate the restated collateral.

To assign the right to amend the financing statement with respect to part (but not all) of the collateral covered by the identified financing statement:Comply with Instruction 3 above and check the ASSIGN collateral box in item 8.

If, due to a full release of collateral, filer no longer claims a security interest under the identified financing statement, check box in item 2 (Termination)and not a box in item 8 (Collateral Change).

9. Name of Authorizing Party. Enter name of party of record authorizing this Amendment. In most cases, the authorizing party is the Secured Partyof record. If this is an Amendment (Assignment), enter Assignor's name in item 9a or 9b. If this is an Amendment (Termination) authorized by aDebtor, check the box in item 9 and enter the name of the Debtor authorizing this Amendment in item 9a or 9b. If this Amendment (Termination)is to be filed or recorded in the real estate records, also enter, in item 12 of Amendment Addendum (Form UCC3Ad), the name of Secured Partyof record. If there is more than one authorizing Secured Party or Debtor, enter additional name(s) in item 14 of Amendment Addendum (FormUCC3Ad).

10. Optional Filer Reference Data. This item is optional and is for filer's use only. For filer's convenience of reference, filer may enter in item 10 anyidentifying information that filer may find useful. Do not include social security numbers or other personally identifiable information.