In an important recent ruling, the Delaware Supreme Court confirmed what many practitioners long suspected: that a secured creditor that mistakenly authorizes the filing of a \u201ctermination statement\u201d will lose the lien covered by the termination statement, even though the creditor did not intend to release the lien.<\/p>\n
In Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A.,<\/em> the Court ruled that, if a secured party authorizes the act of filing of the termination statement, \u201cthe financing statement to which the termination statement relates ceases to be effective\u201d regardless of whether the authorizing party subjectively intended the legal consequences of the statement\u2019s filing. In other words, according to the Court, \u201cit [is] enough that the secured lender review and knowingly approve for filing a UCC-3 purporting to extinguish the perfected security interest.\u201d Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A.<\/em>, No. 325, 2014, 2014 Del. LEXIS 491, 2014 WL 5305937 (Del. Oct. 17, 2014), slip op. at 1 (quoting 6 Del. C. <\/em>\u00a7 9-513(d)). The secured lender need not have intended or understood the termination statement\u2019s effect for it to extinguish the perfected status of the subject security interest.<\/p>\n The Court\u2019s ruling came in response to a certified question of Delaware law posed by the United States Court of Appeals for the Second Circuit. The dispute before the Second Circuit involved a UCC-3 termination statement filed with the Delaware Secretary of State on behalf of JPMorgan Chase Bank, N.A. (\u201cJPMorgan\u201d), the secured party of record. The termination statement referred to a security interest that JPMorgan claimed it had not intended to release. Id<\/em>. at 2. The Second Circuit found that the answer to whether the termination statement was effective depended, among other things, on whether the review and knowing approval of it for filing by a secured lender was sufficient for effectiveness under Delaware law, or more was required. The Second Circuit therefore certified the following question to the Delaware Supreme Court:<\/p>\n 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.<\/em> at 1.<\/p>\n The Delaware Supreme Court recognized the question\u2019s \u201cprecise\u201d nature and noted that the question in effect asked the Court to assume \u201cthe secured party of record has itself reviewed and knowingly approved the termination statement for filing.\u201d Id<\/em>. at 5. The Court rejected what it viewed as JPMorgan\u2019s attempt to \u201creframe the certified question by asking\u201d the Court to \u201cconsider\u00a0.\u00a0.\u00a0. issues of agency law[.]\u201d Id<\/em>. For the Court, the certified question removed from the equation the issue of whether<\/em> the UCC-3 in this particular case was authorized by the secured party, and instead focused on what<\/em> must be authorized: either (1)\u00a0the filing of the termination statement itself, or (2) the filing plus the legal consequences of the filing.<\/p>\n The Supreme Court\u2019s analysis began with Section 9-513 of Delaware\u2019s UCC, which states that \u201c\u2018upon the filing of a termination statement with the filing office, the financing statement to which the termination statement relates ceases to be effective.\u2019\u201d Id<\/em>. at 6 (quoting 6 Del. C.<\/em> \u00a7\u00a09-513(d)). The Court then turned to Section 9-510, which it found to plainly state that a termination statement is effective if the statement was \u201c\u2018filed by a person that may file it under Section 9-509.\u2019\u201d Id<\/em>. (quoting 6 Del. C.<\/em> \u00a7\u00a09-510(a)). Finally, the Court turned to Section 9-509(d)(1), which states that a person may file a termination statement if the \u201c\u2018secured party of record authorizes the filing[.]\u2019\u201d Id<\/em>. (quoting 6 Del. C.<\/em> \u00a7\u00a09-509(d)(1)).<\/p>\n The Court found that Section 9-509(d)(1) unambiguously states that, \u201cfor a termination statement to have the effect specified under \u00a7 9-513 of the Delaware UCC, it is enough that the secured party authorizes the filing.\u201d Id<\/em>. at 7. To reach its result, the Court applied standard principles of statutory construction. The Court found that the UCC\u2019s relevant provisions are unambiguous and therefore \u201c\u2018not subject to judicial interpretation.\u2019\u201d Id<\/em>. at 6 (quoting Leatherbury v. Greenspun, D.O.<\/em>, 939 A.2d 1284, 1288 (Del. 2007)). The Court explained that, had the General Assembly wished to condition a UCC-3\u2019s effectiveness on the authorizing party\u2019s subjective intent, it could have written the statute to include an intent requirement. The Court also stated that its decision was supported by sound policy, observing, \u201cIf 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.\u201d Id<\/em>. at 9-10. In addition, the Court further explained, if an inquiry into intent were necessary every time a creditor sought to rely on a UCC-3 statement, then \u201cno creditor could ever be sure that a UCC-3 filing is truly effective . . . unless a court determined after costly litigation that the filing was in fact subjectively intended.\u201d Id<\/em>. at 11.<\/p>\n The Court concluded that \u201cfor the reasons we have articulated, for a termination statement to become effective under \u00a7\u00a09-509 and thus to have the effect specified in \u00a7\u00a09-513 of the Delaware UCC, it is enough that the secured party authorizes the filing to be made, which is all that \u00a7\u00a09-510 requires.\u201d Id<\/em>. at 12. \u201cThe Delaware UCC contains no requirement[,]\u201d the Court explained, \u201cthat a secured party that authorizes a filing subjectively intends or otherwise understands the effect of the plain terms of its own filing.\u201d Id<\/em>. In so ruling, the Court did not express a view on the factual question that the Second Circuit had reserved for itself: whether, in the particular case before it, the secured lender indeed had reviewed and knowingly approved the filing.<\/p>\n This decision continues a long line of cases recognizing the effectiveness of authorized, but erroneous, UCC filings.<\/p><\/blockquote>\n To be clear, secured parties are not bound by the effects of unauthorized<\/em> UCC-3 filings, and those reviewing a UCC filing search report cannot assume that any indicated UCC-3 filing was authorized and, thus, effective. Rather, weighing a variety of factors, they must continue to choose whether or not to inquire further. But the focus of any such inquiry is the filing of the UCC-3, not any subjective understanding of its legal consequence.<\/p>\n Note<\/em><\/strong>: The appellant was represented in the Delaware proceeding by Young Conaway Stargatt & Taylor, LLP and Dickstein Shapiro LLP.\u00a0 This article was prepared solely by Young Conaway Stargatt & Taylor, LLP and is intended to provide a summary of the Court\u2019s holding.\u00a0 The views expressed are not necessarily those of either firm or its clients.<\/strong><\/p>\n Norman M. Powell<\/strong> is a partner in the law firm of Young Conaway Stargatt & Taylor, LLP. He is a Fellow of the American College of Commercial Finance Lawyers, and an elected Member of the American Law Institute. He serves on the Editorial Boards of The Practical Lawyer and the Uniform Commercial Code Law Journal, and is Chairman of the American Bar Association\u2019s Uniform Commercial Code Committee. Mr. Powell is an American Bar Association Advisor to the Uniform Law Commission\u2019s Permanent Editorial Board on the Uniform Commercial Code, and an adjunct professor at the Temple University James E. Beasley School of Law, where he teaches Secured Transactions.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" In an important recent ruling, the Delaware Supreme Court confirmed what many practitioners long suspected: that a secured creditor that mistakenly authorizes the filing of a \u201ctermination statement\u201d will lose the lien covered by the termination statement, even though the creditor did not intend to release the lien. In Official Committee of Unsecured Creditors of<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8,38],"tags":[],"coauthors":[46],"class_list":["post-215","post","type-post","status-publish","format-standard","hentry","category-faculty-authored","category-regulated-industries","masonry-post","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"yoast_head":"\n