Consumer Bankruptcy Journal Fall 2015 - Page 38

JPMORGAN’S UNFORTUNATE LOSS OF $1.5 BILLION SECURITY INTERESTS VERSUS A BANKRUPTCY DISCHARGE By Christine M. Kieta Law Office of Christine M. Kieta, PC J PMorgan Chase Bank (“JPMorgan”) just lost $1.5 billion – not million – through an error that left most of a loan to General Motors (“GM”) unsecured by any collateral. You don’t have to be a lawyer to appreciate the magnitude of that mistake. When GM paid off a smaller loan (a paltry $300 million) from JPMorgan one of the law firms had to file a termination statement to release the lien in the collateral that secured repayment of that loan. A paralegal for one of their law firms mistakenly included a different lien that secured a different loan for $1.5 billion. That’s a big mistake. An unsympathetic 2nd Circuit Court of Appeals pointed out that “[n]o one at General Motors, Mayer Brown, JPMorgan, or its counsel, Simpson, Thacher & Bartlett, noticed the error.”1 Worse yet the incorrect documents were sent to each organization – and their outside counsel – for review. Translation: everyone reviewed the mistake, 1 38 Id. CONSUMER BANKRUPTCY JOURNAL and everyone failed to catch this? Ouch. I. What In The World Are Secured Transactions, And Why Should Every Lawyer And Every Business Know The Area? Secured transactions are about exciting as a piece of paper. But they touch almost every person and every business that has debt. Sometimes it is secured. Sometimes it is discharged. So what happened to JPMorgan? JPMorgan made loans to GM and took collateral to secure repayment of those loans. This was supposed to do two things: 1) guarantee repayment of the loans; and 2) guarantee that the balance owed on each loan would not be discharged in a bankruptcy at least up to the value of the collateral which creditor can take in lieu of repayment. Article 9 of the Uniform Commercial Code (“UCC”), which is adopted individually by each State, governs security interests in collateral guaranteeing repayment. This is the murky area where it is Winter 2015 easy to make mistakes and that ultimately cost JPMorgan a ton of money. To have an enforceable lien (which is called a security interest under the UCC2) the creditor must do two things. First, it must ensure that its security interest actually attaches to the collateral (a three step process under 9-203(a) and (b)).3 Second, it must tell the world about its security interest in that collateral which protects it from other creditors who may claim an interest in it especially in a bankruptcy. This is called ‘perfecting’ the security interest.4 The most common method of perfecting a security interest – which is what JPMorgan did for both loans – is by filing a financing statement with the applicable state office. For GM, it was Delaware because that is the state in which it is incorporated. The paralegal who prepared the termination statement 2 3 4 § 1-201(b)(35) §9-102 §9-308 has 4 methods for perfection: filing a financing statement, possession, control, and automatic. National Association of Consumer Bankruptcy Attorneys