Consumer Bankruptcy Journal Fall 2015 - Page 39

JPMORGAN’S UNFORTUNATE LOSS to terminate the security interest in the smaller loan accidentally included an extra security interest that secured much of the $1.5 billion loan. Both organizations and their outside counsel reviewed this document before it was filed with the Delaware Secretary of State. When it was filed, JPMorgan released its security interest in the collateral. II. A Whopping Bankruptcy I.O.U. In Naturally, having a $1.5 billion claim against a bankruptcy estate without having a security interest in any collateral securing that claim leaves a creditor in a remarkably unenvied position known as an unsecured creditor. The unsecured creditor usually gets repaid only a small percent if any of the actual debt. Trying to stave off that position, JPMorgan claimed that the termination statement that purportedly discharged its security interest was ineffective because it authorized it mistakenly. It argued reviewing the termination statement before it was filed, seeing the mistake before it was effective, and approving the document containing that mistake does not make the filing itself effective. Instead, the creditor must intend for the specific security interests listed in the termination statement to be released despite what the termination statement actually says. If that sounds unconvincing, that’s because it is. But the Bankruptcy court for the Southern District of New York accepted it and held that the termination statement was ineffective as to that financing statement.5 On appeal, the 2nd Circuit Court of Appeals disagreed and even asked the Delaware Supreme Court to weigh in by answering one of the questions before it through a certified question. Essentially, does Delaware law require a creditor to authorize only filing the termination statement which happens to extinguish the listed security interests, or does it have to intend to extinguish each listed security interest.6 value is sufficient to cover the debt. Any amount owed beyond the collateral’s value is treated as unsecured. This also means – to the benefit of the rest of the unsecured creditors – that property in the bankruptcy estate may be available to pay off their claims if it turns out that the property is unencumbered or non-exempt. At best, JPMorgan is sharing its collateral with GM’s other unsecured creditors but still getting paid at least some of what it was owed. At worst, JPMorgan is left with an unsecured I.O.U. that will likely be discharged. “If parties could be relieved from the legal consequences of their mistaken filings, they would have little incentive to ensure the accuracy of their information contained in their UCC filings,”7 sayeth the Delaware Supreme Court. Well, it’s tough to argue with that. Just consider the ramifications of every organization that would claim a mistake in the wake of finding out that it could be more secured. That left JPMorgan grappling with § 506(a)(1) of the bankruptcy code which states that a secured loan is reaffirmed if the collateral’s 5 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). 6 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 (2nd Cir., 2014). 7 Official Comm. of Unsecured Creditors of Motors Liquidation Co., 2014 WL 5305937 at 3-4. National Association of Consumer Bankruptcy Attorneys Winter 2015 CONSUMER BANKRUPTCY JOURNAL 39