Appeals court: GM agent OK’d security termination on $1.5 billion loan

By Caroline Salls

Pittsburgh, Jan. 21 – A bankruptcy court order stating that General Motors Corp. term loan agent JPMorgan Chase Bank, NA’s inadvertent termination of a security interest was unauthorized and not effective was reversed Wednesday by the U.S. Court of Appeals for the Second Circuit.

The appeals court’s ruling came in response to an appeal filed by the official committee of unsecured creditors of Motors Liquidation Co., which was left as the bankrupt entity when GM emerged from Chapter 11.

The initial ruling was made by the U.S. Bankruptcy Court for the Southern District of New York.

“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,” the appeals court said.

The appeals court said GM entered a term loan in 2006 secured by a large number of its assets, including all of its equipment and fixtures at 42 facilities throughout the United States.

JPMorgan served as administrative agent and secured party of record for that term loan, as well as a $300 million 2001 synthetic lease financing transaction, and caused the filing of 28 financing statements around the country to perfect the lenders’ security interests in the collateral.

When the synthetic lease was nearing termination in 2008, a list of security interests to be terminated under that transaction mistakenly included the interests related to the term loan.

According to Wednesday’s ruling, the error went unnoticed. On Oct. 30, 2008, General Motors repaid the amount due on the synthetic lease, and the security interests related both to the lease and the term loan were identified for termination to the Delaware Secretary of State.

JPMorgan noticed the error after General Motors filed bankruptcy in 2009. The committee filed a lawsuit against the administrative agent, seeking a ruling that, despite the error, the 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 argued that the termination statement was unauthorized and therefore ineffective because no one at JPMorgan, General Motors or their law firms had intended the term loan security interest be terminated.

Motors Liquidation was formerly General Motors, a Detroit-based automaker that filed for bankruptcy on June 1, 2009. The new General Motors Corp. emerged from Chapter 11 on July 10, 2009. Motors Liquidation’s Chapter 11 case number is 09-50026.

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