Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A.

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 DeLCode 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 per *1012 fected 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.

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 (JPMor-gan’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 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 *1013 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 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:

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 *1014 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.

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

“[Unambiguous statutes are not subject to judicial interpretation.” 14 The unambiguous terms of these UCC provisions make clear that if a “secured party of record 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 *1015 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 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, *1016 there are doctrines that allow parties who sign documents they do not understand to escape the consequences 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 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 *1017 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 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 JPMor-gan’s theory, no creditor could ever be sure that a UCC-S 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—“re- viewed] and knowingly approved for filing a UCC-3 purporting 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 Dela *1018 ware 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.