JPMorgan Chase has to live with a paralegal’s mistake that unsecured a $1.5 billion loan made to General Motors, putting the bank in the same boat as other unsecured GM creditors in GM’s 2009 bankruptcy, a federal appeals court has ruled.
Although JPMorgan never intended to authorize the termination of its security interest in the loan, it “authorized the filing of a [Uniform Commercial Code] termination statement that had that effect,” the 2nd U.S. Circuit Court of Appeals said Wednesday in a decision that is a victory for unsecured GM creditors who argued that the loan should not be ranked as a secured debt in GM’s bankruptcy.
The bank knew GM’s law firm, Mayer Brown, was going to file a termination statement and “reviewed and assented to the filing of that statement,” the court ruled. “Nothing more is needed.”
The 2nd Circuit reversed a bankruptcy court judge who ruled in 2013 that while it was “initially tempting” to doom lenders to “live with their mistakes,” JPMorgan had not expressly authorized the termination of the loan’s security interest.
According to the appellate opinion, the snafu began in 2008 when a partner at Mayer Brown instructed an associate to draft documents to release the security interest of JPMorgan and other lenders in $300 million in financing that GM was paying off. One of the steps was to identify other security interests held by GM lenders as collateral that would need to be terminated.
The paralegal researched UCC financing statements recorded against GM in Delaware, mistakenly including the secured $1.5 billion term loan.
“No one at General Motors, Mayer Brown, JPMorgan, or its counsel, Simpson Thacher & Bartlett LLP, noticed the error, even though copies of the closing checklist and draft UCC‐3 termination statements were sent to individuals at each organization for review,” the 2nd Circuit noted.
The error, in fact, wasn’t spotted until GM filed for bankruptcy in 2009. The official committee of unsecured creditors then asked a judge to rule that the $1.5 billion loan was unsecured because of the mistake.
The appellate decision opens the way for creditors left unpaid from GM’s bankruptcy to ask JPMorgan and its lending syndicate “to return money they collected when the loan was paid off,” the Wall Street Journal reported. If the money is returned, the official creditors’ committee “may then reclaim some of it, sharing with other unsecured creditors of the old GM.”