Mistaken Termination of Financing Statement Proves Costly to Lender

Category: Bankruptcy Law
Published: Wednesday, 24 December 2014
Written by Admin

On October 27, 2014, the Delaware Supreme Court ruled that even inadvertent mistakes in UCC filings count, and the burden rests on the filing party to detect errors, and not on affected parties who come across them in a search. This ruling upsets a 2013 decision of a bankruptcy court and will ultimately determine the character of a $1.5 billion security interest in the General Motors (GM) bankruptcy.

Background

Before GM entered bankruptcy, a group of lenders made a $1.5 billion term loan to GM. In 2008, GMs attorneys filed UCC-3 statements intending to terminate perfection of the lenders security interest in an earlier (and unrelated) loan to GM. Unfortunately, the paralegal tasked with the job of assembling the paperwork inadvertently included a termination statement bearing a filing number corresponding to the $1.5 billion term loan. Many individuals (at GM, at the lenders, and at the various law firms involved in the filing) reviewed the paperwork and approved the filing without noticing the mistake until GM entered bankruptcy.

The Official Committee of Unsecured Creditors sought a determination that, because of the error (which the lenders brought to the Committees attention), the lenders security interest was unperfected, which, under applicable bankruptcy law, would make the loan largely unsecured.

The Bankruptcy Court Lets the Lenders off the Hook

On March 1, 2013, the bankruptcy court (Judge Robert E. Gerber) ruled in favor of the lenders, finding that the effect of the erroneous filing depended upon whether it had been authorized. What constitutes an authorized filing? The bankruptcy court found that, based on principles of agency law, the lenders did not give, and GM did not have, actual authority to file the financing statement terminating perfection of the security interests for the term loan. As a result, the erroneous termination statements had no legal effect.

The case went up on direct appeal to the Court of Appeals for the Second Circuit, which certified the following question to the Delaware Supreme Court: 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?

The Delaware Supreme Court Puts the Lenders Back on the Hook

On October 27, the Delaware Court ruled that the unambiguous provisions of Delawares UCC dictate that it [is] enough that the secured lender review and knowingly approve for filing a UCC-3 purporting to extinguish the perfected security interest. 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.

In other words, it was enough that the lenders had knowingly approved for filing a termination statement purporting to extinguish perfection of the security interest.

The case now goes back to the Second Circuit, which may have room to let the lenders off the hook. The Delaware Court left open the fact-based question of whether [the lawyers] had authority as . . . agent [for the lenders] to file the termination statement.

For the time being, though, UCC filers should be aware that the burden is on them to carefully review filings and catch any mistakes before statements are filed -- or at least before anyone searching the filings does.



Detroit bankruptcy judge asks for final bills

Category: Bankruptcy Law
Published: Wednesday, 24 December 2014
Written by Admin

Detroit -- The citys bankruptcy judge Monday ordered Detroits legal team and consultants to file final bills within the next week.

US Bankruptcy Judge Steven Rhodes issued the order during a hearing Monday and told city lawyers to disclose those fees and expenses before the end of the year. Rhodes did not, however, reveal any details on a deal announced last week that cuts those fees by about $25 million.

The deal will free up money for public safety and other services and give Detroit additional breathing room to implement a restructuring plan reached during the citys landmark bankruptcy case.

The law firms and consultants have agreed to trim about $25 million from the overall bill, which is north of $140 million.

The deal was reached during several days of closed-door negotiations after Mayor Mike Duggan expressed concern about escalating fees eating up money needed to revitalize the city and possibly derailing Detroits restructuring plan.

Some of the companies, a source familiar with the deal explained, cut fees, some gave back as in kind contributions and others agreed to not seek payment for future services from firms that Detroit will continue to use after the bankruptcy.

Before the deals were reached, federal mediators held at least four formal sessions over the reasonableness of more than $140 million in fees billed to Detroit by its bankruptcy lawyers and restructuring consultants. The team held talks with about a dozen firms, while the city held earlier talks with about a dozen smaller firms to reach settlements.

The citys lawyers and consultants pointed out during mediation they had already made significant concessions on fees.

By late October, the citys lead bankruptcy law firm, Jones Day, had charged Detroit $52.3 million.

City consulting firm Miller Buckfire renegotiated its contract with the city twice, most recently in June. In the newest contract, the firm was to receive a flat fee of $28 million for all of its services. Prior to revising its contract, the firm had already given the city a discounted rate, according to former Emergency Manager Kevyn Orrs office.

Orr, a former Jones Day attorney, told The News on Wednesday that the fees may seem high, but he said he didnt believe they were out of line for a case of Detroits magnitude.

The bankruptcy allowed the city to shed $7 billion in debt and to restructure another $3 billion, he said.

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Bankruptcy Panel Pushes US Lawmakers to Fix Law

Category: Bankruptcy Law
Published: Tuesday, 23 December 2014
Written by Admin

Top restructuring professionals say US corporate bankruptcy law is broken and are pushing lawmakers for changes that would give struggling companies a better shot at survival.

In a report released Monday, industry professionals called on federal lawmakers to pass reforms they say would make the Chapter 11 process cheaper and more efficient, potentially saving jobs and stabilizing the economy.

The 370-page report from the...

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Category: Bankruptcy Law
Published: Tuesday, 23 December 2014
Written by Admin

There have been approximately 660 Chapter 9 filings nationwide since 1937, mainly in small municipalities and taxing districts, says Chicago attorney James Spiotto, a municipal bankruptcy expert and managing director of financial consulting firm Chapman Strategic Advisors LLC.

Reasons for filing vary but often include troubled public development projects, unanticipated hefty legal judgments against a taxpayer-backed entity, or massive pension and bond debt payments that leave a municipality cash-strapped and unable to cover operating costs of employee salaries, vendor payments and other expenses.

US bankruptcy law requires government entities to obtain specific authorization from the state to file for Chapter 9, but theres no provision in Illinois to grant that authority to local governments, so technically filings arent permitted.

CASH-STRAPPED, WORRIED

Increasingly, though, local government officials statewide are discussing bankruptcy as a way to reorganize their troubled finances.

Mounting pension obligations and other debt, coupled with flat or declining tax revenues, are forcing local governments to slash services, increase fees and taxes and even borrow to make ends meet.

In a months-long investigation, released in August, the Better Government Association closely reviewed the finances of 217 police and fire pension funds in suburban Cook County.

The taxpayer-supported systems, with collective assets of nearly $5 billion, are intended to provide public safety workers and their families with stable retirement incomes.

But the collective unfunded liability of those pension funds is $3.3 billion, BGA Rescuing Illinois research determined. Moreover, dozens of the funds are in immediate financial peril.

READ MORE: Suburban Pension Peril

Money in dozens of Chicago-area police and fire pension funds is drying up - which should be a big worry not only for current and future retirees, but taxpayers, a BGA Rescuing Illinois investigation discovers.

Municipal leaders have told the BGA theyre looking to state lawmakers to reform the local police and fire pension systems, easing their financial burden, but a legislative fix doesnt appear imminent.

Meanwhile, the debts keep mounting.

Morrissey says Rockford isnt in danger of falling into bankruptcy anytime soon. But if the citys pension obligations and other debts arent brought under control it could cause problems down the road.