A Filing Means What It Says

Almost two weeks ago now, the Delaware Supreme Court handed down its decision over J.P. Morgan's mistaken termination statement in the General Motors bankruptcy. (Note to Google Chrome users like me -- the link may not work; try a different web browser.)  I think they got it right, but to understand why, one obviously needs to know the facts. Melissa Jacoby has blogged about the case (especially) here and here. As Melissa explains in more detail in the former post, the case revolves a mistaken Uniform Commercial Code (UCC) filing by JPMorgan Chase. 

To really stylize the facts, there were two loans from JPMorgan Chase to General Motors. Let's call them Loan A and Loan B. Both loans were secured. Loan A was being paid off. Acting on behalf of JPMorgan Chase, lawyers for General Motors were instructed to file a termination statement in the UCC records. Because of a slip-up in the paperwork, termination statements were filed for both Loan A and Loan B. At the time General Motors entered bankruptcy, Loan B was still outstanding in the amount of $1.5 billion, meaning that if the termination statement is effective JPMorgan Chase would be unsecured in the General Motors bankruptcy.

The Delaware Supreme Court framed the question as whether JPMorgan Chase merely had to authorize the filing of the termination statement or whether it also had to intend to terminate the security interest identified in the termination statement. For my money -- but not JP Morgan Chase's money -- the court did the right thing and said it was enough that JPMorgan Chase had knowingly approved for filing a termination statement purporting to extinguish the security interest.

The case has attracted a lot of attention from commercial-law types because the core issue goes to the integrity of the UCC filing system. Most every filing-system issue revolves around whether you want to put the burden on filers to get things right or later searchers to have to make inquiry. If the court had ruled differently, every filing in the UCC system becomes immediately suspect -- and I mean "every filing," not just termination statements. Not only does a later searcher have to inquire after the filing, but also the later searcher would now have to be satisfied the filer had the requisite state of mind to make the filing effective. On the other side of this cost-benefit analysis is that the burdens placed on filers are not difficult. One may say this particular transactional setting was highly complex and hence not as easy to comply as I make it sound. This complexity, however, was introduced by the parties for their own reasons, and they should bear the cost of that complexity. JPMorgan Chase is not a financial naif. 

The case now goes back to the Second Circuit, which still has wriggle room to let JPMorgan Chase off the hook. The Delaware Supreme Court expressly left open to the Second Circuit the "fact-based question of whether [the lawyers] had authority as JPMorgan's agent to file the termination statement." For a UCC filing to be effective, an obvious point is that it must be authorized. A stranger to JPMorgan Chase could not file a termination statement that would bind the company. The Second Circuit could still say the lawyers were authorized only to file a termination statement for Loan A, meaning the termination statement for Loan B was not effective.

The law of agency provides the rules of decision for whether the filing was authorized. There has been some discussion of the issue as a matter of apparent authority. That analysis is wrong. The idea of apparent authority steps in when we have third parties. A classic example is the bar owner who tells the bar's general manager not to order more than 10 kegs of beer. The manager's actual authority is to buy 10 kegs of beer. The manager then buys 15 kegs of beer. The owner cannot refuse to pay for the extra 5 kegs. By putting the general manager in a position of authority, the owner has induced reliance by third parties such as the beer supplier. This simple example (and more complicated ones) are the domain of apparent authority.

Instead of apparent authority, the question here is whether the lawyers were implicitly authorized to file the termination statement. Agents have the authority given by the instructions from their principals, but it is not possible to state every instruction expressly. If the bar owner tells the general manager to sell beer, that would include implicit authority to accept customers' payment on behalf of the bar owner. Doctrinally, the question here is whether JPMorgan Chase's instructions implicitly authorized the filing of the termination statement. It is hard to imagine a factual scenario where they did not.

Stepping back again to consider the effects on UCC filing system, I hope the Second Circuit does not adopt a cramped interpretation of implicit authority in UCC transactional settings. When all of the parties working on the transaction are known to each other, it is best to place the risk of loss from misunderstanding on those parties. Otherwise, later searchers will be put to a tougher inquiry to make sure everyone was acting with authority.

And, even then, how is one ever to be satisfied that authority is present when dealing with a legal entity? The ultimate authority for a corporation is the board of directors. Do we need to know whether the filing of a UCC statement was at least implicitly authorized by a board? Obviously not. Somewhere down the corporate ladder will be someone who we satisfy our notions of who is able to bind the corporation. What I am suggesting is that all we should require is that the person authorizing the filing be in the corporate ladder somewhere, including ladder "hangers-on" at law firms and banks and other service providers. Let the filer police its agents, and allow the later searcher to rely on the written record.