Mistake in GM Loan Could Come Back to Haunt J.P. Morgan

The Delaware Supreme Court Friday weighed in on a key issue in a battle over a $1.5 billion loan tied to the bankruptcy of General Motors Corp., and the word that came down is not good for the company’s lenders.

Asked to advise a federal appeals court in New York that will make the final call, the Delaware high court said creditors are entitled to rely on formal loan documents authorized by secured lenders—even if there’s a big mistake in the documents.

The decision hands an advantage to lower-ranking unsecured creditors in GM’s bankruptcy, who challenged the validity of the security anchoring a $1.5 billion loan from a syndicate of lenders, led by J.P. Morgan Chase & Co. Action continues in the New York court, which had consulted the Delaware court on a fine point of the law that governs loan documents filings.

Lawyers for GM creditors are attempting to persuade the U.S. Court of Appeals for the Second Circuit to rule that a mistake in the paperwork involving the payoff of a different loan effectively rendered the $1.5 billion bank loan an unsecured debt.

The unsecured creditors lost in bankruptcy court, when a judge ruled that J.P. Morgan didn’t intend to authorize the filing of documents that cut off the lien supporting the term loan, called UCC statements. Since neither GM nor J.P. Morgan intended to release the term loan lien, the documents that reflected the lien was terminated were of no legal effect, the bankruptcy judge said.

On appeal, the Second Circuit asked Delaware’s high court to weigh in on a novel question of the law governing the loan deals. Did J.P. Morgan have to authorize the release of the lien, or just the filing of the UCC statement, in order for the lien to be released?

Friday, the Delaware Supreme Court said that, assuming J.P. Morgan reviewed and knowingly approved the UCC statement, the lender must abide by “the plain consequences of its filing.”

It remains to be seen exactly what those consequences will be for J.P. Morgan, the GM creditors and the law firm involved in the filing, Mayer Brown LLP.

Now that Delaware’s high court has weighed in, the matter bounces back to the federal appeals court in New York, which will take up the question of whether Mayer Brown had authority as J.P. Morgan ’s agent to file the termination statement.

Mayer Brown spokesman Bob Harris Friday declined to comment, citing the law firm’s policy of not commenting on matters in litigation. J.P. Morgan, through a spokesman, declined comment.

Barry Seidel, attorney for the GM creditors committee, said the decision answers the legal question of what J.P. Morgan needed to authorize. It will be up to the federal appeals court in New York to decide whether J.P. Morgan  authorized the filing of the UCC termination statement.

J.P. Morgan contends it didn’t authorize the filing. If the lenders lose round two, J.P. Morgan and others in the bank group could have to give back much of a loan they were repaid during the GM bankruptcy. The exact amount unsecured creditors could claim is disputed, Mr. Seidel said.