On October 17, 2014, the Delaware Supreme Court held that under the Delaware Uniform Commercial Code, the subjective intent of a secured party is irrelevant in determining the effectiveness of a UCC-3 termination statement if the secured party authorized its filing.[1]  

Background

The Labor and Employment Group at Hogan Lovells is proud to have contributed to the 2020 version of the firm’s Doing Business in the United States Guide. The Guide provides a high-level overview of the laws and practices important to foreign investors interested in operating in the United States, including recent legal developments.

Intercreditor agreements--contracts that lay out the respective rights, obligations and priorities of different classes of creditors--play an increasingly important role in corporate finance in light of the continued prevalence of complex capital structures involving various levels of debt. When a company encounters financial difficulties, intercreditor agreements become all the more important, as competing classes of creditors seek to maximize their share of the company's limited assets.

Over the past several years, non-recourse receivables financing has been embraced by many major financial institutions and non-bank investors in the US market. With its (i) favorable regulatory treatment for regulated institutions, (ii) perceived positive risk/reward profile and (iii) adaptability to recent technological advancements such as distributed ledger technology (i.e., blockchain), non-recourse receivables financing likely will grow increasingly popular in the US market.

The US Court of Appeals for the Sixth Circuit has ruled that a lender’s security interest in accounts was not perfected because a reference to “proceeds” in the lender’s UCC financing statement did not expressly refer to “accounts.” The Sixth Circuit surprisingly interpreted the definition of “proceeds”1 in Article 9 of the Uniform Commercial Code to exclude “accounts”2 (despite and without reference to provisions of UCC Article 9 to the contrary).

Under the Uniform Commercial Code (UCC), a secured party can perfect its lien on certain of a debtor's assets by the filing of a UCC-1 financing statement. However, Section 9-509 of the UCC provides that a party may file such a financing statement only if the debtor authorizes the filing: either expressly in an authenticated record or, more commonly, by executing a security agreement. The UCC does not specify when a debtor must provide such authorization, but the U.S.

On Jan. 21, in Official Committee of Unsecured Creditors of Motors Liquidation v. JPMorgan Chase Bank (In re Motors Liquidation), No. 13-2187, (2d Cir. Jan. 21, 2015), the U.S. Court of Appeals for the Second Circuit addressed whether a UCC-3 termination statement, which was improperly filed as part of the repayment of an unrelated loan, may be considered effective to terminate the security interest in question, even where none of the parties intended that result.