University of Cincinnati Law Review University of Cincinnati Law Review
Volume 85 Issue 1 Article 4
August 2018
The $1.5 Billion General Motors Recalls at the Dangerous The $1.5 Billion General Motors Recalls at the Dangerous
Intersection of Chapter 11, Article 9, and TARP Intersection of Chapter 11, Article 9, and TARP
Sally McDonald Henry
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Sally McDonald Henry,
The $1.5 Billion General Motors Recalls at the Dangerous Intersection of Chapter
11, Article 9, and TARP
, 85 U. Cin. L. Rev. (2018)
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THE $1.5 BILLION GENERAL MOTORS RECALLS AT THE
DANGEROUS INTERSECTION OF CHAPTER 11, ARTICLE 9,
AND
TARP
Sally McDonald Henry*
I. INTRODUCTION: THE COMPACT VERSION
This article discusses how, in the General Motors Corporation
(General Motors or GM)
1
chapter 11 case, a group of creditors—mostly
collateralized loan obligations, hedge funds, pension, and other funds
2
—
(the Funds or the Lenders
3
) were paid in full, in cash, even though they
had no right to the payment, which amounted to almost $1.5 billion.
Not only were the Funds paid in full, but in addition, their collateral
agent, JPMorgan Chase Bank, N.A. (JPMorgan), is being reimbursed for
millions of dollars of legal fees, even though it has no legal right to the
reimbursement.
4
These improper payments occurred (and continue to
occur) even though many other creditors—unsecured bondholders,
5
tort
creditors, mom and pop business whose existence depend on being paid
* Associate Professor, Texas Tech School of Law. B.A., Duke University; J.D. New York
University School of Law. I am grateful for the comments I received from Jim Hawkins and other
colleagues on an early draft of this paper at the Texas Legal Scholars Workshop organized by the SMU
Dedman School of Law and the University of Houston Law Center. Professors Jay Lawrence
Westbrook and Edward J. Janger also provided invaluable help commenting on a late draft of this
article. Finally, I thank Amber Fly, my former research assistant, and the Texas Tech School of Law for
its financial support for this project. Of course, all errors are mine.
1. The General Motors bankruptcy case has generated a great deal of commentary. For articles
that examine the GM case, see generally Douglas G. Baird, Lessons from the Automobile
Reorganizations, 4 J.
OF LEGAL ANALYSIS 271 (2012); Ralph Brubaker & Charles Jordan Tabb,
Bankruptcy Reorganizations and the Troubling Legacy of Chrysler and GM, 2010 U.
ILL. L. REV. 1375
(2010); Stephen J. Lubben, No Big Deal: The GM and Chrysler Cases in Context, 83 A
M. BANKR. L.J.
531 (2009). After the sale of substantially all its assets, General Motors changed its name to “Motors
Liquidation Corp.” For ease of understanding, I nevertheless refer to the chapter 11 debtor as “GM” or
“General Motors.”
2. The term “Fund” is used loosely herein—as it has come to be used in popular parlance—to
mean investment vehicle.
3. Although the secured creditors sometimes are referred to herein as “Lenders” as shorthand,
in fact a large number of these creditors may have bought their positions long after the Term Loan was
made to General Motors. See generally Anne Maars Huber & Thomas H. Young, The Trading of Bank
Debt In and Out of Chapter 11, 15 J.
BANKR. L. & PRAC. 15, 1, 3 (2006).
4. As of December 31, 2015, the JPMorgan fees already exceeded $10 million. In re General
Motors Corp., No. 09-50026 (Bankr. S.D.N.Y. June 1, 2009) [hereinafter GM Chapter 11 Case];
Motors Liquidation Co. GUC Trust Quarterly GUC Trust Reports as of Dec. 31, 2015 at 10, GM
Chapter 11 Case, No. 09-50026 (Feb. 12, 2016), ECF No. 13605. As of December 31, 2016, the totaled
$31.1 million. Motors Liquidation Co. GUC Trust, Quarterly Report (Form 10-Q) (Feb. 13, 2017) at 9.
5. The bondholders allegedly were owed close to $28 billion and were “the largest unsecured
creditor group in this case.” Transcript re Hearing Held on June 1, 2009 at 86, GM Chapter 11 Case,
No. 09-50026 (June 3, 2009), ECF No. 374.
131
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132 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 85
for their goods and services—are being paid only a portion of their
claims, having received mainly rights to small amounts of equity in the
transferee of the debtor’s assets, General Motors Company (New GM).
6
How did this happen? The Funds were part of a syndicate of lenders
that had loaned roughly $1.5 billion (the Term Loan) to General Motors
about three years before General Motors filed for bankruptcy in 2009.
The loan was supposed to have been secured by equipment and fixtures.
However, the perfection of the security interest in equipment was
accidentally terminated roughly eight months before General Motors
filed for chapter 11 relief.
7
Because the Second Circuit Court of
Appeals ultimately held that the accidental termination was legally
effective, the Funds were effectively unsecured in the bankruptcy case,
except to the extent of any value of their fixture collateral, which the
bankruptcy judge understood “would make most of the $1.5 billion
indebtedness unsecured.”
8
Because the rule in bankruptcy is that, with
very limited exceptions, an unperfected creditor is treated the same as
any other unsecured creditor and oftentimes receives only pennies on the
dollar,
9
payments to those Funds were a windfall for the favored
creditors.
The $1.5 billion raced out the door in the first weeks of the GM case
even though by the time the Funds were paid the weaknesses of their
position had been discovered (but disclosed neither to the court nor on
the public docket that could have been examined by the legions of GM
6. The General Motors disclosure statement contained no estimation of value of the distribution
to unsecured creditors, likely because GM couldn’t predict the value of the shares creditors would
receive. Disclosure Statement for Debtors’ Amended Joint Chapter 11 Plan at 4, GM Chapter 11 Case,
No. 09-50026 (Dec. 8, 2010), ECF No. 8023 [hereinafter Disclosure Statement].
7. Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JP Morgan Chase
Bank, N.A. (In re Motors Liquidation Co.), 755 F.3d 78, 82 (2d Cir. 2014) (noting termination was
“erroneous”).
8. The Bankruptcy Judge characterized the lien securing the equipment as having been the
“principal lien” and opined that if the equipment lien were unenforceable in bankruptcy it would
“make[ ] most of the $1.5 billion in indebtedness under the Term Loan unsecured.”
Official Comm. v.
JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), 486 B.R. 596 (Bankr. S.D.N.Y. 2013),
rev’d on other grounds, 777 F.3d 100 (2d Cir. 2015). Although the Bankruptcy Judge stated in his
opinion that the fixture collateral was worth very little, that matter is still to be determined.
Nevertheless, in all the collateral reports that General Motors delivered to the Lenders’ Agent, none of
the collateral securing the $1.5 billion loan specifically was identified as having been fixtures. Affidavit
of Richard W. Duker in Support of Defendant JPMorgan Chase N.A.’s Motion for Summary Judgment
at Ex. O at 6, GM Chapter 11 Case, Adv. No. 09-00504 (Mar. 1, 2013), ECF No. 40 [hereinafter Duker
Aff.] (Summary Collateral Value Certificate; describing collateral as “M&E” (presumably machinery
and equipment) and “Special Tools”). The Lenders also had a security interest in equipment and
fixtures of Saturn Corporation, which apparently is of little value given the Funds’ hard-fought litigation
over the GM equipment financing statement.
9. See, e.g., 11 U.S.C. §§ 544 (trustee may avoid unperfected security interest), 1122(a) (all
claims classified together must be similar), 1129(b)(2012) (plan must not discriminate unfairly against
nonconsenting classes of claims and must comply with the fair and equitable rule as to nonconsenting
classes of claims).
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2017] THE $1.5 BILLION GENERAL MOTORS RECALLS 133
creditors). Among the inner circle that did know, however, was the
United States Department of Treasury, which had negotiated the deal to
repay the purportedly secured lenders at the outset of the GM case and
continued to require that the Funds be paid immediately even after it
learned the critically important perfection document had been
terminated.
10
Now that the Second Circuit Court of Appeals has
determined that the key security interest was unenforceable, there is a
scramble to determine how much, if any amount, the Funds actually
should have been paid so that some of the money might be recovered for
the General Motors’ creditors. Because over seven years have passed
since the Funds were paid, some of the Funds may be unable to satisfy
any judgment against them; many of the Funds may not even still
exist.
11
Other recoveries may have to be tracked down—at great
expense—in foreign countries. Huge sums in legal and advisory fees
have been and may continue to be spent trying to recover the cash,
12
and
at the end of the day, it may be that the Funds and JPMorgan will retain
money that they never had a right to in the first place.
This article focuses not on the unfortunate error that terminated
perfection of the key lien securing the $1.5 billion Term Loan, but rather
on the payment to the Funds and JP Morgan, notwithstanding their lack
of security. Why would one group of creditors be paid before other
creditors with the same legal claims against the estate? Was this
10. The Department of Treasury loaned GM most of the money necessary to finance its
bankruptcy case under the Troubled Asset Relief Program (TARP). Some funds were provided by
Economic Development Canada (EDC). T
HE FINANCIAL CRISIS INQUIRY COMMISSION, THE FINANCIAL
CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE
FINANCIAL AND ECONOMIC CRISIS 375 (2011). The credit agreement with the Department of Treasury
and the EDC, which was approved in the GM Chapter 11 case, provides that only “Permitted Liens” on
GM property are allowed. The liens of the pre-petition lenders are not Permitted Liens under the
documentation and thus the loan from the Department of Treasury to GM was conditioned on paying off
the Term Loan Lenders. Mot. of Debtors for Entry of Order Pursuant to 11 U.S.C. §§ 361, 362, 363, and
364 (1) Authorizing the Debtors to Obtain Postpetition Financing, Including on an Immediate, Interim
Basis; (ii) Granting Superpriority Claims and Liens; (iii) Authorizing the Debtors to Use Cash
Collateral; (iv) Granting Adequate Protection to Certain Prepetition Secured Parties; (v) Authorizing the
Debtors to Prepay Certain Secured Obligations in Full within 45 Days; and (vi) Scheduling a Final
Hearing Pursuant to Bankruptcy Rule 4001 at Ex. A at 24, GM Chapter 11 Case, No. 09-50026 (June 1,
2009), ECF No. 64 [hereinafter DIP Financing Motion].
11. Indeed, the GM disclosure statement specifically warns, “[T]here is a risk that any judgment
against the lenders under the Prepetition Term Loan Agreement will not be collectible in full because
some of the more than 400 lenders may lack the financial capability to satisfy their respective portion of
any judgment or award. Therefore, there is no assurance that the Term Loan Avoidance Litigation with
result in any recovery from JMCB or the other lenders under the Prepetition Term Loan Agreement.”
Disclosure Statement, supra note 6, at 58–59.
12. In re Motors Liquidation Co., 555 B.R. 355, 360, 369 (Bankr. S.D.N.Y. 2016) (approving
settlement under which liquidating creditors’ trust prosecuting action to recover payments from Funds
could receive up to a $15 million non-interest bearing loan from the debtor-in-possession lenders in
return for a portion of the litigation recovery; noting trust had already been allocated over $15 million to
prosecute litigation and maintain trust created under GM reorganization plan to prosecute litigation).
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payment appropriate, both procedurally and practically? Or, rather, was
it the inappropriate result of a snowballing practice under which the
typical bankruptcy court orders give secured creditors incredible
benefits and preferences over all other creditors, whether they have
established their rights to this Cadillac treatment or not?
This article, then, joins other articles
13
that have examined the power
of secured creditors in mega-chapter 11 cases
14
and proposes reforming
long-standing practices. Rather than take a theoretical, big-picture
approach to the role of secured creditors in chapter 11 cases, this article
takes a close look at one extraordinarily successful case
15
in which a
$1.5 billion issue went terribly wrong. To understand what happened
here, I have read thousands of pages of pleadings, exhibits, and hearing
transcripts from the General Motors chapter 11 case relating to the Term
Loan. What I conclude is that the typical provisions of mega-case
debtor-in-possession financing, which evolved at a time when the law
regarding security interests was dramatically different than it is now and
when lending syndicates were oftentimes dramatically different than
they are now, are antiquated, dangerous models that need to go back to
the shop before more unfairness takes place in chapter 11 cases.
In order for us to understand the need for change, Part II of the article
will review the perfection and termination of security interests and the
importance of perfected security interests in chapter 11 cases. Part III of
this article will discuss the extraordinary “First Day” and debtor-in-
possession financing orders entered in the GM case and the subsequent
litigation to recover the money. Part III will also address the continuing
13. E.g., Jay Lawrence Westbrook, Illinois ABI Symposium on Chapter 11 Reform: Secured
Creditor Control and Bankruptcy Sales: An Empirical View, 2015 U.
ILL. L. REV. 831, 833–34 (2015)
(“Our data suggest that secured creditor control is indeed important, but not as pervasive as many have
assumed.”); Melissa B. Jacoby & Edward J. Janger, Ice Cube Bonds: Allocating the Price of Process in
Chapter 11 Bankruptcy, 123 Y
ALE L.J. 862, 895 (2014) (noting how uncertainty of debtor’s valuation
enhances secured creditor control); George Kuney, Hijacking Chapter 11, 21 E
MORY BANKR. DEV. J.
19, 30 (2004); Harvey R. Miller, Chapter 11 in Transition—From Boom to Bust and Into the Future, 81
A
M. BANKR. L.J. 375, 388 (2007). The late Mr. Miller, a renowned bankruptcy lawyer, opined , “The
chapter 11 process, as contemplated in 1978, has been overwhelmed by marginalization of the debtor-in-
possession [and] expansion of creditor (particularly secured creditor) control . . . .” Id. at 385.
14. Professor Westbrook has reminded us that the vast majority of chapter 11 cases are not the
mega cases, such as General Motors, and has criticized academia’s “myopic focus on very large cases.”
Westbrook, supra note 13, at 832. Although I have not followed his suggestion regarding appropriate
academic inquiries, I have been guided by his admonition that, in examining chapter 11 cases, we may
need to “look deeper but less statistically.” Id. at 845.
15. The success of the GM case may be perceived differently depending on its direct effect on
the individual assessing the case, but at least two scholars have concluded the case was a success: while
of course there were losers—retirees health care was cut, for example—“the automakers got back on
their feet, which helped the recovery of the U.S. economy. Indeed, the auto industry’s outsized
contribution to the economic recovery had been one of the unexpected consequences of the
governmental intervention.” Austin D. Goolsbee & Alan B. Krueger, A Retrospective Look at Rescuing
and Restructuring General Motors and Chrysler, 29 J.E
CON. PERSP. 3, 22 (2015).
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2017] THE $1.5 BILLION GENERAL MOTORS RECALLS 135
controversies regarding the effect of the First-Day orders on the
distributions to creditors. Part IV will set forth modest proposals to
make it less likely that favored creditors will walk away with a windfall
to which they are not entitled.
We start with an overview of the perfection of security interests.
II.
THE PERFECTION AND TERMINATION OF SECURITY INTERESTS
Few legal tasks are simpler than perfecting and maintaining
perfection of a security interest in equipment, which was the main
collateral for the Term Loan. Article 9 of the Uniform Commercial
Code (U.C.C.) was revised in the late 1990s to make what had been at
times a tricky endeavor about as easy as legal practice can get.
16
A. Perfecting a Security Interest in Equipment
“Perfection” is a key concept in the law of security interests and
bankruptcy. If a security interest is properly “perfected” in a timely
fashion, the security interest is enforceable in bankruptcy.
17
If the
security interest is perfected, the secured creditor generally is entitled to
the value of its collateral, over time, even if no other creditor receives a
penny in the bankruptcy case.
18
Most security interests are perfected in a few steps. The debtor (who
has the right to grant a security interest in the collateral) agrees in an
authenticated document to grant a security interest in exchange for
value.
19
The creditor, the debtor, or one of their agents, files a one-page
form (with the permission of the debtor) called a financing statement or
U.C.C.-1—which does not even need the debtor’s signature—in a state
filing office.
20
For most collateral, the form must be filed where the
debtor is located; corporations are deemed to be located where they are
incorporated, so for corporations, “location” is an easy matter to
determine.
21
Here in Texas, the filing costs $15.00 and can be
completed online in a few minutes.
22
Perfecting a security interest is
16. The revision process is described in the official comments to U.C.C. § 9-101(West, Westlaw
through 2015 ann. meetings of the Nat’l Conf. of Comm’r on Unif. State Laws and Am. Law Inst.).
17. U.C.C. §§ 9-312, 9-317(a); 11 U.S.C. §§ 502, 506(a) (2012).
18. See, e.g., U.C.C. §§ 9-102(a)(52)(C), 9-317(a), 9-322(a) (2010); 11 U.S.C. § 1129(b)(A)
(2012).
19. U.C.C. § 9-203(b).
20. U.C.C. §§ 9-310(a), 9-520(a). See generally, Charles Cheatham, Changes in Filing
Procedures Under Revised Article 9, 25 O
KLA. CITY U. L. REV. 235 (2000).
21. U.C.C. § 9-307(e).
22. T
EXAS SECRETARY OF STATE, About the Corporations Section,
http://www.sos.state.tx.us/corp/index.shtml (last visited July 2, 2016).
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136 UNIVERSITY OF CINCINNATI LAW REVIEW [VOL. 85
similarly inexpensive and easy throughout most of the country.
23
The
form has to have the debtor’s correct name;
24
again, this information is
easily available from the corporate debtor’s certificate of incorporation.
The financing statement also has to set forth the name and address of the
secured creditor, but it may list only the name of a collateral agent, and
it need not set forth the email address, phone number, or other details
regarding whom to contact at the office of a secured creditor regarding
the security interest.
25
When the creditor gives value, the loan is
perfected.
26
Once these few steps are taken, the filing is generally good for five
years.
27
In the six-month window before the fifth anniversary of the
filing, the filing needs to be extended (again, with the simple one-page
form)
28
if the loan has not yet been repaid. Of course, the filing should
not be terminated before the obligation that is secured is repaid.
Assuming these steps are followed, the holder of the perfected security
interest has the right to be paid the value of its collateral before
everyone else: the sickly retirees, the person crippled for life by the
debtor’s faulty products, many taxing authorities, and the vendor whose
business will be ruined by its not having been paid.
29
But that is the rule
of the priority of security interests. It is justified on the theory that
society as a whole benefits from the availability and the lower pricing of
secured loans.
30
23. Margit Livingston, A Rose by Any Other Name Would Smell as Sweet (or Would It?): Filing
and Searching in Article 9’s Public Records, 2007 BYU
L. REV. 111, 113 (2007) (detailing how all 50
states have adopted the revised U.C.C. Article 9).
24. U.C.C. § 9-503, 9-506(a).
25. U.C.C. § 9-521 (a).
26. U.C.C. §§ 9-203(b)(1) (for a security interest to attach, value must be given), 9-203(b)(2)
(debtor must have rights in the collateral).
27. U.C.C. § 9-515(a) (generally, filings are effective for five years). But see U.C.C. § 9-515(b)
(filings in manufactured home transactions and public finance transactions effective for thirty years).
28. U.C.C. § 9-515(d).
29. See, e.g., 11 U.S.C. § 1129(b)(1) (2012) (absolute priority rule). If the collateral is not
necessary to the reorganization, the collateral can be abandoned by the trustee, or the court can lift the
automatic stay to allow a creditor to foreclose on the collateral. 11 U.S.C. §§ 362(d)(2), 544(a) (2012).
30. See generally Barry E. Adler, A World Without Debt, 72 W
ASH U. L.Q. 811, 826 (1994)
(proposing carve out for tort claimants); Lucian Arye Bebchuk & Jesse M. Fried, The Uneasy Case for
the Priority of Secured Claims in Bankruptcy, 105 Y
ALE L.J. 857, 861–62 (1996) (examining rationale
for priority of secured debt); Kenneth N. Klee, Barbarians at the Trough: in Defense of the Warren
Carve-Out Proposal, 82 C
ORNELL L. REV. 1466, 1468–69 (1997) (describing attacks on proposals that
secured lenders’ claims should be subject to a carve out for the benefit of unsecured creditors as
“hysterical efforts to entrench wealth in the hands of banks, insurance companies, and finance
companies at the expense of tort creditors, tax creditors, environmental creditors, and perhaps,
employees and trade creditors”); Charles Mooney, The (Il)legitimacy of Bankruptcies for the Benefit of
Secured Creditors, 2015
U. ILL. L. REV. 735 (2015) (discussing societal benefits of liquidating
bankruptcy cases for the benefit of secured creditors); Steven L. Schwarcz, The Easy Case for the
Priority of Secured Credit in Bankruptcy, 47 D
UKE L.J. 425 (1997) (granting security interests to secure
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What did these rules mean in the GM financing? Basically, to perfect
the security interest in equipment, JPMorgan had to file a one-page form
with the secretary of state of Delaware, where General Motors was
incorporated. The form could provide that the collateral was “all
equipment and fixtures.”
31
The form had to have the debtor’s name
correct, which meant that it had to have the name of the debtor set forth
in the debtor’s formation documents.
32
Here, the secured party was
described as “JPMorgan Chase Bank, as Administrative Agent.” The
original filings gave little additional information: the address of
JPMorgan was set forth as “P.O. Box 2558, Houston, TX 77252.”
33
Typically, this perfection would be “blessed” by counsel to the borrower
in the form of a legal opinion to be delivered at closing of the loan.
34
Finally, the filing had to not be terminated. Here, however, the
financing statement that perfected the Term Loan security interest in
equipment was terminated, by accident.
B. Perfecting a Security Interest in Fixtures
Perfection of a security interest becomes a bit more complicated if the
collateral is—or might be—a fixture. In that case, the U.C.C. requires
dual filings for the secured creditor to have the optimum protection.
35
“Fixtures” are “goods that have become so related to particular real
property that an interest in them arises under real property law.”
36
The
plain language of the definition has led at least one scholar to conclude
that a good cannot be a fixture unless a security interest in the good
attached before it became a fixture.
37
This is because a “good” is
defined in U.C.C. section 9-102(a)(41) to be “all things moveable when
“new money” loan benefits unsecured creditors).
31. U.C.C. §§ 9-108(b), 9-504. A lender could enhance its security interest by including any
books, records, and general intangibles relating to the equipment as part of its security.
32. U.C.C. § 9-521.
33. Motors Liquidation Co. Avoidance Action Trust v. JPMorgan Chase Bank, N.A., Adv. No.
09-00504 (Bankr. S.D.N.Y. July 31, 2009) [hereinafter Term Loan Litigation]; Affidavit of Debra
Homic Hoge at Ex. D., Term Loan Litigation, Adv. No. 09-00504 (July 1, 2010), ECF No. 42
[hereinafter Hoge Aff.].
34. See generally Tri-Bar Opinion Committee, Third-Party “Closing” Opinions, 53 B
US. LAW
591 (1998).
35. For an excellent overview of the law of secured transactions as it relates to fixtures, see Marc
L. Roark, Groping Along Between Things Real and Things Personal: Defining Fixtures in Law and
Policy in the U.C.C., 78 U.
CIN. L. REV. 1437 (2010).
36. U.C.C. § 9-102(a)(41). Compare Plant Fed. Credit Union v. Heflin (In re Heflin), 326 B.R.
696, 702 (Bankr. W.D. Ky. 2005) (blinds that can be easily removed are not fixtures) with City of
Buffalo v. Michael, 209 N.E.2d 776, 777 (N.Y. 1965) (sign that was firmly attached to building was
fixture).
37. Roark, supra note 35, at 1455 (“[F]ixtures are only fixtures if a security interest arises before
they become fixtures.”).
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a security interest attaches” (emphasis added).
38
Other language of
Article 9, however, undermines that interpretation.
39
In any event, the threshold question is whether the good is a fixture
under applicable state law.
40
To answer this question, the real property
law of the jurisdiction in which the good is located controls.
41
Although
there is of course variety in the various jurisdictions concerning what
constitutes a fixture, in many jurisdictions the definition can be quite
narrow.
42
If something is in fact a fixture, a security interest in that good can be
perfected by filing a financing statement with the office usually
designated for the filing of financing statements for ordinary goods,
such as equipment. That filing grants the holder of the security interest
in the fixture priority over any other entity with a judicial lien or any
entity that later perfects a security interest in the fixture by filing with
the usual office for filing financing statements.
43
This includes priority
38. U.C.C. § 9-203 (non-possessory security interest in goods attaches when the debtor has
rights in the collateral, has authenticated a written security agreement, and value has been given).
39. Although the language of the U.C.C. is clear that a fixture must be a good, and a good must
be moveable, not all states clearly require that a chattel be moveable when the security interest attaches
in order for the chattel to be an Article 9 fixture. See, e.g., Kinzalow v. Bank & Trust (In re Value Inv.
Props. LLC), 481 B.R. 403 (Bankr. E.D. Tenn. 2012) (“[T]he character of the property at the time the
security interest attaches determines the proper method of perfection.”).
40. U.C.C. § 9-301(3)(A) provides that “while . . . goods . . . [are] located in a jurisdiction, the
local law of that jurisdiction governs: (A) perfection of a security interest in the goods by filing a fixture
filing.” Because the bankruptcy court is a federal court sitting with bankruptcy jurisdiction, as a logical
matter, the court will have to determine what choice of law to apply. In the Second Circuit, courts
follow the choice of law of New York for a case, such as General Motors, pending in the Southern
District of New York. See Bianco v. Entons (In re Gaston), 243 F.3d 601, 606 (2d Cir. 2001)
(bankruptcy court should use choice of law of forum state). Other circuits mandate a federal choice of
law in bankruptcy cases. E.g., In re Lindsay v. Beneficial Reinsurance Co. (In re Lindsay), 59 F.3d 942,
948 (9th Cir. 1995) (bankruptcy court should use federal choice of law).
41. U.C.C. § 9-301(3)(A). As the court in Strain v. Green, 172 P.2d 216, 218 (Wash. 1946)
(quoting Philadelphia Mrtg. & Trust Co. v. Miller, 56 P. 382 (Wash. 1899)) (internal quotation marks
omitted) explained: “Every lawyer knows that cases can be found in this field [regarding fixtures] that
will support any position that the facts of his particular case require him to take . . . . There is a
wilderness of authority[,] . . . [fixture] cases are so conflicting that it would be profitless to undertake to
review . . . them.”
42. See, e.g., In re Value Inv. Props. LLC, 481 B.R. at 408 (citing Hickman v. Booth, 173 S.W.
438, 438 (Tenn. 1915)) (to be a fixture under Tennessee law, a chattel must be “permanently annexed to
the realty or a removal thereof must cause a serious injury to the freehold”); Evans v. Green Tree
Servicing, LLC (In re Evans), 370 B.R. 138 (Bankr. S.D. Ohio 2007) (citing In re Jarvis, 310 B.R. 330,
335–36 (Bankr. N.D. Ohio 2004)) (owner must intend chattel be fixed permanently to real estate); Teaff
v. Hewitt, 1 Ohio St. 511 (1853); In re Jackson, 136 B.R. 797 (Bankr. N.D. Ill. 1992) (“fixtures” under
U.C.C. is broader than under real estate law); Am. Nat’l Bank & Trust Co. v. Matrix IV, Inc. (In re SM
Acquisition Co.), 296 B.R. 452 (Bankr. N.D. Ill. 2005); In re Cliff’s Ridge Skiing Corp., 123 B.R. 753
(W.D. Mich. 1991) (ski chairlift was fixture); Ottaco, Inc. v. Gauze, 226 Mich. App. 646 (1997) (fixture
under Michigan law “(1). . . is annexed to the realty; (2) its adaptation or application to the realty being
used is appropriate; and (3) there is an intention to make the property a permanent accession to the
realty”).
43. U.C.C. § 9-317(a) (holder of perfected security interest primes judicial lien creditor; holder
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over the trustee in bankruptcy—or the chapter 11 debtor in possession,
the equivalent of a bankruptcy trustee for these purposes.
44
However, in order to have priority against an entity with a real estate
mortgage on the property to which the fixture is affixed—or a bona fide
purchaser for value of that real estate—a secured party has to file a
“fixture filing”: a filing in the real property records where the fixture is
located.
45
At that point, the fixture filer has priority over competing
interests in the real property.
46
But what if an entity has no financing statement on file in the general
U.C.C. record-filing office,
47
as was the situation in the GM Term Loan,
but has made a proper fixture filing? In that case, Article 9 suggests that
the fixture filings nevertheless will be good against the bankruptcy
trustee or debtor in possession because Article 9 specifies that the place
to file a financing statement to perfect a security interest in fixtures or
goods that will become fixtures is either the U.C.C. record-filing office
or the place in which real estate mortgages should be filed.
48
This interpretation is buttressed in another part of Article 9, which
provides that:
[A] perfected security interest in fixtures has priority over a
conflicting interest of an encumbrancer or owner of real property if
. . .
. . . .
(3) the conflicting interest is a lien on the real property obtained
of perfected security interest primes bankruptcy trustee); U.C.C. § 9-322(a) (between two perfected
secured creditors, the first to file a financing statement or perfect its security interest has priority).
44. U.C.C. §§ 9-102, 9-317; 11 U.S.C. § 1107 (2012).
45. U.C.C. § 9-102(40).
46. U.C.C. § 9-334.
47. I use the term “U.C.C. record-filing office” to refer to the place most financing statements
are filed, which, in the case of a Delaware corporation such as GM, is the office of the Secretary of State
of Delaware. U.C.C. §§ 9-301(1), 9-307(e).
48. U.C.C. § 9-501(a).
[I]f the local law of this State governs perfection of a security interest or agricultural lien, the
office in which to file a financing statement to perfect the security interest or agricultural lien is:
(1) the office designated for the filing or recording of a record of a mortgage on the related real
property, if:
. . . .
(B) the financing statement is a filed as a fixture filing and the collateral is goods that are or
are to become fixtures; or
(2) the office of [or any office duly authorized by] or in all other cases, including a case in
which the collateral is goods that are or are to become fixtures and the financing statement is
filed as a fixture filing.
Id.
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by legal or equitable proceedings after the security interest was
perfected by any method permitted by this article.
49
Although the language standing by itself is not crystal clear,
50
the
official comments to the U.C.C. explain that the goal of this section is to
“protect[ ] a perfected fixture security interest from avoidance by a
trustee in bankruptcy under Bankruptcy Code section 544(a), regardless
of the method of perfection.”
51
Thus, the official comment argues that
so long as the fixture is subject to a proper fixture filing, the lender’s
security interest is good against a trustee in bankruptcy, and by
extension against the avoiding powers of a debtor in possession or a
creditor’s committee acting on behalf of the estate of a debtor in
possession, even if the secured party did not have a proper non-fixture
filing on file.
C. Fixtures and Equipment in the General Motors Case
Why does all this matter in the GM case? As mentioned, the Funds’
financing statement perfecting their security interest in equipment was
accidentally terminated in the GM case, and that accidental termination
was later held to have been effective. However, under the Term Loan,
the Funds had a security interest not only in equipment, but also in
fixtures.
52
What is unclear from the record, however, was whether in
fact any of the collateral actually was fixtures. The “fixture” component
of the collateral may merely have been “belts and suspenders” to protect
the equipment lenders from the possibility that some of their equipment
would later become or be deemed to be a “fixture” by being attached to
real estate. Although this issue has not yet been determined in the
litigation that has been pending for over seven years in the GM case, the
periodic statements GM provided its lenders up to the eve of its
bankruptcy filing identified none of the collateral as having been
fixtures, but rather categorized the collateral as “E&M” (apparently,
equipment and machinery) and “special tools”: all goods that appear to
49. U.C.C. § 9-334(e)(3).
50. In other sections, Article 9 is clear that a perfected security interest primes the interest of a
“judicial lien holder,” which is defined to include a bankruptcy trustee. See U.C.C. §§ 9-317(a), 9-
102(a)(52)(C). However, the key defined term “judicial lien holder” is not used in U.C.C. § 9-334(e)(3),
arguably creating ambiguity.
51. U.C.C. § 9-334 cmt. 9.
52. Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank,
N.A. (In re Motors Liquidation Co.), 755 F. 3d 78, 79 (2d Cir. 2014). Note there apparently are
problems with at least some of the fixture filings securing the Term Loan. See Stipulation Regarding
Surveyed Metes and Bounds, Term Loan Litigation, Adv. No. 09-00504 (Jan. 10, 2017), ECF. No. 827
(stipulation regarding property description used in filing).
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fall within the definition of equipment under Article 9.
53
The collateral was located all over the country: Delaware, Indiana,
Kansas, Kentucky, Louisiana, Maryland, Michigan, New York, Ohio,
Texas, and Wisconsin.
54
Indeed, if some of the collateral was in fact
fixtures, and if, in fact, those interests were prior to the security interests
of any entities that had liens on the real estate to which the fixtures were
affixed, then there is still some GM collateral securing the Fund’s
claims. That, however, is a thorny factual issue requiring an
investigation into several issues, including the precise collateral and its
use at the time the security interest attached;
55
the applicable state law
that will determine how the term “fixture” is defined; and any prior
mortgages or judicial liens on the property to which the fixture was
affixed.
56
Once it is determined whether any collateral actually was a
fixture over seven years ago and whether the fixture filing alone will
grant the lenders secured status in bankruptcy, the court will have to
determine the value of that collateral (not now, but perhaps over seven
years ago at the beginning of the GM chapter 11 case, when no viable
arm’s length purchaser was willing to purchase its business assets) to
see what part of the loan was secured.
57
D. The 2001 Revisions to Article 9
It bears emphasis that the perfection system currently in effect is
greatly simplified from the rules that applied before the 2001 revisions
to Article 9, which were adopted in all states.
58
Before 2001, many
53. Duker Aff., supra note 8. Under U.C.C. § 9-102(a)(33), “equipment” is defined as “goods
other than inventory, farm products, or consumer goods.” “‘Goods’ means ‘all things that are moveable
when the security interest attaches.’” U.C.C. § 9-102(a)(44). Note, however, that the machinery or
equipment could be attached to the realty in such a way that it became a fixture. See supra notes 35–39
and accompanying text.
54. Duker Aff., supra note 8, at Ex. O, Schedule 1 Annex 1 to U.C.C. Financing Statement;
Declaration of Eric Fisher in Support of Motion for Partial Summary Judgment, Term Loan Litigation,
Adv. No. 09-00504 (July 1, 2010), ECF No. 27 [hereinafter Fisher Decl.].
55. This assumes that a good must be movable at the time the security interest attaches in order
for it to be a fixture.
56. Under the U.C.C., the choice of law for determining perfection of a security interest in a
fixture filing is the local law of the jurisdiction where the goods are located. U.C.C. §§ 9-301(3), 9-
301(4). Thus, the court will have to look to the local law of each jurisdiction in which the collateral was
located on June 1, 2009, to determine if in fact the good was a “fixture” under the U.C.C. and whether
the fixture filing was proper.
57. See Affidavit of Frederick A. Henderson, Pursuant to Local Bankruptcy Rule 1007-2 ¶ 14,
GM Chapter 11 Case, No. 09-50026 (June 1, 2009), ECF No. 21 [hereinafter Henderson Aff.] (“[T]he
only entity that has the financial wherewithal and is qualified to purchase the assets—and the only entity
that has stepped forward to make such a purchase—is the U. S. Treasury-sponsored purchaser.”); Id.
¶ 73 (noting that the company could not “sell discrete assets that otherwise should have had substantial
value under normal market conditions”).
58. Livingston, supra note 23, at 113.
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more financing-statement filings could be required and there were, in
many cases, no bright lines regarding where those financing statements
should be filed in order to be effective. Thus, before the 2001 revisions,
when the property was tangible collateral, such as equipment, the
financing statement had to be filed where the collateral was located,
unless the collateral was mobile goods.
59
By contrast, when the
property was intangible collateral, such as accounts or general
intangibles, the financing statement had to be filed where the debtor was
located.
60
For corporations, the debtor generally was “located” at its
place of business if it had one place of business and at its chief executive
office if it had more than one place of business.
61
For large companies,
like General Motors, it could be very difficult to keep track of where
collateral was located. In some cases, it was even difficult to determine
the location of the company’s chief executive office. The perfection of
security interests through the filing of financing statements would be
even more complicated in states that had adopted what was designated
as the “Third Alternative” to filing rules, which required both central
and local filing to perfect many security interests.
62
One scholar described the process as follows: “The Article 9 Filing
System is a mess. Filings are spread among more than 4,300 offices,
each of which imposes its own procedures and requirements.”
63
That all changed, however, when in 2001 all states adopted an
overhauled version of Article 9. Under the revised Article 9, most
security interests are perfected by filing only one financing statement in
the state in which the debtor is located.
64
The location of a corporation
for filing a financing statement is where the corporation is
incorporated.
65
Suddenly, everything relating to perfecting a security
interest became much simpler.
At the same time that Article 9 perfection was being simplified, the
process of filing financing statements and searching for filed financing
statements also became much easier. Filings once had taken up musty
file drawers in large, sometimes remote buildings wherever a state
capital or county registrar’s office happened to be located. Now, in
most cases, these files can be easily—and cheaply—accessed
electronically. For example, in Texas, searching for all financing
59. U.C.C. § 9-103(1) (superseded 2001) (herein I refer to the version of Article 9 that was
superseded in 2001 as the “Former U.C.C.”).
60. Former U.C.C. § 9-103(3).
61. Former U.C.C. § 9-103(3)(d).
62. Former U.C.C. § 9-401(1).
63. Lynn M. LoPucki, Why the Debtor’s State of Incorporation Should Be the Proper Place for
Article 9 Filing: A Systems Analysis, 79 M
INN. L. REV. 577, 579 (1995).
64. U.C.C. §§ 9-301, 9-307, 9-311.
65. U.C.C. § 9-307(c).
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statements filed against a particular debtor can be done electronically in
a process that takes only a few minutes and costs only $3.00.
66
It is hard
to imagine a better, more user-friendly system. Unlike Texas, however,
Delaware has not adopted a process that is as speedy and inexpensive.
Unlike states with low fees and immediate, easy access to the filing
system, Delaware’s system is more complicated. In Delaware, the fee to
search a particular debtor’s name is at least $85 and a lawyer cannot
undertake the search directly. Rather, the lawyer must hire a company
to retrieve searches.
67
These Delaware procedures increase the cost, and
more importantly for the issues to follow, increase the time to search the
files: what is a 10 minute process in Texas that can be undertaken at any
hour of the day, for example, takes a bit longer in Delaware, at many
times the cost.
68
E. Why Is a Filing System Important?
In order to understand why a technical slip up such as the accidental
termination in the GM case could lead to a $1.5 billion loss, we need to
consider why having accurate records in the filing system is important.
For centuries, courts have believed that it is a fraud on creditors to
grant a secret lien to a favored creditor: the idea is that all creditors
should be able to understand the assets that a debtor has available to pay
its creditors.
69
The ancient case first famous for articulating the concept is Twyne’s
Case.
70
In Twyne’s Case, an individual transferred his property to a
third party, Twyne, in payment of outstanding debts, but the debtor
continued to use the property himself. “C,” an unpaid creditor, sought
to recover money the debtor owed him, only to learn that assets the
debtor possessed that appeared to be available for creditors were in fact
66. SOSDirect: An Online Business Service from the Office of the Secretary of State, TEXAS
SECRETARY OF STATE, sos.state.tx.us/corp/sosda/index.shtml (last visited July 2, 2016).
67. UCC Search, S
TATE OF DELAWARE, DEPT. OF STATE, DIV. OF CORPORATIONS,
https://corp.delaware.gov/uccsearch.shtml (last visited Feb. 26, 2016). The fees for a search are not on
the Delaware web site. However, the web site requires that a searcher use an authorized search service.
One search service informed me that the fee is $50.00 for the state; $40 for the search company; $35.00
for the first page of a report, and $2.00 for every page of the report thereafter. Email from
nraiseservices.com to Sally M. Henry (Mar. 10, 2016) (on file with author). More recently, another
search firm informed me that the fee was $75.00 if the search came up empty, $110.00 for the first page
retrieved, and $2.00 for each page thereafter. Email from Nicholas Bialota, Account Technician,
Parasec, to Sally M. Henry (Jan. 5, 2017) (on file with author). Thus, a search for a large company’s
filings could be very expensive.
68. UCC Search, supra note 67; Email from nraiseservices.com to Sally M. Henry, supra note
67; Email from Nicholas Bialota to Sally M. Henry, supra note 67.
69. Jonathan C. Lipson, Secrets and Liens: The End of Notice in Commercial Finance, 21
E
MORY BANKR. DEV. J. 421, 424 (2005).
70. Twyne’s Case (1601) 76 Eng. Rep. 809; 3 Co. Rep. 80b.
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held by his debtor for the benefit of a third party. The Star Chamber
attacked the practice, claiming it to be a fraud, in part because it was a
secret transfer.
71
Courts in the United States followed suit, demonstrated most
famously in the case of Benedict v. Ratner,
72
in which the Supreme
Court also held that a secret lien was a fraud on creditors.
Because secret liens were so suspect, for years the only appropriate
security interest was the pledge, in which the secured creditor took
possession of the collateral.
73
That rule relaxed eventually, and today,
although security interests in tangible collateral may still be perfected by
the secured creditor’s taking possession of the collateral,
74
the law no
longer requires that the secured party possess the collateral.
Accordingly, security interests today generally are perfected through
public filings.
75
Because of the common law’s long-standing belief that security
interests should be public knowledge, the 2001 Article 9 revision was
criticized for increasing the secrecy of liens.
76
One major way in which
the 2001 revisions did so was by providing that collateral could be
described in a financing statement simply as “all personal property of
the debtor” (provided the debtor agreed to that broad of a collateral
description).
77
Previously, the U.C.C. had required much more
specificity in the collateral description, and thus some were concerned
that as a result of the revisions, a U.C.C. filing would be much less
informative to third parties.
78
Another criticism is that the revision
allows, for the first time, for a security interest to be perfected in deposit
accounts (checking accounts, savings accounts, and the like) and that
there need be no public notice of deposit-account security interests.
79
71. Id.
72. 268 U.S. 353, 364–65 (1925).
73. Lipson, supra note 69, at 429.
74. U.C.C. § 9-313(a) (security interest in tangible collateral may be perfected by possession,
with limited exceptions).
75. U.C.C. § 9-310(a) (“Except as otherwise provided in subsection (b) and Section 9-312(b), a
financing statement must be filed to perfect all security interests and agricultural liens.”). Besides filing,
security interests in tangible collateral may be perfected by possession, which also gives notice to the
world that the collateral is not available to other creditors. Security interests in a limited range of
collateral are perfected automatically or by control of the collateral by the secured party. In addition to
having the effect of making consensual security interests public, the filing system also prevents fraud
with respect to the timing of a transaction creating a security interest. Steven Harris & Charles W.
Mooney, Jr., A Property-Based Theory of Security Interests: Taking Debtors’ Choices Seriously, 80 V
A.
L. REV. 2051, 2056–58 (1994).
76. Lipson, supra note 69, at 455.
77. U.C.C. § 9-504.
78. U.C.C. § 9-402(1) had required that a financing statement “contain[] a statement indicating
the types, or describing the items, of collateral.”
79. Lipson, supra note 69, at 429–30.
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In this regard, note that, although a creditor or an entity doing
business with a debtor can look at the financing statement to see if the
debtor’s property is subject to any sort of security interest, under the
current scheme, it is now possible for the creditor to know only that the
property has been subject to a security interest, securing some amount of
debt, at some time in the previous five years (perhaps currently) in some
or all of the debtor’s personal property. The filing does not have to
disclose the amount of the obligation or the specific collateral unless the
debtor itself requires that the secured creditor describe the collateral
specifically.
80
Moreover, the law specifically provides that the secured
creditor need not respond to any requests for information from any
entity other than the debtor.
81
This scheme is not inevitable. In England, for example, which has a
system very much like the United States filing system in many respects,
creditors do have the right to specific information regarding the security
interests held by other creditors.
82
III.
IT’S NOT A LIGHT AT THE END OF THE TUNNEL, BUT RATHER AN
ONCOMING CAR OUT OF CONTROL
By early 2008, the U.S. economy was stalled. In March, the
Department of the Treasury had orchestrated an emergency acquisition
of the investment bank Bear Sterns, and other banks were suffering from
the freezing of the residential mortgaged-backed securities market.
83
Chrysler and General Motors were in trouble, and it was becoming
increasingly clear that something had to be done if those companies
80. U.C.C. § 9-521 (form of acceptable financing statement).
81. U.C.C. § 9-210 (describing rights of debtor to obtain information from a secured creditor);
U.C.C. § 9-210 cmt. 3 (“A financing statement filed under Part 5 may disclose only that a secured party
may have a security interest in specified types of collateral. In most cases the financing statement will
contain no indication of the obligation (if any) secured, whether any security interest actually exists, or
the particular property subject to a security interest . . . . [T]he secured party should not be under a duty
to disclose any details of the debtor’s financial affairs to any casual inquirer or competitor who may
inquire. For this reason, this section gives the right to request information to the debtor only.”).
82. Scholars have described the contrast as follows:
In the English system, this creditor would have the right to review copies of every instrument
creating a charge against the company. In the American system, this creditor would have the
right to only the names of persons who might have security interests and general categories of
property those interests might encumber.
Lynn M. LoPucki, Arvin I. Abraham & Bernd P. Delahaye, Optimizing English and American Security
Interests, 88 N
OTRE DAME L. REV. 1785, 1803 (2013).
83. T
HE FINANCIAL CRISIS INQUIRY REPORT, supra note 10, at ch. 15, 280–91; HENRY M.
PAULSON, Jr., ON THE BRINK: INSIDE THE RACE TO STOP THE COLLAPSE OF THE GLOBAL FINANCIAL
SYSTEM 90–121 (2010).
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were going to be saved.
84
The situation only worsened. After Lehman Brothers filed for chapter
11 relief on September 15, 2008, the markets crashed: the Dow Jones
Industrial Average plummeted, finally hitting bottom at less than half of
its previous all-time high in March 2009.
85
A. General Motors Files Its Chapter 11 Case; No One Seems to Care if
the Term Lenders’ Security Interests Actually Are Perfected
At the same time, two of the United States’ major automotive
manufacturers, General Motors and Chrysler LLC, were running out of
gas and needed emergency funding from the United States government.
Saving those two automakers was believed to be critically important in
avoiding economic collapse: the domestic automobile industry
accounted, by some estimates, for 4% of the gross domestic product.
86
In the first quarter of 2009, General Motors had negative cash flow of
$9.4 billion. General Motor’s then-CEO, Frederick Henderson, later
contended that the failure of General Motors would lead to the loss of
200,000 jobs at General Motors, the collapse of 11,500 vendors of
General Motors, and potential catastrophe for the vendors’ 500,000
employees.
87
Eventually, the GM bankruptcy court approved the sale of the GM
debtor companies to a consortium of purchasers that included the United
States government.
88
The sales were to be part of prearranged chapter
11 cases negotiated with the GM unions that provided special
protections for employees and retirees in exchange for important
concessions.
89
These special protections were arguably at the expense
of other unsecured creditors, who would eventually be paid from new
GM securities and, possibly, other units of a General Unsecured
Creditors’ Trust.
90
Accordingly, although the pre-negotiated sale was
not without some precedent, the magnitude of the transactions, the
visibility of the transactions, and the fact that the United States
84. See generally THE FINANCIAL CRISIS INQUIRY REPORT, supra note 10, at ch. 11.
85. David K. Randall, March 9, 2009: The Day Stocks Bottomed Out, F
ORBES (March 8, 2010),
http://www.forbes.com/2010/03/06/march-bear-market-low-personal-march-2009.html.
86. See Henderson Aff., supra note 57, ¶ 48.
87. In re Motors Liquidation, 529 B.R. 510, 531 (Bankr. S.D.N.Y. 2015).
88. In re GMC, 407 B.R. 463, 480–483 (Bankr. S.D.N.Y. 2009) (purchasers were the United
States Department of the Treasury, Export Development, a new employees’ beneficiary association, and,
if certain contingencies were met, the pre-petition General Motors would own stock in the post-
confirmation automobile manufacturer).
89. Henderson Aff., supra note 57, ¶¶ 16–18 (detailing pre-petition deal among the U.S.
Treasury, Canada Export-Import and the United Auto Workers).
90. In re Motors Liquidation, 447 B.R. 198, 203 (Bankr. S.D.N.Y. 2011) (opinion on order
confirming GM reorganization plan).
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Department of Treasury was already under attack for bailing out large
institutions when neighborhoods throughout much of the country were
being blighted by foreclosures made it inevitable that the Treasury-
driven auto chapter 11s would engender attention and attack. Indeed,
when the GM sale was finally brought to hearing, roughly 835 entities
objected to the General Motors sale.
91
B. The First Recall: The Erroneous Termination
During the fall of 2008, when the economy had been spinning out of
control, General Motors arranged for certain of its secured obligations to
be repaid: obligations due under a facility referred to as the “Synthetic
Lease Facility.”
92
In connection with the repayment, General Motors
hired a law firm (the GM Lease Counsel) that was tasked with
documenting the unwinding of the Synthetic Lease Facility.
93
This
work included causing the financing statements that had been filed with
respect to that facility to be terminated.
94
The work terminating the
financing statements was ultimately delegated to a paralegal who
apparently did not have an overview of GM’s financings.
95
At the same time, JPMorgan, the agent for the Synthetic Lease
Facility, hired its own counsel (JPMorgan Lease Counsel) to look out
for its interests in the transaction.
96
An interesting delegation of duties
occurred, however, in this mega-deal: the termination of the JPMorgan
Synthetic Lease financing statements was not assigned to JPMorgan
Lease Counsel. Instead, JPMorgan Lease Counsel served for the most
part as a reviewer of the documentation that was being prepared by the
most junior professionals at the law firm of GM’s Lease Counsel.
97
Although the documentation reflects that GM Lease Counsel’s junior
lawyers and paralegals worked hard to effectively accomplish this
task,
98
in fact they still made an error. Not only did the parties cause the
financing statements relating to the Synthetic Lease Facility to be
terminated, but they also caused the filings relating to another, unrelated
91. In re Motors Liquidation, 529 B.R. at 531.
92. Official Comm. of Motors Liquidation v. JPMorgan Chase Bank, N.A. (In re Motors
Liquidation), 777 F.3d 100, 101 (2d Cir. 2015).
93. Id. at 101–02.
94. Official Comm. v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), 486 B.R.
596 (Bankr. S.D.N.Y. 2013), rev’d on other grounds, 777 F.3d 100 (2d Cir. 2015).
95. Indeed, that’s what the Second Circuit concluded. In re Motors Liquidation, 777 F.3d at
101.
96. In re Motors Liquidation Co., 486 B.R. at 610, rev’d on other grounds, 777 F.3d 100 (2d Cir.
2015).
97. Id. at 607–14.
98. Fisher Decl., supra note 54, at Exs. M–N.
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financing to be terminated. This was the Delaware financing statement
relating to the $ 1.5 billion Term Loan that had perfected the Lenders’
security interest in equipment.
Under the Term Loan, JPMorgan served as the administrative and
collateral agent for the syndicate of lenders that had loaned $1.5 billion
to GM.
99
Based on the entities later named in the complaints filed to
recover the amounts paid to the Funds, the syndicate members were for
the most part collateralized loan obligations and other types of funds.
100
The lenders also included some other entities, such as local pension
funds.
101
JPMorgan would later insist that the firm it had hired on the synthetic
lease deal was engaged only to represent it in connection with the
Synthetic Lease Facility and not in any way in connection with the Term
Loan.
102
In any event, GM’s Lease Counsel prepared a closing list that
included the termination not only of the financing statements relating to
the Synthetic Lease Transaction, but also the financing statement—filed
in the same record in Delaware—relating to the Term Loan.
103
The
closing list was circulated repeatedly.
104
Accordingly, after approval of
all the lawyers on the deal, the financing statement relating to the Term
Loan was terminated.
105
As explained above, a basic principle is that, if a security interest is
not perfected, it is unenforceable in a bankruptcy case.
106
Accordingly,
99. In re Motors Liquidation Co., 486 B.R. 596, rev’d on other grounds, 777 F.3d 100 (2d Cir.
2015).
100. Five hundred fifty entities are named as defendants in the amended complaint. They include
entities such as “Advent Global Opportunity Master Fund,” “Aegeon/Transamerica Series Trust MFS
Highyield,” “APG Fixed Income Credits Pool,” and “APG Investments US Inc. A/C Stichting
Pensionfunds ABP.” The list of defendants in the amended complaint that are not household names
goes on and on. They include over fifty entities that include the term “CLO” (Collateralized Loan
Obligation) in their name. In addition, the defendants include over 130 entities with the name “Fund” in
their name. Many more have a similar phrase in their name. Only a handful of banks are name as
defendants. First Amended Adversary Complaint for (1) Avoidance of Unperfected Lien, (2)
Avoidance and Recovery of Postpetition Transfers, (3) Avoidance and Recovery of Preferential
Payments, and (4) Disallowance of Claims by Defendants, Term Loan Litigation, Adv. No. 09-00504
(May 20, 2015), ECF No. 91 [hereinafter Amended Complaint]; Answer of Defendant JPMorgan Chase
Bank, N.A., Term Loan Litigation, Adv. No. 09-00504 (Oct. 7, 2009), ECF No. 12.
101. Amended Complaint, supra note 100.
102. Duker Aff., supra note 8, ¶ 12; Memorandum of Law in Support of Defendant JP Morgan
Chase Bank, N.A. Motion for Summary Judgment at 35 n.15, Term Loan Litigation, Adv. No. 09-00504
(July 1, 2010), ECF No. 29.
103. In re Motors Liquidation Co.,
486 B.R. 596, rev’d on other grounds, 777 F.3d 100 (2d Cir.
2015).
104. Id. at 610–14.
105. Id. at 608-614.
106. 11 U.S.C. § 544 (2012) (trustee has rights of judicial lien creditor); U.C.C. § 9-317(a)
(judicial lien creditor generally primes unperfected security interest); U.C.C. § 9-102(a) (defining lien
creditor to include bankruptcy trustee).
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with General Motors very publicly on the verge of bankruptcy, it would
be normal to expect secured creditors to double check their filed
financing statements and other secured loan documentation to be certain
that all was in order.
107
If the filings were not in order, in many cases
the problem could be fixed so long as the creditor did not wait until the
last minute to correct filing errors.
108
And that is exactly what JP
Morgan attempted to do: the banker at JP Morgan working on matters
relating to the GM credit contacted a JPMorgan group located in
Banglalore, India, to satisfy himself that all was in order with respect to
the filing of the financing statement relating to the Term Loan.
109
Why reach out to Bangalore? Apparently JPMorgan had delegated
oversight of U.C.C. perfection documentation to a group located in
India, perhaps as a cost savings matter.
110
In this case, however, there
was another failure: the JPMorgan banker who was attempting to verify
that the filings were in order received a nonresponsive answer from
India that related to a different, already-concluded deal and did not
follow up on the matter.
111
Thus, no one conducted a lien “audit,”
designed to allow for any necessary corrections to the filed financing
statements in time for the creditor to salvage the situation.
There were, moreover, other opportunities when the mistake may
have been caught: in March 2009, the Term Loan was renegotiated to
waive an event of default that would have occurred if GM’s accountants
had expressed a going concern qualification regarding GM.
112
In
connection with that waiver, GM gave the lenders more collateral and
JPMorgan was paid a $6 million fee.
113
Even then, however, apparently
no one working on the restructuring of that transaction checked to see if
107. This is possibly what happened in the case of Bucks Hospital. There, the Bank of New York
had failed to refile its financing statement when the debtor changed its name, thereby limiting the
effectiveness of its financing statement. Eventually the Bank of New York did file a corrected financing
statement about 88 days before Bucks Hospital filed for chapter 11 relief. See In re Lower Bucks Hosp.,
471 B.R. 419 (E.D. Pa. 2012). Note that if debtor’s counsel had been aware of the belated refiling it
would have been incentivized to file the chapter 11 petition before the ninety-day preference period ran.
108. See generally 11 U.S.C. § 547 (2012 & Supp. 2016) (trustee can avoid a transfer of property
of an insolvent debtor to a creditor on account of a pre-existing claim made within ninety days before a
bankruptcy filing that causes the creditor to receive more than it would have received absent the
transfer). A transfer may include the perfection of a security interest. In short, if a deficient filing is
corrected more than ninety days before a debtor files for chapter 11 relief (one year in rare cases), the
perfection problem can be solved and the secured creditor treated as secured even though there was a
period in which the filings were deficient.
109. Fisher Decl., supra note 54, at Ex. Z (emails); Fisher Decl., supra note 54, at Ex. C 54–62
(Deposition of Richard W. Duker).
110. Fisher Decl., supra note 54.
111. Fisher Decl., supra note 54, at Ex. C, 60 (Deposition of Richard W. Duker.); Fisher Decl.,
supra note 54, at Ex. Z.
112. Duker Aff., supra note 8, ¶¶ 22–28 and Exs. M–N.
113. Id.
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the security interests were perfected.
114
In fact, the JPMorgan business
person on the deal stressed during the litigation that “[a]t no time during
the negotiations of the First Amendment did anyone from GM or
anywhere else suggest that the Term Loan Lenders’ security interests
were not fully perfected.”
115
The March restructuring was not the first time that a team of lawyers
had been working on GM financings after the critical financing
statement was terminated, however. In December 2008, the Department
of the Treasury had loaned GM $4 billion and took a security interest in
a great deal of GM collateral.
116
Even then, however, no one discovered
that GM’s equipment was no longer subject to a security interest
enforceable in bankruptcy.
What happened when GM finally filed its chapter 11 case in June
2009, reflects that, in the fast-paced and sometimes chaotic days leading
up to and immediately following the filing of the GM chapter 11 case,
with one exception, apparently none of the innumerable parties in
interest who had been working on a GM restructuring for over eight
months checked to make sure that the $1.5 billion Term Loan was
properly secured.
C. The First Days and the First-Day Orders
When a debtor files for chapter 11 relief, it is typical for the debtor to
seek so-called “first-day orders.”
117
These orders are necessary to
provide for critically important relief designed to preserve the business
and stabilize operations. Although the Bankruptcy Code never uses the
term “first-day order,”
118
these orders are present in almost all, if not all,
large chapter 11 cases.
119
They include orders allowing for the payment
114. Transcript of Hearing re Motions for Summary Judgment at 20, Term Loan Litigation, Adv.
No. 09-00504 (Dec. 6, 2010), ECF No. 63.
115. Duker Aff., supra note 8, ¶ 25.
116. Henderson Aff., supra note 57, ¶ 54 (noting that GM borrowed $4 billion on December 31,
2008, and an additional $9.4 billion in January and February 2009, “secured by a first priority lien on
and security interest in substantially all the unencumbered assets of GM and the guarantors, as well as a
junior lien on encumbered assets, subject to certain exceptions.”).
117. These “first-day orders” are so common that web sites for services that make available
dockets of large chapter 11 cases have separate sections for interested parties to access “first-day
motions” and “first-day orders.” See, e.g., L
OGAN & COMPANY, INC., www.loganandco.com (last
visited July 2, 2016); P
RIME CLERK, www.primeclerk.com (last visited July 2, 2016).
118. Indeed, they have become so common that the Bankruptcy Rules have evolved to require that
some of orders not be entered in a final form on the first day of a chapter 11 case, but rather require
greater notice to interested parties. See, e.g., F
ED. R. BANKR. P. 4001(b)(2), 4001(c)(2) (requiring that
orders providing for debtor-in-possession financing and the use of cash collateral not be finally
approved before fourteen days after service of the motion).
119. On the first day of the GM case, as he was granting an order allowing for the payment of pre-
petition employee claims, the judge remarked, “This motion is going to be granted for the reasons by
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of employees (any pay due to those employees for work performed pre-
petition is a pre-petition claim that normally could not be paid until the
end of the case absent a court order); orders relating to goods in transit
(to alleviate confusion about whether title to the goods passed pre-
petition, in which case the debtors could not pay for the goods right
away absent a court order and may not receive critically important
deliveries), and, perhaps most importantly, emergency financing orders.
This emergency financing order would include orders granting pre-
petition lenders adequate protection for the collateral securing their
outstanding loans to the debtor if the debtor will be using the creditors’
collateral.
120
D. The Need for DIP Financing
If a company is going to operate in chapter 11, it needs cash. Of
course, it could use free cash it has on hand, but by the time a debtor is
in the desperate situation that justifies a chapter 11 filing, the little cash
it has is usually encumbered directly or as proceeds of other
collateral.
121
On the filing of a chapter 11 case, a debtor may use
encumbered cash (cash collateral) with the permission of its secured
lenders.
122
Without their permission, however, the debtor must prove
that the lenders will be adequately protected,
123
and proving the lenders
are adequately protected could lead to a protracted trial at the outset of
the case rather than the “soft landing” that debtors prefer in the belief
that it helps to preserve their businesses. Vendors do not want to ship
goods when they learn a debtor is having a court battle with its secured
creditor in order to get its hands on cash necessary to pay its chapter 11
bills.
Accordingly, it is typical for these issues to be addressed on day one
of a case: the debtor seeks and is granted a debtor-in-possession
124
which motions of this character have been routinely granted (sic) every Chapter 11 case in my career.”
Transcript re Hearing Held on June 1, 2009, supra note 5, at 55. In response to a motion to pay certain
pre-petition taxes, the court noted, “I don’t think I’ve seen a motion anywhere where it hasn’t been
granted.” Id. at 78.
120. See generally Notice of Commencement of Chapter 11 Cases and Agenda for First Day
Hearings, In re Republic Airways Holdings, Inc., No. 16-10429 (Bankr. S.D.N.Y., Feb. 25, 2016), ECF
No. 31; Notice of Hearing to Consider First Day Pleadings, In re Sports Authority Holdings, Inc., No.
16-10527 (Bankr. D. Del. Mar. 2, 2016), ECF No. 26.
121. U.C.C. §§ 9-103, 9-203(f), 9-315.
122. 11 U.S.C. § 363 (2012).
123. Id. The Bankruptcy Code does not define “adequate protection,” but the courts usually
describe it as compensation for the risk of diminution in the value of the collateral during the case.
United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988).
124. The term “debtor in possession” refers to the debtor serving as a fiduciary for creditors of its
chapter 11 estate; the debtor in possession has most of the rights and duties of a trustee. 11 U.S.C.
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financing order, which provides for so-called “DIP” financing that
makes cash available to a debtor,
125
and/or the debtor enters into a
consensual “Cash Collateral Order” with its secured creditors, allowing
it to use cash collateral.
126
At the same time, these or related orders may
also include provisions for adequate protection of collateral other than
cash: if the collateral value deteriorates during a chapter 11 case, the
secured creditor would eat the loss unless the court has entered an order
granting it adequate protection. These orders are typically entered on
limited notice—after all, the need for cash is an emergency—at the
outset of a case. Because notice is limited, these are interim orders that
may not become final until after the passage of at least fourteen days
from service of the motions.
127
E. Proof Required for DIP Financing
Although the evidence for these motions theoretically could be put on
in the same way as in any federal trial,
128
given the many complicated
issues before the court it is common for a “first-day affidavit”
129
to be
filed with the pleadings. Counsel thus introduces his direct case through
that affidavit, and any cross-examination of the affiant to take place in
the traditional manner.
130
Of course, there are many varieties in how the
evidence is presented, but in most large cases the first-day affidavit is
critical for establishing the evidence that will support the emergency
motions. In the GM case, Frederick A. Henderson, GM’s then-president
and chief executive officer, signed the first-day affidavit that would
serve as the evidence supporting most of the motions, including the DIP
Financing motion and the Adequate Protection Motion.
131
Later,
William Repko, a financial advisor to the debtor, also submitted a
declaration in support of the GM DIP financing.
132
§ 1107 (2012).
125. For a discussion of debtor-in-possession financing, see generally Kuney, supra note 14;
David A. Skeel, Jr., The Past, Present and Future of Debtor-in-Possession Financing, 25 C
ARDOZO L.
REV. 1905 (2004).
126. See Dean P. Wyman, On our Watch: Cash Collateral; The Risks of Non-Consensual Use,
Am. Bankr. Instit. J. 12 (Sept. 1999).
127. F
ED. R. BANKR. P. 4001(b)(2), 4001(d)(2).
128. F
ED. R. BANKR. P. 9014(d), 9017 (2016) (Federal Rules of Evidence apply in bankruptcy
cases).
129. Of course, the affidavit may also be a declaration sworn to under penalty of perjury. 28
U.S.C. § 1746 (2012).
130. See generally G. Michael Fenner, The Forced Use of Inadmissible Hearsay Evidence in
Bankruptcy Court, 8 A
M. BANKR. INST. L. REV. 453 (2003).
131. Henderson Aff., supra note 57.
132. Declaration of William C. Repko in Support of Debtors’ Proposed Debtor in Possession
Financing, GM Chapter 11 Case, No. 09-50026 (June 1, 2009), ECF No. 68.
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These DIP Financing and Adequate Protection orders are governed by
Bankruptcy Code sections 361, 363, and 364 and Bankruptcy rule 4001.
In addition, many jurisdictions, including the Bankruptcy Court for the
Southern District of New York where the GM case was pending, have
adopted local rules regarding DIP financing and cash collateral
orders.
133
When a debtor files for protection under chapter 11, it lacks leverage
in negotiating its debtor-in-possession financing with its secured
creditors.
134
For that reason, financing orders have increasingly
included provisions that some have felt were overreaching,
135
such as
provisions limiting the time period during which the liens of the pre-
petition creditor can be examined or litigation commenced relating to
the liens;
136
provisions providing that the debt is immediately
133. See, e.g., BANKR. S.D.N.Y. R. 4001-2 (as amended December 1, 2009). Before the adoption
of LBR 4001-2, the Bankruptcy Court for the Southern District of New York had a similar rule, LBR
4001-2, “Requests for Use of Cash Collateral or to Obtain Credit,” repealed August 4, 2008, and before
that a local order, General Order M-274.
134. One debtor’s lawyer described the DIP Financing negotiations as follows:
Over the weekend, the lender’s lawyer gave us this much loan documentation that was
absolutely horrendous, the worst thing I had ever seen, and there were no negotiations. They
effectively said, if we gave them back a red line, in four hours we will have twenty-five things
that courts have prevented them from doing, and that this judge prohibited, and they said “Sign
it or no money.”
Edward Wolkowitz, Hon. Barry Russell, Jonathan Rosenthal & Richard Wagner, Symposium,
Bankruptcy in the New Millennium: Panel Two: Debtor-in-Possession Financing in Mega-Cases:
Transcript of Proceedings, 39 S
W. L. REV. 643, 651 (2010) (statement of Richard Wynne). The late
Harvey Miller, one of the most respected bankruptcy lawyers of all time, concurred, noting that
“[n]egotiations over DIP agreements tend to be one-sided, with lenders structuring such agreements to
enhance and influence control.” Miller, supra note 13, at 390.
135. Kuney, supra note 14, at 30 (“[t]he lending industry and the insolvency community [have]
found the holes and handles in chapter 11 and have used them to their advantage”).
136. For example, the final DIP financing order in the 2015 Patriot Coal case provides not only
that the creditors’ committee has only forty-five days to commence a case challenging security
interests (unless the condition is waived by the potential defedants or extended by the court for cause),
but also that the court must determine the matter within 45 days after the action is commenced. Final
Order (I) Authorizing the Debtors (A) to Obtain Post-Petition Financing , (B) Authorizing Use of Cash
Collateral, (C) Granting Liens and Superpriority Claims, (D) Granting Adequate Protection, (E)
Modifying the Automatic Stay And (G) Granting Related Relief ¶ 26, In re Patriot Coal Corp., No. 15-
32450 (Bankr. E.D. Va. June 4, 2015), ECF No. 230 [hereinafter Final DIP Financing Order]. The final
cash collateral order in the Caesar’s gaming bankruptcy case provides that the Creditors’ Committee
must commence any action challenging certain liens no later than May 6, 2015 (the cases were filed on
January 15, 2015) and that other interested parties have no later than seventy-five days after the entry of
the final cash collateral order (March 26, 2015) to contest liens. The committee has a budget of no more
than $150,000 to contest the liens and any challenge to the liens must have resulted in a final order no
later than ninety days after the action was commenced. Final Order (I) Authorizing Use of Cash
Collateral, (II) Granting Adequate Protection; (III) Modifying the Automatic Stay to Permit
Implementation and (IV) Granting Relief, In re Caesar’s Entertainment Operating Co., No. 15-01145
(Bankr. N. D. Ill. Mar. 25, 2015), ECF No. 988.
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accelerated if certain “goal posts” (such as the filing of a plan or the sale
of assets) are not reached in a particular time period;
137
etc. These
provisions, which typically have been approved early in the case,
increasingly have been criticized by the bench and bar and led to the
adoption of a revised Bankruptcy rule 4001. Rule 4001 provides,
generally, that certain provisions in the orders must be conspicuous and
that, while an interim order may be entered before fourteen days after
service of the motion, a final order may not be entered until that period
has lapsed.
138
Conspicuously absent from rule 4001, however, is any requirement
that the debtor show that the security interests being protected are in fact
perfected.
139
Nevertheless, a standard provision of financing orders has
been that the debtor will make “adequate protection” payments—
oftentimes the interest provided for the in pre-petition credit
agreement—to the secured creditor before the security interest is
determined to be enforceable.
140
Instead of findings that it is proper to
pay the secured claim, the order oftentimes provides that purportedly
secured creditors will disgorge any payments if it turns out they had no
right to be paid.
141
This limited proof is in stark contrast, for example,
to the proof secured creditors must submit when they file a claim in a
case to be paid in the ordinary fashion. In that case, the claim must be
accompanied by “evidence that the security interest has been
perfected.”
142
137. The GM DIP financing provided by the Treasury department contained a number of goal
posts, including deadlines for the approval of the sale. DIP Financing Motion at 2(u) (setting forth case
milestones); Interim Order Pursuant to Bankruptcy Code Sections 105(a), 361, 362, 363, 364 and 507
and Bankruptcy Rules 2002, 4001 and 6004 (A) Approving a DIP Credit Facility and Authorizing the
Debtors to Obtain Post-petition Financing Pursuant Thereto, (B) Granting Related Liens and Super-
priority Status, (C) Authorizing the Use of Cash Collateral and (D) Granting Adequate Protection to
Certain Pre-petition Secured Parties, GM Chapter 11 Case, No. 09-50026 (June 2, 2009), ECF No. 292
[hereinafter Interim DIP Financing Order].
138. F
ED. R. BANKR. P. 4001(b).
139. Nor do the local rules and orders for the Southern District of New York or the District of
Delaware provide that any party establish that a security interest is perfected as a condition for entry of a
DIP financing order giving secured creditors extraordinary rights. Rather, the local rules of the
Southern District of New York, for example, provide that an order providing for the immediate payment
of pre-petition debt that is allegedly secured must provide that the payment be disgorged if it turns out
the security interest had not been properly perfected. See B
ANKR. S.D.N.Y. R. 4001-1.
140. Marcia Goldstein et al., Debtor in Possession Financing and Second Lien/Subordination
Issues (ALI-ABA, Apr. 2011), http://files.ali-
cle.org/thumbs/datastorage/skoobesruoc/pdf/CS029_chapter_01_thumb.pdf; Kuney, supra note 14, at
49; Skeel, Jr., supra note 126.
141. E.g., B
ANKR. S.D.N.Y. R. 4001-2; BANKR. D. DEL. R. 4001-2.
142. F
ED. R. BANKR. P. 3001(d) setting forth the requirements for filing a proof of claim,
provides: “Evidence of Perfection of Security Interest. If a security interest in property of the debtor is
claimed, the proof of claim shall be accompanied by evidence that the security interest has been
perfected.”
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Of course, in the early days of chapter 11 (which was effective in
1979), the typical financing orders may not have required proof the
relevant security interests were perfected; before the revisions that took
effect in 2001, the Article 9 perfection rules were extremely
complicated. In a large case such as GM, financing statements covering
substantially all of a debtor’s property would have had to have been
filed everywhere the debtor operated and had assets.
143
Figuring out
whether those filings were appropriate was no easy task: there were
three alternatives in the “uniform” code, not to mention non-uniform
variations in some states.
144
And the “easy” financing statement
filing—only one filing to perfect a security interest in accounts and
general intangibles—was not so easy at all because the filing had to be
made where the debtor had its chief executive office (wherever that was
as a matter of law and fact).
145
In this regard, consider General Motors
itself: its “headquarters” were in Detroit, but its finance and accounting
operations were conducted out of New York City.
146
Because
determining whether a purportedly perfected secured party was in fact
perfected was such a challenging undertaking before the 2001 U.C.C.
revisions, proof of perfection was not available at the beginning of a
case unless the debtor or secured creditor had plenty of time before the
chapter 11 case to marshal its evidence. Moreover, even if a party had
gathered evidence of perfection, it could be a difficult undertaking for
interested parties to quickly ensure themselves that the security interests
in the collateral were in fact perfected.
Another reason paying secured creditors made sense in the early days
of DIP financing before a lien investigation was completed was because
of the perceived low risk of the transaction. At the time DIP financing
disgorgement provisions first appeared, they may not have seemed very
risky because the lenders were more often highly regulated depositary
institutions that were required by law to be well capitalized. The
identity, whereabouts, amenability to service in the jurisdiction, and
ability to repay the payments to be disgorged was often of little concern.
The Department of the Treasury, the Federal Reserve Bank, and the
Office of the Comptroller of the Currency were all seeing to that.
Although the Bankruptcy Code does not explicitly bless the practice,
some courts—including the Southern District of New York and the
District of Delaware, where many large chapter 11 cases are filed—have
begun not only to require the debtor to make adequate protection
payments, but also to allow the debtor in possession’s new financing to
143. LoPucki, supra 63, at 579–80.
144. Id.
145. Id. at 590.
146. Henderson Aff., supra note 57, ¶ 21.
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pay off its pre-petition loans.
147
These payments are oftentimes referred
to as “roll-ups” because in many cases the financing being repaid is a
revolving credit agreement and the mechanism by which the pre-petition
debt is repaid is that the new collections on accounts receivable are
applied first to outstanding pre-petition debt.
148
The justification for this
practice is, among other things, ease of administration: because the pre-
petition lenders have (presumably) a perfected security interest in pre-
petition inventory and accounts, as well as in their proceeds,
149
litigants
thought that these debts should just as well be paid off.
Even if the prepayment is not part of the DIP financing, however, a
debtor may seek to prepay its secured creditor if it clearly will have cash
to pay the creditor in full at the conclusion of the case and it seeks to
avoid interest payments (or even default interest payments). Indeed,
here, both the pre-petition revolving loan, for which Citibank was the
agent, and the pre-petition Term Loan provided for 5% additional
interest as a default rate, and lenders’ counsel told the judge that it was
the Lenders’ agreement to waive this default interest that was the reason
for the prepayment of both loans.
150
Despite the ubiquity of this prepayment practice in the jurisdictions
that host many of the largest chapter 11 cases, there is little appellate
analysis of the propriety of the practice,
151
and it arguably is contrary to
the case law in some circuits that criticize the pre-confirmation payment
of pre-petition claims.
152
The Bankruptcy Code itself does not provide
for the prepayment of secured creditors. Rather, assuming that secured
creditors are not allowed to foreclose on their collateral or their
collateral is not abandoned,
153
the Bankruptcy Code and Rules
154
147. BANKR. S.D.N.Y. R. 4001-2; BANKR. D. DEL. R. 4001-2.
148. A former general order of the Bankruptcy Court of the Southern District of New York
defined a roll-up as follows: “Roll-ups include the application of proceeds of post-petition financing to
pay, in whole or in part, pre-petition credit.” General Order No. M-274 at 7, In the Matter of the
Adoption of Guidelines for Financing Requests (Bankr. S.D.N.Y. Sept. 9, 2002).
149. U.C.C. § 9-203(f).
150. Transcript re Hearing Held on June 1, 2009, supra note 5, at 105–06.
151. For cases addressing “roll-ups,” see In re Simon & Schuster, Inc. v. Advanced Mktg. Servs.,
360 B.R. 421, 425 (Bankr. D. Del. 2007) (describing a roll-up in that case), In re Appliance Store, Inc.,
181 B.R. 237, 243 (Bankr. W.D. Pa. 1995) (referring to a roll-up as a “contract of adhesion”), and In re
FCX, Inc., 54 B.R. 833, 842 (Bankr. E.D.N.C. 1985) (roll-up allowed subject to proof of perfection and
priority of security interest).
152. Official Comm. of Equity Sec. Holders v. Mabey, 832 F.2d 299, 302 (4th Cir. 1987)
(forbidding pre-confirmation payment of unsecured claims of women who had been injured by defective
intrauterine contraceptive device to pay for reconstructive surgery to allow for childbearing at a time
when such surgery had a possibility of success; reasoning that Bankruptcy rule 3021 provides for
distributions only after a reorganization plan is confirmed); cf. In re Kmart Corp., 359 F.3d 866, 872
(7th Cir. 2004) (declining to determine whether 11 U.S.C. § 363(b) allows for the pre-confirmation
payment of critical vendors).
153. The filing of a petition in bankruptcy creates an automatic stay that prohibits most creditors’
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contemplate that secured creditors should be paid at the same time
unsecured creditors are paid: at the end of the case.
155
Some
jurisdictions specifically restrict the early payment of pre-petition
claims.
156
Even though there is no direct statutory authority supporting the roll-
up practice,
157
the practice has become commonplace. In fact, a roll-up
has sometimes occurred in the case of a pre-petition term loan as well as
in a case involving a pre-petition revolving loan,
158
although the
“bookkeeping” rationale would not be applicable to a term loan to the
same extent as to a revolver because in a term loan the bookkeeping
could be less complicated.
There is, indeed, reason for a court to be careful with respect to cash
collateral and DIP financing orders: if the entity extending credit did so
in good faith, any order approving financing is subject to very limited
review on appeal.
159
actions to recover on their claims. 11 U.S.C. § 362 (2012).
154. F
ED. R. BANKR. P. 3021 (providing for distributions to claimants after plan confirmation).
155. See 11 U.S.C. §§ 1123(a), 1129 (2012).
156. See Comments to Cash Collateral and DIP Financing, B
ANKR. N.D. TEX. R. app. H, ¶ 5A
(revised Apr. 1, 2012) (“The court will not approve cash collateral orders (or post-petition financing
orders that are in substance cash collateral orders) that have the effect of converting all the pre-petition
liens and claims to post-petition liabilities under the guise of collecting pre-petition accounts and re-
advancing them post-petition) that have the effect of converting pre-petition secured debt into post-
petition administrative claims that must be paid in full in order to confirm a plan. That type of provision
unfairly limits the ability and flexibility of the debtor and other parties in interest to formulate a plan.
That type of provision, granted at the outset of a case, effectively compels the debtor to pay off the
secured lender in full on the effective date and has the consequence of eviscerating § 1129(b).”).
157. Nevertheless, there is substantial authority supporting the payment of secured claims pre-
confirmation in appropriate cases. See In re Capmark Fin. Group Inc., 438 B.R. 471 (Bankr. D. Del.
2010); Law Debenture Trust Co. v. Calpine Corp. (In re Calpine Corp.), 356 B.R. 585, 589 (S.D.N.Y.
2007); HSBC Bank USA v. Calpine Corp., No. 07 Civ. 3088, 2010 U.S. Dist. LEXIS 96792, at *32–34
(S.D.N.Y. Sept. 14, 2010); United States ex rel. Rural Electrification Admin. v. Wabash Valley Power
Ass’n. (In re Wabash Valley Power Ass’n), 167 B.R. 885, 889 (S.D. Ind. 1994); cf. In re FCX, Inc.,
54
B.R. 833, 840 (Bankr. E.D.N.C. 1985) (cross-collateralization appropriate when lender is over-secured).
See generally In re Indus. Office Bldg. Corp., 171 F.2d 890, 893 (3rd Cir. 1949) (interim distributions to
mortgage bonds appropriate when ultimate distributions to all creditors will not be decreased).
158. Daniel J. Bussel & Kenneth N. Klee, Recalibrating Consent in Bankruptcy, 83 A
M. BANKR.
L.J. 663, 707 n.209 (2009) (describing roll-ups as typically being associated with final DIP financing
orders).
159. 11 U.S.C. § 364(e) (2012) (“The reversal or modification on appeal of an authorization under
this section to obtain credit or incur debt, or of a grant under this section of a priority or a lien, does not
affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended
such credit in good faith, whether or not such entity knew of the pendency of the appeal, unless such
authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending
appeal.”).
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F. The GM Cash Collateral Order and DIP Financing Order Are Built
With Faulty Parts
On the first day of GM’s chapter 11 case, the court entered both
an Adequate Protection Order and a DIP Financing Order.
160
First, the
estate sought and obtained a DIP Financing Order.
161
This was no
garden-variety order between a debtor and a bank; in this case the main
lender was the United States Treasury.
162
In addition, the bankruptcy
court entered an adequate protection order with respect to the Term
Loan. This adequate protection order provided, among other things, as a
finding of fact, that the Term Loan liens were “secured claims” and
provided for those “secured claims” to be repaid in full upon the draw
down on the U.S. Treasury facility.
163
In addition, the Adequate
Protection Order provided that the debtor could use the Term Lenders’
collateral so long as replacement liens equal to the value of the collateral
used were granted to the Term Loan Lenders and so long as the Funds
received periodic payments equal to the interest payments that would be
due under the pre-petition Term Loan agreement.
164
There is no hint in
any of the papers filed that day, or the orders entered by the court, that
anyone suspected any security interest of the Term Loan Lender’s
claims may not be perfected. This suggests that no one involved in
negotiating and drafting the DIP financing or the adequate protection
order had been able to examine the Term Loan financing statements to
be certain they were effective. No one included evidence of perfection
of the liens, attached that evidence to the First-Day Affidavit, or filed
that evidence with the court. Instead, the Henderson Affidavit merely
recited, “The Debtors believe the Term Loan Lenders are oversecured
and anticipate full payment of all amounts owing under the Term Loan
within 45 days.”
165
160. Background facts were in the Henderson Aff., supra note 57.
161. Interim DIP Financing Order, supra note 137.
162. Economic Development Canada was also a lender. Id.
163. Interim Order Under 11 U.S.C. §§ 105, 361, 362, 363 and F
ED. R. BANKR. P. 2002, 4001 and
9014 (I) Granting Adequate Protection to Term Loan Secured Parties and (II) Scheduling a Final
Hearing Pursuant to Bankruptcy Rule 4001(b) ¶ 3 , GM Chapter 11 Case, No. 09-50026 (June 1, 2009),
ECF No. 181 [hereinafter Interim Adequate Protection Order] (“The Debtors’ Obligations are secured
by liens granted to the Term Loan Agent on the property of the estates that constitutes Collateral under,
and as defined in, the Term Loan Facility.”).
164. Id. ¶ 5.
165. Motion of Debtors for Entry of Orders Pursuant to 11 U.S.C. §§ 105, 361, 362, 363, and
507(i) Authorizing Use of Cash Collateral (ii) Granting Adequate Protection to the Revolver Secured
Parties, (iii) Granting Adequate Protection to the Term Loan Secured Parties, and (iv) Scheduling a
Final Hearing Pursuant to Bankruptcy Rule 4001, GM Chapter 11 Case, No. 09-50026 (June 1, 2009),
ECF No. 60 [hereinafter Adequate Protection Motion]. Considering that the Adequate Protection
Motion proposed to pay the Term Loan Lenders roughly $1.5 billion, it is surprisingly brief in making
its case. To secure GM’s and Saturn’s obligations under the Term Loan (the “Term Loan Obligations”),
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Indeed, at this time the debtors were behaving, and had been
behaving, as if they thought that the Term Lenders were over-secured: in
March, they had renegotiated the Term Loan apparently based on that
belief, and in the months leading up to the chapter 11 case they had
continued to give JPMorgan collateral statements.
166
And it is at this point that a little clarification is in order. The first-
day affidavit, which was signed not by a lawyer but rather by General
Motor’s then-President and CEO, Frederick A. Henderson, actually
never made any attempt to establish that the Term Loan security
interests were effective in bankruptcy.
167
Recall that having a security
interest—usually made effective by an agreement by a debtor to grant a
lender a right in the debtor’s collateral to secure an obligation owed to
the lender
168
—is not the same as having a perfected security interest.
169
Only perfected security interests give creditors the special benefits of
secured status in bankruptcy. Thus, the statements in the First-Day
Declaration that the Term Lenders were “secured” in no way established
that the Term Lenders had a security interest that was enforceable in
bankruptcy, or that there was any legal basis to pay the Term Loan in
full in a case in which other unsecured creditors were not being paid in
full.
170
The right to full payment over time would have arisen (at the
conclusion of the case) only if the Term Loan Lenders had a perfected
secured claim.
171
In other words, there was absolutely no evidence in
any of the submissions or at the hearing showing that the Term Loan
Lenders had a right to be paid.
172
Not one bit.
It bears emphasis, however, that the local rules in the Southern
GM and Saturn entered into the Term Loan Collateral Agreement. Pursuant to the Term Loan Collateral
Agreement, the Term Loan Agent was granted a security interest in and continuing senior liens on the
Term Loan Collateral for the benefit of the Term Loan Agent and the Term Loan Lenders. As of May
23, 2009, the outstanding principal amount of the Term Loan was $1,466,250,000. The borrowings
under the Term Loan were used to fund general working capital requirements. The Debtors believe that,
as of the Commencement Date, the value of the assets encumbered by the Term Loan Agent, for the
benefit of the holders of Term Loan Obligations, exceed the aggregate amount of the Term Loan
Obligations.
166. Duker Aff., supra note 8, ¶ 26, Exs. G, N, O (detailing collateral certificates of GM delivered
to JPMorgan on December 2, 2008, March 23, 2009, and May 28, 2009).
167. Henderson Aff., supra note 57, ¶ 113 (describing Term Loan as being “secured”).
168. U.C.C. § 9-203(b).
169. Compare U.C.C. § 9-203(b) with U.C.C. § 9-311. See also U.C.C. § 9-317(a).
170. In general, unless classes of creditors agree to different treatment, in bankruptcy cases claims
are paid in accordance with rules of absolute priority, with secured claimants being paid the present
value of their collateral and unsecured claims of the same rank being paid pari passu. See generally 11
U.S.C. § 1129 (2012). Classes of claimants can vote to give up their rights to absolute priority so long
as individual dissenting members are paid as much as they would be paid in a chapter 7 liquidation. 11
U.S.C. § 1129(a)(7) (2012).
171. 11 U.S.C. § 544(a) (2012) (trustee may avoid an unperfected security interest).
172. Transcript re Hearing Held on June 1, 2009, supra note 5, at 100–06.
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District of New York where the GM case was pending (and where most
other mega-chapter 11 cases are filed) not only requires no proof of
perfection of the security interests but instead contemplates just the
opposite: that the pre-petition debt may be repaid—at least in part—
before the validity of the security interests has been established. The
local rule specifically requires that an order providing for the repayment
of pre-petition debt provide that the payments must be disgorged if the
security interests are invalid.
173
This requirement has descended from a
general order of the Southern District of New York that went back to
2002.
174
Accordingly, in one of the largest chapter 11 cases of all time
in the middle of the greatest American financial catastrophe since the
Great Depression, it is not surprising that, with so much else to be done,
the usual model was followed. Compared with the other problems
facing the court and many of the parties, this $1.5 billion Term Loan
may have seemed to be small potatoes.
G. The Term Loan Claims Were Scheduled to Be Paid Even Though
There Was No Evidence the Security Interests Were Perfected
Notwithstanding the lack of relevant evidence, on the first day of the
GM case, the court entered an interim order providing that, when the
United States Department of Treasury and Economic Development
Canada provided the DIP financing, the Term Loan Lenders would be
repaid in full. The Order also provided that the Term Loan was secured,
that the Lenders were entitled to adequate protection,
175
and that the
reasonable fees and expenses incurred by the Lenders and their
professionals would be paid going forward, with no necessity of further
court approval.
176
As is required by the Bankruptcy Rules, the initial
orders were “interim” orders that were made available to creditors and
that were scheduled to be revisited if any objections to the orders were
filed.
177
173. BANKR. S.D.N.Y. R. 4001-2.
174. See General Order No. M-274 ¶ A.2 at 11, In the Matter of the Adoption of Guidelines for
Financing Requests (Bankr. S.D.N.Y. Sept. 9, 2002) ( “An order approving a rollup must ordinarily
reserve the right of the Court to unwind the paydown of the prepetition debt in the event that there is a
timely and successful challenge to the validity, enforceability, extent, perfection, and (where
appropriate) priority of the prepetition lender’s claims or liens, or a determination that the prepetition
debt was undersecured as of the petition date.”).
175. Interim Adequate Protection Order, supra note 163.
176. The authorization to pay fees for secured creditors is in 11 U.S.C. § 506(b) (2012) (“To the
extent that an allowed secured clam is secured by property, the value of which, after any recovery under
subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the
holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for
under the agreement or state statute under which such claim arose.”).
177. Interim DIP Financing Order, supra note 137.
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The interim financing order and the interim adequate protection order
were entered on June 2, 2009.
178
On June 3, 2009, a new set of lawyers
entered the picture: counsel for the GM Creditors’ Committee.
179
This
firm, selected by a committee of unsecured creditors, typically is tasked
with, among other things, assuring itself that the security interests of
purported secured creditors are in fact perfected and thus enforceable in
chapter 11 cases. As is virtually always the case, the GM creditors’
committee was formed by the Office of the United States Trustee shortly
after a chapter 11 case was commenced and promptly selected its
counsel.
180
H. JPMorgan Bankruptcy Counsel Discovers the Financing Statement
Had Been Terminated
Although apparently no one knew that the equipment’s security
interest financing statement had been terminated when the interim
orders requiring payment of the Funds were entered, roughly two weeks
into the GM case JPMorgan’s bankruptcy counsel (JPMorgan
Bankruptcy Counsel)—a different firm from that which had worked on
the termination of the Synthetic Lease Financing—discovered the error.
On June 16, 2009, the young associate who had worked on the GM
Lease matter received an email from a paralegal with whom he had
worked asking him to immediately contact Chase’s Bankruptcy
Counsel: “It is my understanding that [JPMorgan Bankruptcy Counsel]
is in a roomful of lawyers right now and wants us to understand that this
matter is urgent.”
181
Undoubtedly, JPMorgan Bankruptcy Counsel did perceive that the
matter was urgent, having just discovered a $1.5 billion error. At that
point, things moved into high gear: the next day, on June 19, 2009,
178. Interim Order Pursuant to Bankruptcy Code Sections 105(a), 361, 362, 363, 364 and 507 and
Bankruptcy Rules 2002, 4001 and 6004(A) Approving a DIP Credit Facility and Authorizing the
Debtors to Obtain Post-Petition Financing Pursuant Thereto, (B) Granting Related Liens and Super-
Priority Status, (C) Authorizing the Use of Cash Collateral, (D) Granting Adequate Protection to Certain
Pre-Petition Secured Parties and (E) Scheduling a Final Hearing, GM Chapter 11 Case, No. 09-50026
(June 2, 2009), ECF No. 292; Interim Adequate Protection Order, supra note 163.
179. For a thoughtful empirical investigation of the important role played by creditors’
committees in chapter 11 cases, see Michelle M. Harner & Jamie Marinck, Committee Capture? An
Empirical Analysis of the Role of Creditors’ Committees in Business Reorganizations, 64 V
AND. L.
REV. 747 (2011).
180. The competition to become counsel to the creditors’ committee is another time in which
lawyers could have discovered problems with the Term Loan security interest, because counsel typically
make pitches to the newly appointed members of the creditors’ committee and strive to prove to the
committee their ability to protect unsecured creditors’ interests. See generally 11 U.S.C. §§ 1102, 1103
(2012).
181. Declaration of John M. Callagy in Support of Motion for Summary Judgment of JPMorgan
Chase Bank, N.A. at Ex. 20, Term Loan Litigation, Adv. No. 09-00504 (Dec. 6, 2010), ECF No. 41.
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almost three weeks into the GM chapter 11 case and less than a week
before the final hearing on the payment of the Term Loan, JPMorgan
Bankruptcy Counsel emailed GM Bankruptcy Counsel (a different firm
from GM Lease Counsel), newly appointed counsel to the Official
Creditors’ Committee, along with counsel to the Department of the
Treasury’s Automotive Task Force.
182
The group was informed that the
financing statement had been accidentally terminated, but not
surprisingly, JPMorgan Bankruptcy Counsel maintained in this initial
email that its security interests were still effective because the
termination had been accidental.
183
I. The $1.5 Billion Term Loan Is Paid Before the Termination Is Made
Public
Even though GM’s Bankruptcy Counsel, counsel for GM’s creditors’
committee and counsel for the Automotive Task Force of the
Department of Treasury knew the key security interest filing had been
terminated, on June 25, less than a month after the GM case was
commenced, the court nevertheless ordered the Term Loan Lenders to
be paid off in full. Before he signed the order, however, the judge was
not informed that a serious problem had been discovered with respect to
the security interests of the Term Loan lenders,
184
nor was there a hint in
any pleadings that there was any issue concerning the perfection of the
liens: although the Creditors’ Committee filed a usual “reservation of
rights” two days before the final hearing on DIP financing, this brief
pleading had not a word suggesting there was any concern about the
enforceability of any security interest.
185
Not a word was said in court
about the key security filing having been terminated.
There was, however, an important change in the orders that were
182. Fisher Decl., supra note 54, at Ex. G (email message, dated June 19, 2009). See generally
S
TEVEN RATTNER, OVERHAUL: AN INSIDER’S ACCOUNT OF THE OBAMA ADMINISTRATION’S
EMERGENCY RESCUE OF THE AUTO INDUSTRY (2011).
183. Fisher Decl., supra note 54, at Ex. G (“Attached herewith is an affidavit . . . which sets forth
the circumstances under which the termination statement was filed, and makes clear that such action was
unauthorized . . . . We are hopeful that this clarifies the situation and removes any doubt that the
termination statement was ineffective.”).
184. Transcript re Hearing Held on June 25, 2009, GM Chapter 11 Case, No. 09-50026 (June 26,
2009), ECF No. 2595 (Statements of counsel to GM, seeking approval of prepayment of Term Loan).
185. Reservation of Rights of the Official Committee of Unsecured Creditors to Debtors’ Motion
for an Order Pursuant to 11 U.S.C. §§ 361, 362, 363 and 364 (I) Authorizing the Debtors to Obtain
Postpetition Financing, Including on an Immediate, Interim Basis; (II) Granting Superpriority Claims
and Liens; (III) Authorizing the Debtors to Use Cash Collateral; (IV) Granting Adequate Protection to
Certain Prepetition Secured Parties; (V) Authorizing the Debtors to Prepay Certain Secured Obligations
in Full Within 45 Days; and (VI) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001, GM
Chapter 11 Case, No. 09-50026 (June 23, 2009), ECF No. 2319.
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presented to the court on June 25, 2009, from those the court and
interested parties had seen on June 1, 2009: unlike the first orders, the
final orders did not provide that the Term Loan liens were valid and
enforceable.
186
That change, however, was not highlighted and would
not have been immediately obvious to anyone comparing the lengthy
orders.
In any event, although the order reserved the Committee’s right to
contest the perfection of the security interests, as is typical, it
specifically provided that JPMorgan’s counsel could be paid all its
reasonable expenses, including all expenses incurred in any objection to
the security interests.
187
This was a puzzling initial concession—again
with no meaningful notice to the creditor body—because, although the
Bankruptcy Code allows for the payment of reasonable attorneys’ fees
to secured creditors, those fees are absolutely not payable unless the
secured creditor is oversecured.
188
If a large piece of the collateral
package securing the loan was invalid, then the Term Loan Lenders
likely were not in fact oversecured, and JP Morgan would have had no
right to have its fees paid by the estate going forward.
189
Why repay the Term Lenders? We do not know why Treasury
continued to require this after it was discovered that there was a serious
problem with the security interests, but we do know the reason bank
counsel presented to the court before the infirmity in the liens was
discovered: the loans provided for an additional 5% default interest rate.
186. Final DIP Financing Order, supra note 136, ¶ 19(c).
187. Id. (“In the event the Committee investigates any liens of any of the Prepetition Senior
Facilities Secured Parties or any third party brings an action against a Prepetition Senior Facilities
Secured Party that is entitled to indemnification by the Debtors under the applicable Prepetition Senior
Facility, then, notwithstanding any other provision of this Final Order, (i) the Debtors shall pay (in
accordance with Paragraph 6(d) of the Prepetition Revolving Credit Agreement Order and Paragraph
5(d) of the Prepetition Term Loan Facility Order), the reasonable fees, costs, and charges incurred by
the agents for the Prepetition Senior Facilities . . .in responding to such investigation or in defending any
challenge to such liens or to their ability to retain any Payment. . . .”).
188. 11 U.S.C. § 506(b) (2012) (“To the extent that an allowed secured claim is secured by
property the value of which . . . is greater than the amount of such claim, there shall be allowed to the
holder of such claim . . . any reasonable interest on such claim, and any reasonable fees, costs, or
charges provided for under the agreement . . . under which such claim arose.”). Indeed, the Supreme
Court has recently stressed that a bankruptcy court has no equitable discretion to allow for the payment
of fees that are not explicitly provided for in the Bankruptcy Code. Baker Botts L.L.P. v. Asarco LLC,
135 S. Ct. 2158, 2164 (2015) (“Our basic point of reference when considering the award of attorney’s
fees in the bedrock principle known as the American Rule. Each litigant pays his own attorneys’ fees,
win or lose, unless a statute or contract provides otherwise.”); cf. Guerin v. Weil, Gotshal & Manges,
205 F.2d 302, 304 (2d Cir. 1953) (court may not allow payment of professional fees not specifically
provided for in Bankruptcy Act); see also Official Comm. of Unsecured Creditors v. UMB Bank, N.A.
(In re Capital), 501 B.R. 549 (Bankr. S.D.N.Y. 2013) (undersecured creditor not entitled to interest or
attorneys’ fees).
189. Its fees could be paid, however, as an unsecured claim, at no greater percentage than the
claims of other unsecured creditors. See generally Ogle v. Fidelity & Deposit Co. of Md., 586 F.3d 143
(2d Cir. 2009).
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Indeed, avoiding a punitive default interest rate is a common
justification for prepaying pre-petition secured claims. If another lender
is going to lend the estate enough money to pay off the pre-petition loan
for which default interest will have kicked in, the estate might save
considerable funds—assuming the interest rate on the new financing is
materially less than the default rate on the pre-petition financing—by
paying off the pre-petition lender, because interest is allowed on an
oversecured claim.
190
This rationale for prompt payment of secured
lenders is used even though most courts hold that there is only a
“rebuttable presumption” that oversecured creditors are entitled to be
paid the default rate provided for in their pre-petition agreements during
the period from when a case is filed until the effective date of a
reorganization plan.
191
Indeed, the rationale of avoiding default interest
by repaying the secured lender is so compelling that in its recent,
prestigious review of chapter 11 designed to identify the need for
changes, the American Bankruptcy Institute concluded that it is
appropriate to pay off pre-petition secured loans when a new lender is
entering the picture, although not when the pre-petition lender is the DIP
lender.
192
The rationale of avoiding paying default interest, however, does not
apply in the case of a pre-petition lender that is undersecured.
193
In that
case, not only is the lender not entitled to default interest, it is also not
entitled to post-petition interest in any amount.
194
Given that clear-cut
rule, it appears that the Lenders had absolutely no right to interest of any
sort, and thus the traditional justification for prepaying the Lenders was
nonexistent.
190. 11 U.S.C. § 506(b) (2012).
191. Interest incurred by secured creditors in the period between the filing of a case and the
confirmation of a chapter 11 case is referred to as “pendency interest.” In re 785 Partners, LLC, 470
B.R. 126, 134 (Bankr. S.D.N.Y. 2012) (“Pendency interest is not based on contract and fixing the
appropriate rate rests with the ‘limited discretion’ of the bankruptcy court”; adopting rate provided for in
contract for payment of pendency interest); see also Prudential Ins. Co. of Am. v. City of Boston (In re
SW Boston Hotel Venture, LLC), 748 F.3d 393 (1st Cir. BAP 2014) (allowing default interest at
contract rate but refusing to allow monthly compounding provided in credit agreement based upon
equitable considerations); Key Bank Nat’l Assn. v. Milham (In re Milham), 141 F.3d 420, 423 (2d Cir.
1998) (noting “limited discretion” of court to varying from contract rate when awarding pendency
interest to oversecured creditor); In re Mkt. Ctr. East Retail Prop., LLC., 433 B.R. 335 (Bankr. D.N.M.
2010) (pendency interest allowed at default rate).
192. American Bankruptcy Institute Commission to Study the Reform of Chapter 11, 23 A
M.
BANKR. INST. L. REV. 4, 79, 80–86 (2015).
193. The rationale also does not apply in a case in which the interest rate at which a debtor
borrows money to repay the pre-petition debt is higher than the default interest rate. Along these lines,
note that Marcia Goldstein, the chair of the prestigious Weil Gotshal restructuring department, and other
Weil attorneys calculated that the effective post-petition borrowing interest rate—taking into account the
fees paid for the loan and the limited duration of the loan—was 41% in one recent case and 33% in
another case. Goldstein et al., supra note 140, at 4.
194. 11 U.S.C. § 506(b) (2012) (oversecured lender is entitled to interest).
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One could argue, however, that, even though the Funds’ financing
statement had been terminated, it seemed likely that eventually the liens
of the lenders would be vindicated. After all, no one seemed to have
known that the filing was terminated, suggesting that no one relied upon
the mistaken termination. One could argue that it is grossly unfair to
penalize innocent parties for a minor technical slipup on which no one
relied, especially when the penalty could be almost $1.5 billion. That
being said, the presence of a string of decisions from all over the country
broadly construing the pre-revised Article 9 filing statement termination
provisions
195
would have raised serious questions about whether the
faulty termination should be ignored even though apparently no one had
relied on the termination.
Of course, June 2009 was an extraordinary time: the Department of
the Treasury had been doing its best to keep banks that were likely
insolvent afloat to save the economy from even worse distress.
196
Because the Department of the Treasury was financing the case, it could
dictate whether the Funds and JPMorgan’s fees would be paid. But
even though the Treasury knew about the problem of the terminated
financing statement, the Treasury did nothing to stop the roughly $1.5
billion from being paid or from committing the estate to pay
JPMorgan’s legal fees going forward. In fact, just the opposite
occurred: the Treasury Loan agreement had, from the beginning,
actually required that the Lenders be repaid, and that long-standing
requirement was not modified after the parties knew the key financing
statement had been terminated.
197
The record reveals nothing about the motivation of the Department of
Treasury. The decision to pay creditors whose right to be paid was in
dispute may have been a decision based on the conclusion that all
energy should be focused on completing the sale, recapitalizing GM,
and—hopefully, because the matter was in doubt—saving the economy.
As large as the sum involved was, $1.5 billion was a paltry amount
compared to the amount at risk in the GM deal as a whole, and more
importantly, for the economy as a whole. We do not know what
195. Crestar v. Neal (In re Kitchen Equip. Co.), 960 F.2d 1242, 1246–47 (4th Cir. 1992)
(erroneous notation on public filing was legally effective); In re Pacific Trencher & Equip., Inc., 735
F.2d 362, 365 (1984) (affirming order refusing to reform amendment to financing statement when
“termination” was erroneously checked); In re Silvernail Mirror & Glass, Inc., 142 B.R. 987, 989
(Bankr. M.D. Fla. 1992) (“Even if the termination statement did not reflect the parties’ true intent” it
was legally effective); In re York Chemical Industries, 30 B.R. 583, 586 (Bankr. D. S. C. 1983); JI Case
Credit Corp. v. Foos, 717 P.2d 1064, 1067 (Kan. Ct. App. 1986). But see In re A.F. Evans, Co., No. 09-
41727 EDT, 2009 Bankr. LEXIS 2473 (Bankr. N.D. Cal. July 14, 2009) (termination not effective when
an unknown entity (someone other than the secured party) checked a “termination” box on a form).
196. See, e.g., B
EN S. BERNANKE, THE FEDERAL RESERVE AND THE FINANCIAL CRISIS 74–96
(2013); R
ICHARD A. POSNER, THE CRISIS OF CAPITALIST DEMOCRACY 80–92 (2010).
197. Interim DIP Financing Order, supra note 137.
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Treasury was thinking (assuming this $1.5 billion technicality was even
brought to the attention of those higher up the chain of command), but
we have been told that Treasury was extremely concerned that secured
creditors—both in the United States and abroad—be protected in the
bail outs: recently Ben Bernanke has explained how distressed soon-to-
be Treasury Secretary Timothy Geithner was, in late 2008, because
secured creditors were forced to take a haircut when JPMorgan Chase
acquired Washington Mutual; Secretary Geithner, in his memoir of the
financial crisis, confirmed Bernanke’s opinion.
198
In any event, the Final Financing Order did more than provide for the
repayment of the Funds and the payment of the JPMorgan legal
expenses and fees. The Final Financing Order also provided for a
release of JPMorgan and the Funds with respect to issues relating to the
Term Loan, but with a limitation on that release to allow the Creditors’
Committee to commence an action “with respect only to the perfection
of first priority liens of the Prepetition Senior Facilities Secured Parties
(it being agreed that if the Prepetition Senior Facilities Secured Parties,
after Payment, assert or seek to enforce any right or interest in respect of
any junior liens, the Committee shall have the right to contest such right
to interest in such junior lien on any grounds, including (without
limitation) validity, enforceability priority, perfection or value).”
199
Later, JPMorgan would argue that the release language left no room for
any debate over whether the fixture collateral (if any) fully secured its
loan.
200
In the future, other defendants would also argue using
additional theories that the DIP order waived causes of action and
otherwise hogtied the Committee or undermined individual defendant’s
rights.
201
198. BEN BERNANKE, THE COURAGE TO ACT: A MEMOIR OF A CRISIS AND ITS AFTERMATH 323
(2015) (describing Treasury Secretary Geithner’s disputes with head of the FDIC Sheila Bair regarding
the treatment of Washington Mutual; Bair would not agree to use FDIC funds to pay Washington
Mutual’s secured creditors (who were not legally entitled to be paid with FDIC funds) because she was
concerned with preserving the FDIC’s assets; Geithner was adamant they should be paid with FDIC
insurance funds so that secured creditors would not fail to be paid in full in the resolution of a failed
insured depositary institution and thus suffer a loss). In his memoir S
TRESS TEST, Timothy F. Geithner,
Secretary of the Treasury at the time the Term Loan was repaid, describes how distraught he was that
secured creditors of Washington Mutual were forced to take a haircut. T
IMOTHY F. GEITHNER, STRESS
TEST: REFLECTIONS ON THE FINANCIAL CRISIS 215–16 (2015) (“The U.S. government had sent a
message that [secured] creditors of U.S. financial institutions were not safe, precisely the wrong
message to send at a time of peril.”).
199. Final DIP Financing Order, supra note 136, ¶ 19(d).
200. Defendant JPMorgan Chase Bank N.A.’s Reply Memorandum of Law in Further Support of
Motion for Summary Judgment at 24–27, Term Loan Litigation, Adv. No. 09-00504 (Aug. 26, 2010),
ECF No. 56 (interpreting the Final DIP Financing Order to provide that Committee may not challenge
the value of the non-equipment collateral security securing the Funds’ liens.).
201. E.g., Answer and Cross-Claims of Ad Hoc Group of Answering Term Lenders at 98, Term
Loan Litigation, Adv. No. 09-00504 (Dec. 18, 2015), ECF No. 334 (Twentieth Affirmative Defense).
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No one objected to the order, but why would anyone object: the
general creditor body had no notice JPMorgan’s key financing statement
had been terminated.
J. Who Was Paid?
As noted, the DIP Financing Order provided that the Funds would be
paid but that, if the payment were later determined to have been
improper, the Funds would repay the money to the estate.
202
But who
were these entities that were obligated to return $1.5 billion to the GM
estate if the payment had been improper? Years later we are just
beginning to learn who was paid.
203
First, a little background: $1.5 billion is a lot of money, and in
practice a loan for this amount does not come from one entity. Rather, a
loan such as this is made by a group of lenders who are represented with
respect to the loan by an agent or agents. The agent is typically a large
commercial bank, such as JPMorgan, and the syndicated lenders are a
variety of entities: pension funds, investment funds, hedge funds, private
equity, commercial banks, or other entities. When the loans are so-
called “leveraged loans,”
204
the lenders tend to be funds; a recent study
concluded that the largest lenders in syndicates of leveraged loans are
collateralized loan obligations (CLOs, a securitization vehicle), hedge
funds, and mutual funds, which purportedly share 85% of the market.
205
Although the syndicate members typically appear in court through their
agent, they themselves are the entities that hold the claims against the
estate; their representation by the agent only goes as far as the
syndication agreement. The actual identity of the lenders can change:
the secured creditors’ claims can be bought and sold. Indeed, it is
202. Final DIP Financing Order, supra note 136, ¶ 19(d) (“Any Prepetition Senior Facilities
Secured Party accepting Payment shall submit to the jurisdiction of the Bankruptcy Court, it being
understood that the respective administrative and collateral agents for the Prepetition Senior Facilities
shall have no responsibility or liability for amounts paid to any Prepetition Senior Facilities Secured
Parties and such agents shall be exculpated for any and all such liabilities, excluding only such funds as
are retained by each such agent solely in its respective role as a lender.”).
203. Adversary Complaint For (1) Avoidance Of Unperfected Lien, (2) Avoidance And Recovery
Of Postpetition Transfers, (3) Avoidance And Recovery Of Preferential Payments, And (4)
Disallowance Of Claims By Defendants ¶ 8, Term Loan Litigation, Adv. No. 09-00504 (July 31, 2009),
ECF No. 1 [hereinafter Complaint] (“In a diligent attempt to properly identify all possible parties to this
Complaint, the Committee (i) asked counsel to [JPMorgan,] the administrative agent under the Term
Loan Agreement, for a list of all lenders under the Term Loan Agreement or other entities who acquired
an interest in the loan, which list has not been provided to date.”).
204. A leveraged loan is a loan with a low rating. In re Citigroup, Inc. Sec. Litig., 753 F. Supp.
2d 206, 216 (S.D.N.Y. 2010).
205. O
LIVER WYMAN, RISK RETENTION FOR CLOS: A SQUARE PEG IN A ROUND HOLE? 6 (2013),
https://www.federalreserve.gov/SECRS/2013/November/20131127/R-1411/R-
1411_112713_111665_439982689060_1.pdf.
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common for claims to change hands, particularly as the debtor’s
financial situation deteriorates and entities that are willing to bear more
risk in exchange for a higher return buy claims at a discount in hopes of
making a home run.
Incredibly, although they were paid almost $1.5 billion of estate
assets, the identity of the Funds and the amount of money each received
have only recently been publicly disclosed. This is so even though these
entities were paid with taxpayer money (TARP funds) and billions of
GM TARP dollars have never been and will never be repaid to the
United States Treasury.
206
Recently, the Committee annexed an exhibit
with the list of defendants to its amended complaint in the Term Loan
litigation, setting forth their identities and the amount of money those
defendants purportedly received. In accordance with an agreement with
JP Morgan, however, that exhibit was filed under seal.
207
Only
recently—over six years after government funds were used to pay
them—has the seal been removed from the exhibit, potentially providing
information about who was paid.
208
The mix of lenders we see in the GM case reflects changes in lending
over the last few decades. As noted previously, in the early days of
chapter 11 the lenders were oftentimes banks or insurance companies
that are highly regulated. Increasingly, however, lenders today are often
less closely regulated CLO trusts, other funds, private equity lenders, or
hedge funds.
209
As one expert described it, “In a little over ten years,
the players in the loan markets have done almost a 180 degree shift. In
1995 banks represented over 70% of the investors in loans. Today [in
2007] that number stands at under 13%. Conversely in 1995,
collateralized loan obligations (CLOs), hedge funds, and other such
funds represented just over 16% of the lenders in loans. Today, that
number stands at over 77%.”
210
The number and assets of these funds have grown amazingly over the
past few decades: for example, while hedge funds had $38.9 billion
under management in 1990, by the summer of 2008, they had roughly
206. Bank Bailouts Approach a Final Reckoning, WALL ST. J. (Dec. 14, 2014),
http://www.wsj.com/articles/ally-financial-exits-tarp-as-treasury-sells-remaining-stake-1419000430
(summarizing Department of Treasury loss on GM bailout as roughly $10.5 billion); see also Financial
Stability: Auto Industry, U.S.
DEPT. TREASURY, https://www.treasury.gov/initiatives/financial-
stability/TARP-Programs/automotive-programs/Pages/default.aspx (last visited Mar. 6, 2016)
(indicating Treasury had $11.3 billion loss on GM bailout).
207. Complaint, supra note 203, ¶ 8; Amended Complaint, supra note 100.
208. Order Removing the Confidential Designation From Certain Documents and Unsealing
Exhibits 3 and 4 to the Amended Complaint, Term Loan Litigation, Adv. No. 09-00504 (Dec. 3, 2015),
ECF No. 300 [hereinafter Order Removing the Confidential Designation].
209. See generally F
INANCIAL STABILITY BOARD, GLOBAL SHADOW BANKING MONITORING
REPORT 2015 (2015) (noting increase from 2002 in the assets of non-bank financial intermediaries).
210. Miller, supra note 13, at 379.
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$2 trillion under management.
211
Throughout the world, they are
playing a larger role in secured lending: a recent survey by Professor
Michele Harner indicates that hedge funds preferred investment in a
chapter 11 case is as a secured lender.
212
Many of these investors are established overseas,
213
in venues that
offer tax or other advantages to their operations or investors, although
the actual day-to-day operations of the lenders may be run from offices
in the United States.
214
These funds themselves may have raised all the
money for their investments, or they may have gathered money to invest
from other funds, also located abroad. Because these funds are
oftentimes located off shore, collecting judgments from them or from
the entities to which they transfer monies they receive may be a real
challenge. Moreover, some of them may no longer exist or have no
unencumbered assets.
215
Indeed, in a motion to dismiss filed in the
Term Loan Litigation, certain defendants have insisted that “several of
the Term Lenders have dissolved, been terminated, or otherwise
materially changed their positions in the over six years since the
complaint was filed.”
216
The developing facts in the Term Loan Litigation illustrate how little
is known about who really received the taxpayer money. Like all parties
to litigation, the defendants are required to file corporate ownership
statements.
217
However, over six years into the litigation, counsel for
211. HAL S. SCOTT, THE GLOBAL FINANCIAL CRISIS 98–99 (2009).
212. For an empirical analysis of the role of distressed debt purchasers in chapter 11 cases, see
Michelle M. Harner, Trends in Distressed Debt Investing: An Empirical Study of Investors’ Objectives,
16 A
M. BANKR. INST. L. REV. 69 (2008). In her study, Professor Harner notes that 34.5% of the
distressed debt investors she surveyed indicated that senior secured bank debt was their first choice for
investments. Id. at 83. For other commentary on the role of distressed debt investors in chapter 11
cases, see generally Barry E. Adler, Bankruptcy Primitives, 12 A
M. BANKR. INST. L. REV. 219, 239
(2004) and Douglas G. Baird & Robert K. Rasmussen, Private Debt and the Missing Lever of Corporate
Governance, 154 U.
PA. L. REV. 1209, 1211 (2006).
213. S
COTT, supra note 211, at 98.
214. See, e.g., In re Zais Inv. Grade Ltd. VII, 455 B.R. 839 (Bankr. D. N.J. 2011) (describing
Cayman Island corporation—a collateralized debt obligation—operating though agents in the United
States); In re SPhinX, Ltd., 351 B.R. 103, 107 (Bankr. S.D.N.Y. 2006) (explaining that funds were
established offshore to attract non-U.S. investors and U.S.-tax-exempt investors); In re Basis Yield
Alpha Fund (Master), 381 B.R. 37 (Bankr. S.D.N.Y. 2008) (describing fund established in Cayman
Islands).
215. Katherine Burton, Hedge Funds See Worst Year for Closures Since 2009, B
LOOMBERG BUS.
(Dec. 1, 2014), www.bloomberg.com/news/articles/2014-12-01/hedge-funds-see-worst-year-for-
closures-since-2009; Alexandra Stevenson, Hedge Funds Close Doors, Facing Low Returns and
Investor Scrutiny, N.Y.
TIMES (May 17, 2015),
www.nytimes.com/2015/05/18/business/dealbook/facing-low-returns-and-balky-investors-more-hedge-
funds-close-doors.
216. Motion of Ad Hoc Group of Term Lenders (1) To Vacate Certain Prior Orders of the Court,
and (2) To Dismiss the Adversary Proceeding, Term Loan Litigation, Adv. No. 09-00504 (Nov. 19,
2015), ECF No. 262.
217. F
ED. R. BANKR. P. 7007.1.
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over 200 defendants sought an extension of the time to file such
statements, explaining that “[f]or many clients . . . such information is
not readily accessible. For example, investment funds often do not have
direct access to the names of their investors because that information is
controlled by a trustee or other intermediary, which itself may not
always know if an entity owns 10% or more of the interests in the
defendant.”
218
Despite this reality, there does not seem to be a thorough appreciation
of the role that funds play in distressed lending. Although bankruptcy
judges and practitioners in mega-cases are well aware that large secured
loans are held by assorted non-bank lenders, in fact those parties
oftentimes in shorthand refer to the loans as if they were made by the
agent, rather than by a group of lenders.
219
As a practical matter, that
means that when an order provides that sums paid to the lenders will be
disgorged, many interested parties may be thinking that means the
money will be repaid by JP Morgan Chase Bank, N.A., a member of the
Federal Reserve system, required to maintain capital reserves in
accordance with federal regulations, and not some unknown fund,
organized who knows where, that may have transferred the funds
received to who knows whom, organized wherever. In fact, however,
oftentimes relative unknown entities are the actual lenders and the
beneficiaries of early distributions. Here the Final DIP Financing Order
specifically provided that JPMorgan would have no liability for the
amounts paid to the Funds. Rather, the Final DIP Financing Order
provided that the Funds alone would disgorge any inappropriate
payments made to them.
220
K. The Committee Faces Challenges in Bringing the Claims
Repaying lenders at the outset of a case, even though key players
were aware of a serious problem regarding the lenders’ security
interests, was a noteworthy example of one of the more unusual aspects
of the GM case.
218. Letter to The Honorable Robert F. Gerber from Bruce Bennett, Term Loan Litigation, Adv.
No. 09-00504 (Dec. 16, 2015), ECF No. 317.
219. For example, the bankruptcy rules require that the five largest secured lenders of the debtor
be listed on a schedule to be filed on the first day of the case. In the General Motors case, the third
largest secured lender was listed as “JPMorgan Chase Bank, N.A.,” which the affidavit asserted was
owed almost $1.5 billion. In fact, as explained above, JPMorgan was the agent for a group owed almost
$1.5 billion. When creditors read official sworn filings such as this, it would be natural for all but the
most sophisticated creditors to be confused. Henderson Aff., supra note 57, at 72 sched.3.
220. Final DIP Financing Order, supra note 136, ¶ 19(d) (“the respective administrative and
collateral agents shall have no responsibility or liability for amounts paid to any Prepetition Secured
Facility”).
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There was, however, one aspect of the post-petition financings that
was typical: even though the Bankruptcy Code provides for a two-year
period to bring actions challenging liens and improper transfers,
221
under the DIP financing order, the GM creditors would be given an
extremely narrow window to file an avoidance complaint: the
Committee had until no later than July 31 to file any complaint.
222
That
was less than 60 days from the filing of the petition in a case in which
hundreds of critical pleadings were being filed. Notwithstanding the
two-year statutory limitations period, a short window for the
investigation of liens is so common that rules formalizing the practice
have been promulgated in both the Southern District of New York and
the District of Delaware, two of the most popular venues for the filing of
large chapter 11 cases.
223
In the Southern District of New York, the
local rule provides that the period “shall ordinarily be sixty (60) days
from the date of entry of the final order authorizing the use of cash
collateral or the obtaining of credit, or such longer period as the Court
orders for cause shown prior to the expiration of such period.”
224
The historic rationale for an order shortening that time to a few
months or less was that the secured creditor did not want to throw good
money after bad by financing a chapter 11 case
225
in order to preserve its
collateral’s value if its pre-petition security interests would later be
voided. Of course, that rationale could not have applied in the General
Motors case because the Term Lenders were lending no new money to
the estate. In fact, the record discloses absolutely no rationale for the
truncated time period, a period that was shorter than the time period
required by the applicable local rule
226
and almost two years less than
the applicable statute of limitations.
227
As we shall see, that shortened
period later hurt the estate.
L. The Second Recall: The Litigation Commences
In light of the termination of the critical security interest filing, in
July 2009, the Creditors’ Committee commenced litigation against the
221. 11 U.S.C. § 546(a) (2012).
222. Final DIP Financing Order, supra note 136, ¶ 19(d).
223. B
ANKR. S.D.N.Y. R. 4001-2; BANKR. D. DEL. R. 4001-2.
224. B
ANKR. S.D.N.Y. R. 4001-2(f).
225. An important rationale for lending money to a chapter 11 debtor (which may not successfully
emerge from chapter 11), is that sometimes pre-petition lenders can use their post-petition loan to
stabilize the business and, they hope, realize more on their collateral than they would if the debtor were
desperate for cash.
226. The Bankruptcy Code provides generally for a two-year statute of limitations for actions to
avoid an unperfected security interest or an improper post-petition transfer. 11 U.S.C. § 546(a) (2012).
227. Id.
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holders of the Term Loan.
228
The Committee initially named over 400
defendants as having been paid, including numerous collateralized debt
obligations and a number of entities affiliated with giant financial
organizations, such as Blackrock, Citibank, Pimco, and Fidelity.
229
In
addition, the committee alleged that, although it had attempted to
discover the participants in the loan, the agent, JPMorgan, had refused
its request for a list of the syndicate members, and thus the Committee
alleged that there could be additional entities that were participating in
the credit at the time of the loan and therefore had been repaid.
230
Not
surprisingly, given the extremely tight window in which the Committee
was required to file its complaint, the complaint appears to have some
errors in the name of the defendants, and may not have named all the
entities that actually received the money:
231
the initial complaint named
roughly 413 defendants; by contrast, the amended complaint named
roughly 550 defendants.
232
M. The Bankruptcy Court Decision
Both parties moved for summary judgment on the issue of whether
the key security interest had been terminated. After discovery, the
matter was decided by the bankruptcy court, which reasoned that the
critical question was whether JPMorgan had authorized the
termination.
233
The key statute is U.C.C. section 9-509(d), which
provides:
(d) Person entitled to file certain amendments. A person may file
an amendment other than an amendment that adds collateral
covered by a financing statement or an amendment that adds a
debtor to a financing statement only if:
(1) the secured party of record authorizes the filing. . . .
228. Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JP Morgan Chase
Bank, N. A. (In re Motors Liquidation Co.), 755 F.3d 78, 82 (2d Cir. 2014).
229. Complaint, supra note 203.
230. Id. ¶ 8.
231. For example, in a recent pleading one of the defendants, Alticor Inc. asserts, “Alticor has not
been able to confirm receipt of the alleged transfers, but such transfers may have been received by
Alticor or any of its related affiliates, subsidiaries, trusts or plans.” Limited Objection By Alticor, Inc. to
Motion of Motors Liquidation Company Avoidance Action Trust for an Order Further Extending Time
to Serve Summons and Amended Complaint at 2 n.1, Term Loan Litigation, Adv. No. 09-00504 (Aug.
4, 2015), ECF No. 125.
232. Amended Complaint, supra note 100.
233. Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank,
N.A. (In re Motors Liquidation Co.), 486 B.R. 596 (Bankr. S.D.N.Y. 2013) rev’d on other grounds, 777
F.3d 100 (2d Cir. 2015).
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In the eyes of the bankruptcy court, the question was whether
JPMorgan, had “authorized” the filing as the term was used in U.C.C.
section 9-509(d).
234
Because the term “authorized” is undefined in the
U.C.C., the question was whether it was sufficient that the secured party
approved the filing—as had undoubtedly happened here—or whether
the secured party had to subjectively intend to terminate the security
interests.
235
Acknowledging that JPMorgan Lease Counsel had signed off on the
documents proposing to terminate the Term Loan financing statement,
the bankruptcy court nevertheless focused on the subjective
understanding of JP Morgan Lease Counsel.
236
The court held that,
because JPMorgan Lease Counsel did not understand his approval of the
documents to be approval of the termination of the Term Loan liens, the
termination was not legally effective.
237
Given the importance and novelty of the issues, the Bankruptcy Judge
granted a direct appeal to the Second Circuit Court of Appeals.
238
N. The Second Circuit Turns to Delaware
On appeal, the Second Circuit reasoned that there were two important
questions.
239
The first question was “[m]ust the secured creditor
authorize the termination of the particular security interest that the
U.C.C.-3 identifies for termination, or is it enough that the secured
lender authorize the act of filing a U.C.C.-3 statement that has that
effect?”
240
The second key question was whether Chase had granted to
GM’s counsel “the relevant authority—that is, alternatively, authority
either to terminate the . . . Term Loan U.C.C.-1 or to file the U.C.C.-3
statement that identified that interest for termination?”
241
Because the
first question was a significant matter of unsettled Delaware law, the
Second Circuit certified the following question to the Supreme Court of
Delaware:
Under U.C.C. Article 9, as adopted into Delaware law by Del.
Code Ann. Tit. 6, art. 9, for a U.C.C.-3 termination statement to
234. In re Motors Liquidation Co., 486 B.R. at 48 (“[T]he resolution of this controversy turn on
whether GM was authorized, as part of the payoff of the Synthetic Lease, to terminate JPMorgan’s
security interest in the unrelated Term Loan”).
235. In re Motors Liquidation Co., 777 F.3d at 104.
236. In re Motors Liquidation Co., 486 B.R. at 646.
237. Id.
238. Id. at 646–47.
239. In re Motors Liquidation Co., 755 F.3d 78, 84 (2d Cir. 2014).
240. Id.
241. Id.
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effectively extinguish the perfected nature of a U.C.C.-1 financing
statement, is it enough that the secured lender review and
knowingly approve for filing a U.C.C.-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
U.C.C.-3?
242
O. Delaware Lowers the Boom
It did not take long for the Supreme Court of Delaware to rule, and its
opinion was clear: JPMorgan’s Lease Counsel had authorized the filings
that terminated the financing statement and it did not matter that
JPMorgan’s Lease Counsel did not understand the effect of the filings
he had authorized. The Supreme Court of Delaware emphasized the
importance of filings being available for public review and the
importance of the filings being accurate. It explained:
JPMorgan’s argument that a filing is only effective if the
authorizing party understands the filing’s substantive terms and
intends their effect is contrary to 9-509, which only requires that
“the secured party of record authorize[ ] the filing.”
. . . .
Even if the statute were ambiguous, we would be reluctant to
embrace JPMorgan’s proposition [that a secured party understand
what it is authorizing]. Before a secured party authorizes the filing
of a termination statement, it ought to review the statement
carefully and understand which security interests it is releasing and
why . . . . If parties could be relieved from the legal consequences
of their mistaken filings, they would have little incentive to ensure
the accuracy of the information contained in their U.C.C.
filings.
243
P. The Long and Winding Road After the Second Circuit Decision
After Delaware ruled, the outcome before the Second Circuit Court of
Appeals was predictable: it held that, given the approvals of the filings
from JPMorgan’s Lease counsel, GM’s counsel had acted with authority
242. Id. at 86.
243. Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank,
N.A., 103 A.3d 1010, 1016 (Del. 2014) (footnote omitted) (first alteration in decision).
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and the financing statement was terminated.
244
That, however, was not
the end of the road: JPMorgan asked for a rehearing en banc, which was
denied.
245
The Second Circuit’s rulings will not end the matter. The Second
Circuit remanded the case; the committee is beginning to serve the
defendants; the defendants are beginning to answer or move to dismiss
the case; some of the 550 defendants are joining forces; other defendants
have not appeared; and some defendants apparently no longer exist.
246
The syndicate members have already received the money. Do they still
have it, or if they are still in business, have they disbursed the funds to
investors or otherwise become judgment proof?
Indeed, there are at least two other material issues that could stand in
the way of recovering the money from the Funds. First, JPMorgan has
argued that the Committee’s options are severely limited by the terms of
the DIP Financing Order.
247
Counsel for JPMorgan explained its
position during the oral argument on the motion for summary judgment
held before the bankruptcy court as follows:
The fact of the matter is, Section 19(d) of the DIP order in this
case preserves one issue to the creditors committee and that is the
question of perfection. . . . . . . The question of value is not
preserved and the only issue at least under the DIP order as we
read it . . . that’s preserved is the question of perfection. We
believe that those twenty-six fixture filings should end the issue
but that’s obviously the issue—we need to deal with the issues that
they’ve raised.
248
In other words, JPMorgan’s position is that, under the language of the
order that was entered with no meaningful notice to the creditor body,
244. Official Comm. of Motors Liquidation v. JPMorgan Chase Bank, N.A. (In re Motors
Liquidation), 777 F.3d 100, 105 (2d Cir. 2015).
245. Id. at 101.
246. Docket, Term Loan Litigation, Adv. No. 09-00504 (July 31, 2009).
247. E.g., Transcript of Hearing re Motions for Summary Judgment, supra note 114, at 47–48
(“Section 19(d) of the DIP order in this case preserves one issue to the creditors committee and that is
the question of perfection. And, in fact, that very same order, the very same section talks about a
different scenario where the question of value is preserved but as it relates to this particular inquiry. . .
the only its that’s preserved is the question of perfection. We believe those 26 fixture filings should end
the issue. . . .”).
248. Transcript of Hearing re Motions for Summary Judgment, supra note 114, at 47 (“Section
19(d) of the DIP order in this case preserves one issue to the creditors committee and that is the question
of perfection. And, in fact, that very same order, the very same section talks about a different scenario
where the question of value is preserved but as it relates to this particular inquiry, . . .the only issue
that’s preserved is the question of perfection. We believe those twenty-six fixture filings should end the
issue. . . .”).
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the court is precluded from examining the value of its security interests
in fixtures (if, indeed, they have any value).
The second roadblock to recovery is the nature of the defendants:
over 550 diverse entities that may or may not still exist, that may or may
not be judgment proof, that may or may not be domiciled in the United
States, that may or may not be subject to the personal jurisdiction of the
bankruptcy court, and that may not even include all the entities that
should have been sued.
249
The Bankruptcy Code drafters understood the possibility that
defendants could in fact transfer property wrongfully transferred to them
to yet a third person. Accordingly, in order to enable the recovery of
wrongfully transferred property from secondary transferees, Bankruptcy
Code section 550 allows recovery from these transferees.
The use of that section may be limited here, however. Because many
hedge funds and CLOs are located outside the United States
250
and may
take investments from foreign entities that in turn take other investments
from other foreign entities, a litigant attempting to collect a judgment
against them can encounter tremendous obstacles. In the Madoff case,
for example, the SIPA trustee obtained judgments against a number of
hedge funds that have received fraudulent transfers from Bernie
Madoff’s hedge fund, but was foiled when he tried to collect the
judgment from transferees of foreign-based funds (the Feeder Funds)
that had invested in the funds that dealt directly with the Madoff estate
and against which he had obtained initial recoveries.
251
The Feeder
Funds were in liquidation in foreign jurisdictions and had settled with
the Madoff Trustee for small amounts, and thus the best opportunity for
the estate to recover the money to which it was entitled was to go after
the transferees using Code section 550(a).
252
The district court refused, however, to let the Madoff trustee use the
Bankruptcy Code to recover from the foreign transferees of the entities
that had done business with Madoff’s fund.
253
Considering the possible
application of section 550(a), the court emphasized that comity is
249. Although JPMorgan eventually turned over a list of the defendants to the Committee, the list
had at least one error involving a defendant that was subsequently dismissed from the litigation because
it never was properly served. Motors Liquidation Co. Avoidance Acton Trust v. JPMorgan Chase Bank
(In re Motors Liquidation Co.), No. 09-50026, Adv. No. 09-00504, 2016 Bankr. LEXIS 4182 (Bankr.
S.D.N.Y. Dec. 07, 2016).
250. John M. Timperio, New Developments in Collateralized Loan Obligation Transactions, in
N
EW DEVELOPMENTS IN SECURITIZATION 2012 at 1182 (Practicing Law Institute 2012) (describing
offshore nature of CLO securitizations).
251. Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 222 (S.D.N.Y.
2014).
252. This would include a debtor in possession or a creditors’ committee that had been granted
standing.
253. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. at 233.
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especially important in bankruptcy matters.
254
The court concluded that
the foreign entities that had done business with the foreign feeder funds
had no reason to think they would be subjected to United States laws
and that Code section 550(a) should not be applied extra-territorially.
255
If other courts in the future follow this reasoning, an important tool to
enable recoveries will be unavailable with respect to transfers to foreign
entities, such as hedge funds and CLOs.
Granted, litigation usually settles. What is different about this
litigation, however, is that, because JPMorgan’s fees are being paid out
of the estate, it has less incentive to settle than it otherwise would have.
And even if JPMorgan wanted to settle, over 500 entities are parties;
negotiations should prove to be extremely difficult.
IV.
WHAT IS TO BE DONE?
A. The Flawed Official Response to the Term Loan Crash
As mentioned above, in the late 1990s, Article 9 of the U.C.C. was
overhauled. The group that spearheaded this overhaul was a committee
formed by the American Law Institute, the prestigious group that has
spearheaded many legal reforms.
256
In 2009, when the GM perfection
issue became public, the group was considering minor tweaks to Article
9, mostly in the nature of “clean up.”
257
The controversy that had arisen from the erroneous termination in the
GM case apparently did not miss the attention of this august group.
Although no change was proposed to U.C.C. section 9-513 (the section
addressing termination statements), the group did revise the official
comments to U.C.C. section 9-518. This change buttressed the case of
secured creditors that have mistakenly terminated a financing statement.
The revision added to the official comment the following phrase: “Just
as searchers bear the burden of determining whether an initial financing
statement was authorized, searchers bear the burden of determining
whether the filing of every subsequent record was authorized.”
258
This
254. Id. at 231–32.
255. Id. at 232.
256. U.C.C. § 9-101 cmt. 1.
257. Among the changes being considered was a change to enable the certainty in the name of the
individual debtor’s to be placed on financing statements. See U.C.C. § 9-503 (as amended 2010). For an
analysis of the changes proposed, see generally David Frisch, The Recent Amendments to UCC Article
9: Problems and Solutions, 45 U. R
ICH. L. REV. 1009 (2011), Henry C. Sigman, Improvements (?) to the
UCC Article 9 Filing System, 46 G
ONZ. L. REV. 457 (2010–11), and Edwin E. Smith, A Summary of the
2010 Amendments to the Official Text of Article 9 of the Uniform Commercial Code,
42 UCC L.J. 345
(2010).
258. U.C.C. § 9-518 cmt. 2 (amended 2010).
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revised official comment has been adopted in 52 states and territories as
of June 15, 2015.
259
The ALI’s desire to protect secured creditors from the harsh effects of
an erroneous termination is understandable. After all, the circumstances
of the General Motors case suggest that creditors may not monitor the
financing statement filings of secured parties, and if that is true, it
should have little practical effect if a filing had been accidentally
terminated.
260
The proposed revised comment also upheld the sanctity
of the deal the debtor and its lenders had entered into and gave weight to
bargained-for expectations. To the extent an accidental termination is
not given effect, it would seem to encourage secured lending by
enhancing predictability.
What the revised official comment also did, however, was undermine
the long-standing principle of English common law that secret liens are
fraudulent as to creditors, a basic principle of the law since the time of
Elizabeth I.
261
In suggesting that “searchers bear the burden of
determining whether every subsequent record was authorized” (such as
whether termination was authorized), the official comment is in truth
asking searchers to do the impossible. Because Article 9 very
specifically provides that secured parties have absolutely no duty to
respond to requests for information about financing statements other
than those of the debtor, it is hard to imagine a creditor could ever
determine whether a termination was authorized. Indeed, in this case,
JPMorgan could not even determine for itself what financing statements
it had on file. Moreover, it is impossible to imagine how any creditor
would be able to determine whom to contact at JP Morgan to determine
for itself whether the termination was authorized: after all, neither a
financing statement nor a termination statement require any information
about the secured creditor other than its name and address—the official
form provides for neither an email address, a telephone number, nor a
contact person at the secured party. Thus it is impossible to imagine that
a creditor could determine whether a termination was authorized.
The 2001 amendments to Article 9 have already gone a long way to
making liens secret, by allowing the description in a financing statement
to provide that the collateral is “all personal property” of the debtor.
That change has some justification: because it is over-inclusive, rather
than under-inclusive, it does not lead parties that deal with a debtor to
259. 52 Jurisdictions Have enacted the 2010 Amendments to UCC Article 9, UNIFORM LAW
COMMISSION (June 15, 2015),
http://www.uniformlaws.org/NewsDetail.aspx?title=52%20Jurisdictions%20Have%20Enacted%20the%
202010%20Amendments%20to%20UCC%20Article%209.
260. Hoge Aff., supra note 33.
261. Lipson, supra note 69, at 423–36.
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believe there are free assets when none exist. But the new official
comment to U.C.C. section 9-518 does exactly that, because given other
Code provisions, there is as a practical matter absolutely no way for a
creditor to know if a creditor meant to terminate a filing.
Moreover, having to determine if a termination statement was filed in
error could impose a tremendous burden on searchers: in the mid-1990s
one scholar reported that continuation statements, amendments, and
termination statements accounted for about 44% of the U.C.C. filings in
a sample he examined.
262
And this is why the “fix” of the revision committee is flawed: it has
the effect of further increasing the secrecy of liens, a matter that had
already led to criticism of the 2001 Article 9 revisions.
263
Accordingly,
the admonition to entities to inquire whether a filing terminated in the
public records actually was meant to have been terminated just simply
does not make sense.
B. The Bankruptcy Rules Should Be Revised
This automobile pileup suggests, however, that changes should be
made to the Bankruptcy Rules.
1. The Court Should Not Approve Extraordinary Payments to Secured
Creditors or Truncated Periods to Commence Avoidance Actions
Without Proof the Relevant Security Interest Is Perfected.
The repair is easy: the Bankruptcy Rules should be amended to
provide that a purported secured creditor must prove it is in fact
perfected before it is paid on its secured debt.
The Bankruptcy Rules specifically require that proofs of claim have
annexed to them proof of perfection of any security interest claimed.
264
There is, however, no such requirement that proof of perfection be
presented for DIP Financing orders, orders providing for adequate
protection payments for security interests, or orders otherwise allowing
for the payment of claims outside of the proof of claim process,
265
but
there should be.
The propriety of requiring this proof is especially true now, following
the 2001 revisions to Article 9. Now, most security interests are
262. LoPucki, supra note 63, at 597 n.71.
263. See Lipson, supra note 69, at 426 (“Article 9 . . . appears increasingly tolerant of secret
liens.”); Lynn M. LoPucki, The Unsecured Creditor’s Bargain, 80 V
AND. L. REV. 1887, 1891 (1994)
(attacking “the deceptive nature of security”).
264. F
ED. R. BANKR. P. 3001.
265. F
ED. R. BANKR. P. 4001.
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perfected by creditors filing one financing statement in one state. The
ease of proving that a security interest is perfected is much greater than
it was before Article 9 was revised in 2001. As noted, in many cases it
takes less than ten minutes to get the information to prove perfection of
a security interest.
One exception is those few cases in which a security interest in the
collateral is not perfected by one filing in the debtor’s location. But
what collateral is that? It includes deposit accounts, perfection of which
requires only a control agreement with the bank and for which the
secured party should have the paperwork readily at hand to prove its
security interest.
266
Moreover, with respect to this collateral, the secured
party—typically a bank—can temporarily freeze the account pending a
determination of the parties’ rights.
267
Another exception arguably is the very type of collateral that
continues to be at issue in the GM case: fixtures. But here again the
solution is easy. If a secured creditor wants to prove that it is perfected,
it need only produce in evidence one central filing in the state in which
the debtor is located.
268
It should be a rare case in which a bank has
fixture filings filed throughout the United States and yet has not also
made a central filing that includes fixtures to perfect its position in
bankruptcy. Should there be such a rare case—as we have here, by
accident—solving the problem only is a matter of time. Remember,
fixtures are, by definition, affixed to the realty. The risk of fixtures
disappearing overnight or being swiftly consumed should be minimal.
Similarly, the other types of collateral that require dual filings (timber to
be cut, as-extracted collateral)
269
may be less likely to disappear
immediately than other types of collateral. In any event, until a court
finds that the security interests are perfected, the secured creditor can be
protected by the requirement that the debtor provide the creditor
adequate protection that does not involve payments to the syndicate
members (but could require segregation of funds).
There is another pressing reason that courts should immediately
institute new safeguards before allowing the pre-confirmation payment
of a pre-petition claim: the nature of the lender has changed. While at
one time many lenders were often closely regulated depository
institutions, insurance companies, or American-based pension funds,
270
266. U.C.C. § 9-312(b)(1).
267. Citizens Bank v. Strumpf, 516 U.S. 20, 21 (1995) (bank that asserts a right of set off in
deposit account may freeze account pending determination of rights to funds in account).
268. U.C.C. §§ 9-301(1), 9-309(a1).
269. U.C.C. §§ 9-301(3)(B), 9-301(4). “As extracted collateral” is certain oil, gas, and other
minerals and related accounts. U.C.C. § 9-102(a)(6).
270. G. Ray Warner, The Anti-Bankruptcy Act: Revised Article 9 and Bankruptcy, 9 A
M. BANKR.
INST. L. REV. 3, 41–42 (Spring 2001).
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now they oftentimes are foreign-based CLOs, hedge funds, or private
equity,
271
which are not as tightly regulated or as well capitalized.
These funds come and go, and it can be very difficult—if possible at
all—to recover a judgment from these entities.
The rule amendment I propose does not have to break new ground.
We merely need to include in Bankruptcy rule 4001 (the rule regulating
debtor-in-possession financing and adequate protection orders) a
provision similar to that in Bankruptcy rule 3001(d) regarding proofs of
claim, which provides: “If a security interest in property of the debtor is
claimed, the proof of claim shall be accompanied by evidence that the
security interest has been perfected.” Therefore, Bankruptcy rule 4001
should be amended to include: “If a motion proposes to pay pre-petition
debt on account of its being secured, whether such payment is to be
made immediately or over time, the motion shall be accompanied by
admissible evidence that the security interest is perfected.” A related
rule would be, “If a motion proposes to shorten the time in which any
party in interest can commence an action under any section of the
Bankruptcy Code, including sections 544, 547, 548 and 554, and in
connection with the motion any party alleges that any potential
defendant claims to have a security interest in property of the estate, the
motion shall be accompanied by evidence that the security interest of
that potential defendant is perfected.” In chapter 11 cases, that evidence
should be either (1) a control agreement (for deposit accounts) or (2) a
security agreement and one file-stamped financing statement from one
state.
272
Given the speed with which a secured creditor now can produce this
limited, easy proof of perfection, there is no justification for not
requiring this proof; after all, every other creditor has to be able to prove
its claim. Admittedly, this limited requirement of proof of perfection
does not prove that the secured lender should be paid on its pre-petition
claim: for example, another entity may have priority, or the collateral
may not be equal in value to the secured creditor’s outstanding claim.
Even if a secured claim is oversecured, moreover, proof of perfection
does not definitively establish that a secured creditor has a right to be
paid; a secured claim could be disallowed as having been a fraudulent
271. Matt Wirz & Liz Hoffman, Investors Turn Sour on Risky Debt Deal, WALL ST. J. (Nov. 9,
2015), http://www.wsj.com/articles/DJFDBR0120151109ebb9h0o9q (banks need to off-load high yield
debt by year-end in order to comply with capital requirements of their regulators).
272. Granted, the proof may be slightly more complex for other collateral, such as that
automatically perfected or perfected through possession, but that proof is required in a proof of claim,
which is the usual way in which entities are paid. I also noted above that searching the Delaware
Secretary of State for financing statements is somewhat slower than in some other states; if that timing
should ever become problematic, Delaware presumably would modernize its systems.
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transfer
273
or a preferential transfer.
274
There are other theories on
which a secured claim could be disallowed or not paid, such as equitable
subordination.
275
Those facts, however, are not as easily established as
is the presence of one authenticated security agreement and one proper
financing statement on file in the correct location. However, nothing
proposed herein requires a secured creditor to be paid merely with proof
of perfection of its security interest, and nothing would stop creditors
from seeking delay in appropriate cases if a purportedly secured claim
might be disallowed.
276
My second suggestion, set forth below, will
help creditors make a more informed decision about whether they
should oppose a particular payment in bankruptcy cases in light of the
possibility that the secured claim could be avoidable even if it is
perfected.
2. The Parties Must Know Key Facts Regarding Whom Is Being Paid
In the Term Loan litigation in the GM case, the Committee was
forced to file its complaint less than forty days after the final debtor-in-
possession financing order was entered instead of two years after the
petition date, which is the period the Bankruptcy Code sets as the
minimum limitations period to bring avoidance claims.
277
Given the
shortened time period, the Committee apparently had no way to
determine whom had been paid: no names had been filed with the court,
and the agent apparently refused to disclose the names of the syndicate
members.
278
So, although the Committee seems to have done the best
that it could in these terrible circumstances, it appears to have made
more than a few errors in determining whom to sue.
279
Indeed, the
litigation is just getting underway, and more problems could surface that
might have been avoided had the Committee had a reasonable amount of
time to bring its action.
280
In any event, no other future plaintiff should
273. See, e.g., 11 U.S.C. §§ 544, 548 (2012) (providing for the avoidance of fraudulent transfers).
274. See, e.g., 11 U.S.C. § 547 (2012 & Supp. 2016) (providing for the avoidance of preferential
transfers).
275. See 11 U.S.C. § 510(c) (2012) (providing for equitable subordination).
276. This is not to suggest that the proposals of the American Bankruptcy Institute relating to
secured financing should not be adopted. The suggestions set forth herein, however, are much more
modest suggestions that can be more easily implemented. See generally American Bankruptcy Institute
Commission, supra note 192, at 79, 80–86 (proposals limiting “roll-ups” of pre-petition secured debt).
277. 11 U.S.C. § 546(a) (2012).
278. Complaint, supra note 203, ¶ 8.
279. Compare Complaint, supra note 203 (naming roughly 413 defendants) with Amended
Complaint, supra note 100 (naming roughly 550 defendants).
280. Indeed, problems are already surfacing. For example, the court has dismissed the complaint
as to an entity that was not served properly because of challenges the plaintiff faced in determining
whom to serve and where to serve them. Motors Liquidating Co. Avoidance Action Trust v. JPMorgan
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be put in such an unfair position. Accordingly, the Bankruptcy Rules
should be amended to provide that lenders being paid are required to
disclose the amount of money they are receiving, their legal names, and
their agents for the service of process.
There is a second reason that the identities of the recipients of the
extraordinary payments must be disclosed: interested parties need to be
able to consider whether the estate can ultimately recover the money
paid. If they know who is being paid, interested parties can consider the
potentially limited life span and assets of the lenders. Moreover, parties
can consider whether a judgment against the lenders—or their
transferees—likely will ever be collectible.
V.
CONCLUSION
Creditors of General Motors who were harmed by GM’s negligence
have not been paid in full. Laborers who worked their lives for GM
have lost ground as a result of the GM restructuring. Unless they
received special treatment under one of the extraordinary GM first-day
orders, small suppliers to GM have been paid little on their claims, and
their businesses may have been ruined. These creditors were all
unsecured creditors, and for that reason, the hard luck of chapter 11’s
absolute priority rules is that they can end up with a fraction of their
claims, or nothing.
Sophisticated financial investors, however, have been wrongfully
paid in full, and even if they return all the money to which they were not
entitled, they will have had the use of almost $1.5 billion for years.
Even if they have to return the entire amount of any overpayment they
received, with interest—a resolution that is hard to imagine as a
practical matter—the interest for which they will be liable is only the
federal judgment rate, a paltry sum these days, particularly when
compared to returns in the financial markets since they were paid.
In explaining why AIG could pay out $165 million in “boom level
bonuses” to its high executives after the company received billions of
dollars of American-taxpayer bailout funds, former Secretary of the
Treasury Timothy J. Geithner explained that those payments could not
be stopped and, moreover, should not have been stopped by the
Department of the Treasury
281
because “we’re a nation of laws.”
282
Chase Bank (In re Motors Liquidation Co.), No. 09-50026, 2016 Bankr. LEXIS 4182 (Bankr. S.D.N.Y.
Dec. 7, 2016) (dismissing complaint against GMAM Investment Funds Trust when trustee, proper entity
for service, had liquidated in 2011 prior to service and new trustee had been appointed).
281. G
EITHNER, supra note 198, at 315–18. The former Secretary of the Treasury also
emphasized, “The rule of law was arguably our most important anchor, especially during the limbo
period when fears of nationalization and federal interference were pervasive.” Id. at 316.
282. Id. at 318.
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Even though Treasury was in the driver’s seat of the GM case,
283
the
Department of Treasury did nothing to stop the illegal payment of
JPMorgan’s litigation defense fees. Ironically, at the time JPMorgan
received this gift, it insisted it had absolutely no need for government
money.
284
Similarly, the Department of the Treasury required that the
Funds be paid almost $1.5 billion, even though their right to that
money—and the ability to recover it should the payment be made—was
doubtful.
This article has made much of one small error—with horrible
consequences—made at the time of a grave financial crisis, when it was
unclear whether our financial system would avoid a collapse that would
lead to even greater misery than befell many people as a result of that
financial crisis. No lives were lost because of this accident, but because
of a minor technical glitch, lenders may be denied the benefits of the
bargain they made, huge sums have been spent trying to come to a fair
resolution of the issues, and reputations have suffered. We should not
forget that many of the lawyers, businessmen, and politicians who were
involved with this $1.5 billion accident were at the same time working
night and day to salvage the economy, bringing to bear creative
lawyering of the highest caliber. But, just as we admire and marvel at
the flight of the latest transcontinental jet, we appreciate that the pilots
have strict protocols and check lists that they must go through before
and during every flight to reduce the likelihood of a crash. After every
accident, the experts dig through the wreckage, trying to determine how
to avoid the next crash and specifically how to refine the systems so that
future accidents can be avoided.
285
So we’ve dug through this wreckage. In short, these $1.5 billion
recalls may be the least successful of the General Motors recalls. But
perhaps the numbers involved will cause the courts and practitioners to
focus on the problems arising from the absence of clear proof
requirements for financing orders and could encourage a beneficial re-
engineering of the system.
283. For an overview of the role the Automobile Task Force played in the General Motors chapter
11 case, see R
ATTNER, supra note 182. The extent to which the Department of the Treasury was calling
the shots in the case may be best illustrated by an error Rattner, the so-called “Auto Czar,” made in his
recounting of the restructuring: he mistakenly refers to bankruptcy counsel for General Motors as “our
counsel.” Id. at 260.
284. Id. at 355 (describing how Jamie Dimon, CEO of JPMorgan, brought a fake $25 billion
check to a White House meeting to emphasize his desire to repay money Treasury had insisted
JPMorgan take and for which he contended the bank had absolutely no need).
285. Apologies for mixing metaphors.
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University of Cincinnati Law Review, Vol. 85, Iss. 1 [2018], Art. 4
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