Case Summary
The court case focuses on three groups of plaintiffs who are suing General Motors for a critical defect in ignition switches that could shut off the ignition, disabling steering, breaks, and airbags even in the middle of driving. However, the issue at hand is that due to the 2009 financial crisis, GM declared bankruptcy under the oversight of the U.S. Treasury after bailouts did not effectively aid the suffering company. As a result of bankruptcy proceedings, a new entity, ‘New GM’, was formed that purchased most of the assets of the Old GM, with a ‘free and clear’ provision in the bankruptcy court sale order which essentially clears New GM of any liability for its predecessor. In 2014, the new company started recalling vehicles with the ignition switch defect. This resulted in class action lawsuits being initiated under the clause of ‘successor liability – indicating that New GM was responsible, and the claims sought damages for losses and injuries as a result of the ignition switch defect. The original bankruptcy court upheld the Sale Order that enjoined the claims against New GM (Elliott v. Gen. Motors LLC, 2016).
The appeal was examined by the U.S. Court of Appeals for the Second Circuit in 2016. The court found that while the bankruptcy court had the jurisdiction to enforce the Sale Order, the ‘free and clear’ provision is only applicable to accidents and claims occurring prior to the sale, and does not cover independent claims or used car purchasers. The court decided there was no error in the finding by the bankruptcy court that Old GM “should have known about the defect” and “notified individuals by direct mail or equivalent as required by procedural due process” (Elliott v. Gen. Motors LLC, 2016). Enforcing the sale order would otherwise violate procedural due process, thus new GM’s motion to enforce and bind the plaintiffs by the sale order would be wrong. The court vacated the “bankruptcy court’s decision on equitable mootness as advisory” (Elliott v. Gen. Motors LLC, 2016). The proceedings are remanded based on the appeal court decision.
Argument
The side took: Creditor’s Committee
In the examination of the case, Official Committee of Unsecured Creditors of Motors Liquidation Company v. JP Morgan Chase Bank, N.A (2015), in the en banc rehearing of the case by the Court of Appeals by the Second Circuit, it is recommended that the original appeal decision is upkept of reversing and remanding the decision of the Bankruptcy Court. The partial summary judgment for Plaintiff should be fulfilled in that the Main Term Loan UCC-1 should be terminated.
While the error is tremendous and unfortunate, multiple factors provide to the legality of the UCC-3 termination of the Main Term Loan UCC-1. First, the UCC-3 termination must be “authorized by the secured party of record”, which was J.P. Morgan Chase Bank (Creditors v. JP Morgan Chase Bank, 2015). The UCC-3 although filed erroneously, followed all instructions and details, including the identifying UCC-1 file numbers being terminated. All proper procedures and authority were followed. As stated in the appeal, General Motors repaid the amount into the Escrow Agreement at which point the escrow agent would send the three individual UCC-3 termination statements to JP Morgan’s counsel.
Under all legal and otherwise conditions, JP Morgan had the time, capability, and responsibility to review all documentation where the error could have been discovered. As the secured party and creditors, it was the burden of JP Morgan to ensure the correctness of all forms, which the counsel Simpson Thatcher did and signed the forms under all proper procedures and regulations. JP Morgan has also brought up the argument of whether its counsel had the authority to make the decisions on its behalf for the UCC-3 termination to have an effect. However as stated in precedent cases, “actual authority … is created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent takes action on the principal’s behalf.” (Whaley & McJohn, 2017). The circulation of documents and interaction between Thatcher and Mayer demonstrates that JP Morgan and its counsel were aware and authorized of all proceedings.
The second factor to consider based on these arguments is Delaware law. The Delaware Supreme Court certified the question that if the secured party authorizes the filing of the UCC-3 termination statement, then it is effective regardless of if the secured party “subjectively intends or understands the effect” of that action (Whaley & McJohn, 2017). Under the Delaware UCC, in order for the termination statement to go into effect as specified in §9-509 and §9-513, the secured party authorizing the filing is legally appropriate, and the code does not have a requirement for the party to comprehend the contents of the filing. Despite the ambiguity of the UCC code which JP Morgan argues, there are legal and policy implications if the Bankruptcy Court decision is upheld. If parties could be easily relieved from legal or financial consequences of filings, even if mistaken, then there would be little incentive to ensure the accuracy of the information in the UCC filings as well as the potential for abuse (Whaley & McJohn, 2017).
References
Elliott v. Gen. Motors LLC, 829 F.3d 135 (2d Cir. 2016). Web.
Official Committee of Unsecured Creditors of Motors Liquidation Company v. JP Morgan Chase Bank, N.A, 13-2187-bk (2d Cir. 2015). Web.
Whaley, D. J., & McJohn, S. M. (2017). Problems and materials on secured transactions. Wolters Kluwer.