On January 21, 2015, the U.S. Court of Appeals for the Second Circuit issued an opinion regarding a mistaken UCC-3 termination statement that all loan market participants should consider carefully. The Second Circuit held that a secured party’s lack of intent to terminate a properly filed UCC-1 financing statement, which perfected its lien granted in connection with a secured financing, is not sufficient to deem ineffective the filing of a UCC-3 termination statement with respect thereto. Even absent the intent to terminate, the actions of the secured party and its lawyers prior to the filing of the UCC-3 termination statement were, in this case, sufficient as a legal matter to form the requisite authority to file under Article 9 of the Uniform Commercial Code (the “UCC”). As a result of the Second Circuit’s ruling, a $1.5 billion prepetition financing does not have a perfected security interest on the intended collateral, and the secured creditor may not be repaid in full as part of the debtors’ bankruptcy. For general unsecured creditors, the secured creditor’s error created a significant source of additional distributable value, potentially improving their recoveries on their prepetition claims.

On February 4, 2015, the secured party filed a petition with the Second Circuit seeking a rehearing en banc. We anticipate that it will take at least one month for the Second Circuit to rule on the secured party’s rehearing request.