Section 4-9-513 of the Colorado Uniform Commercial Code (UCC) provides that "a secured party shall cause the secured party of record for a financing statement to file a termination statement . . . within one month after there is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance . . . ."  Simply stated, when a secured obligation is paid and there is no commitment to make an advance, the secured party is obligated to file a termination statement.

Section 4-9-409 of the UCC authorizes the debtor to file a termination statement if the secured party fails to do so and "the termination statement indicates that the debtor is authorized to file it."

There have been at least two cases[1] holding that termination statements that had mistakenly terminated security interests were effective notwithstanding they were erroneous.  The risk to a secured party is readily identifiable if an unauthorized termination statement is filed, i.e., loss of priority or perfection of the security interest.

A recent decision by the United States Bankruptcy Court for the Southern District of New York[2] held that for an agent to effectively terminate a financing statement on behalf of a secured party, the termination statement must be authorized by the secured party.  This decision arose out of a large loan (Synthetic Lease) to General Motors Corporation, which in 2008 was repaid.  Before the Synthetic Lease credit was repaid, the secured party entered into a term loan with General Motors.

General Motors filed three termination statements, but only one related to the Synthetic Lease credit.  The term loan was still extant, but one of the three termination statements related to the term loan.  The bankruptcy court rejected the rationale of the earlier cases, holding that a termination statement was effective even if erroneous, and concluded that under the 2001 amendments to the UCC an agent (here the debtor) who files a termination statement must be authorized by the principal.  General Motors was not authorized to file the termination statement for the term loan made by J.P. Morgan Chase Bank.

Even though this case comes out of a bankruptcy court, it is significant in that it gives lenders a basis for contending that the filing of an unauthorized termination statement is invalid.  It also creates a problem for a prospective lender since the prospective lender cannot be certain that a termination statement on file is valid.  A prudent prospective lender may find it necessary to verify that a termination statement, particularly one filed by the debtor, was authorized before extending any credit.

[1] Crestar Bank v. Neal 960 F.2d 1242 (4th Cir. 1992) and Koehring Co. v. Nolden 27 B.R. 167, aff'd 735 F.2d 362 (9th Cir. 1984).

[2] Motors Liquidation Company v. J.P. Morgan Chase Bank, N.A. 486 B.R. 596 (Bankr. S.D.N.Y. 2003).