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JPMorgan loses appeal over US$1.5b GM mistake

Discovered when GM's Chapter 11 reorganisation was in progress, the creditors' committee claimed the mistake meant JPMorgan didn't have a valid lien to secure the US$1.5 billion loan.

[NEW YORK] JPMorgan Chase Bank lost the second and decisive round of a US$1.5 billion (S$2 billion) appeal when a federal appeals court in Manhattan ruled that creditors of General Motors Corp, the bankrupt automaker, are entitled to a billion-dollar payday thanks to mistakes by lawyers paying off a US$300 million loan.

Unsecured creditors were told when the Detroit-based automaker was emerging from bankruptcy that their recovery depended chiefly on two factors. First was the value of the stock and warrants they got in the reorganised "new" GM. The second was the outcome of the lawsuit resulting from a mistake made during a loan refinancing.

The story begins in 2001 with a US$300 million synthetic lease financing from New York-based JPMorgan. In 2006, with the same bank as agent, GM obtained a new US$1.5 billion loan secured by most of the carmaker's assets.

GM paid off the smaller loan in October 2008, before its June 2009 Chapter 11 filing in Manhattan.

As it turned out, lawyers for JPMorgan and GM mistakenly filed documents that, on their face, also terminated the security interest for the US$1.5 billion financing that was supposed to remain on the books.

Discovered when GM's Chapter 11 reorganisation was in progress, the creditors' committee claimed the mistake meant JPMorgan didn't have a valid lien to secure the US$1.5 billion loan.

Judge Robert E. Gerber ruled in favour of the bank in March 2013 and said the loan's secured status survived the error because it wasn't what either GM or the bank intended.

Creditors went straight to the US Court of Appeals for the Second Circuit in Manhattan. In June, the court asked Delaware's Supreme Court to resolve an undecided issue of state law under the Uniform Commercial Code, which governs the validity of the JPMorgan loan and security interest.

The Delaware court issued an opinion in October in favour of the creditors, saying "unambiguous provisions" in the statute "dictate" that the creditors must win on the question because it's "enough that the secured party authorizes the filing."

The Delaware court's decision alone didn't mean the creditors would win and GM would lose collateral for the loan. The Second Circuit said it still had to decide whether the law firm was authorised as agent to terminate the security interest.

In an unsigned 15-page opinion Wednesday, a three-judge circuit panel said the filing was authorised, although mistaken.

The opinion starts by explaining how the assignment was first given to an associate who subcontracted some of the labour to a paralegal. Documents were prepared that, as it turned out, terminated not only a lien that was intended to end but also the US$1.5 billion lien that wasn't.

The appeals court said bankers and lawyers for GM and JPMorgan all were sent documents multiple times asking for review and comment.

The circuit court said "repeated manifestations" by JPMorgan and its own lawyers showed they knew GM's lawyers would file the papers, even though it turned out the documents would terminate the wrong security interest.

"Nothing more is needed," the court concluded.

The appeals panel sent the case back to the bankruptcy court to make appropriate changes in the treatment of creditors under old GM's plan.

Before then, JPMorgan can attempt a final appeal to the US Supreme Court. The high court, however, takes few cases concerning state commercial law, since the states are ordinarily the final authority on that subject.

"We're still reviewing the decision and looking at our options," Andrew Gray, a spokesman for JPMorgan, said in an interview on Wednesday.