Some of you may be tired of hearing me run on about the GM-JPMorgan mess. Remember? JPMorgan and its counsel authorized the termination of the UCC financing statement securing a $1.5 Billion Syndicated Term Loan. And despite the General Motors’ bankruptcy judge deciding that JPMorgan did not “intend” to terminate the UCC and that the termination should be void, on appeal the Delaware Supreme Court and the Second Circuit Court of Appeals ruled that the termination statement was “authorized” (even if not intended). And despite the error the termination statement was effective leaving JPMorgan (and hundreds of co-lenders who invested in that loan) unsecured.
So why am I bringing this up when all of that happened by 2015?
Because the “old” GM Creditors’ Committee is out there trying to collect money that had been paid to JPMorgan and its syndicate prior to the determination that they were unsecured.
But not only is the Committee trying to recover funds from JPMorgan and its syndicate, members of the lending syndicate have brought cross-claims against JPMorgan for having terminated the UCC. Again by way of reminder, JPMorgan did need to terminate UCCs – but not for the $1.5 Billion Term Loan. They needed to release the UCCs securing a much smaller synthetic lease that had gone its term. It was the error of those who were charged with unwinding the synthetic lease who unknowingly authorized the release of the UCCs securing the $1.5 Billion Term Loan.
And you don’t expect JPMorgan to just sit back and let those cross-claimants walk all over it and stick JPM with the entire $1.5 billion bill, do you? Oh no! JPM is raising defenses that come right out of the standard exculpatory provisions intended to protect agents from claims by syndicate members; those standard provisions that are offered to you on a “take it or leave it” basis if you wish to be part of that club and get your funds employed.
At least one of the answers to cross-claims filed by JPM provides:
The claims asserted in the …Cross-Complaint are barred by provisions of the Term Loan Agreement, including: (a) section 8.04 of the Term Loan Agreement, which provides that JPMCB “shall be entitled to rely, and shall be fully protected in relying” upon “advice and statements of legal counsel (including, without limitation, any counsel to the Borrower)”; (b) section 8.02 of the Term Loan Agreement, which permits JPMCB to execute any of its duties “by or through agents or attorneys-in-fact” and states that JPMCB “shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care”; (c) section 8.03 of the Term Loan Agreement, which provides that JPMCB shall not be liable “for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person’s own gross negligence or willful misconduct)”; and (d) section 8.06 of the Term Loan Agreement, which provides that each lender “expressly acknowledges” that JPMCB has not “made any representations or warranties to it,” and that each lender “represents that it will, independently and without reliance upon the Agent . . . continue to make its own credit analysis, appraisals and decisions” with respect to the Term Loan.
Section 8:03 of the Term Loan Agreement provides, in part:
Exculpatorv Provisions. Neither the Agent nor any of its officers, directors, employees or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person’s own gross negligence or willful misconduct) …. [emphasis added]
Gross negligence is very difficult to prove. New York courts[1] have addressed this issue stating:
Gross negligence, however, differs in kind as well as degree from ordinary negligence [citations omitted] “It is conduct that evinces a reckless disregard for the rights of others or ‘smacks’ of intentional wrongdoing”
When you sign on to a syndicate you understand the borrower credit risks you are taking on. But you are not generally taking on the risk that your agent will release the collateral securing the loan.
This case will continue on for a while. The cross-claim defendants still have until December 31, 2017, to assert their cross claims against JPM.
Whatever comes of this case keep these exculpatory provisions in mind next time you sign off and join a syndicate and understand what your rights are when what can’t go wrong does go wrong.
Stay tuned. We will continue to update you from time to time as this case further develops.
[1] Sutton Park v Guerin, 297 A.D.2d 430
Click below to revisit some of my other articles and posts on the GM matter and similar issues click here:
http://www.rmfpc.com//wp-content/uploads/2015/03/ABF-Journal-March-2011-JPMorgan-Chase..pdf
https://wurstcasescenario.com/general-motors-and-the-second-circuitagain/
http://www.rmfpc.com/wp-content/uploads/2013/11/Mutiny-on-the-Agent-TheSecuredLender_Nov13.pdf
https://wurstcasescenario.com/another-erroneous-release-of-a-ucc/