January 29, 2019, New York – On June 1, 2009, Debtor General Motors, Inc. (GM) and certain of its subsidiaries filed voluntary Chapter 11 petitions in the bankruptcy court. GM also filed a motion seeking authority to obtain over $33 billion in post-petition DIP financing from the U.S. and Canadian governments. The motion requested authority to use a portion of the DIP financing to repay its term loan with Defendant J.P. Morgan and various other lenders (“Term Lenders”).
At the time the Debtor filed for bankruptcy, it was believed that the Defendants in this action held a fully secured claim. Shortly thereafter, it was discovered that a UCC-3 termination statement (“2008 Termination Statement”) purporting to terminate the main lien securing the Term Lenders’ loan had been filed by mistake in 2008. While this created uncertainty with respect to the Term Lenders’ position, all parties involved understood the urgency of restructuring the Debtor.
Faced with a serious risk that the Term Lenders could hold up completion of a section 363 sale of substantially all of the Debtor’s assets, the parties agreed to a final DIP Order by which the United States and Canadian Governments provided over $33 billion in DIP financing to facilitate a section 363 sale and the ongoing chapter 11 cases. The terms of the order authorized the Debtor to repay the Term Lenders in full, but it also preserved the right of the Official Committee of Unsecured Creditors of the Debtor (the “Committee”) to challenge the loan repayment after the fact and to recover all or part of that repayment for the benefit of the estate.
On July 31, 2009, the Committee filed a complaint initiating the adversary proceeding against the Term Lenders, alleging that the 2008 Termination Statement caused the main lien on the collateral to become unperfected and sought to avoid the transfer to the Term Lenders authorized by the final DIP Order. The Motors Liquidation Company Avoidance Action Trust as successor to the Committee litigated the question of whether the 2008 Termination Statement terminated the main lien or not.
On January 21, 2015, the Second Circuit had held that, because of the filing of the 2008 Termination Statement, the main lien was not effective as of the petition date and remanded the case to the Bankruptcy Court to determine the extent to which the Term Lenders were secured parties absent the main lien. The Term Lenders argued that the so-called “earmarking doctrine” provided them a complete defense to the AAT’s claim. The AAT moved the Court for partial summary judgment and sought dismissal of the Term Lenders’ earmarking defense.
The Court concluded that the earmarking defense was not available in the case at bar. The Court reasoned that the DIP financing was not subject to a clear obligation to use the money to pay the Term Lenders. The Court added that while the DIP Order authorized the repayment to the Term Lenders, it was expressly subject to challenge and recovery based on the extent, validity and priority of the liens securing the Term Loan. Furthermore, the Court determined that the repayment to the Term Lenders diminished the Debtor’s estate. Accordingly, the Court granted the partial summary judgment to the AAT and dismissed the Term Lenders’ earmarking defense as a matter of law.
Motors Liquidation Co. v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), Nos. 09-50026 (MG), 09-00504 (MG), 2019 Bankr. LEXIS 199 (Bankr. S.D.N.Y. Jan. 29, 2019)