Canada: When A Secured Loan Turns Into Unsecured Debt: The Irreversibility Of Discharged Registrations

Last Updated: February 11 2015
Article by M. Sandra Appel

A discharge is effective whether or not the secured party intended to discharge that particular registration. That was the decision of the United States Court of Appeals for the Second Circuit,1. which left JP Morgan unsecured for $1.5 billion as a result of a paperwork mix-up. Case law in Ontario and elsewhere in Canada suggests that the decision here would be the same. Consequently, lawyers and law clerks need to exercise extreme care in discharging registrations.


General Motors ("GM") entered into a syndicated lease financing transaction for about $300 million ("Lease Transaction") with several banks including JP Morgan Chase Bank N.A. (JP Morgan"), as administrative agent. Two registrations were made pursuant to the Uniform Commercial Code ("UCC"), with JP Morgan identified as the secured party on the UCC-1 financing statement.

Several years later GM entered into a term loan facility ("Term Loan Transaction") for about $1.5 billion. Again, JP Morgan acted as the administrative agent for a syndication of lenders. Although there were many UCC filings for the Term Loan Transaction, the major financing statement was registered in Delaware and is referred to as the "Main Term Loan Security".

When the Lease Transaction was nearing maturity, GM instructed its counsel ("GM Counsel") to prepare the documentation to repay JP Morgan and its syndicate and to release the Lease Transaction security. GM Counsel instructed an associate to prepare a closing checklist and the relevant documents. The associate instructed a paralegal to undertake a search for UCC-1 financing statements registered against GM. The paralegal located three such statements, but did not realize that only two related to the Lease Transaction; the third was the Main Term Loan Security.

GM Counsel prepared draft discharge statements (UCC-3 statements) to terminate the UCC-1 filings registered against GM. All three registrations against GM in favour of JP Morgan were discharged. The error went unnoticed until a year later when GM filed for bankruptcy protection.

The United States Bankruptcy Court for the Southern District of New York, in an application, determined that even though the UCC-3 statement for the Term Loan Transaction was filed in error, it was effective. JP Morgan was an unsecured creditor for over $1.5 billion.

JP Morgan argued, in a summary judgment motion, that the UCC-3 filing in respect of the Term Loan Transaction UCC-1 was unauthorized. The Bankruptcy Court agreed and determined that the UCC-3 filing was not effective to terminate the Main Term Loan Security.

The Authorization of Discharges – Does Intention Count?

On appeal to the United States Court of Appeals for the Second Circuit, competing interpretations of the provisions of the UCC in respect of the authorization of discharges were argued. JP Morgan maintained that it did not authorize the discharge of the Main Term Loan Security because it did not intend to discharge that registration. The Committee of Unsecured Creditors argued that intention was not relevant. The only requirement for compliance with the relevant provisions of the UCC was that the secured lender authorize the filing of the UCC-3.2.

The Appeals Court identified two questions to be addressed by it. First, what must a secured lender authorize in order for a UCC-3 termination statement to be effective? Second, was JP Morgan Counsel authorized to file the UCC-3 terminating the Main Term Loan Security?

The Appeals Court delegated the first question to the Delaware Supreme Court. That Court determined that "if the secured party of record authorizes the filing of the UCC-3 termination statement, then that filing is effective regardless of whether the secured party subjectively intends or understands the effect of the filing."3.

JP Morgan argued that it did not instruct the registration of this particular UCC-3. It relied on its counsel to terminate the security only in respect of the Lease Transaction. Both GM Counsel and JP Morgan Counsel agreed that neither intended to terminate the Main Term Loan Security. But the closing checklist and the relevant documents included the UCC-3 to terminate the Main Term Loan Security. The Court determined that although JP Morgan never intended to discharge the Main Term Loan Security, by agreeing to the filing of the UCC-3 the authority was provided and JP Morgan Counsel was authorized.

Cross-border Application: The Personal Property Security Act ("PPSA")

In Ontario, there is currently no requirement in the Personal Property Security Act ("OPPSA") that the secured party authorize the filing of the financing change statement to effect a discharge of a registration.4. In the Minister's Order made under the OPPSA, there is the provision that the name and address of one of the secured parties or of the registering agent be set out. 5. The OPPSA is not as specific as the UCC in requiring that the secured party authorize the filing of the discharge.

There have been a few decisions that have been reported in Ontario dealing with the inadvertent discharge of a registration under the OPPSA. There has not been the type of analysis that was done in Re: Motors. But the result has been the same. In Re Dante Shoe Boutique Shoes Ltd.6., a financing change statement – discharge – was unintentionally registered by the bank. The Court held that the effect of the registration was to discharge the original registration and that once the discharge had been registered, the original registration could not be corrected by the filing of a further financing change statement. In Frankel v. Canadian Imperial Bank of Commerce7. the Ontario Court determined that an unintentionally discharged financing statement cannot be reinstated as it would likely mislead a reasonable person.

In BC there is no comparable provision under the Personal Property Security Act ("BCPPSA") to section 55 of the OPPSA. The BCPPSA contains provisions whereby a debtor can demand the registration of a discharge in certain circumstances.8. Under section 30(7) of the BCPPSA, if a security interest discharged without authorization is re-registered within 30 days, in most instances the priority is unaffected. In a recent BC decision9., the secured party had its registration accidentally discharged by a third party. The secured party registered again, but not for 73 days. The BC Court of Appeal overturned the decision of the BC Supreme Court and determined that in order to protect the integrity of the system, it had to enforce the provisions of the BCPPSA. The secured party could not, after the 30 days, get its position re-instated.

Check, Re-check, and Check Again – Discharged Registrations Are Irreversible

In PPSA jurisdictions, the results should be similar to the decision made by the United States Court of Appeals for the Second Circuit in Re: Motors. Both the UCC-9 and the PPSA are designed to give certainty to secured creditors in respect of priority in collateral of the debtor. If a registration is discharged, whether intentionally by the secured party or inadvertently, the discharge stands. Creditors of the debtor should be entitled to rely upon the registration system. A lesson here for lawyers and law clerks: be extremely careful when effecting discharges. It is critical to ensure that the correct registrations are the ones being discharged.

This publication is intended to provide our general comments on developments in the law. It is not intended to be a comprehensive review nor is it intended to provide legal advice. Readers should not act on information in the publication without first seeking specific advice on the particular matter. The firm will be pleased to provide additional details or discuss how this information is relevant to a specific situation.


1. In Re: Motors Liquidation Company, et al., decided January 21, 2015. Docket No. 13-2187 ("Re: Motors")
2. UCC 9-509(d) : "A person may file an amendment other than an amendment that adds collateral covered by a financing statement or an amendment that adds a debtor to a financing statement only if: (1) the secured party of record authorizes the filing".
3. Supra, page 9
4. Section 55, Revised Statutes of Ontario 1990, c. P.10: "A registration may be discharged or partially discharged by the registration of a financing change statement discharging or partially discharging the registration."
5. Section 19.
6. 2 P.P.S.A.C. 27 (Ont.S.C.)
7. 12 P.P.S.A.C.(2nd) 306
8. Section 50, Revised Statutes of BC 1996, c 359
9. KBA Canada,Inc. v Supreme Graphics Limited (2014) BCCA 117)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions