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 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.