Articles

Why One Court Case is Compelling Firms to Review Their Due Diligence Policies on UCC Filings

Law firms and businesses across the country were provided with a high-profile reminder of the necessity of thorough due diligence following a recent court decision. The U.S. Court of Appeals ruled that a critical document preparation error by General Motors' (GM) counsel would not be reversed—a mistake that could potentially cost one of GM's creditors $1.5 billion.

In its decision, the court maintained that all secured parties should "review statements carefully [to] understand which security interests it is releasing and why." The court also noted that if parties could be relieved from the consequences of errors, they would have "little incentive to ensure the accuracy of the information contained in their UCC filings."

The magnitude of this decision—and of the error itself—could lead to significant changes in law offices and boardrooms across the country, as a number of firms are already reviewing existing due diligence practices.

Several remedies to improve due diligence operations may be proposed. These include an expanded review process, new models that would reduce ambiguity by requiring explicit directives and the potential curtailment of law firm authority during UCC document preparation.

While GM's creditor may end up paying a steep price for a lapse on the part of counsel, other firms can benefit from the example this case provides.

To read the full article on the Motors Liquidation-GM case and what companies can do to update and strengthen their due diligence policies, click here.

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