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(Reuters) - The Delaware Supreme Court said on Friday that creditors are entitled to rely on formal loan documents authorized by secured lenders, even if there is a mistake in the documents.
The court was responding to a question from a New York federal appeals court relating to a dispute between creditors of General Motors (GM.N) before its 2009 bankruptcy and its former lender, JPMorgan Chase & Co (JPM.N).
The issue relates to GM's insolvency, in which its healthy assets were sold to the new General Motors Co, while the rest were liquidated for the benefit of unsecured creditors.
GM's unsecured creditors' committee claimed JPMorgan and other holders of a syndicated $1.5 billion term loan extinguished their lien on GM's assets, freeing up the assets to unsecured creditors. JPMorgan said neither it nor GM intended to nix the lien.
"Parties in commerce are entitled to rely upon a filing authorized by a secured lender and assume that the secured lender intends the plain consequences of its filing," the court said in it opinion.
JPMorgan and GM could not immediately be reached for comment.
In 2013 unsecured creditors lost when a bankruptcy court ruled in favor of JPMorgan, saying its error did not rise to the express authorization required under Delaware's Uniform Commercial Code.
The case was then appealed to the 2nd Circuit U.S. Court of Appeals, which referred it to the Delaware Supreme Court for its opinion on what constitutes authorization under UCC.
According to court papers, freeing up the JPMorgan collateral could boost unsecured creditors' recoveries by 2 to 3 percent.
However, it is still unclear whether the creditor group would be entitled to any money as the U.S. Treasury, which bailed out GM, has asserted a lien over litigation proceeds.
The case is In re: Motors Liquidation Co, in the Delaware Supreme Court, No. 325, 2014.
The underlying case is In re: Motors Liquidation Co, U.S. Bankruptcy Court, Southern District of New York, No. 09-50026.
Reporting By Kanika Sikka in Bangalore; Editing by Alan Crosby