Lien subordination agreements are common in commercial transactions. Section 9-339 of the Uniform Commercial Code (UCC) generally permits a secured creditor with a prior security interest to subordinate such priority by agreement. Today we discuss the priority issues that can arise where three or more creditors claim a security interest in the same collateral and a recent Seventh Circuit case, Caterpillar Financial Services v. Peoples National Bank,1 that discusses this infrequently-adjudicated problem.

Background

When two creditors with perfected security interests seek to agree on their relative lien priorities on common collateral and no other perfected security interests in that collateral exist, §9-339 is fairly straightforward. The analysis becomes more complex, however, when there is another secured creditor who will not be party to this agreement. The Official Comments to §9-339 make a pointed, and one might think obvious, remark that "a person’s rights cannot be adversely affected by an agreement to which the person is not a party." In fact, many parties to lien subordination agreements fail to consider adequately the rights of other secured creditors in common collateral or recognize that courts may disagree on the effects of a lien subordination agreement on those intervening security interests.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]