Many business loan agreements contain provisions to protect the lender in the event the business of the debtor gets into trouble. Sometimes these arrangements involve a “lock box” under which all or a portion of the receipts of the business are deposited into a bank account controlled by the lender. Other loans contain “sweep” provisions under which the lender can move funds from a bank account controlled by the debtor to an account controlled by the lender. Such sweep provisions often are triggered by a default or other problem with the loan. Obviously loan agreements are drafted by lenders and their counsel, and borrowers rarely are in a position to negotiate the terms. A recent Tax Appeals Tribunal decision, Matter of Kieran,1 demonstrates the risks inherent in these arrangements.
‘Matter of Kieran’
Patrick Kieran was the president and 25-percent owner of Bay Chevrolet, Inc., a General Motors (GM) car dealership in Douglaston, Queens. The dealership needed substantial financing to enable it to acquire needed inventory and to obtain working capital to operate the business. It entered into a financing arrangement with General Motors Acceptance Corporation (GMAC). Bay Chevrolet chose GMAC from a variety of GM-approved lenders. As part of the financing agreement, GMAC could “sweep” cash out Bay Chevrolet’s general account bank in order to satisfy any payments that the dealership owed to GMAC. Bay Chevrolet’s general bank account held payments received from customers, including sales tax.
