Purchase Money Security Rules in Equipment and Inventory – Part Seven
Corporate, Due DiligenceWe are pleased to welcome attorney, Bennett L. Cohen of Cohen, Salk and Huvard, P.C., as a special guest blogger. Please read on for the seventh and final installment of Bennett’s seven-part blog series on Purchase Money Security Interest in Equipment and Inventory.
Frequently Asked Question #8: Does a Borrower Obtaining Purchase Money Financing Create a Default Under the Security Agreement Between the Borrower and its Blanket Lien Lender?
The answer lies in the blanket lien lender’s security agreement. Does such security agreement permit the borrower to obtain purchase money financing from other creditors, and if so, under what terms? If the borrower has agreed not to create any liens on its assets in favor of any party other than the blanket lien lender, a default under the security agreement would arise if a third party creditor were to provide purchase money financing to the borrower. If the security agreement does permit the borrower to obtain purchase money financing from other creditors, does the security agreement contain any restrictions or limitations which were violated by the borrower (e.g., some loan agreements permit the borrower to obtain purchase money financing but not to exceed a specified outstanding dollar amount at any time)?
Frequently Asked Question #9: If I obtain a purchase money security interest in equipment or inventory, do I need to obtain an inter-creditor agreement (i.e., subordination agreement) from the senior lender?
If a lender is satisfied that it has fully satisfied all the of the Code requirements for a purchase money security interest in equipment or inventory (as the case may be), an inter-creditor agreement is not necessary for priority purposes. However, there are a lot of other important issues, besides priority, which can be addressed in an inter-creditor agreement with the senior lender. For example, an inter-creditor agreement can provide the following important agreements by the senior lender: (a) the senior lender will not challenge the PMSI lender’s purchase money priority in the PMSI collateral, (b) the senior lender will not exercise its security interests in, or take any other remedial action against, the PMSI collateral while the PMSI debt is outstanding, (c) the senior lender will promptly turn over any proceeds it may receive that arise from the sale or other disposition of the PMSI collateral, (d) the senior lender agrees that in the case of any loss or damage to the PMSI collateral, the insurer may deal solely with the PMSI lender and is authorized to pay any such insurance proceeds directly to the PMSI lender, (e) if the PMSI lender elects to dispose of the PMSI collateral, the senior lender will promptly release its security interest in the PMSI collateral so that such disposition can be made, and (f) the senior lender will not assign its security interest in the borrower’s assets unless the assignee agrees to be bound by the terms of the inter-creditor agreement. There are other routine provisions to include in the inter-creditor agreement besides the provisions itemized above which are outside the scope of this article.
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