- October 12, 2021
- Posted by: Nicholas Fitch
As with pledge assignments, some medium or smaller transactions depend on short and simple sub-performance agreements. In the case of larger, more structured operations, subsecration agreements can take the form of a full interconnection agreement or similar multi-page documentation that deals with a large number of issues. For example, more robust interconnection agreements specifically address whether the lender would have absolute priority (even if it has not properly perfected or perfected the applicable collateral) or only relative priority. Such agreements also deal with a large number of bankruptcy elements, for example.B. whether the conflicting secured party may challenge the validity of the lender`s right of pledge in bankruptcy proceedings, whether the conflicting insured party may contradict a request by the lender for exemption from automatic suspension, and the extent to which an insured party may provide self-financing. As a first step, the Court determined whether the agreement constituted total or partial subordination between Peabody and the Bank. Total subordination is recognized in a minority of jurisdictions and has the consequence that the interest of the subordinate party is placed under that of the other party and (b) that the priorities of all demanding parties, including those who are not parties, are reorganized. For example, if a priority party voted a subordination agreement with a priority third party, the agreement would move the holder of the first priority among the holders of the third priority, thus placing the second priority party (i.e. the non-party) in the first priority position.
Partial subordination, recognised by a majority of jurisdictions, leads the parties to the subordination agreement to change their respective priority positions. The Court adopted the majority approach and found that the agreement replaced Peabody`s priority position with the bank, placed the bank in first priority position and placed Peabody behind Caterpillar. The Court analysed the Bank`s agreement and priority according to four different theories: (i) Did the agreement create partial or total subordination; (ii) Did Caterpillar obtain a contribution to the security of the purchase of the equipment by refinancing the debt on the Caterpillar aircraft? (iii) has the placement of ownership of the equipment on an ad hoc vehicle null and neasing the bank`s claim? and (iv) provided the “composite document” rule service to further Peabody`s interest in equipment and bank demand….