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.
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