Vendor Financing Agreements and Financial Accommodations Contracts in Bankruptcy
Whatever their ultimate business decision may be, practitioners would be well-served to consider the implications of Section 365(a) of the Bankruptcy Code when they are first negotiating the vendor finance agreements.
March 28, 2022 at 11:31 AM
10 minute read
Banking and Finance LawsConsider the following: a lender and manufacturer enter into an inventory financing program for dealers of the manufacturer's products. Pursuant to the agreement reached between the manufacturer and the lender, the lender agrees to finance the purchase of more than $100 million worth of the manufacturer's products by various dealers, which will then sell the products to commercial and consumer third parties (depending on the type of products). The manufacturer begins experiencing supply chain issues, increases in its production costs and workforce shortages brought on by a global pandemic. The manufacturer seeks relief from its financial pressures by filing a Chapter 11 bankruptcy petition and, after filing, contends that the lender must continue to perform under the inventory financing program agreement by making loans to the dealers, notwithstanding the manufacturer's material covenant defaults and significant uncertainty about the manufacturer's future viability, including its ability to honor warranties for the purchased inventory.
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