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Partial Subordination Agreement

The latest Caterpillar Financial Services case against Peoples National Bank, N.A. (March 4, 2013) of the U.S. Court of Appeals` Seventh Circuit shows the potential case of entering into a subordination agreement without an experienced professional collateral processing service. At Caterpillar, the debtor obtained loans for the purchase of mining equipment from three different companies: (1) Peabody Energy Corporation (“Peabody”), (2) Caterpillar Financial Services Corporation (Caterpillar)) and (3) Peoples National Bank (“Peoples”). Each of the creditors renewed their loans in the order indicated and filed their PEC financing statement at the time of the loan, which gave them the priority indicated above. The debtor eventually fell behind on all three loans. Subordination agreements are the most common in the mortgage industry. If a person borrows a second mortgage, that second mortgage has less priority than the first mortgage, but these priorities can be disrupted by refinancing the original loan. When the construction project failed during the Great Recession, the mechanical agents argued that NRS 108.225, despite the subordination agreement, prevailed over the Treuhandehe, since the Treuhande was registered to insure the new loan after visible construction began. The lender argued that the subordination agreement had only the effect of “partial subordination”, i.e.

it had “reversed” only the priority of two of its loans at the same amount, so that the intermediate mechanical deposits were not affected. Conversely, the mechanic candidates argued that the subordination agreement was a “total subordination,” since the trusts that secured them were registered after visible construction began. Therefore, for a simple reading of NRS 108.225, the mechanical instructions must prevail over the entire act of trust. The district court gave the lender a summary judgment on the priority of the deposit and found that it was a partial subordination and that it was applicable, since the candidate mechanics are not concerned by the subordination agreement. It is essential that the subordination agreement does not alter the amount of debt to which [the pledge creditor] was subordinated and, therefore, the subordination agreement does not infringe NRS 108.225. While the seventh circle found that it was following the approach of partial subordination, this was not the end of the analysis. Peabody was unable to submit a security agreement authenticated by the debtor that identified the security. As Peabody`s priority interest was not properly perfected in the first place, the subordination agreement did not allow the people to assert a security interest with a higher priority than Caterpillar. . . .

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