This seems to be a fair solution, as it prevents Caterpillar from being affected by the subordination agreement in which it did not participate. Caterpillar`s priority would remain unchanged, with the same amount of debt to be paid before Caterpillar is satisfied with its debts. When Peoples obtained its loan, Peabody agreed to prioritize its first position to the people, in order to increase the possibility that debtors would have the opportunity to repay the Peabody loan. The court was considering whether the subordination agreement allowed people to be ahead of Caterpillar. The court found that there were two approaches to subordination – « partial subordination, » which is the majority approach, and « total subordination » that is pursued in a minority of jurisdictions. There are cases where a secured creditor decides to subordinate a priority position to another creditor, as this increases the chances that the commitment will be met. However, when a creditor is considering providing financing, equipment or other assets on the basis of obtaining a priority by exchanging priority with an existing creditor, that creditor must be careful in this approach. The low-priority creditor who entered into the subordination agreement must carefully review the security agreement and the perfection procedures implemented by the existing creditor to ascertain whether the previous security interest has been properly perfected. The UCC offers special benefits for the « money security interests. » If perfection is correct, a « PMSI » has priority over a competitive interest in the same property, even if the other creditor perfected a « blanket » security interest as part of a pre-filed financing statement. In other words, a bank statement covering « all assets, whether currently held by the borrower or acquired after the date of that date, » is lost in favour of a properly refined PMSI. Finally, one or two words about stock financing are needed. There is a special procedure for PSis in stock, which requires a UCC review to be conducted before initiating an inventory financing program. If the equipment is qualified as an inventory (anything that is sold or leased, even on a single basis), the UCC must be reviewed and, instead of obtaining a subordination agreement, creditors with existing lump sum rights must be informed in the « full inventory » or similar before the guarantees are delivered to the borrower.
The good news is that this communication is given once every five years and does not need to be specific. A communication simply stating that the lender intends to grant the borrower a number of inventory-financed loans (a general description is a good idea if possible) should be sufficient to grant PMSI benefits to the inventory lender. The recent case of Caterpillar Financial Services v. Peoples National Bank, N.A. (March 4, 2013) of the Seventh Circle of the United States Court of Appeals shows the potential case of a subordination agreement without an experienced professional pawnshop service.