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We have a potential borrower who owns a lot of equipment. He has 12 loans with other banks, and these other lenders each have UCC blanket liens covering all of the borrower’s inventory and equipment. We would like to make a loan secured by (but not to purchase) specific equipment covered by those UCC liens. Can we require the other lenders to assign us their interest in only this specific equipment or to otherwise acknowledge our lien priority with respect to this equipment? – IBA Compliance Connection

IBA Compliance Connection

Your go to source for compliance!

We have a potential borrower who owns a lot of equipment. He has 12 loans with other banks, and these other lenders each have UCC blanket liens covering all of the borrower’s inventory and equipment. We would like to make a loan secured by (but not to purchase) specific equipment covered by those UCC liens. Can we require the other lenders to assign us their interest in only this specific equipment or to otherwise acknowledge our lien priority with respect to this equipment?

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You may request lien subordinations from each of the senior lenders for this piece of equipment, but you cannot require them to subordinate their security interests to your bank.

The Illinois Uniform Commercial Code (UCC) permits a lender holding a senior security interest to subordinate its interest to another lienholder by entering into a subordination agreement. The senior lienholder may agree to this arrangement in order to allow its customer to obtain necessary financing from your institution, but the law does not compel this subordination.

We should note that different rules would apply if a purchase-money loan was involved. If your bank were to loan the funds to purchase new equipment and properly filed a financing statement covering that equipment within twenty days after the borrower received possession of it, then your bank would have priority with respect to that piece of equipment over the blanket UCC liens that cover “all equipment.”

For resources related to our guidance, please see:

  • 810 ILCS 5/9-339 (Permits subordination by agreement by a person entitled to priority)

  • 810 ILCS 5/9-324(a) (“Except as otherwise provided in subsection (g), a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided in Section 9-327, a perfected security interest in its identifiable proceeds also has priority, if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter.”)