• Business Lender Loan Stacking Decision
  • November 24, 2017 | Author: Bryan M. Mull
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • A recent Maryland Business and Technology Case Management Program decision in the Montgomery County Circuit Court offers insight into disputes between lenders with competing security interests in accounts receivable. The plaintiff, as the senior lender, provided financing to the borrower to be repaid through automatic debits from the borrower’s bank account. The senior lender also obtained a security interest in the borrower’s personal property and proceeds (including its accounts receivable). Later, the borrower applied to a subsequent lender for additional financing. The subsequent lender purchased the borrower’s future accounts receivable and obtained a security interest in the borrower’s property. The borrower eventually defaulted under both agreements and the senior lender brought suit against the subsequent lender, claiming tortious interference with contract and liability under Article 9 of the UCC (Md. Code Ann., Comm. Law §9-625) for violating the senior lender’s rights in its collateral. The court denied the subsequent lender’s motion for summary judgment, thus permitting the senior lender to proceed to trial on both claims. In support of its decision, the court stressed the following facts: (1) the senior lender had filed a financing statement that included an admonition to third parties that interference with the collateral would constitute interference with the senior lender’s contract rights; (2) the senior lender sent notice letters to numerous small business finance lenders (including the subsequent lender) notifying them of the senior lender’s loan agreement terms and warning that additional financing that violated the senior lender’s loan terms constituted an interference with its contracts; and (3) the borrower had disclosed to the subsequent lender the existence of the senior lender’s loan. It is not uncommon for certain distressed businesses to obtain financing secured by their accounts receivable from multiple lenders in short succession, resulting in those lenders fighting over the same diminishing collateral. This case demonstrates that a senior lender may have recourse against aggressive junior lenders, provided that the senior lender can demonstrate that it took sufficient steps to put third parties on notice of its rights under contract and in its collateral. For junior lenders, this case demonstrates the risk of stacking additional liens on the borrower’s accounts receivable. Notably, the court flatly rejected the subsequent lender’s argument that the senior lender’s claims must fail because (1) the subsequent lender determined during its underwriting process that the borrower could afford all of its debt service (and thus no interference was intended), and (2) the borrower made a representation and warranty to the subsequent lender that the borrower was not violating any other agreement.