Should agreements given by a senior lien holder to subordinate Art 9 liens to a junior lien holder be recorded in UCC records? Im not aware of any "national" form for subordination so, I wasnt sure if a lender drafted form would be rejected.
Thanks

I would want some type of recorded documentation. If the collateral is the same, could you have the 1st lienholder assign their UCC to you and then file a new UCC behind the assigment? If that's a possiblity I'd make sure you got a copy of their filed UCC to verify it was completed and filed correctly.

Assuming that you have already filed your financing statement and you are second behind another creditor the subordination does not need to be recorded. The subordination agreement is between you and the other creditor and not the world.

I used to be expert in this area, but it has been a number of years since I have practiced in the UCC. Having said that, I am not so certain you don't have to record the subordination or take an assignment of interest. What if you are in third position and get the subordination of the first secured party? What does that do to the second secured interest? Is it possible that a second security interest could actually be in a third position without knowing it? The idea behind the UCC was to facilitate financing by making clear rules on perfecting a security interest and thereby eliminate "hidden liens". Moreover, even with notice to second party, there would be some prohibition of a third party's ability to "jump over" a second party's security interest by virtue of subordination of a first secured interest. An opinion of counsel would be well advised in this situation.

An agreement between a first and third secured party would not affect the second in line. In order to be first, you would have to have a subordination from everyone ahead of your filing. I agree with Tom, a subordination agreement does not have to be filed of record. It is an agreement between lenders.

Okie, I don't know if it is as simple as you make it sound. If the first lien holder subordinates to a third lien holder, how does that affect the security interest of a second lien holder? For example, the first security interest is for $10,000, the second for $15,000 and the third for $20,000. If the first subordinates to the third, does all $20,000 of the third come ahead of the second lien holder? What happens to the first secured party's priority versus the second lien holder? Is it possible that the first would still come ahead of the second but after the third? In other words, the second lien holder thought they were looking at a $10,000 secured interest in line ahead of them and it is now $20,000 or even $30,000?

I was not aware that in most cases that a UCC filing secured a specific dollar amount? If I am in first position, all I need is a security agreement to back up my claim - which can be modified at any time as long as my UCC filing is still current. I have seen an assignment of a UCC - but of what real value is a subordinate UCC filing anyway - you just get to pick up the pieces left over???

Len, I think that's the risk you inherit when you take a second or third position. Like Randy said, there's no dollar amount involved when a UCC is filed.

There's a good lesson we can all take from this. Never settle for a second or third lien position!

That would make the third before the first, and the first before the second and the second before the third.

You would want to get the Subordination from the first AND the second, which puts you in first, first in second and second in third.

Now - do you know who's on first?

If a secured position can be subordinated in the manner proposed wouldn't that provide an avenue to circumvent the priority of security interests by allowing a third position to jump over a second position with the cooperation of the first security interest holder?

As I said in my original post, at one time I specialized in asset-based lending and I was very familiar with the UCC and Article 9 (maybe my knowledge is a bit stale, but the principles are still clear in my mind). I don't think it is possible for a third party's priority of a secured interest (in the example, the second secured party) to be effectively subordinated to a more junior lien holder (the third secured interest) as long as the second security interest had been perfected prior to the third secured interest). I can understand how the secured interest of the first lien holder can be assigned (because it would be limited to the value of the first secured interest), but I don't understand how it can be subordinated (thereby suggesting that both the first and third security interests would supercede the second security interest).

While Rich is correct that the UCC filing doesn't specify a dollar amount, the reality is that the security interest is limited to the dollar value actually advanced (unless you have a "future advance clause")or delineated in the loan agreement. If you subsequently modify or rewrite the loan agreement your secured interest priority would be determined by the date of the new or modified agreement potentially putting you into a junior lien position if there were any intervening liens.

Maybe there have cases that have been adjudicated that have changed the application of Article 9 as I knew and practiced it. I am interested in hearing more from anyone who may be more up to date.

There has been a little confusion on the subject of subordinations. A subordination agreement is between the two parties of the agreement and does not need to be recorded. An assignment, where one party assigns their filing to another, must be recorded.
In section 9-339 of the Uniform Commercial Code it states that “[t]his act does not preclude subordination by agreement by a person entitled to priority.” There is no provision in the Uniform Commercial Code to file a subordination agreement.

Not filing a subordination agreement does not harm any other creditor. If debtor owes “A” $100, who has a priority position; owes “B” $100,000, who is in second position and also owes “C” $1,000,000, who is in third position; “A” could subordinate to “C” but “C” could only come ahead of “B” for the $100 owed “A”. “B” was not harmed by the subordination.

Also, you do not need to file to have a lien (security interest). To have a lien you must have a (1) security agreement authenticated by the debtor, (2) value must be give the borrower, and (3) the debtor must have rights in the collateral (or the power to transfer the right in the collateral to a secured party). When you get all three you have a lien and can foreclose based on default.

Filing has to do with perfection and not liens. Only if you want priority in an item that can be perfected by a filing do we file a financing statement. It is not required for a lien. Don’t forget, there are four ways to perfect a lien and filing is only one of those ways.