owned tooling. Some states, such as
Michigan, permit certain tooling liens
to remain perfected after possession of
the tool is relinquished, but maintaining
possession of tools is almost always the
key for legal and practical purposes.
Preserving such tooling liens can be
critical to a lender’s collection of accounts
receivable. The secured lender with a well-written blanket lien will have an interest
in its borrower’s rights in the tooling. In
an enforcement situation, this means
that the supplier’s lien is the lender’s lien.
Automotive customers know the practical
importance of tools in maintaining
product supply, and they often know the
legal tooling scheme better than most
lenders. They wisely try to establish the
right to remove tools to protect their
production by deeming themselves
owners, secured creditors or otherwise
“entitled.” This happens through supply
agreements and purchase order fine print.
At the first signs of weakness, customers
will know exactly where your borrower’s
tools are and which ones they need. A
prudent lender will know just a little
earlier than that and, more importantly,
will understand the importance of tooling
in the account enforcement process. As a
result, the lender will include provisions
in forbearance agreements that restrict
suppliers from turning over tooling
without lender consent, which enables
the lender to use the tooling as
leverage in subsequent negotiations
with the customer.
Find the Devil in the Contract
Details
Piecing together what constitutes the
“contract” for production of any given
part can be quite an undertaking. Master
supply agreements reference purchase
orders, which, in turn, are conditioned
upon releases being issued before
product is ordered. It does not stop
there; certain terms and conditions may
be incorporated by reference and only
available on a customer’s password-protected website. In short, the highly
specialized nature of the automotive
supply industry is supported by a system
of highly specialized supply agreements.
Some states, such
as Michigan, permit
certain tooling liens to
remain perfected after
possession of the tool
is relinquished, but
maintaining possession
of tools is almost always
the key for legal and
practical purposes.
This structure creates layers of legal
pitfalls for suppliers and their lenders.
Within this mesh of agreements
governing a secured lender’s receivable
collateral are several provisions
that can, if unchecked, make eligible
accounts worthless. These agreements
may contain provisions that purport to
transfer ownership of certain tooling
to the customer before full payment,
waive (without any notice to the lender)
any tooling liens that your borrower
may have, permit the customer to offset
amounts owed because of monies
due to its affiliates, and sometimes
grant the customer an option to buy
machinery and equipment (also your
collateral) at bargain prices. Some of
these collateral-eroding terms can be
addressed with a notice or defended
through your security interest, but
others require more significant strategic
action. Understanding the details of
your account collateral is the first step
to finding a cure for their problems.
Don’t Be Afraid to Ask for
Customer Accommodations
There comes a time in most distressed
automotive supply situations when the
lender must determine with relative
certainty what collateral it can rely
upon going forward. However, it may
be difficult or impossible to accurately
value inventory designed for a single use
or receivables owing by the customer
of that inventory. On the other hand,
the fact that a small number of your
borrower’s customers may constitute
substantially all of your account debtors
can create an opportunity for a secured
lender, because the lender can reach
the vast majority of the account debtors
and build upon their reliance on the
borrower’s continued production.
In terms of legal documentation,
the outcome of the lender’s and the
customers’ combined interest in the
orderly restructuring or winding down
of an automotive supplier are two
types of agreements: accommodation
agreements and access agreements.
Accommodation agreements are tri-party arrangements among a supplier,
