SUBORDINATION

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Subordination. means an agreement to put a debt or claim which has priority in a lower position behind another debt, particularly a new loan.  A debt subordination agreement is a contract in which a junior creditor agrees that its claims against a debtor will not be paid until all senior indebtedness of the debtor is repaid. Under a general subordination agreement, a junior creditor agrees to subordinate its claim to all presently existing and future claims against the debtor. In a specific subordination agreement, a junior creditor subordinates its claim to a particular obligation of the debtor.

Subordination means a person who takes free of a security interest takes title that is not subject to the security interest and can transfer the property to others free of the security interest.

The priority rule of new section 9-317(a) for lien creditors is different.  New section 9-317(a) provides that under the conditions spelled out in new section 9-317(a)(2), as just discussed, a security interest is “subordinate to” the rights of a lien creditor.  Former section 9-301(1)(b) likewise provided for subordination.

Subordination essentially means the lien creditor has the first crack at the property to satisfy the lien.  To oversimplify somewhat, if property worth $1,000 is levied upon to satisfy a $300 judgment before a security interest in the property securing a $1,000 debt was perfected, then the lien creditor gets $300 and the secured party is able to reach only the $700 of “equity” left in the property.  In practice, the resolution of conflicts between lien creditors and secured parties is anything but mathematically precise and determining how and what a secured party actually will realize on its security interest if it is subordinate to a lien creditor can be difficult at best.