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Bankruptcy Law Firm Financials Legal Operations

The Interplay Between Vendor Finance Agreements and Bankruptcy

While regularly used among lenders, manufacturers, and dealers, treatment of Inventory financing program agreements in bankruptcy is not uniform, and uncertainty exists with respect to how such agreements may be treated in the context of a manufacturer’s Chapter 11.

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Consider the following: a lender and manufacturer enter into an inventory financing program for dealers of the manufacturer’s products. Pursuant to the agreement reached between the manufacturer and the lender, the lender agrees to finance the purchase of more than $100 million worth of the manufacturer’s products by various dealers, which will then sell the products to commercial and consumer third parties (depending on the type of products). The manufacturer begins experiencing supply chain issues, increases in its production costs and workforce shortages brought on by a global pandemic. The manufacturer seeks relief from its financial pressures by filing a Chapter 11 bankruptcy petition and, after filing, contends that the lender must continue to perform under the inventory financing program agreement by making loans to the dealers, notwithstanding the manufacturer’s material covenant defaults and significant uncertainty about the manufacturer’s future viability, including its ability to honor warranties for the purchased inventory.

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