The Interplay Between Vendor Finance Agreements and Bankruptcy

In such a scenario, could the lender be forced to perform under the inventory financing program agreement, including making new loans to the dealers? The answer, which is dependent upon both contract law and the statutory framework of the bankruptcy code, is not always straightforward or predictable. In order to examine the issue more closely, a short explanation of the interplay between vendor finance agreements and bankruptcy is appropriate.

Inventory financing program agreements, pursuant to which a lender agrees to provide financing to dealers to enable them to purchase inventory produced by a specific manufacturer, are regularly used for a variety of equipment classes and across industries. Simplified, these agreements are programs between a lender and manufacturer wherein the lender agrees to provide inventory financing for the purchase of the manufacturer's products (secured by a lien against such products) to the manufacturer's dealers who, in turn, sell the equipment to third parties. Vendor financing program agreements contemplate extensions of cash or a line of credit to finance the purchase of inventory by a dealer, as distinguished from leases or contracts entered into with the end-user of the equipment. While regularly used among lenders, manufacturers, and dealers, treatment of these finance products 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.