Secured Lender Protocol

The second government statute affecting accounts receivable funding is not a lien, but an order of distribution which gives priority to government claims. Known as the federal insolvency statute, this act imposes a specific order of distribution whenever money is owed to the government or any government agency. Specifically, the statute requires that all government claims be paid ahead of all other creditors, (including secured lenders), when two elements exist - a government claim and a defined act of insolvency by the debtor.

For purposes of the statute, an act of insolvency is defined as the appointment of a receiver over any asset, the assignment for the benefit of the creditors of the borrower, a fraudulent transfer, or having liabilities exceed assets. Interestingly, insolvency does not include a bankruptcy filing, where priority is governed by general bankruptcy laws.

The effect: the government has a priority claim to the receivables generated after the act of insolvency. This statute does not create a lien; however, there is little practical distinction between the two, as the statute subordinates secured lenders. The government will be paid first from the property subject to the statute. This lien may be imposed on all debtor property including property transferred to assignees and real estate. All state-law liens yield to this statute unless the liens are choate, which is defined in a similar manner as the cases interpreting IRS liens.

Triggered only by an act of insolvency and governed by the same principles of choateness, the statute is a bit easier for the secured lender to avoid application than the IRS lien. First, accounts receivable lenders should avoid seeking a receiver. This is considered an act of insolvency and would trigger application of the statute unless the receivables generated before the act of insolvency more than cover the loan. Second, because the act does not apply to choate liens, it would not affect perfected security interests in equipment or a mortgage on real property. Future accounts receivable after the act of insolvency would be subject to the interest of the government.

Pension priority claims Many borrowers who operate union shops are required to make contributions to an ERISA union trust fund. In the event that the borrower fails to pay the contribution to the trust fund, ERISA provides for a super-priority lien in favor of the trust fund.'

This lien enjoys the same priority as the IRS super priority liens. Indeed, the ERISA statute incorporates by reference Section 6323 of the IRS Code. This lien covers all property of the borrower and subordinates all other liens, except those which are choate. It is even applicable in a bankruptcy proceeding. This lien arises after the trust has audited the borrower, determined there is a default, and made demand on the borrower. It is enforced by the trust fund by a federal lawsuit.

Account Receivables