Tuesday, March 2, 2021

Cross-Collateralization Clauses – Tough Lessons For Lenders


The farm economy, in general, is in better shape than it was three or fours years ago.  Crop prices are stronger, land values remain firm, and interest rates (at least for the time being) remain low.  But, that doesn’t mean that financial problems associated with the most recent farm economic downturn are all in the past.  Indeed, the legal and financial systems often address issues long after the initial problems arose. 

One of the most recent issues is a mix of those financial and legal issues.  Farmers often need to borrow money to finance their operations, and lenders must decide whether making ag loans are a good idea.  That means that a lender must understand clause language contained in a potential farm borrower’s existing lending documents and the associated rights and obligations of the parties.

Once of those clauses merits a close look.  It’s known as a “cross collateralization” clause.  If a potential lender doesn’t understand what the clause language means, the lender can end up losing the priority position that it thought it had.

A “cross-collateralization clause in a lending instrument – it’s the topic of today’s post.


Defined.  I examined the issue of cross-collateralization in a post in late 2017 that you may read here: https://lawprofessors.typepad.com/agriculturallaw/2017/10/tough-financial-times-in-agriculture-and-lending-clauses-peril-for-the-unwary.html. There, I noted that “cross-collateralization” is a term that describes a situation when the collateral for one loan is also used as collateral for another loan. For example, if a farmer takes out multiple loans with the same lender, the security for one loan can be used as cross-collateral for all the loans.

Clause language.  As noted above, clause language in lending and leasing documents should be carefully reviewed and understood for their implications.  This is particularly true with respect to cross-collateralization language.  For example, the following is an example of such a clause that appears to be common in John Deere Financial security agreements.  Here is how the language of one particular clause reads:

Security Interest; Missing Information.  You grant us and our affiliates a security interest in the Equipment (and all proceeds thereof) to secure all of your obligations under this Contract and any other obligations which you may have to us or any of our affiliates or assignees at any time and you agree that any security interest you have granted or hereafter grant to us or any of our affiliates shall also secure your obligations under this Contract.  You agree that we may act as agent for our affiliates and our affiliates may as agent for us, in order to perfect and realize on any security interest described above.  Upon receipt of all amounts due and to become due under this Contract, we will release our security interest in the Equipment (but not the security interest for amounts due an affiliate), provided no event of default has occurred and is continuing.  You agree to keep the Equipment free and clear of all liens and encumbrances, except those in favor of us and our affiliates as described above, and to promptly notify us if a lien or encumbrance is placed or threated against the Equipment.  You irrevocably authorize us, at any time, to (a) insert or correct information on this Contract, including your correct legal name, serial numbers and Equipment descriptions; (b) submit notices and proofs of loss for any required insurance; (c) endorse your name on remittances for insurance and Equipment sale or lease proceeds; and (d) file a financing statement(s) which describes either the Equipment or all equipment currently or in the future financed by us.  Notwithstanding any other election you may make, you agree that (1) we can access any information regarding the location, maintenance, operation and condition of the Equipment; (2) you irrevocably authorize anyone in possession of that information to provide all of that information to us upon our request; (3) you will not disable or otherwise interfere with any information gathering or transmission device within or attached to the Equipment; and (4) we may reactivate such device.”

So, what does that clause language mean?  Several points can be made:

  • The clause grants Deere Financial and its affiliates a security interest in the equipment pledged as collateral to secure the obligations owed to it as well as its affiliates.
  • When all obligations (including debt on the equipment purchased under the contract and all other debts for the purchase of equipment that Deere Financial finances) to Deere under the contract are paid, Deere Financial will release its security interest in the equipment. That appears to be straightforward and unsurprising.  However, the release does not release the security interest of the Deere’s affiliates.  This is the cross-collateral provision. 
  • The clause also makes Deere Financial the agent of its affiliates, and it makes the affiliates the agent of Deere Financial for purposes of perfection. What the clause appears to mean is that if a financing statement was not filed timely, perfection by possession could be pursued.
  • The clause also irrevocably authorizes John Deere to insert or correct information on the contract.
  • The clause allows John Deere to access any information regarding the location, maintenance, operation and condition of the collateral.
  • The clause also irrevocably authorizes anyone in possession of that information to provide it to John Deere upon request.
  • Also, under the clause, the purchaser agrees not to disable or interfere with any information gathering or transmission device in or attached to the Equipment and authorizes John Deere to reactivate any device.

Example.  Consider the following example of the effect of cross-collateralization by machinery sellers and financiers:






Equity by Item

JD 4710 Sprayer 90' Boom



JD Finance



JD 333E Compact Track Loader



JD Finance



JD 8410T Crawler Tractor



JD Finance



JD 612C 12 Row Corn Head



JD Finance




Farm Plan



Total Value



Total Liabilities




Equity with Cross Collateralization



Equity without Cross Collateralization



The equity in the equipment without cross-collateralization is the sum of the equity in the Compact Track Loader, the Crawler Tractor and the Row Corn Head ($80,000).  With cross-collateralization, however, the equity in the equipment is $2,571. 

Sellers that finance the purchase price of the item(s) sold (termed a “purchase money” lender) are using cross-collateralization provisions with some degree of frequency.  As noted above, the cross-collateralization provisions of the John Deere security agreement will allow John Deere to offset its under-secured status on some machinery by using the equity in other financed collateral to make up the unsecured portion of its claims.  Other machinery financiers (such as CNH and AgDirect) are utilizing similar cross-collateral provisions in their security agreements. 

Impact of Cross-Collateralization on “Dragnet” Liens

The issue.  Would a bank’s properly filed financing statement and perfected blanket security agreement be sufficient to defeat a cross-collateralization provision?  Stated differently, would an equipment dealer’s financing of equipment via a lending document containing a cross-collateralization clause be sufficient to allow the dealer’s subsequently filed financing statement(s) to defeat the prior perfected security interest of another lender, such as a bank?  

In some instances, when a purchase money security interest holder has sought to enforce a cross-collateralization clause, the purchase money security interest holder has always backed down.  For example, in one recent scenario, John Deere Financial sought to enforce its cross-collateralization agreement against a Bank in a situation similar to the one set forth above.  The bank properly countered that its blanket security interest in farm equipment perfected before any of the Deere Financial purchase money security interests were perfected defeated the Deere Financial cross-collateralization.  Deere Financial backed down thereby allowing the bank to have all the equity in the equipment, $80,000, be paid to the bank by the auctioneer after the liquidation auction.

Recent case.  In a recent bankruptcy case from Kentucky, In re Duvall, No. 19-11272(1)(12), 2021 Bankr. LEXIS 22 (Bankr. W.D. Ky. Jan. 7, 2021), a bank found out to its detriment how an equipment financier’s cross-collateralization clause works.  In the late 1990s, two individuals started a farming partnership.  The business arrangement lacked formality and largely involved sharing machinery and equipment.  To sustain the farming operations, they obtained financing from various lenders, either individually or collaboratively, including John Deere Financial (JDF).  The debtor, one of the individuals in the farming partnership, applied for a “Multi-Use Account” with JDF in late 2013.  The Multi-Use Account line of credit was governed by a Credit Agreement and secured by collateral of John Deere pursuant to cross-collateralization clauses in numerous John Deere security agreements executed when John Deere financed (via purchase-money security interests (PMSIs)) various machinery and equipment purchases of the debtor.  The first one of the John Deere PMSIs was in late October of 2016 for the debtor’s purchase of three tractors.  That PMSI and all subsequent John Deere PMSI’s (of which there were many) contained the standard John Deere cross-collateralization clause language noted above.

After the initial John Deere PMSI, various other lenders, including a bank, loaned funds to the debtor and attempted to take security interests in the debtor’s machinery, equipment, tools and after-acquired property.  Ultimately, the debtor defaulted on the Multi-Use Account which made the entire account balance of $274,000 to become due along with all of the outstanding amounts on the PMSIs.  About a year later, the debtor filed Chapter 12 bankruptcy.  John Deere filed a proof of claim in the bankruptcy matter and the bank filed an adversary proceeding to establish lien priority.

The bankruptcy court determined that John Deere possessed valid PMSIs in its collateral and had properly perfected them in accordance with the Kentucky Uniform Commercial Code (KUCC).  As such, John Deere’s PMSIs were prior and superior to any other interest that the bank or any other lender had in the collateral.  The bankruptcy court also noted that the debtor, in each of the security agreements, not only granted John Deere a security interest in the collateral that the security agreement/financing statement described, but also agreed to the John Deere cross-collateralization clause language.  The bankruptcy court held that the cross-collateralization clause in each of the security agreements was valid under the KUCC.  The bankruptcy court specifically noted that, “Subsection [(1)], together with subsection [(3)], also validates “cross-collateral” clauses under which collateral acquired at any time secures advances whenever made.”  Comment 2 to K.R.S. §355.9-204.  Thus, the amounts loaned to the debtor via the Multi-Use Account were also secured by John Deere’s collateral.  The result was that John Deere had a second priority security interest in its collateral, behind only it’s valid PMSIs via the cross-collateralization clauses.  The bank (and other lenders) lost. 


If a farmer is presented with a lending transaction that involves either a cross-collateralization or a co-lessee clause, legal counsel with experience in such transactions should be consulted.  Fully understanding the risks involved can pay big dividends.  Failing to understand the terms of these clauses can lead to the financial failure of the farmer that signs the document.  The same points apply to lenders.


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