When Two Lenders Both Claimed The Same Trucks First

The situation

Arman spent nine years as a police sergeant before he left the force to take over the family business full time. His father, Reza, had built the company from a single delivery van into a commercial refrigeration and food-service equipment distributor with about thirty-five employees and roughly $9 million in annual revenue. Reza had since scaled back to a few hours a week, splitting his time with part-time work as a pharmacist, but he still held a minority ownership stake and expected to be kept in the loop on anything that touched the company's finances.

The business ran on a $2 million revolving operating line of credit with its bank, used to smooth out the gap between paying suppliers and collecting from restaurant and grocery clients. Like most commercial operating lines, it was secured by a general security agreement, commonly called a GSA — a single document giving the bank a claim over essentially everything the company owned or would ever own, registered against the company under Ontario's Personal Property Security Act, the statute that governs who has priority over a business's equipment, inventory, receivables and other movable assets when more than one lender is involved.

By the spring, the company's delivery fleet was aging and expensive to maintain. A specialty equipment lender offered to finance five new refrigerated trucks, worth roughly $1.4 million altogether, at a noticeably better rate than drawing further on the bank line. To Arman, it looked like a straightforward equipment loan — the kind of financing that gets arranged over a phone call and a signature. He signed the equipment lender's commitment letter, paid a deposit of roughly $280,000 toward the trucks, and only then asked Hodan, the company's controller, to pull together the paperwork before calling Treadstone Law to handle what he assumed would be a routine closing.

What the review found

Before finalizing anything, our team asked to see the company's existing loan agreement with its bank. That document contained a negative pledge covenant — a promise, standard in most commercial lending agreements, that the borrower will not grant any other lender a security interest in its assets without the bank's written consent. Because the GSA already covered all present and after-acquired property, the five new trucks fell squarely inside it the moment the company took ownership of them, regardless of who paid for them.

This created two separate problems that had to be solved in different ways. The first was a matter of priority: Ontario's personal property law allows a lender who finances the purchase of specific equipment to obtain a purchase-money security interest, sometimes called a PMSI, which can rank ahead of an earlier, broader general security interest in that same equipment — but only if it is registered correctly and within a strict window tied to when the borrower takes possession of the goods. The second problem was contractual, not statutory: even a properly registered PMSI does not excuse a borrower from a promise made directly to its existing lender. The negative pledge meant the bank's consent was required regardless of how the new lender's priority was arranged.

The more urgent issue was that one of the five trucks had already been delivered and put into service, and the deposit had already been paid, without the bank's knowledge. Most operating lines of this kind are demand facilities, meaning the bank can call the loan due at any time at its discretion, and a breach of a negative pledge covenant is exactly the sort of event that gives a bank grounds to do so. The company was not in a hypothetical risk position — it was already in technical breach of its existing loan agreement, and had been for several weeks without anyone realizing it.

What we did

1. Stopped further exposure immediately. Arman was advised to hold off accepting the remaining four trucks and to pause any further payments to the equipment lender or the vendor until the bank issue was resolved, even though this meant the delivery schedule the company had already agreed to would slip.
2. Reviewed the bank's loan agreement in full. Working with Hodan, our team confirmed exactly what the negative pledge required, what consent process the bank's documentation contemplated, and whether the one truck already delivered had triggered any automatic default provisions requiring immediate repayment rather than simply a right the bank could choose to exercise.
3. Approached the bank proactively. Rather than wait for the bank to discover the breach on its own — through a routine security search or an annual review — we recommended disclosing the situation directly, along with a proposed path to fix it. Lenders generally respond far better to a borrower who surfaces a problem and brings a solution than to one caught after the fact.
4. Negotiated an intercreditor agreement between the two lenders. This document set out, in writing, that the equipment lender's security interest would have first priority specifically over the five trucks, while the bank kept its priority over every other asset of the company. It let both lenders' claims coexist without either one having to guess where it stood relative to the other if the company ever ran into trouble.
5. Secured the bank's written consent and completed the PMSI registration correctly. The consent came in the form of a formal amendment to the loan agreement rather than an informal email, so there was no ambiguity later about what had been approved. The equipment lender's registration against the trucks was filed within the required window to preserve its priority position under the Personal Property Security Act.
6. Kept Reza informed throughout. As a minority owner with a direct stake in the company's financial stability, Reza was briefed at each stage so the fix to the bank relationship did not become a second surprise inside the family.

The outcome

The financing closed, but roughly six weeks later than Arman had originally expected, and at a real cost that would have been avoidable with earlier legal involvement. The bank agreed to consent and enter into the intercreditor arrangement, but only in exchange for a one-time waiver fee of roughly $14,000 and a reduction of about $150,000 in the operating line's available room, to rebuild the cushion it wanted after seeing the company add new secured debt without asking first. The equipment vendor also charged a delay fee of roughly $9,000 for postponing pickup of the remaining trucks while the bank issue was sorted out.

What did not happen mattered more than what did. The bank did not call the operating line due, which was a live possibility once the breach came to light, and which could have forced the company to refinance its entire working-capital facility on short notice — a far more disruptive and expensive outcome than the fees it did pay. The five trucks were eventually delivered and financed as planned, with both lenders' security properly ranked and documented. Reza's ownership position was untouched throughout.

This was not a case where the legal work produced a clean win. The company paid real money and lost real time because a lender's commitment letter was signed before a lawyer looked at how it interacted with an existing loan relationship. The damage that mattered — a demand for immediate repayment of a $2 million facility — was the piece that got contained.

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