This case presents several interesting takeaways. First, make use of ICAs if you become aware of competing interests in your collateral.

As debt structures become increasingly layered and complex, intercreditor agreements (ICAs) can be a useful tool in clarifying a lender’s rights and the priority between it and a borrower’s other creditors with respect to collateral that has been pledged by a borrower to more than one party. As with most credit-related documents, however, lenders should craft such documents with an eye toward how they might be applied or construed in a bankruptcy case or proceeding.

There have been a few key contexts in which bankruptcy courts have been given the task of interpreting an ICA or subordination agreement, including situations in which (i) a lender objected to a 363 sale,[1] (ii) a lender objected to Chapter 11 plan that subordinated its claim in violation of a subordination agreement with other creditors,[2] and (iii) senior noteholders initiated an adversary proceeding against junior noteholders who had voted in favor of a plan opposed by the seniors when they had an ICA that prohibited the junior noteholders from taking any action that would “hinder any exercise of remedies undertaken” by the senior noteholders.[3]

In a recent decision by the United States Bankruptcy Appellate Panel of the Eighth Circuit, In re Pro-Mark Services, Inc., 2025 WL 2950482 (B.A.P. 8th Cir. 2025), the court reversed and remanded a decision issued by a bankruptcy court in favor of the debtor’s secured lender, holding that the bankruptcy court erred when it ignored an ICA in determining the priority between the debtor’s secured lender and a surety bond holder, each of which had an interest in mutual collateral that was the subject of the lender’s lift stay motion, pursuant to which the lender asserted a right of setoff.

Background

The debtor in this case, Pro-Mark Services Inc., is a general contracting construction company that obtained certain payment and performance bonds from Hartford Accident and Indemnity Company. Id. at 1. In exchange, Pro-Mark and other indemnitors entered into a general indemnity agreement (GIA), assigning to Hartford all of the company’s rights in the bonded contracts. Id.

Seventeen months later, Pro-Mark entered into two different business loan agreements with Capital Credit Union (CCU), pursuant to which Pro-Mark borrowed $15.75 million. Id. The loans were secured by security interests in all of Pro-Mark’s assets, including its deposit accounts held at CCU, which CCU properly perfected. Recognizing their overlapping claims to Pro-Mark’s assets, Hartford and CCU entered an ICA to define their respective rights and priorities with respect to the assets. Id. The ICA provided that Hartford had a superior lien in the assets and proceeds tied to the bonded contracts, while CCU had priority over all other assets. By entering the ICA, CCU and Hartford agreed to override the attachment provisions of Article 9 that would otherwise apply. Id. at 2.

Less than three years later, on April 22, 2024, Pro-Mark filed for bankruptcy under Chapter 7 in the United States Bankruptcy Court for District of North Dakota. Id. At the time, Pro-Mark owed CCU more than $12 million and had over $3.3 million in two separate deposit accounts at CCU. Id. After the bankruptcy filing, CCU froze the deposit accounts and moved for relief from the automatic stay under Section 362(d) of the Bankruptcy Code to set off the balances in the deposit accounts against Pro-Mark’s debt due and owing to it. Id. Hartford filed an objection, asserting that it had a superior claim to the funds on deposit at CCU under both the GIA and ICA. Id. The bankruptcy court ruled in favor of CCU, reasoning that because the assignment provision in the GIA did not specifically include the word “proceeds,” Pro-Mark had not granted Hartford an interest in the deposited funds. The bankruptcy court did not consider the ICA. Id. at 3.

Hartford appealed, arguing that the ICA—not the GIA—should control the dispute between the two creditors.

Bankruptcy Appellate Panel Ruling

On appeal, Hartford raised two arguments. First, it argued that the bankruptcy court exceeded its authority in adjudicating the merits of a priority dispute outside of the context of an adversary proceeding. Id. at 4. Second, it argued that even if the court had authority, it ruled incorrectly by ignoring the ICA. Id.

The appellate court disagreed with Hartford’s authority argument, holding that it was appropriate for the bankruptcy court to decide the issue in the context of a motion for stay relief. Id. In support of its decision on this issue, the appellate court relied on In re Nuclear Imaging Systems Inc., 260 B.R. 724, 744-45 (Bankr. E.D. Pa. 2000) and highlighted that both Hartford and CCU had fully briefed and argued their legal positions concerning the requested setoff, the evidentiary record was small and mostly uncontested, and the opposing party should not have had another opportunity to challenge the subsequent setoff. Id.

As for Hartford’s second argument—that the ICA was the governing document and not the GIA—the appellate court found in favor of Harford and held that the bankruptcy court erred by focusing only on the GIA and North Dakota’s Uniform Commercial Code (UCC) provisions to determine the two creditor’s priority as to the funds on deposit with CCU. Id. at 5. The appellate court noted that under North Dakota law, parties can enter into agreements that change how the UCC’s default rules apply. Id. The appellate court also found that the ICA specifically defined Hartford and CCU’s interests in the mutual collateral that was pledged to them and also spelled out who got paid first from which assets. Id.  As a result, the ICA superseded the default provisions of the UCC. Id.

Conclusion

This case presents several interesting takeaways. First, make use of ICAs if you become aware of competing interests in your collateral. Second, if you’re a senior lienholder with a claim in a debtor’s collateral and you have an ICA with a junior lienholder who violates that ICA, there may be several opportunities for you to contest the priority of that junior lienholder’s claim via an objection or by filing an adversary proceeding. Third, ICAs are a useful tool, but lenders should carefully review the provisions of the UCC in the applicable jurisdiction(s) before entering one to make sure any provisions overriding that jurisdiction’s UCC statute in the ICA are permitted. Fourth and finally, if you’re a surety or guarantor and enter into a general indemnity agreement, make sure the assignment provision applies not just to the collateral but to proceeds of the collateral, too.

For More Information

If you have any questions about this Alert, please contact Sommer L. Ross, Klara Bradbury, any of the attorneys in our Business Reorganization and Financial Restructuring Practice Group or the attorney in the firm with whom you are regularly in contact.

Notes

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