Oregon Court of Appeals Affirms Creditor’s Right to Elect Remedy

The Oregon Court of Appeals recently affirmed that a secured creditor can choose their remedy, such as a forbearance agreement, without waiving their right to priority in the borrower’s collateral. In Davis v. F.W. Financial Services, a lender extended credit to an electrical business and properly perfected its security interest which gave it priority in the business’s assets. When the electrical business defaulted, the lender entered into a forbearance agreement to allow them an opportunity to stabilize. Meanwhile, a junior creditor began to garnish the businesses accounts receivable. When the business again defaulted on its payments, the priority lender foreclosed on its security interest and sought to trace and recapture money garnished by the junior creditor.

The Court held that the priority lender did not waive any of its rights to priority in the collateral by entering into a forbearance agreement instead of immediately foreclosing, and that the priority lender could recapture the funds garnished by the junior creditor. In making its decision, the Court focused on language in the priority lender’s contract that said the creditor did not waive any of its remedies, even if it chose to delay exercising those remedies on default.

Lenders who enter into secured transactions should review their agreements to make sure issues of waiver are appropriately addressed, and that security interests are perfected by filing in the appropriate public office. If you have any questions regarding this case, please contact a member of the Financial Services Team.