Double Negative Pledge Agreement

1988), the Mudges entered into an agreement to sell the family welding business to Redding. The contract of sale contained a negative provision on the deposit, according to which the buyer promised not to encumber the assets of the company without the agreement of the seller until the full purchase price was paid. Almost immediately after the sale was completed, the buyer applied to a Wyoming bank for a loan of $US 100,000, which was a clear violation of the negative deposit agreement. During the credit negotiations, the bank`s credit officers received a copy of the sales agreement. Notwithstanding the terms of the sales contract, the bank took a guarantee interest in the company`s assets, although the buyer never obtained the seller`s agreement. Banks have traditionally used a device known as a negative deposit (“negative pledge”) in credit documents. The negative pledge is an agreement by which a borrower pledging to a lender not to grant a pledge on the property of the deposit holder. Negative pledging is most often used as one of the standard provisions of a loan agreement or other loan document such as a Covenant Negative Pledge or a separate agreement for a given piece of land held by a borrower or guarantor (“Specific Negative Pledge”). Negative deposit clauses help bondholders protect their investments. Where a bond includes a negative deposit clause, it prevents the issuer from borrowing future debt that may affect its ability to meet obligations to existing bondholders. Since a negative deposit clause increases the collateral for a bond issue, it often allows issuers to borrow funds at a slightly lower rate. This lower interest rate benefits the issuer and creates a win-win situation for both the issuer and the bondholder. When a financial institution grants an unsecured loan to a natural or legal person, it may include in the contract a negative deposit clause to protect itself.

In metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884 (2d Cir. 1990), the RJR District Court temporarily prohibited the sale of assets subject to a negative deposit agreement. . . .

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