In accordance with Section 2953.3 of the California Civil Code, any subordination agreement must contain the following: In simple terms, a subordination agreement is a legal agreement that puts a debt as a debt that ranks behind another debt in the priority for the recovery of repayment by a debtor. It is an agreement that changes the position of the deposit. In the absence of subordination clauses, loans have a chronological priority, which means that a position of trust, registered in the first place, is considered a priority for all subsequently registered trust companies. As such, the oldest loan becomes the main loan, the first call to all income from the sale of a property. However, a subordination agreement recognizes that the right or interest of one party is less than that of another party when the debt unit liquidates its assets. In addition, shareholders are subordinated to all creditors. It was there that a bank and a family business entered into an extrajudicial enforcement agreement and the pawned property was sold. The complainant, the mother of the family who ran the business, lent money to the family and took out a mortgage on the company`s land and buildings as collateral for the loan. However, the family members, who were unknown to the mother, had obtained financing by granting two other mortgages on the transaction to two banks. The first bank was a priority for loans in the event of enforcement, the applicant had the second priority and the second was the third priority. When another bank refused to provide additional financing to the company, unless it signed a subordination agreement that gives the bank its priority position, the applicant signed the agreement. As a result, the third bank provided additional resources to the company. Two months later, the case collapsed and the execution process began.
Under the subordination agreement, the proceeds of the sale were first converted into bank loans. The applicant filed a complaint, but the court ruled against the applicant on the grounds that the subordination agreement was valid. The applicant appealed and argued that the subordination agreement was not valid because it was not supported by a consideration. A subordination agreement recognizes that the requirement or interest of one party is greater than that of another party if the borrower`s assets must be liquidated to repay the debt. Debt subordination is not uncommon when borrowers are working to obtain financing and enter into loan contracts. Subordination agreements are often executed when an owner refinanced the first mortgage. The refinancing announces the loan and writes a new one. These events happen at the same time. As soon as the bank terminates the primary mortgage, the second mortgage rises to the top position and, as a result, the refinanced primary credit ranks behind the second mortgage.