## Facts

- A bank held a first-priority security interest in certain personal property of Sisco Enterprises.
- First City Capital Corporation (FCCC) later obtained a second-priority security interest in the same collateral.
- ITT Diversified Credit Corporation (ITT) later obtained a third-priority security interest in the same collateral.
- To facilitate ITT’s lending to Sisco, the bank executed a subordination agreement subordinating its first lien to ITT as to specified assets.
- After Sisco defaulted on ITT’s loan, ITT foreclosed on the collateral and sold it, generating sale proceeds.
- FCCC demanded the proceeds on the theory that its second lien retained priority over ITT’s third lien despite the bank’s agreement with ITT.
- The trial court awarded FCCC the proceeds plus interest and costs; the court of appeals affirmed based on a real-property lien priority case.
- The Supreme Court of Texas granted review to determine the effect of the bank–ITT subordination agreement on FCCC’s priority status.

## Issues

1. Under Texas UCC Article 9, does a subordination agreement between first- and third-priority secured parties automatically elevate the third-priority party ahead of an intermediate second-priority party?
2. Does an intermediate lienholder’s priority change when it is not a party to the subordination agreement?

## Decision

- The Supreme Court of Texas reversed the court of appeals and remanded to the trial court.
- Article 9 permits subordination by agreement by a party entitled to priority, and the Code’s provisions may be varied by agreement.
- A subordination agreement is a contract that modifies priority only as between the parties to the agreement and must be construed according to its terms and the parties’ expressed intent.
- The lower courts erred by treating subordination as an automatic re-ranking that displaced the intermediate lienholder and by relying on an inapplicable real-property lien case.
- On remand, the trial court was to apply Article 9 priority rules together with proper contract interpretation of the subordination agreement to determine the correct allocation of proceeds.

## Legal Principles

- Article 9 allows a person entitled to priority to subordinate that priority by agreement.
- UCC provisions may be varied by agreement, subject to contract interpretation principles.
- A subordination agreement is a contractual modification of lien priorities; its effect depends on the agreement’s language and the contracting parties’ intent.
- A subordination agreement between two secured parties does not, by itself, reorder the priorities of an intermediate secured party who is not a party to the agreement.
- Real-property lien priority precedents do not control priority disputes governed by Article 9 security-interest rules for personal property.

## Conclusion

The Supreme Court of Texas held that subordination under Article 9 is a bilateral contractual adjustment affecting only the parties who agree, not a mechanism that automatically changes an intermediate creditor’s priority; it reversed the lower courts’ contrary approach and remanded for application of Article 9 and contract construction to the agreement and proceeds.


ITT Diversified Credit Corp. v. First City Cap. Corp., 737 S.W.2d 803 (Tex. 1987)