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Consider the following scenario: A lender and a manufacturer enter into an inventory-financing program for dealers of the manufacturer’s products. Pursuant to the agreement reached between the manufacturer and the lender, the lender agrees to finance the purchase of more than $100 million worth of the manufacturer’s products by various dealers, which will then sell the products to commercial or consumer third parties.

Then the manufacturer begins experiencing supply-chain issues, increases in its production costs, and workforce shortages brought on by a global pandemic. The manufacturer seeks relief from its financial pressures by filing a Chapter 11 bankruptcy petition. After filing, it contends that the lender must continue to perform under the inventory financing program agreement by making loans to the dealers, notwithstanding the manufacturer’s material covenant defaults and significant uncertainty about the manufacturer’s future viability, including its ability to honor warranties for the purchased inventory.

In such a scenario, could the lender be forced to perform under the inventory financing program agreement, including making new loans to the dealers? The answer, which is dependent upon both contract law and the statutory framework of the bankruptcy code, is not always straightforward or predictable. In order to examine the issue more closely, a short explanation of the interplay between vendor finance agreements and bankruptcy is appropriate.

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