RICK L. KNUTH is the keeper of the Banking and Finance Law Spotlight Site.

Rick's practice focuses on assisting institutional and private lenders and borrowers in asset-based loan transactions, real estate financing, accounts receivable and inventory-based financing. He has over 30 years experience in loan documentation, mortgage and trust deed foreclosures, loan participations, credit opinion letters, workouts, and insolvency proceedings of all kinds. He counsels banks large and small in all aspects of their commercial credit relationships.

Look for postings by the other attorneys in our Commercial Lending and Banking Practice Group.

Keven M. Rowe (Group Leader)
Tom Berggren
Rick L. Knuth
Kyle V. Leishman
James W. Peters
Susan B. Peterson
Jacob Redd
George R. Sutton
Glen D. Watkins
Randon W. Wilson

Published Articles

"Fraudulent Checks- the 'Same Wrongdoer' Defense"
by Rick L. Knuth

Originally Published in Utah Banker Magazine Fall 2013.

Important Resources
Posted on Oct. 29, 2012

There are two major ways a lender can declare a covenant default, that is, a default that results not from the failure to make a loan payment, but one that results from a change in the borrower’s financial condition. Typical commercial loan documents require the debtor to maintain certain minimum financial conditions, such as specified levels of inventory, debt coverage, net cash on hand and the like. Pretty boring stuff. The pinch point for the loan parties is how to craft the loan documents so that the lender’s need to declare a default in the face of a borrower’s deteriorating financial condition is balanced by the borrower’s need to have some measure of predictability.

One aspect of financial covenants that is worth greater consideration is whether the default should be triggered by “incurrence” or “maintenance “of a proscribed financial condition. In simple terms, a “maintenance" trigger can be pulled if the borrower fails to continuously meet a financial covenant as reflected at the end of each quarter, each fiscal year, or whatever time period the agreement specifies. On the other hand, an "incurrence" test triggers an immediate default at whatever point in time the covenant fails. Each test triggers on a different event, and each has advantages and disadvantages.

For example, suppose the documents contain a maintenance test measured at the end of each fiscal quarter: At quarter end, after financial statements have been prepared, the borrower would be obligated to inform the lender that the financial covenant has not been maintained. Accordingly, since borrowers don’t like to "rat themselves out," the lender most likely will not know about the default until after the financial statements have been prepared and presented to the lender.

On the other hand, an incurrence test means that the default occurs simultaneously with the breach of the covenant. However, the lender will likely not know about the covenant default until after those same financial statements have been prepared and delivered. Sometimes, though, the lender will have sufficient information to trigger an incurrence test earlier than would happen under a maintenance test.

Accordingly, the lender will be pushing for an incurrence trigger, while the borrower will want a maintenance trigger, since the maintenance trigger will ordinarily give the borrower additional time to deal with the problem, or simply postpone the inevitable.


This post was written by attorney Rick L. Knuth

Post Comment:





Rick Knuth is a member of the American College of Mortgage Attorneys.

George Sutton was recognized in 2012 as Utah Attorney of the Year in Financial Services Regulation Law by Best Lawyers in America.

Rick Knuth was recognized in 2012 as Utah Attorney of the Year in Banking and FinanceLaw by Best Lawyers in America.

All eligible attorneys in this group are ranked AV Preeminent by Martindale-Hubbell.

community and industry outreach


Utah Association of Financial Services

  • Associate Member and Convention Sponsor

Utah Banker's Association

  • Convention Sponsor