Key Takeaways

  • UCC 9-406 governs how an account debtor can discharge obligations once notified of an assignment.
  • Proper notification must be authenticated and identify the assignee clearly.
  • Payments made to the wrong party after valid notice can lead to legal disputes or double payment liability.
  • Anti-assignment clauses are typically overridden under UCC 9-406.
  • Assignees can enforce rights unless a valid defense exists; account debtors should verify notice authenticity.

Understanding UCC 9 406 and the rest of the Uniform Commercial Code can be somewhat daunting, but it is important for anyone who is conducting sales, either as a buyer or a seller.

Uniform Commercial Code 9-407

Under this code, the secured party on record can release part or all of the collateral that is described in a financial statement that has been filed through a signed statement.

Uniform Commercial Code 9-408

According to UCC Code 9-408, a statement of release is good enough as long as it includes:

·      A description of the released collateral

·      The debtor’s name and address

·      The secured party’s name and address

·      The file number of the financing statement

The statement of release that is signed by anyone outside of the secured party has to have an entirely separate written statement of assignment that includes the signature of the secured party on record. It also must comply with subsection (2) of Section 9-405. This includes paying the fee that is required.

Uniform Commercial Code 9-409

When the filing officer is provided the statement of release, he or she will mark it with the filing date information, including the hour, and will make a note in the margin of the index when filing the financial statement.

Uniform Commercial Code 9-410

There is a uniform fee for filing a statement of release. It will vary among the different states. The fee will also vary depending on the form that is prescribed by the Secretary of State.

Uniform Commercial Code 9-411

This section defines the effect of notification and the discharge of the account debtor. The account debtor on an account or on an intangible payment can discharge any of his obligations when he pays the assignor. This does not occur until after the account debtor gets notified that the amount due is assigned by the assignor or the assignee.

Uniform Commercial Code 9-412

Once receipt of notification has been made, the account debtor can discharge any obligations when paying the assignee. It cannot be discharged by providing payment to the assignor.

UCC 9-406 and Anti-Assignment Clauses

UCC 9-406 also plays a vital role in limiting the enforceability of anti-assignment clauses in certain contracts. Specifically:

  • Ineffectiveness of Restrictions:
    UCC 9-406 renders contractual terms that prohibit, restrict, or require consent for the assignment of accounts, chattel paper, payment intangibles, or promissory notes ineffective. This means such terms cannot stop an assignment from occurring, nor can they make it unenforceable.
  • Rationale:
    The purpose of this provision is to facilitate commerce by allowing credit rights to be freely assignable, which helps financial institutions and businesses manage risk and liquidity.
  • Practical Implication:
    Even if a contract says “this account may not be assigned,” the assignment will still be legally valid under Article 9 of the UCC. However, it’s important to distinguish between a valid assignment and one that the debtor must honor—proper notice is still required for enforceability.

Best Practices for Account Debtors Facing Assignment Notices

To mitigate legal risk under UCC 9 406, account debtors should:

  • Promptly review any assignment notices and confirm their legitimacy.
  • Check contract terms and any preexisting defenses before redirecting payment.
  • Verify the identity of the assignee using reliable methods (e.g., official letterhead, legal documentation, return-receipt mailing).
  • Maintain records of all notices received and payments made, particularly if multiple parties claim the same payment right.
  • Consult legal counsel if the notice seems questionable or ambiguous.

By following these steps, debtors can reduce the risk of double payment or violating their contractual obligations.

What Constitutes Proper Notification?

The first component of proper notification is that the contents of the notice have to be sufficient. According to UCC 9-404(a), the notice will have to be authenticated and convey the facts of the assignment. It will also have to identify the assignee.

Not only must the notice be authenticated, but it also has to include a demand that all payments in the future will have to be made to the assignee directly and will have to identify the rights that are assigned.

The authentication process is typically satisfied when you send the notice using the letterhead of the assignee, or in a form where the name of the assignee is present. There is no set rule on what reasonable identification is, so common sense has to be used.

An assignee does not need to rely solely on the issuance of new invoices that list the address of the assignee or provide notification to the account debtor in regular conversation.

A notice needs to be a in the form of written communication. Special care needs to be taken to ensure the collateral, loan documentation, those party to the documentation, and loan number are identified.

It is best to have as much detail as possible. You also need to remember that, should an account debtor be notified to make a payment of less than the full amount of an installment, he or she may ignore the notice as it is not effective.

An account debtor has to receive the notification. Any notice that is mailed to an address on the loan documentation that is not valid will not be sufficient. It is best to send notice through the U.S. mail using certified mail with a return receipt requested. An email should be sent as well.

Keep in mind that the rules will vary by state. It is essential to fully review all assignee notices.

UCC 9-406: Discharge of Account Debtor and Assignment Enforcement

Under UCC 9-406, when a debtor owes money under a contract, and the right to receive that payment is assigned to a third party (the assignee), the account debtor must pay the assignee once proper notice is given. The key provisions include:

  • Discharge by Payment to Assignor (Pre-Notice):
    An account debtor may discharge its obligation by paying the assignor until it receives proper notification of the assignment. After valid notice, payment must go to the assignee.
  • Notice Requirements:
    The notification must:
    • Be authenticated by the assignee.
    • State clearly that the payment obligation has been assigned.
    • Provide the identity of the assignee.
    • Direct that payment must now be made to the assignee.
  • Burden of Proof:
    If challenged, the assignee must prove the assignment's existence and legitimacy. However, this burden only arises if the account debtor contests the notice's validity in good faith.
  • Defense Retention:
    The account debtor retains any defenses it had against the assignor—such as contract breach or fraud—unless it explicitly agrees to a waiver in a signed record.
  • Double Payment Risk:
    A common issue arises when debtors are unaware of valid assignments and pay the wrong party. This mistake may result in having to pay again, especially if notice was correctly delivered but ignored.

Frequently Asked Questions

  1. What is UCC 9-406 in simple terms?
    UCC 9-406 governs how debt payments must be redirected when the original creditor assigns the right to receive payment to another party (an assignee). It outlines when and how debtors must comply after receiving notice.
  2. Can a debtor ignore an assignment notice?
    No. Once a debtor receives proper and authenticated notice of assignment under UCC 9-406, they are legally obligated to pay the assignee. Ignoring it can lead to double liability.
  3. Are anti-assignment clauses enforceable?
    Generally not for accounts, chattel paper, or similar financial rights. UCC 9-406 overrides most anti-assignment clauses, allowing such rights to be assigned regardless of contractual prohibitions.
  4. What makes a notice of assignment “proper”?
    It must be in writing, authenticated by the assignee, identify the assigned rights, name the assignee, and direct payment to them.
  5. What if multiple parties claim the right to payment?
    Debtors should seek immediate legal advice to avoid double payment. UCC 9-406 allows the first assignee with valid notice to have priority, but disputes can arise.

If you need help understanding the Uniform Commercial Code and all stipulations therein, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.