Assignments, Anti-Assignment Clauses
and
Structured Settlements
Under Revised Article 9

© 2002 by John Krahmer
Professor of Law
School of Law
Texas Tech University
Lubbock, Texas 79409-0004
(806) 742-3990 x237

"Issues relating to 9-406/9-408 will be the big growth industry in UCC-land for the next 10 years."

..... Kenneth Kettering

I. Introduction

One of the most significant changes in the law of secured transactions under Revised Article 9 is the deliberate adoption of rules designed to increase the availability of credit. These changes can be found in a number of different and, sometimes, seemingly unrelated provisions in the text but, taken as a whole, the direction is clear. For example, the definition of accounts has been much expanded, as a simple visual comparison of the old and new definitions illustrates:

----- Comparison of Old & New Account Definitions -----

Similarly, the definition of proceeds has been revised to now include not only things received by virtue of an exchange of collateral, but also things received on account of collateral. Thus, a stock dividend received by a debtor on stock that had been pledged as collateral was not a "proceed" under the former Article 9 because it was not something received in exchange for the stock, but it is now a "proceed" under revised Article 9 because it is something received on account of the collateral.

The statutory adoption of the "dual staus rule" instead of the "transformation rule" in commercial cases is another example of a rule designed to free up assets that can be used as loan collateral. ⁽¹⁾

The dual- status rule has the economic effect of unlocking the debtor's equity in collateral and making it available for new loans, much like home-equity lending unlocks the equity in a homeowner's residence.

Another example of rules designed to increase the asset pool available as loan security are the provisions in sections 9-406, 9-407, 9-408, and 9-409 that invalidate, in whole or in part, anti-assignment clauses or legal restrictions affecting accounts, chattel paper, general intangibles (including payment intangibles), promissory notes, health care receivables, leases, and letters of credit. While these sections are not identical in their treatment of anti-assignment clauses and legal restrictions, they tend to have the same type of economic impact. Each of these sections is further discussed below.

II. A Hypothetical

A hypothetical helps to understand the operation of sections 9-406 through 9-409:

Debtor (D), a corporation organized under the law of State Y, operates a winery in that state. D's assets, and their percentage value in relation to D's business, consist of the following:

Accounts, Equipment & Inventory: 20
Liquor License 20
Letter of Credit 20
Lease (as Lessor) 20
Lease (as Lessee) 20
Total 100

Secured Party (SP) loans D an amount equal to 60 percent of the value of D's assets. If SP's security interest attaches to all of D's assets, SP is over- secured. If SP's security interest only attaches to the accounts, equipment, and inventory, SP is under-secured. Obviously, SP's interest needs to attach to at least two of the other assets to provide adequate security. Each of the assets listed above is discussed below.

III. Analysis

Accounts, Equipment, and Inventory

Insofar as equipment and inventory are concerned, these are not the types of collateral where an anti- assignment clause would generally be of concern except for leased equipment. Issues concerned with equipment held by the debtor under a lease are discussed below. To the extent that the "accounts" in this category of assets are ordinary receivables of the kind covered by the former Article 9, the rules in revised Article 9 have remained much the same although the provisions of the former sec. 9-318 are now found in three separate sections, 9-404, 9-405, and 9-406. As under the prior law, sec. 9-406 renders an anti-assignment clause ineffective when the obligation of the account debtor on an account, chattel paper, payment intangible, or promissory note involves only the payment of money. ⁽²⁾

Absent an enforceable agreement not to assert defenses or claims, the assignee is (1) subject to the terms of the underlying agreement between the account debtor and the assignor and to any defenses or claims in recoupment arising from the underlying transaction, and (2) any other defenses or claims of the account debtor against the assignor that accrue before the account debtor is notified of the assignment. ⁽³⁾

Except in consumer cases, claims against the assignee can be asserted only to reduce the amount owed by the account debtor; the assignor does not incur liability in excess of that amount simply by becoming an assignee. ⁽⁴⁾

Assignments in consumer transactions are subject to two additional rules. First, by its own terms, sec. 9-404 is subject to any law other than Article 9 that establishes a different rule for consumer transactions. ⁽⁵⁾

Second, even if the contract used in a consumer transaction does not contain the notice required by the FTC Holder in Due Course Rule ⁽⁶⁾ or by other applicable law, ⁽⁷⁾ sec. 9-404(d) treats the contract as if the notice did appear in the contract. ⁽⁸⁾

Once assigned, the underlying contract is still subject to modifications made by the assignee and the account debtor, though with various limitations that depend, in part, on whether the account debtor has received notification of the assignment. ⁽⁹⁾ The notice requirements are particularly important in protecting the rights of the assignee. Until notice of the assignment is received by the account debtor, the obligation can still be discharged by payments made by the account debtor to the assignor. ⁽¹⁰⁾ After receipt of notification, the account debtor can discharge the obligation only by making payments to the assignee. ⁽¹¹⁾ The notification itself is subject to several requirements and is ineffective if it fails to meet those requirements.

The importance of proper notice is nicely illustrated by the case of Fulton County v. American Factors of Nashville, Inc. ⁽¹²⁾ where an account factor sent a notices to the account debtor (Fulton County) stating:

NOTICE

This account has been sold, assigned and is payable at Brentwood, Tennessee to

AMERICAN FACTORS OF NASHVILLE, INC.
P.O. BOX 954
BRENTWOOD, TN 37024-0954

Remittance to other than American Factors of Nashville, Inc. does not constitute payment of this Invoice. American Factors of Nashville, Inc. must be given notification of any claims agreements or merchandise returns which would affect the payment of all or part of this Invoice on the due date.

615-221-3939

This notice was stamped on each invoice. In addition to this notice, a cover sheet was attached to each invoice that identified the relevant invoice by number, date, and amount, and included a notice and certification by the assignor that the invoice had been assigned to American Factors.

Despite the notices, the county made payments directly to the assignor. In an action by the account factor to collect the unpaid accounts, the county defended by asserting the notices were inadequate because they were not forwarded to the Chairman of the County Board of Commissioners as required by a contract term between the county as account debtor and the assignor. The court held that under the former sec. 9-318, this was an attempt to prohibit assignment that was ineffective and the notice was adequate under UCC sec. 1-201(27) since it had been sent to the person in charge of the transactions in question.

Since the account debtor in this case happened to be a governmental body, the case also points up another aspect of revised sec. 9-406. In addition to invalidating contractual restrictions on assignments, sec. 9-406 also invalidates legal restrictions on assignments created by "rule of law, statute, or regulation." ⁽¹³⁾ The relationship between the sec. 9-406 "override" and other state law is one area of substantial non-uniformity among the several states. ⁽¹⁴⁾ Under revised Article 9, absent a non-uniform variation or stated exception to the rule of 9-406(f), it would be even clearer that the county could not restrict the assignment of accounts.

Thus, absent peculiar circumstances, ordinary accounts receivable resulting from the sale of inventory by our hypothetical winery should be fully assignable and the assignment should be effective if proper notice is given. ⁽¹⁵⁾

The Liquor License

The creation of a security interest in the liquor license is more problematic. Under the law of most states, a governmental body must approve the issuance and transfer of liquor licenses. The governmental body may be at the state level or it may be at a county or municipal level. In any event, the general law is, "Not just anybody can sell booze."

Unlike accounts, chattel paper, and payment intangibles, a liquor license would be a "general intangible" under revised Article 9. ⁽¹⁶⁾ The assignment of general intangibles is governed by sec. 9-408 which, like sec. 9-406, contains language invalidating contractual terms that prohibit assignment. ⁽¹⁷⁾ Also like sec. 9- 406, sec. 9-408 also invalidates legal restrictions on assignments ⁽¹⁸⁾ and provides that the section prevails over any inconsistent provisions in other law. ⁽¹⁹⁾

While sec. 9-408 has a number of parallels to sec. 9-406 in terms of allowing assignability and overriding conflicting anti-assignment provisions in an underlying contract or in rules of law, it differs in one very important respect. Section 9-408 places extensive restrictions on the ability of a secured party to enforce a security interest in the assigned collateral even if a valid security interest has been created. Section 9-408(d) provides:

(d) To the extent that a term in a promissory note or in an agreement between an account debtor and a debtor that relates to a health-care-insurance receivable or general intangible or a rule of law, statute, or regulation described in Subsection (c) would be effective under law other than this article but is ineffective under Subsection (a) or (c), the creation, attachment, or perfection of a security interest in the promissory note, health-care- insurance receivable, or general intangible:

(1) is not enforceable against the person obligated on the promissory note or the account debtor;

(2) does not impose a duty or obligation on the person obligated on the promissory note or the account debtor;

(3) does not require the person obligated on the promissory note or the account debtor to recognize the security interest, pay or render performance to the secured party, or accept payment or performance from the secured party;

(4) does not entitle the secured party to use or assign the debtor's rights under the promissory note, health-care-insurance receivable, or general intangible, including any related information or materials furnished to the debtor in the transaction giving rise to the promissory note, health-care- insurance receivable, or general intangible;

(5) does not entitle the secured party to use, assign, possess, or have access to any trade secrets or confidential information of the person obligated on the promissory note or the account debtor; and

(6) does not entitle the secured party to enforce the security interest in the promissory note, health-care-insurance receivable, or general intangible.

After reading sec. 9-408(d), it is a fair question to ask, "What the hell does a secured party get by taking a security interest in a general intangible covered by subsection (d)?"

The answer is that, by attaching a security interest to the "base" collateral, the secured party will have a security interest in any proceeds that result from that collateral. For example, suppose the debtor decides to sell the winery and, as part of the sale, obtains the consent of the appropriate commission to transfer the liquor license. Since the license will have a value associated with it as part of the sale of the business, the secured party can reach that value. ⁽²⁰⁾ If the debtor goes into bankruptcy, a security interest in the base collateral will also permit the secured party to reach the proceeds of any sale of the business while the bankruptcy is pending. ⁽²¹⁾

The Letter of Credit

Like its counterparts in secs. 9-406 and 9-408, the general rule of sec. 9-409 permits the assignment of a beneficiary's interest in a letter of credit despite anti-assignment provisions in the letter of credit or prohibitions contained in a rule of law, statute or regulation. ⁽²²⁾ Like sec. 9-408, however, sec. 9-409 limits the effect of an assignment to protect the issuer and other parties from any adverse effects of an assignment. Thus, sec. 9-409(b) provides:

(b) To the extent that a term in a letter of credit is ineffective under Subsection (a) but would be effective under law other than this chapter or a custom or practice applicable to the letter of credit, to the transfer of a right to draw or otherwise demand performance under the letter of credit, or to the assignment of a right to proceeds of the letter of credit, the creation, attachment, or perfection of a security interest in the letter-of- credit right:

(1) is not enforceable against the applicant, issuer, nominated person, or transferee beneficiary;

(2) imposes no duties or obligations on the applicant, issuer, nominated person, or transferee beneficiary; and

(3) does not require the applicant, issuer, nominated person, or transferee beneficiary to recognize the security interest, pay or render performance to the secured party, or accept payment or other performance from the secured party.

Assignment of Lessor's Interest

If the hypothetical winery has leased equipment or other personal property to a lessee, sec. 9-407 would generally allow the winery to assign its interest in the lease despite any anti-assignment clause that might be contained in the lease. ⁽²³⁾ The assignment can include both the lessor's right to receive payments under the lease and the lessor's residual interest in the leased goods. The only limitation that might come into play would arise from an assignment that materially increases the burden or risk placed on the lessee. ⁽²⁴⁾ This could occur, for example, if the lessor had a continuing responsibility to maintain or upgrade the leased equipment. In this case, the lessee may have remedies available under sec. 2A-303.

Assignment of Lessee's Interest

Unlike the assignment of a lessor's interest, assignment of a lessee's interest may well be subject to an anti-assignment clause that is not invalidated by sec. 9-407 because the lessee's interest will generally involve the possession and use of the leased goods. In recognition of this fact, sec. 9-407(b) provides:

(b) Except as otherwise provided in Section 2A.303(g), a term described in Subsection (a)(2) is effective to the extent that there is:

(1) a transfer by the lessee of the lessee's right of possession or use of the goods in violation of the term; or

(2) a delegation of a material performance of either party to the lease contract in violation of the term.

It may, therefore, be much more difficult for the winery as lessee to assign its interest in leased goods than it would be for the winery as lessor. Nonetheless, the ability to use the leased goods has a value to the debtor and, as with the liquor license, attachment of a security interest to the base collateral will permit the secured party to reach any proceeds that may result if the lessee's interest is eventually transferred, either with the permission of the lessor (perhaps in exchange for a payment) or in the course of the debtor's bankruptcy under secs. 363 or 1129.

IV. Anti-Assignment Clauses and Securitization

By increasing the assignability of rights in assets, revised Article 9 facilitates securitization transactions. In an excellent article discussing securitization and revised Article 9, ⁽²⁵⁾

Professor Steven L. Schwarcz described the effect of the revised Article 9 rules on anti-assignment clauses and securitization this way:

Parties to contracts sometimes restrict the assignment of rights and obligations thereunder. These restrictions are often referred to as "anti- assignment clauses." In a securitization transaction, the parties to that contract are the originator and a third party obligated on the financial asset. Because the focus is on the originator's transfer of its rights in the financial asset to an SPV [special purpose vehicle], we need only examine the obligor's ability to restrict that transfer.

Current Article 9 nullifies anti-assignment clauses that prohibit "assignment of an account or . . . creation of a security interest in a general intangible for money due or to become due." The rationale given is that the nullification of anti-assignment clauses "is widely recognized in the cases and . . . corresponds to current business practices." An implicit rationale, however, might be that the obligor on the account or general intangible is not prejudiced by its assignment, whereas enforcing the anti- assignment clause would impair the free alienability of property rights.

Revised Article 9 clarifies the rule of Current Article 9. First, the revision eliminates any argument that a transfer of financial assets in violation of an invalidated anti-assignment clause nonetheless constitutes a breach as between the obligor and the originator. Second, the revision treats anti-assignment clauses in payment intangibles and promissory notes differently depending on whether the transfer in question is a sale or merely a transfer for security. Anti-assignment clauses would be ineffective in both cases from preventing perfection of the transfer of the right to payment, but they would be upheld to prevent an originator from selling its underlying business relationship. Thus, if the originator is a bank which has made a loan to a borrower, the bank could sell a participation in that loan--a loan participation being a payment intangible--to an SPV or other third party and could perfect that sale notwithstanding an anti-assignment clause in the underlying loan agreement; but the bank could not alter the underlying debtor-creditor relationship with its borrower. The buyer of the loan participation therefore would have no direct collection rights against the borrower. (Footnotes omitted.) ⁽²⁶⁾

V. Anti-Assignment Clauses and Structured Settlements ⁽²⁷⁾

I. Qualified Structured Settlements

A. Structured settlements are agreements entered into to settle actual or potential lawsuits. They may not be used after a jury has rendered a verdict.

B. Section 130 grants tax-favored treatment to structured settlement payments. If payments qualify, payor can deduct amount of payments made to recipient, and recipient can exclude that amount from income. To qualify for tax favored treatment under sec. 130 of the Code:

(1) payments must be fixed as to amount and time;

(2) payments cannot be accelerated, deferred, increased, or decreased by recipient

(3) payor's obligation is no greater than liable person's obligation; and

(4) payments are excludable by recipient under sec. 104(a)(2) of Code.

II. Requirements:

A. Defendant, who is required either by a suit or by an agreement to pay damages to a physically injured or ill person, enters into structured settlement agreement with injured person.

B. Defendant pays lump sum to structured settlement company.

C. Structured settlement company assumes defendant's liability to injured person.

D. Structured settlement company is required to pay injured person specified amounts over period of time.

E. Structured settlement company purchases annuity contract to fund liability and uses payments received under contract to pay amounts due injured person.

F. Defendant has up front deduction for payment to structured settlement company.

G. Structured settlement company does not recognize income on receipt of that payment to extent it requires an annuity or other qualified investment.

H. Payments to structured settlement company are not subject to tax to extent they are netted out as payment to injured person.

I. Injured person is not subject to tax on any amounts received.

J. Result is that earnings on funds set aside for injured person are never subject to tax.

III. If not a qualified structured settlement:

A. Receipt of settlement is not taxed, but

B. Earnings on settlement funds would be taxed

C. If injured person purchases annuity with settlement funds, receipt of annual payments is taxed under sec. 72 (settlement amount/expected return = amount excluded from income)

IV. Example

P receives a $l M settlement in a personal injury suit. Part of the settlement agreement is that D will pay a lump sum to A, a structured settlement company for A to purchase an annuity that will pay P $150,000 for ten years. D pays $1 M to A. A then purchase an annuity for $980,000 that will pay $150,000 for ten years. A has income under sec. 130 of $20,000 ($1,000,000 - $980,000). Each year A will receive $150,000, which it will pay directly to P. A will have no income pursuant to sec. 130 because the entire amount is paid to P. P will have no income pursuant to sec. 104.

If P had purchased an annuity with the $1 M settlement amount, P would have had income under sec. 72 of $50,000 annually, computed as follows: $1,000,000 (investment)/$1,500,000 (expected return-$150,000 x 10) x $150,000 (annual payment) = $100,000 (amount of annual payment excluded from income). Thus, the amount included in income is $50,000.

If D had purchased the annuity, D could not have deducted the cost of the annuity. Pursuant to sec. 461(h)(2)(C), D can take a deduction for its liability under the settlement only when payments are made to P. Thus, D would have income of $50,000 from each annuity payment (computed under sec. 72 as in illustration above) and a deduction of $150,000, as the annuity payment is made to P. D's investment of $1M in the annuity contract, then, is deducted over the life of the annuity, as a net deduction of $100,000 [$150,000 (deduction) - $50,000 (income)]. Section 468B permits a deduction of an amount paid to a designated settlement fund. Thus, if D pays a structured settlement company to buy the annuity, D may deduct the amount paid the company ($1 M in the current example).

Structured Settlements and Section 9-408

Plaintiffs who enter into structured settlements may later attempt to sell all or part of their rights to future payments. The validity of such sales has been the subject of considerable litigation. One article summarizing this litigation states:

Many--perhaps most--courts that have considered the assignability of structured settlement proceeds in the face of anti-assignment clauses have made no reference in their analysis to any possible Article 9 issues. While this omission suggests that those courts found Article 9 to be inapplicable, it sheds no light upon the underlying rationale for this conclusion.

Those courts that have explicitly addressed the Article 9 question have uniformly found it to be inapplicable, although their rationales vary.

Under revised sec. 9-408, the ground rules have changed; the more difficult issue, however, is whether they have changed enough to permit assignments of structured settlement payments. Official Comment 15 to sec. 9-109 states, in part, "Note that once a claim arising in tort has been settled and reduced to a contractual obligation to pay (as in, but not limited to, a structured settlement) the right to payment becomes a payment intangible and ceases to be a claim arising in tort." ⁽²⁸⁾

If this Comment is accurate, the sale of structured settlement payments is now covered by Article 9 and sec. 9-408 comes into play. As noted above, that section invalidates both legal and contractual anti- assignment clauses unless prevented by other law from doing so, but limits the invalidation and any adveres effects on the account debtor by the terms of sec. 9-408(d). ⁽²⁹⁾

Recall that those terms provide that a security interest

(1) is not enforceable against the account debtor

(2) does not impose a duty on the account debtor

(3) does not require the account debtor to recognize the security interest or make payments to the secured party

(4) does not entitle the secured party to use or assign the debtor's rights

(5) does not entitle the secured party to use, assign, possess, or have access to any trade secrets or confidential information.

How do these limitations affect the sale of structured settlement payments under sec. 9-408? Although not addressing this question under sec. 9-408, the court nicely framed the issue in CGU Life Insurance Company v. Singer Asset Finance Company ⁽³⁰⁾ where the court said:

Under a structured settlement agreement, a defendant, its insurer, or its assignee, is obligated to make the payments to the plaintiff. To do so, the defendant or its insurer assigns the obligations to make the payments to a "qualified assignee" who purchases an annuity for the purpose of making the payments. Under current IRS regulations, the qualified assignee is eligible to have any amounts it receives from the annuity excluded from its gross income so long as, among other things, such periodic payments are not "accelerated, deferred, increased, or decreased by the recipient." 26 USC sec. 130(c)(2). Should the IRS determine that the sale or assignment of future benefits to a third party, violates the above listed conditions, such a transfer could jeopardize the tax advantages of the structured settlement agreements under IRS regulations.

* * *

Here, the purpose of the non-assignment clause was to shelter the settlement funds from potential tax liability for CGU. Under the Internal Revenue Code, "qualified assignees" such as CGU Annuity, who assume the liability to make periodic payments on account of a personal injury are eligible to have any amounts they receive pursuant to the transaction excluded from their gross income so long as such periodic payments are not "accelerated, deferred, increased, or decreased by the recipient." 26 USC sec. 130(c)(2). The IRS has not ruled on this issue, but the potential for jeopardizing the tax treatment of the structured settlement in the event of such a ruling, clearly provides a sufficient basis for the parties to contractually preclude such a sale or assignment. A sale or assignment of future payments could constitute a violation of 26 USC sec. 130(c)(2).

If sec. 9-408 is viewed as permitting attachment only to the base collateral, as in the case of the liquor license, but not as giving the secured party any rights against the account debtor, the secured party would have a right to the future payments as proceeds of the base collateral, but no other rights. This could be an important right in bankruptcy as illustrated by In re Berghman ⁽³¹⁾ and In re Kaufman ⁽³²⁾.

In Berghman the debtor assigned his right to receive payments under a structured settlement. As part of the transaction, the debtor instructed the account debtor to send the payments to an address maintained by the assignee. Shortly thereafter the debtor, acting without the assignee's consent, sent a letter to the account debtor asking that payments be sent to the debtor's personal address. Not long after, the debtor filed bankruptcy. In the bankruptcy proceeding, the court held that the pre-petition assignment was not invalid under Florida law and, equally importantly, that the debtor had converted payments belonging to the assignee under the assignment agreement and this justified excepting the amount of these payments from discharge. Furthermore, as to payments not yet made, the court held that these did not become property of the bankruptcy estate but were the property of the assignee.

In Kaufman, responding to certified questions from the Bankruptcy Court for the Western District of Oklahoma, the Oklahoma Supreme Court held that even though an anti-assignment clause was otherwise valid, the bankruptcy debtor/assignor could not assert the invalidity of the assignment on equitable grounds noting, "In Oklahoma, an assignor cannot maintain the inequitable position of asserting, as against its assignee, nonassignability."

There are no reported cases as yet interpreting sec. 9-408 in the context of structured settlements nor discussing the effect of other state laws regulating the assignment of payments under structured settlements. The Appendix does include, however, some recent articles bearing on this issue and a collection of some non-uniform amendments to sec. 9-408.

As to the federal tax issue, perhaps all that can be said at this time is to quote Official Comment 9 to sec. 9-408. That Comment states:

This section does not override federal law to the contrary. However, it does reflect an important policy judgment that should provide a template for future federal law reforms.⁽³³⁾

1. A good discussion of the "dual status rule" and the "transformation rule" appears in In re McAllister, 267 B.R. 614 (Bankr. N.D. Iowa 2001). Based on its analysis of earlier cases, the court chose to apply the dual status rule as the preferable rule. Although not applicable to the case because it arose under former Article 9, the court also noted that revised Article 9 adopts the dual status rule.

2. Section 9-406(d) provides:

(d) Except as otherwise provided in Subsection (e) and Sections 2A.303 and 9.407 , and subject to Subsection (h), a term in an agreement between an account debtor and an assignor or in a promissory note is ineffective to the extent that it:

(1) prohibits, restricts, or requires the consent of the account debtor or person obligated on the promissory note to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in, the account, chattel paper, payment intangible, or promissory note; or

(2) provides that the assignment or transfer or the creation, attachment, perfection, or enforcement of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the account, chattel paper, payment intangible, or promissory note.

3. Section 9-404(a) provides:

(a) Unless an account debtor has made an enforceable agreement not to assert defenses or claims, and subject to Subsections (b)-(e), the rights of an assignee are subject to:

(1) all terms of the agreement between the account debtor and assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract; and

(2) any other defense or claim of the account debtor against the assignor that accrues before the account debtor receives a notification of the assignment authenticated by the assignor or the assignee.

A recent example of a case applying the similar rule found in the former section 9-318 is National City Bank, Northwest v. Columbian Mutual Life Insurance Co., ___ F.3d ___, 2002 WL 269200 (6th Cir., February 27, 2002).

4. Section 9-404(b) provides:

(b) Subject to Subsection (c) and except as otherwise provided in Subsection (d), the claim of an account debtor against an assignor may be asserted against an assignee under Subsection (a) only to reduce the amount the account debtor owes.

5. Section 9-404(c) provides:

(c) This section is subject to law other than this chapter that establishes a different rule for an account debtor who is an individual and who incurred the obligation primarily for personal, family, or household purposes.

An example that might fit this section is a home solicitation sales act that imposes liability for damages on an assignee if a home solicitation contract is assigned in violation of the act.

6. The Federal Trade Commission Holder in Due Course Rule is mandated by 16 C.F.R. secs. 433.1 - 433.3. Under that rule, a consumer credit contract must include one of the two following notices:

For seller-financed sales: ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

For lender-financed sales: ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

The notice must be in capital letters and must be in a least ten-point, bold face type. The notice appearing here meets those requirements.

7. Some states may require notices in circumstances not covered by the FTC rule. For example, the Illinois Motor Vehicle Leasing Act requires a notice similar to that in the FTC rule (which does not govern lease transactions) and imposes liability on an assignee for violations not apparent on the face of the lease agreement. See Jarvis v. South Oak Dodge, Inc., 747 N.E.2d 383 (Ill. App. 2001). This is a stricter rule for lease transactions than that imposed by federal law. See 15 U.S.C. sec. 1641(a) (2000) limiting the liability of assignees for truth in lending violations to violations apparent on the face of the disclosure statement.

8. Section 9-404(d) provides:

(d) In a consumer transaction , if a record evidences the account debtor's obligation, law other than this chapter requires that the record include a statement to the effect that the account debtor's recovery against an assignee with respect to claims and defenses against the assignor may not exceed amounts paid by the account debtor under the record, and the record does not include such a statement, the extent to which a claim of an account debtor against the assignor may be asserted against an assignee is determined as if the record included such a statement.

Thus, in addition to the hypothetical lien creditor of sec. 544 of the Bankruptcy Code, we now have the hypothetical notice of UCC sec. 9-404.

9. Section 9-405 provides:

(a) A modification of or substitution for an assigned contract is effective against an assignee if made in good faith . The assignee acquires corresponding rights under the modified or substituted contract. The assignment may provide that the modification or substitution is a breach of contract by the assignor. This subsection is subject to Subsections (b)-(d).

(b) Subsection (a) applies to the extent that:

(1) the right to payment or a part thereof under an assigned contract has not been fully earned by performance; or

(2) the right to payment or a part thereof has been fully earned by performance and the account debtor has not received notification of the assignment under Section 9.406(a).

(c) This section is subject to law other than this chapter that establishes a different rule for an account debtor who is an individual and who incurred the obligation primarily for personal, family, or household purposes.

(d) This section does not apply to an assignment of a health-care-insurance receivable.

10. Section 9-406(a) provides:

(a) Subject to Subsections (b)-(i), an account debtor on an account , chattel paper , or a payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.

11. Id.

12. 551 S.E.2d 781 (Ga. App. 2001).

13. Section 9-406(f) provides:

(f) Except as otherwise provided in Sections 2A.303 and 9.407 , and subject to Subsections (h) and (i), a rule of law, statute, or regulation that prohibits, restricts, or requires the consent of a government, governmental body or official, or account debtor to the assignment or transfer of, or creation of a security interest in, an account or chattel paper is ineffective to the extent that the rule of law, statute, or regulation:

(1) prohibits, restricts, or requires the consent of the government, governmental body or official, or account debtor to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in, the account or chattel paper; or

(2) provides that the assignment or transfer or the creation, attachment, perfection, or enforcement of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the account or chattel paper.

14. See the Appendix listing of state variations in sections 9-406 and 9-408.

15. The assignability of accounts and the importance of notice are also nicely illustrated by Cadle Company v. Schlichtmann, 258 F.3d 1, 45 U.C.C.Rep.Serv. 19 (1st Cir. 2001, opinion withdrawn from bound volume at request of court, superseding opinion to be issued), where a law firm granted a security interest in the law firm's accounts. Following dissolution of the firm when one of its partners filed bankruptcy, the partner subsequently received payment on a contingent fee for work he performed after the bankruptcy and paid part of the fee to third parties before receiving notice that an assignee had purchased the rights to this later-earned fee. The court held that the bankruptcy discharge did not extinguish the secured claim, but it also held that the partner was not liable in conversion for amounts paid to third parties before he received notice of the assignee's interest.

16. See sec. 9-102(a)(42).

17. Section 9-408(a) provides:

(a) Except as otherwise provided in Subsection (b), a term in a promissory note or in an agreement between an account debtor and a debtor that relates to a health-care-insurance receivable or a general intangible, including a contract, permit, license, or franchise, and which term prohibits, restricts, or requires the consent of the person obligated on the promissory note or the account debtor to, the assignment or transfer of, or creation, attachment, or perfection of a security interest in, the promissory note, health-care-insurance receivable, or general intangible, is ineffective to the extent that the term:

(1) would impair the creation, attachment, or perfection of a security interest; or

(2) provides that the assignment or transfer or the creation, attachment, or perfection of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the promissory note, health-care-insurance receivable, or general intangible.

(b) Subsection (a) applies to a security interest in a payment intangible or promissory note only if the security interest arises out of a sale of the payment intangible or promissory note.

18. Section 9-408(c) provides:

(c) A rule of law, statute, or regulation that prohibits, restricts, or requires the consent of a government, governmental body or official, person obligated on a promissory note, or account debtor to the assignment or transfer of, or creation of a security interest in, a promissory note, health-care-insurance receivable, or general intangible, including a contract, permit, license, or franchise between an account debtor and a debtor, is ineffective to the extent that the rule of law, statute, or regulation:

(1) would impair the creation, attachment, or perfection of a security interest; or

(2) provides that the assignment or transfer or the creation, attachment, or perfection of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the promissory note, health-care-insurance receivable, or general intangible.

19. As with the "override" in sec. 9-406, this is an area of non-uniformity among the several states. See the listing in the Appendix for examples of the variation.

20. As noted in Example 5 in Official Comment 8 to sec. 9-408, which is based on the sale of a franchise, "As consideration for the transfer, the debtor receives from the buyer its check for part of the purchase price and its promissory note for the balance. The security interest attaches to the check and promissory note as proceeds."

21. This effect of the anti-assignment rules in revised Article 9 has been applauded by some, see Thomas E. Plank, The Limited Security Interest in Non-Assignable Collateral Under Revised Article 9, 9 Am. Bankr. Inst. L.Rev. 323 (2001) and strongly criticized by others. See G. Ray Warner, The Anti-Bankruptcy Act: Revised Article 9 and Bankruptcy, 9 Am. Bankr. Inst. L.Rev. 3 (2001).

22. Section 9-409(a) provides:

(a) A term in a letter of credit or a rule of law, statute, regulation, custom, or practice applicable to the letter of credit that prohibits, restricts, or requires the consent of an applicant, issuer, or nominated person to a beneficiary's assignment of or creation of a security interest in a letter-of-credit right is ineffective to the extent that the term or rule of law, statute, regulation, custom, or practice:

(1) would impair the creation, attachment, or perfection of a security interest in the letter-of-credit right; or

(2) provides that the assignment or the creation, attachment, or perfection of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the letter-of-credit right.

23. Section 9-407(a) provides:

(a) Except as otherwise provided in Subsection (b), a term in a lease agreement is ineffective to the extent that it:

(1) prohibits, restricts, or requires the consent of a party to the lease to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in an interest of a party under the lease contract or in the lessor's residual interest in the goods; or

(2) provides that the assignment or transfer or the creation, attachment, perfection, or enforcement of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the lease.

24. Section 9-407(c) provides:

(c) The creation, attachment, perfection, or enforcement of a security interest in the lessor's interest under the lease contract or the lessor's residual interest in the goods is not a transfer that materially impairs the lessee's prospect of obtaining return performance or materially changes the duty of or materially increases the burden or risk imposed on the lessee within the purview of Section 2A.303(d) unless, and then only to the extent that, enforcement actually results in a delegation of material performance of the lessor.

25. Steven L. Schwarcz, The Impact on Securitization of Revised UCC Article 9, 74 Chi.-Kent L.Rev. 947 (1999). This article was part of a symposium on revised Article 9 published as Vol. 74, No. 3 by the Chicago-Kent Law Review. The symposium is a "must read" resource on revised Article 9.

26. Steven L. Schwarcz, The Impact of Securitization of Revised UCC Article 9, 74 Chi.-Kent L.Rev. 947, 958 -960 (1999).

27. This outline of structured settlements was provided by the courtesy of my colleague, Professor Marilyn Phelan who teaches taxation and related courses at the Texas Tech Law School.

28. Whether the courts will treat this Comment as an accurate expression of whether structured settlements are now within the scope of Article 9 is already open to some question. In In re Kaufman, 37 P.3d 845 (Okla. 2001), the court, after noting that sec. 9-318 had been repealed, said in dicta, "[S]ection 9-109(d)(8) exempts transfers of interests to or an assignment of a claim under an insurance policy. Annuities are insurance policies which inversely treat life expectancy." 37 P.3d at fn 13. The court did not mention the Official Comment.

29. The text of sec. 9-408(d) appears in the text following note 16, supra.

30. 553 S.E.2d 8, 2001 WL 770911 (Ga. App. 2001).

31. 235 B.R. 683 (Bankr. M.D. Fla. 1999).

32. 37 P.3d 845 (Okla. 2001).

33. As to the interaction of state and federal law regarding the assignment of structured settlements, see the discussion in In re Granati, 270 B.R. 575, 587-90 (Bankr. E.D. Va. 2001).

Samples of Non-uniform Amendments to Sections 9-406 and 9-408:
(Note: The American Bar Association Commercial Financial Services website includes a chart summarizing state variations on the assignment of claims when a state is the account debtor. See http://www.abanet.org/buslaw/cfs/claims.html

Section 9-406

Ten states (Alabama, Arizona, Delaware, Iowa, Nebraska, North Carolina, Rhode Island, South Dakota, Tennessee, and Wyoming), have a provision similar to the following:

This section prevails over any inconsistent provision of an existing or future statute, rule, or regulation of this state unless the provision is contained in a statute of this state, refers expressly to this section and states that the provision prevails over this section.

Section 9-408

Fourteen states (Alabama, Alaska, Arizona, Delaware, Indiana, Iowa, Kentucky, Maryland, Montana, Nebraska, North Carolina, Rhode Island, South Dakota, Tennessee, and Wyoming) have a provision similar to the following:

This section prevails over any inconsistent provision of an existing or future statute, rule, or regulation of this State unless the provision is contained in a statute of this State, refers expressly to this section, and states that the provision prevails over this section.

Other Variations in Sections 9-406 and 9-408

New York

Section 9-406 was amended by adding a non-uniform provision prohibiting (1) the assignment of health care insurance receivables to the extent such assignment conflicts with other law, (2) the assignment of a claim or right to receive compensation for injuries or sickness described in 26 U.S.C. sec. 104(A)(1) & (2), (3) the assignment of a claim or right to receive benefits under a special needs trust as described in 42 U.S.C. sec. 1396P(d)(4). A similar provision was added to sec. 9-408. In In re Chorney, 277 B.R. 477 (Bankr. W.D.N.Y. 2002), the court upheld a security interest granted in a structured settlement under former sec. 9-318, but specifically noted that, because of the non-uniform amendment in revised Article 9, the secured party would have been unable to obtain a valid security interest in the stuctured settlement payments "because Revised Article 9 does not apply to a right to receive compensation for injuries or sickness as described in 26 U.S.C. Section 104(a)(1) and (2), and the Settlement Agreement specifically sets forth that the Payments to the Debtor are damages for such injury." 277 B.R. at 490.

North Carolina

[T]his section does not apply to an assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in, a right the transfer of which is prohibited or restricted by any of the following statutes to the extent that the statute is inconsistent with subsection (...) of this section: North Carolina Structured Settlement Act (Article 44B of Chapter 1 of the General Statutes); North Carolina Crime Victims Compensation Act (Chapter 15B of the General Statutes); North Carolina Consumer Finance Act (Article 15 of Chapter 53 of the General Statutes); North Carolina Firemen's and Rescue Squad Workers' Pension Fund (Article 86 of Chapter 58 of the General Statutes); Employment Security Law (Chapter 96 of the General Statutes); North Carolina Workers' Compensation Act (Article 1 of Chapter 97 of the General Statutes); and Programs of Public Assistance (Article 2 of Chapter 108A of the General Statutes). [This section appears in both 9-406 and 9-408].

Kentucky

(5) This section [9-408] prevails over any inconsistent provisions of the following statutes and any administrative regulations based on those statutes: KRS 56.230(2), 138.320(3), 138.665(4), 138.720(5), 139.250, 154A.400(3), 190.047(1), 190.070(2)(c), 217B.535(2), 228.070(2), 230.300(9), 234.330(10), 243.630(2), 260.730(3), 260.815, 288.460(2), 292.320(2)(b), 294.036(3), 304.3-410(2)(f), 304.3-520(5), 333.080, 350.135(1), 365.430(27), and 368.070(2).

(6) Subsection (3) [ineffectiveness of other laws] of this section does not apply to the following statutes and to administrative regulations promulgated under the authority of those statutes: KRS 304.2-260, KRS 304.24-420, Subtitle 33, of KRS Chapter 304, and Subtitle 37 of KRS Chapter 304.

Texas

Texas has adopted non-uniform provisions similar to those of New York described above but did not specifically relate them to secs. 9-406 and 9-408. See Tex. Bus. & Com. Code Ann., Ch. 9 (2002 Supp.)

Wyoming

Subsection (c) of this section [9-408] does not apply to an assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in, a right the transfer of which is prohibited or restricted by any of the following statutes, to the extent that the statute is inconsistent with subsection (c) of this section: W.S. 1-40-113, 26-15-132 and 27-14-702.

G. Ray Warner, The Anti-Bankruptcy Act: Revised Article 9 and Bankruptcy, 9 Am. Bankr. Inst. L.Rev. 3 (2001)

Thomas E. Plank, The Limited Security Interest in Non-Assignable Collateral Under Revised Article 9, 9 Am. Bankr. Inst. L.Rev. 323 (2001)

Steven O. Weise, The Financing of Intellectual Property Under Revised Article 9, 74 Chi.-Kent L.Rev. 1077 (1999)

C. Scott Pryor, Revised Uniform Commercial Code Article 9: Impact in Bankruptcy, 7 Am. Bankr. Inst. L.Rev. 465 (1999)

Gregory Scott Crespi, Selling Structured Settlements: The Uncertain Effect of Anti-Assignment Clauses, 28 Pepperdine L.Rev. 787 (2001)