The debtor objected to a creditor’s proof of claim on the grounds that transfer of the claim to the creditor was unenforceable against the debtor because it violated anti-assignment provisions in the applicable promissory notes and loan agreements. The bankruptcy court rejected the creditor’s argument that the anti-assignment provisions were unenforceable and sustained the objection (without prejudice to the right of the assignor to file a proof of claim). The creditor appealed to the district court.
The debtor was one of hundreds of affiliated debtors used to perpetuate a Ponzi scheme. At issue in this case were three $25,000 promissory notes. Each note contained the following clause:
No Assignment. Neither this Note, the Loan Agreement of even date herewith … nor all other instruments executed or to be executed in connection there with … are assignable by [the lender] without the [debtor’s] written consent and any such attempted assignment without such consent shall be null and void.
Each accompanying loan agreement contained the same restriction.
Notwithstanding the prohibition on assignment without consent, shortly after the debtor filed bankruptcy the lender executed an Evidence of Transfer of Claim and entered into a Transfer of Claim Agreement with the creditor. The agreement provided that the lender “agreed to ‘sell, convey, transfer and assign’ to [the creditor], inter alia, ‘all causes of action held by [the lender]’ in connection with the transferred documents and the transferred claims.” The debtor did not consent to the transfer.
As a preliminary matter, the court rejected creditor’s argument that FRBP 3000(e) reflected a policy of free assignability of claims. As the bankruptcy court noted, this bankruptcy rule merely acknowledges that claim trading occurs and provides procedures relating to the transfers. Rather there was nothing in the Bankruptcy Code or bankruptcy policy that would preclude the court from enforcing non-bankruptcy law restricting transfers.
In that regard, applicable state law (Delaware) recognized the validity of restrictions on subsequent assignment of a party’s rights, although the restrictions are to be narrowly construed. The bankruptcy court explained that “the modern approach to assignment clauses ‘is to distinguish between the power to assign and the right to assign.'”
If a party’s power to assign is restricted, the assignment is void. However, this requires express language that the subsequent assignment will be void or invalid. Otherwise, the provision merely restricts the right to assign. In that case, an assignment will be valid and enforceable, although it will give rise to a breach of contract action.
In this case, the documents included express language that assignment without consent “shall be null and void.” Consequently, the anti-assignment provisions constituted a restriction on power and the assignment was void.
The creditor countered that the provision should be narrowly construed to prohibit assignment of the notes themselves, but not the additional “claims, causes of action, and rights to payment.” In support the creditor cited to a Restatement of Contracts section stating: “Unless the circumstances indicate to the contrary, a contract term prohibiting assignment of ‘the contract’ bars only the delegation to an assignee of the performance by the assignor of a duty or condition.” However, the Restatement also included a comment clarifying that this did not invalidate anti-assignment provisions. It just required that they be unambiguous. The court reviewed various terms in the loan documents and concluded that it was unambiguous that the restriction extended to rights, claims and causes of action.
Thus, the district court agreed with the bankruptcy court that there was an unambiguous restriction on the power to assign, rather than a mere contractual provision barring the right to assign.
The court also agreed with the bankruptcy court that payment defaults under the notes did not bar enforcement of the anti-assignment clauses. The court further agreed that portions of section 9-408 of the UCC providing that certain anti-assignment clauses were unenforceable applied only to the grant of a security interest in a promissory note, not an outright sale of the note.
Accordingly, the district court affirmed the bankruptcy court decision.
This case brings back fond memories of working with Professor Layman E. Allen’s Legal Relations Language, which built on Wesley Hohfeld’s concepts (as discussed in a 1913 Yale Law Journal article and a later book). In particular, reducing legal relations to rights and duties can be problematic. Adding concepts of power, privilege and immunity to rights can bring clarity to analysis of legal problems.
Vicki R Harding, Esq.