Does this no-assignment clause stop the other side from assigning its receivables or pledging them to a lender?
Mostly no. Under Cal. Com. Code § 9406(d) a term in an agreement between an account debtor and an assignor, or in a promissory note, is INEFFECTIVE to the extent it prohibits, restricts, or requires consent to the assignment or transfer of, or the creation, attachment, perfection or enforcement of a security interest in, an account, chattel paper, a payment intangible or a promissory note, and equally ineffective to the extent it makes such an assignment a default, breach, right of recoupment, defence, termination or other remedy.
The trap
The override is narrower than drafters on both sides assume, and the carve-outs are in the same section. Subdivision (e) takes the SALE of a payment intangible or promissory note (other than a sale on a disposition under § 9610 or an acceptance under § 9620) outside subdivision (d); subdivision (k) provides that subdivisions (d), (f) and (j) do not apply to a security interest in an OWNERSHIP INTEREST in a general partnership, limited partnership or limited liability company; subdivision (h) makes the section subject to other law establishing a different rule for an account debtor who is an individual and incurred the obligation primarily for personal, family or household purposes; and subdivision (i) takes the section off altogether for an assignment of a HEALTH CARE INSURANCE RECEIVABLE. Subdivision (d) is also expressly subject to Sections 9407 and 10303: § 9407 states its own rule making a term in a LEASE agreement restricting assignment or a security interest ineffective, with stated exceptions, and § 10303 governs transfers of an interest under a lease contract. So the clause is ineffective as to ordinary trade receivables and remains operative as to a security interest in an LLC membership interest. This rule does not address anti-assignment clauses covering other contract rights.
10 authorities
- statuteCal. Com. Code § 9406enactment date not established
The words that state the rule
(d) In this subdivision, “promissory note” includes a negotiable instrument that evidences chattel paper. Except as otherwise provided in subdivisions (e) and (k) and in Sections 9407 and 10303, and subject to subdivision (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 does either of the following: (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. (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.
- statuteCal. Com. Code § 9406enactment date not established
The words that state the rule
(e) Subdivision (d) does not apply to the sale of a payment intangible or promissory note, other than a sale pursuant to a disposition under Section 9610 or an acceptance of collateral under Section 9620.
- statuteCal. Com. Code § 9406enactment date not established
The words that state the rule
(h) This section is subject to law other than this division which establishes a different rule for an account debtor who is an individual and who incurred the obligation primarily for personal, family, or household purposes.
- statuteCal. Com. Code § 9406enactment date not established
The words that state the rule
(k) Subdivisions (d), (f), and (j) do not apply to a security interest in an ownership interest in a general partnership, limited partnership, or limited liability company.
- statuteCal. Com. Code § 9407enactment date not established
The words that state the rule
(a) Except as otherwise provided in subdivision (b), a term in a lease agreement is ineffective to the extent that it does either of the following: (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. (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. (b) Except as otherwise provided in subdivision (g) of Section 10303, a term described in paragraph (2) of subdivision (a) is effective to the extent that there is either of the following: (1) A transfer by the lessee of the lessee’s right of possession or use of the goods in violation of the term. (2) A delegation of a material performance of either party to the lease contract in violation of the term. (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 subdivision (d) of Section 10303 unless, and then only to the extent that, enforcement actually results in a delegation of material performance of the lessor.
- statuteCal. Com. Code § 10303enactment date not established
The words that state the rule
(b) Except as provided in subdivision (c) and Section 9407, a provision in a lease agreement which (1) prohibits the voluntary or involuntary transfer, including a transfer by sale, sublease, creation or enforcement of a security interest, or attachment, levy, or other judicial process, of an interest of a party under the lease contract or of the lessor’s residual interest in the goods, or (2) makes such a transfer an event of default, gives rise to the rights and remedies provided in subdivision (d), but a transfer that is prohibited or is an event of default under the lease agreement is otherwise effective.
- statuteCal. Com. Code § 10303enactment date not established
The words that state the rule
(c) A provision in a lease agreement which (1) prohibits a transfer of a right to damages for default with respect to the whole lease contract or of a right to payment arising out of the transferor’s due performance of the transferor’s entire obligation, or (2) makes such a transfer an event of default, is not enforceable, and such a transfer is not a transfer that materially impairs the prospect of obtaining return performance by, materially changes the duty of, or materially increases the burden or risk imposed on, the other party to the lease contract within the purview of subdivision (d).
- statuteCal. Com. Code § 9406enactment date not established
The words that state the rule
(i) This section does not apply to an assignment of a health care insurance receivable.
- statuteCal. Com. Code § 10303enactment date not established
The words that state the rule
(d) Subject to subdivision (c) and Section 9407: (1) If a transfer is made which is made an event of default under a lease agreement, the party to the lease contract not making the transfer, unless that party waives the default or otherwise agrees, has the rights and remedies described in subdivision (b) of Section 10501. (2) If paragraph (1) is not applicable and if a transfer is made that (A) is prohibited under a lease agreement or (B) materially impairs the prospect of obtaining return performance by, materially changes the duty of, or materially increases the burden or risk imposed on, the other party to the lease contract, unless the party not making the transfer agrees at any time to the transfer in the lease contract or otherwise, then, except as limited by contract, (C) the transferor is liable to the party not making the transfer for damages caused by the transfer to the extent that the damages could not reasonably be prevented by the party not making the transfer and (D) a court having jurisdiction may grant other appropriate relief, including cancellation of the lease contract or an injunction against the transfer.
- statuteCal. Com. Code § 10303enactment date not established
The words that state the rule
(g) In a consumer lease, to prohibit the transfer of an interest of a party under the lease contract or to make a transfer an event of default, the language must be specific, by a writing, and conspicuous.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.