Does a no-assignment clause actually stop an assignment of receivables, or of an interest in a Delaware LLC or partnership?
For accounts, chattel paper, payment intangibles and promissory notes, Delaware's Article 9 makes the clause ineffective: a term in an agreement between an account debtor and an assignor, or in a promissory note, that prohibits, restricts or requires consent to the assignment or transfer of, or the creation, attachment, perfection or enforcement of a security interest in, that collateral, or that makes the assignment a default, breach, right of recoupment, claim, defence, termination or remedy, has no effect (except as provided in subsection (e) and Sections 2A-303 and 9-407, and subject to subsection (h)). Subsection (i) takes whole categories out of the section entirely, including an interest in a trust governed by Delaware law and an interest in a partnership or limited liability company.
The trap
The override stops at entity and trust interests. Section 9-406(i)(5) says the section does not apply to 'an interest in a partnership or limited liability company', and (i)(4) does the same for an interest in a trust to the extent Delaware law governs it. So a transfer restriction in an LLC or LP agreement is NOT rendered ineffective by 9-406 and must be dealt with on its own terms, and § 9-408, the general-intangibles section a secured lender would reach for next, carries the same carve-out in its (e)(4), while the same clause in a supply contract covering receivables is dead letter. Subsection (d) also does not reach the sale of a payment intangible or promissory note (subsection (e)), unless the sale is a Section 9-610 disposition or a Section 9-620 acceptance of collateral, where (d) applies after all, and subsection (h) yields, for an individual account debtor who incurred the obligation primarily for personal, family or household purposes, to any other law that establishes a different rule.
5 authorities
- statute6 Del. C. § 9-406enactment date not established
The words that state the rule
(d) Term restricting assignment generally ineffective. — In this subsection, “promissory note” includes a negotiable instrument that evidences chattel paper. 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.
- statute6 Del. C. § 9-406enactment date not established
The words that state the rule
(i) Inapplicability. — This section does not apply to: (1) an assignment of a health-care-insurance receivable; (2) a claim or right to receive compensation for injuries or sickness as described in 26 U.S.C. § 104(a)(1) or (2), as amended from time to time; (3) a claim or right to receive benefits under a special needs trust as described in 42 U.S.C. § 1396p(d)(4), as amended from time to time; (4) an interest in a trust, including any right or power of a beneficiary (including a settlor) or owner of a trust, arising under a governing instrument (as defined in Section 3301(e) of Title 12), Title 12, or other applicable law, to the extent that Delaware law governs such interest; or (5) an interest in a partnership or limited liability company.
- statute6 Del. C. § 9-406enactment date not established
The words that state the rule
(e) Inapplicability of subsection (d) to certain sales. — Subsection (d) does not apply to the sale of a payment intangible or promissory note, other than a sale pursuant to a disposition under Section 9-610 or an acceptance of collateral under Section 9-620.
- statute6 Del. C. § 9-406enactment date not established
The words that state the rule
(h) Rule for individual under other law. — This section is subject to law other than this Article 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.
- statute6 Del. C. § 9-408enactment date not established
The words that state the rule
(e) Inapplicability. — This section does not apply to: (1) a claim or right to receive compensation for injuries or sickness as described in 26 U.S.C. § 104(a)(1) or (2), as amended from time to time; (2) a claim or right to receive benefits under a special needs trust as described in 42 U.S.C. § 1396p(d)(4), as amended from time to time; (3) an interest in a trust, including any right or power of a beneficiary (including the settlor) or owner of a trust, arising under a governing instrument (as defined in Section 3301(e) of Title 12), Title 12, or other applicable law, to the extent that Delaware law governs such interest; or (4) an interest in a partnership or limited liability company.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.