Affirming an opinion by Bankruptcy Judge Kevin Carey, who stepped down from the bench at the end of August, a district judge in Delaware held that a proof of claim will be expunged if the note and loan agreement underlying the claim prohibit assignment and provide that assignment without consent will be “null and void.”
A creditor had loaned $75,000 to the debtor, documented with promissory notes and a loan agreement. The two documents contained identical provisions prohibiting assignment without the debtor’s written consent. The documents went on to provide that “any such attempted assignment without such consent shall be null and void.”
You guessed it! A claim purchaser nonetheless bought the claim and filed a proof of claim in the debtor’s chapter 11 case. The debtor objected to the allowance of the claim.
Without prejudice to the ability of the original lender to file a claim, Bankruptcy Judge Carey disallowed the claim filed by the claim purchaser. He was upheld on September 11 by District Judge Leonard P. Stark. Judge Carey announced this week that he is joining the Philadelphia office of Hogan Lovells as a partner. He served as a bankruptcy judge for 19 years in Delaware and Philadelphia.
The Distinction Between the Right and Power to Assign
On appeal, the claim purchaser argued that disallowance of the claim violated a policy of “free assignability” allegedly contained in Bankruptcy Rule 3001(e), dealing with the transfer of claims.
As he did throughout, Judge Stark copiously quoted Judge Carey. Regarding the alleged policy, Judge Stark quoted Judge Carey as saying, “I am aware of no provision in the Bankruptcy Code or of any overarching bankruptcy policy which impairs the Court’s authority to determine and enforce applicable non-bankruptcy law concerning contract provisions which may restrict transfers of claims.” In re Woodbridge Group of Companies LLC, 590 B.R. 99, 103 (Bankr. D. Del. 2018).
Again adopting Judge Carey’s analysis, Judge Stark illuminated the difference between prohibiting the right or prohibiting the power to assign. Quoting Judge Carey, Judge Stark said there must be “express language that any such subsequent assignment will be void or invalid” before the contract clause “prohibits the power to assign.” Id. at 103-104 (quoting Southeastern Chester County Refuse Authority v. BFI Waste Services of Pennsylvania LLC, 2017 WL 2799160 at *5 (Del. Super. Ct. June 27, 2017)).
If a contract “limits a party’s right to assign instead of the power to do so, the assignment is valid and enforceable but generates a breach of contract action that the non-assigning party may bring against the party assigning its interest.” Id.
Because the note and loan agreement contained clear language making an unauthorized assignment null and void, Judge Stark said that Judge Carey correctly ruled that the transfer of the claim was invalid because the contract barred the power to assign, not just the right to assign.
Next, the claim purchaser contended that the debtor’s breach of the notes and loan agreement made the anti-assignment provision unenforceable. Quoting Judge Carey once again, Judge Stark said it is “axiomatic” that the debtor’s breach did not give more rights to the claim purchaser than it had before the breach.
Finally, the claim purchaser argued that UCC § 9-408(a) made the anti-assignment clause unenforceable. Judge Stark agreed with Judge Carey’s “well-reasoned conclusion” that § 9-408(a) “applies only to transactions that grant a security interest in a promissory note, not to outright sales of promissory notes.”
Affirming an opinion by Bankruptcy Judge Kevin Carey, who stepped down from the bench at the end of August, a district judge in Delaware held that a proof of claim will be expunged if the note and loan agreement underlying the claim prohibit assignment and provide that assignment without consent will be “null and void.”
A creditor had loaned $75,000 to the debtor, documented with promissory notes and a loan agreement. The two documents contained identical provisions prohibiting assignment without the debtor’s written consent. The documents went on to provide that “any such attempted assignment without such consent shall be null and void.”
You guessed it! A claim purchaser nonetheless bought the claim and filed a proof of claim in the debtor’s chapter 11 case. The debtor objected to the allowance of the claim.
Without prejudice to the ability of the original lender to file a claim, Bankruptcy Judge Carey disallowed the claim filed by the claim purchaser. He was upheld on September 11 by District Judge Leonard P. Stark. Judge Carey announced this week that he is joining the Philadelphia office of Hogan Lovells as a partner. He served as a bankruptcy judge for 19 years in Delaware and Philadelphia.