Anti-Assignment Clause in Promissory Note Enforceable under Delaware Law to Disallow Claim Transfer

Morris James LLP

On June 20, 2018, Judge Carey of the Delaware Bankruptcy Court issued an opinion in the Woodbridge Group of Companies bankruptcies enforcing an anti-assignment clause contained in a promissory note to restrict assignment rights to third parties.  The opinion and order (a copy found here, and dated June 20, 2017), nullified the attempted transfer of a promissory note and resulting proof of claim filed by the transferee.  The Court found that the anti-assignment clause in the notes was enforceable under Delaware law, the tenets of contract law and the Uniform Commercial Code.  

Sustaining the debtors' claim objection, the Bankruptcy Court found that the anti-assignment clause contained in promissory notes with the debtors was legally valid and voided the transfer of the notes.  Prior to the bankruptcy, in 2016 and 2017, debtor Woodbridge Mortgage Investment Fund 3A, LLC (the “Fund”) issued three promissory notes to Elissa and Joseph Berlinger in the principal amount of $25,000 each (the “Promissory Notes”). The Promissory Notes contained the following anti-assignment clause:

14. No Assignment. Neither this Note, the Loan Agreement of even date herewith between Borrower and Lender, nor all other instruments executed or to be executed in connection therewith (collectively, the “Collateral Assignment Documents”) are assignable by Lender without the Borrower’s written consent and any such attempted assignment without such consent shall be null and void.

As one of the Collateral Assignment Documents, the Loan Agreement, executed between the Debtors and the Berlingers, contains supplementary language in § 4(d):

(d) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that Lender shall not assign, voluntarily, by operation of law or otherwise, any of its rights hereunder without the prior written consent of Woodbridge and any such attempted assignment without such consent shall be null and void….

On February 13, 2018, the Berlingers and Contrarian Funds, LLC entered into an agreement, in which the Berlingers would “sell, convey, transfer and assign” the Promissory Notes and the corresponding rights thereunder to Contrarian.  Contrarian subsequently filed a proof of claim asserting a secured claim of $75,000 against the Fund.  The Debtors filed a claim objection pursuant to section 502(a) of the Bankruptcy Code.  

The Court reviewed Delaware law and the recent Superior Court decision of Southeastern Chester Cty. Refuse Authority v. BFI Waste Servs. of Penn., LLC, 2017 WL 2799160 (Del. Super. Ct. June 27, 2017).  The Court noted that Delaware courts, while "recogniz[ing] the validity of clauses limiting a party’s ability to assign its rights, generally construe such provisions narrowly because of the importance of free assignability."  Op. at 4 quoting Southeastern.  The Court also looked to the Restatement (Second) of Contracts and specifically § 322(1) thereof, which is based upon UCC § 2-210(3), which applies to contracts for the sale of goods, which does not apply to instruments such as promissory notes (see § 9-102(a) of the UCC).

The Court found that the anti-assignment clause and the Loan Agreement to be clear and unambiguous.  Any assignment of the Promissory Notes or any rights thereunder, absent the Fund's consent, was null and void.  The breach of the Promissory Notes by the Debtors did not render the anti-assignment clause unenforceable.  A non-breaching party may not emerge post-breach with more rights than it had pre-breach.  Op. at 8 citing S & R Corp. v. Jiffy Lube Int'l, Inc., 969 F.2d 371, 376 (3d Cir. 1992).  In its analysis, the Court also distinguished the case of Hipcricket, Inc. v. mGage LLC, 2016 WL 3910837 (Del Ch. July 15, 2016), which is discussed in more detail in this Morris James blog post.  The Court looked to its prior decision in In re KB Toys, Inc., 470 B.R. 331 (Bankr. D.Del. 2012), aff'd sub nom., 736 F.3d 247 (3d Cir. 2013) to conclude that the claim's purchaser holds the claim subject to the same rights and disabilities under Bankruptcy Code section 502(d) as does the original claimant.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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