(a) Subject to Subsections (b) through (i) of this section, an account debtor on an account, chattel paper or a payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.

(b) Subject to Subsection (h) of this section, notification is ineffective under Subsection (a) of this section:

(1) if it does not reasonably identify the rights assigned;

(2) to the extent that an agreement between an account debtor and a seller of a payment intangible limits the account debtor's duty to pay a person other than the seller and the limitation is effective under law other than Chapter 55, Article 9 NMSA 1978; or

(3) at the option of an account debtor, if the notification notifies the account debtor to make less than the full amount of any installment or other periodic payment to the assignee, even if:

(A) only a portion of the account, chattel paper or payment intangible has been assigned to that assignee;

(B) a portion has been assigned to another assignee; or

(C) the account debtor knows that the assignment to that assignee is limited.

(c) Subject to Subsection (h) of this section, if requested by the account debtor, an assignee shall seasonably furnish reasonable proof that the assignment has been made. Unless the assignee complies, the account debtor may discharge its obligation by paying the assignor, even if the account debtor has received a notification under Subsection (a) of this section.

(d) Except as otherwise provided in Subsection (e) of this section and Sections 55-2A-303 and 55-9-407 NMSA 1978, and subject to Subsection (h) of this section, 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.

(e) Subsection (d) of this section does not apply to the sale of a payment intangible or promissory note, other than a sale pursuant to a disposition under Section 55-9-610 NMSA 1978 or an acceptance of collateral under Section 55-9-620 NMSA 1978.

(f) Except as otherwise provided in Sections 55-2A-303 and 55-9-407 NMSA 1978 and subject to Subsections (h) and (i) of this section, a rule of law, statute or regulation that prohibits, restricts or requires the consent of a government, governmental body or official, or account debtor to the assignment or transfer of, or creation of a security interest in, an account or chattel paper is ineffective to the extent that the rule of law, statute or regulation:

(1) prohibits, restricts or requires the consent of the government, governmental body or official, or account debtor to the assignment or transfer of, or the creation, attachment, perfection or enforcement of a security interest in the account or chattel paper; 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 or chattel paper.

(g) Subject to Subsection (h) of this section, an account debtor may not waive or vary its option under Paragraph (3) of Subsection (b) of this section.

(h) This section is subject to law other than Chapter 55, Article 9 NMSA 1978 that establishes a different rule for an account debtor who is an individual and who incurred the obligation primarily for personal, family or household purposes.

(i) This section does not apply to an assignment of a health-care-insurance receivable.

(j) This section is subject to laws other than Chapter 55, Article 9 NMSA 1978 to the extent that those laws prohibit or restrict the assignment, transfer of or creation of a security interest in benefits, compensation, any other account or chattel paper.

History: 1978 Comp., § 55-9-406, enacted by Laws 2001, ch. 139, § 68; 2013, ch. 137, § 10.

OFFICIAL COMMENTS

UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.

1. Source. Former section 9-318(3), (4).

2. Account Debtor's Right to Pay Assignor Until Notification. Subsection (a) provides the general rule concerning an account debtor's right to pay the assignor until the account debtor receives appropriate notification. The revision makes clear that once the account debtor receives the notification, the account debtor cannot discharge its obligation by paying the assignor. It also makes explicit that payment to the assignor before notification, or payment to the assignee after notification, discharges the obligation. No change in meaning from former section 9-318 is intended. Nothing in this section conditions the effectiveness of a notification on the identity of the person who gives it. An account debtor that doubts whether the right to payment has been assigned may avail itself of the procedures in subsection (c). See comment 4.

An effective notification under subsection (a) must be authenticated. This requirement normally could be satisfied by sending notification on the notifying person's letterhead or on a form on which the notifying person's name appears. In each case the printed name would be a symbol adopted by the notifying person for the purpose of identifying the person and adopting the notification. See section 9-102 (defining "authenticate").

Subsection (a) applies only to account debtors on accounts, chattel paper, and payment intangibles. (Section 9-102 defines the term "account debtor" more broadly, to include those obligated on all general intangibles.) Although subsection (a) is more precise than its predecessor, it probably does not change the rule that applied under former article 9. Former section 9-318(3) referred to the account debtor's obligation to "pay," indicating that the subsection was limited to account debtors on accounts, chattel paper, and other payment obligations.

3. Limitations on Effectiveness of Notification. Subsection (b) contains some special rules concerning the effectiveness of a notification under subsection (a).

Subsection (b)(1) tracks former section 9-318(3) by making ineffective a notification that does not reasonably identify the rights assigned. A reasonable identification need not identify the right to payment with specificity, but what is reasonable also is not left to the arbitrary decision of the account debtor. If an account debtor has doubt as to the adequacy of a notification, it may not be safe in disregarding the notification unless it notifies the assignee with reasonable promptness as to the respects in which the account debtor considers the notification defective.

Subsection (b)(2), which is new, applies only to sales of payment intangibles. It makes a notification ineffective to the extent that other law gives effect to an agreement between an account debtor and a seller of a payment intangible that limits the account debtor's duty to pay a person other than the seller. Payment intangibles are substantially less fungible than accounts and chattel paper. In some (e.g., commercial bank loans), account debtors customarily and legitimately expect that they will not be required to pay any person other than the financial institution that has advanced funds.

It has become common in financing transactions to assign interests in a single obligation to more than one assignee. Requiring an account debtor that owes a single obligation to make multiple payments to multiple assignees would be unnecessarily burdensome. Thus, under subsection (b)(3), an account debtor that is notified to pay an assignee less than the full amount of any installment or other periodic payment has the option to treat the notification as ineffective, ignore the notice, and discharge the assigned obligation by paying the assignor. Some account debtors may not realize that the law affords them the right to ignore certain notices of assignment with impunity. By making the notification ineffective at the account debtor's option, subsection (b)(3) permits an account debtor to pay the assignee in accordance with the notice and thereby to satisfy its obligation pro tanto. Under subsection (g), the rights and duties created by subsection (b)(3) cannot be waived or varied.

4. Proof of Assignment. Subsection (c) links payment with discharge, as in subsection (a). It follows former section 9-318(3) in referring to the right of the account debtor to pay the assignor if the requested proof of assignment is not seasonably forthcoming. Even if the proof is not forthcoming, the notification of assignment would remain effective, so that, in the absence of reasonable proof of the assignment, the account debtor could discharge the obligation by paying either the assignee or the assignor. Of course, if the assignee did not in fact receive an assignment, the account debtor cannot discharge its obligation by paying a putative assignee who is a stranger. The observations in comment 3 concerning the reasonableness of an identification of a right to payment also apply here. An account debtor that questions the adequacy of proof submitted by an assignor would be well advised to promptly inform the assignor of the defects.

An account debtor may face another problem if its obligation becomes due while the account debtor is awaiting reasonable proof of the assignment that it has requested from the assignee. This section does not excuse the account debtor from timely compliance with its obligations. Consequently, an account debtor that has received a notification of assignment and who has requested reasonable proof of the assignment may discharge its obligation by paying the assignor at the time (or even earlier if reasonably necessary to avoid risk of default) when a payment is due, even if the account debtor has not yet received a response to its request for proof. On the other hand, after requesting reasonable proof of the assignment, an account debtor may not discharge its obligation by paying the assignor substantially in advance of the time that the payment is due unless the assignee has failed to provide the proof seasonably.

5. Contractual Restrictions on Assignment. Former section 9-318(4) rendered ineffective an agreement between an account debtor and an assignor which prohibited assignment of an account (whether outright or to secure an obligation) or prohibited a security assignment of a general intangible for the payment of money due or to become due. Subsection (d) essentially follows former section 9-318(4), but expands the rule of free assignability to chattel paper (subject to sections 2A-303 and 9-407) and promissory notes and explicitly overrides both restrictions and prohibitions of assignment. The policies underlying the ineffectiveness of contractual restrictions under this section build on common-law developments that essentially have eliminated legal restrictions on assignments of rights to payment as security and other assignments of rights to payment such as accounts and chattel paper. Any that might linger for accounts and chattel paper are addressed by new subsection (f). See comment 6.

Former section 9-318(4) did not apply to a sale of a payment intangible (as described in the former provision, "a general intangible for money due or to become due") but did apply to an assignment of a payment intangible for security. Subsection (e) continues this approach and also makes subsection (d) inapplicable to sales of promissory notes. Section 9-408 addresses anti-assignment clauses with respect to sales of payment intangibles and promissory notes.

Like former section 9-318(4), subsection (d) provides that anti-assignment clauses are "ineffective." The quoted term means that the clause is of no effect whatsoever; the clause does not prevent the assignment from taking effect between the parties and the prohibited assignment does not constitute a default under the agreement between the account debtor and assignor. However, subsection (d) does not override terms that do not directly prohibit, restrict, or require consent to an assignment but which might, nonetheless, present a practical impairment of the assignment. Properly read, however, subsection (d) reaches only covenants that prohibit, restrict, or require consents to assignments; it does not override all terms that might "impair" an assignment in fact.

Example: Buyer enters into an agreement with Seller to buy equipment that Seller is to manufacture according to Buyer's specifications. Buyer agrees to make a series of prepayments during the construction process. In return, Seller agrees to set aside the prepaid funds in a special account and to use the funds solely for the manufacture of the designated equipment. Seller also agrees that it will not assign any of its rights under the sale agreement with Buyer. Nevertheless, Seller grants to Secured Party a security interest in its accounts. Seller's anti-assignment agreement is ineffective under subsection (d); its agreement concerning the use of prepaid funds, which is not a restriction or prohibition on assignment, is not. However, if Secured Party notifies Buyer to make all future payments directly to Secured Party, Buyer will be obliged to do so under subsection (a) if it wishes the payments to discharge its obligation. Unless Secured Party releases the funds to Seller so that Seller can comply with its use-of-funds covenant, Seller will be in breach of that covenant.

In the example, there appears to be a plausible business purpose for the use-of-funds covenant. However, a court may conclude that a covenant with no business purpose other than imposing an impediment to an assignment actually is a direct restriction that is rendered ineffective by subsection (d).

6. Legal Restrictions on Assignment. Former section 9-318(4), like subsection (d) of this section, addressed only contractual restrictions on assignment. The former section was grounded on the reality that legal, as opposed to contractual, restrictions on assignments of rights to payment had largely disappeared. New subsection (f) codifies this principle of free assignability for accounts and chattel paper. For the most part the discussion of contractual restrictions in comment 5 applies as well to legal restrictions rendered ineffective under subsection (f).

7. Multiple Assignments. This section, like former section 9-318, is not a complete codification of the law of assignments of rights to payment. In particular, it is silent concerning many of the ramifications for an account debtor in cases of multiple assignments of the same right. For example, an assignor might assign the same receivable to multiple assignees (which assignments could be either inadvertent or wrongful). Or, the assignor could assign the receivable to assignee-1, which then might reassign it to assignee-2, and so forth. The rights and duties of an account debtor in the face of multiple assignments and in other circumstances not resolved in the statutory text are left to the common-law rules. See, e.g., Restatement (2d), Contracts sections 338(3) and 339. The failure of former article 9 to codify these rules does not appear to have caused problems.

8. Consumer Account Debtors. Subsection (h) is new. It makes clear that the rules of this section are subject to other law establishing special rules for consumer account debtors.

9. Account Debtors on Health-Care-Insurance Receivables. Subsection (i) [(j)] also is new. The obligation of an insurer with respect to a health-care-insurance receivable is governed by other law. Section 9-408 addresses contractual and legal restrictions on the assignment of a health-care-insurance receivable.

Repeals and reenactments. — Laws 2001, ch. 139, § 68 repealed former 55-9-406 NMSA 1978, as amended by Laws1986, ch. 36, § 4, and enacted a new section, effective July 1, 2001.

The 2013 amendment, effective July 1, 2013, clarified the effectiveness of an agreement between an account debtor and an assignor relating to a sale pursuant to a disposition or an acceptance of collateral; and in Subsection (e), after "promissory note", added "other than a sale pursuant to a disposition under Section 55-9-610 NMSA 1978 or an acceptance of collateral under Section 55-9-620 NMSA 1978".

Decisions under former Section 55-9-406 NMSA 1978. — In light of the similarity of this section and former Section 55-9-406 NMSA 1978, annotations decided under former Section 55-9-406 NMSA 1978 have been included in the annotations in this section.

Contractual restrictions on assignment. — Attempted restrictions placed upon capital retains by the bylaws of a dairy cooperative were ineffective. Creditor had a valid security interest in capital retains. Norwest Bank v. Van Tol (In re Van Tol), 255 B.R. 57 (10th Cir. B.A.P. 2000).

Debtor not liable until notified of assignment. — In the absence of notice of assignment the debtor may, without incurring liability to the assignee, make payment as directed by the assignor. S & W Trucks, Inc. v. Nelson Auction Serv., Inc., 1969-NMCA-058, 80 N.M. 423, 457 P.2d 220 (decided under former law).

Authorizing payment to another deemed insufficient notification. — Merely authorizing payment of a stated sum to a particular person cannot be considered as a notification that such sum had been assigned to the individual to whom payment is authorized. S & W Trucks, Inc. v. Nelson Auction Serv., Inc., 1969-NMCA-058, 80 N.M. 423, 457 P.2d 220 (decided under former law).

Sufficient notification. — Here the assignment said that all right, title and interest of contractor to funds due from account debtor were to be assigned to bank, and this assignment was accepted by agent of account debtor. This was not a case of indirect collection. The account debtor could readily determine that assignee had purchased assignor's right, title and interest in the proceeds. There was no need for the assignee to instruct the account debtor not to pay the assignor. The unconditional language of the assignment was sufficient notice that the assignee was to be paid. First Nat'l Bank v. Mountain States Tel. & Tel. Co., 1977-NMSC-089, 91 N.M. 126, 571 P.2d 118 (decided under former law).

Receipt and deposit of payments by an account seller were proper, since account debtors may continue making payments to the debtor unless notified of the assignment and of the fact that payments are to be sent to the assignee (creditor) under the UCC. GMA, Inc. v. Boerner, 70 B.R. 77 (Bankr. D.N.M. 1987) (decided under former law).

Clause prohibiting assignments prohibited. — Subsection (4) [now subsection (d)] of this section nullifies any provision in a contract between a debtor and a party who has assigned an account to provide security to another, to the extent the contract seeks to disallow the assignment for the purposes of creating a security interest in the account. Hasse Contracting Co. v. KBK Fin., Inc., 1998-NMCA-038, 125 N.M. 17, 956 P.2d 816, aff'd, 1999-NMSC-023, 127 N.M. 316, 980 P.2d 641 (decided under former law).

Am. Jur. 2d, A.L.R. and C.J.S. references. — 68A Am. Jur. 2d Secured Transactions § 538.

Rights and duties in respect of property subject of conditional sale as between seller and seller's assignee, 65 A.L.R. 783.

Right as between surety on contractor's bond and assignee of money to become due on contract, 76 A.L.R. 917.

Priority as between assignee of rights of, and subsequent buyer from, conditional seller, 88 A.L.R. 109.

Notice to debtor as affecting priority as between different assignees of same chose in action, 110 A.L.R. 774.

Priority between assignee and surety of contractor who completes contract as to money earned by contractor but unpaid before default, 164 A.L.R. 613.

Constitutionality, construction and application of statute respecting sale, assignment or transfer of retail installment contracts, 10 A.L.R.2d 447.

Validity of anti-assignment clause in contract, 37 A.L.R.2d 1251.

Transferee of commercial paper given by purchaser of chattel and secured by conditional sale, retention of title, or chattel mortgage as subject to defenses which chattel purchaser could assert against seller, 44 A.L.R.2d 8, 39 A.L.R.3d 518.

Construction and operation of UCC § 9-318(3) providing that account debtor is authorized to pay assignor until he receives notification to pay assignee, 100 A.L.R.3d 1218.

79 C.J.S. Secured Transactions § 134.