Rights of Third Parties under the Commercial Code

California Commercial Code, Division 9, Chapter 4, deals with the rights of third parties in secured transactions. Section 9401 states, whether a debtor’s rights in collateral may be voluntarily or involuntarily transferred is governed by law other than this division. An agreement between the debtor and secured party which prohibits a transfer of the debtor’s rights in collateral or makes the transfer a default does not prevent the transfer from taking effect.

Section 9402 provides the existence of a security interest, agricultural lien, or authority given to a debtor to dispose of or use collateral, without more, does not subject a secured party to liability in contract or tort for the debtor’s acts or omissions.

Section 9403 defines the term “value.” An agreement between an account debtor and an assignor not to assert against an assignee any claim or defense that the account debtor may have against the assignor is enforceable by an assignee that takes an assignment that satisfies all four of the specified conditions.

In a consumer transaction, if a record evidences the account debtor’s obligation, law other than this division requires that the record include a statement to the effect that the rights of an assignee are subject to claims or defenses that the account debtor could assert against the original obligee, and the record does not include such a statement, then both of the specified provisions apply.

Section 9404 says that, unless an account debtor has made an enforceable agreement not to assert defenses or claims, the rights of an assignee are subject to both of the two specified requirements. The claim of an account debtor against an assignor may be asserted against an assignee only to reduce the amount the account debtor owes.

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. There are additional rules for a consumer transaction. Also, this section does not apply to an assignment of a health care insurance receivable.

Section 9405 specifies that a modification of or substitution for an assigned contract is effective against an assignee if made in good faith. The assignee acquires corresponding rights under the modified or substituted contract. The assignment may provide that the modification or substitution is a breach of contract by the assignor.

In addition, the above requirement applies to the extent that either of two specified circumstances apply. However, this section does not apply to an assignment of a health care insurance receivable.

Section 9406 provides 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, signed 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.

Notification is ineffective in three specified instances. Only a portion of the account, chattel paper, or payment intangible has been assigned to that assignee. A portion has been assigned to another assignee. The account debtor knows that the assignment to that assignee is limited.

This subdivision defines the term “promissory note.” 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 does either of two specified provisions.

An account debtor may not waive or vary its option. 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. This section does not apply to an assignment of a health care insurance receivable.

Section 9407 provides a term in a lease agreement is ineffective to the extent that it does either of two specified things. 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.

Section 9408 sets forth that a term in a promissory note or in an agreement between an account debtor and a debtor that relates to a health care insurance receivable or a general intangible, including a contract, permit, license, or franchise, and which term prohibits, restricts, or requires the consent of the person obligated on the promissory note or the account debtor to, the assignment or transfer of, or the creation, attachment, or perfection of a security interest in, the promissory note, health care insurance receivable, or general intangible, is ineffective to the extent that the term does, or would do, either of the two specified actions.

A rule of law, statute, or regulation that prohibits, restricts, or requires the consent of a government, governmental body or official, person obligated on a promissory note, or account debtor to the assignment or transfer of, or the creation of a security interest in, a promissory note, health care insurance receivable, or general intangible, including a contract, permit, license, or franchise between an account debtor and a debtor, is ineffective to the extent that the rule of law, statute, or regulation does, or would do, either of two specified actions.

To the extent that a term in a promissory note or in an agreement between an account debtor and a debtor that relates to a health care insurance receivable or general intangible or a rule of law, statute, or regulation would be effective under law other than this division, but is ineffective elsewhere under the law, the creation, attachment, or perfection of a security interest in the promissory note, health care insurance receivable, or general intangible is subject to all of the six specified rules.

This section does not apply to a security interest in an ownership interest in a general partnership, limited partnership, or limited liability company. The term “promissory note” is defined.

Section 9409 specifies that a term in a letter of credit or a rule of law, statute, regulation, custom, or practice applicable to the letter of credit which prohibits, restricts, or requires the consent of an applicant, issuer, or nominated person to a beneficiary’s assignment of or creation of a security interest in a letter-of-credit right is ineffective to the extent that the term or rule of law, statute, regulation, custom, or practice does, or would do, either of two specified activities.

To the extent that a term in a letter of credit is ineffective, but would be effective under law other than this division or a custom or practice applicable to the letter of credit, to the transfer of a right to draw or otherwise demand performance under the letter of credit, or to the assignment of a right to proceeds of the letter of credit, all three of the specified rules apply with respect to the creation, attachment, or perfection of a security interest in the letter-of-credit right.