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Anti-Assignment Clauses Enforced to Void and Nullify Claims Purchases

In re Woodbridge Group of Cos., LLC, No. 17-12560 (KJC), 2018 WL 3131127 (Bankr. D. Del. June 20, 2018)

Prior to the commencement of the Woodbridge chapter 11 bankruptcy cases, one of the many debtors (“Woodbridge”) issued three promissory notes, each containing an anti-assignment clause.  The clause prohibited the lenders from assigning the notes, the related loan agreements, and any other instruments executed in connection therewith absent the written consent of Woodbridge.  If a non-consensual assignment was attempted, the provision provided that the assignment would be null and void.  Similar language existed in the related loan agreements that prohibited the non-consensual assignment of the lenders’ rights thereunder.  Despite the foregoing, however, following the commencement of the bankruptcy cases and Woodbridge’s default under the notes, the lenders sold, transferred, and conveyed the notes and related rights to Contrarian Funds, LLC (“Contrarian”) without Woodbridge’s written consent.  Contrarian then asserted a secured claim against Woodbridge, to which the debtors objected.  In deciding the merits of the claims objection, three questions were put before the Delaware Bankruptcy Court – namely, whether the anti-assignment clauses are enforceable under Delaware law, whether a non-breaching party to a note in default, which seeks to enforce the note in bankruptcy through a proof of claim, is bound by an anti-assignment clause, and whether the Uniform Commercial Code (the “UCC”) overrides and nullifies the anti-assignment clauses in the notes.

With respect to the first question, the Honorable Kevin J. Carey held the anti-assignment clauses enforceable and, thus, the transfers to Contrarian void.  As a general matter, claims trading in bankruptcy is permitted.  It is not only recognized by the courts and the Bankruptcy Rules, but as Judge Carey notes, His Honor is unaware of any Bankruptcy Code provision or policy that impairs a court’s ability to enforce laws applicable to contract provisions restricting claims transfers.  Under Delaware law, parties may restrict powers of assignment but there must be specific language providing that a subsequent assignment is null and void.  Absent this language, a subsequent assignment gives rise to a breach of contract but is enforceable.  See Southeastern Chester Cty. Refuse Auth. v. BFI Waste Servs. of Penn., LLC, 2017 WL 2799160 (Del. Super. Ct. June 27, 2017).  Here, the notes and the loan agreements were found clear and unambiguous, making any assignments absent Woodbridge’s written consent null and void.

With respect to the second question, Judge Carey, citing applicable case law from the Third Circuit and Delaware Bankruptcy Court, held that the debtors were entitled to enforce the notes’ anti-assignment clauses despite their material breach thereof.  Otherwise, such an outcome, as noted by the Court, would give a non-breaching party more rights than it had pre-breach and, specifically in the claims trading circumstance, would shed infirmities of an original claim from a purchased claim.  See, e.g., In re KB Toys, Inc., 470 B.R. 331 (Bankr. D. Del. 2012), aff’d sub nom., 736 F.3d 247 (3d Cir. 2013) (holding purchased claim is subject to the same rights and disabilities under section 502(d) as the original claim).  Finally, with respect to the third question, the Court found the UCC and, in particular, section 9-408, which places restrictions on the assignment of certain security interests, inapplicable to the case at hand and thus, not able to override the notes’ anti-assignment provisions.