New York Court of Appeals Affirms a Secured Lender’s Right to Recover Against Account Debtors
There is nothing more critical to a secured lender than its right to recover on its collateral. Those of us engaged in commercial lending have slept under that security blanket since the beginning of time (well, since the creation of security interests). We have relied on Sections 9-406 and 9-607 (and their predecessor sections in the old Article 9 of the Uniform Commercial Code) and sent account debtors notifications to pay the lender or be at risk of paying twice.
In recent years, a number of court rulings have missed the point and miscomprehended the purpose of these sections and their importance as the lifeblood of asset-based lending and factoring. For example, the Fourth Circuit Court of Appeals ruled “the UCC provisions …. do not provide a private right of action….” The Eleventh Circuit Court of Appeals held: “we conclude that § 9-406(a) creates neither an express nor an implied right of action for a secured party…” Various state and federal trial courts have made similar rulings. In short, this is a critical issue that threatens the basis of commercial financing.
Keep in mind that when the Fourth and Eleventh Circuits (and other federal courts) made their rulings, they were interpreting state law because the Uniform Commercial Code (UCC) is law adopted by each state (in some cases with non-uniform provisions) and is not the law of the nation. Thus, when state courts interpret the UCC, those decisions, once affirmed by that state’s highest court, will be binding upon relevant federal courts as well.
New York is certainly a significant jurisdiction for commercial finance law – perhaps the most significant. Thus, when a case involving a secured party’s right of action to recover on its accounts receivable collateral works its way through the complex legal system, it is one that is worthy of attention.
The Supreme Court of New York  ruled in a November 2020 decision: “to hold that an account debtor is obligated to pay the secured creditor and not the debtor would be tantamount to creating a duty owed by the account debtor to the secured creditor that was separate and distinct from the duty it owed to the debtor.” This led to the appeal discussed below.
First, the facts. Worthy Lending LLC provided a loan to Checkmate Communications LLC and Checkmate executed a Promissory Note and Security Agreement in favor of Worthy Lending. Worthy filed a UCC-1 financing statement and sent a notification to New Style Contractors, Inc. as follows:
Pursuant to Section 9–406 of the Uniform Commercial Code, payments of accounts made by New Style to Checkmate or to anyone other than Worthy Lending will not discharge any of New Style’s obligations with respect to such Accounts, and notwithstanding any such payments, New Style shall remain liable to Worthy Lending for the full amount of such Accounts.
Checkmate defaulted on the note and Worthy accelerated the debt, but Checkmate filed for bankruptcy. Worthy brought an action against New Style, the account debtor, alleging that New Style was obligated to pay Worthy, even if it had already paid Checkmate. New Style brought a motion to dismiss and the trial court dismissed the complaint stating that Section 9-607 of the UCC
does not determine whether an account debtor, bank, or other person obligated on collateral owes a duty to a secured party (UCC 9-607[e]). In other words, the section upon which [Worthy’s] cause of action is based does not determine whether [New Style] owes a duty to [Worthy]. (internal quotes omitted)
Worthy appealed to the Appellate Division (New York’s intermediate appellate court), which held:
. . . .[Worthy] did not have an independent cause of action against [New Style] pursuant to UCC 9-607. [Worthy] and [New Style] have no contractual or other relationship or duty to one another. [Worthy] seeks to impose upon [New Style] a separate obligation to repay [Worthy] the same amount it has already paid the nonparty [Checkmate] under their contract. Because there was a dispute between [Worthy], the secured creditor, and [Checkmate] as to who had the right to collect from [New Style], section 9-607(e) applied.
In reversing the lower courts, the New York Court of Appeals wrote:
The language of the statute, as well as the clear commentary on the relevant sections requires reversal. New York’s UCC 9–607 and 9–406 adhere to the standard UCC language. Section 9–607(a)(3), entitled “Collection and Enforcement by Secured Party,” provides as follows:
“If so agreed, and in any event after default, a secured party … may enforce the obligations of an account debtor or other person obligated on collateral and exercise the rights of the debtor with respect to the obligation of the account debtor or other person obligated on collateral to make payment or otherwise render performance to the debtor, and with respect to any property that secures the obligations of the account debtor or other person obligated on the collateral.”
The Court went on to explain that an account debtor who receives a secured creditor’s notification asserting its right to receive payment directly can pay the secured creditor and receive a complete discharge or, if in doubt, can seek proof from the secured creditor that it possesses a valid assignment and withhold payment in the interim. The Court of Appeals confirmed that Worthy Lending is the “secured party” with the authority to enforce the rights of its debtor (Checkmate) to collect on the obligations of the account debtor (New Style).
The lower courts held that subsection 9–607(e) bars Worthy from using the mechanism provided for in section 9–607, by providing that “[t]his section does not determine whether an account debtor, bank, or other person obligated on collateral owes a duty to a secured party.” However, the plain language of subsection (e) merely states that UCC 9–607 does not itself determine whether an account debtor owes a duty to a secured party.
The agreement between Worthy and Checkmate grants Worthy the right to direct Checkmate’s debtors to pay Worthy directly, and bars Checkmate from interfering with any such direction if given. Subsection (e) of 9–607 does not even imply, much less state, that parties cannot contractually assume duties concerning the right of a secured party to enforce the rights of a debtor as against account debtors. Indeed, section 9–607(a)(3) expressly provides that “in any event after default,” a secured party may obtain collateral directly from an account debtor, and the secured party and debtor may agree that the secured party may do so by agreement, without regard to default—which they did here.
Finally, the Court addressed the concerns of the Appellate Division and the Supreme Court that New Style may have paid Checkmate and will now need to pay double by paying Worthy:
That is the statutory consequence of failing to pay a secured party who has notified the account debtor to pay the secured party directly. (emphasis added)
Keep in mind that before Article 9 of the UCC was fully revised in 2001, the New York Court of Appeals had addressed this very same issue. In the Worthy decision, the Court of Appeals quoted its 1995 “on point” decision, stating:
“. . . .after the account debtor receives notification that the right has been assigned and the assignee is to be paid, and it continues to pay the assignor, the account debtor is liable to the assignee.” If New Style continued to pay Checkmate after receiving direction from Worthy to pay Worthy instead of Checkmate, the burden of double payment as between Worthy and New Style falls on New Style.
ONE FOR THE GOOD GUYS.
So, what does this mean? It means that New York is a safe haven for a secured party to pursue account debtors and recover on its collateral.
Those other jurisdictions that have taken a contrary view will likely be influenced by the precedent of this case even though the precedent is only binding in the State of New York – especially those misguided Federal Courts of Appeal that previously had no guidance.
So do we really need to celebrate this as a victory when a court issued a ruling that we long took as a basic tenet of secured lending?
Sure, why not?
Worthy Lending LLC v New Style Contractors, Inc. 2022 WL 17095585 (NY Nov. 22, 2022)
 Forest Capital v Blackrock, Inc., 658 Fed.Appx 675, (4th Cir., 2016)
 Durham Commercial Capital Corp v Ocwen Loan Servicing, LLC, 777 Fed.Appx. 952 (11th Cir., 2019).
 Note that New York’s “Supreme Court” is its trial court, while the Supreme Court of every other state is its highest court of appeals. New York’s highest court is its Court of Appeals.
 General Motors Acceptance Corp. v. Clifton-Fine Cent. School Dist., 85 N.Y.2d 232 (N.Y., 1995).