Contrarian Funds, LLC v. Woodbridge Group of Companies, LLC (In re Woodbridge Group of Companies, LLC), 606 B.R. 201 (D. Del. 2019)
A distressed debt investor purchased promissory notes from the original noteholders in violation of anti-assignment provisions in the notes and the related loan agreements. The investor argued that section 9-408 of the UCC rendered the anti-assignment clauses unenforceable. The U.S. District Court for the District of Delaware rejected the investor’s argument, concluding that UCC section 9-408 applies only to transactions involving the grant or transfer of a security interest in a promissory note, not an outright sale of a promissory note.
Woodbridge Mortgage Investment Fund 3A, LLC (“Woodbridge“) was one of a number of real estate finance and development funds used by Robert Shapiro to perpetrate a Ponzi scheme. In 2016 and 2017, Woodbridge issued three promissory notes to Elissa and Joseph Berlinger, each in an original principal amount of $25,000. Each note included an anti-assignment clause providing that neither the note, nor the related loan agreement nor any other instrument executed in connection therewith is assignable by the lenders without Woodbridge’s written consent, and any attempted assignment without such consent is null and void.
In December 2017, Woodbridge, along with hundreds of other funds controlled by Robert Shapiro, filed for bankruptcy under Chapter 11. In February 2018, without Woodbridge’s consent, the Berlingers entered into an agreement with Contrarian Funds, LLC (“Contrarian“) pursuant to which the Berlingers agreed to sell, transfer and assign to Contrarian all of their right, title and interest in their $75,000 claim against Woodbridge, along with all causes of action they held in connection with the transferred documents and transferred claims. Contrarian filed a proof of claim asserting a secured claim against Woodbridge in the amount of $75,000; Woodbridge objected, arguing that the assignment by the Berlingers to Contrarian is unenforceable. Contrarian responded that (1) the anti-assignment provisions are unenforceable under Delaware law, (2) Woodbridge’s breach of the notes and loan agreements renders the anti-assignment provisions unenforceable, and (3) section 9-408(a) of the UCC overrides the anti-assignment provisions. The bankruptcy court rejected each of Contrarian’s arguments.
On appeal, the district court affirmed the bankruptcy court’s decision. The district court found that the anti-assignment provisions are enforceable under Delaware law because the notes and the related loan agreements contain clear and unambiguous language prohibiting, and rendering null and void, any assignment of the notes or any rights thereunder without Woodbridge’s consent. The district court also rejected Contrarian’s argument that Woodbridge’s breach renders the anti-assignment clauses unenforceable, finding the case law cited by Contrarian to be distinguishable or inapplicable.
With respect to Contrarian’s argument that section 9-408(a) of the UCC overrides the anti-assignment provisions, the district court disagreed with Contrarian’s interpretation of the UCC. Section 9-408(a) provides that, “Except as otherwise provided in subsection (b), a term in a promissory note [that] prohibits, restricts, or requires the consent of the person obligated on the promissory note [. . .] to the assignment or transfer of, or creation, attachment, or perfection of a security interest in, the promissory note [. . .] is ineffective to the extent that the term: (1) would impair the creation, attachment, or perfection of a security interest; or (2) provides that the assignment or transfer or the creation, attachment, or perfection of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the promissory note [. . .]” Section 9-408(b) provides that subsection (a) applies to a security interest in a payment intangible or promissory note only if the security interest arises out of a sale of the payment intangible or promissory note. Contrarian argued that section 9-408 invalidates contractual provisions requiring the consent of the maker of the note before the note may be transferred, because the purchase of a promissory note is a “security interest” as such term is defined in UCC section 1-201(b)(35).
The district court rejected Contrarian’s position that the sale of a promissory note always constitutes a “security interest”. The court cited the language of UCC section 1-201(b)(35), which provides that the term “security interest” means an interest in personal property or fixtures which secured payment or performance of an obligation. The court found that UCC section 9-408(a) did not apply in this case because Contrarian did not make any loan that would have been secured by the Berlingers’ interest in the notes and, therefore, Contrarian did not hold any “security interest” in the notes.
In support of its conclusion, the court reasoned that Contrarian’s interpretation of UCC section 9-408 would make UCC section 9-406 superfluous, as section 9-406 specifically addresses restrictions on assignment of promissory notes. The court noted that, in this case, section 9-406 would not invalidate the anti-assignment provisions in the notes and loan agreements.
Article courtesy of Margaret G. Parker-Yavuz of Akin Gump Strauss Hauer & Feld LLP