Article courtesy of Michael Robson (Greenberg Traurig, LLP)
First State Bank Nebraska v. MP Nexlevel LLC, S‑19‑543. 309 Neb. 198, 2020 WL 5581733 (Sept. 18, 2020).
The Nebraska Supreme Court (the “Court”) found that a state trial court erred in dismissing a secured lender’s action to collect on a third‑party accounts receivable assigned to the lender by a borrower as security for a defaulted loan. The Court ruled that MP Nexlevel LLC (“Nexlevel”), a contractor, was obligated to make payments it owed under a contract with Husker Underground Utilities & Construction LLC (“Husker Underground”) directly to First State Bank Nebraska (“First Bank”) because Husker Underground’s grant to First Bank of a security interest in its accounts as security for a commercial loan constituted an assignment.
First Bank and Husker Underground entered into several loan agreements and a business manager agreement in which First Bank agreed to purchase certain accounts receivable from Husker Underground in May and June 2016. Husker Underground secured the loans and its performance under the agreements by granting First Bank a security interest in the majority of its assets, including its accounts and accounts receivable. In January 2018, Nexlevel contracted with Husker Underground for Husker Underground to perform services for some of Nextlevel’s Nebraska customers. First Bank was not a party to any of the agreements between Nexlevel and Husker Underground, nor was Nexlevel a party to any of the agreements between Husker Underground and First Bank.
Later in 2018, Husker Underground failed to make payments when due, including the payment due upon one of the promissory note’s maturity. First Bank subsequently sued, and a state trial court granted summary judgment in First Bank’s favor in January 2019. Before bringing its action, First Bank sent notices to Nexlevel, informing them of Husker Underground’s defaulted loans, for which First Bank held security interests in Husker Underground’s accounts, and that Husker Underground had assigned its right to receive payments from Nexlevel to First Bank upon its default. First Bank then ordered Nexlevel to pay directly all amounts owed to Husker Underground to it, and threatened action against Nexlevel if they failed to comply.
At trial, Pat Carlson, an account supervisor at Nexlevel, testified that Husker Underground disputed the claim that it had assigned its accounts to First Bank and demanded that Nexlevel continue to make its contractually‑obligated payments to it. Furthermore, Carlson claim that Nexlevel never received a copy of any assignment of Husker Underground’s rights or any other evidence of the agreements between First Bank and Husker Underground, nor did it receive notice of First Bank’s judgment against Husker Underground. Consequently, Nexlevel continued to satisfy its outstanding payments totaling $410,000 to Husker Underground under the contract.
Shortly after bringing its action against Husker Underground, First Bank filed a claim against Nexlevel, alleging that it was entitled to enforce its security agreement and foreclose upon Husker Underground’s accounts receivable pursuant to Nebraska’s codification of the UCC. First Bank alleged that Nexlevel’s payments to Husker Underground breached its obligations under the contract, entitling First Bank to the delinquent payments from Nexlevel. Nexlevel resisted by arguing that First Bank lacked standing to enforce the contract and that Husker Underground was entitled to receive payments under the agreement while it contested the default. The trial court ruled in favor of Nexlevel, finding no basis in Nebraska’s adoption of the UCC for a claim by a secured creditor against an account debtor not in default, which Husker Underground was not deemed to be until January 2019.
The Court’s review of the trial court’s ruling focused on Article 9 of the UCC, as adopted by Nebraska, which governs security interests. Under Article 9, “secured parties” include both parties with security interests granted by security agreements, as well as parties to whom payment rights have been sold. Conversely, “debtors” include both parties having interests in collateral other than security interests or liens and the sellers of payment rights. Article 9 also governs a secured party’s enforcement rights after a debtor’s default, including granting a secured party the right to notify an account debtor of a debtor’s default and to exercise the debtor’s rights under an agreement with the debtor once notice of the default is given. Article 9 also states that account debtors may continue paying obligations directly to the “assignor” (in this case, Husker Underground), but upon receipt of notice of the assignment authenticated by either the assignor or the “assignee” (in this case, First Bank) and instruction to pay the assignee, the account debtor may only pay the assignee.
Based off this review, the Court concluded that the trial court erred in finding that it was not an assignment, as Article 9 of the UCC does not define the term “assignment,” and found no compelling reason to narrow the definition from including outright transfers of ownership, along with contingent transfers to exclude a presently exercisable security interest, such as in the case at hand. Examining the facts at hand, the Court held that First Bank’s notification and authentication of the assignment as stipulated by Article 9 was sufficient, as they provided Nexlevel with identification, disclosures, and allegations that Husker Underground breached its obligations. As such, the Court rejected the trial court’s ruling and found the evidence sufficient to satisfy the requirements of Article 9 and trigger Nexlevel’s obligation to pay First Bank.
The Court then turned to the trial court’s determination that First Bank lacked the authority to enforce Nexlevel’s payment obligations while Husker Underground contested its default. The trial court deemed that forcing Nexlevel to determine whether Husker Underground was in default would constitute a duty they did not owe. The Court viewed this as a misapplication of Article 9 and held that once proper notice was given, Nexlevel’s obligations to Husker Underground were modified and First Bank stood in Husker Underground’s shoes, entitling them to enforce Nexlevel’s contractual obligations.