Payor Beware: Pitfalls of Accounts Receivable Assignment
In today’s world of spam, hacks, and phishing, it may be tempting to treat a notice that directs you to make payments to one of your suppliers to a different company like you would treat any other junk mail. However, ignoring this kind of notice can be costly.
What Is a Notice of Assignment?
Many types of commercial lending, including Asset Based Lending, Accounts Receivable Financing, and Invoice Factoring, involve the sale or assignment of accounts receivable. The borrower in these lending situations generally sells or assigns its accounts receivable to the lender. The Uniform Commercial Code (UCC) is a body of law that governs these transactions.
Under the UCC, the lender that purchases or takes the assignment of the accounts receivable (known as the Assignee) is authorized to notify the borrower’s customers (known as Account Debtors) that the amounts or invoices owing by the borrower’s customers have been assigned to the Assignee and that payment on the accounts must be made directly to the Assignee instead of the borrower. The UCC refers to this type of notice and payment instruction as a Notice of Assignment.
What Does It Mean?
If you receive a Notice of Assignment, it does not automatically mean that your supplier is in financial difficulty or that it is going out of business. Long gone are the days when only struggling companies pledged their accounts receivable as collateral to hard-money lenders at extraordinary rates. As lending markets continue to shift and heave more and more lenders, including traditional banks, are offering accounts receivable financing to their borrowers, which then triggers a Notice of Assignment to the Account Debtors. If you receive a Notice of Assignment, it generally means your supplier has entered into a new financing arrangement. It also means you now must take proper action or risk double payment liability.
Double Payment Liability
Under the UCC, once you receive a Notice of Assignment, you can only discharge your obligations on an account or invoice by paying the invoice to the Assignee in accordance with the instructions contained in the Notice of Assignment. If you ignore the Notice of Assignment and pay your supplier, then you remain liable to the Assignee for the full amount of the invoice and may be required to pay the invoice a second time to the Assignee.
For example, you receive an invoice for $25,000 after you have received a Notice of Assignment. If you do not pay the $25,000 to the Assignee in accordance with the Notice of Assignment and instead pay the $25,000 to your supplier, then you remain liable to the Assignee and may be required to pay an additional $25,000 to the Assignee, meaning you will have paid $50,000 for the $25,000 invoice.
Having to pay an invoice twice may seem unfair. In this situation, your gut instinct may tell you that the UCC doesn’t apply to your business, or that you didn’t authorize your supplier to assign the accounts owing by you, or that you have no relationship whatsoever with the lender. However, under the UCC, these types of protests are irrelevant. Once you receive a Notice of Assignment, you are subject to all of its related ramifications, including the risks of double payment liability.
Proceed with Caution
Although having to pay an invoice twice seems extreme, the UCC does not leave you without guidance. If you proceed with caution and act appropriately after receiving a Notice of Assignment, then the risks of double payment liability can be minimized.
The first and most important step to take upon receiving a Notice of Assignment is don’t ignore it – don’t delete it or throw it away. Notices of Assignment are a large part of the commercial world, and they are becoming more commonplace. With a few additional steps, payment arrangements can be clarified and your relationship with your supplier can continue uninterrupted.
Contact the Assignee named in the Notice of Assignment. Under the UCC, you can ask the Assignee to provide proof that the accounts have been assigned and the Assignee must respond. The Assignee generally will provide a copy of the financing or loan documents and a copy of its UCC-1 Financing Statement (which is a public record that evidences the Assignee’s interests in your supplier’s accounts). If the Assignee provides proof, then the Assignee has met its duties and the Notice of Assignment is likely effective.
It is also prudent to contact your supplier. Your supplier likely will confirm the Notice of Assignment and payment instructions and this should give you comfort in sending payments to the Assignee. However, if for any reason the supplier tells you to ignore the Notice of Assignment and to continue sending payments to the supplier, and you follow the supplier’s request, you will be at risk for double payment liability. Blaming your supplier for your failure to comply with a Notice of Assignment is not a defense under the UCC.
To be legally effective, a Notice of Assignment must contain certain information. It is a good idea to consult with your attorney about any Notice of Assignment you receive, especially if your supplier directs you to not comply with the Notice of Assignment. Your attorney can help you determine any deficiencies in a Notice of Assignment and navigate any discrepancies in payment instructions.
The financing of accounts receivable is on the rise. If your business hasn’t already received a Notice of Assignment, it is only a matter of time until it does. Although receiving a Notice of Assignment may seem like a disruption or cause for concern, if you proceed with caution and take a few appropriate steps upfront, you can minimize the risks and disruption to your business.
This publication is designed to provide general information on pertinent legal topics. The statements made are provided for educational purposes only. They do not constitute legal or financial advice nor do they necessarily reflect the views of Holland & Hart LLP or any of its attorneys other than the author. This publication is not intended to create an attorney-client relationship between you and Holland & Hart LLP. Substantive changes in the law subsequent to the date of this publication might affect the analysis or commentary. Similarly, the analysis may differ depending on the jurisdiction or circumstances. If you have specific questions as to the application of the law to your activities, you should seek the advice of your legal counsel.