The U.S. Bankruptcy Court for the District of Delaware recently issued an opinion of particular importance to those in the claims trading market: In re Woodbridge Grp. of Cos., LLC, No. 17-12560 (KJC), 2018 Bankr. LEXIS 1904 (Bankr. D. Del. June 20, 2018). The Court addressed three issues: (1) whether an anti-assignment clause contained in a promissory note is a valid restriction on assignment rights under Delaware law; (2) whether a non-breaching party to a promissory note in payment default is bound by an anti-assignment clause while seeking to enforce the note in bankruptcy through a proof of claim; and (3) whether the Uniform Commercial Code (“UCC”) overrides and nullifies an anti-assignment clause in a promissory note. Upon evaluating each issue, the Court determined that the anti-assignment clause in question was enforceable, expunged an invalid note transfer, and sustained the debtors’ claim objection.
In 2016 and 2017, Woodbridge issued three promissory notes to the Berlingers, each containing an anti-assignment clause prohibiting assignment of the note and all related instruments without the borrower’s (Woodbridge’s) written consent. Woodbridge defaulted on the notes. After Woodbridge filed for bankruptcy, the Berlingers sold the promissory notes to Contrarian Funds, LLC. Contrarian filed a proof of claim, to which Woodbridge objected.
The Court began by stating that the “modern claims trading industry is robust and fruitful.” While Delaware courts recognize the validity of clauses limiting a party’s ability to assign its rights, they generally construe such provisions narrowly. “The modern approach to assignment clauses is to distinguish between the power to assign and the right to assign.” When a contract limits a party’s right to assign instead of the power to assign, the assignment is valid and enforceable, but generates a breach of contract action that the non-assigning party may bring against the party assigning its interest. The anti-assignment clause at issue limited the power to assign, therefore the court determined that the note transfer was void.
The Court then rejected Contrarian’s argument that even if the anti-assignment clause were legally valid, Woodbridge could not enforce the clause because Woodbridge defaulted on its obligation to pay and materially breached the agreement. Judge Kevin Carey made it clear that a non-breaching party does not emerge post-breach with more rights than it had pre-breach. Specifically, a claim purchaser holds the claim subject to the same rights and disabilities as the original claimant. In the case at bar, the “disability” occurred at the time of the initial violation of the anti-assignment clause and travelled with the transferred claim to Contrarian. Finally, the Court rejected Contrarian’s argument that the UCC should override the anti-assignment clause, holding that the UCC was not applicable.
Ultimately, the Court sustained the claim objection and voided the transfer from the Berlingers to Contrarian. The Berlingers retained their right to assert a proof of claim.