New York Court of Appeals Sets Important Precedent for Secured Lenders

As previously reported, in early 2022, the New York Court of Appeals granted the request of the Secured Finance Network (SFNet) to appear as amicus curiae in support of a secured lender’s appeal of problematic rulings issued in litigation between Worthy Lending, LLC and New Style Contractors, Inc.  SFNet believed that the lower courts’ rulings were inconsistent with established commercial law and practice and, if allowed to stand, would operate to the detriment of secured lenders, borrowers and account debtors.  SFNet sought leave and was permitted to participate in the appeal to advocate for the important principle that the holder of a security interest in a borrower’s receivables is an assignee of such receivables, without necessitating a separate formal assignment and that the assignment affords the lender the right to collect pledged accounts directly from the account debtor upon proper notice.  New Style Contractors, an account debtor, challenged such rights contending that New York law requires that an assignment be separately documented, and arguing that in the absence of a formal assignment agreement an account debtor is entitled to discharge its payment obligations by paying the borrower directly, even if the account debtor received notice of the lender’s security interest directing payment to the lender.

On November 22, 2022, the Court issued a well-reasoned opinion that agreed with the positions urged by SFNet and the secured lender. The Court ruled that New York’s Uniform Commercial Code treats a security interest as an assignment.  The Court reasoned that when a loan agreement so provides, upon requisite notification to an account debtor, the account debtor cannot discharge its obligation by paying the borrower, but must instead either pay the secured creditor directly or ask the secured creditor for proof of the assignment if there is uncertainty.  The Court reversed the rulings of the lower courts in favor of the account debtor and directed that the account debtor’s motion to dismiss the secured lender’s complaint be denied, thereby allowing the lender to pursue its suit to collect from the account debtor the payment it improperly paid to the borrower.  Significantly, the Court specifically noted that an account debtor who chooses to ignore a secured creditor’s direct payment notice risks having to pay twice for its original obligation. This important opinion makes clear that as between a secured creditor and an account debtor, the Uniform Commercial Code places the risk on the account debtor if it chooses to pay the borrower despite receiving notice to remit payment directly to the lender. 

A copy of the decision can be found at the following link.

Parker Hudson partners William J. Holley, II and Bryan E. Bates are the attorneys for amicus curiae SFNet, for which Parker Hudson partner Bobbi Acord Noland serves as co-General Counsel. SFNet would also like to recognize the firm of Otterbourg P.C. and Richard G. Haddad of Otterbourg as representing Worthy Lending in this important litigation.