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Assignments: Paying Agent Not Liable to Assignee
Section 9406(a) of the Uniform Commercial Code provides that once an account debtor receives notification that the account has been assigned, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor. This statute is critical to receivables financing, including factoring. In a recent opinion by the U.S. Court of Appeals for the Ninth Circuit, the court held that the account debtor's payment obligations do not extend to its agent. Nationwide Transport Finance v. Cass Information Systems, Inc., 523 F.3d 1051, 65 UCC Rep.2d 709, 2008 U.S. App. LEXIS 9176 (9th Cir. 2008).
Nationwide is a finance company that purchases freight invoices from carriers or truckers who assign their payments under those invoices directly to Nationwide, a typical factoring arrangement. The account debtors are shippers or manufacturers who utilize the carriers to transport their goods across the country. The shippers contract with Cass Information Systems to handle the processing and payment of their freight invoices. The shipper pays Cass the funds needed to pay the invoices, and Cass, in turn, forwards these funds to Nationwide. The business relationship between Nationwide and Cass worked well for more than 17 years until one day Cass erroneously misdirected a payment to a carrier. Although Nationwide eventually got paid, Cass asserted its rights under a hold harmless agreement. This induced Nationwide to terminate the agreement. As a result, Cass refused to pay any future invoices to Nationwide.
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