CHAPTER 11.07. Restrictions on Transfer

• Jurisdiction: United States

11.07. Restrictions on Transfer

Many types of collateral, including contracts, permits, and licenses, contain restrictions on transfer. Real estate lenders often require assignments of the contracts, permits, and licenses. Contracts, permits, and licenses are general intangibles for purposes of the Delaware U.C.C.¹⁰⁴ These assignments are governed by the Delaware U.C.C., as they are intended as security for the loan. For contracts such as construction contracts, architectural contracts, management contracts, or franchise agreements, a modification of the underlying contract is effective against the assignee if made in good faith.¹⁰⁵ Moreover, the underlying contract or license may contain a restriction on assignment. Under the Delaware U.C.C., a term that limits the assignment of a "contract, permit, license or franchise" is invalid to the extent that the prohibition against assignment would impair the attachment or perfection of a security interest.¹⁰⁶ A prohibition against assignment is also ineffective to the extent it creates a default or right to terminate the underlying general intangible.¹⁰⁷ The same rules apply to legal restrictions and legal consent requirements on assignment, including those restrictions created by statutes or governmental rules or regulations.¹⁰⁸ Although the restrictions contained in the terms of the underlying contract or applicable law are ineffective in certain circumstances, the secured party as assignee does not have the right to use the assigned rights or enforce the security interest.¹⁰⁹ However, the Delaware U.C.C. gives the assignee priority over subsequently filed security interests and in the proceeds of the sale of the assigned interest, including priority over a trustee in bankruptcy.¹¹⁰

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Notes:

^[104] 6 Del. C. § 9-408(a).

^[105] 6 Del. C. § 9-405.

^[106] 6 Del. C. § 9-408(a)(1).

^[107] 6 Del. C. § 9-408(a)(2).

^[108] 6 Del. C. § 9-408(c).

^[109] 6 Del. C. § 9-408(d).

^[110] 6 Del. C. §§ 9-408 and 9-404. Note that these rules do not apply to the assignment of a limited liability company interest. 6 Del. C. § 9-408(e). See also supra Section 5.04[2] with respect to mezzanine loans.