Maryland Court of Special Appeals Case Summaries: March 17, 2008

Daily Record, The (Baltimore), Mar 17, 2008

The relevant terms, as used in Title 9, "account," "collateral," "secured party," "debtor," and "account debtor," are defined in CL [section][section]9-102 (a)(2), (a)(12), (a)(73), (a)(28), and (a)(3), respectively.

The Mooneys are secured parties, Chesapeake is the debtor, and the University is the account debtor. The monetary obligation by the University to Chesapeake is an account, and the account receivable is collateral.

CL [section]9-406 addresses, among other things, the rights of an account debtor when a security interest exists in accounts receivable. When a debtor defaults, the security interest in an account receivable operates as an assignment by the debtor to the secured party of the right to receive payment from the account debtor. See generally CL [section]9-607(a)(1).

Moreover, CL [section]9-406(f) provides that a law which prohibits or requires consent for the assignment of an account for the purpose of creating a security interest in the account receivable is ineffective.

Consistent with that provision, COMAR 21.05.02.24 provides that "[a] State contract is not transferrable, or otherwise assignable, without the written consent of the procurement officer provided, however, that a contractor may assign monies receivable under a contract after due notice to the State." MD. Code Regs. 21.05.02 .24.

Under the UCC, except as otherwise expressly stated, the obligations with respect to the assignment of an account are generally in accord with the law of contracts. Pursuant to [section]9-404(a), the rights of an assignee of an account are subject to defenses or claims of the account debtor against the assignor which accrue before the account debtor receives notification of the assignment. CL. [section]9-404(a). See also Motor Vehicle Security Fund v. All Coverage Underwriters, Inc., 22 Md. App. 586, 614 (1974). As such, the assignee stands in the shoes of the assignor. Textor v. Orr, 86 Md. 392, 398 (1897).

Under contract law, an obligor under an assigned contract owes a duty of performance to an assignee only when the obligor has received notice of the assignment. Robinson v. Marshall, 11 Md. 251, 255-56 (1857).

Not inconsistently, under CL [section]9-406(a), an account debtor may "discharge its obligation" by paying the assignor until, but not after, it receives notification that the amount due has been assigned and that payment is to be made to the assignee. CL [section]9-406(a). "After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor." Id.

Subtitle 6 of Title 9 addresses the rights of parties after default by a debtor subject to a security interest. Section 9-601 provides that, after default, a secured party has the rights provided in subtitle 6 and, with certain exceptions, the rights provided by agreement of the parties.

Once the debtor defaults, [section]9-607(a)(3) provides that the secured party may enforce the obligation of an account debtor and exercise the rights of the debtor with respect to that obligation.