This article was published in the August 16, 2018 issue of Middle Market Growth, a weekly newsletter published by Association of Corporate Growth (ACG). It is reprinted here with permission.
On June 20, the U.S. Bankruptcy Court for the District of Delaware held that anti-assignment clauses contained in certain promissory notes were enforceable under Delaware law, contract law and the Uniform Commercial Code. In In re Woodbridge Group of Companies, the court held that the assignment of certain promissory notes to a claims purchaser was null and void and the claims purchaser did not have a valid claim in the bankruptcy case.1 The case has important takeaways for private equity companies, including:
- Private equity companies should perform thorough due diligence on a seller's ability to assign its assets.
- Private equity companies should review anti-assignment clauses carefully to determine whether they restrict the "right" or the "power" to assign.
- Private equity companies should obtain protections from a seller, including representations and warranties regarding the transferability of assets.
Background
In 2016 and 2017, before it declared bankruptcy, debtor Woodbridge Mortgage Investment Fund 3A, LLC, entered into a prepetition loan agreement and issued three promissory notes to Elissa and Joseph Berlinger in the principal amount of $25,000 each. The promissory notes contained the following anti-assignment clause:
14. No Assignment. Neither this Note, the Loan Agreement of even date herewith between Borrower and Lender, nor all other instruments executed or to be executed in connection therewith (collectively, the “Collateral Assignment Documents”) are assignable by Lender without the Borrower's written consent and any such attempted assignment without such consent shall be null and void.
The anti-assignment clause not only restricted the assignability of the notes without the borrower's written consent; it provided that any assignment without consent would be deemed null and void. The underlying loan agreement was similarly drafted.
At the end of 2017, Woodbridge filed for bankruptcy under chapter 11. During the bankruptcy case, the Berlingers assigned their promissory notes to a claims purchaser, Contrarian Funds, LLC. The Berlingers and Contrarian entered into an agreement, in which the Berlingers would “sell, convey, transfer and assign” the promissory notes and rights thereunder to Contrarian. Contrarian then filed a...
