assignment by operation of law new york

Do Change of Control Transactions Constitute an Assignment by Operation of Law?

Commercial landlords often rely on anti-assignment provisions to restrict the ability of tenants to assign their interest in a lease to a third party. Such provisions often restrict assignments by “operation of law,” which are generally considered involuntary assignments mandated via a court order. Commercial landlords may assume that a change of control transaction violates a basic anti–assignment clause. Landlords wishing to restrict change of control of a tenant entity, however, should have clear anti-assignment provisions in their leases that expressly restrict such transactions and characterize such “changes of control” as assignments.

A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition.

The general rule is that change of control of a corporate entity is not an assignment by operation of law, and therefore does not violate a basic anti-assignment provision. Courts have reasoned that a landlord entering into a lease with a corporate tenant should be aware that a corporation, or limited liability company, is an entity which exists separate and apart from its ownership, and that a change in ownership of the corporate entity does not change the tenant entity under the lease.

Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. In Sears Termite & Pest Control, Inc. v. Arnold , a Florida court held, “[t]he fact that there is a change in the ownership of corporate stock does not affect the corporation’s existence or its contract rights, or liabilities.” Further, in Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH , a Delaware court ruled, “[g]enerally mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.”

Importantly, the rule is different if the tenant entity does not survive the transaction. In MTA Canada Royalty Corp. v. Compania Minera Pangea , a Delaware Superior Court held that a merger in which the contracting entity does not survive may be held to be an assignment by operation of law.

If a landlord intends for a change of control of a tenant to violate the anti-assignment clause in its lease, the landlord should ensure that its lease expressly states that a change of control constitutes an assignment.

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Do Change of Control Transactions Constitute an Assignment by Operation of Law?

Commercial l andlords often rely on anti-assignment provisions to restrict the ability of tenants to assign their interest in a lease to a third party . Such provisions will often explicitly restrict assignments by “ operation of law, ” which are generally considered involuntary assignments mandated via a court order. Commercial landlords may assume that a change of control transaction violates a basic anti – assignment cla use, but clear drafting is necessary for Landlords to protect their interests . Landlords wishing to restrict change of control of a tenant entity , should have clear anti-assignment provision s in their leases that expressly restrict such transaction s and characterize such “changes of control” as assignments .

A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition.

The general rule is that change of control of a corporate entity is not an assignment by operation of law , and therefore does not violate a basic anti- assignment provision. Courts have reasoned that a landlord entering into a lease with a corporate tenant should be aware that a corporation, or limited liability company, is an entity which exists separate and apart from its ownership, and that a change in ownership of the corporate entity does not change the tenant entity under the lease.

Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. I n Sears Termite & Pest Control, Inc. v. Arnold , a Florida court held , “ [t] he fact that there is a change in the ownership of corporate stock does not affect the corporation’s existence or its contract rights, or liabilities. ” Further, i n Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH , a Delaware court ruled, “ [ g ] enerally mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.”

If a l andlord inten d s for a change of control of a tenant to violate the anti-assignment clause in its lease, the landlord should ensure that its lease expressly state s that a change of control constitutes an assignment .

This article is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read here. Please review the full disclaimer for more information. Relying on the information provided in this article or communicating with Lowndes through our website does not create an attorney/client relationship.

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Courts Consider Anti-Assignment Clauses And Reverse Triangular Mergers

In a reverse triangular merger, the acquiring company forms a subsidiary that merges with and into the target with the outstanding shares of the target being converted into securities of the acquiring corporation or some other consideration. Does a reverse triangular merger constitute an assignment of a target corporation's contracts? Because the reverse triangular merger is an exceedingly common acquisition technique, one would expect that this question was answered long ago. Surprisingly, however, this isn't the case.

Earlier this year, Vice Chancellor Donald F. Parsons analyzed whether a reverse triangular merger violated an anti-assignment clause that read as follows: "Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .". He concluded:

In sum, Meso could have negotiated for a "change of control provision." They did not. Instead, they negotiated for a term that prohibits "assignments by operation of law or otherwise." Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law. On the other hand, I find Meso's arguments as to why language that prohibits "assignments by operation of law or otherwise" should be construed to encompass reverse triangular mergers unpersuasive and its related construction of Section 5.08 to be unreasonable.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , 62 A.3d 62, 88 (Del. Ch. 2013). See I’ve Been Thinking About Conversion, But I Haven’t Decided To Convert .

Here in California, U.S. District Court Judge Samuel Conti recently addressed the issue even more recently as follows:

No California state court has resolved this matter, and the Court is not inclined to guess at possible conclusions. The Court therefore begins from the presumption that a reverse triangular merger, which leaves intact the acquired corporation, does not effect a transfer of rights from the wholly owned subsidiary to its acquirer as a matter of law. What little applicable law there is could be analogized from California cases on stock sales, like Farmland Irrigation Co. v. Dopplmaier , 48 Cal. 2d 208, 223, 308 P.2d 732 (Cal. 1957), which suggested that if a plaintiff had sold all of his stock in a corporation, there could be no contention that the corporation's licenses would be extinguished as a matter of law, since the two contracting parties were still extant and in privity.

Florey Inst. of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers, 2013 U.S. Dist. LEXIS 138904 (N.D. Cal. Sept. 26, 2013).

Both jurists confronted, and declined to follow, Judge Marilyn Hall Patel's earlier decision in SQL Solutions v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097 (N.D. Cal. Dec. 18, 1991) with Vice Chancellor Parsons saying: "I decline to adopt the approach outlined in SQL Solutions , however, because doing so would conflict with Delaware's jurisprudence surrounding stock acquisitions, among other things. Under Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law." Judge Conti said "Plaintiff relies solely on SQL Solutions to argue that assignment occurred as a matter of law when an acquired corporation became another corporation's wholly owned subsidiary. That case did not analyze nonassignment clauses and also found that federal copyright law forbid transfer."

Hollywood, Somali Pirates and Homer

Over the weekend, I saw the recently released film, Captain Phillips . The movie tells the story of the takeover of the MV Maersk by Somali pirates. When the Navy uses a Somali speaker to communicate with the pirates, one of the pirates asks "Who's this?". The translator answers "nemo", the Latin word for "no one". The interchange, of course, is an echo of the famous encounter of Odysseus and the Cyclops, Polyphemus in Homer's Odyssey :

Κύκλωψ, εἰρωτᾷς μ᾽ ὄνομα κλυτόν, αὐτὰρ ἐγώ τοι ἐξερέω: σὺ δέ μοι δὸς ξείνιον, ὥς περ ὑπέστης. Οὖτις ἐμοί γ᾽ ὄνομα: Οὖτιν δέ με κικλήσκουσι μήτηρ ἠδὲ πατὴρ ἠδ᾽ ἄλλοι πάντες ἑταῖροι. Cyclops, you are asking my renowned name, nevertheless I will declare: "Give to me the hospitality, you were promising. My name is no one: no one is what my mother, father and all my comrades call me."

Homer, Odyssey Book 9, lines 364 -367 (my translation). Matters went downhill from there for both Polyphemus and the pirates.

Keith Paul Bishop

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Weiss v Phillips

Defendant Edward Phillips appeals from the order of the Supreme Court, New York County (Gerald Lebovits, J.), entered November 4, 2016, which, among other things, granted plaintiff's motion for summary judgment on the first cause of action, to foreclose on an unsatisfied mortgage, and denied Phillips's cross motion for summary judgment dismissing the action.

Shaw & Binder, P.C., New York (Stuart F. Shaw and Daniel S. LoPresti of counsel), for appellant.

Dorf & Nelson LLP, Rye (Jonathan B. Nelson, Laura-Michelle Horgan and Jami L. Mevorah of counsel), and Cox Padmore Skolnik & Shakarchy LLP, New York (Solomon J. Borg of counsel), for respondent.

In this case, plaintiff Peter Weiss seeks, among other things, a foreclosure and sale based [*2]on a Mortgage and Note Extension and Modification Agreement (CEMA)[FN1] executed by defendant Edward Phillips. Plaintiff lent $500,000 to borrowers who purported to own the real estate property they sought to mortgage [FN2]. The borrowers signed a note, in which they promised to pay the loan, and a mortgage, in which they gave the plaintiff/lender a security interest in the property they purported to own. The borrowers, however, acquired the property by fraudulent means. After the rightful owner, Phillips, reacquired the property, he executed the CEMA with the individual lender, Weiss. Pursuant to the CEMA, Phillips acknowledged Weiss's rights under the note and mortgage; and, Weiss agreed to forbear from foreclosing on the subject property for a year, presumably to permit Phillips to obtain refinancing.

We find that the motion court properly granted Weiss summary judgment. Unlike the dissent, under the circumstances of this case, we find that Weiss's interest in the property as a mortgagee was not rendered null and void because his borrowers, the mortgagors, had acquired the property by fraudulent means. In addition, we find that Weiss met his burden for summary judgment, on his claim for foreclosure and sale, by submitting the Mortgage and CEMA, along with undisputed evidence establishing both the existence of the note, which obviated the need to submit the note as proof that Weiss had the right to foreclose, and the nonpayment.

In the 1990's, Phillips bought two distressed properties in Harlem (8 West 130th Street and 10 West 130th Street). On September 15, 1999, Phillips deeded 10 West 130th Street to a relative, Arque McCarthy, for no consideration. Phillips transferred the property to McCarthy so that McCarthy could obtain a mortgage for him to make repairs and pay accumulated debt. McCarthy held legal title with the understanding that Phillips would pay the loan and McCarthy would transfer the deed back to Phillips at a later date.

Four and one-half years later, in April 2004, Phillips's lawyer told him that he was sending his paralegal, Austin Smith, to obtain McCarthy's signature on a deed to transfer the property back to Phillips. Smith provided McCarthy with a blank deed.

Rather than filling in Phillips's name on the deed as the transferee, Smith inserted his mother's name (Jeanetta Welch-Ford) as the grantee for no consideration. Then, on December 8, 2005, 18 months after the fraudulent transfer, Welch-Ford unlawfully deeded the property to herself and Smith.

Also on or about December 8, 2005, Weiss lent $500,000 to Welch-Ford and Smith pursuant to their signing a note and mortgage in favor of Weiss, encumbering the property for the subject loan amount [FN3]. Welch-Ford and Smith breached the terms and conditions of the note by [*3]failing to make the required payments due on the note. Subsequently, when Phillips learned of the fraudulent transfer, he sued McCarthy to recover his property. Phillips later abandoned his lawsuit against McCarthy when she agreed to sue Welch-Ford and Smith to recover the property from them. Eventually, the lawsuit settled when Welch-Ford and Smith agreed to transfer title to the property back to Phillips. This deed transfer took place on February 23, 2009. At the time, the original McCarthy loan (made by McCarthy on behalf of and at the request of Phillips) reportedly remained unpaid; the principal and accumulated interest totaled $450,000.

Once Phillips learned of Weiss's intention to foreclose on Phillips's reclaimed property, Phillips executed the CEMA with Weiss, on April 8, 2009, extending and modifying the terms of Weiss's mortgage [FN4]. The CEMA stated that Smith and Welch-Ford were conveying the property to Phillips, and that Weiss agreed to extend and modify the terms of the note and mortgage that were executed by Smith and Welch-Ford. Paragraph 2(a) of the CEMA stated that Phillips consented to the conveyance of the property and understood that he was not personally assuming payment of the note executed by Smith and Welch-Ford. Paragraph 4 stated that Phillips warranted that the principal outstanding balance under the note was $500,000; that Smith and Welch-Ford had no deductions, counterclaims, defenses, or offsets to the note or mortgage; and that the note and mortgage remained in full force and effect and were fully enforceable in accord with their terms and the modification in the CEMA.

In paragraph 5, Phillips "ratifie[d] and reaffirm[ed]" that the terms and revisions of the [*4]note and mortgage remained in effect, and were true and correct, without modification, "except as necessary to implement" the CEMA. Paragraph 6 provided that Phillips warranted that the CEMA was a "valid, enforceable and binding obligation of [his]." In paragraph 7, Phillips "represent[ed] and warrant[ed] that there [we]re no deductions, counterclaims, defenses, or offsets of any nature whatsoever to any of [his] obligations under the Note or Mortgage, as ... modified [by the CEMA]."

Paragraph 15 stated that the note and mortgage as modified

by the CEMA remained in full force and effect. Paragraph 16 provided that "[n]o extension, change, modification or amendment of any kind" of the CEMA, note, or mortgage would be effective unless it was in writing and signed by Weiss and Phillips. Paragraph 19 provided that all prior agreements between the parties with respect to the subject matter of the CEMA were merged into the CEMA.

Finally, Weiss agreed to forbear from foreclosing on the property for a year to permit Phillips to obtain refinancing. Specifically, paragraph 3 of the CEMA extended the due date for a year until April 1, 2010; it also capped the interest due at 9.6%, and required Phillips to make interest payments accruing each month in the amount of $4,000. Phillips paid $4,000 of accrued interest toward Weiss's mortgage on the first of each month for four consecutive months following the CEMA's execution, but he ceased doing so in September 2009.

Upon the expiration of the CEMA's extension period in April 2010, Weiss commenced this action against Phillips, Welch-Ford, and Smith. Subsequently, Weiss moved for summary judgment on the first cause of action of the complaint against Phillips. Along with his motions papers, Weiss provided a copy of the CEMA and the mortgage contract, but he did not provide a copy of the promissory note. Phillips both opposed the motion and cross- moved for summary judgment dismissing the complaint, arguing that the mortgage was unenforceable as it was based on a void deed. The motion court granted Weiss's motion for summary judgment on the first cause of action of the complaint for foreclosure on the mortgage and denied Phillips's cross motion for summary judgment dismissing the complaint. The motion court found that Weiss satisfied his prima facie burden of demonstrating his entitlement to judgment as a matter of law, and that Phillips offered insufficient evidence to raise a triable issue of fact.

As a threshold consideration, given Phillips's execution of the CEMA and other unique facts of this case, we reject the dissent's argument that the failure to produce the note prevents plaintiff from establishing a prima facie case for foreclosure.

The basis of a foreclosure is that an actionable breach of the mortgage has occurred entitling the plaintiff/mortgagee to sell the property to satisfy the debt the mortgage secured (see e.g. Fortress Credit Corp. v Hudson Yards, LLC, 78 AD3d 577 [1st Dept 2010]; Red Tulip, LLC v Neiva, 44 AD3d 204, 209 [1st Dept 2007], lv dismissed 10 NY3d 741 [2008]). The complaint must allege statements that will ultimately establish a judgment of foreclosure and sale (id.). Accordingly, a motion for summary judgment requires the plaintiff to prove the allegations of the complaint which, absent a viable defense or efficacious counterclaim, would entitle a plaintiff to the relief requested (see Alvarez v Prospect Hosp., 68 NY2d 320 [1986]; Winegrad v New York Univ. Med. Ctr., 64 NY2d 851 [1985]).

In this case, the complaint seeks a foreclosure and sale based on the CEMA and the mortgage encumbering the subject property. As indicated, under the CEMA, as the "new owner," Phillips ratified and affirmed all the terms of the note and mortgage and warranted that there were no deductions, counterclaims, defenses, and/or setoffs to any obligations under the note. When the CEMA's extension period expired, without complete payment, Weiss commenced this action. Under these circumstances, Weiss established the allegations of the complaint by submitting the CEMA and the mortgage contract, along with unchallenged [*5]deposition testimony of the existence of the note and nonpayment.

Unlike the dissent, we do not view this action as a typical mortgage foreclosure action. In a typical mortgage foreclosure transaction, a prima facie case is based on production of the unpaid note and mortgage, which establishes that the plaintiff is entitled to foreclose on the unpaid note. A prima facie case is established here, however, by plaintiff's submission of the mortgage and the CEMA, in which Phillips acknowledges the existence and validity of the unpaid note and mortgage, as well as the deposition testimony in which the existence of the note is unchallenged (see Seaway Capital Corp. v 500 Sterling Realty Corp., 94 AD3d 856 [2d Dept 2012]).

We are not persuaded by the dissent's argument that UCC 3-804 mandates a different result. As fully explained below, the dissent takes UCC 3-804 out of context. UCC 3-804 allows one to maintain an action as a "holder" on a promissory note even though the instrument has been lost or destroyed. The section does not apply here where it is established that plaintiff has the right to sue on the note as the undisputed "holder" of the note.[FN5]

UCC article 3 defines "a holder in due course" as one who lawfully possesses a negotiable instrument (UCC 3-302). A holder in due course has the presumption that it is the proper party to enforce or negotiate the instrument (see UCC § 3-301, 3-302). Consistent with article 3, mortgage obligations are owed to the "[p]erson entitled to enforce the note" (see UCC § 3-301; see also Aurora Loan Servs., LLC v Taylor, 25 NY3d 355, 361-362 [2015]; Bank of N.Y. v Silverberg, 86 AD3d 274, 279 [2d 2011]). The concept of entitlement to enforce the note is designed to protect the mortgagor against having to pay twice or defend against multiple claims on the note. If the mortgagor pays in full the person entitled to enforce the note, the note is discharged and the mortgage that secures it is extinguished (see FGB Realty Advisors, Inc. v Parisi, 265 AD2d 297 [2d Dept 1995]).

UCC 3-804 comes into play because article 3 of the UCC does not necessarily equate the person entitled to enforce the note with the person who owns the negotiable instrument (see UCC 3-3a). UCC 3-804 is intended to provide a method of recovery on instruments that are lost, destroyed or stolen. The plaintiff who claims to be the owner of such an instrument is not a holder as that term is defined under article 3, if the plaintiff is not in possession of the paper, and the plaintiff does not have the holder's prima facie right to recover under the section (see generally, 3 Anderson, Uniform Commercial Code, § 3-804 [3d ed. 1998]). Thus, under UCC 3-804, the plaintiff must establish the terms of the instrument and his ownership, and must account for its absence.

In this case, because of the CEMA, standing is not an issue [FN6]. The note's absence is [*6]accounted for by the CEMA and there is no legitimate question that Weiss is the party entitled to enforce under the note, as evinced by the mortgage contract and the CEMA, in which Phillips acknowledges Weiss's right under the note and mortgage, and the deposition testimony indicating the existence of the note. When he entered into the CEMA, Phillips was represented by counsel and he knew that Weiss remained the lawful holder of the note and mortgage. Indeed, Phillips waived lack of standing as a defense by failing to raise it in the answer, or by a pre-answer motion (CPLR 3211[e]; 3211[a][3]; see also Security Pac. Natl. Bank v Evans, 31 AD3d 278, 279-281 [1st Dept 2006], appeal dismissed 8 NY3d 837, 862 [2007]).

Our holding here is consistent with a prior holding from the Second Department in Seaway Capital Corp. v 500 Sterling Realty Corp. (94 AD3d 856). In Seaway, the foreclosure action contained the added element of a forbearance agreement (id. at 856). The Second Department found that the plaintiff established a prima facie case for foreclosure "by submitting proof of the existence of the mortgage and note made by and executed on behalf of [the defendant], certain forbearance agreements and [the defendant's] default." In such a situation, the submission of the forbearance agreement, like the CEMA here, served to establish the plaintiff's entitlement to foreclosure, along with proof of the note and mortgage, thus the failure to submit the note was not a fatal defect.

The dissent expresses unfounded concerns that our holding is inconsistent with the purpose of article 3 of the UCC, which, as indicated, dictates that only a holder in due course can sue on a note so that an obligor is not subject to double liability if the note later turns up in the possession of another claiming to be a holder in due course. Such a risk does not exist in this case where Phillips has assumed no personal liability for the note and the mortgage would be extinguished upon foreclosure.

The dissent seems to be operating under the misconception that Weiss can only enforce his rights under the subject note and mortgage if Phillips had assumed the mortgagors' (borrowers) personal obligations under the note. To be sure, a mortgage instrument is not independently enforceable as a debt (see FGB Realty Advisors v Parisi, 265 AD2d 297, 298 [2d Dept 1999] ["A mortgage is merely security for a debt or other obligation and cannot exist independently of the debt or obligation"]). This simply means that a mortgage may be enforced only by the person who is entitled to enforce the note's obligations that the mortgage secures (see Aurora Loan Servs., LLC v Taylor, 25 NY3d 355, 361 [2015]).

Since Weiss's failure to submit the note, under the circumstances of this case, does not negate his entitlement to summary judgment of foreclosure, the burden shifted to Phillips to produce admissible proof sufficient to raise a triable issue of fact. In this case, as noted, the CEMA contains a provision whereby Phillips waived interposition of defenses or counterclaims in any foreclosure action. Courts have held that the waiver of the right to assert defenses, counterclaims or set offs is enforceable and thus not violative as against public policy (see e.g. Parasram v DeCambre, 247 AD2d 283 [1st Dept 1998]; KeyBank N.A. v Chapman Steamer Collective, LLC, 117 AD3d 991 [2d Dept 2014]). Similarly, where the agreement of the parties, like the CEMA here, clearly recites that the indebtedness must be paid without set offs, deduction, defense or counterclaim, such claims are barred (see Federal Land Bank of Springfield v Saunders, 108 AD2d 838, 839 [2d Dept 1985], lv denied 64 NY2d 611 [1985]). Accordingly, waived defenses "may not be maintained" (Bank of New York v Cariello, 69 AD2d 805, 805 [2d Dept 1979]).

Phillips, however, argues that the mortgage is not enforceable because it was based on a [*7]"fraudulent/forged deed." We reject this argument. Essentially, Phillips asserts that because McCarthy and Smith never had title in the first place, they never had anything to mortgage. Thus, the mortgage was invalid. Phillips's argument, however, conflates the distinction between a void deed and a voidable deed.

To be clear, a deed may be cancelled because it is void or because it is voidable. The difference, however, between a void deed and a voidable deed is important under the law because it affects a party's ability to defend against a future purchaser or encumbrancer for value. A void real estate transaction is one where the law deems that no transfer actually occurred (Faison v Lewis, 25 NY3d 220, 225 [2015]). Accordingly, if the deed is void, it does not pass title and cannot be enforced even if title is later acquired by a bona fide purchaser (id.; ABN AMRO Mtge. Group, Inc. v Stephens, 91 AD3d 801, 803 [2d Dept 2012]). Similarly, a lender who takes a mortgage to a property subject to a void deed does not have anything to mortgage, so the lender's mortgage is invalid as well (Cruz v Cruz, 37 AD3d 754 [2d Dept 2007]; Yin Wu v Wu, 288 AD2d 104, 105 [1st Dept 2001]). In contrast, a voidable real estate transaction is one where a transfer is deemed to have occurred, but can be revoked. In that situation the deed is only voidable (Faison v Lewis, 25 NY3d at 225).

The question becomes whether the deed by which Welch-

Ford and Smith acquired the subject real estate was a void deed or a voidable deed. Forged deeds and/or encumbrances are those executed under false pretenses, and are void ab initio (see Marden v Dorthy, 160 NY 39 [1899]; GMAC Mtge. Corp. v Chan, 56 AD3d 521, 522 [2d Dept 2008]; Cruz v Cruz, 37 AD3d 754). The interests of subsequent bona fide purchasers or encumbrancers for value are thus not protected under Real Property Law § 266 [FN7] when their title is derived from a forged deed or one that is the product of false pretenses (see Ameriquest Mtge. Co. v Gaffney, 41 AD3d 750 [2d Dept 2007]; LaSalle Bank Natl. Assn. v Ally, 39 AD3d 597, 599-600 [2d Dept 2007]). In contrast, a fraudulently induced deed is merely voidable, not void (see Marden v Dorthy, 160 NY at 150; Dalessio v Kressler, 6 AD3d 57, 61 [2d Dept 2004]; Yin Wu v Wu, 288 AD2d at 105).

In this case, Phillips improperly labels the instrument by which the improper transfer took place as both a "fraudulent/forged deed." The undisputed facts establish, however, that the deed was the result of fraudulent inducement, rather than the result of a forged deed or one executed under false pretenses. As fully explained above, the tortfeasor (at the time, a paralegal assigned to procure the deed transfer) obtained the owner's signature on the deed purportedly to transfer the property back to its original owner, Phillips. The paralegal presented the owner with a blank deed, which she signed. The subsequent deed transfer was the result of a classic fraudulent inducement, because the owner believed that she was signing the deed in order to transfer the property back to its original owner, Phillips. Instead, the deed transferred the property to the paralegal's mother and then himself, before they obtained a loan and mortgage from Weiss. Thus, the deed here was voidable, not void ab initio.

Phillips, however, argues that Weiss was not a bona fide encumbrancer entitled to protection under Real Property Law § 266. While the evidence in this case presents an issue of fact as to whether Phillips was in actual possession of the property when Weiss acquired his mortgage interest, which was sufficient to require an inquiry by Weiss into "the existence of any right which [the owner may be] able to establish" (Phelan v Brady, 119 NY 587, 592 [1890]), [*8]Phillips's attack on the mortgage faces an insurmountable obstacle, the CEMA. The CEMA makes clear that Phillips acknowledged Weiss's rights under the note and mortgage and waived any claims or defenses as to the same.

We reject Phillips's contention - adopted by the dissent

here - that the CEMA is ambiguous as to its intended purpose.[FN8] Phillips argues that ambiguity is created by the language in the CEMA stating that Phillips "is not personally assuming payment of the Note." However, this simply means that if Weiss proceeded to an eventual foreclosure and sale of the property and the proceeds of the sale were less than the amount due and owing to Weiss under the note and mortgage, Phillips would not be personally liable to pay the deficient amount. Contrary to the dissent's position, this language is not inconsistent with the remaining terms of the CEMA which, in effect, indicated to Phillips that his property was subject to Weiss's lien up to the amount of the unpaid note.

Ultimately, Phillips may not avoid a mortgage obligation on his property on the ground of fraud where, after acquiring knowledge of the fraud, he affirmed in the CEMA that his property was subject to Weiss's lien up to the amount of the unpaid note. A party can ratify a contract by failing to timely disaffirm it or by acts, like here, that are consistent with a showing of an intent to be bound by the contract, even if the contract was otherwise voidable (see Stauss v Title & Guar. Trust Co., 284 NY 41, 45 [1940]; Cooper v Greenberg, 151 AD2d 423, 424 [1st Dept 1989]).

In this case, not only did Phillips sign the CEMA, by which he acknowledged Weiss's rights under the Note and Mortgage, but he also paid $4,000 of accrued interest toward Weiss's mortgage on the first of each month, for four consecutive months, pursuant to the CEMA's extension agreement. Accordingly, because of the unequivocal language of the CEMA, and in light of Phillips's conduct following its execution, Phillips expressly and impliedly ratified Weiss's mortgage on the property (see Votta v Votta Enter., 249 AD2d 536, 537 [2d Dept 1998] [mortgage debt deemed ratified where borrowers made payments for 18 months after discovering the alleged fraud]).

Significantly, Phillips signed the CEMA while represented by counsel. It is of no moment that Phillips now claims to have misunderstood the legal implications and ramifications of the terms of the CEMA. The fact that no one allegedly explained the agreement to the signer does not make the agreement unenforceable unless it rises to the level of fraud, overreaching or unconscionability (Matter of Gould v Board of Educ. Of Sewankaha Cent. High School Dist., 81 NY2d 446, 453 [1993]). The concept of unconscionability permits a court to declare a part or all of a contract inoperative if it would result in "unfair surprise" or if it would be "oppressive" to [*9]the signer (id.; see also Broadway-111th St. Assoc. v Morris, 160 AD2d 182 [1st Dept 1990]).

There is no showing of unconscionability in the formation of the CEMA, the subject contract (see Morris v Snappy Car Rental, 84 NY2d 21, 30 [1994]). Phillips's allegation that his lawyer improperly induced him to sign the CEMA is refuted by his counsel's detailed explanation for entering into the CEMA. In his deposition, counsel for Phillips explained that $450,000 of the $500,000 proceeds of Weiss's loan went to satisfy the first mortgage, which McCarthy had obtained on Phillips's behalf. The mortgage, for which McCarthy was liable, was in default even though Phillips had agreed to make payments on the loan. The $500,000 second mortgage loan covered the debt of the first mortgage loan taken out by McCarthy on behalf of Phillips. Under the circumstances, counsel for Phillips reasonably concluded that Weiss, as a mortgagee, had a valid equitable subrogation claim for $450,000 (see King v Pelkofski, 20 NY2d 326 [1967] [A party who provides the money used to discharge a prior mortgage is entitled to be subrogated to the rights of the prior lienor where the party's lien, through some disability, becomes invalid]). Finally, counsel for Phillips explained that, prior to entering into the CEMA, Phillips had already agreed to waive seeking the remaining $50,000 from the parties who defrauded him, in exchange for regaining title to the property.

Phillips alternatively claims that the CEMA is unenforceable because there was no consideration. This ignores the fact that by entering into the CEMA, Weiss agreed to forbear from foreclosing on the property for a year to permit Phillips to obtain refinancing. Finally, we have considered Phillips's remaining contentions, including that Weiss violated the rule against successive summary judgment motions, and find them unavailing.

Accordingly, the order of the Supreme Court, New York County (Gerald Lebovits, J.), entered November 4, 2016, which, among other things, granted Weiss's motion for summary judgment on the first cause of action, to foreclose on an

unsatisfied mortgage, and denied Phillips's cross motion for summary judgment dismissing the action, should be affirmed, without costs.

All concur except Gesmer, J. who

dissents in part in an Opinion.

I respectfully dissent as to the portion of the majority decision that affirms the grant of summary judgment to plaintiff Peter Weiss. The majority's position is premised on the accuracy of two statements in the first paragraph of its writing, both of which are unsupported by any evidence. First, my colleagues state that plaintiff loaned $500,000 to the borrowers. However, plaintiff does not swear in any of his affidavits that he loaned $500,000 to anyone, and the record before the court does not include any documents showing that he did so.

Second, the majority states that the alleged borrowers signed a note. However, the record before the court does not include any note, or any affidavit by anyone who claims to have drafted or signed the alleged note, or even by anyone who claims to have seen or ever possessed the alleged note. In fact, plaintiff's failure to produce the note on which he sues deprives him of a fundamental element of his prima facie case for foreclosure (Bank of Smithtown v 264 West 124 LLC, 105 AD3d 468, 469 [1st Dept 2013]). Plaintiff can only cure this deficiency by explaining the absence of the note and proving its terms, which he has failed to do (UCC 3-804; see also Shanmugam v SCI Eng'g, P.C., 122 AD3d 437, 438 [1st Dept 2014]; Clovine Assoc. Ltd. Partnership v Kindlund, 211 AD2d 572, 573 [1st Dept 1995]). The record does not include any explanation for the absence of the note. One possible conclusion is that the note does not exist. This undercuts the majority's conclusion that plaintiff is the "undisputed holder' of the note." Thus, in the absence of an explanation for its absence, production of the note, and proof that [*10]plaintiff holds it, is essential to plaintiff's case. The majority makes the unprecedented holding today that plaintiff may make out a prima facie case for foreclosure without either producing the note or explaining its absence and proving its terms.

The majority writing is also premised on a significant error of law. A foreclosure proceeding is premised on the breach of a note, not, as the majority states, a breach of a mortgage, since "a mortgage is merely security for a debt or other obligation and cannot exist independently of the debt or obligation" (FGB Realty Advisors v Parisi, 265 AD2d 297, 298 [2d Dept 1999], citing Copp v Sands Point Mar., 17 NY2d 291, 293 [1966]).

Defendant Edward Phillips has raised triable issues of fact as to plaintiff's entitlement to a judgment of foreclosure, including whether Phillips had any obligation to pay plaintiff on which he could have defaulted, and whether plaintiff is the holder of a bona fide obligation. Therefore, I would reverse the grant of summary judgment to plaintiff, and affirm the denial of summary judgment to Phillips.

Plaintiff, a college graduate, is in the business of lending money secured by mortgages. He works both in his own name and through his business, Confidential Lending LLC. Phillips had no formal education after the age of 14, when he quit school to work on his family's farm in Tobago. He now supports himself doing plumbing repairs on a freelance basis for a management company.

On May 15, 1996, Phillips purchased a three family dwelling at 10 West 130th Street in Manhattan (the Property). In 1999, on the advice of his lawyer Edwin Drakes, he made an oral agreement with his relative Arque McCarthy that he would deed the Property to her, for no consideration, and that she would, upon his request, deed the Property back to him, at a future date. Accordingly, on September 15, 1999, he executed a deed transferring ownership of the Property to McCarthy.[FN1]

In or about April 2004, Drakes told Phillips that it was time to have McCarthy deed the Property back to him. Drakes said that he would take care of the transfer, by sending his employee Austin Smith to obtain McCarthy's signature on a deed that would transfer the Property back to Phillips [FN2]. Phillips told McCarthy that she should meet with Smith to sign the [*11]deed. According to McCarthy's undisputed affidavit, on or about April 28, 2004, Smith presented her with a blank deed, which she signed; no notary was present when she did so. She believed that she was signing the deed in order to transfer the Property back to Phillips.

On August 2, 2004, a deed dated April 28, 2004 transferring the Property from McCarthy to Smith's mother, Jeanetta Welch-Ford, was recorded [FN3]. An acknowledgment of McCarthy's signature by notary Lewis Phillip appears on the deed. McCarthy did not authorize the transfer of the Property to Welch-Ford, and did not see the completed deed until years later. The accompanying Real Property Transfer Report submitted to the City Register provides that this was a "Sale Between Relatives or Former Relatives." There is no claim that Welch-Ford and McCarthy are relatives or former relatives. The accompanying smoke detector affidavit submitted to the City Register confirms that the Property is residential.

On November 12, 2004, Phillips commenced an action against McCarthy under New York County index number 116025/04 in which he filed a lis pendens against the Property and claimed that McCarthy was going to transfer or had transferred the Property to a third party in violation of their agreement. He sought an order directing her to transfer title of the Property back to him. By order dated August 26, 2005, the court denied a motion to vacate the lis pendens. According to the Unified Court System website, the matter was dismissed on August 30, 2005.[FN4]

On or about December 8, 2005, Welch-Ford executed a deed transferring the Property from herself to herself and Smith. Simultaneously, Smith and Welch-Ford entered into a Mortgage, Security Agreement and Assignment of Leases and Rents (the Mortgage) with plaintiff, ostensibly to secure a loan from plaintiff of $500,000. Plaintiff had done three or four mortgage transactions with Smith before that.

The Mortgage refers to a note dated December 8, 2005 (the Note) but the Note is not in the record on appeal and there is no indication that it was provided to the motion court [FN5]. Plaintiff has failed to meet his burden to provide an explanation as to why the Note was not produced. Therefore, the court cannot consider testimony as to its contents (Jerome Prince, Richardson on Evidence § 10-201 [Farrell 11th ed 1995]; Martin, Capra and Rossi, New York Evidence [*12]Handbook § 10.3 [3d ed 2017]; 57 NY Jur 2d, Evidence and Witnesses § 253). Indeed the record is also devoid of evidence that Weiss paid $500,000 to Smith and Welch-Ford at that time, either by direct payment or by making a payment on their behalf. Weiss does not make any affirmative statement that he made such a payment, nor is there any documentary evidence that he made such a payment.

The recording and endorsement cover page for the Mortgage states that the Property is a "DWELLING ONLY - 3 FAMILY."[FN6] However, the Mortgage provides, at Paragraph 45, titled "Non-Residential Property," that it "does not cover real property principally improved by one or more structures containing in the aggregate six (6) or less residential dwelling units having their own separate cooking facilities." At the end of the mortgage document, there are three boxes in which the borrower is to indicate whether the property securing the loan is residential, and has one or two units, or more; no box is checked.

A December 2005 title report, prepared in connection with the Mortgage, lists Phillips's lis pendens, as well as a lis pendens filed against McCarthy in connection with foreclosure actions against her by Nationscredit Financial Services. Phillips first saw this title report when it was produced in discovery in this action. Plaintiff testified that, although he received the title report prior to the closing, he did not examine the schedules attached to it. Plaintiff further testified that, before making the loan, he never spoke to Welch-Ford, did not request that Smith and Welch-Ford complete a loan application, did not conduct a credit check on them, did not run an internet search on the Property, and did not have the Property appraised prior to closing. He testified that he only looked at the Property from the outside.

On January 31, 2006, the deed transferring the Property from Welch-Ford to Welch-Ford and Smith was recorded, along with the Mortgage.

On January 5, 2007, McCarthy, represented by attorney David K. Fiveson,[FN7] commenced an action against Smith and Welch-Ford under New York County index number 100179/07 (the McCarthy action)[FN8] seeking to set aside the deeds transferring the Property from McCarthy to Welch-Ford and from Welch-Ford to herself and Smith, and seeking damages of $500,000, "minus any sums used from these proceeds to discharge valid liens of plaintiff against [the Property]." According to the Unified Court System website, the McCarthy action was marked "settled during trial" on February 4, 2009. The record does not contain either a written settlement agreement or a transcript of an agreement entered into in open court, and no one has [*13]explained its absence. Therefore, the terms of the alleged agreement have not been established, except that, on or about February 23, 2009, Smith and Welch-Ford executed a "correction deed," transferring the Property to Phillips, which states that it "is intended to correct the name of the grantee's in the deed recorded 1/31/2006 under CRFN 2006000059194 from Jeanettea [sic] Welch Ford and Austin Smith -to- edward [sic] Phillips pursuant to a settlement of New York County Supreme Court action/index no. 10017/2007 [sic]." The correction deed was recorded on May 29, 2009.

In April 2009, Phillips and plaintiff executed a document titled "Mortgage and Note Extension and Modification Agreement" (EMA)[FN9]. The EMA denominates Smith and Welch-Ford as "Original Borrower," Phillips as "New Owner," and plaintiff as "Lender." The EMA provides that plaintiff consents to the conveyance of the Property from Smith and Welch-Ford to Phillips, and provides, at paragraph 2(a), that "[i]t is understood and acknowledged that New Owner is not personally assuming payment of the Note." It extends the maturity date of the Note to April 1, 2010. However, the EMA does not set forth the terms of the Note.

Moreover, contrary to the majority's statement that the EMA obligates Phillips to make interest payments to plaintiff, the EMA is explicit that Phillips is not assuming payments due under the alleged Note. The EMA is, at best, ambiguous as to who is obligated to make interest payments, as the motion court previously found in its October 10, 2012 order denying plaintiff's first motion for summary judgment. This ambiguity had not been resolved, and remained the law of this case at the time the motion court granted plaintiff's second motion for summary judgment, which is the subject of this appeal. The second paragraph 3 of the EMA, at the bottom of page 1, provides that

"[i]nterest shall continue to accrue on the outstanding principal balance due under the Note from March 1, 2009 until the Maturity Date at the rate of 9.6% per annum. Interest only shall be payable in the amount of $4,000 on April 1, 2009 and like amount on the first day of each month thereafter. All accrued interest shall be due and payable on the Maturity Date or such earlier date as the principal sum due under the Note shall become due and payable. Borrower may prepay the principal balance and all accrued interest at any time without premium or penalty."

The EMA further states that accrued interest under the Note totaled $81,666.66 as of February 28, 2009; that the outstanding principal balance was $500,000; and that "Borrower has no deduction, counterclaim, defense and/or offset relating to the Note or Mortgage, which Note and Mortgage are acknowledged to be and remain in full force and effect and fully enforceable in accordance with their respective terms . . . . " It further provides that "New Owner represents and warrants that there are no deductions, counterclaims, defenses, or offsets of any nature whatsoever to any of its obligations under the Note or Mortgage . . . . " However, it does not state that New Owner has any obligations under the Note, Mortgage, or EMA, and it does not define the term "Borrower."

Phillips testified throughout his deposition that he had difficulty understanding written documents, legal concepts, or words such as "indemnify," "convey," or "legitimate."[FN10] He testified that he understood the EMA to obligate "the person who took . . . the [M]ortgage to pay" it. In his affidavit submitted to the motion court, he also stated that he understood the EMA to be a forbearance agreement that did not give plaintiff the right to foreclose against him.

Plaintiff testified that he understood the second paragraph three in the EMA to obligate Phillips to make interest payments of $4,000 per month, although that paragraph does not impose any obligation on Phillips either by name or as "New Owner." Although the EMA defines Smith and Welch-Ford as "Original Borrower," the term "Borrower" is not defined. Plaintiff testified that he understood the term "Borrower" to refer to Phillips, although he acknowledged that plaintiff never received any funds from the Mortgage proceeds. Although plaintiff has a college education and is an experienced businessman whose business is making loans secured by mortgages, he claimed not to understand the language in paragraph 2(a) of the EMA providing that Phillips is not personally liable on the Mortgage.

Plaintiff commenced this foreclosure action on November 19, 2010. Smith and Welch-Ford did not appear or submit an answer.

In the amended complaint dated March 4, 2011,[FN11] plaintiff alleges in his first cause of action that Smith and Welch-Ford failed to make payments due under the Mortgage and Note on February 1, 2008 and thereafter; that Phillips was obligated to pay $4,000 per month commencing April 1, 2009 pursuant to the EMA; and that he failed to do so on and after September 1, 2009. Plaintiff seeks a judgment of foreclosure.

The amended complaint further alleges, in the second cause of action, that plaintiff is entitled to a judgment against "Defendant" for the costs of collection because Smith and Welch-Ford agreed to pay collection costs and counsel fees. In addition, in the third cause of action, plaintiff alleges that Smith and Welch-Ford are liable for sums due under the Mortgage and Note pursuant to a written guaranty, and plaintiff seeks a judgment against them for any deficiency remaining after sale of the Property. The fourth cause of action alleges that McCarthy took out a mortgage on the Property in 1999 for $208,000, that McCarthy and Phillips failed to make payments on that mortgage, and that $350,000 of the proceeds of the Mortgage were used to pay off the 1999 mortgage. Plaintiff seeks, in the alternative to a judgment on his first three causes of action, a declaratory judgment that he has a valid first lien on the Property, to the extent that $350,000 of the proceeds from the Mortgage were used to pay off the earlier mortgage on the Property or were "paid to or for the benefit of" Phillips.[FN12]

Phillips filed a verified amended answer on April 7, 2011. Phillips's affirmative defenses include that the Mortgage is unenforceable because it is based on a deed obtained through false pretenses; that plaintiff is not a bona fide encumbrancer for value because he should have known that the deed was questionable, and failed to make reasonable inquiry; that the EMA is unenforceable because it is based on a deed obtained through false pretenses, and lacks consideration; and that the EMA does not obligate Phillips to pay any sums.

By order dated October 10, 2012, Judge Wooten denied both plaintiff's first motion for summary judgment, which sought dismissal of Phillips's defenses to his obligations under the Mortgage, and Phillips's cross motion for summary judgment, in which he sought dismissal on the grounds that plaintiff had failed to attach a copy of the Mortgage and Note. In addition, Judge Wooten held that the EMA was ambiguous, and that plaintiff's and Phillips's materially divergent claims about their intent in entering into the EMA precluded summary judgment as a matter of law.

After further discovery, including party depositions, plaintiff moved for summary judgment on his first cause of action for a judgment of foreclosure, and Phillips cross-moved for summary judgment dismissing the complaint as against him. By order dated July 22, 2016, which is the subject of this appeal, Judge Lebovits granted plaintiff's motion for summary judgment on his first cause of action, denied Phillips's cross-motion for summary judgment, and directed plaintiff to settle an order on notice referring the matter to a Special Referee.

I would vote to reverse the award of summary judgment to plaintiff for three reasons.

First, plaintiff has failed to make out a prima facie case entitling him to a judgment of foreclosure, since he has failed to produce the Note (Bank of Am., N.A. v Thomas, 138 AD3d 523 [1st Dept 2016]; see also Bank of Smithtown, 105 AD3d at 469; Bank of N.Y. Trust Co., N.A. v Chiejina, 142 AD3d 570 [2d Dept 2016][all holding that plaintiff establishes a prima facie right to foreclosure by producing the mortgage, note and undisputed evidence of nonpayment])[FN13]. Indeed, neither plaintiff's affidavit in support of the motion for summary judgment, nor his attorney's accompanying affirmation, even refer to the Note, even though plaintiff's failure to present it to the motion court was a major factor in the denial of plaintiff's first summary [*14]judgment motion.

The majority's statement that plaintiff satisfied his obligation by producing unspecified "evidence . . . of the note" is not consistent with the case law. A party may only prevail in a foreclosure action without producing the underlying note where he meets his "burden of explaining the note's loss, ownership and terms as required by UCC 3-804" (Clovine Assoc. Ltd. Partnership v Kindlund, 211 AD2d at 573; see also Shanmugam v SCI Eng'g, P.C., 122 AD3d 437, 438 [1st Dept 2014]; Marrazzo v Piccolo, 163 AD2d 369 [2d Dept 1990]). Absent evidence of the complete terms of the Note, plaintiff has failed to establish his prima facie case (76-82 St. Marks, LLC v Gluck, 147 AD3d 1011 [2d Dept 2017]; Wong v Wong, 86 AD3d 439 [1st Dept 2011]; Cole v Canno, 168 App Div 178, 183 [3d Dept 1915]["It would certainly be establishing a dangerous precedent to permit a writing vital to the maintenance of a cause of action to be established by parol until some satisfactory proof of its loss or of inability to produce it had been made, or at least some effort to ascertain whether the writing were still in existence"]).

This is consistent with the purpose of UCC 3-804, which protects the obligor by requiring the plaintiff to prove it is a holder in due course of the note sued upon, so that the obligor is not subject to double liability if the note later turns up in the possession of another claiming to be the holder in due course (see Official Commentary, McKinney's Cons Laws of NY, Book 62½, UCC 3-804)[FN14]. Here, plaintiff has offered no explanation whatsoever for the Note's absence, and no proof of its contents. Furthermore, the majority may not rely on the EMA to take the place of the missing Note, because that document does not set forth the terms of the alleged Note.

Moreover, plaintiff has also failed to present "undisputed evidence" that Phillips has defaulted since, as discussed further below, the EMA is ambiguous as to whether it obligates Phillips to make any payments on the Note (Red Tulip, LLC v Neiva, 44 AD3d 204, 209 [1st Dept 2007], lv dismissed 10 NY3d 741 [2008]). The majority appears to view Phillips's execution of the EMA as a ratification of the Mortgage and alleged Note. However, the EMA merely states at paragraph 7 that Phillips acknowledges that there are no defenses or counterclaims to his obligations under the Note or Mortgage. Since there is no claim that he had obligations under either, this statement does not impose any obligation on him, or constitute a ratification of either document. Nor has plaintiff presented evidence that the original borrowers defaulted, since he has not proven what obligations, if any, the Note imposed on them.

Second, defendant has raised material questions of fact as to the EMA's enforceability. At the time that Weiss made his second motion for summary judgment resulting in the order now appealed from, it remained the law of this case that the EMA is ambiguous, and neither party has produced evidence in admissible form sufficient to resolve the ambiguity.

The motion court seemed to hold that the ambiguity of the EMA was resolved by the settlement agreement in the McCarthy action against Smith and Welch-Ford, which plaintiff claims was binding on Phillips and required him to indemnify Smith and Welch-Ford against any deficiency judgment in connection with the Mortgage.

However, no one has produced that settlement agreement. To succeed on a summary judgment motion, the movant must establish his cause of action by presentation of proof in [*15]admissible form (Zuckerman v City of New York, 49 NY2d 557, 562 [1980]; Advanced Global Tech., LLC v Sirius Satellite Radio, Inc., 44 AD3d 317, 318 [1st Dept 2007]). The best evidence of the terms of the alleged settlement agreement would be a certified copy of the complete transcript of the proceedings, or a signed writing; neither party presented any such evidence to the motion court (see Schozer v William Penn Life Ins. Co. of N.Y., 84 NY2d 639, 644 [1994]). Instead, plaintiff presented an unsigned transcript of Phillips's deposition testimony, which included purported quotes of portions of the transcript of the alleged settlement agreement. This is clearly inadequate under the best evidence rule to establish the contents of the settlement agreement.

In addition, since Phillips was not a party to the McCarthy action, it is unlikely that any settlement of that action would bind him. CPLR 2104, which deals with agreements "between parties or their attorneys relating to any matter in an action," requires that such agreements be reduced to a writing, unless they are made "between counsel in open court" (CPLR 2104). Since Phillips was not a party to the McCarthy action, the exception created by CPLR 2104 does not apply here. Furthermore, since the agreement is alleged to have addressed interests in real property and an obligation to pay for the debt of another, an oral agreement would also violate the statute of frauds (General Obligations Law § 5-701[a][2], [10]; see also Matter of Dolgin Eldert Corp., 31 NY2d 1, 11 [1972]).

Moreover, as Judge Wooten previously found, the plain language of the EMA does not obligate Phillips or "New Owner" to do anything, and expressly provides that he is not personally liable on the Note. The deposition testimony attached to the motion does not resolve the ambiguity; indeed, it demonstrates that Phillips and Weiss had directly contrary purposes and understandings in entering into the EMA. Phillips testified that he believed, when he signed the EMA, that Fiveson, whom Phillips perceived to be representing him at the time, had prepared it and that it was "a part of the deed" transferring the Property back to him. He further testified that Fiveson did not fully explain it to him, and, contrary to the majority's statement, it is not clear on the record before us that Fiveson, or any other attorney, represented Phillips when he executed the EMA [FN15]. Fiveson and Borg testified that Borg prepared it. Fiveson testified that he understood the EMA to be a forbearance agreement, not a loan to Phillips secured by the Property.

Finally, contrary to the majority's statement, Phillips has also raised questions of fact as to whether plaintiff is a bona fide encumbrancer entitled to protection under Real Property Law § 266. I agree with the majority that a deed that is the result of fraudulent inducement is voidable (Faison v Lewis, 25 NY3d 220, 225 [2015]). However, the majority fails to address the relevance to this case of the doctrine that, where a mortgagee had previous notice of fraud affecting the grantor's title, it may not be a bona fide encumbrancer, and may not be protected (RPL § 266; see also Yin Wu v Wu, 288 AD2d 104, 105 [1st Dept 2001]). "A mortgagee will be charged with constructive notice if it is aware of facts that would lead a reasonable, prudent lender to make inquiries of the circumstances of the transaction at issue.' If a reasonable [*16]inquiry' would reveal some evidence of fraud, then failure to make some investigation' will divest the mortgagee of bona fide encumbrancer status" (Miller-Francis v Smith-Jackson, 113 AD3d 28, 34 [1st Dept 2013] [internal citations omitted]).

Here, Phillips has raised questions of fact requiring a trial as to whether plaintiff is a bona fide encumbrancer entitled to protection [FN16]. First, the Mortgage itself raises an issue as to whether plaintiff conducted a reasonable inquiry, since the cover pages state that the Property is residential, and the Mortgage itself states that it is not; moreover, public records and a cursory perusal of the outside of the Property would have revealed that it is a residential building. Second, plaintiff admitted that he received a title report in connection with the Mortgage prior to the closing, but did not read it completely. That title report showed that Phillips had obtained a lis pendens on the property in his 2004 action against McCarthy. Similarly, plaintiff knew that, at the time of the closing on the Mortgage, another mortgage existed in McCarthy's name, even though Smith and Welch-Ford claimed to own the Property. Finally, plaintiff admitted at his deposition that he conducted virtually no investigation into Smith's and Welch-Ford's creditworthiness and bona fides and into the Property and its history and value, other than viewing the outside of the building and walking around the neighborhood; and Phillips testified that plaintiff later admitted to him that he had not even done that.

Since plaintiff has failed to make out a prima facie case entitling him to a judgment of foreclosure, and Phillips has raised issues of fact requiring a trial, I would vote to reverse the motion court's award of summary judgment to plaintiff on his first cause of action, and I would affirm the motion court's denial of Phillip's motion for summary judgment.

Order, Supreme Court, New York County (Gerald Lebovits, J.), entered November 4, 2016, affirmed, without costs.

Opinion by Renwick, J. All concur except Gesmer, J. who dissents in part in an Opinion.

Acosta, P.J., Renwick, Mazzarelli, Gische, Gesmer, JJ.

THIS CONSTITUTES THE DECISION AND ORDER

OF THE SUPREME COURT, APPELLATE DIVISION, FIRST DEPARTMENT.

ENTERED: NOVEMBER 21, 2017

Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.

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Spotting issues with assignment clauses in M&A Due Diligence

Written by: Kira Systems

January 19, 2016

6 minute read

Although not nearly as complex as change of control provisions , assignment provisions may still present a challenge in due diligence projects. We hope this blog post will help you navigate the ambiguities of assignment clauses with greater ease by explaining some of the common variations. (And, if you like it, please check out our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence. )

What is an Assignment Clause?

First, the basics:

Anti-assignment clauses are common because without them, generally, contracts are freely assignable. (The exceptions are (i) contracts that are subject to statutes or public policies prohibiting their assignment, such as intellectual property contracts, or (ii) contracts where an assignment without consent would cause material and adverse consequences to non-assigning counterparties, such as employment agreements and consulting agreements.) For all other contracts, parties may want an anti-assignment clause that allows them the opportunity to review and understand the impact of an assignment (or change of control) before deciding whether to continue or terminate the relationship.

In the mergers and acquisitions context, an assignment of a contract from a target company entity to the relevant acquirer entity is needed whenever a contract has to be placed in the name of an entity other than the existing target company entity after consummation of a transaction. This is why reviewing contracts for assignment clauses is so critical.

A simple anti-assignment provision provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may also provide specific exclusions or inclusions to a counterparty’s right to consent to the assignment of a contract. Below are five common occurrences in which assignment provisions may provide exclusions or inclusions.

Common Exclusions and Inclusions

Exclusion for change of control transactions.

In negotiating an anti-assignment clause, a company would typically seek the exclusion of assignments undertaken in connection with change of control transactions, including mergers and sales of all or substantially all of the assets of the company. This allows a company to undertake a strategic transaction without worry. If an anti-assignment clause doesn’t exclude change of control transactions, a counterparty might materially affect a strategic transaction through delay and/or refusal of consent. Because there are many types of change of control transactions, there is no standard language for these. An example might be:

In the event of the sale or transfer by [Party B] of all or substantially all of its assets related to this Agreement to an Affiliate or to a third party, whether by sale, merger, or change of control, [Party B] would have the right to assign any or all rights and obligations contained herein and the Agreement to such Affiliate or third party without the consent of [Party A] and the Agreement shall be binding upon such acquirer and would remain in full force and effect, at least until the expiration of the then current Term.

Exclusion for Affiliate Transactions

A typical exclusion is one that allows a target company to assign a contract to an affiliate without needing the consent of the contract counterparty. This is much like an exclusion with respect to change of control, since in affiliate transfers or assignments, the ultimate actors and responsible parties under the contract remain essentially the same even though the nominal parties may change. For example:

Either party may assign its rights under this Agreement, including its right to receive payments hereunder, to a subsidiary, affiliate or any financial institution, but in such case the assigning party shall remain liable to the other party for the assigning party’s obligations hereunder. All or any portion of the rights and obligations of [Party A] under this Agreement may be transferred by [Party A] to any of its Affiliates without the consent of [Party B].

Assignment by Operation of Law

Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure that an assignment occurring by operation of law requires counterparty approval:

[Party A] agrees that it will not assign, sublet or otherwise transfer its rights hereunder, either voluntarily or by operations of law, without the prior written consent of [Party B].

while an exclusion could be negotiated by a target company to make it clear that it has the right to assign the contract even though it might otherwise have that right as a matter of law:

This Guaranty shall be binding upon the successors and assigns of [Party A]; provided, that no transfer, assignment or delegation by [Party A], other than a transfer, assignment or delegation by operation of law, without the consent of [Party B], shall release [Party A] from its liabilities hereunder.

This helps settle any ambiguity regarding assignments and their effects under mergers statutes (particularly in forward triangular mergers and forward mergers since the target company ceases to exist upon consummation of the merger).

Direct or Indirect Assignment

More ambiguity can arise regarding which actions or transactions require a counterparty’s consent when assignment clauses prohibit both direct and indirect assignments without the consent of a counterparty. Transaction parties will typically choose to err on the side of over-inclusiveness in determining which contracts will require consent when dealing with material contracts. An example clause prohibiting direct or indirect assignment might be:

Except as provided hereunder or under the Merger Agreement, such Shareholder shall not, directly or indirectly, (i) transfer (which term shall include any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to or permit any such transfer of, any or all of its Subject Shares, or any interest therein.

“Transfer” of Agreement vs. “Assignment” of Agreement

In some instances, assignment provisions prohibit “transfers” of agreements in addition to, or instead of, explicitly prohibiting “assignments”. Often, the word “transfer” is not defined in the agreement, in which case the governing law of the contract will determine the meaning of the term and whether prohibition on transfers are meant to prohibit a broader or narrower range of transactions than prohibitions on assignments. Note that the current jurisprudence on the meaning of an assignment is broader and deeper than it is on the meaning of a transfer. In the rarer case where “transfer” is defined, it might look like this:

As used in this Agreement, the term “transfer” includes the Franchisee’s voluntary, involuntary, direct or indirect assignment, sale, gift or other disposition of any interest in…

The examples listed above are only of five common occurrences in which an assignment provision may provide exclusions or inclusions. As you continue with due diligence review, you may find that assignment provisions offer greater variety beyond the factors discussed in this blog post. However, you now have a basic understand of the possible variations of assignment clauses. For a more in-depth discussion of reviewing change of control and assignment provisions in due diligence, please download our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence.

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Assignability of Commercial Contracts (NY) | Practical Law

Assignability of Commercial Contracts (NY)

Practical law practice note w-010-1902 (approx. 41 pages).

assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

Founded in 1939, our law firm combines the ability to represent clients in domestic or international matters with the personal interaction with clients that is traditional to a long established law firm.

Case review: non-assignment clauses and transferring the right to arbitrate by operation of law (Court of Appeal decision)

Global | Publication | January 2024

Introduction

Factual background, the high court’s decision, the court of appeal’s decision, key takeaways.

Does a non-assignment clause that prohibits assignments “by any party to any third party, for any reason whatsoever” prevent an assignment (akin to subrogation) to an insurer where such assignment takes effect by operation of law? The Court of Appeal had to consider this question in the recent case of Dassault [2024] EWCA Civ 5 .

Overturning the High Court’s decision, the Court of Appeal found that the assignment in question did not fall foul of the non-assignment clause as the assignment had not been effected “by” a party because the transfer had occurred by operation of law. That being said, the judgment does not establish a general principle as to the relationship between non-assignment clauses and assignments arising by operation of law; rather the Court of Appeal’s decision was heavily focussed on the interpretation and the wording of the non-assignment clause in the contract.

Dassault Aviation SA (“ Dassault ”) had entered into an English law sale contract with Mitsui Bussan Aerospace Co., Ltd (“ MBA ”) for the sale of two maritime surveillance aircraft (the “ Sale Contract ”). MBA had agreed to onward sell those aircraft to the Japanese Coast Guard pursuant to a Japanese law governed contract (the “ Sub-Sale Contract ”).

The Sub-Sale Contract provided for liquidated damages in case of delayed delivery of the aircraft to the Japanese Coast Guard. MBA had entered into a Japanese law contract of insurance with its insurer (the “ Insurer ”) to insure the risk of MBA being held liable to the Japanese Coast Guard for such late delivery (the “ Insurance Contract ”).

The aircraft were delivered late by Dassault to MBA, which led to a consequent late delivery of the aircraft by MBA to the Japanese Coast Guard. MBA was therefore liable to pay liquidated damages to the Japanese Coast Guard under the Sub-Sale Contract. Following the payment of such damages, MBA claimed against the Insurer under the Insurance Contract and the Insurer paid out the insured amount to MBA.

Under Japanese law (the law of the Insurance Contract), when an insurer pays out an insurance claim it is automatically assigned, by operation of statutory law, the assured’s rights of recovery against third parties in respect of that claim. Having been assigned MBA’s rights, the Insurer accordingly commenced (in its own name) ICC proceedings against Dassault, pursuant to the arbitration agreement found in the Sale Contract.

Dassault challenged the Tribunal’s jurisdiction to hear the Insurer’s claim. It argued that the assignment to the Insurer was in breach of the non-assignment clause found in the Sale Contract, and that as a result the assignment was null and void. Accordingly, the Insurer was not entitled to rely on the arbitration agreement to bring its claim and the Tribunal lacked substantive jurisdiction. In response, the Insurer contended that the non-assignment clause did not on its proper construction apply to an assignment effected by operation of law. Since the Insurer’s rights arose by operation of law, the Insurer contended that it was not an assignment caught by the non-assignment clause.

The Tribunal considered the jurisdictional issue as a preliminary issue and the majority (Lord Collins of Mapesbury and Joe Smouha KC) found in the Insurer’s favour (Mr Crookdenden KC dissenting). Dassault challenged the Tribunal’s decision pursuant to section 67 of the Arbitration Act 1996, bringing proceedings before the High Court.

The High Court found in Dassault’s favour and ruled that the Tribunal had no jurisdiction to hear the Insurer’s claim. Mrs Justice Cockerill (the “ Judge ”) reached this decision by considering the two following issues:

Was there a general rule/presumption under English law that transfers “by operation of law” would not fall foul of a prohibition on assignment clause (the “ First Issue ”)?
If there was no such rule, as a matter of interpretation of the Sale Contract, did the non-assignment clause prohibit the assignment of MBA’s rights to the Insurer, notwithstanding this was an assignment to an insurer akin to subrogation (the “ Second Issue ”)?

On the First Issue, the Judge took the view that the caselaw did not support the proposition that an assignment by “operation of law” would be outside the scope of a non-assignment clause. Instead, the Judge noted that the authorities (mainly old insolvency cases) supported a narrower distinction between transfers which can be said to be willing/voluntary (in the sense of consented to/ within the control of the transferor) and those which were truly unwilling/involuntary. On that basis, the Judge considered that a non-assignment clause could apply to an assignment with the sufficient “taint of voluntariness”.

Turning to the Second Issue, the Judge noted that an iterative process of interpretation had to be followed that gave due weight to the words and commercial purpose of the non-assignment clause, as well as the factual matrix and commercial common sense. The Judge noted that the wording of the non-assignment clause was intentionally broad with the only limitation imposed being the following words which required the assignment to be: “ by any party to any third party” (emphasis added). That wording, the Judge reasoned, invited one to consider the cause of the assignment rather than the mechanism by which it took place – this, the Judge said, was in line with the approach outlined by the authorities.

Since MBA had, amongst other things, chosen of its own volition to take out insurance, to do so under a system of non-English law which provided for assignment instead of subrogation, and to make a claim under that insurance, the Judge concluded that MBA had voluntarily caused the assignment, thereby falling provisionally within the scope of the wording of the non-assignment clause.

The Judge then considered the context/commercial purpose indications. Whilst accepting the logic of the Insurer’s argument – that if an English subrogation is not caught by a non-assignment clause then it is inherently unlikely that the parties intended for the subrogation-equivalent of another legal system to be caught by such clause (not least because the only difference would be the name of the claimant on the arbitration documents) – she ultimately concluded that the context/commercial purpose indications were not weighty enough to displace the position indicated by a consideration of the words.

The Judge accordingly held that the Tribunal had no jurisdiction to hear the Insurer’s claim, but did so with an “unusual degree of hesitation”. The Insurer appealed the Judge’s findings on both issues.

Overturning the Judge’s decision, the Court of Appeal (consisting of Sir Geoffrey Vos, Master of the Rolls, Lord Justice Coulson, and Lord Justice Phillips) unanimously held that the Tribunal did have jurisdiction to hear the Insurer’s claim.

On the First Issue, following a close consideration of the authorities, the Court found that “the old insolvency cases d[id] not enunciate a general principle applicable to the interpretation of non-assignment clauses in commercial contracts.” Those cases simply turned on the nature of the insolvency under which the transfer in question took place.

Turning to the Second Issue, that of interpretation, the Court noted that the words of the non-assignment clause were clear and unambiguous. The key words that had to be considered were the words: “by any party”. The Court of Appeal rejected the causal analysis taken by the High Court and Dassault, and noted that “[t]he correct question was whether the transfer was made by MBA, not whether the transfer was caused as a consequence of certain actions taken by MBA.”

The Court of Appeal found that the non-assignment clause therefore prevented any assignment which was effected by a party to the sale contract, but not a transfer that was effected by operation of law. As it was common ground between the parties (and had been unanimously decided by the Tribunal) that MBA’s claims against Dassault had been assigned to the Insurer pursuant to Japanese statutory law, that was an assignment by operation of law and not within the scope of the non-assignment clause.

The Court of Appeal considered that the meaning of the non-assignment clause was clear and unambiguous and that the High Court had erred in thinking that there were two possible meanings to the non-assignment clause. As such, it was not “necessary to consider whether the commercial matrix of fact points in favour of one of two possible meanings of [the clause]”, but the Court did note in obiter that it was “far from clear” that the non-assignment clause was intended to “catch transfers arising from insurance payouts, by whatever law those insurance contracts might be governed”.

The Court of Appeal accordingly allowed the appeal and reinstated the Tribunal’s award.

Dassault has sought permission to appeal to the Supreme Court.

The Court of Appeal’s decision should bring some comfort to insurers that an assignment to an insurer by operation of law is unlikely to fall foul of a prohibition on assignment clause. However, the Court did not go so far as to say that there is a general principle to that effect. Parties will therefore be well advised to closely scrutinise any non-assignment clauses and to ensure that they have been drafted in as clear terms as possible (given the Court of Appeal’s emphasis on the interpretation and wording of the individual clause).

Where the parties envisage insurance being taken out, an express carve out, if possible, should be provided in the non-assignment clause in favour of insurers. Furthermore, when insuring under a non-English law and seeking to rely on subrogation or analogous rights, parties should make enquiries as to the mechanism of transfer under that non-English law to ensure it does not fall foul of any non-assignment/transfer clause.

Ultimately, the Court of Appeal’s rejection of the Judge’s causal analysis (voluntary vs involuntary) and its application to non-assignment clauses in commercial contracts is welcomed as it avoids an approach that would be replete with practical difficulties.

The Appellant was represented by Zayba Drabu, Cloudesley Long, and Yiannis Charalambous of Norton Rose Fulbright LLP together with Chris Smith KC and Benjamin Joseph of Quadrant Chambers.

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On September 15, 2023, New York Governor Kathy Hochul signed into law a new section of the New York Labor Law limiting the assignment of inventions by employees to their employers. Specifically, Section 203-f of the Labor Law renders unenforceable provisions in employment agreements that require employees to assign certain inventions to their employer which were developed using the employee’s own property and time. The new law became immediately effective upon Governor Hochul’s signing.

New Labor Law Section 203-f bans the enforcement of invention assignment agreements that entitle employers to intellectual property developed by employees entirely on their own time without using their employer’s equipment, supplies, facilities, or trade secret information; unless the invention relates at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer, or if the invention results from any work performed by the employee for the employer. Section 203-f further provides that a requirement in an employment agreement that an employee assign, or offer to assign, any of his or her rights in an invention developed on his or her own time to an employer is against New York State public policy and shall be unenforceable. Notably, Section 203-f does not state that such a provision renders an entire employment agreement unenforceable if it contains such a provision and does not create a private right of action.

The new bill was originally sponsored by New York State Senator Jessica Ramos from the 13th Senate District. State lawmakers approved the legislation in June 2023 after other States, including California, Illinois, New Jersey, and Nevada approved similar protections.

In fact, the bill provides protections similar to California’s Labor Code Section 2870. However, the New York legislation differs from its California counterpart in that California Labor Code Section 2870 includes language that explicitly allows employers to require employees to disclose all inventions employees develop during the term of their employment. California also places a burden on employees to prove that their inventions are not covered by their employee invention assignment agreement.

As a result, employers should review their employment agreements in New York to ensure they comply with the new law and draft any new agreements accordingly. Jackson Lewis attorneys continue to monitor further developments.

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COMMENTS

Mergers and Restrictions on Assignments by "Operation of Law"
Nonetheless, " [w]hen an anti-assignment clause includes language referencing an assignment 'by operation of law,' Delaware courts generally agree that the clause applies to mergers in which the contracting company is not the surviving entity.". [3] Here the anti-assignment clause in the original acquisition agreement did purport to ...
Do Change of Control Transactions Constitute an Assignment by Operation
The general rule is that change of control of a corporate entity is not an assignment by operation of law, and therefore does not violate a basic anti-assignment provision. Courts have reasoned ...
Do Change of Control Transactions Constitute an Assignment by Operation
Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. I n Sears Termite & Pest Control, Inc. v. Arnold , a Florida court held , " [t] he fact that there is a change in the ownership of corporate stock does not affect the corporation's existence or its ...
FALL 2006
voluntary acts by the tenant.29 Because assignments by operation of law are not voluntary acts by the assignor, Basic Assignment Restrictions do not prohibit them.30 As one potential exception to this rule, courts might not allow assignments by operation of law that have demon-realprop-newsl-fall06.indd 3 11/21/2006 9:23:46 AM
PDF Summary of Legal Aspects of Mergers, Consolidations, and Transfers of
operation of law, contracts are not technically assigned from one corpora-tion to the other, and so approval for assignment is not required from vendors having contracts with the merging corporations. ... 1540 Broadway | New York, NY 10036 877.323.4171 For more information about us, please visit
Reverse Triangular Mergers: Mere Change of Ownership? Maybe Not
New York case law generally supports this proposition, even though courts in Delaware or New York have not considered . ... ruling, that the phrase "by operation of law" in an anti-assignment provision could be commonly understood to include (i.e., prohibit) a merger. The Court then noted a case in which the federal court in the Northern ...
Mergers and Restrictions on Assignments by "Operation of Law"
Mergers and Restrictions on Assignments by "Operation of Law". Weil Gotshal & Manges LLP. USA September 22 2020. Few things are more fundamental to M&A due diligence than determining whether ...
Courts Consider Anti-Assignment Clauses And Reverse Triangular Mergers
On the other hand, I find Meso's arguments as to why language that prohibits "assignments by operation of law or otherwise" should be construed to encompass reverse triangular mergers unpersuasive and its related construction of Section 5.08 to be unreasonable. Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 62 A.3d 62, 88 (Del. Ch. 2013
Anti-Assignment Provisions And Reverse Triangular Mergers
A recent Delaware Court of Chancery decision examined whether a reverse triangular merger ("RTM") qualified as a prohibited assignment by operation of law under Delaware law. In Meso Scale ...
PDF DELVACCA presents: Avoiding Boilerplate Blunders in Mergers and
Assignment - Mergers. Many courts narrowly construe anti-assignment provisions as prohibiting only voluntary assignments. To prohibit other types of assignments, add "by operation of law, merger or otherwise". May need to be even more explicit for some states (including TX and CA) that have statutes providing that mergers do not constitute ...
A Critical Determination: Who Is the Restricted Person in a Change of
Endnotes (↵ returns to text). And remember not all mergers even constitute transfers. See Glenn West, Mergers and Restrictions on Assignments by "Operation of Law," Weil Insights, Weil's Global Private Equity Watch, September 22, 2020, available here. ↵; See Glenn West, Pondering One of Diligence's Seemingly Imponderable Questions: The Effect of Restrictions on "Indirect ...
Reverse Triangular Mergers and Non-Assignment Clauses in Leases
This view is particularly common where the lease explicitly restricts assignments by operation of law (in this case, the operation of the merger statute) and where—as is the case in a forward ...
General Contract Clauses: Assignment and Delegation (NY)
A Standard Clause, also known as an anti-assignment clause and anti-delegation clause, that provides for a contractual limitation on the assignability of contractual rights and the delegation of contractual duties under New York law. This Standard Clause has integrated notes with important explanations and drafting tips.
Assigning Contracts in the Context of M&A Transactions
One of the key considerations in structuring merger and acquisition (M&A) transactions is determining which contracts of the target company, if any, will remain in effect for the acquiror following closing. This post will briefly outline: (1) the general rules of contract assignment; (2) the effect of anti-assignment clauses and other ...
Weiss v Phillips :: 2017 :: New York Appellate Division ...
The doctrine of law of the case provides that once an issue is judicially determined, it is not to be reconsidered by judges or courts of coordinate jurisdiction in the course of the same litigation (Martin v City of Cohoes, 37 NY2d 162, 165 [1975]; Kenney v City of New York, 74 AD3d 630 [1st Dept 2010]; New York State Thruway Author. v KTA ...
Spotting issues with assignment clauses in M&A Due Diligence
An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure that an assignment occurring by operation of law requires counterparty approval: [Party A] agrees that it will not assign, sublet or otherwise transfer its rights hereunder, either voluntarily or by operations of law, without the prior written ...
Assignability of Commercial Contracts (NY)
A Practice Note examining New York law relating to the transferability of commercial contracts, including a party's legal ability to assign its rights and delegate its performance obligations under a contract that is silent on transferability, the construction and enforceability of contractual anti-assignment and anti-delegation clauses, and drafting an effective assignment.
PDF Anti-AssignmentProvisions in Leases
District of New York (applying New York law) have consistently taken a strict approach to construing anti-assignment provisions. In Brentsun Realty Corp. v. D'Urso Supermarkets, Inc., 182 A.D.2d 604, 582 N.Y.S.2d 216 (N.Y. App. Div. 1992), the Second Department interpreted an anti-assignment covenant in a lease that pro -
A Guide to Understanding Anti-Assignment Clauses
In SQL Solutions, Inc. v. Oracle Corp. (N.D. Cal. 1991), a United States District Court in the Northern District of California applied California law and federal IP principles to hold that a ...
Assignments: The Basic Law
Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court, 35 Cal. 2d 109, 113-114 (Cal. 1950). An assignment will generally be permitted under the law unless there is an express prohibition against assignment ...
Anti-Assignment Provisions in Leases
In Brentsun Realty Corp. v. D'Urso Supermarkets, Inc ., 182 A.D.2d 604, 582 N.Y.S.2d 216 (N.Y. App. Div. 1992), the Second Department interpreted an anti-assignment covenant in a lease that ...
Case review: non-assignment clauses and transferring the right to
What is the effect of a non-assignment clause which prevents assignments "by any party to any third party, for any reason whatsoever" in the context of an assignment to an insurer that is effected by foreign statutory law and is akin to subrogation? The Court of Appeal had to consider this question in the recent case of Dassault Aviation SA v Mitsui Sumitomo Insurance Co., Ltd.
New York Labor Law Prevents Assignment of Inventions to Employer
On September 15, 2023, New York Governor Kathy Hochul signed into law a new section of the New York Labor Law limiting the assignment of inventions by employees to their employers. Specifically ...
PDF EXHIBIT B Assignment and Assumption of Facilities Ground Lease
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("Agreement") made and entered into this day of , 200-, (the "Effective Date") by and between THE NEW YORK RACING ASSOCIATION, INC., a not-for-profit ... Corporation Law of New York, as authorized by Chapter 18 of the Laws of 2008, with a place of business at 110-00 Rockaway Boulevard, South Ozone Park ...