ENOUGH IS ENOUGH!
Written by: Michael Ullman, Esq. & Jared Ullman, Esq., Ullman & Ullman, P.A.
This article, titled “Enough is Enough,” addresses how factors and other secured parties should respond when account debtors (oftentimes through counsel), mischaracterize the phrase “reasonable proof that the assignment has been made” contained in Uniform Commercial Code (UCC) § 9-406(c) as requiring the factor to compile an exhaustive evidentiary package to satisfy the statute. Whether these overbroad demands are made in good faith is often difficult to determine. Either way, factors must recognize the tactic, respond promptly, and cut off abusive demands quickly.
The State of Florida’s version of the UCC § 9-406 is titled “Discharge of account debtor; notification of assignment; identification and proof of assignment; restrictions on assignment of accounts, chattel paper, payment intangibles, and promissory notes ineffective.” The statute is materially identical to other states’ versions of § 9-406(c). For purposes of this article, the relevant provision is UCC § 9-406(3), which together with subsection (1) provides as follows:
(1) … an account debtor on an account, … may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, signed by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.
(3) … if requested by the account debtor, an assignee shall seasonably furnish reasonable proof that the assignment has been made. Unless the assignee complies, the account debtor may discharge its obligation by paying the assignor, even if the account debtor has received a notification under subsection (1).
Subsection (3) was designed primarily to protect an innocent account debtor from paying the wrong party. It provides temporary limited protection to continue paying the assignor if the purported assignee fails to seasonably furnish reasonable proof that an assignment occurred. But Subsection (3) does not make the account debtor the arbiter of what qualifies as “reasonable proof.”
In recent years, however, commercial factors and receivables financiers have seen account debtors and their counsel increasingly attempt to weaponize UCC § 9-406(3). When a factor issues a standard Notice of Assignment directing payment to the factor, the account debtor’s response should ordinarily be straightforward compliance. Instead, factors are increasingly encountering evasive and burdensome demands for documentation. Some account debtors go so far as to demand unredacted master factoring agreements, including fee schedules, or other documents beyond what the statute requires. Moreover, others may seek the factoring client’s written consent to the Notice of Assignment.
These requests are often framed as legitimate demands for “reasonable proof of the assignment” under UCC § 9-406(3). In practice, such requests appear to be delay tactics designed to buy time or manufacture an argument that reasonable proof was never provided (in many cases after the account debtor already commences making payments to the factor in accordance with the Factor’s Notice of Assignment).
A related problem may arise after an account debtor receives and initially honors a Notice of Assignment by paying the factor, only for the assignor—the factoring client—to later attempt to reverse the payment stream and redirect payments back to itself. In those situations, some account debtors, often through counsel, may seek to invoke § 9-406(3) as a pretext to withhold or justify redirecting payments despite having already acknowledged and honored the assignment. As explained below, § 9-406(3)’s “reasonable proof” requirement was intended as a narrow protective shield—to ensure the account debtor does not pay the wrong party—not as a sword to audit the factor’s internal relationship with its client, impose arbitrary burdens beyond the statute, or authorize an account debtor to misdirect payments on assigned accounts because of a dispute between the factor and its client.
The question, then, is where the boundary lies: what qualifies as “reasonable proof,” and what practical steps can a factor take to avoid delay tactics while preserving its collection rights?
Official Comment 3 to UCC § 9-406 makes clear that “reasonable proof” is “not left to the arbitrary decision of the account debtor.” The assignee must provide proof that the right to receive payment was assigned—nothing more. The statute does not give the account debtor a right to review confidential commercial terms, pricing, or private covenants between the factor and the assignor. Examples of unreasonable account-debtor demands include:
A. Requiring Unredacted Factoring Agreements
The Account Debtor's Argument: "We need to see the entire factoring agreement to verify that the factor has the legal right to purchase this specific invoice."
Legal Reality: The account debtor is not a party to the factoring agreement and has no right to enforce or audit its terms. The factor has no obligation to disclose its discount rates, advance percentages, reserves, default provisions, or fee schedules to a third-party account debtor. Demanding an unredacted factoring agreement is a fishing expedition that exposes proprietary financial information without advancing any legitimate § 9-406(3) inquiry.
B. Requiring Proof of Specific Invoice Funding (Wire Receipts)
The Account Debtor's Argument: "We will not pay the factor unless the factor provides proof that it actually advanced funds to purchase from the client a specific invoice(s)."
Legal Reality: If the factoring agreement grants the factor a security interest in the client’s accounts, whether the factor funded a specific invoice is irrelevant to the validity of the assignment under Article 9. A presently exercisable assignment or security interest in accounts becomes valid upon execution and attachment under UCC § 9-203. The account debtor’s only legitimate concern is whether the right to receive payment was transferred—not whether the factor paid to purchase a particular invoice.
C. Requiring Client Account Ledgers and Financial Records
The Account Debtor's Argument: "We need a complete accounting of the client’s balance, reserve positions, and other assigned invoices."
Legal Reality: The account debtor’s obligation is limited to the invoice or account it owes for goods sold or services rendered. The broader financial relationship between the factor and its client, including balances, reserves, and other assigned accounts, is confidential and outside the scope of any § 9-406(3) inquiry.
If the above conduct falls outside the scope of § 9-406(3), the next question is what actually satisfies the statutory threshold for “reasonable proof.”
There is no bright-line standard under UCC § 9-406(3). Courts and industry practice, however, recognize that “reasonable proof” is satisfied when the assignee provides objective evidence showing that the assignor transferred its right to receive payment on existing and future accounts. Each of the following categories of documents, standing alone or in combination, should satisfy the reasonable-proof requirement under UCC § 9-406(3):
Written confirmation from the assignor: A separate letter or written statement from the assignor, and the factoring client, confirming that the client assigned its present and future accounts to the factor and directing the account debtor to follow the factor’s payment instructions.
Redacted factoring or security agreement: A copy of the factoring or security agreement showing the signature page, the assignment or security-interest grant, and the collateral definition covering accounts. Confidential commercial terms—such as rates, fees, and advance limits—may be redacted because they are irrelevant to the account debtor’s § 9-406(3) inquiry (In unusual financing arrangements, it may be appropriate to provide a bill of sale or schedule of accounts showing that the specific invoice was purchased, assigned, or financed by the factor or secured lender).
UCC-1 financing statement: A UCC-1 filing alone does not constitute an assignment. However, factors often provide a filed UCC-1 together with a signed confirmation of assignment and/or redacted factoring agreement. The UCC-1 financing statement supplies public-record evidence of the factor’s perfected security interest in accounts and further supports the factor’s right to receive payment.
Once the factor provides these documents, the statutory burden under UCC § 9-406(3) should be deemed satisfied. At that point, the account debtor’s limited protection ends, and it may discharge its obligation only by recognizing the Notice of Assignment and paying the factor as assignee. Account debtors that continue to delay payment under the guise of § 9-406(3) do so at their own legal risk. Factors may choose to (firmly) advise recalcitrant account debtors of the consequences of improper nonpayment, including loss of limited protection, double-payment exposure, and, where authorized by law, liability for prejudgment interest and collection costs.
Our firm believes that each factor should maintain a prepackaged Proof of Assignment Package for use when account debtors employ these tactics. Where appropriate, the factor, or its counsel, may send a cover letter enclosing the package, explaining the factor’s legal position under UCC § 9-406(3), rejecting requests for confidential, proprietary, or irrelevant information, and demanding payment of all outstanding invoices by their maturity dates. The tone and level of aggressiveness should be calibrated to the circumstances, including the factor’s relationship with its client and the account debtor.
UCC § 9-406(3) was designed to promote commercial certainty and protect innocent parties from fraud. It was not intended to create a fishing expedition or a loophole for account debtors seeking to avoid payment. By maintaining a standardized Proof of Assignment Package, factors can more effectively neutralize bad-faith delay tactics, protect their collateral, and keep collections moving.
About the Author:
As principal of the firm, Michael Ullman has served as counsel and trusted advisor to over 200 factoring companies throughout the United States and abroad. He also serves numerous other business clients in a range of industries. He started Ullman & Ullman in 1980. Ullman & Ullman, P.A. specializes in all forms of commercial transactions and litigation, including domestic, international and complex arbitration proceedings, entity formation and drafting of contracts and agreements. Because of his more than 35 years of experience and significant involvement with factoring, forfaiting and asset-based lending, Mr. Ullman has extensive familiarity with business operations in a diverse range of industries. Mr. Ullman serves as co-counsel for the International Factoring Association, a position he has held for over 10 years, and lectures frequently at IFA events as well as publishing frequently in the organization’s journal.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.