How I Learned to Stop Worrying and Love Litigation
Written by: Robby Dube, Esq., Partner, Eckland & Blando, LLP
No factor wants to litigate to recover its money. For many factors, the word “litigation” itself calls in nightmares of attorney fees, discovery costs, delay, business distraction, and the uncomfortable possibility that even a successful lawsuit may only return money that should have been paid in the first place. At first glance, putting together the costs, risks, and time necessary to pursue a dispute might not seem worthwhile. That instinct is understandable, but it overlooks the very real possibility that a factor can actually make money from litigation. This is because of the interplay between UCC § 9-406 and 9-608, which together not only make an account debtor responsible for paying over notice, but also allows the factor to keep “surplus” funds in certain circumstances. Taken together, these can result in a factor actually making money when an account debtor pays over notice to the factor client and the factor client only pays some sums to the factor.
Let’s begin with the basics. UCC §9-406, which provides that, after receiving an authenticated notice of assignment, “the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.” Id. This is the payment over notice prohibition factors are no doubt well familiar with. Get the authenticated notice of assignment out immediately, and your right to payment is secure even if the account debtor pays your client. But, as factors are well familiar with, accounts debtors frequently ignore the authenticated notice of assignment, or more frequently trust a factor’s client when the client tells the account debtor to pay the client, not the factor.
This is where UCC § 9-608 comes in. UCC § 9-608 provides a structure for how recovered funds are treated: “If a security interest or agricultural lien secures payment or performance of an obligation, the following rules apply:” (1) the reasonable collection and enforcement expenses, including attorneys fees, are paid first; then (2) satisfy the lien; then (3) satisfy subordinate liens. UCC § 9-608(1)(a). But the crucial language comes at the end, which says that “if the underlying transaction is a sale of accounts” the debtor is not entitled to any surplus, and the obligor is not responsible for any deficiency. Id. (b).[i]That is where the opportunity to make money comes in.
Let’s demonstrate this with a hypothetical. Factor advances $500,000 worth of funding on Client’s Accounts Receivable, and issues the authenticated notice of assignment to Account Debtor. Account Debtor pays $500,000 to Client, who sends $100,000 to Factor and pockets the rest before going under. Now, the Factor needs to recover the remaining $400,000 that it is owed. It sues the Account Debtor for the full $500,000, spends $50,000 in attorney’s fees to recover the amount (after the usual failed defenses by Account Debtor).[ii] Under UCC § 9-406, the Account Debtor must pay $500,000 to Factor. But, under UCC § 9-608, the Factor gets to keep all of the funds.
So, under the hypothetical, the Factor received a total of $600,000 while only outlaying $550,000 between the advance and the attorney’s fees, therefore netting a $50,000 profit on top of whatever factor fee and other charges the Factor assessed. And this is not just a hypothetical; this is what happened with one of our factoring clients in the recent past.
Of course, factors would rather the factoring relationship go smoothly and avoid litigation. After all, litigation can take time and during that time the factor is missing out on potential financial opportunities it could have explored if the money had been paid timely. But the interplay between UCC § 9-406 and 9-608 means that litigation can be a net financial asset, rather than just a loss. At a minimum, it provides powerful leverage to the factor in settlement negotiations to make the account debtor realize that litigation is only a losing proposition.
So factors, while it may seem strange, I encourage you to stop worrying and love litigation. It just might net you a significant windfall!
About the Author
Robby grew up working in his family’s small business and ranch in Texas, so he understands the needs of businesses and the “little guy” and works tirelessly to advocate for them in a cost-effective manner as an outside general counsel. He is a zealous trial attorney, having won trials, cases, and motions before state and federal courts across the country in every stage of the litigation process, including as lead counsel for a multi-week federal jury trial where he secured a multi-million dollar verdict for his client.
Robby is the chair of the Federal Bar Association’s Government Contracts Section, reflecting his deep experience with pursuing claims against all levels of government, including bid protests, size protests, challenging terminations for cause, drafting requests for equitable adjustments, and guiding businesses through government contract compliance, including with CMMC and ITAR. Robby has successfully defeated oppressive state and federal regulations via Administrative Procedures Act challenges, winning unanimous decisions at the district courts and federal appellate courts.
Robby has extensive experience with the factoring industry and the import/export industry, litigating for and advising clients across the country. He is a passionate election and constitutional law lawyer, having zealously and successfully represented citizens and citizen groups across the country wherever their government has tried to take away their rights to referendum, free speech, free association, and more. Recently, Robby has been involved in the fight against foreign ownership of crucial infrastructure projects, working to protect national security and the environment, and has testified to Congress on these issues. He is also representing citizens fighting data centers in their communities. As a campaign finance lawyer, he served as general counsel for statewide campaigns and advised individual campaigns.
Robby is an adjunct professor at the University of Minnesota Law School where he teaches a deposition course and was a coach for the University of St. Thomas Law School Mock Trial team from 2024-2025. He is also the best-selling author of the epic fantasy novel Ursa.
Robby graduated magna cum laude from the University of Minnesota Law School, where he served as Law Council President and as Executive Editor of the Minnesota Journal of International Law. He also served as the Head Writer for the law school musical group T.O.R.T. (Theatre of the Relatively Talentless) and led the Orientation Program as a Program Director. After graduating, Robby clerked for Hawai’i Supreme Court Associate Justice Richard Pollack.
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.
[i] Factors should always make sure the state law that applies has a UCC-conforming statute. It is always possible for the legislature to change the UCC in a way that harms factors.
[ii] See Reading Co-Operative Bank v. Suffolk Construction Co. Inc., 984 N.E.2d 776 (Mass. 2013) (requiring account debtor to pay full sums when it paid over notice, even if factoring client has paid some sums to factor); Pac. Bus. Cap. Corp. v. Time Warner Cable, LLC, No. CV 09-5188 RSWL PJWX, 2012 WL 2970490 (confirming that account debtors can be compelled to pay twice); Lumbermens Mut. Cas. Co. v. United States, 654 F. 3d 1305, 1322 n. 3 (Fed. Cir. 2011) (confirming that payment terms cannot be changed by factoring client after authenticated notice of assignment is received by the account debtor)