Factoring Notice of Assignment: UCC 9-406 Duties and Defenses

A factoring notice of assignment is a written notification telling a customer that a vendor’s invoices have been sold to a factoring company and that payment must now go to the factor instead of the original vendor. Under UCC 9-406, once you receive a valid notice, paying the original vendor no longer satisfies the debt. You can be forced to pay the factor as well, with your only recourse being to chase the misdirected funds from the vendor. The statute spells out what the notice must contain, when you can hold payment to verify it, and the narrow situations in which the normal rules don’t apply.

What Makes a Notice of Assignment Valid

UCC 9-406(a) sets two baseline requirements. The notice must be authenticated by either the assignor (the original vendor) or the assignee (the factor), and it must state that the amount due has been assigned, with instructions to pay the assignee.¹ Until a notice meeting both conditions arrives, you can keep paying the original vendor without risk.

Subsection (b) adds a third requirement: the notice must “reasonably identify the rights assigned.” A vague notice referring to “all future invoices” without specifying which accounts or invoice numbers are covered may be treated as ineffective.¹ A proper notice typically lists the specific invoice numbers and amounts, the effective date of the assignment, and the factor’s remittance address or electronic payment instructions.

The UCC defines “authenticate” broadly. It covers a traditional ink signature and also an electronic sound, symbol, or process attached to or logically associated with a record, provided the person intended to adopt or accept it.² An email with a typed signature block from an authorized representative, or an electronically signed PDF, can satisfy this requirement.

What Happens Once You Receive the Notice

The legal picture shifts immediately. UCC 9-406(a) states that after receiving an authenticated notification, the account debtor can discharge its obligation only by paying the assignee. Paying the original vendor no longer counts.¹

This is where real losses happen. A customer that ignores the notice and sends payment to the vendor anyway still owes the full amount to the factor. The misdirected payment does not satisfy the debt, and the factor has every right to demand the money a second time. Your only option at that point is to try to recover the funds from the vendor, which may be difficult if the vendor’s cash flow problems were what drove them to factor the invoices in the first place.

Note that only specific invoices may be assigned while other payables to the same vendor stay unaffected. A blanket change to the vendor profile in your payment system can misroute payments on invoices the factor never purchased. Match the redirect to the invoices actually listed in the notice.

Requesting Proof Before You Pay

You are not required to take a notice at face value. UCC 9-406(c) allows the account debtor to ask the assignee for reasonable proof that the assignment has been made. While waiting for that proof, you can hold payment without being considered late or in default on the invoice.¹

The statute doesn’t define exactly what qualifies as reasonable proof. In most transactions, the factor produces a copy of the signed factoring agreement or the assignment schedule listing the specific invoices. Written confirmation from the original vendor also tends to satisfy the request. If the factor fails to respond at all, you regain the right to pay the original vendor and discharge the debt that way, even if the notice itself was valid when received.¹

This verification right is a safeguard, not a stalling tactic. Send the request promptly, give the factor a reasonable window to respond, and redirect payment as soon as the documentation arrives.

When You Can Ignore the Notice

One provision in UCC 9-406 catches factors off guard. Under subsection (b)(3), a notice that instructs you to pay less than the full amount of any installment or periodic payment to the assignee is ineffective at your option. You can simply ignore it. The rule holds even when you know the assignment is limited to a portion of the account, or that portions were assigned to multiple factors. This protection cannot be waived by contract under subsection (g).¹

So if a notice tells you to send 80% of an invoice payment to the factor and 20% to the vendor, you can disregard it entirely and continue paying the vendor as before. The factor and the vendor need to sort out any split between themselves after the full payment is collected.

A notice that doesn’t satisfy the authentication, assignment-statement, or reasonable-identification requirements in subsections (a) and (b) can also be treated as ineffective, meaning you can keep paying the original vendor without penalty.

Defenses You Keep Against the Original Vendor

Receiving a notice of assignment does not strip you of defenses you had against the vendor. UCC 9-404 preserves the account debtor’s right to raise defenses and claims arising from the underlying transaction. If the vendor shipped defective goods, failed to perform, or overcharged, you can assert those claims against the factor to reduce what you owe.³

Timing matters. Defenses arising from the transaction that generated the receivable are always available. Other defenses against the vendor, ones unrelated to the specific invoice, can only be asserted if they accrued before you received the authenticated notice.³ Once the notice arrives, the clock stops on raising unrelated claims against the factor.

There is a ceiling on how far a defense can take you. A claim against the vendor can only reduce what you owe the factor, not generate a recovery from the factor beyond the amount owed. If you owe $50,000 on assigned invoices and have a $20,000 claim against the vendor for defective goods, you can reduce your payment to the factor to $30,000. If the defective-goods claim is $60,000, you can reduce the payment to zero, but you must pursue the extra $10,000 directly against the vendor.³

Keep in mind that most anti-assignment language in your contract with the vendor won’t help you here. UCC 9-406(d) renders contract clauses that ban assignment, require consent, or treat assignment as a default ineffective for accounts, chattel paper, and promissory notes. Subsection (f) extends the override to statutes and regulations attempting the same restriction.¹ A “no assignment without consent” clause in your purchase order generally will not block a factor from stepping in.

Situations Where the Standard Rules Don’t Apply

Three categories of receivables fall outside the usual UCC 9-406 framework.

Health-Care-Insurance Receivables

Subsection (i) carves out health-care-insurance receivables from the anti-assignment override. A contract clause restricting assignment of these receivables remains enforceable, so health-care providers factoring insurance claims need to check whether their agreements with insurers actually permit the assignment.¹

Consumer Obligations

Subsection (h) defers to other laws when the account debtor is an individual who took on the obligation for personal, family, or household purposes. State consumer protection statutes may impose additional restrictions on assignment or create debtor protections that override the UCC’s general permissiveness.¹

Federal Government Contracts

The UCC is state law. The federal Assignment of Claims Act at 41 U.S.C. § 6305 imposes its own requirements on assignments of payments under federal contracts. The federal rules are more restrictive: the assignment must go to a bank, trust company, or other financing institution; the contract must total at least $1,000; the assignment must cover the full balance due unless the contract says otherwise; and the assignee must file written notice with the contracting officer, any surety on the bond, and the disbursing officer. Unlike the UCC override, a federal contract assignment cannot proceed if the contract itself forbids it.⁴

When Two Factors Claim the Same Invoice

A vendor sometimes factors the same receivables twice, leaving the customer facing competing notices of assignment. UCC 9-322 resolves the priority question: among competing perfected security interests in the same collateral, priority goes to whichever party filed or perfected first.⁵

A factor typically protects itself by filing a UCC-1 financing statement with the appropriate state office, usually the secretary of state, before or at the time it begins purchasing receivables. UCC 9-310 generally requires that filing to perfect a security interest in accounts receivable.⁶ A perfected interest beats an unperfected one, and between two perfected interests, the earlier filing wins.⁵

Faced with competing notices, request proof from both parties under UCC 9-406(c) and pay the one that can demonstrate the superior claim. When the situation remains genuinely ambiguous, some debtors interplead the funds with a court and let the factors sort it out between themselves.

1
Legal Information Institute (Cornell Law School). UCC 9-406 – Discharge of Account Debtor; Notification of Assignment
2
Legal Information Institute (Cornell Law School). UCC 9-102 – Definitions and Index of Definitions
3
Legal Information Institute (Cornell Law School). UCC 9-404 – Rights Acquired by Assignee; Claims and Defenses Against Assignee
4
Office of the Law Revision Counsel. 41 USC 6305 – Assignment of Contract
5
Legal Information Institute (Cornell Law School). UCC 9-322 – Priorities Among Conflicting Security Interests in and Agricultural Liens on Same Collateral
6
Legal Information Institute (Cornell Law School). UCC 9-310 – When Filing Required to Perfect Security Interest