Can They Contact My Customers? 6 Rules on UCC Lien Notification

The Rules, Not the Aftermath

This is the question owners ask before it happens, usually after a collector mentions it on a call. It deserves a straight answer built out of the statute rather than reassurance, because the answer is uncomfortable: in most files a funder with a perfected interest in your receivables and a declared default has a statutory route to your customers, and no court order is required to use it. What varies, and what decides your file, is whether this funder holds that interest in these accounts and whether its letter says what the law requires.

Two words make the rest readable. Your customer is the account debtor, the person obligated on the receivable. The unpaid invoice is an account, a right to payment for property sold or services rendered. When a funder buys your receivables or takes a security interest in them, those invoices are the collateral, and Article 9 supplies both the funder’s route to collect them and the limits on that route.

What follows is the rule set, in the order counsel applies it: what a notification does, what it has to contain, what your customer can demand, what the funder inherits, where the collection right comes from, and when the conduct crosses into something you can sue over. If a letter has already reached your customers, the sequence of what happens next and what to do about it is on our companion page about the week after a UCC notification lands. This page is the law behind it.

1. Rule One: It Moves Who Pays, It Does Not Move What Is Owed

The operative provision is U.C.C. §9-406(a), and the mechanism is narrower than the panic it produces. Before a proper notification, your customer discharges the invoice by paying you. After receiving one, your customer discharges by paying the assignee and no longer discharges by paying you. Nothing about the amount changes, nothing about the underlying contract changes, and the customer’s obligation to pay somebody is exactly what it was the day before.

That distinction is worth holding onto in a conversation with an accounts payable manager, because it reframes the letter from an accusation into a payment-instruction problem. Your customer is not being told you did something wrong. It is being told that if it pays the wrong party it may have to pay twice, which is why the rational response from its side is to stop paying anyone until its counsel has read the letter. The freeze that follows is a risk-management reflex rather than a judgment about you.

It also explains why the letter is the funder’s cheapest tool. A lawsuit needs a filing fee, service and months. A restraining notice needs a judgment first. A notification needs a stamp and a perfected interest, and it operates on the one relationship a business cannot easily replace. Understanding that the funder is buying leverage rather than collecting efficiently is the beginning of understanding how the leverage gets taken back.

2. Rule Two: The Letter Has Content Requirements and Fails Without Them

Section 9-406(b) is the provision your counsel reads first, because it lists the ways a notification is simply ineffective. A notification does not take effect if it does not reasonably identify the rights assigned. It does not take effect where the account debtor requested proof and none was seasonably furnished, which is the subject of the next rule. And it is ineffective at the account debtor’s option where it directs payment of less than the full amount of an installment or other periodic payment.

The first of those does the most work in practice, because letters produced in volume by collection shops are frequently vague about scope. They name your company and demand that all payments be redirected, without identifying which contracts, which invoices, which dates or which receivables are actually covered. That is not a stylistic complaint. Whether a notification reasonably identifies the rights assigned decides whether your customer must honor it or may set it aside on its own counsel’s advice, and no amount of insistence by the funder cures a letter that does not do the job.

The installment provision matters in a narrower set of files but it is worth knowing. Where a funder claims a percentage of a stream and the letter tells your customer to split each payment, the customer may treat the notification as ineffective at its option, because the statute does not require account debtors to become bookkeepers for someone else’s collateral arrangement. Get the exact letter, in the form your customer received it, before anybody characterizes it. The version forwarded to you by a nervous accounts payable clerk is often not the whole document.

3. Rule Three: Your Customer Can Demand Proof, and the Burden Sits on the Funder

Section 9-406(c) is the provision almost nobody in an accounts payable department knows exists. If the account debtor requests it, the assignee has to seasonably furnish reasonable proof that the assignment was made, and unless the assignee complies, the account debtor may discharge its obligation by paying the assignor. In plain terms, your customer can ask the funder to prove it, and if the funder does not, your customer can go back to paying you.

The request does useful work in both directions, which is why it belongs at the top of the response list rather than the bottom. If the funder produces the security agreement and the financing statement, your counsel now has the documents needed to test scope, perfection and priority, obtained without a subpoena. If the funder produces nothing, or produces a filing that does not reach these accounts, the customer’s ability to pay you is restored by the statute rather than by anyone’s argument.

Two cautions govern how it gets sent. The request has to come from your customer, because it is the account debtor’s right, and it should go out with your counsel’s knowledge rather than at your direction, since you are asking a customer to take a step with legal consequences for it. And you should never pair it with an instruction to ignore the letter and keep paying you. If the notification is valid, a customer who pays you has not discharged the debt and can be pursued for the same money a second time, and having caused that is worse for the relationship than the letter was.

4. Rule Four: Every Defense in Your Customer Contract Travels With the Account

A funder collecting your receivables does not collect them free of what happened between you and the customer. Under U.C.C. §9-404(a), an assignee’s rights are subject to the terms of the contract between the account debtor and you, to any defense or claim in recoupment arising out of that transaction, and to any other defense or claim that accrued before the account debtor received notification. Warranty claims, credit memos, retainage, backcharges, offsets for late delivery and disputes about scope all survive.

That has an obvious consequence and a less obvious one. The obvious one is that a funder demanding face value on invoices carrying a legitimate backcharge is going to collect less than it thinks. The less obvious one is that this makes the funder’s job unattractive: it has now inserted itself into commercial disputes it knows nothing about, with a customer that has no reason to cooperate, on paper it did not write. Funders understand this, which is one reason the letters are more often a lever than a genuine collection plan.

There is a countervailing provision to check before relying on any of it. Under U.C.C. §9-403(b), an agreement by an account debtor not to assert defenses against an assignee is enforceable by an assignee that takes an assignment for value, in good faith and without notice of a claim, with limits set out in the surrounding subsections. Waiver-of-defenses clauses appear in some commercial supply and service contracts, so read the contract between you and the affected customer before assuming §9-404 does all the work.

5. Rule Five: The Right to Collect Comes From §9-607, and It Has Conditions

Section 9-406 tells your customer who to pay. The funder’s authority to send the letter at all comes from U.C.C. §9-607(a), which permits a secured party, if so agreed and in any event after default, to notify a person obligated on collateral to pay the secured party, and to enforce the account debtor’s obligations and exercise your rights with respect to them. Two conditions are embedded in that: a genuine default, and a security interest that actually attached to these accounts.

Attachment and perfection are separate questions and both get tested. The security agreement has to grant an interest in accounts, and the collateral description has to reach the receivables at issue rather than a narrower slice such as credit card receipts from named processors. The financing statement has to have been filed by someone entitled to file it, since §9-509(a) requires authorization and §9-510(a) makes a filed record effective only to the extent the filer was entitled to file it. And priority between conflicting perfected interests runs by time of filing or perfection under §9-322(a)(1), which is exactly the point a junior funder in a stacked file would rather you not raise.

Two further limits are worth knowing. Section 9-607(c) requires a secured party to proceed in a commercially reasonable manner where it undertakes to collect from an account debtor and has recourse against you. And §9-608(a)(1) applies collections first to the funder’s reasonable expenses of collection and enforcement, including attorney’s fees where the agreement provides for them, and then to the secured obligation, with §9-608(a)(4) requiring an accounting for any surplus. Expenses coming off the top is the part that surprises owners who assumed every dollar collected reduced the balance by a dollar.

6. Rule Six: A Lawful Notification Is Not Interference, and an Inaccurate One Might Be

Owners routinely ask whether they can sue for the damage. The honest answer is that a funder exercising a real statutory right after a real default is generally not committing a tort by doing so, and the elements are demanding. In New York, interference with an existing contract requires a valid contract with a third party, the defendant’s knowledge of it, intentional procurement of its breach without justification, an actual breach and damages, as set out in Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413 (N.Y. 1996).

Where the relationship is prospective rather than contractual, the bar rises again. Carvel Corp. v. Noonan, 3 N.Y.3d 182 (N.Y. 2004), holds that conduct interfering with a prospective business relationship generally has to be criminal or an independent tort, and that conduct which is merely lawful and motivated by the defendant’s own economic self-interest will not support the claim. A letter that accurately describes a perfected interest and a genuine default sits squarely inside that protected space, whatever it costs you commercially.

The cases that are worth bringing look different, and the difference is factual rather than rhetorical. A notification asserting a default that never occurred. A letter stating a balance materially higher than the payment history supports. Letters sent to customers whose invoices the funder has no interest in, which is the most common form of overreach in stacked files. A filing that was never authorized in an authenticated record. Those facts change the analysis, and elements and available claims vary state to state, so this is an assessment counsel makes on your documents rather than a conclusion you can reach from a page.

Which Funders Can Actually Do This, and Which Are Bluffing

Not every funder threatening your customers has the paperwork to reach them. Start with the legal category. A sale of accounts is itself an Article 9 transaction under §9-109(a)(3), so a funder that genuinely purchased receivables still needs to have perfected, and for accounts that means a filed financing statement rather than possession or control. If nothing was filed, or the filing names the wrong debtor, or the collateral description covers only equipment, the funder’s letter is asserting more than it holds.

Then check scope against your actual customer list. Many advances are documented as a purchase of a stated percentage of future receipts from named card processors, and the collateral description follows that structure. A funder holding that paper who mails every account debtor on your aging report is reaching well past its own document. Compare the description word for word against the invoices at issue, because a mismatch is both a defense for your customer and the single best piece of settlement leverage in this scenario.

Finally, check the filings themselves for age and authority. A financing statement lapses five years after filing unless continued, under §9-515. A filing made without your authorization in an authenticated record is effective only so far as the filer was entitled to file it, per §9-509(a) and §9-510(a), and §9-625(e)(3) supplies a $500 statutory amount for an unauthorized filing. None of this gets resolved by argument on a phone call; it gets resolved by pulling the filings, reading the descriptions and putting the mismatch in writing.

Who Should You Call? Our Top-Rated Business Debt Firms

One firm on this list works the entire lifecycle of a business debt file, from stopping the daily debits through attorney-led negotiation, UCC lien removal, and a signed release. The other two cover broader debt categories that often sit alongside the advances. Choose accordingly.