Senior secured lenders are increasingly encountering a familiar disruption – not within their borrower’s operations, but among its customer base. Customers, often long-standing account debtors, are receiving UCC 9-406 notices from MCA companies or their collection representatives directing them to stop paying the vendor and instead remit payment elsewhere. A UCC 9-406 notice is a directive issued by a party claiming an assignment of receivables, instructing a customer to redirect payment away from the original vendor. For those customers, the issue is not theoretical; it is immediate and practical:
- Do I have to comply with this?
- Who am I actually supposed to pay?
- What happens if I pay the wrong party?
The answer, critically, is this:
No. You are not required to redirect payment simply because you received a 9-406 notice. That obligation arises only where the sender holds a valid, senior, and enforceable assignment of receivables.
When a UCC 9-406 Notice Creates an Obligation to Redirect Payment
In the context of merchant cash advances, which are typically structured as forward purchases of future receivables rather than secured lending arrangements, that condition is rarely, if ever, satisfied. MCA providers are almost never in a senior secured position with a blanket, enforceable assignment of receivables. Absent that, there is no legal or contractual basis to issue a 9-406 notice, nor is there cause to respond to one.
These notices are often presented as payment redirection demands, but their enforceability depends entirely on whether the sender holds a valid and senior assignment of receivables.
In the confusion MCAs create, the risk is not just misdirected payment, but stalled payment- where account debtors, unsure who to pay, stop paying altogether.
“Very often, these notices follow closely behind payment defaults that arise in environments where MCA withdrawal amounts remain effectively fixed despite declining revenue, rather than adjusting in line with the performance-based structure of the agreements themselves. By that point, the business is already under strain, and the unwarranted issuance of payment redirection notices further compounds that pressure by interfering with incoming cash flow,” Michael Petrecca, Rise Alliance
That interruption disrupts the cash cycle, erodes collateral, and can jeopardize the business, all as a result of the improper use of a remedy reserved for a senior secured lender. This raises a critical practical question for account debtors:
Should A Customer Stop Paying After Receiving a UCC 9-406 Notice?
The short answer is no.
“Most account debtors don’t redirect payment, they pause,” adds Aaron Todrin of Second Wind Consultants.“What feels like a prudent response interrupts receivable flow and places immediate pressure on the business, even where the party issuing the notice lacks any senior right to the receivables and has no lawful basis to redirect payment. The result is that the account debtor is pulled into a creditor dispute it has no role in, while an otherwise valid contractual payment stream is disrupted. At that point, the notice is not operating as a legitimate enforcement of rights, but as a mechanism that leverages confusion to exert pressure on the business itself.”
Faced with what appears to be a formal and authoritative demand package, customers typically pause payment altogether while attempting to determine the appropriate course.
That instinct, however, has a direct and often severe effect. By halting payment, the account debtor interrupts the ordinary flow of receivables, placing immediate pressure on the operating business whose revenue has effectively been shut off. What is perceived as caution at the account debtor level can, in practice, destabilize the business itself.
In the context of MCA structures, where subordinate providers do not hold senior rights to the receivables, payment redirection would not be legally warranted in the first place. But the practical impact does not depend on funds actually being redirected. The disruption caused by payment cessation alone is sufficient to exert meaningful pressure.
Given that MCA providers are unlikely to expect payment to be redirected in these circumstances, the effect of the notice is better understood as leveraging the account debtor’s uncertainty to interrupt cash flow and create pressure on the business – an operative mechanism, rather than merely a byproduct.
In that light, it becomes difficult to view the resulting payment interruption as incidental. Where priority is already established, and no legitimate basis exists to redirect payment, the more immediate and reliable effect of these notices is the cessation of revenue- and the pressure that follows.
This dynamic places third-party account debtors squarely in the middle of what is fundamentally a dispute between creditor and borrower, forcing them to make payment decisions that may conflict with their actual contractual obligations. As these practices become more visible, they underscore the importance of careful review, particularly where payment instructions appear inconsistent with known creditor rights.
What 9-406 Is Intended to Do
Under UCC 9-406, a secured party with a valid assignment of receivables may direct account debtors to send payment to that party instead of the business. When properly used, this typically involves a senior secured lender with a perfected security interest and a clearly defined assignment of receivables. In that context, the notice creates clarity by aligning payment flow with legal entitlement.
But that framework depends on the party issuing the notice actually holding the rights it is asserting. A 9-406 notice does not create a right to payment. It only reflects one, if it exists.
Where It Breaks in MCA-Driven Structures
In MCA-driven capital structures, that condition is almost never satisfied, because MCA providers are almost never in a senior secured position with a blanket, enforceable assignment of receivables. Yet 9-406 notices are routinely issued as if they are. Rather than reflecting established priority, they are broadly deployed as a collection tactic, directing customers to reroute payments without legal entitlement and without regard to existing lien hierarchy.
In doing so, these notices attempt to intercept receivable flow that is often already subject to a prior perfected security interest, directly infringing on the rights of the actual senior secured lender.
“The use of UCC 9-406 notices has become one of the MCA industry’s most aggressive and widely deployed collection tactics, often in ways that disrupt established lender priorities and interfere with borrower operations. Against that backdrop, it is notable that the MCA industry itself is now attempting to advance legislation in California aimed at restricting restructuring services for distressed companies – effectively seeking to remove one of the few structural checks on questionable practices. The irony is difficult to ignore: An industry that remains largely unregulated, and is frequently criticized for a usurious product and aggressive enforcement behavior, is attempting to limit access to the very solutions designed to stabilize businesses and protect stakeholder value.” Shane Heskin, Heskin & Proper PLLC
To the account debtor, however, none of this is visible. The notice appears formal, legal, and urgent. But in substance, the sender typically does not have the legal right to redirect payment.
This distinction matters, because unlike traditional factoring arrangements, where specific receivables are purchased, identified, and controlled, MCA transactions are generally structured as forward-looking purchases of future receivables, without the same level of specificity or exclusivity. They typically do not involve the transfer of clearly defined invoices or a perfected, senior claim over a discrete pool of receivables. As a result, the legal basis to direct account debtors to redirect payment under 9-406 is absent.
Courts and commentators interpreting UCC 9-406 have consistently tied enforceability to the existence of a valid assignment and the rights of the secured party asserting it. The statute does not grant independent collection authority to any party that simply issues notice; it operates within the framework of established lien priority. Where that priority is absent, the notice itself does not create an enforceable obligation on the account debtor.
Account Debtor Response to UCC 9-406 Notices
From the perspective of the account debtor, the issue is straightforward: what should be done after receiving one of these notices?
The correct response is not immediate compliance, it is timely verification. Adds Annette Jarvis, restructuring attorney at Greenberg Traurig, who regularly advises account debtors and lenders on UCC 9-406 disputes:
“UCC 9-406(c) gives account debtors the right to request reasonable proof of assignment from
the party giving notice, which should include a request of proof of senior priority.
Assurance can also be sought from the vendor. An account debtor, upon receipt of a
questionable UCC 9-406 notice, should seek the assistance to independently
verify and act on proper information to make certain it is paying the proper party in a timely
manner. Legal counsel can also assist senior lenders when borrowers, who are already under stress, are experiencing slow pays from account debtors due to improper UCC 9-406 notices,“ Annette Jarvis, Greenburg Traurig
The obligation to redirect payment only arises where the sender can establish a valid assignment of receivables and demonstrate priority over other creditors. In the MCA context, that will almost certainly not be the case.
Verification of Assignment and Priority
Accordingly, that means requiring the party issuing the notice to substantiate its claim, including evidence of assignment and priority.
“As a practical matter, account debtors should promptly request that information and set clear expectations for response, typically within two to three business days. If adequate proof is not provided within that period, the account debtor should continue paying the vendor in the ordinary course, consistent with its existing contractual obligations, unless and until the sender is able to demonstrate a valid and superior right to direct payment, so as not to unnecessarily disrupt an otherwise lawful payment stream.”
— Shane Heskin, Heskin & Proper PLLC
Accordingly, the appropriate course is to contact the business directly to confirm the accuracy of the notice, specifically asking, through the company’s legal or financial representation, whether the party issuing the notice holds a senior secured position over receivables. This step serves to corroborate the information being requested from the sender, not to replace it, ensuring that payment decisions are made based on verified priority rather than conflicting or unsupported instructions.
That inquiry should be supported by confirmation of the capital structure, the existence and scope of any assignment, and whether the notice has been coordinated with any senior lender.
The account debtor is not responsible for independently determining lien priority. However, it is entirely appropriate to require that any party asserting payment rights substantiate its claim promptly. The customer’s primary obligation remains its contractual relationship with the vendor, and it must act reasonably to avoid delay or disruption that could result in a breach of that obligation, interfere with the normal flow of receivables, or undermine the underlying commercial relationship.
Where it is confirmed that the sender is not the senior secured lender and does not hold priority over receivables, the instruction to redirect payment lacks a legal basis. In those circumstances, continuing to pay the business in the ordinary course is consistent with the actual structure of rights. And where that lack of MCA priority is evidenced by lack of substantiation, the notice itself can be treated as having been inappropriately issued, and disregarded.
Collateral Impact: A Lender Problem, Not Just a Customer Problem
For senior secured lenders, the implications are operational as much as legal. When customers receive unsupported or conflicting payment instructions, receivable flow becomes inconsistent, customer confidence is disrupted, and otherwise performing credits begin to appear unstable. In effect, the lender’s collateral is not impaired by performance, but by uncertainty introduced at the point of payment.
This is what makes the issue more than a legal technicality. It is a direct interference with collateral control.
A Structural Issue, Not an Isolated One
These situations are not isolated. They are a byproduct of capital structures in which multiple financing arrangements exist without clear coordination, where reporting is inconsistent, and where control over receivables is not centralized.
In that environment, the misuse of 9-406 becomes possible.
But the broader issue is not the notice itself – it is the absence of structure that allows it to create confusion and enables third parties to assert rights they do not possess.
Conclusion
A properly issued 9-406 notice creates clarity by directing payment in accordance with established rights.
An improperly issued one does the opposite, shifting the burden of a creditor dispute onto the customer, disrupting receivable flow, and interfering with the rights of senior secured lenders.
For account debtors receiving these notices, the takeaway is simple:
Do not assume a UCC 9-406 notice must be complied with. Verification should come first. Once it is established that the party issuing the notice cannot establish a senior lien position or enforceable assignment rights, payment should continue in the ordinary course to the vendor. In that circumstance, the notice has no material impact on the underlying payment obligation, and delaying or withholding payment due to confusion can itself cause harm by disrupting the business and impairing the rights of the actual priority lien holder. Account debtors should act promptly to reasonably establish priority and not allow an improperly issued notice to undermine a valid contractual relationship.
For lenders, the implication is equally clear:
When your borrower’s customers are unsure who to pay, it is already affecting your collateral. In that environment, communication with the borrower is critical. Where MCA exposure is present, lenders should be prepared to provide account debtors with documentation confirming their priority position. Timely clarity helps maintain payment continuity; without it, confusion can delay cash flow, disrupt operations, and put collateral at risk.
Ultimately, this is not about notices, it is about control. When parties without priority assert rights they do not have, the result is predictable: confusion at the customer level, disruption in cash flow, and risk to the senior lender’s collateral. The solution is clarity, ensuring that payment follows priority, not unwarranted collection tactics masquerading as legal enforcement.