In some jurisdictions, priority is determined by the time of assignment. However, a debtor is not liable to pay a prior assignee who failed to give notice of the assignment to the debtor. A notice of an assignment deposited in the mail by an assignee is invalid against the debtor until it is actually communicated to him/her.[i] If an assignor receives payment from the debtor after the assignment, the assignor will be liable to the assignee.
However, failure to provide notice by the first assignee will not divest him/her of any right or vest any claim in a subsequent purchaser.[ii] Moreover, failure to provide notice can become an important element where equitable estoppel arises against a first assignee.[iii]
Generally, a subsequent assignee can acquire property by giving notice of his/her assignment, if a prior assignee fails to provide notice to the person holding the fund assigned to him/her.[iv] However, if a prior assignment is effective and irrevocable, or the subsequent assignee acts in good faith, then the right of an assignee is superior to that of a subsequent assignee of the same right.[v]
An assignee is generally subject to all the equities between the assignor and his/her debtor. However, to perfect the title against the debtor, an assignee must provide notice of the assignment to the debtor. Otherwise, priority of right will be obtained by a subsequent assignee.[vi] If an equity exists in favor of an assignor against his/her subsequent assignee and if the subsequent assignee assigns to a bona fide purchaser without notice of the equity of the prior assignor, then the subsequent assignee takes such equity.
The assignee of a chose in action takes it subject to all its equities which affected the right of the original holder to recover it from the debtor. In other words, the debtor can make any defense to the claim after the assignment of it which he/she could have made before.[vii]
In order to constitute an assignment for the benefit of creditors, there must be voluntary transfer by a debtor of his/her property to an assignee for the payment of his/her debts. During this period, the assignee is treated only as a trustee and not the absolute owner. However, in the absence of statutory provisions, the duty of assignees and their conduct in the management of the assigned property are subject to the ordinary rules and principles applicable to trustees.[viii]
A valid assignee takes priority over any subsequent creditors of the assignor who had no lien on the subject matter. Moreover, no notice is needed to establish the priority of the assignee’s interest over subsequent creditors of the assignor if there is no statutory provision.
It was observed in Townsend v. Carpenter, 11 OHIO 21 (Ohio 1841) that to constitute an assignment of a debt or other chose in action in equity, no particular form is necessary. Indorsing and delivering a bond to an assignee amounts to an assignment of the bond. An assignment of a debt can be by parol as well as by deed. It was also noted that an assignment of a nonnegotiable note will not transfer any legal interest, but only transfers an equitable interest in it.
[i] In re Leterman, Becher & Co., 260 F. 543 (2d Cir. N.Y. 1919)
[ii] Salem Trust Co. v. Manufacturers’ Finance Co., 264 U.S. 182 (U.S. 1924)
[iv] Phillips’s Estate, 205 Pa. 515 (Pa. 1903)
[v] H. S. Mann Corp. v. Moody, 144 Cal. App. 2d 310 (Cal. App. 2d Dist. 1956)
[vi] Lambert v. Morgan, 110 Md. 1 (Md. 1909)
[vii] Wethrill’s Appeal, 3 Grant 281 (Pa. 1859)
[viii] Solon H. Wilhelm and Sidney S. Wilhelm v. Edwin Byles and edwin J. Phelps, assignees of Kellogg, Sawyer & Co., 60 Mich. 561 (Mich. 1886)