Effect of Notice to Debtor

An assignment is a transfer of property or of a right or interest in such property, from one person to another and the right to receive money due or to become due is generally assignable.  Even a preexisting debt can constitute sufficient consideration for assignment.[i]  Although notice of assignment is not an essential prerequisite for assignment’s validity, notice is required in order to charge a third-party with the duty to make payment to the assignee. [ii]

Paying the wrong party does not discharge a negotiable instrument.  Thus, the debtor will not be discharged from liability to the assignee by making payment to the assignor of the negotiable instrument.[iii]

An assignment of a chose in action is incomplete as regards the debtor, third persons, including subsequent assignees and attaching creditors until notice of the assignment has been given to the debtor.  Hence, an attachment by a creditor in the intervening period between the assignment and the notice will have preference over such assignment.  As for negotiable instruments, notice to the maker of the transfer of the note is not required.  This is because the maker can protect himself/herself by demanding production of the instrument and refusing to pay a party not in possession of it.[iv]

Some courts have taken a contrary view and criticized the requirement of notice to perfect title in the assignee.  Thus, courts have held that notice to the debtor or to creditors of the assignor is not indispensable to complete the assignment.  “The essential element is the bona fide agreement between the assignor and assignee, for a sufficient consideration and without intent to defraud creditors or subsequent purchasers.  When this is done, the assignment is complete, and a subsequent failure to give notice thereof does not affect the validity of the assignment.”[v]

Even if the attaching creditor had no notice of the assignment at the time of institution of proceeding is immaterial and in such situations, the rights of the parties does not depend on notice because “a creditor can subject to legal process only the interest of his debtor, and his debtor has no interest in a chose in action he assigned before seizure by legal process.”[vi]

Notice to the debtor of an assignment is not necessary to render the assignment binding as between the assignor and the assignee.  However, a debtor is not bound by the transaction until he/she receives notice of the assignment.  Thus, in order to charge the debtor with the duty of payment to the assignee, a debtor shall be provided with sufficient notice of assignment and if the debtor pays the assignor or the assignor’s judgment creditor before receiving the notice, the debtor shall be discharged from liability.

The effect of this rule is that after notice of the assignment the debtor deals with the assignor at his/her peril, and can do nothing that will adversely affect the interest of the assignee.  Some courts have held that the rule should be qualified by the statement that, “when the existence of the assigned fund is dependent upon performance by the assignor of an executory contract, the anticipatory debtor may, at any time, do whatever reasonably appears to be necessary to enable the assignor to perform the contract.” [vii]

Once a valid assignment has been made, the assignor cannot cancel or modify the completed assignment by a unilateral action without the consent of the assignee.[viii] Hence, once the obligor has been given a notice of assignment, the assignor has no residual power of release and the obligor must pay the assignee.[ix]  If the obligor pays the amount to the assignor in violation of the assignee, the obligor will be liable to the assignee.[x]  The obligor will be liable in the same manner if he/she makes payment to some person other than the assignee.

Thus, Payment by the obligor to the assignor is valid as against the assignee only in the absence of notice to the obligor.  Once the obligor has notice of the assignment, a settlement and release with the assignor will not defeat the assigned right.[xi]
However, if the obligor pays the assignee after notice, even if there is a defect in the right of an assignee, the assignee has the same power that the assignor had to discharge or modify the duty of the obligor.  The assignee can discharge or modify the duty of the obligor only if the obligor gives value to the assignee.  An obligor can also be discharged if the obligor otherwise changes his/ her position in good faith and without knowledge of the defect in the assignment.

The essential element of a valid assignment is the bona fide agreement between the assignor and assignee, for a sufficient consideration and without intent to defraud creditors or subsequent purchasers.  Once this condition is fulfilled, the assignment is complete, and a subsequent failure to give notice to the debtor or to creditors of the assignor does not affect the validity of the assignment.  Thus, in a case, the California court has held that the fact that an attaching creditor had no notice of the assignment at the time he instituted his proceeding is immaterial.[xii]  Hence, notice to the debtor or to creditors of the assignor is not essential to complete the assignment.

However, this rule is inapplicable in the case of an obligor.  An assignment is not effective against the obligor in the absence of a notice of assignment.  Further, the notice must clearly express to the obligor that a right has been assigned.

[i] In re Robert T. Noel Coal, Inc., 82 B.R. 778 (Bankr. W.D. Pa. 1988)

[ii] Commonwealth v. Baldassari, 279 Pa. Super. 491 (Pa. Super. Ct. 1980)

[iii] Boc Group, Inc. v. Katy Nat’l Bank, 720 S.W.2d 229 (Tex. App. Houston 14th Dist. 1986)

[iv] Lambert v. Barker, 232 Va. 21 (Va. 1986)

[v] Smith v. Harris, 127 Cal. App. 2d 311 (Cal. App. 1954)

[vi] Id.

[vii] Stansbery v. Medo-Land Dairy, 5 Wn.2d 328, 340 (Wash. 1940)

[viii] Martinez v. Martinez, 650 P.2d 819 (N.M. 1982)

[ix] Wood v. Chicago Title Agency, 109 Nev. 70, 73 (Nev. 1993)

[x] Bonanza Motors v. Webb, 657 P.2d 1102 (Idaho Ct. App. 1983)

[xi] Service Adjustment Co. v. Underwriters at Lloyd’s London, 205 Ill. App. 3d 329, 336 (Ill. App. Ct. 1st Dist. 1990)

[xii] Smith v. Harris, 127 Cal. App. 2d 311, 316 (Cal. App. 1954)


Inside Effect of Notice to Debtor