Defenses Based On Invalid Assignment

Generally, a debtor may assert against an assignee, all equities or defenses existing against the assignor prior to notice of the assignment.  Thus a debtor may allege any claim that may render the assignment absolutely invalid or ineffective.  The debtor can allege that the assignee has no title or right to sue.  However, if the assignment is effective enough to pass legal title, the debtor cannot introduce defects or objections which merely render the assignment voidable at the option of the assignor or the assignee.[i]

The rationale behind the rule that an obligor may not defend on any ground which renders the assignment voidable alone is that the only interest or right which an obligor of a claim has in the instrument of assignment is to insure himself/herself that he/she will not have to pay the same claim twice.[ii]

The various defenses available to the debtor against an assignee include the defense of failure to provide adequate notice, fraud, and misrepresentation in the creation of an assignment.[iii]  Thus, courts have held that fraudulent “representation that defendant was a bona fide operating corporation authorized to do business in a state and was legally qualified in the state” could constitute a good defense to an assignee’s claim under assignment.[iv]
Courts have further held that defenses of usury, fraud, and unconscionable contract preclude enforcement.[v]  The burden of proof falls on the party alleging fraud or misrepresentation and a party must prove the following elements by clear and convincing evidence:(1) “A representation; (2) its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by the person and in the matter reasonably contemplated; (6) the hearer’s ignorance of its falsity; (7) his reliance upon its truth; (8) his right to rely thereon; (9) his consequent and proximate injury.”[vi]  As to the burden of proof, the burden is a “function of the degree of confidence a court should have in the correctness of a factual determination that one has perpetrated a fraud.”[vii]

[i] Glass v. Carpenter, 330 S.W.2d 530 (Tex. Civ. App. San Antonio 1959)

[ii] Tri-Cities Constr., Inc. v. American Nat’l Ins. Co., 523 S.W.2d 426, 430 (Tex. Civ. App. Houston 1st Dist. 1975)

[iii] Fall River Trust Co. v. B. G. Browdy, Inc., 346 Mass. 614 (Mass. 1964)

[iv] Bauer v. Costello, 7 Conn. Supp. 98 (Conn. Super. Ct. 1939)

[v] In re Estate of Vought, 76 Misc. 2d 755 (N.Y. Sur. Ct. 1973), Great Southern Nat’l Bank v. McCullough Environmental Services, Inc., 595 So. 2d 1282, 1288-1289 (Miss. 1992)

[vi] Johnson v. Brewer, 427 So.2d 118, 121 (Miss. 1983)

[vii] Anderson v. Burt, 507 So.2d 32, 38 (Miss. 1987)

Inside Defenses Based On Invalid Assignment