Generally, an assignee can have no rights superior to those held by his assignor. This is because law presumes that an assignee simply stands in the shoes of the assignor. However, at times, it becomes inevitable to confer some greater rights to the assignee than his/her assignor because of an estoppel arising against the obligor. Thus, the principle of equitable estoppel may be raised in favor of an assignee of a nonnegotiable chose in an action to protect his/her rights against equity of the debtor. The general rule that an assignee acquires no greater rights than his assignor is subject to the qualification that the debtor may, by his/her representations or conduct, estop himself /herself to set up against the assignee, defenses which were available to him/her against the assignor.[i]
Similarly, public policy considerations will not allow a debtor to interpose a defense available against his /her original creditor against an assignee of that creditor.[ii]
A debtor may be estopped by representations or conduct from asserting against the assignee any counterclaims, setoffs, or defenses that otherwise would have been available to the debtor against the assignor. For instance, if the debtor had expressly waived all rights of action, setoff, and counterclaim he/she may have had against the assignor, the debtor is estopped from proceeding against the assignee. Similarly, a debtor is estopped by representations or recitals in the original assigned instrument and retaining the benefit of the assigned instrument. A debtor is also prohibited from executing a new agreement with the assignee.
However, the doctrine of estoppel does not always come to the rescue of the assignee, especially if he/she fails to exercise good faith in the transaction. Courts have held that the doctrine of estoppel is founded upon principles of morality and fair dealing and is available only for the protection of claims made in good faith. Good faith requires the exercise of reasonable diligence to learn the truth, and, accordingly, estoppels is denied where the party claiming it had available means for ascertaining the truth of the transaction, at least where the element of actual fraud is absent.[iii] Thus, an assignee is precluded from assigning the defense of estoppel, when the assignee has knowledge of a possible defense by the debtor against the assignor or when he/ she is a principal in the originating transaction. Also, an assignee of a nonnegotiable chose of action has a right of equitable estoppels against the equity of a prior owner of the chose from whom an assignment was obtained by his/ her immediate assignor by fraud or for a limited purpose.
[i] Thorp Finance Corp. v. Le Mire, 264 Wis. 220, 224 (Wis. 1953)
[ii] Gooch v. Gooch, 178 Iowa 902, 910 (Iowa 1916)
[iii] Thorp Finance Corp., 264 Wis. 220