This section is from the book "The Law Of Contracts", by Samuel Williston. Also available from Amazon: Treatise on the Law of Contracts.
The right of an assignee of a chose in action may be called equitable in this sense because of the following characteristics:
1. An assignee takes subject to all existing equities in favor of the debtor.28
2. An assignee loses the benefit of his assignment if the debtor in good faith acquires a defence against the assignor even after the date of the assignment.29
3. The assignee also takes subject to rights of set-off existing in favor of the debtor at the time of the assignment, or acquired by the debtor prior to notice of the assignment.30
4. A prior assignment though for value is subordinated to a subsequent assignment for value if the subsequent assignee in
28 See supra, Sec. 432. 29 See supra, Sec. 433.
30 See supra, Sec. 432.
good faith actually collects the claim or makes a novation with the debtor.31
5. In most jurisdictions the assignee takes subject to an equitable claim against the assignor existing at the time of the assignment in favor of a third person.32
6. A prior partial assignee (whose claim is everywhere held to be merely equitable) 33 is protected as against a subsequent assignment of the whole claim made for value and in good faith.34 All of these characteristics of the assignee's right are explicable on the theory that his right is equitable in its nature. Most of them are not necessarily inconsistent with the view that his right is legal, but a few of them are inconsistent. In the transfer of chattel property it is often held that a subsequent purchaser with delivery is preferred to a prior purchaser without delivery; and yet the prior purchaser is regarded as having a legal right. So where real estate is conveyed to two purchasers, the second purchaser prevails if he first records his deed, and yet the first purchaser had a legal title. In these cases the legal title of the first purchaser is made defeasible by subsequent events. So it may be said the right of a prior assignee is defeasible by a subsequent assignment to one who collects the claim, or, under the English rule,35 who first gives notice to the debtor. If this were the true way to look at the matter, however, the burden of proof should be upon one who asserted that the legal title of the assignee had been defeated, whereas it has been held that if the debtor has paid the assignor, after the assignment, the burden is upon the assignee to show that the debtor had notice of the assignment prior to the payment.36 It may also be regarded as consistent with a legal right in the assignee that he should take subject to equities in favor of the assignor. This may be considered as a mere definition or limitation of the size of the legal right assigned; though confusion is likely to arise from this method of regarding the matter. As title to a horse obtained by fraud will pass free of the defrauded seller's equity if sold to a bona
31 See supra, Sec. 435. 32Seeropra, Sec.438. 33 See supra, Sec.Sec. 442, 443. 34 See supra, Sec. 435 ad fin.
35 See supra, Sec. 435.
36 Burritt v. Tidmarsh, 1 111. App. 571; Heermans v. Ellsworth, 64 N. Y. 160.
fide purchaser for value without notice, so it will naturally seem that if the legal title to a chose in action passes to an assignee that the assignee ought similarly to take free of the debtor's defence of fraud or from any other equitable defence.37 However this may be, certainly the allowance of set-off against the assignee of claims the debtor has against the assignor, especially claims acquired subsequently to the assignment, and the enforcement of latent equities in favor of third persons, are both inconsistent with the theory of a legal right. The only explanation of the debtor's right to set off against the assignee a totally separate claim against the assignor is that the legal right to the assigned claim is still in the assignor. In a system of law where the smaller of two mutual debts cancels the other pro tanto 38 it would not be necessary to deny the. assignee legal ownership of the assigned claim in order logically to reach this result; but in the common law a cross-claim is not payment or part payment of the original claim,39 the right of set-off is rather in the nature of a cross-action.
37 In Stoddart v. Union Trust, Ltd., [1912] 1 K. B. 181, the assignee of a sum of money to fall due under a contract for the sale of a newspaper sued to recover the money. The defendant claimed that the contract was induced by fraud of the assignor, and being unable to offer to rescind the contract, set up a counter-claim against the assignee for damages; the court held that the counter-claim could not be supported because the subject-matter of it was not sufficiently connected with the original contract; but Vau-ghan Williams, L, J., at page 189 said: "I think that a debtor sued by the assignee of a debt might set up the defence that the contract under which the debt arose ought to be set aside and cancelled on the ground of fraud, but whether that could have been done in the present case is immaterial, for the defendants have not sought to do that, for the reason that they have so acted with regard to the subject-matter, the sale of which was the consideration for the debt, that they could not repudiate the contract." Buckley, L. J., though willing to assume this to be true nevertheless, said at page 190, "Notice of the assignment was given to the debtors. As from that moment Price ceased to be, and Stoddart became the owner of that debt of 800 l, if there was such a debt." There is at least an apparent inconsistency in this latter statement, and in the statement that rescission would be permitted on account of the fraud of the assignor. If the English Statute giving' the assignee a right of action in his own name did not expressly preserve the right of the debtor to set up equities existing against the assignor, it may be feared that the English Court would find it difficult so to hold, in view of their broad statements as to the nature of the assignee's right.
38As in the Civil Law. See infra, Sec.859.
39Ibid.
Certainly it seems impossible to say, that it is a legal limitation of the claim, and if it is only an equity, it would be cut off by the assignment if the assignee became the legal owner of the claim. So in the case of latent equities, if the assignee were really the legal owner of the assigned claim, he could not be affected by an equity which a third person had against the assignor; as for instance, if the assignor had procured the claim by fraud from a third party. The assignee as bona fide purchaser of a legal title would prevail over the prior equity of the defrauded original owner. However opposed this result may be to the weight of authority some may may think it desirable. Indeed, perhaps the chief reason (other than a blind revolt at the assertion that choses in action are not transferable when in fact they are transferred every day) why the view is often taken that the assignee of a chose in action acquires legal ownership is because thereby so-called latent equities against the claim would be cut off, and it is thought unfair to subject the assignee to equities which he is unable to discover. On the other hand, it is to be observed that intangible choses in action are not primarily intended for merchandising, as chattels are. The rule in regard to latent equities has no importance not only where negotiable paper is concerned, but where choses in action having tangible form like policies of insurance, savings bank books, or non-negotiable notes are in question. The delivery of the document will cut off the equity. If, therefore, the parties desire to put an obligation in a merchantable form they can (if they wish) do so, and can do so without making the obligation negotiable. For such property, then, as an intangible chose in action, there seems little reason to prefer the assignee to a previously defrauded owner of the claim. Where the sale of property is a necessary function of commercial activity, it is socially desirable to protect the new purchaser at the expense of a former innocent victim; but the desirability of this policy seems limited to that class of property.
Finally, it is also inconsistent with the view that the assignee of a chose in action acquires a right legal in its nature if his assignment though subsequent in time is not given precedence over any prior assignment which was confessedly merely equitable. Consequently, if the assignment of an entire claim creates a legal right, it would prevail over a prior partial assignment, and also over a prior total assignment of the claim made before it had arisen, though after the contract out of which the claim arose had been entered into; since confessedly the rights of both a partial assignee,40 and of an assignee of a future right 41 are equitable. In neither case does such a result seem desirable or warranted by the authorities. Other cases also may be supposed on which no actual authority can be found. Suppose that the second of two assignees for value first receives payment, which he demands and takes in ignorance of the rights of the prior assignee who bad, however, previously notified the debtor of his rights, the latter being forgetful or fraudulent in making payment. If the rights of an assignee are equitable the second assignee can keep what he has obtained. If, however, the prior assignee has a legal right, protected against all the world by notice to the debtor, the second assignee obtained nothing by his assignment, and received by mistake and for no present value, money due to another, which he must surrender. Suppose again that a parol assignment without consideration is made and notice of the assignment given to the debtor, and thereafter a release without consideration is made by the assignor to the debtor. If the equitable rule that an assignment without consideration is not entitled to protection prevails, the assignor was justified in revoking his assignment, in effect, by giving a release. If, however, assignment and notice create a legal right, this would not be true.
It seems, therefore, that the authorities referred to in a preceding section holding that merely procedural changes have been effected by modern statutes are sound and that the assignee's right should still be regarded as equitable in the sense of being governed and defined by the principles originally established by courts of equity.42
40 See eupra, Sec.Sec. 442, 443. 41 See supra, Sec. 414. 42 See further articles by the present miter in 30 Harv. L. Rev. 91, 31 id.
822; by Professor Cooke in 29 id. 816, 30 id. 449; and by Professor George L. Clark in Vol. 15, No. 17, of the Univ. of Mo. Bulletin.
 
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