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Assigning A Breach of Contract Claim In Illinois – Some Basics

February 8, 2016

 

Contract rights are assigned fairly often, especially in the mortgage loan and credit card contexts.  In the former mortgage scenario, it’s common for a promissory note to be assigned multiple times during the note’s lifespan.

 

When there’s eventually a note default, it becomes a challenge for the noteholder to trace how it came into the note’s possession.  Repeated note assignments also provide the note maker (person who signed the note) a ready-made defense to a lawsuit based on the note.  The noteholder plaintiff then has the burden of proving to the court that it has the right to sue on the note.

 

Because assignments are so prevalent and confusion often results as to who can enforce contract rights, it’s important from both plaintiff and defense sides to have a working knowledge of what claims can be assigned and what defenses are available to a a defendant sued by an assignee of a contract claim.

 

The basics: a person that has a claim against another has a “chose in action.”  Classic examples of a chose in action include a claim for money owed on a debt, a right to stock shares or a claim for damages in tort.  Black’s Law Dictionary 258 (8th ed. 2004)

 

Choses in action are generally assignable. An assignment transfers title to the chose in action to the assignee, who becomes the real party in interest.  The assignee of the chose in action may then sue on the claim in his or her own name.

 

An action brought by an assignee is subject to any defense or set-off existing before notice of the assignment is given to the defendant.  735 ILCS 5/2–403(a).  But the set-off or defense must relate specifically to the assigned claim.  It can’t pertain to something extraneous to that claim.

 

Example, if Company X assigns its 2015 breach of contract claim against Person Y to me and I sue Person Y, Person Y can’t raise as a defense a $1,000 claim Person Y has against Company X from a 2013 contract.  The two contracts are different and involve different underlying facts. Person Y can only defend based on the same 2015 contract Company X assigned.

 

Puritan Finance Corp. v. Bechstein Const. Corp. 2012 IL App(1st) 112261 illustrates what defenses a defendant has versus a contract claim assignee under the common law and under Article 9 of the UCC.

The plaintiff was the assignee of a bankrupt trucking company (the Assignor) that had previously done business with the defendant.  The Assignor was owed monies by the defendant and assigned its claim to the plaintiff, a secured creditor of the Assignor.

 

After the plaintiff sued, the defendant asserted defenses based on an unrelated claim it had against the Assignor before the plaintiff’s involvement.  The court granted judgment for the plaintiff after a bench trial for the full amount of its claim (about $22,000) and the defendant appealed.

 

Affirming the judgment for the assignee, the court first rejected the defendant’s set-off claim under Code Section 2-403(a).  Since the defendant’s set-off involved a contract that was separate from the one being sued on, the defendant couldn’t use this separate contract as a defense to the assignee’s lawsuit.

 

The defendant’s Article 9 defense was a closer call.  UCC Article 9 governs security interests in personal property as collateral to secure a debt.  Section 9-404(a) of the UCC (810 ILCS 5/9-404) provides that an account debtor can assert against the assignee (1) any defense he (the debtor) had against the assignor “arising from the transaction” giving rise to the assignee’s claim; and (2) any other defense the debtor has against the assignor that accrues before the debtor received notice of the assignment.

 

Here, the defendant argued that under paragraph (2) of 9-404, it could assert defenses that related to a separate contract between it (the defendant) and the Assignor.  The court disagreed and gave a narrow reading to Section 9-404.

 

It held that since the defendant didn’t and couldn’t yet file suit against the Assignor before the assignment of the contract to the assignee/plaintiff, the defendant’s claim hadn’t “accrued” within the meaning of Section 9-404.  As a result, judgment for the plaintiff was affirmed.

 

Afterwords:

– Where a defendant is sued by an assignee of a contract claim, it will be difficult to challenge the claim unless the defendant has claims or defenses against the assignor that are transactionally related to the assigned claim.  If the defendant’s defense relates to a separate, unrelated transaction, the defense or set-off will likely fail;

– Under Section 9-404, a defense “accrues” where the defendant actually has a viable cause of action against the assignor, such as where there has been a default in assignor’s payment obligations, instead of just a bare claim that a defendant is owed money on an unpaid invoice.

 

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