Archive for October, 2011

Assigning a Debt

Saturday, October 1st, 2011

The Court of Appeal released a decision yesterday that really doesn’t advance the law related to assignments so much as it serves to reinforce the the prior law is still valid and will be upheld.  Put simply, A and B were friends and work colleagues.  They did work with C.  Subsequently, B left the workplace and started up his own business and tried to do business with C.  A was able to get an injunction to stop B and C doing business for a short period of time – 3 months.  For whatever the stoppage for three months was worth, it clearly displeased B.  Later on, A wanted to buy property and C agreed to loan A over $100,000.  A subsequently defaulted and C agreed to assign the loan debt to B – with the result that B was now in the shoes of the lender and A owed the money to B.  B and C agreed that if A paid the money to B that B and C would then later decide how to split the monies that were recovered.

A complained that the arrangement between B and C was champertous and therefore should not be an enforceable assignment – that is, that A should still have to deal with C, not with B.  Why?  In part, I’m sure, because of the bad blood between A and B.  In part, I would expect, in that A would be concerned that his competitor, B, would now be in a position to potentially run him out of business, etc.

Madam Justice Feldman rejected the argument that this was a champertous situation.  She quoted from a prior decision of the Court of Appeal that nicely summarizes the law of champerty and maintenance:

Although the type of conduct that might constitute champerty and maintenance has evolved over time, the essential thrust of the two concepts has remained the same for at least two centuries. Maintenance is directed against those who, for an improper motive, often described as wanton or officious intermeddling, become involved with disputed (litigation) of others in which the maintainer has no interest whatsoever and where the assistance he or she renders to one or the other parties is without justification or excuse.  Champerty is an egregious form of maintenance in which there is the added element that the maintainer shares in the profits of the litigation.

The law had long held, however, that the mere assignment of a debt (even if it is does for an improper motive) is not, in and of itself, champertous.  In upholding this law, the assignment from C to B was not champertous and therefore was valid.

Similarly, the assignment was valid because there had been compliance with Section 53 of the Conveyancing and Law of Property Act.  That section reads as follows:

53.  (1) Any absolute assignment made on or after the 31st day of December, 1897, by writing under the hand of the assignor, not purporting to be by way of charge only, of any debt or other legal chose in action of which express notice in writing has  been given to the debtor, trustee or other person from whom the assignor would  have been entitled to receive or claim such debt or chose in action is effectual  in law, subject to all equities that would have been entitled to priority over  the right of the assignee if this section had not been enacted, to pass and  transfer the legal right to such debt or chose in action from the date of such  notice, and all legal and other remedies for the same, and the power to give a  good discharge for the same without the concurrence of the assignor.

Is there anything earth-shattering in this case.  Not really.  However, it does give me a good excuse to set out for you the law of champerty and to advise of Section 53 of the Conveyancing and Law of Property Act.

Let’s talk quickly about champerty and maintenance.  Litigation is not for the faint of heart – or of wallet.  What often happens is that people start the lawsuit expecting it to cost $X and soon realize that it is going to cost more than $X.  So, they start borrowing money from friends, relatives, etc. to help pay for their legal fees.  This is borderline maintenance but usually will not be overly problematic.  What is far more problematic is when Person X says to Person Y – go ahead and sue Person Z and I’ll cover your costs.  If that happens, then Persons X and Y are going to be in trouble.  So, you should watch out when you are asked to give guarantees or agree to cover legal fees for any business associates.

Section 53 of the Act, is also important for you to know about.  Why?  Because it has two aspects.  The first is that any assignment is not effective as against a debtor unless and until notice of the assignment is given.  So, suppose that one of your customers cannot pay you, but he says that he is owed a lot of money by one of his customers and he agrees to assign over to you the accounts receivable so that when that customer pays, the money goes to you.  That could be a very good setup and ensure that you get paid.  However, unless and until the customer is given written notice of this assignment, he has the right to continue to pay your customer directly, instead of paying to you, and you will have no right to complain (especially when, as usually happens, your customer then proceeds to blow the money instead of forwarding it to you).

The other aspect to bear in mind is the fact that Section 53 of the Act preserves the concept that a person takes an assignment “subject to the equities”.  So, in my example immediately above, suppose that the assignment occurs and then you go to your customer’s customer and say “you owe my customer $100,000 and you are now to pay me.”  The customer’s customer has the right (assuming it is a valid claim) to say something like “I admit that I would owe $100,000, except for the fact that the product / services / whatever provided by your customer to us was deficient / non-existent / whatever and so we do not have to pay $100,000 but only $X (being some amount less than $100,00) because of the problems caused by your customer.”  If it is a valid claim, then you will be stuck with this reduction and will not be able to say “that’s between you and our customer, pay us the $100,000 and then any rebate or reduction you will have to take up with our customer.”

So, if you are either giving or taking an assignment of a debt, always bear in mind that you will want to ensure that it is not seen as being a form of maintenance or champerty that will invalidate the assignment and also keep in mind the requirements of Section 53 of the Conveyancing and Law of Property Act to ensure that you can enforce the assignment and also to ensure that either there are no set-offs or reductions that can be applied or that a sufficient discount is given on the price paid for the assignment to take such potential set-offs or reductions into account.

Something to think about.