Credit Assignment and Subrogation in Civil Law

Credit Assignment and Subrogation in Civil Law

• Change of creditor.
• Assigned.

It is a voluntary act. It is a legal transaction: a transfer of a credit title to a new creditor. The assignment is a business transaction between the assignor (original creditor or transferor) and the transferee (new creditor).

The assignment can be for consideration (the assignor receives payment, which will be paid by the transferee) or gratuitous (the assignor receives nothing in return).

The debtor may or may not have knowledge of or consent to the transfer of credit. Knowledge is irrelevant to the validity of the transfer, although it affects its legal effects. The main effects are:

Payment of the obligation

• Payment of the obligation: If the debtor, without knowledge of the assignment, pays the original creditor, the payment is considered valid and the obligation is extinguished. Art. 1527 CC: the debtor who satisfies the creditor before having knowledge of the assignment is relieved of the obligation.

Compensation (Set-off)

• Compensation: If the debtor knows of the assignment, the new creditor cannot object to a set-off (compensation) that would have applied against the original creditor. If the debtor does not know of the assignment, he may oppose the set-off of debts owed to the original creditor until he becomes aware of the transfer.

If the debtor does not know of the transfer to the new creditor, he can oppose claims owed to the original creditor until he acquires knowledge of the assignment.

It is appropriate to notify the debtor of the assignment of credit. Art. 1198 CC: the debtor who has consented to the transfer of rights by a creditor to a third party may raise against the assignee the same set-offs (compensations) that would have applied against the assignor.

If the transfer occurs without the debtor's knowledge and the debtor has not consented, the debtor may oppose set-off for debts that arose prior to the transfer, but not for debts arising afterward.

If the transfer is made without the debtor's knowledge, he may oppose set-off for claims prior to and after the transfer until he becomes aware of the assignment.

Subrogation of Credit

Subrogation of credit.

Subrogation is a legal effect produced by payment by a third party. In this case the right is transferred to the third party (the subrogee), who becomes the new creditor. Subrogation can arise when a third person pays the debtor's obligation; ideally this should be done with the knowledge and consent of the debtor.

Art. 1158 CC: Anyone may pay another person's obligation, whether or not they have an interest in the performance of the obligation, and whether or not the debtor knows or approves the payment. A person who pays on behalf of another may claim from the debtor what the debtor would have paid, except where payment was made against the debtor's express wishes. In that case, the payer can only recover what was necessary and useful for the payment.