Third Party Rights

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E. Assignments, Delegations & TRACC

1). T: Transaction Costs

Transaction costs attend every loan that credit companies originate, but they are usually higher for the company originating the loan than the party to whom the rights to payment are assigned. Before First Finance loaned Kirk the money, it invested the time, money and effort to make sure he was credit worthy. When First Finance assigned its right to payments to Credit USA, it didn’t have to investigate Kirk’s credit worthiness; that had already occurred. However, the circumstances differ significantly with Kirk’s delegation to Gert

2). R: Risks

Gert’s a stranger to Credit USA and has no idea about her credit worthiness. On the one hand, she might be a better risk than Kirk, but on the other hand, she might have no assets beyond her next paycheck, against which creditors could aleady have claims. Either way, if courts generally enforced delegations, credit would be difficult, if not impossible to obtain for many individuals and companies, and the cost of credit would increase dramatically. If delegations were enforceable, debtors such as Kirk could walk away from their debts by delegating them to third parties, independent of their credit worthiness. To prevent such unfortunate possibilities, the delegator, Kirk in this example, is liable on the debt until it’s fully paid, either by himself or him and Gert.

3). A: Allocative Efficiency

Theoretically, Credit USA could run a credit check on Gert, but that would be an inefficient use of scarce resources. Kirk sought out the loan and secured it only after proving to First Finance that he was a worthy credit risk. Even if Gert were credit worthy, she might resist turning over critical financial data. With Kirk’s delegation of his duties, she was taking on an-already existing loan, not seeking one out.

Additionally, companies that originate loans, such as First Finance have established, time-tested methods and procedures to check a prospective client’s credit standing. If Credit USA specializes in accepting assignments, for which they pay the assignor, it might not have standard credit-checking procedures established. Making Kirk responsible for the loan, even when he delegated his duty to repay it is a more efficient allocation of scarce resources.

4). C: Cost/Benefit

A cost/benefit analysis supports the ease of assignments when the right to money is involved. Credit USA bought the note from First Finance at a price discount. At the time of the assignment, First Finance preferred to have a lesser amount immediately than to have a larger sum over time. By comparison, Credit USA preferred to pay a lesser amount now in exchange for a larger return over time. So long as First Finance can assign its notes by selling them to larger finance companies, it can originate more loans, which is its reason for existing. By buying loans, Credit USA spreads the risk over multiple loans into the thousands or scores of thousands, and profiting from most of them. Each benefits while minimizing their costs.

Further, if First Finance does a poor job and extends loans to poor credit risks, larger finance companies will stop buying its notes. First Finance, and other enterprises like it, succeeds to the extent that it does a credible job in identifying worthy credit risks. Having done that, Credit USA or other large finance companies will buy the notes that smaller companies want to assign to them. The benefits to each exceed the costs.

However, if Credit USA has to do another credit check, for example on Gert, it’s incurring a needless cost for a benefit that’s already been secured, which First Finance incurred in checking Kirk’s credit status. Incurring the cost of a second credit check, increases the cost, maybe dramatically, without producing any additional benefit.

5). C: Control

Kirk started the process in seeking the loan from First Finance. He knew the risks he incurred and balanced them against his assets and income from his music business. First Finance extended the loan after carefully considering Kirk’s assets and his prospects for success. Each had complete control in assessing Kirk’s chance for repaying the loan; both agreed in their assessments so Kirk got the loan.

Kirk also had control over whom, if anyone he delegated his duties to. Since he wanted out of the deal he could have been careful and found a credit-worthy delegatee, but instead acted hastily and lost control; the loan that he thought was a thing of his past re-emerged, much to his chagrin, and very possibly with payments several months in arrears and late fees. Unfortunately for him, Kirk learned a hard, possible costly lesson, but fortunate also smiled on him.

F. Novation

Kirk could have learned that Gert had a poor credit history, and that she was in arrears on two credit cards. With a bit more effort he would have learned that her musical talents and interests were equally spotting. An oboist, she was third chair in her high school orchestra that had but to oboe players. But Rachel came to Kirk’s rescue after buying the business from Gert. Rachel knew that something was amiss when Gert sold her the business at a fire-sale price, but soon learned about Kirk’s debt. Rachel proposes that she and Kirk should make a novation, with her replacing Kirk’s obligation.

A novation is a substituted contract, that involves Credit USA, Kirk and Rachel. Credit USA realized that Kirk was in financial straits and upon learning that Rachael helped him with back payments and had an excellent credit agreed to substitute her in place of Kirk. Unlike his delegation to Gert, Credit USA knew of the delegation to Rachel and agreed to substitute her for his obligation, in essence creating a new contract, hence the word “novation.”

G. Assignments and the Statute of Frauds

Assignments can be oral or written. If the subject matter of the assignment comes within the Statute of Frauds, it must be in writing to be enforceable. The subject matter that requires a writing to be enforceable is LEGS, discussed in the notes on the Statute of Frauds.

Generally, option contracts can be bought and sold, i.e., assigned, unless the contract has an anti-assignment clause. Courts honor such clauses since courts try to enforce the intent of the parties. However, anti-assignment clauses that assign money are not enforceable, nor are limits on assigning land