Assignee Can Stand in the Shoes of the Assignor and Assert the Original Assignors Reliance

By: Justin W. Curcio

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The Sixth Circuit recently held that an assignee of a bankruptcy claim has the right to stand in the shoes of the original creditor and assert that the debt was  non-dischargeable under section 523(a)(2)(B) of the Bankruptcy Code.[1]In Pazdzierz v. First American Title Insurance Co. (In re Pazdzierz), the debtor allegedly procured loans from the original creditor based on false statements regarding his income, assets, and employment.[2] The debtor eventually defaulted and filed for bankruptcy.[3]After the original creditor assigned its claim, the assignee commenced an adversary proceeding seeking a determination that the debt owed under the assigned claim was non-dischargeable because of the debtor’s alleged fraud in obtaining the loans underlying the assigned claim.[4]The debtor moved for summary judgment, arguing that the assignee’s complaint was asserting a simple fraud claim, which the assignee could not assert because fraud claims cannot be assigned under Michigan Law.[5] The bankruptcy court granted the debtor’s motion.[6] The district court reversed, holding that assignee was pursuing a non-dischargeability claim, which was not a naked fraud claim that .[7] The Sixth Circuit affirmed, stating that assignee’s claim arose from the promissory notes, not a naked claim of fraud.[8]  Accordingly, the Sixth Circuit held that the rule barring the assignment of fraud claims did not apply because the assignee’s complaint sought to enforce the assignee’s rights under the promissory notes, which only depended on a showing of fraud incidentally.[9]

 The Sixth Circuit’s decision in Pazdzierz joined the Seventh and Ninth Circuits in holding that an assignee can assert that its claim is non-dischargeable if the assignor could have asserted the same.[10] The Seventh Circuit held that “the very reason that the institution of assignment exists is to enable Creditor to transfer its rights against [a d]ebtor . . . to [an a]ssignee . . . .”[11] As such, an assignee can still successfully assert that its claim is non-dischargeable under section 523(a)(2)(B) if the debtor obtains the loan through deceitful means.[12]Similarly, the Ninth Circuit held that “[section] 523(a)(2)(B)(iii) permits an assignee to stand in the shoes of its assignor and to pursue an exception to discharge based on the assignor’s reliance on materially false financial statements.”[13]

The Pazdzierz decision should provide comfort to parties seeking to assert bankruptcy claims that are based promissory notes that they obtained from a third party via an assignment. In particular, Pazdzierz demonstrates that, in a case where the debtor fraudulently obtained a loan, an assignee can both (1) assert a claim arising from the assigned promissory notes and (2) seek a determination that its claim is non-dischargeable under section 523(a)(2). As such, Pazdzierz further illustrates that the assignee’s action seeking a dischargeability determination was not an independent claim, but was rather part of the assignee’s overall effort to collect on its claim arising from the promissory notes. Therefore, even though an action seeking a dischargeability determination depends on a showing of fraud by the debtor, an assignee can still stand in the shoes of the original creditor and assert that its claim is non-dischargeable.

[13] See Boyajian v. New Falls Corp. (In the Matter of Boyajian), 564 F.3d 1088, 1090, 1093 (9th Cir. 2009).