new york law contract assignment

• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Assignment and Assumption Agreement and Optional Novation (NY) | Practical Law

Assignment and Assumption Agreement and Optional Novation (NY)

Practical law standard document w-002-7123  (approx. 24 pages).

• Practical Law

Contract Assignment: New York

Practical law state q&a w-000-2743  (approx. 13 pages).

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Lambert v Schiller

Hilscher & Hilscher, Catskill (J. Theodore Hilscher of counsel), for appellants.

The Baynes Law Firm, PLLC, Ravena (Brendan F. Baynes of counsel), for respondent.

MEMORANDUM AND ORDER

Appeal from an order of the Supreme Court (Tailleur, J.), entered December 12, 2016 in Greene County, which, among other things, granted plaintiff's cross motion for partial summary judgment.

This action arises from a June 2010 memorandum of understanding (hereinafter MOU) wherein defendants agreed to finance the sale to plaintiff of four parcels of land, totaling approximately 100 acres, for $300,000. Relevant here, the MOU stated that the purchase price of the first 7.8-acre parcel (hereinafter parcel one) was $60,000. The "basic terms" of the sale were that plaintiffs would make an initial $10,000 down payment then monthly payments in the amount of at least $5,000 for five years at a 6% interest rate on the balance. The MOU

further provided that all four parcels would be deeded to plaintiff "[a]fter $100,000 in principal payments [were] made" and that plaintiff would pay $60,000 of the principal by November 2010, at which time defendants would convey parcel one to plaintiff "with a mortgage of $40,000 remaining on it (the remaining principal amount of $40,000 having been spread over the other parcels)."

Plaintiff made the $10,000 down payment in June 2010 and a $5,000 monthly payment from July 2010 until September 2011. In August 2011, having made more than $60,000 in principal payments, plaintiff demanded that defendants provide the deed for parcel one. Defendants declined. Nonetheless, plaintiff took possession of parcel one and made considerable improvements to the property. With some exceptions, plaintiff continued to make regular monthly payments, albeit in varying amounts, from May 2012 until November 2013. In April 2014, defendants commenced a summary proceeding to evict plaintiff, mischaracterizing their [*2]relationship as landlord and tenant. The parties then executed a "contract for purchase and sale of real estate" (hereinafter the April 2014 agreement) that involved the sale of two parcels — including parcel one — totaling approximately 60 acres for $175,000 at a 6% interest rate. The April 2014 agreement provided that plaintiff would begin to make weekly payments "deemed rent [and] not refundable" if the property did not close. In July 2014, a court order was issued in defendants' favor requiring plaintiff to come current on his payments or face eviction. In August 2014, the parties executed a third contract (hereinafter the August 2014 agreement) wherein they agreed that plaintiff would purchase parcel one — as adjusted to approximately 12 acres by an intended boundary line agreement — for $76,000, payable in weekly installments. As in the April 2014 agreement, the weekly payments were characterized as rent in the event that the property did not close. Notably, neither the April 2014 agreement nor the August 2014 agreement referred to the MOU or credited any of plaintiff's previous payments.

In September 2015, plaintiff commenced this action seeking specific performance of the MOU, an equitable lien on parcel one, a constructive trust in the amount that plaintiff had paid defendants and to have the April 2014 and August 2014 agreements declared null and void because they were unconscionable, coerced or executed under duress. Defendants joined issue and filed counterclaims, including that plaintiff breached "the contracts and agreements" between the parties. Thereafter, defendants moved for, among other things, summary judgment dismissing the complaint and plaintiff cross-moved for, among other things, partial summary judgment on his cause of action for specific performance. Supreme Court, among other things, granted plaintiff's cross motion for partial summary judgment and directed defendants to deliver a deed to parcel one. Defendants now appeal.

Defendants' primary argument on this appeal is that plaintiff is not entitled to specific enforcement of the MOU because the April 2014 agreement was a novation and rescission of the MOU, the August 2014 was a novation and rescission of the April 2014 agreement and plaintiff failed to make the payments required pursuant to any of these agreements. Generally, a novation can be raised as a defense to an action on an existing agreement where a new agreement extinguishes any obligations arising from the existing agreement (see Miles v Houghtaling, 32 AD2d 714, 715 [1969]). "A novation has four elements, each of which must be present in order to demonstrate novation: (1) a previously valid obligation; (2) agreement of all parties to a new contract; (3) extinguishment of the old contract; and (4) a valid new contract" (Callanan Indus. v Micheli Contr. Corp., 124 AD2d 960, 961 [1986] [citations omitted]). If a party breaches a preexisting contract, there can be no novation because the first element is negated (see Wasserstrom v Interstate Litho Corp., 114 AD2d 952, 954 [1985]).

In support of their motion for summary judgment, defendants rely on an affidavit by their attorney, the MOU, the April 2014 and August 2014 agreements and account statements — purportedly prepared by defendants — listing plaintiff's periodic payments pursuant to all three agreements. There is no dispute that plaintiff failed to pay $60,000 in principal payments by November 2010 as required by the MOU. Nonetheless, the submissions confirm that plaintiff made and defendants accepted "semi-regular" payments from July 2010 through September 2011, and that plaintiff had paid more than $60,000 in principal by August 2011. By November 2013, plaintiff had paid more than $86,000 on the four parcels. After the parties executed the April 2014 agreement, plaintiff paid and defendant accepted periodic payments in excess of $10,000 through July 2014. Defendants' submissions indicate that by the time plaintiff commenced this action, he had paid more than $96,000 towards the purchase of parcel one as described in the MOU.

We agree with Supreme Court's determination that plaintiff did not breach the MOU. [*3]Initially, defendants do not challenge Supreme Court's characterization of the MOU as an installment land purchase contract that gave plaintiff "equitable title to the property and an equitable lien on the amount of payment" (Heritage Art Galleries v Raia, 173 AD2d 441, 441 [1991] [internal quotation marks and citation omitted]). Where, as here, such an agreement does not include a provision that time is of the essence, the purchaser may tender performance within a reasonable time after the specified date for payment (see Highbridge Dev. BR, LLC v Diamond Dev., LLC, 67 AD3d 1112, 1114 [2009]). "[A] seller may unilaterally convert [a] contract into one making time of the essence by giving the buyer clear, unequivocal notice and reasonable time to perform" (Mills v Chauvin, 103 AD3d 1041, 1044 [2013] [internal quotation marks and citations omitted]). Defendants gave no such notice here. Rather, by accepting plaintiff's late payments over time, defendants waived their right to demand timely payments and plaintiff was entitled to assert his rights under the MOU (see Snide v Larrow, 93 AD2d 959, 959 [1983], affd 62 NY2d 633 [1984]).

Defendants do not dispute that, in August 2011, plaintiff demanded that defendants deliver the deed to parcel one pursuant to the MOU after he had made more than $60,000 in payments towards the principal balance of the sale price. We agree with Supreme Court that defendants breached the MOU when they failed to deliver the deed upon plaintiff's demand. Further, we agree that, because defendants breached the MOU, defendants' assertion that the April 2014 agreement or the August 2014 agreement was a novation necessarily fails as a defense (see Wasserstrom v Interstate Litho Corp., 114 AD2d at 954).

Turning to plaintiff's cross motion, "[t]o obtain summary judgment for specific performance of a real estate contract, [the movant] must demonstrate that he [or she] substantially performed his [or her] contractual obligation and was ready, willing and able to fulfill his [or her] remaining obligations, that defendant was able but unwilling to convey the property and that there is no adequate remedy at law" (Fallati v Mackey, 31 AD3d 879, 880 [2006] [internal quotation marks, brackets and citations omitted], lv denied 7 NY3d 711 [2006]). In our view, plaintiff met this burden by submitting uncontroverted evidence that plaintiff resided on and made substantial improvements to parcel one, time was not of the essence under the MOU, he paid $60,000 towards the principal amount due within a reasonable time, he demanded that defendants transfer title to parcel one and defendants refused to comply. Further, plaintiff averred that despite defendants' refusal to transfer the deed, he continued to make payments and improvements to the property.

As set forth herein, defendants did not dispute any of plaintiff's factual claims with regard to the payments paid pursuant to the MOU. Rather, defendants contend that the $60,000 in principal payments should have been allocated "to each of the three distinct properties" and that parcel one was to be transferred "with a mortgage of $40,000 remaining on it." This is not consistent with the MOU, which provided that the purchase price of parcel one was $60,000, and that the mortgage represented "the remaining principal amount . . . having been spread over the other parcels," and "in any case any parcel [would] be deeded and/or fully released of [the] mortgage lien upon the payment of the entire stated purchase price." Because there is no factual dispute that plaintiff paid the entire purchase price stated for parcel one, we find that Supreme Court properly granted plaintiff's motion for partial summary judgment as to parcel one.

Peters, P.J., Egan Jr., Clark and Rumsey, JJ., concur.

ORDERED that the order is affirmed, with costs.

Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.

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When Assigning the Right to Pursue Relief, Always Remember to Assign Title to, Or Ownership in, The Claim

• Posted on: Oct 4 2016

Whether a party has standing to bring a lawsuit is often considered through the constitutional lens of justiciability – that is, whether there is a “case or controversy” between the plaintiff and the defendant “within the meaning of Art. III.” Warth v. Seldin, 422 U.S. 490, 498 (1975). To have Article III standing, “the plaintiff [must have] ‘alleged such a personal stake in the outcome of the controversy’ as to warrant [its] invocation of federal-court jurisdiction and to justify exercise of the court’s remedial powers on [its] behalf.” Id. at 498–99 (quoting Baker v. Carr , 369 U.S. 186, 204 (1962)).

To show a personal stake in the litigation, the plaintiff must establish three things: First, he/she has sustained an “injury in fact” that is both “concrete and particularized” and “actual or imminent.” Lujan v. Defenders of Wildlife , 504 U.S. 555, 560 (1992) (internal quotation marks omitted). Second, the injury has to be caused in some way by the defendant’s action or omission. Id . Finally, a favorable resolution of the case is “likely” to redress the injury. Id . at 561.

When a person or entity receives an assignment of claims, the question becomes whether he/she can show a personal stake in the outcome of the litigation, i.e. , a case and controversy “of the sort traditionally amenable to, and resolved by, the judicial process.’” Sprint Commc’ns Co., L.P. v. APCC Servs., Inc., 554 U.S. 269, 285 (2008) (quoting Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 777–78 (2000)).

To assign a claim effectively, the claim’s owner “must manifest an intention to make the assignee the owner of the claim.” Advanced Magnetics, Inc. v. Bayfront Partners, Inc. , 106 F.3d 11, 17 (2d Cir. 1997) (internal quotation marks and brackets omitted). A would-be assignor need not use any particular language to validly assign its claim “so long as the language manifests [the assignor’s] intention to transfer at least title or ownership , i.e., to accomplish ‘a completed transfer of the entire interest of the assignor in the particular subject of assignment.’” Id. (emphasis added) (citations omitted). An assignor’s grant of, for example, “‘the power to commence and prosecute to final consummation or compromise any suits, actions or proceedings,’” id. at 18 (quoting agreements that were the subject of that appeal), may validly create a power of attorney, but that language would not validly assign a claim, because it does “not purport to transfer title or ownership” of one. Id.

On September 15, 2016, the New York Appellate Division, First Department, issued a decision addressing the foregoing principles holding that one of the plaintiffs lacked standing to assert claims because the assignment of the right to pursue remedies did not constitute the assignment of claims.  Cortlandt St. Recovery Corp. v. Hellas Telecom., S.à.r.l. , 2016 NY Slip Op. 06051.

BACKGROUND :

Cortlandt involved four related actions in which the plaintiffs – Cortlandt Street Recovery Corp. (“Cortlandt”), an assignee for collection, and Wilmington Trust Co. (“WTC”), an indenture trustee – sought payment of the principal and interest on notes issued in public offerings. Each action alleged that Hellas Telecommunications, S.a.r.l. and its affiliated entities, the issuer and guarantor of the notes, transferred the proceeds of the notes by means of fraudulent conveyances to two private equity firms, Apax Partners, LLP/TPG Capital, L.P. – the other defendants named in the actions.

The defendants moved to dismiss the actions on numerous grounds, including that Cortlandt, as the assignee for collection, lacked standing to pursue the actions. To cure the claimed standing defect, Cortlandt and WTC moved to amend the complaints to add SPQR Capital (Cayman) Ltd. (“SPQR”), the assignor of note interests to Cortlandt, as a plaintiff. The plaintiffs alleged that, inter alia , SPQR entered into an addendum to the assignment with Cortlandt pursuant to which Cortlandt received “all right, title, and interest” in the notes.

The Motion Court granted the motions to dismiss, holding that, among other things, Cortlandt lacked standing to maintain the actions and that, although the standing defect was not jurisdictional and could be cured, the plaintiffs failed to cure the defect in the proposed amended complaint. Cortlandt St. Recovery Corp. v. Hellas Telecom., S.à.r.l. , 47 Misc. 3d 544 (Sup. Ct., N.Y. Cnty. 2014).

The Motion Court’s Ruling

As an initial matter, the Motion Court cited to the reasoning of the court in Cortlandt Street Recovery Corp. v. Deutsche Bank AG, London Branch , No. 12 Civ. 9351 (JPO), 2013 WL 3762882, 2013 US Dist. LEXIS 100741 (S.D.N.Y. July 18, 2013) (the “SDNY Action”), a related action that was dismissed on standing grounds.  The complaint in the SDNY Action, like the complaints before the Motion Court, alleged that Cortlandt was the assignee of the notes with a “right to collect” the principal and interest due on the notes. As evidence of these rights, Cortlandt produced an assignment, similar to the ones in the New York Supreme Court actions, which provided that as the assignee with the right to collect, Cortlandt could collect the principal and interest due on the notes and pursue all remedies with respect thereto. In dismissing the SDNY Action, Judge Oetken found that the complaint did not allege, and the assignment did not provide, that “title to or ownership of the claims has been assigned to Cortlandt.” 2013 WL 3762882, at *2, 2013 US Dist. LEXIS 100741, at *7. The court also found that the grant of a power of attorney (that is, the power to sue on and collect on a claim) was “not the equivalent of an assignment of ownership” of a claim. 2013 WL 3762882 at *1, 2013 US Dist. LEXIS 100741 at *5. Consequently, because the assignment did not transfer title or ownership of the claim to Cortlandt, there was no case or controversy for the court to decide ( i.e. , Cortlandt could not prove that it had an interest in the outcome of the litigation).

The Motion Court “concur[red] with” Judge Oeken’s decision, holding that “the assignments to Cortlandt … were assignments of a right of collection, not of title to the claims, and are accordingly insufficient as a matter of law to confer standing upon Cortlandt.”  In so holding, the Motion Court observed that although New York does not have an analogue to Article III, it is nevertheless analogous in its requirement that a plaintiff have a stake in the outcome of the litigation:

New York does not have an analogue to article III. However, the New York standards for standing are analogous, as New York requires “[t]he existence of an injury in fact—an actual legal stake in the matter being adjudicated.”

Under long-standing New York law, an assignee is the “real party in interest” where the “title to the specific claim” is passed to the assignee, even if the assignee may ultimately be liable to another for the amounts collected.

Citations omitted.

Based upon the foregoing, the Motion Court found that Cortlandt lacked standing to pursue the actions.

Cortlandt appealed the dismissal. With regard to the Motion Court’s dismissal of Cortlandt on standing grounds, the First Department affirmed the Motion Court’s ruling, holding:

The [IAS] court correctly found that plaintiff Cortlandt Street Recovery Corp. lacks standing to bring the claims in Index Nos. 651693/10 and 653357/11 because, while the assignments to Cortlandt for the PIK notes granted it “full rights to collect amounts of principal and interest due on the Notes, and to pursue all remedies,” they did not transfer “title or ownership” of the claims.

The Takeaway

Cortlandt limits the ability of an assignee to pursue a lawsuit when the assignee has no direct interest in the outcome of the litigation. By requiring an assignee to have legal title to, or an ownership interest in, the claim, the Court made clear that only a valid assignment of a claim will suffice to fulfill the injury-in-fact requirement. Cortlandt also makes clear that a power of attorney permitting another to conduct litigation on behalf of others as their attorney-in-fact is not a valid assignment and does not confer a legal title to the claims it brings. Therefore, as the title of this article warns: when assigning the right to pursue relief, always remember to assign title to, or ownership in, the claim.

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Related Practices & Jurisdictions

• Labor & Employment
• Intellectual Property
• Administrative & Regulatory

On September 15, 2023, New York Governor Kathy Hochul signed a law that made dramatic changes to the enforceability of invention assignment provisions in employment agreements and likely in related agreements including offer letters and Confidentiality, Information and Invention Assignment Agreements (CIIAAs). The law took effect immediately and adds New York to a growing list of states with laws placing limits on invention assignment provisions.

What Is an Invention Assignment Agreement?

An invention assignment agreement is a contract between an employer and employee that defines the rights to any inventions, or other intellectual property, created during the course of the employment relationship and any employee inventions that may pre-date employment. These agreements are important for making clear who owns what. 

Generally, these agreements transfer ownership of inventions created by the employee during the course of the employment relationship to the employer; the employee effectively surrenders any right to any invention created or developed during the employment. 

These agreements may be included in the employment agreement – if one exists – or may be part of standalone agreements such as (CIIAAs) where the invention assignment provision may be bundled with other restrictive covenants. 

New York Senate Bill S5640 amended New York labor law by adding a new section – New York CLS Labor § 203-f – that makes some invention assignment provisions in employment agreements unenforceable. New York previously had no restrictions on invention assignment provisions before S5640 passed with bipartisan support. As a practical matter then, employers previously had discretion to require employees to assign to the Company inventions made during the course of employment, even if unrelated to the business and the performance of the job.

Not necessarily anymore. S5640 is modeled after, and is virtually identical to, California’s Labor Code Section 2870 , and prohibits provisions that assign inventions to the employer if they are made on an employee’s own time and do not use the employer’s “equipment, supplies, facilities, or trade secret information.”  The bill does not forbid all invention assignment provisions. The law does include exceptions for select inventions. Specifically, the law does not prohibit assignments of inventions that result from work the employee performed for the employer, or inventions that, at the time of their creation were related to the employer’s business or research and development.

Uncertainty

No court has been asked to interpret the law yet. As a result, there remains much uncertainty about how the law will be enforced. Because of this uncertainty, there are many questions with which employers should be concerned. Three such questions are of particular note.

• What is an invention ? According to its sponsors, the bill was passed to protect employees. But the law attempts to do so without clarifying the true scope of what exactly is protected. The bill does not define what an “invention” is, and there are no court decisions interpreting the types of intellectual property that are covered by the law. A reading of the legislative history of the bill only further confuses the matter. In her memorandum in support of the bill , S5640’s sponsor, Senator Jessica Ramos of the 13 th District, used language far broader than that of the bill. While the bill uses the word “invention,” Senator Ramos expressed in her memo the intent to provide “better [Intellectual Property] protection for employees.” Until the courts are asked to weigh in, this conflicting language makes it difficult to know how broad these protections truly are.
• What is employer time?  Because the dynamics of work have changed dramatically in the post-COVID world, there may be difficulty ascertaining what inventions were created on company time, and are therefore covered by the law. The line between what is and is not employer time has become blurred.  As we have previously covered , calculating the hours an employee spends working from home can prove challenging. This difficulty identifying when company time ends, and personal time begins, will make it challenging to assess whether specific employee inventions are covered by the law.
• What are employer resources? Much like employer time, hybrid work arrangements have muddied the waters of what constitutes employer resources. A computer provided for work purposes by an employer would seem to clearly be a company resource. But what about situations where a company provides an employee with a computer, but permits the computer to be used for personal matters? At least one court interpreting the California statute believed this was still obviously a company resource. But this decision pre-dates the COVID-19 pandemic and the changes to the nature of work precipitated by it. These everchanging dynamics make it difficult to predict how post-COVID courts will rule on the issue. 

Key Takeaways

While there remains much uncertainty about this law, there is no question that this would mark a change for employers with workers in New York. Employers will need to review any agreements or policies containing invention assignment provisions, and consult counsel to discuss necessary steps in light of this law. As this law continues to evolve, we will continue monitoring developments, and provide updates as new information becomes available.

This article was co-authored by Wolfram Ott.

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