7. If the bank sues the homeowner for $8,000, which of the following will the court decide?

When one person enters into a valid contract with a second person, this contract does not contemplate performance to or by a third party. However, if one of the parties seeks to transfer her rights and/or duties under the contract to a third party, this is called an «assignment.»

An assignment establishes privity of contract between the obligor and the assignee while extinguishing privity between the obligor and the assignor (the original contracting parties). The assignee then replaces the assignor as the real party in interest, and he alone is entitled to performance under the contract. Once the obligor has knowledge of the assignment, he must render performance to or pay the assignee. If the obligor renders performance to or pays the assignor, he does so at his own risk. Typically, one of the parties (usually the assignee) will notify the obligor of the assignment.

The assignee will generally stand in the shoes of the assignor, which means the assignee will receive the rights subject to any defenses, set-offs, and counter-claims that the obligor could have asserted against the assignor. If an obligor has a valid claim against the assignor, he may bring suit against the assignee in some circumstances. If the obligor's claim against the assignor is somehow related to the same contract that was assigned to that assignee, the obligor may bring the claim regardless of whether it arose before or after the obligor's notice of the assignment. This is called «recoupment,» which may only be used to diminish the assignee's claim and may not yield affirmative recovery for the obligor.

C is correct. When contract rights are assigned, the assignee stands in the shoes of the assignor, meaning he has the same rights the assignor had, and he may be subjected to the same defenses. Specifically, if an obligor has a claim against the assignor based on the same contract that was assigned to the assignee, the obligor may «recoup» losses regardless of when the obligor received notice of the assignment. Here, the builder (assignor) assigned his contractual rights to the bank (assignee), which means the bank's right to repayment under that contract would have been subject to claims the homeowner (obligor) had against the assignor that arose out of the contract. The fact that the builder (assignor) abandoned his contractual duties under the contract without cause amounts to a material breach, and the homeowner (obligor) may recoup his losses against the assignee (bank) against any claim the bank may have against the homeowner.

A is incorrect. It is true that notice of an assignment is relevant for some defenses and claims an obligor may bring against the assignee. However, an obligor may bring a claim that he had against the assignor against an assignee if it is related to the original assigned contract, regardless of when notice of the assignment occurred. This is a claim for recoupment and is used to diminish the rights of the assignee enforceable against the obligor. In this case, the builder's material breach, even though it happened after notice of the assignment to the homeowner, is still actionable because it relates to the same contractual duties under the assigned contract. The bank's rights are thus vulnerable to the homeowner's recoupment, regardless of timing.

B is incorrect. The rights that the bank acquired are subject to the same defenses that could have been used against the builder if they arose out of the same contract, which includes a claim that the builder was in material breach by failing to complete the job without legal justification. As stated above, the homeowner may diminish the bank's rights based on the builder's breach.

D is incorrect. This answer reaches the correct answer with the wrong reasoning. The homeowner will win, but not because of the timing of the notice of the assignment. If an obligor's claim against an assignor is related to the same contract that has been assigned to the assignee, the obligor may use this claim whether it arose prior to or subsequent to the obligor's receipt of notice of the assignment. Here, the timing and the bank's status as the builder's creditor are irrelevant to whether the homeowner can raise the defense of the builder's breach against the bank.