Subrogation and Assignment of Credit: Transferring Obligations

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

Subrogation and assignment of credit are mechanisms under the Brazilian Civil Code that allow creditor rights to be transferred. Each has its own requirements, effects and practical uses in obligations law.

What Is Subrogation?

Subrogation occurs when a third party pays the debtor’s debt and steps into the legal position of the original creditor, along with all the rights, claims, privileges and guarantees the creditor held (art. 346 of the Civil Code). The third party who pays replaces the creditor in the obligation and may collect from the debtor the amount paid.

Subrogation may be legal (it happens automatically by operation of law) or conventional (it results from an agreement between the parties). Legal subrogation is provided for in art. 346 of the CC (the Civil Code) and applies in favor of a creditor who pays the debt of a common debtor, a buyer of mortgaged real estate who pays the mortgage creditor, and an interested third party who pays the debt.

In conventional subrogation, the original creditor or the debtor may transfer the creditor’s position to a third party by express agreement. When the creditor does so, it must be done no later than the moment of payment (art. 347, I). When the debtor does so, the transfer takes effect upon payment made with money from a third-party lender (art. 347, II).

What Is Assignment of Credit?

Assignment of credit is a legal transaction in which the creditor (the assignor) transfers to a third party (the assignee) its right to payment from the debtor (the assigned debtor), without the debtor’s consent (art. 286 of the CC). The assignment may be free of charge or for consideration, and it covers not only the principal claim but also its accessory rights.

An assignment of credit must be in writing and, to be effective against third parties, the debtor must be notified (art. 290 of the CC). Until the debtor is notified, the debtor may validly pay the original creditor and be released from the obligation.

The assignor is liable for the existence of the credit at the time of the assignment, unless otherwise agreed (a pro soluto assignment). If the assignor also guarantees the debtor’s solvency, it is a pro solvendo assignment, in which the assignor bears the risk of default.

The third party who pays replaces the creditor in the obligation and may collect from the debtor the amount paid.

Not every credit can be assigned. Art. 286 of the CC prohibits assignment when the nature of the obligation, the law or an agreement with the debtor stands in the way. Strictly personal credits (such as child or spousal support) and credits with a non-assignability clause cannot be transferred.

Differences Between Subrogation and Assignment of Credit

The fundamental difference is that subrogation presupposes payment (the third party pays the debt and takes the creditor’s place), whereas assignment of credit is a stand-alone transfer transaction that does not depend on payment. In an assignment, the assignee acquires the credit in order to collect from the debtor; in subrogation, the third party first pays and then collects.

In subrogation, the subrogated third party cannot collect from the debtor more than what was actually paid (art. 350 of the CC). In an assignment of credit, the assignee may collect the full amount of the credit, even if it paid less to acquire it, because this is a legitimate speculative transaction.

As for guarantees, subrogation automatically transfers all the guarantees attached to the original credit. In an assignment, the transfer of accessory rights depends on the contract, although art. 287 of the CC presumes that accessory rights are transferred, unless otherwise agreed.

Practical Applications and Case Law

Subrogation is common in insurance: when an insurer pays a claim to the insured, it is subrogated to the insured’s rights against whoever caused the damage (art. 786 of the CC). It also frequently arises in banking, when one bank pays a customer’s debt to another bank and takes over the credit.

Assignment of credit is widely used in the financial market, in factoring (the assignment of receivables) and in the securitization of credits. Companies assign their receivables to financial institutions, receiving revenue early in exchange for a discount.

In the tax context, the assignment of tax credits is subject to specific rules, and courts have been reviewing the validity of these transactions case by case. The assignment of court-ordered government payment orders (precatórios) is also permitted, with mandatory registration at the court of origin.

The case law of the STJ (Brazil’s Superior Court of Justice) has clearly distinguished the two mechanisms for purposes of standing to sue. The subrogated party, because it fully replaces the original creditor, has standing to enforce the debt against the debtor in the same case file. The assignee, because it acquires the credit in a stand-alone transaction, may need to prove the assignment in order to be admitted to the proceedings.

Notifying the Debtor and the Effects

In an assignment of credit, notifying the debtor is a requirement for the assignment to take effect (art. 290 of the CC). Without notice, a debtor who pays the original assignor is released from the obligation. Notice may be given by any means that proves the debtor knew of the assignment, including a letter with return receipt or an extrajudicial notice.

In subrogation, the law does not require notice to the debtor, because the transfer takes place by operation of law or through the act of payment itself. In practice, however, it is advisable to notify the debtor to prevent a mistaken payment to the original creditor.

A debtor who has been notified of the assignment may raise against the assignee any defenses the debtor had against the assignor at the time of notice (art. 294 of the CC). If the debt had already become time-barred or been offset, or if the debtor held a claim against the assignor, those defenses may be raised against the assignee.

Frequently Asked Questions

Does the debtor have to agree to an assignment of credit?

No. Under art. 286 of the Civil Code, an assignment of credit does not depend on the debtor’s consent. Notice is all that is needed for the assignment to take effect against the debtor. However, if a contract clause prohibits assignment (a pacto de non cedendo), the creditor cannot assign the credit without breaching the contract.

What is the practical difference between subrogation and assignment for the debtor?

For the debtor, the main difference is that in subrogation the new creditor can collect only the amount actually paid to the original creditor, whereas in an assignment the assignee can collect the full amount of the credit, regardless of how much it paid for it. In addition, in an assignment the debtor may raise against the assignee the defenses the debtor had against the assignor up to the date of notice.

How does subrogation work in an insurance contract?

When the insurer pays a claim to the insured, it is automatically subrogated to the insured’s rights against the third party who caused the damage, under art. 786 of the Civil Code. The insurer may then collect from the party responsible for the loss the amount it paid the insured. This subrogation is legal and automatic and does not depend on any agreement between the parties.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.