Rouse v. United States
215 F.2d 872 (1954)
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Rule of Law:
A promisor who agrees to assume a promisee's specific debt to a creditor may assert personal defenses they have against the promisee (such as fraudulent inducement) when sued by the creditor's assignee. However, the promisor may not assert defenses the promisee might have had against the creditor regarding the underlying obligation.
Facts:
- Bessie Winston purchased a heating plant from Associated Contractors, Inc., financing it with a promissory note for $1,008.37.
- The note was guaranteed by the Federal Housing Administration and sold to Union Trust Company.
- Winston later sold her house to Rouse.
- In the contract of sale, Rouse agreed "to assume payment of $850 for heating plant."
- Winston subsequently defaulted on her promissory note.
- The United States, having honored the FHA guarantee, paid the bank and took an assignment of Winston's note.
- The United States demanded payment of the $850 from Rouse based on his assumption agreement with Winston.
Procedural Posture:
- The United States sued Rouse in the U.S. District Court for $850 plus interest.
- Rouse alleged two defenses: (1) fraudulent misrepresentation by Winston and (2) unsatisfactory installation by Associated Contractors.
- The District Court struck both of Rouse's defenses.
- The District Court then granted summary judgment in favor of the plaintiff, the United States.
- Rouse, the defendant, appealed the judgment to the U.S. Court of Appeals for the D.C. Circuit.
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Issue:
May a promisor, who contractually agrees to pay a promisee's specific debt to a creditor, assert a defense of fraud by the promisee when sued by that creditor or its assignee?
Opinions:
Majority - Edgerton, Circuit Judge.
Yes. A promisor who agrees to pay a promisee's specific debt to a creditor can assert a defense of fraud by the promisee when sued by that creditor. Rouse's liability arises not from the promissory note, which he never signed, but from his separate contract with Winston. In a third-party beneficiary contract like this one, the promisor (Rouse) can assert any defense against the creditor (United States) that he could have asserted against the promisee (Winston). Therefore, the trial court erred in striking Rouse's defense that Winston fraudulently misrepresented the condition of the heating plant. However, the court correctly struck the defense regarding the contractor's poor performance. The court interpreted Rouse's promise to assume "payment of $850" as a promise to pay a specific debt, not a promise to discharge whatever liability Winston was under. Consequently, whether Winston herself had a valid defense against the contractor is immaterial to Rouse's specific promise to pay the $850.
Analysis:
This case clarifies the scope of defenses available to a party who assumes the debt of another. It establishes that the assuming party's liability is defined by their own contract, not the original debt instrument they did not sign. The decision bifurcates available defenses: personal defenses against the party from whom the debt was assumed are permissible, while defenses belonging to that party against the original creditor are not. This holding provides protection to assuming parties against fraud in their own agreement while simultaneously offering certainty to creditors that a specific assumed debt will be honored regardless of disputes in the original transaction.
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