## Facts

- Thomas J. Downing sold the “Raintree Restaurant and Lounge” to James and Nidrah Dial under a contract of conditional sale covering the business assets (including inventory, equipment, and all shares of a related closely held corporation).
- The conditional sale contract allowed assignment only with Downing’s consent.
- With Downing’s consent, the Dials assigned their interest to Patricia Watkins. The assignment stated that Watkins would assume the contract obligations as though she had been an original party.
- Watkins later assigned the contract to additional transferees, again with Downing’s consent.
- In connection with one of the later assignments, Downing required and received an additional $12,000 prepayment to increase his security for the debt.
- The final assignee made payments for a time but eventually defaulted.
- After default, Downing gave the Dials notice of default as required by the contract and sued the Dials and Watkins for the unpaid balance.
- The trial court entered judgment against Watkins for the amount due but ruled that the Dials were not liable because the assignment to Watkins, together with Downing’s conduct (including consenting to later assignments and accepting the $12,000), showed a novation releasing the Dials.
- The Dials asserted a counterclaim tied to a separate, related real-estate agreement under which Downing was to convey the connected property once stated payment conditions were met and the Dials would assume Downing’s mortgage.

## Issues

1. Whether Downing’s consent to the Dials’ assignment to Watkins, coupled with Watkins’s assumption language and Downing’s later conduct (accepting payments, consenting to further assignments, and taking additional money), constituted a novation that discharged the Dials from liability under the original conditional sale contract.
2. Whether the trial court correctly rejected the Dials’ counterclaim based on the related real-estate agreement.

## Decision

- The Court of Appeals of Indiana held that no novation was shown and reversed the judgment that released the Dials from the conditional sale contract.
- The court explained that the record did not show Downing’s clear agreement to substitute Watkins (or later assignees) in place of the Dials and to extinguish the Dials’ original obligation.
- The judgment against Watkins for the unpaid balance was left in place.
- On the real-estate counterclaim issue, the court affirmed the trial court’s ruling in the respects challenged on appeal.
- Disposition: affirmed in part and reversed in part, with remand for further proceedings consistent with the holding that the Dials remained liable.

## Legal Principles

- A novation requires a prior valid obligation, a new valid contract, agreement of the parties to substitute the new contract for the old one, and extinguishment of the original obligation.
- The party asserting novation has the burden to prove it; the creditor’s intent to release the original debtor is not presumed and must be shown clearly.
- An assignment with the creditor’s consent, even when the assignee agrees to assume the assignor’s duties, does not by itself release the original obligor; it typically adds another party who may be liable without discharging the first.
- A creditor’s acceptance of performance from an assignee, delay in seeking payment from the original obligor while payments are being made, consent to successive assignments, or receipt of additional security does not alone establish a novation without proof of an agreed substitution and discharge.

## Conclusion

Downing v. Dial holds that even though Downing consented to the Dials’ assignment to Watkins, accepted payments from assignees, consented to later transfers, and received extra money to secure the debt, those facts did not show the clear, three-party agreement required for a novation; the Dials therefore remained liable on the original conditional sale contract, while the trial court’s rejection of the Dials’ related real-estate counterclaim was largely upheld.


Downing v. Dial, 426 N.E.2d 416 (1981)