Detroit Bank and Trust Co. v. Chicago Flame Hardening Company

Brief Fact Summary. The shareholders of a corporation adopted a resolution providing for monetary payments to the spouse of any shareholder that died.  The shareholders eventually rescinded this agreement and the guardian of one of the shareholder's spouses sued.

Synopsis of Rule of Law. "[T]he parties to a third party beneficiary contract may rescind, vary or abrogate the contract as they see fit, without the approval of the third party, at any time before the contract is accepted, adopted or acted upon by a third party beneficiary."

Facts. The Defendant was the Chicago Flame Hardening Company (the "Defendant").  Marvin R. Scott ("Mr. R. Scott"), Gainor D. Scott ("Mr. D. Scott"), and John R. Keeler ("Mr. Keeler") were the only shareholders of the Defendant corporation (collectively referred to as the "Shareholders").  On July 29, 1964, the Shareholders agreed that if one of the Shareholder's wives died, the corporation would pay the wife from the date of her husband's death "a graduated monthly stipend over a fifteen (15) year period totaling $150,300 to terminate in the event of her death if prior to the expiration of the payment period."  The Shareholders surviving spouse would have to provide some services to the Defendant corporation.  There was no specific right to rescind in the agreement.  On July 12, 1967, Mr. Keeler died and his wife Marjorie Scott Keeler ("Ms. Keeler") began receiving the monthly stipend.  She received payments for about four years, but during 1971 and 1972 she agreed to postpone payments because of the Defendant's precarious financial situation.  On February 15, 1971, Mr. R. Scott, Mr. G. Scott and Ms. Keeler adopted a second corporate resolution rescinding Mr. R. Scott's wife, Roxanne Scott ("Ms. Scott") right to receive the monthly payments set forth in the July 29, 1964 resolution.  Previously, Ms. Scott said she forgot about the July 29, 1964 resolution.  However, Ms. Scott was aware that Ms. Keeler was receiving payments pursuant to the July 29, 1964 resolution.  Mr. R. Scott died on October 31, 1971, and upon learning that the July 29, 1964 resolution was no longer valid, the Plaintiff, Detroit Bank & Trust Co. (the "Plaintiff") brought suit.  The Plaintiff was appointed guardian for Ms. Scott.  The Plaintiff brought suit for the pay¬ments due under the original resolution.

Issue. Does a third party beneficiary have a cause of action where the promisor(s) and promise(s) modify an agreement affecting the rights of the third party beneficiary?

Held. The court first observes that the rule now is "that modification on the part of the promisor and promisee is ineffective only if the agreement so provides, unless the third party beneficiary has changed his position in reliance on the promise or has accepted, adopted or acted upon it."  The court recognized that "the parties to a third party beneficiary contract may rescind, vary or abrogate the contract as they see fit, without the approval of the third party, at any time before the contract is accepted, adopted or acted upon by a third party beneficiary."  As such "[a] rescission prior to the required change in position by a third party deprives that third party of any rights under or because of the contract."  Applying these rules to the facts before it, the court recognized that the February 15, 1971 resolution rescinding the July 29, 1964 resolution was valid based on Indiana law, even though the parties to the original agreement did not reserve the right to amend it.  The only way the February 15, 1971 would be valid is if Ms. Scott "had not accepted, adopted or acted upon the original widow's resolution." 
•    The court then tries to define the word "acceptance."  The court observes "[a]cceptance may be an overt act, or the adoption of a benefit which is a question of intent and thereby also a factual determination."  It then lays out the following rule from Restatement (Second):  "the power of promisor and promisee to vary the promisor's duty to an intended beneficiary is terminated when the beneficiary manifests assent to the promise in a manner invited by the promisor or promisee." The court concludes Ms. Scott did not accept the July 29, 1964 resolution because she said in testimony during the trial that she forgot about it.

Discussion. This court offers an informative discussion about the rights of third party beneficiaries and how they have evolved over time.