A contractor installed a heater in individual 1's home. Individual 1 gave the contractor a promissory note as payment for the heater. The individual sold the home to individual 2 who assumed the remaining payments for the heater. Individual 2 defaulted on the note and the United States took assignment of the note, paid it off, and brought suit against individual 2.
"[O]ne who promises to make a payment to the promisee's creditor can assert against the creditor any defense that the promisor could assert against the promisee."
Associated Contractors, Inc. ("Associated"), installed a heating plant in Bessie Winston's ("Ms. Winston") house. Ms. Winston gave Associated a promissory note in the amount of $1,008.37 as payment for the heating plant. Ms. Winston was required to pay $28.01 per month. The Federal Housing Authority (the "FHA") represented by the Plaintiff, the United States (the "Plaintiff"), guaranteed the note and Associated endorsed it to the lending bank. Ms. Winston sold her home to the Defendant, Rouse (the "Defendant"). The Defendant assumed the remaining payment of $850 for the heating plant. There was no reference to the note. Ms. Winston defaulted on the note. The Plaintiff paid the bank, took an assignment of the note. Subsequently, the Plaintiff sued the Defendant for $850 plus interest. The Defendant alleged that Ms. Winston fraudulently represented to him the condition of the heating plant and that Associated failed to install the heating plant properly. The district court granted summary judgment to the Plaintiff and the Defendant appealed.
Can one who promises to make a payment to a promisee's creditor, assert against that creditor any defense that he could have asserted against the promisee?
The court recognized that the only way the Defendant was liable to the Plaintiff was if the Defendant's contract with Ms. Winston specifies that he is liable. The court first concludes that the lower court was incorrect in striking the first defense. The Defendant's promise to "assume payment of $850 for heating plant' made him liable to Associated Contractors, Inc., only if and so far as it made him liable to Winston[.]" Meaning, since the Defendant made a promise to pay Ms. Winston's creditor, Associated, the Defendant can assert any defense against Associated that Ms. Winston could assert against Associated. As such, if the Defendant had been sued by Associated, he has the right to show fraud on the part of Ms. Winston. Further, the Defendant is equally allowed to demonstrate the fraud perpetrated by Ms. Winston in an action against the Plaintiff, the assignee of Associated's claim. On the other hand, the court determined the lower court properly struck the Defendant's second defense. This is the case because the Defendant did not agree to pay the Associated debt, but instead a certain sum of money.
This case offers an interesting look at how the third party beneficiary doctrine is construed by the courts.