Detroit Bank & Trust Co. v. Chicago Flame Hardening Co.
541 F.Supp. 1278, 1982 U.S. Dist. LEXIS 14502 (1982)
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Rule of Law:
The parties to a third-party beneficiary contract can rescind or modify the contract at any time before the beneficiary's rights have vested. A beneficiary's rights vest when they accept, adopt, or act in reliance upon the contract.
Facts:
- In 1956, Marvin R. Scott, Gainor D. Scott, and John R. Keeler founded Chicago Flame Hardening Company, Inc.
- On July 29, 1964, the three founders, as sole shareholders, created a corporate resolution promising to pay a 15-year monthly stipend to the surviving wife of any of the three upon their death.
- Shortly after, Marvin Scott's wife, Roxanne Scott, became aware of the resolution but later testified she "forgot the whole thing."
- Following the death of John R. Keeler in 1967, his widow began receiving payments under the resolution, a fact of which Roxanne Scott was aware.
- Roxanne Scott did not make any expenditure, change her position, or perform any act in reliance on the 1964 resolution.
- On February 15, 1971, Marvin R. Scott and the other shareholders executed a new corporate resolution that explicitly rescinded the benefits for his surviving spouse, Roxanne Scott, to ensure the company's financial integrity.
- On October 31, 1971, Marvin R. Scott died, leaving Roxanne Scott as his widow.
Procedural Posture:
- Detroit Bank and Trust Company, acting as guardian for Roxanne Scott, filed a complaint against Chicago Flame Hardening Company, Inc. in the United States District Court for the Northern District of Indiana.
- The complaint sought to enforce the terms of the 1964 corporate resolution for the benefit of Roxanne Scott.
- A bench trial was held before Judge Phil M. McNagny, Jr. on December 22 and 23, 1980.
- Judge McNagny passed away before rendering a decision in the case.
- By joint motion, the parties agreed that a successor judge could decide the matter based on the trial transcript, exhibits, briefs, and a new final oral argument, waiving any objections under Trial Rule 63.
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Issue:
Does a rescission of a third-party beneficiary contract by the original contracting parties extinguish the rights of a donee beneficiary who had knowledge of the contract but had not accepted, adopted, or acted upon it prior to the rescission?
Opinions:
Majority - Lee, District Judge
Yes. A rescission of a third-party beneficiary contract by the original parties is valid and extinguishes the beneficiary's rights if it occurs before the beneficiary has accepted, adopted, or acted upon the promise. Indiana law follows the modern rule, which allows parties to a third-party beneficiary contract to abrogate it at any time before the third party's rights have vested. A beneficiary's rights vest only when they accept, adopt, or act in reliance on the contract. The court rejected the argument that acceptance should be presumed merely from the beneficiary's knowledge of the agreement, distinguishing cases involving minor beneficiaries where such a presumption serves to protect their interests. Roxanne Scott was a competent adult when the contract was made and when it was rescinded. The court found no evidence that she had accepted or relied upon the promise; in fact, her own testimony stated she "forgot the whole thing." Because the rescission on February 15, 1971, occurred before she took any action to accept or rely on the 1964 resolution, her potential rights were extinguished.
Analysis:
This decision solidifies Indiana's adherence to the modern rule articulated in the Restatement (Second) of Contracts regarding the vesting of rights for third-party beneficiaries. It clarifies that a beneficiary's rights are not indefeasibly vested upon the creation of the contract; the beneficiary must take an affirmative step to secure their interest. The case establishes that mere knowledge of a beneficial promise, without more, is insufficient to constitute acceptance and prevent the original parties from modifying or rescinding their agreement. This places the onus on the beneficiary to manifest assent or demonstrate reliance to make their rights enforceable.
