Detroit Bank & Trust Co. v. Chicago Flame Hardening Co.
1982 U.S. Dist. LEXIS 14502, 541 F.Supp. 1278 (1982)
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Rule of Law:
Under Indiana law, the parties to a third-party beneficiary contract may rescind or modify the agreement at any time before the beneficiary accepts, adopts, or acts in reliance upon the promise. The rights of a competent adult beneficiary do not vest upon mere knowledge of the contract; an overt act of acceptance or reliance is required.
Facts:
- In 1964, the three sole shareholders of Chicago Flame Hardening Company, Inc.—Marvin R. Scott, Gainor D. Scott, and John R. Keeler—created a corporate resolution to pay a monthly stipend to their respective widows upon their deaths.
- Marvin R. Scott's wife, Roxanne Scott, learned of this resolution shortly after its creation but later testified that she "forgot the whole thing" and did not make any plans in reliance on it.
- Following the death of John R. Keeler in 1967, Chicago Flame began making payments to his widow, Marjorie Scott Keeler, pursuant to the 1964 resolution, a fact of which Roxanne Scott was aware.
- On February 15, 1971, the remaining original shareholders, Marvin R. Scott and Gainor D. Scott, along with Marjorie Scott Keeler, executed a new corporate resolution that explicitly rescinded the benefits for Marvin R. Scott's future widow.
- Marvin R. Scott's motivation for participating in the rescission was to ensure the future financial integrity of Chicago Flame.
- Marvin R. Scott died on October 31, 1971, survived by his wife, Roxanne Scott.
- Roxanne Scott did not request any payments from Chicago Flame after her husband's death and before the lawsuit was filed, nor did she perform any other act in reliance on the 1964 resolution.
Procedural Posture:
- Detroit Bank and Trust Company, 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 to enforce the 1964 resolution.
- The case was tried without a jury before Judge McNagny on December 22 and 23, 1980.
- Judge McNagny passed away before rendering a decision in the case.
- The parties filed a joint motion agreeing that a successor judge could decide the matter based on the trial transcript, exhibits, and briefs, waiving any objections.
- The case was assigned to Judge Lee, who heard final oral arguments on September 1, 1981.
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Issue:
Under Indiana law, does a subsequent mutual rescission of a third-party beneficiary contract by the original contracting parties terminate the rights of a donee beneficiary who knew of the contract but had not accepted, adopted, or acted in reliance upon it?
Opinions:
Majority - Lee, J.
Yes. Under Indiana law, a subsequent mutual rescission of a third-party beneficiary contract by the original contracting parties terminates the rights of a donee beneficiary who has not yet accepted, adopted, or acted in reliance upon the agreement. The court followed the modern rule, as articulated in the Restatement (Second) of Contracts and Indiana case law, which holds that the original parties are free to modify or rescind a contract for a third-party's benefit until the beneficiary's rights have vested. The court rejected the argument that acceptance should be presumed for a competent adult beneficiary merely because the promise is beneficial. Roxanne Scott's rights had not vested because she took no overt action to accept the promise, nor did she change her position in reliance on it before the 1971 rescission; her own sworn testimony revealed she "forgot the whole thing." Therefore, the 1971 rescission was valid and extinguished any potential claim she had to the benefits.
Analysis:
This decision solidifies Indiana's adherence to the modern rule articulated in the Restatement (Second) of Contracts regarding the modification of third-party beneficiary contracts. It clarifies that for a competent adult donee beneficiary, rights are not indefeasibly vested upon formation or knowledge of the contract. The ruling emphasizes the requirement of an affirmative act of acceptance or detrimental reliance by the beneficiary to make the promise irrevocable, setting a clear standard for future cases involving similar corporate resolutions or gratuitous promises for third parties.
