Norton v. First Federal Savings
128 Ariz. 176, 624 P.2d 854 (1981)
Rule of Law:
A performance bond required by a municipality for subdivision improvements primarily protects the municipality, not individual lot purchasers, who are merely incidental beneficiaries and cannot sue on the bond. Furthermore, an assignment of contractual rights, particularly one made in lieu of foreclosure, does not delegate the assignor's duties to the assignee unless there is an express or implied assumption of those duties.
Facts:
- On August 7, 1973, developer Clyde Hutcheson posted a performance bond with First Federal Savings as surety to the City of Flagstaff to guarantee the construction of off-site improvements in a subdivision.
- On July 21, 1974, plaintiffs, including the Nortons and Crowleys, entered into agreements with Hutcheson to purchase lots in the subdivision.
- Hutcheson's sales agreements with the plaintiffs included a promise to complete specific off-site improvements, such as grading streets and installing water and sewer lines, by November 1, 1974.
- Hutcheson failed to complete the required improvements by the contractual deadline.
- On November 4, 1976, Hutcheson, who was in default on mortgages held by First Federal Savings, executed an assignment agreement conveying his interests in the subdivision properties to First Federal in lieu of foreclosure.
- The off-site improvements for the subdivision were ultimately completed in the summer of 1977.
Procedural Posture:
- Plaintiffs sued developer Clyde Hutcheson and the City of Flagstaff in the Superior Court of Coconino County (trial court).
- The trial court ordered the City to complete the off-site improvements.
- Plaintiffs filed an amended complaint, adding First Federal Savings as a defendant.
- Plaintiffs filed a second amended complaint, seeking damages from First Federal in Counts Four (as a third-party beneficiary of the bond) and Five (for assuming Hutcheson's duties).
- The trial court granted partial summary judgment in favor of defendant First Federal Savings on Counts Four and Five.
- Plaintiffs, as appellants, appealed the trial court's grant of partial summary judgment to the Supreme Court of Arizona.
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Issue:
Does a performance bond posted by a developer with a city to guarantee subdivision improvements create a right for individual lot purchasers to sue the surety as third-party beneficiaries for damages, and does an assignment of the developer's property interests to a creditor in lieu of foreclosure automatically delegate the developer's contractual duties to that creditor?
Opinions:
Majority - Gordon, Justice
No, lot purchasers are not third-party beneficiaries of the performance bond and the assignment did not delegate the developer's duties. To recover as a third-party beneficiary, the contract must indicate a direct and intentional intent to benefit that party. Here, neither the bond nor the city ordinance showed an intent to benefit lot purchasers directly; the primary purpose was to protect the city from the financial burden of completing the improvements. Regarding the assignment, Arizona law holds that an assignment of rights does not automatically delegate duties. The agreement assigned 'interests in properties,' not the contracts themselves, and was made in lieu of foreclosure, which militates against finding an implied assumption of Hutcheson's obligations. First Federal completed the improvements to satisfy its own obligation to the City under the bond, not because it assumed Hutcheson's duties to the plaintiffs.
Dissenting - Struckmeyer, Chief Justice
Yes, the assignment should be interpreted as delegating the developer's duties. The majority's holding is an anachronism that rejects the modern rule of the Restatement of Contracts § 164, which presumes that a general assignment of an executory contract includes a delegation of duties. Evidence, including a letter from First Federal's counsel, shows the bank understood it was taking over Hutcheson's contracts. To allow an assignee to accept the benefits of a contract (the right to receive payments) without assuming its burdens (the duty to perform) is unjust and will lead to mischievous results.
Concurring - Hays, Justice
No, the assignment did not delegate duties under these specific facts. While the court should recognize the legal principle of implied assumption of duties, it is not appropriate to apply it here. The assignment was made because the developer was in default on a security interest held by the assignee, First Federal. Since the assignment was essentially a substitute for a foreclosure proceeding, where the assignee gained little more than it would have through foreclosure, an assumption of the assignor's duties should not be implied.
Analysis:
This decision reinforces a traditional, more restrictive view of both third-party beneficiary rights and assignee liability. By declining to adopt the Restatement's presumption that an assignment of a contract includes a delegation of duties, the Arizona Supreme Court solidified a higher bar for holding assignees liable for an assignor's obligations, requiring clear evidence of intent to assume. The ruling clarifies that performance bonds required by a government entity are for the public's protection (i.e., the city's treasury), not for the private benefit of individuals who may be harmed by a developer's breach. This precedent makes it more difficult for lot purchasers to recover from a developer's surety and for original parties to a contract to enforce performance against an assignee, especially in the context of assignments made to satisfy a security interest.
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