Contracts

The Town and Country Homecenter of Crawfordsville, Indiana Inc v Ronald Woods, National City Bank of Indiana, 725 NE2d 1006 (Ind Ct App 2000).

Facts: Lynn Fellows (Fellows) contracted with Ronald Woods (Woods) to build a home. Fellows paid Woods a down payment and applied for a mortgage with National City Bank (the Bank) to cover the remaining balance due at closing. Woods purchased materials for the home from The Town and Country Homecenter of Crawfordsville, Indiana Inc. (Town and Country). Town and Country did not perfect a mechanics' lien or communicate with anyone at the Bank prior to the closing.

At closing, Woods met with a representative from the Bank. The representative required Woods to sign a vendor's affidavit stating that there were no unpaid claims for materials furnished. With Fellow's permission, the Bank disbursed funds to Woods, based on his statement that he would pay Town and Country with the proceeds. Woods failed to pay Town and Country for the materials provided.

About three months later, Town and Country filed a mechanics' lien for $32,866.12. Then, Town and Country filed suit to foreclose its lien. It argued that by supplying materials to Woods, it was a third-party beneficiary of the agreement between the Bank and Fellows. Town and Country further argued that the Bank was guilty of constructive fraud and criminal deception in the disbursement of funds. The Circuit Court entered judgment in favor of the Bank. Town and Country appeals.

Holding: Judgment affirmed. To prove third-party beneficiary status, an individual must show that there was: (1) a clear intent to benefit the third-party; (2) a duty imposed on one of the parties in favor of the third-party; and (3) a requirement that performance was necessary to render a direct benefit to the third-party. In this case, the court did not find a statement promising that Town and Country would be paid. The language of the agreement promised to protect Fellow's interest by addressing the notice at the closing. The court did not find a commitment by the Bank to ensure payment to Town and Country. The Bank had a duty to protect Fellows, not Town and Country. The court did not reach the third element. There was no clear intent that a duty be imposed on the Bank in favor of Town and Country, therefore, it is not a third-party beneficiary.

Constructive fraud requires: (1) a duty existing by the relationship between the parties; (2) a violation of the duty by making deceptive material misrepresentations; (3) the complainant relies on the misrepresentations; (4) the misrepresentations are the proximate cause of the complainant's injury; and (5) the party accused of fraud gains an advantage at the expense of the injured party. Town and Country failed to submit evidence to establish a relationship between itself and the Bank. There was no evidence that Town and Country was injured by reliance on misrepresentations made by the Bank. Finally, the Bank did not gain an advantage at Town and Country's expense. Thus, there is no constructive fraud.

According to Section 35-43-5-3(a)(3) of the Indiana Code, criminal deception occurs when an individual "misapplies entrusted property, . . . in a manner that the person knows involves substantial risk of loss or detriment to either the owner of the property or to a person for whose benefit the property was entrusted." The court found no evidence to support the allegation that the Bank misapplied the entrusted property. Furthermore, there is no evidence that the Bank had any warning that Woods would not pay Town and Country for the materials. Therefore, the Bank could not have known that Town and Country was at "a substantial risk of loss" when it disbursed it funds through Woods.

EDITOR'S NOTE: Under Illinois law, courts examine both the language and the intent of the parties before inferring third-party status. A contract may expressly identify a third-party beneficiary, define the third-party by description of class, or may identify the third-party at the time performance on the contract is due. The promisor's liability must be affirmatively expressed in the language of the agreement. Carson Pirie Scott & Co v Parrett, 346 Ill 252, 178 NE 498 (Ill 1931). A court will not extend liability or interpret a contract to extend third-party liability solely because the parties' circumstances demand further liability. Id.

A court gleans the parties' intent by examining the whole contract and the circumstances contemporaneous with the forming of the contract. Metro East Sanitary Dist v Village of Sauget, 131 Ill App 3d 653, 475 NE2d 1327, 86 Ill Dec 760 (5th D 1985). A court must find that the intention of the parties was to directly benefit the third-party. Carson Pirie Scott & Co, 346 Ill 252. If there is no clear intention to benefit the third-party, a court will not extend liability or interpret the contract to extend liability to the third-party. Id.

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