Business Law Study Set 1

Business

Quiz 18 :

Third Persons and Contracts

Quiz 18 :

Third Persons and Contracts

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Washington purchased an automobile from Smithville Motors. The contract called for payment of the purchase price in installments and contained the defense preservation notice required by the Federal Trade Commission regulation. Smithville assigned the contract to Rustic Finance Co. The car was always in need of repairs, and by the time it was half paid for, it would no longer run. Washington canceled the contract. Meanwhile, Smithville had gone out of business. Washington sued Rustic for the amount she had paid Smithville. Rustic refused to pay on the grounds that it had not been at fault. Decide.
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From the FDIC site, the defense preservation notice states that:
"Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder."
This is known as the Holder-in-Due-Course rule. That means when borrower W financed purchase of a car from S , S assigned that loan to R. R is now liable for the state of the car.

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Lone Star Life Insurance Co. agreed to make a long-term loan to Five Forty Three Land, Inc., whenever that corporation requested one. Five Forty Three wanted this loan to pay off its short-term debts. The loan was never made, as it was never requested by Five Forty Three, which owed the Exchange Bank Trust Co. on a short-term debt. Exchange Bank then sued Lone Star for breach of its promise on the theory that the Exchange Bank was a third-party beneficiary of the contract to make the loan. Was the Exchange Bank correct [Exchange Bank Trust Co. v Lone Star Life Ins. Co., 546 SW2d 948 (Tex App)]
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Refer to the case Exchange Bank Trust v Lone Star Life Insurance (546 SW2d 948).
Facts
1) Bank is suing an insurance company as third party beneficiary claiming that the insurance company failed to adhere to a loan promise to the bank's debtor.
2) The trial court granted summary judgment in favor of insurance company. Bank appealed.
Relevant Terms, Laws, and Cases
Third person beneficiary contract An individual or organization that is not a party to the contract, known as third party, but the contract is made for their benefit e.g. life insurance policy and a contract to purchase an item for a third party.
Intended beneficiary is a third party which was intended to benefit from contract.
Incidental beneficiary an unintended party that benefits from the contract, they are not third party beneficiary and can't enforce contract.
Opinion
Appeals court affirmed the decision.
The loan promised made by insurance company and bank's debtor mentioned the bank but did not express mention them as the intended beneficiary. The court refused to bank's claim on this ground stating that at most they were an incidental beneficiary.

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Union Bank lent $200,000 to Wagner. Union required Wagner to obtain a life insurance policy naming Union as beneficiary. While the loan was outstanding, Wagner stopped paying the premiums on the policy. Union paid the premiums, adding the amounts paid to Wagner's loan. Wagner died, and the insurance company refused to pay the policy proceeds to Union. Union may: a. Recover the policy proceeds because it is a creditor beneficiary b. Not recover the policy proceeds because it is a donee beneficiary c. Not recover the policy proceeds because it is not in privity of contract with the insurance company d. Not recover the policy proceeds because it is only an incidental beneficiary
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a) True. The insurance policy was bought naming the bank as a beneficiary. A creditor beneficiary is naming a third party as beneficiary to resolve loans. In this case, the insurance was probably purchased to insure payment to the bank in case of the debtor W 's passing.
b) False. There are outstanding loans due by W. He is not "donating" to the bank.
c) False. Intended beneficiaries such as the bank are entitled to recover. It doesn't have to be a party signing the contract.
d) False. This was not incidental beneficiary, that under some circumstances the bank happens to be a benefited party. The bank is directly named in the policy.

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Give an example of a third-party beneficiary contract.
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A court order required John Baldassari to make specified payments for the support of his wife and child. His wife needed more money and applied for Pennsylvania welfare payments. In accordance with the law, she assigned to Pennsylvania her right to the support payments from her husband. Pennsylvania then increased her payments. Pennsylvania obtained a court order directing John, in accordance with the terms of the assignment from his wife, to make the support-order payments directly to the Pennsylvania Department of Public Welfare. John refused to pay on the ground that he had not been notified of the assignment or the hearing directing him to make payment to the assignee. Was he correct [Pennsylvania v Baldassari, 421 A2d 306 (Pa Super)]
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Zoya operated a store in premises rented from Peerless. The lease required Zoya to maintain liability insurance to protect Zoya and Peerless. Caswell entered the store, fell through a trap door, and was injured. She then sued Zoya and Peerless on the theory that she was a third-party beneficiary of the lease requirement to maintain liability insurance. Was she correct [Caswell v Zoya Int'l, 654 NE2d 552 (Ill App)]
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Assume that Lee agrees to the assignment of the house-painting contract to Karen as stated in question 3. Thereafter, Lee fails to perform the contract to paint Karen's house. Karen sues Sally for damages. Is Sally liable
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The Ohio Department of Public Welfare made a contract with an accountant to audit the accounts of health care providers who were receiving funds under the Medicaid program. Windsor House, which operated six nursing homes, claimed that it was a third-party beneficiary of that contract and could sue for its breach. Was it correct [Thornton v Windsor House, Inc., 566 NE2d 1220 (Ohio)]
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Industrial Construction Co. wanted to raise money to construct a canning factory in Wisconsin. Various persons promised to subscribe the needed amount, which they agreed to pay when the construction was completed. The construction company assigned its rights and delegated its duties under the agreement to Johnson, who then built the cannery. Vickers, one of the subscribers, refused to pay the amount that he had subscribed on the ground that the contract could not be assigned. Was he correct
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Jessie borrows $1,000 from Thomas and agrees to repay the money in 30 days. Thomas assigns the right to the $1,000 to Douglas Finance Co. Douglas sues Jessie. Jessie argues that she had agreed to pay the money only to Thomas and that when she and Thomas had entered into the transaction, there was no intention to benefit Douglas Finance Co. Are these objections valid
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On August 1, Neptune Fisheries contracted in writing with West Markets to deliver to West 3,000 pounds of lobster at $4.00 a pound. Delivery of the lobsters was due October 1, with payment due November 1. On August 4, Neptune entered into a contract with Deep Sea Lobster Farms that provided as follows: "Neptune Fisheries assigns all the rights under the contract with West Markets dated August 1 to Deep Sea Lobster Farms." The best interpretation of the August 4 contract would be that it was: a. Only an assignment of rights by Neptune b. Only a delegation of duties by Neptune c. An assignment of rights and a delegation of duties by Neptune d. An unenforceable third-party beneficiary contract
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Lee contracts to paint Sally's two-story house for $2,500. Sally realizes that she will not have sufficient money, so she transfers her rights under this agreement to her neighbor Karen, who has a three-story house. Karen notifies Lee that Sally's contract has been assigned to her and demands that Lee paint Karen's house for $2,500. Is Lee required to do so
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Graham contracted with the city of Harris to train and employ high school dropouts residing in Harris. Graham breached the contract. Long, a resident of Harris and a high school dropout, sued Graham for damages. Under the circumstances, Long will: a. Win, because Long is a third-party beneficiary entitled to enforce the contract b. Win, because the intent of the contract was to confer a benefit on all high school dropouts residing in Harris c. Lose, because Long is merely an incidental beneficiary of the contract d. Lose, because Harris did not assign its contract rights to Long
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The New Rochelle Humane Society made a contract with the city of New Rochelle to capture and impound all dogs running at large. Spiegler, a minor, was bitten by some dogs while in her schoolyard. She sued the school district of New Rochelle and the Humane Society. With respect to the Humane Society, she claimed that she was a third-party beneficiary of the contract that the Humane Society had made with the city. She claimed that she could therefore sue the Humane Society for its failure to capture the dogs that had bitten her. Was she entitled to recover [Spiegler v School District of the City of New Rochelle, 242 NYS2d 430]
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Helen obtained an insurance policy insuring her life and naming her niece Julie as beneficiary. Helen died, and about a year later the policy was found in her house. When Julie claimed the insurance money, the insurer refused to pay on the ground that the policy required that notice of death be given to it promptly following the death. Julie claimed that she was not bound by the time limitation because she had never agreed to it, as she was not a party to the insurance contract. Is Julie entitled to recover
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Henry was owed $10,000 by Jones Corp. In consideration of the many odd jobs performed for him over the years by his nephew, Henry assigned the $10,000 claim to his nephew Charles. Henry died, and his widow claimed that the assignment was ineffective so that the claim was part of Henry's estate. She based her assertion on the ground that the past performance rendered by the nephew was not consideration. Was the assignment effective
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