7.5 Cases by Subject Matter Area

• Library: Contract Law in Virginia (Virginia CLE) (2019 Ed.)

7.5 CASES BY SUBJECT MATTER AREA

7.501 Accounting and Auditing Services. In Ward v. Ernst & Young, ⁸⁰ the court held that Ward, the sole stockholder of a corporation, was a third-party beneficiary by implication of a contract for accounting services to be provided by Ernst & Young to facilitate the sale of stock, although he was not named in the contract. ⁸¹ The court considered evidence beyond the "four corners of the contract," looking to the reason for the audit and who

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stood to gain from the accounting services and the resulting sale of stock. As Ward was the primary beneficiary of the benefits to be conferred upon execution of the contract, the court held that Ward was the intended third-party beneficiary of the contract and could therefore enforce its terms. ⁸² The court, however, remanded for a new trial, holding that the determination third-party beneficiary status was one of fact for the jury.

7.502 Arbitration Provisions. In Bishop v. Medical Facilities of America XLVII(47) Ltd. Partnership, ⁸³ the plaintiff signed a health care center's admission documents as the "Responsible Party" for his mother. The signature line for the "Resident" was left blank. The documents, described as an "Admissions and Business Contract," contained a mandatory and binding arbitration agreement. Upon his mother's death, the plaintiff, as her executor, brought a wrongful death action against the health care center for negligent care, arguing that his mother's estate was not bound to arbitration by a contract she had not signed. The defendant responded with a motion to compel arbitration under the contract.

Although the general rule is that persons who are not parties to an arbitration agreement are not bound by it, the defendant argued that the deceased and, subsequently, her estate were bound by the agreement because she was a third-party beneficiary to the contract and her estate's claim was "dependent upon the existence of the contract or . . . 'intertwined with and related to' the contract." ⁸⁴

The Virginia Supreme Court rejected the contention that the wrongful death claim was not dependent upon the existence of the contract that ended with decedent's death. ⁸⁵ The court noted that the plaintiff did not allege a breach of the contract or seek to enforce rights under it, and the evidence necessary to prove the allegations of negligence did not necessarily include evidence that would prove that the defendant had failed to meet obligations under the contract. The court noted that the third-party beneficiary of the contract was the deceased, not her estate, stating that the purpose of the contract

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ended before either the estate came into existence or the executor qualified. ⁸⁶

7.503 Attorney-Client Contracts/Estates/Wills. In Copenhaver v. Rogers, ⁸⁷ the Virginia Supreme Court held that beneficiaries under a will must allege and prove that they were intended beneficiaries of the agreement between a lawyer and the client and not just intended beneficiaries of the estate under the will as finally executed. ⁸⁸

In Thorsen v. Richmond SPCA, the Virginia Supreme Court held that an oral contract between a lawyer and client that is expressly conditioned on providing a benefit to a third party is sufficient to state a common law claim for breach of contract as a third-party beneficiary. ⁸⁹ Furthermore, there is no rule barring a contingent, residuary beneficiary under the will from stating a claim under the third-party beneficiary doctrine. ⁹⁰ The Court reiterated, though, that these are by their nature difficult cases to prove. ⁹¹

Finally, the principal of a corporation, by mere status as such, is not necessarily an intended beneficiary of a contract with the corporation for purposes of bringing a breach of contract action under a third-party beneficiary theory for attorney malpractice against the corporation. ⁹²

7.504 Banking. In Collins v. First Union National Bank, ⁹³ a nonparty, InterBank, set up "For The Benefit Of _______ " (FBO) accounts at defendant FUNB designating the plaintiff foreign nationals as beneficiaries of the accounts in an elaborate scheme to defraud the plaintiffs who were seeking to obtain United States visas based on the EB-5 Investment Visa

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Program. After they lost their money as part of InterBank's scheme, the plaintiffs brought an action against FUNB alleging various claims including breach of contract. The plaintiffs had not contracted with FUNB, had not communicated with FUNB relating to the FBO accounts, had not signed documents relating to the accounts, and had no signatory authority over the accounts. Nonetheless, the plaintiffs argued that they were third-party beneficiaries of the contract between FUNB and Interbank.

The Virginia Supreme Court upheld the trial court's judgment for FUNB, holding that plaintiffs failed to carry their burden of proof. ⁹⁴ The court reasoned that the evidence at trial did not show that the contracting parties clearly and definitely intended to benefit the plaintiffs. The court noted that the evidence indicated that FUNB's intention and "main concern" in setting up the FBO accounts was to protect the bank from any involvement with criminal activity, and that "conferring a benefit upon the [plaintiffs] was the farthest thing from [InterBank's] mind." ⁹⁵

In Lance v. Wells Fargo Bank, N.A., the court held that a banking official who dispersed funds to an individual who was not a named party to a power of attorney agreement could not be sued for breach of contract. ⁹⁶

7.505 Bankruptcy. In Shenandoah Realty Partners, L.P. v. Ascend Healthcare, Inc. (In re Shenandoah Realty Partners, L.P.), ⁹⁷ a Chapter 11 debtor brought an action to compel a proposed purchaser of its assets, who had obtained confirmation of plan, to specifically perform in accordance with the plan or alternatively to pay contract damages. The court held that the proposed purchaser, Ascend, was bound by the Bankruptcy Code to comply with the terms of the plan and that such compliance would benefit the bankrupt estate, as outstanding obligations to bondholders would be paid. ⁹⁸ The court then determined that because the debtor was also obligated to operate according to the terms of the plan, the plan acted as a contract between the parties. Holding that the debtor was "clearly . . . intended to directly benefit from Ascend's fulfilling the requirements of the Plan," the court found that

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the debtor was a third-party beneficiary under the contract and had standing to sue. ⁹⁹

7.506 Corporate Directors. In In re Health Diagnostic Lab, Inc., ¹⁰⁰ the court cited with approval the holding of In re Baldwin-United Corp., ¹⁰¹ that while bylaws of a corporation constitute a contract between the corporation and its shareholders—not between the corporation and its officers and directors—directors may enforce, as third-party beneficiaries, obligations of the company incorporated in the bylaws.

7.507 Disability Benefits/Individuals with Disabilities Education Act Contracts. In Stevens v. Jackson, ¹⁰² Stevens sought to qualify for food stamps. As part of his application, he was required to disclose the total amount of his household income. At issue was whether the total amount of the Social Security disability benefits he was receiving should be disclosed or whether the portion he was paying for the care of his children living in another household came under an exemption for payments "for the care and maintenance of a third-party beneficiary who is not a household member." ¹⁰³ The court held that the disability payments were intended for Mr. Stevens' disability, not for third-party beneficiaries, and although the benefits were paid directly to Mr. Stevens' children pursuant to court order, Mr. Stevens did not receive the payment for the purpose of paying third-party beneficiaries. The children were held to be mere incidental beneficiaries, not the intended beneficiaries. ¹⁰⁴

In Smith v. James C. Hormel School of the Virginia Institute of Autism, ¹⁰⁵ the plaintiff, an autistic child, who was removed from a private school where he had been placed due to safety concerns, sued the school for breach of contract as a third-party beneficiary of a contract between the school and Greene County. Analyzing the four corners of the contract, the court concluded that the child was not a third-party beneficiary, explaining

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that the child was not specifically named in the contract, that the contract was a "generic form agreement available to any agency of the Commonwealth contracting with a private entity to provide services to disabled or at-risk youth," that the contract language did not reveal any intent to benefit [the child] specifically, and that the agreement was a "generic funding mechanism" through which the county could purchase services from the private school under federal law. ¹⁰⁶

7.508 Family Law—Marital Agreements. In Griffin v. CowserGriffin, ¹⁰⁷ the Court held that the daughter of a couple could sue as a thirdparty beneficiary when deceased father failed to maintain life insurance and name her as a beneficiary of his retirement plan as he agreed to do under a Separation and Property Settlement Agreement. The court noted that the Amended Complaint read together with the Property Settlement Agreement made it clear that the children were clearly intended third-party beneficiaries.

7.509 Health Care. In S.R. v. INOVA Healthcare Services, ¹⁰⁸ the plaintiff, a Fairfax County resident, asserted a third-party beneficiary breach of contract claim against INOVA for accessing her confidential psychiatric treatment records at Alexandria Hospital. The plaintiff argued that as a resident of Fairfax County, she was a third-party beneficiary of an agreement between INOVA and Fairfax County to facilitate "the provision of high quality, accessible community based health care . . . for the benefit of all residents of Fairfax County," ¹⁰⁹ and also of general hospital...