Chapter 15 THIRD PARTIES AND THIRD-PARTY BENEFICIARIES

• Jurisdiction: New York

Chapter Fifteen

Third Parties and Third-Party Beneficiaries

I. Spouse May Mortgage Interest in Property Held as Tenancy By the Entirety; a Nonparty Lacks Standing to Challenge an Agreement to Which He Was Not a Party and May Not Challenge the Mortgage

In V.R.W., Inc. v. Klein,²⁹⁰⁵ the wife borrowed money against her share of real property held as tenants-by-the-entirety and signed a note (a contract) and a mortgage to secure the debt. May the lender seek payment from the mortgagor-spouse? The Court of Appeals held that "[t]he dissolution of the tenancy-by-the-entirety transforms the mortgagee's interests to the same extent that it transforms the interests of the principals and, more specifically that it extinguishes all previously existing rights of survivorship"²⁹⁰⁶; that "the inchoate rights of the mortgagee follow those of its mortgagor."²⁹⁰⁷

What if the mortgagor-spouse's rights are transferred to either the former spouse or to an unrelated third party; can such a transferee seek to invalidate the mortgage? Initially, absent a contractual relationship with either party to a contract or as a beneficiary thereof, a nonparty lacks standing to bring suit under the contract.²⁹⁰⁸ Furthermore, a nonparty to a contract lacks standing to raise a claim based upon the terms or bargaining conditions of the contract.²⁹⁰⁹

It is further settled law that a third party who was not a party to a mortgage which is the subject of a mortgage-foreclosure action lacks standing to raise the defense of lack of consideration on the ground that such defense is personal to the original mortgagor.²⁹¹⁰ The successor-mortgagor thus has no "sufficiently cognizable stake in the outcome" and has not realized an injury-in-fact (see 15.1, "Capacity to Sue, Standing," below).

The judgment of divorce, in Robins v. Robins,²⁹¹¹ directed the sale of the marital residence, awarding the wife one-third of the net proceeds. Prior to the sale, the wife obtained a loan for $85,000, thereby encumbering her interest in the property in that amount. Following the payment of more senior debts against her, the wife's eventual share of the net proceeds left a shortfall of $18,387.46 to this mortgagee. In anticipation of that unpaid lien, the husband was obligated, at the time of the conveyance of the premises, to place $50,000 of the purchase price in escrow as security for the wife's debts. He sought cancellation of the mortgage lien, contending that there was no remaining interest in the realty to which it could attach. The Supreme Court discharged the mortgage and directed the release of the escrow funds to the husband. The Appellate Division affirmed.

While the wife was free to mortgage her interest in the marital real property, she could only do so to the extent of her actual interest therein. Since the mortgagee could acquire no greater interest in the subject property than the wife possessed, the extinguishment of her interest through the satisfaction of various more senior liens also served to extinguish the mortgagee's interest in the property, and the cancellation of the mortgagee's lien was therefore proper. Nevertheless, the wife's personal liability to repay the loan survived.

In Goldman v. Goldman,²⁹¹² at the time that the plaintiff instituted the action for divorce, she and the defendant owned the marital premises, as tenants by the entirety. The plaintiff gave a mortgage in the amount of $50,000 to her matrimonial attorney, the intervenor, as security for payment of counsel fees, which mortgage was recorded. The husband was aware of the mortgage. The judgment of divorce awarded title to the premises to the defendant, but the plaintiff failed to convey her interest in the premises to him. Almost one and one-half years after the entry of the judgment of divorce, the defendant moved to discharge the mortgage. The court granted his motion, and the plaintiff and the intervenor appealed.

Citing V.R.W., the intervenor's interest in the premises was not impaired by the judgment of divorce, since the judgment was entered after the mortgage was recorded.

The court in County of Tioga v. Solid Waste Industries Inc.²⁹¹³ held that, although the judgment-creditor was a necessary party to the action, as a nonparty to the mortgage, it had "no standing to raise the affirmative defense of lack of consideration in the foreclosure action"—the "defense is personal to the parties to the contract and a stranger to the mortgage and the underlying contract may not assert it."²⁹¹⁴

In Homeowners Loan Corp. v. Recckio,²⁹¹⁵ the plaintiff brought an action to foreclose on certain mortgaged property owned by the defendant-father who had conveyed a life estate in the property to his son pursuant to a settlement agreement, after which conveyance, the father obtained a mortgage from the plaintiff. The Appellate Division affirmed the denial of the plaintiff's motion to dismiss the son's affirmative defense that he had a duly recorded life estate in the property. Significantly, the plaintiff, a nonparty to the agreement, lacked standing to challenge as void the father's conveyance of the life estate to his son.

II. Enforcement of Support-Related Provisions By Third-party Beneficiaries; Recognition of Third-party Beneficiaries; Intended and Incidental Beneficiaries

A third party may sue as a beneficiary on a contract made for his benefit.²⁹¹⁶

Upon the principle of law long recognized and clearly established, that when one person, for a valuable consideration, engages with another, by a simple contract, to do some act for the benefit of a third, the latter, who would enjoy the benefit of the act, may maintain an action for the breach of such engagement . . . upon the broader . . . basis, that the law operating on the act of the parties creates the duty, establishes a privity, and implies the promise and obligation on which the action is founded. ²⁹¹⁷

Nonparties to a contract may under certain circumstances be entitled to seek enforcement of a contract as third-party beneficiaries. It is familiar law that a contract entered into between two parties may be enforced by a third party if the contracting parties intended the contract for the third party's direct benefit. The general rule of construction to be used to determine whether a contract was intended for the benefit of persons other than the obligee is whether the contract shows an intent to protect such persons by agreeing to see that they are paid; the intention of the parties manifested in their agreement is controlling²⁹¹⁸—intent to benefit the third party must be shown.²⁹¹⁹ An agreement may specifically express that it is not intended to confer third-party-beneficiary status on any others, so as to negate enforcement by third parties.²⁹²⁰ Provisions which expressly negate enforcement by third parties are controlling.²⁹²¹

It is axiomatic that without an agreement there can be no contract and without a contract there can be no breach of the agreement.²⁹²² Generally, a party alleging a breach of contract must demonstrate the existence of a contract reflecting the terms and conditions of the purported agreement.²⁹²³ In the context of a third-party beneficiary claim, the plaintiff must establish: (1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for their benefit, and (3) that the benefit to them is sufficiently immediate to indicate the assumption by the contracting parties of a duty to compensate it if the benefit is lost.²⁹²⁴

The best evidence of the intent to bestow a benefit on a third party is the language of the contract itself.²⁹²⁵ Third-party beneficiary status may be conferred where "appropriate to effectuate the intention of the parties."²⁹²⁶ In determining third-party beneficiary status it is permissible for the court to look at the surrounding circumstances as well as the agreement. Moreover, it is well settled that the obligation to perform to the third party beneficiary need not be expressly stated in the contract.²⁹²⁷ Where performance is rendered directly to the third party, it is presumed that the contract was for his or her benefit. It is not enough that the contract benefit the third party incidentally; the agreement must express an intent to assume a duty directly to the third party. In ascertaining the rights of an asserted third-party beneficiary, the intention of the promisee is of primary importance, since the promisee procured the promise by furnishing the consideration therefor.²⁹²⁸

The intention which controls the determination whether a stranger to a contract qualifies as an intended third-party beneficiary is that of the promisee.²⁹²⁹ It is not necessary that a third-party beneficiary be identified or identifiable at the time of the making of a contract and has no right to enforce the contract himself or herself until such time as he or she is identified. Nevertheless, the promisee has an undisputed right to enforce the contract made for the benefit of third parties.²⁹³⁰

The benefit must be one which is not merely incidental; "[t]he benefit must be immediate in such a sense and to such a degree as to indicate the assumption of a duty to make reparation if the benefit is lost. Absent such intent, the third party is merely an incidental beneficiary with no right to enforce the contract."²⁹³¹ "An incidental beneficiary is a third party who may derive benefit from the performance of a contract though he is neither the promisee nor the one to whom performance is to be rendered."²⁹³²

A nonparty to a contract is without standing to raise a claim based upon the terms or bargaining conditions of the contract.²⁹³³ A nonparty, who is neither an assignor nor a third-party beneficiary to a contract, lacks standing to bring an action on the contract.²⁹³⁴ A nonparty to a contract is without standing to raise the affirmative defense of unconscionability. As proof of unconscionability generally requires "some showing of 'an absence of meaningful...