## Facts

- Chicago Flame Hardening Co., Inc. was a closely held Indiana corporation owned by Marvin R. Scott, Gainor D. Scott, and John R. Keeler.
- In 1964, the shareholders adopted a corporate resolution promising that, upon a shareholder’s death, his widow would receive a graduated monthly stipend over 15 years totaling $150,300, terminating upon her earlier death, in exchange for certain services to the corporation.
- The 1964 resolution did not contain a term restricting later modification or rescission by the corporation and shareholders.
- In 1967, Keeler died, and his widow began receiving payments under the 1964 resolution; due to financial strain, she later agreed to defer payments during 1971–1972.
- Roxanne Scott, Marvin Scott’s wife, knew of the 1964 resolution and that Keeler’s widow had received payments, but did not take actions reflecting acceptance of the benefit and at one point stated she had forgotten about the resolution.
- In February 1971, amid financial difficulties, the remaining owners and Keeler’s widow adopted a second resolution rescinding any future obligation to pay benefits to Roxanne if Marvin predeceased her; Roxanne was not consulted and did not participate.
- Marvin Scott died in October 1971; after his death, Roxanne (through her guardian, Detroit Bank & Trust Co.) learned of the rescission.
- In 1977, the guardian sued in diversity to enforce the 1964 resolution as an intended third-party beneficiary and to recover the claimed payments.
- After a bench trial, the original judge died before decision; by agreement, a successor judge decided the case on the trial record and briefs.

## Issues

1. Whether an intended third-party beneficiary may enforce a contract after the promisor and promisee rescind or modify it, when the rescission occurs before the beneficiary accepts, relies on, or otherwise acts on the promise.
2. Whether Roxanne Scott’s knowledge of the 1964 widow-benefit resolution and expectation of future payments constituted acceptance, adoption, or reliance sufficient to vest her rights.

## Decision

- The court entered judgment for Chicago Flame Hardening Co.
- The court held Roxanne Scott’s third-party beneficiary rights under the 1964 resolution had not vested before the 1971 rescission.
- Because the original parties rescinded the benefit as to Roxanne before vesting, the rescission was effective and the guardian could not enforce the 1964 resolution.

## Legal Principles

- Parties to a third-party beneficiary contract may rescind, vary, or abrogate the contract without the beneficiary’s approval until the beneficiary has accepted, adopted, or acted upon the promise, or has materially changed position in reliance on it.
- Modification or rescission is ineffective only if the contract itself restricts modification, or if the beneficiary has accepted/adopted the promise or detrimentally relied on it.
- Mere awareness of a promised benefit, without definite acceptance or a material change of position in reliance, does not vest enforceable third-party beneficiary rights.

## Conclusion

Because Roxanne Scott neither accepted nor relied on the widow-benefit promise before the corporation and shareholders rescinded it, her third-party beneficiary interest never vested, and the corporation owed no stipend upon Marvin Scott’s death.


Detroit Bank & Tr. Co. v. Chi. Flame Hardening Co., 541 F. Supp. 1278 (N.D. Ind. 1982)