Facts
- An individual investor entered a custodianship agreement with a bank under which the bank held securities and, upon authorized instructions, would transfer assets out of custody.
- The agreement contemplated future transfer instructions but did not list specific future transferees or beneficiaries.
- Over several years, the investor periodically instructed the bank to transfer shares to a charitable foundation, and the bank completed those transfers.
- In February 2007, the investor’s authorized agent issued written instructions directing the bank to transfer all shares of a specified mutual fund “for credit to” the foundation’s identified account; the instruction described the transaction as a gift to the foundation.
- The bank initially sent the transfer letter to the wrong recipient, did not correct the error for several days, and the shares were not credited to the foundation’s account until early March 2007.
- The foundation sold the shares after receipt and alleged it realized approximately $1.6 million less than it would have obtained had the transfer been timely.
- The foundation sued the bank for breach of contract, alleging failure to properly and timely execute the transfer instructions.
- The trial court granted summary judgment to the bank on the ground that the foundation lacked standing because it was not an intended third-party beneficiary of the custodianship agreement.
Issues
- Whether a non-signatory charitable donee had standing to sue a custodian bank for breach of a custodianship agreement as an intended third-party beneficiary regarding a particular, specifically directed transfer instruction.
- Whether a later instruction naming the donee and its account can supply the specificity needed to distinguish an intended beneficiary from an incidental beneficiary in an ongoing custodial-services contract.
Decision
- The appellate court reversed the summary judgment for the bank and remanded for further proceedings.
- The court held that the foundation had standing as an intended third-party beneficiary with respect to the investor’s specific transfer instructions directing that shares be credited to the foundation’s account as a gift.
- The decision addressed only standing and did not resolve whether the bank breached the agreement or the proper measure of damages.
Legal Principles
- A nonparty may sue for breach of contract when the contract, expressly or by necessary implication, shows that the contracting parties intended to confer on the nonparty the right to enforce the promised performance.
- The intent inquiry turns on the contract language and the surrounding circumstances, including whether performance is directed to the third person’s benefit or merely confers an incidental benefit.
- In an ongoing service or custodial contract that anticipates future instructions, a third party not named in the original agreement may become an intended beneficiary for a discrete transaction when later authorized instructions specifically identify that third party as the direct recipient of performance.
- A claimant is not an intended beneficiary if it is merely one of an indefinite, undefined group of potential recipients; naming the recipient and directing performance to a specified account supports intended-beneficiary status.
Conclusion
Because the custodianship agreement obligated the bank to execute authorized transfer instructions and the later written instruction identified the foundation by name and account as the exclusive recipient of the transfer, the foundation was an intended third-party beneficiary for that transaction and could sue for breach of the duty to carry out the instruction.