Are you the third-party beneficiary of a contract? Chances are, you don't know what that even means, let alone whether you are one. But it could matter a lot to you if you have a home loan and are in trouble, and live in the United States.
Or it could matter... not at all.
Did I pique your interest? I hope so, because I was trying for a good lead-in to this post, which will give me a chance to toot my own horn, point out an exciting new area of law, and also teach about third party beneficiaries of contracts, an esoteric point of law that is going to take on a new relevance very soon.
First the toot my own horn part. I defend people whose mortgages are in foreclosure, and in a recent case, I was retained for just that: some clients had been foreclosed and wanted me to stop it. In investigating the situation, it appeared to me that the clients' lender (a) was covered by the Home Affordable Modification Program (HAMP), (read more about HAMP here) and (b) the lender hadn't, apparently, complied with HAMP before starting the foreclosure.
My initial strategy was to file a motion to dismiss the case -- to stop the foreclosure short and try to get the lender to comply with HAMP. But then, I had one of my brilliant ideas (I get lots of them) and thought: Why should my clients have to pay me to get the lender to comply with a federal law?
Why should they? They didn't violate the federal law -- the lender did. So instead of simply moving to dismiss the case, I filed a counterclaim, alleging that the lender had breached the contract by failing to comply with HAMP, and that as a result of that, my clients were entitled not just to dismiss the foreclosure, but also to an award of damages, including my attorney's fees. (Although the general rule is that party's do not get attorney's fees for winning, attorney's fees incurred in suing, when no suit should have been necessary, can be awarded as damages.)
So I went ahead and filed that counterclaim, and then I learned that another group, not long after, had done the same thing, on a larger scale: A class action was filed arguing that "Aurora Loan Services, LLC" had breached a contract by not following through on its HAMP obligations. The class action suit (which I'm not crazy about, as I don't like class actions, for a couple of reasons) argues a slightly different tactic, saying that borrowers are "third party beneficiaries" of the contract between the lenders/servicers and the government.
A third-party beneficiary of a contract is created when two people enter into a contract for the direct benefit of a third party, or a group of people identifiable as a third-party. The benefits the third party wants to claim have to be direct, not "incidental." So, for example:
-- Stockholders of a corporation were not "third party beneficiaries" of a contract between the corporation and a company hired to sell corporate assets -- the benefit to the stockholders was too indirect.
-- Injured people are generally not "third party beneficiaries" of insurance contracts between the insurer and the insured.
Homeowners whose loans are held or serviced by lenders might be third-party beneficiaries of those contracts,and they might not be; the Courts will have to decide, and I'm betting it will hinge on whether the laws -- and the contracts they incorporated -- were intended to benefit the homeowners.
(It seems obvious to me that the laws and contracts were to benefit homeowners, but Courts may decide otherwise.)
On the other hand, there may be a third tactic, one that incorporates both my "direct breach of contract," and the class-actions' third party breach of contract. That third tactic is this: The homeowners -- the public -- are the only ones who can enforce the law if its breached, so they have to have the right to sue, even if they aren't contractually bound to the claims.
Sounds crazy, right? But that decision is the exact one that the Supreme Court of Wisconsin made in a different context. In the case of "State ex rel Journal/Sentinel, Inc. v. Pleva," Wisconsin's highest court ruled that when parties to a contract incorporate a statute into that contract, the public can sue to enforce the law.
What happened in Pleva is that the City of Milwaukee and the people who organized Summerfest entered into a contract which required that the Summerfest people adopt bylaws for their organization which would require “that all of the meetings of the Board and its committees will be conducted openly consistent with the dictates of the State of Wisconsin open meeting law.” The company did that, and then excluded a Journal/Sentinel reporter from a meeting. The company sued and claimed a violation of the law, and also claimed that the public was the "third-party beneficiary" of the contract.
The Supreme Court of Wisconsin didn't accept either of those arguments; instead, it held that the incorporation of the law into the contract expressed an intent to let the public enforce the law as regarded the otherwise-private company, and that, in fact, if the public could not enforce the contract, it would be meaningless:
"[I]t is a rare contract that, as here, can be breached by both parties at the same time, leaving no one but the public to enforce it,"
the Court said -- but because this was that "rare" contract, the public had to have the right to sue.
And, to me, the HAMP laws and contracts are that way: They're contracts between the government, and the lenders/servicers. That contract -- created by and arguably incorporating the HAMP laws -- is that "rare contract that... can be breached by both parties at the same time, leaving no one but the public to enforce it." If the lenders don't follow up, and the government doesn't take action, both have breached the contract, and only you -- the homeowning public-- would have the right to sue.
So, are you a third-party beneficiary of the HAMP contracts? The answer is, it may not matter -- just call a lawyer and point him or her to this post.
0 comments:
Post a Comment