Delta Mech., Inc. v. Garden City Grp., Inc.

FILED
NOT FOR PUBLICATION MAY 16 2014

MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S. COURT OF APPEALS

FOR THE NINTH CIRCUIT

DELTA MECH., INC., No. 12-15285

Plaintiff - Appellant, D.C. No. 2:06-cv-01095-JWS

v.

GARDEN CITY GRP., INC.; RHEEM MEMORANDUM*
MFG. CO.; AM. WATER HEATER CO.;
BRADFORD WHITE CORP.; A. O.
SMITH CORP.; STATE INDUS., INC.;
LOCHINVAR CORP.,

Defendants - Appellees.

On Appeal from the United States District Court
for the District of Arizona
John W. Sedwick, District Judge, Presiding

Argued and Submitted February 14, 2014
San Francisco, California
Before: CALLAHAN and M. SMITH, Circuit Judges, and KORMAN, Senior
District Judge.**

Rheem Manufacturing Company, American Water Heater Company, the

Bradford White Corporation, A.O. Smith Corporation, State Industries, Inc., and

Lochinvar Corporation (collectively, the “manufacturers”) are manufacturers of water

heaters. Delta Mechanical, Inc. (“Delta”) is a plumbing company. This appeal arises

out of a class action settlement between the manufacturers and the owners of defective

water heaters that had been produced by the manufacturers. The settlement agreement

required the manufacturers to pay authorized third-party contractors to replace or

repair the defective water heaters. Delta served as one of the authorized third-party

contractors. The settlement agreement set forth the claims protocol that class

members were required to follow in order to obtain the replacement or repair.

While Delta received over $3,000,000 from the manufacturers for providing

nearly 24,000 repairs or replacements, the manufacturers refused to reimburse Delta

for approximately $500,000 because Delta’s customers failed to follow the claims

protocol in certain instances. Delta then filed the present action against the

*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
**
The Honorable Edward R. Korman, Senior District Judge for the U.S.
District Court for the Eastern District of New York, sitting by designation.

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manufacturers. The district court granted summary judgment in favor of the

manufacturers on the ground that Delta was not a third-party beneficiary of the

settlement agreement under Missouri law because “any obligation assumed by [the

manufacturers] was indirect and conditional.” Delta Mech., Inc. v. Garden City Grp.,

Inc., No. 2:06-CV-01095, 2012 WL 94564, at *3-*4 (D. Ariz. Jan. 12, 2012)

(emphasis in original). We reverse and remand.

While it is not entirely clear what the district judge meant by the phrase

“indirect and conditional,” we assume he was holding that, because Delta’s right to

recover was contingent on compliance with the claims protocol, it could not recover

as a third-party beneficiary. In essence, the district court held that a conditional

obligation was insufficient as a matter of law to confer third-party beneficiary status

on Delta. Id. at *3. This holding is contrary to hornbook law. As Professor Corbin

explains, “[m]erely attaching a condition to a promise to pay the promisee’s debt or

a promise to confer a gift on the third party does not affect the right of a third party

any more than it would affect the right of a promisee. The condition, however, must

occur to activate the right of the beneficiary just as it must occur to activate the right

of a promisee.” 9-46 Corbin on Contracts § 46.1; see also Williston on Contracts §

37:26 (same). The Restatement echoes both Williston and Corbin. See Restatement

(Second) of Contracts § 303 (1981). One illustration of this principle, which is

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particularly apposite here, appears in comment a, as follows. “A owes C $100. B

promises A to pay the debt if Dancer wins the Derby. C is an intended beneficiary of

the conditional promise.” Id. at § 303 cmt. a, Illustration 1 (emphasis added). Indeed,

at oral argument, the counsel to the manufacturers conceded that the position of the

Restatement (Second) likely is controlling in this case. Oral Argument at 19:30, Delta

Mech., Inc. v. Garden City Grp., No. 12-15285 (9th Cir. filed Feb. 10, 2012),

available at http://www.ca9.uscourts.gov/media/view.php?pk_id=0000012356.

The primary case that the manufacturers rely on in arguing that a Missouri

Court would not apply the position of the Restatement is Stephens v. Great S. Sav. &

Loan Ass’n, 421 S.W.2d 332 (Mo. Ct. App. 1967). A careful reading of Stephens

plainly supports the conclusion that Delta was a third-party beneficiary of the

settlement agreement. Indeed, in the course of the opinion, the Missouri Court of

Appeals cited the following example of what would and would not constitute an

enforceable third-party beneficiary agreement: “B promises A for sufficient

consideration to pay whatever debts A may incur in a certain undertaking. A incurs

in the undertaking debts to C, D and E. If, on a fair interpretation of B’s promise, the

amount of the debts is to be paid by B to C, D and E, they are creditor beneficiaries;

if the money is to be paid to A in order that he may be provided with money to pay C,

D and E, they are at most incidental beneficiaries.” Stephens, 421 S.W.2d at 336

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(quoting Restatement (First) of Contracts § 133, Illustration 9 (1932)). The present

case is one that fits neatly into the example of what would constitute an enforceable

third-party beneficiary agreement. In this case, the manufacturers promised to pay

Delta directly for the debt incurred by the customers on the condition that the claims

protocol was followed. The manufacturers did not promise to provide the customers

with money to pay Delta or the other approved plumbers for services that they had

rendered under the settlement agreement.

Because the district court’s decision rested solely on the ground that Delta was

not a third-party beneficiary, it did not address the issue of whether Delta and its

customers complied with the claims protocol for the disputed claims. Accordingly,

we vacate the district court’s ruling and remand to the district court for proceedings

consistent with this disposition. Each side shall bear its own costs on appeal.

VACATED AND REMANDED.

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