Norton v. First Federal Sav., No. 14685

• Court: Supreme Court of Arizona
• Writing for the Court: GORDON; HAYS; STRUCKMEYER
• Citation: 624 P.2d 854,128 Ariz. 176
• Parties: Daniel F. NORTON and Jacqueline T. Norton, husband and wife; Leo Crowley and Mary Ellen Crowley, husband and wife, Appellants, v. FIRST FEDERAL SAVINGS, a corporation, Appellee.
• Decision Date: 02 February 1981
• Docket Number: No. 14685

Page 854

624 P.2d 854 128 Ariz. 176 Daniel F. NORTON and Jacqueline T. Norton, husband and wife; Leo Crowley and Mary Ellen Crowley, husband and wife, Appellants,
v.
FIRST FEDERAL SAVINGS, a corporation, Appellee. No. 14685. Supreme Court of Arizona, In Banc. Feb. 2, 1981.
Rehearing Denied March 3, 1981.

[128 Ariz. 177]

Page 855

Leo Crowley, Flagstaff, for appellants.

Mangum, Wall, Stoops & Warden by Robert W. Warden, Flagstaff, for appellee.

GORDON, Justice:

Plaintiffs/appellants entered into agreements on July 21, 1974, to purchase from Clyde Hutcheson three subdivision lots in Pinecrest Terrace Unit Six in the City of Flagstaff. As required by city ordinance, Hutcheson had posted a performance bond on August 7, 1973, with First Federal Savings as surety, to guarantee construction of off-site improvements on these lots. Following several extensions granted Hutcheson to perform on the bond, plaintiffs filed a complaint against Hutcheson and the City of Flagstaff seeking damages and a writ of mandamus compelling the City of Flagstaff to complete the off-site improvements as [128 Ariz. 178]

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soon as possible. The Superior Court of Coconino County ordered the City to complete the improvements on or before June 15, 1977. The off-site improvements were finally completed in the summer of 1977.

On November 29, 1977, plaintiffs amended their complaint to add defendant/appellee First Federal Savings as a party. On May 2, 1978, plaintiffs filed a second amended complaint, Counts Four and Five of which sought damages from First Federal Savings due to Hutcheson's failure to complete the off-site improvements. Count Four alleged that plaintiffs were entitled to recover damages under the performance bond because they were third-party beneficiaries of the contract whereby First Federal agreed with Hutcheson to post such a bond. Count Five alleged that First Federal has assumed all obligations and damages owed by Hutcheson to plaintiffs by virtue of a November 4, 1976, assignment agreement. On July 8, 1978, partial summary judgment was entered in favor of First Federal Savings as to Counts Four and Five of plaintiffs' second amended complaint. It is from this partial summary judgment that plaintiffs now appeal.

We have jurisdiction pursuant to A.R.S. § 12-2101 B and Rule 19(e), 17A A.R.S., Rules of Civil Appellate Procedure. We affirm.

The Arizona rule is that in order for a person to recover as a third-party beneficiary of a contract, an intention to benefit that person must be indicated in the contract itself, Irwin v. Murphey, 81 Ariz. 148, 302 P.2d 534 (1956); Basurto v. Utah Construction & Mining Company, 15 Ariz.App. 35, 485 P.2d 859 (1971). The contemplated benefit must be both intentional and direct, Irwin, supra, Treadway v. Western Cotton Oil Etc. Co., 40 Ariz. 125, 10 P.2d 371 (1932), and "it must definitely appear that the parties intend to recognize the third party as the primary party in interest," Irwin, supra, at 154, 302 P.2d at 538.

Plaintiffs have pointed to nothing in any contract between First Federal Savings and Hutcheson which demonstrates an intention to benefit them. Nor does any intent to benefit plaintiffs appear in the terms of the bond. ¹ Rather, it appears from the record that plaintiffs' real contention is that they should be allowed to recover as third-party beneficiaries of the bond because the city's purpose in requiring performance bonds such as this one was to benefit purchasers of subdivision lots.

We have said that in the case of a bond given in compliance with a statute, the statute constitutes a part of the bond. Employer's Liability Assur. Corp. v. Lunt, 82 Ariz. 320, 313 P.2d 393 (1957). Plaintiff claims that the bond under consideration here was given in compliance with City of Flagstaff Ordinance 689 ² as mandated by A.R.S. [128 Ariz. 179]

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§ 9-463.01 C(8). ³ We see nothing in the language of either piece of legislation which indicates an intent to create rights in lot purchasers to recover damages from a surety company in the event off-site improvements are not completed in a timely fashion.

Plaintiffs contend that § 9-463.01 is "a counterpart to § 11-806.01," which authorizes counties to regulate subdivisions within their corporate limits. In Transamerica Title Insurance Co. v. Cochise County, the Court of Appeals said:

"The purpose of A.R.S. § 11-806.01 is to insure that consumers who purchase lots in residential developments are provided with adequate streets, utilities, drainage, and generally pleasant, healthy and livable surroundings." 26 Ariz.App. 323, 327, 548 P.2d 416, 420 (1976).

From this quoted language, plaintiffs argue that the purpose of § 11-806.01 is to protect subdivision lot purchasers, that because § 11-806.01 and § 9-463.01 are "almost identical," the purpose of § 9-463.01 must also be to protect lot purchasers, and that the bonds required by § 9-463.01 C(8) must therefore be intended to be for the benefit of lot purchasers.

We are not convinced by this logic, as A.R.S. § 9-463.01 was not effective until January 1, 1974, more than four months after the bond was posted, and could not be construed as a part of this bond. Municipal Planning Act, ch. 178, § 4, 1973 Ariz.Sess.Laws 1764 (A.R.S. § 9-461 et seq. (1977)).

Going to the merits of the argument, however, we note that there is a vast difference between identifying the broad purpose of an entire statutory scheme and holding that, because of such broad purpose, a benefitted group gains rights in contracts to which they are not parties. Assuming that the purpose of A.R.S. § 9-463.01 may be to insure that municipal subdivision lot buyers are provided with adequately improved lots, it does not follow that those lot buyers can sue for damages as third-party beneficiaries of performance bonds which may be required under subsection C(8) of that statute.

Finally, plaintiffs contend that off-site subdivision improvements could be constructed without posting a bond before any lots were sold because a bond is required only when a developer offers lots for sale before having completed off-site improvements. Thus, they argue, "the bond requirement can only be intended to protect the specific purchaser of lots in an unimproved subdivision." Assuming the accuracy of plaintiffs' premise, their conclusion is a nonsequitur.

Municipalities have their own separate and identifiable interests in requiring performance bonds such as that called for in Section III(B)(4)(b). If a subdivision developer failed to finish off-site improvements after selling the subdivision lots, any improvements completed thereafter would be accomplished by the city with city funds. Similarly, if the developer installed defective improvements and refused to correct the defects, any repairs or alterations would be undertaken by the city. Performance bonds which insure the proper completion of street, sewer and water utilities by subdivision developers protect the city from the necessity of spending its citizens' money to fulfill the developers' responsibilities.

The purpose of requiring a performance bond from a subdivision developer who sells unimproved lots would seem to be assurance that the required off-site improvements are completed. The bond posted here could be satisfied either by the developer's[128 Ariz. 180]

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satisfactory construction of improvements or by payment to the City of Flagstaff of the predicted cost of that construction for the city's use in completing the improvements. Allowing private lot buyers to collect on the performance bond for damages they suffered due to untimely completion of improvements would frustrate the purpose of the bond by depleting the funds thereby provided for the city's construction of improvements.

It is obvious that plaintiffs also have an interest in having these improvements completed, but in the absence of wording in the statute and/or ordinance to the contrary, it would be unreasonable to conclude that protection of the City of Flagstaff's interests was not the primary purpose of the bond requirement.

We feel, therefore, that plaintiffs are third party beneficiaries of neither the performance bond nor a contract between First Federal Savings and Hutcheson to post such a bond. Therefore, the trial court was correct in granting summary judgment in favor of First Federal on Count Four of plaintiffs' second amended complaint.

Plaintiffs in Count Five of their second amended complaint seek damages from First Federal caused by the delay in completion of the off-site improvements. They argue that First Federal assumed Hutcheson's obligation to complete off-site improvements by November 1, 1974, pursuant to a November 4, 1976, assignment agreement and that First Federal is therefore liable for damages caused by the delay in their completion. Plaintiffs assert that the improvements were completed on approximately July 13, 1977.

Hutcheson's promise which plaintiffs contend First Federal assumed is contained in the escrow instructions covering the lot sale between Hutcheson and Crowleys:

"Seller agrees that he will, prior to 11-1-74, complete the grading of the streets so as to be passable to a passenger car and complete the installation of water & sewer lines so as to permit services to the residence which buyers contemplate may be constructed upon the above described lot."

Plaintiffs claim that First Federal assumed Hutcheson's above-quoted promise pursuant to Paragraph 8 of the November 4, 1976, assignment agreement, which states:

"8. This Agreement is intended to cover all interests and potential interests...