The James Family Charitable Found. v. State St. Bank

• Decision Date: 28 October 2011
• Docket Number: No. 10–P–1616.,10–P–1616.
• Parties: The JAMES FAMILY CHARITABLE FOUNDATIONv.STATE STREET BANK AND TRUST COMPANY.
• Court: Appeals Court of Massachusetts

80 Mass.App.Ct. 720

956 N.E.2d 243

The JAMES FAMILY CHARITABLE FOUNDATION

v.STATE STREET BANK AND TRUST COMPANY.

No. 10–P–1616.

Appeals Court of Massachusetts, Suffolk.

Argued Sept. 6, 2011.Decided Oct. 28, 2011.

Michael A. Collora, Boston, for the plaintiff.Paula M. Bagger, Boston, for the defendant.Present: MILLS, SMITH, & WOLOHOJIAN, JJ.WOLOHOJIAN, J.

Hamilton James (James), a client of State Street Bank and Trust Company (State Street), wished to make a charitable gift of mutual fund shares to The James Family Charitable Foundation (foundation). The shares were in the custody of State Street pursuant to a custodianship agreement (agreement) between James and State Street that, among other things, required State Street to transfer assets when instructed to do so by James. James, through his investment agent, instructed State Street to transfer the shares to the foundation's broker in order to effectuate his charitable gift. State Street failed to initiate the transaction properly, thus delaying the transfer to the foundation. The foundation alleges that it consequently was unable to sell the shares until after their value had significantly declined.

The foundation seeks to maintain a breach of contract claim against State Street even though the foundation was not a party to the agreement.¹ The foundation argues that it has standing because it is an intended beneficiary of the custodianship agreement and, as such, is entitled to maintain a claim for breach of the agreement against the promisor (State Street). The judge below disagreed and allowed State Street's motion for summary judgment. We now reverse.

Background. In April, 2002, James and State Street entered into the agreement whereby State Street agreed, for a monthly fee, to serve as custodian of certain of James's assets. We find State Street's summary of its obligations under the agreement helpful for these purposes and accordingly set it out here:

“One of State Street's contractual obligations was to receive James'[s] assets into custody and transfer them out upon receipt of authorized instructions. Other obligations of State Street under the Custodianship Agreement includ[ed] acting on Mr. James'[s] investment instructions; collecting the proceeds of sales, maturities, and other dispositions; collecting income, dividends and other proceeds of investments; responding to shareholder actions; responding to information requests from securities issuers; providing account statements and value appraisals; deducting the investment manager's fees; issuing 1099 Forms; making authorized wire transfers; and voting proxies.” (Emphasis added.)

Because the agreement contained no termination date, and had no fixed term, State Street's obligations were to continue until one party or the other gave notice of termination.

The agreement itself did not specify which assets were to be placed in State Street's custody. Rather, the agreement provided that State Street would “hold all property turned over to it from time to time” by James. Similarly, the agreement did not contain any specific instructions from James. Instead, the agreement provided that State Street would carry out instructions as they were received in the future from James or his authorized investment agent.

From time to time between 2002 and 2007, James ² instructed State Street to transfer shares of stock to the foundation's account. State Street acted on each of those instructions in a timely and effective manner,³ except as described below.

By the beginning of February, 2007, James had more than 800,000 shares of Vanguard Emerging Markets Stock Index Fund (VEIEX) in State Street's custody, and he decided to make a charitable gift of these shares to the foundation. Accordingly, on February 13, 2007, James instructed State Street to transfer all of the VEIEX shares in its custody “FOR CREDIT TO THE JAMES FAMILY CHARITABLE FOUNDATION ACCOUNT # [xxxxx].” This instruction was made in writing on a State Street form intended to be used for this purpose. In response to State Street's request on the form for an explanation for the transfer, the following appeared: “GIFT TO JAMES FAMILY CHARITABLE FOUNDATION.”

State Street acted on these instructions immediately by correctly completing a letter of instructions. However, instead of sending the letter of instructions to Vanguard as it should have done, State Street mistakenly sent the letter to the foundation's broker. Despite multiple inquiries from James's agent over the next several days as to the status of the transfer, State Street did not discover its error until February 22, 2007. On that day, it sent a second letter of instructions, this time properly directed to Vanguard. For reasons not pertinent here, the shares did not reach the foundation's account until March 1, 2007.⁴

The foundation contends that, had State Street carried out its obligations under the agreement when it received James's instructions on February 13, 2007, the foundation would have been able to sell the shares while the price was above twenty-five dollars.⁵ The foundation further contends that State Street's breach of its obligations under the agreement caused the foundation to have to sell the shares at a lower price, resulting in a loss of over $1.6 million to the foundation.⁶

2. Discussion. The sole issue on appeal is whether the foundation has standing to sue for breach of contract as a third party beneficiary of the agreement between James and State Street. In 1982, our courts adopted the intended beneficiary theory of standing from the Restatement (Second) of Contracts §§ 302–315 (1981). Rae v. Air–Speed, Inc. 386 Mass. 187, 195–196, 435 N.E.2d 628 (1982). See Flattery v. Gregory, 397 Mass. 143, 148, 489 N.E.2d 1257 (1986) (§ 302 and all associated sections of Restatement [Second] of Contracts were adopted at same time). Although we have had occasion to discuss the doctrine in the thirty years since its adoption, those occasions have been infrequent and have not involved facts such as presented here. We accordingly begin by surveying the doctrine generally.

The Restatement (Second) of Contracts recognizes the right of an intended beneficiary of a contract to sue for its enforcement or breach: “A promise in a contract creates a duty in the promisor to any intended beneficiary to perform the promise, and the intended beneficiary may enforce the duty.” Restatement (Second) of Contracts § 304. This statement is a modern articulation of a principle we have long recognized in Massachusetts, namely that “when one person, for a valuable consideration, engages with another, by simple contract, to do some act for the benefit of a third, the latter, who would enjoy the benefit of the act, may maintain an action for the breach of such engagement.” Brewer v. Dyer, 61 Mass. 337, 7 Cush. 337, 340 (1851), quoted with approval in Rae v. Air–Speed, Inc., supra at 195, 435 N.E.2d 628.

In contrast to an intended beneficiary, an incidental beneficiary obtains no right to enforce the contract. Restatement (Second) of Contracts § 315.⁷ To determine whether a beneficiary ⁸ is intended, rather than merely incidental, we look to the intent of the parties. Markel Serv. Ins. Agency, Inc. v. Tifco, Inc., 403 Mass. 401, 405, 530 N.E.2d 340 (1988). As set out in the Restatement:

“(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either

“(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or

“(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.”

Restatement (Second) of Contracts § 302. There is no dispute that James (the promisee) intended to give the foundation the benefit of the promised performance (the transfer of the shares). Subsection (b) is thus clearly satisfied. The issue, therefore, is whether giving the foundation a right to performance under the contract is “appropriate to effectuate the intention of the parties.”

“We look at the language and circumstances of the contract for indicia of intention” for purposes of determining whether a particular person is an intended beneficiary. Anderson v. Fox Hill Village Homeowners Corp., 424 Mass. 365, 366, 676 N.E.2d 821 (1997). The intent of the contracting parties must be “clear and definite.” Lakew v. Massachusetts Bay Transp. Authy., 65 Mass.App.Ct. 794, 798, 844 N.E.2d 263 (2006), quoting from Anderson v. Fox Hill Village Homeowners Corp., supra at 366–367, 676 N.E.2d 821. That said, there is no requirement that the intended beneficiary be identified by name in the contract or even that the intended beneficiary be identified at the time the contract is entered into. See Flattery v. Gregory, 397 Mass. at 149, 489 N.E.2d...