Delta Mechanical, Inc. v. Garden City Group, Inc. et al

Filing 138

ORDER AND OPINION granting 125 Motion for Summary Judgment; denying 127 Motion for Partial Summary Judgment. The Clerk shall please enter judgment for defendants. (See document for further details). Signed by Judge John W Sedwick on 1/11/12.(LAD)

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UNITED STATES DISTRICT COURT

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DISTRICT OF ARIZONA

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DELTA MECHANICAL INC.,
Plaintiff,

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vs.
GARDEN CITY GROUP, INC., et al.,

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Defendants.
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2:06-cv-01095 JWS
ORDER AND OPINION
[Re: Motions at Dockets 125 and 127]

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I. MOTIONS PRESENTED
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At docket 125, defendants Rheem Manufacturing Company, American Water
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Heater Company, Bradford White Corporation, A.O. Smith Corporation, and Lochnivar
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Corporation (collectively “defendants”) move pursuant to Federal Rule of Civil
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Procedure 56 for summary judgment. Plaintiff Delta Mechanical, Inc. (“Delta”) opposes
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the motion at docket 130. Defendants’ reply is at docket 133.
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At docket 127, Delta cross-moves for partial summary judgment on the issue of
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whether it was an intended third-party beneficiary of the settlement agreement on which
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its claims are based. Defendants oppose the motion at docket 132. Delta’s reply is at
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docket 136.
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Oral argument was requested and was heard on January 11, 2012.
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II. BACKGROUND

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Defendants manufacture water heater tanks. Delta is a plumbing company. In

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Heilman v. Perfection Corp.,1 a class action lawsuit against defendants, the United

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States District Court for the Western District of Missouri approved a settlement

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agreement by which defendants agreed to facilitate the repair of defective water heaters

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that they had manufactured.

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The settlement agreement defined the class as “all persons throughout the

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United States who own a water heater manufactured by [defendants] containing a [dip

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tube manufactured by Perfection Corporation] or who owned such a heater and suffered

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damages.”2 Under Section 8.2 of the agreement, members of the class who had not yet

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incurred out-of-pocket expenses related to the faulty dip tubes or whose problems had

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not yet been fully repaired were entitled to either a certificate for a dip tube replacement

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or a repair of property damage or both.3 Class members who timely submitted a proof

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of claim would receive a certificate matched to the serial number of their water heater

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entitling them to a dip tube replacement. The certificates had to be redeemed within six

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months of their receipt. The agreement stated that “[t]he names of authorized service

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personnel who [would] be available to provide the service [would] be provided with the

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certificate.”4 Defendants agreed to “ensure that adequate and trained service personnel

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[would be] available to provide the service to Class Members in a timely manner.”5 In

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No. 99-0679-CW-W-6 (May 1, 2000 W.D. Mo.).

Doc. 126-2 at 14; see also id. at 13 (defining “Subject Dip Tube” as “all dip tubes
manufactured . . . by Perfection between August 1993 and October 1996 that were installed into
[defendants’] water heaters”). A dip tube is a “plastic tube that transports cold water from the
intake at the top of the water heater to the bottom of the water heater tank.” Id. at 10.

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Id. at 15.
Id. at 16.
Id.

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order to receive benefits under Section 8.2., proofs of claim had to be postmarked by

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December 31, 2000.

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Delta was among the “authorized service personnel” enlisted to perform dip tube

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replacements. Delta maintains that it performed hundreds of dip tube replacements

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between January 2000 and December 2001 for class members who had submitted

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proofs of claim. However, defendants did not issue certificates to those class members.

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Presumably because certificates were not issued, Delta was not compensated for that

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work.

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Delta hired a collection agency in December 2001 to seek payment from

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defendants. In August 2003, defendants informed Delta that the settlement fund had

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been exhausted. Delta subsequently moved to intervene in the Missouri action to

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enforce the settlement agreement. In September 2005, the Western District of Missouri

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denied Delta’s motion.

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In March 2006, defendants filed this lawsuit in Arizona state court, asserting

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claims against defendants and the administrator of the settlement agreement6 for

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breach of contract, breach of the implied covenant of good faith and fair dealing, unjust

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enrichment, and promissory estoppel. The case was removed to federal court on the

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basis of diversity.

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In June 2007, the court dismissed Delta’s promissory estoppel and unjust

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enrichment claims as barred by the applicable statutes of limitation. In a separate

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order, following supplemental briefing that applied Missouri law, the court dismissed

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Delta’s breach-of-contract and breach of the implied covenant of good faith and fair

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dealing claims, holding that Delta was not an intended third-party beneficiary of the

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Heilman settlement agreement.7 The Ninth Circuit Court of Appeals reversed the

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Garden City Group, Inc. was the third-party administrator of the settlement agreement.
It was dismissed as a defendant to this lawsuit. See doc. 48.
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Doc. 48.

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court’s determination and stated that “[t]he evidentiary record on this issue

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demonstrates that at this early stage of the case . . . whether Delta was or was not a

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third-party beneficiary is a genuine issue of material fact that might survive summary

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judgment.”8

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III. STANDARD OF REVIEW
Summary judgment is appropriate where “there is no genuine dispute as to any

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material fact and the movant is entitled to judgment as a matter of law.”9 The materiality

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requirement ensures that “only disputes over facts that might affect the outcome of the

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suit under the governing law will properly preclude the entry of summary judgment.”10

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Ultimately, “summary judgment will not lie if the . . . evidence is such that a reasonable

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jury could return a verdict for the nonmoving party.”11 In resolving a motion for summary

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judgment, a court must view the evidence in the light most favorable to the non-moving

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party.12 The reviewing court may not weigh evidence or assess the credibility of

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witnesses.13 The burden of persuasion is on the moving party.14

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Doc. 66-1 at 2–3.

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Fed. R. Civ. P. 56(a).

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Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

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Id.

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Lopez v. Smith, 203 F.3d 1122 (9th Cir. 2000).
Dominguez-Curry v. Nevada Transp. Dept., 424 F.3d 1027, 1036 (9th Cir. 2005).
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

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IV. DISCUSSION

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Third-party beneficiary status exists where the terms of a contract “clearly

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express intent to benefit [a third] party or an identifiable class of which the [third] party is

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a member.”15 “In cases where the contract lacks an express declaration of that intent,

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there is a strong presumption that the third party is not a beneficiary and that the parties

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contracted to benefit only themselves.”16 “[A] mere incidental benefit to the third party is

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insufficient to bind that party.”17 “Third party beneficiary status depends not so much on

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a desire or purpose to confer a benefit on the third person, but rather on an intent that

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the promisor assume a direct obligation to him.”18 “In order for third party beneficiary

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status to arise, it must be shown that the benefit to the third party was the cause of the

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creation of the contract.”19 “Only those third parties for whose primary benefit the

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contracting parties intended to make the contract may maintain an action.”20

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The settlement agreement does not expressly declare an intent to benefit the

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authorized service personnel.21 The court therefore starts with the presumption that

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Delta is not an intended third-party beneficiary.

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Nitro Distrib., Inc. v. Dunn, 194 S.W.3d 339, 345 (Mo. 2006).
Id.

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Id.

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Chesus v. Watts, 967 S.W.2d 97, 106 (Mo. Ct. App. 1998).

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Chmielski v. City Products Corp., 660 S.W.2d 275, 289 (Mo. Ct. App. 1983).

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OFW Corp. v. City of Columbia, 893 S.W.2d 876, 879 (Mo. Ct. App. 1995).

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Delta does not argue otherwise. Delta distinguishes certain authority cited by
defendants on the ground that “it is beyond dispute that the [settlement agreement] contains
several references to the class of approved plumbers/authorized service personnel.” Doc. 130
at 6. Those references do not include an express declaration of intent to benefit the authorized
service personnel.

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A. Defendants’ Motion

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1. Delta’s Breach-of-Contract Claim

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Defendants argue first that the contract clearly expresses an intent to benefit the

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class members. Defendants note that the contract states the parties’ conclusion “that it

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is in the best interests of the Class to enter into th[e] Agreement to avoid the

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uncertainties of litigation and to assure a timely benefit to all members of the Class.”22

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The court agrees that the contract expresses an intent to benefit the members of the

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class. Although that intent does not preclude intent to also benefit the service personnel

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who would be performing the work, it undermines the notion that a benefit to service

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personnel was a motivating factor underlying the settlement agreement.

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Defendants also argue that the service personnel are not identifiable until a class

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member obtains a certificate and selects a plumber from the list of adequate and trained

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service personnel. The primary question under Missouri law is whether defendants

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intended to assume a direct obligation to the class of service personnel. Here, any

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obligation assumed by defendants was indirect and conditional. There was no

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obligation running from defendants to Delta–or any other authorized service

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personnel–until a class member submitted a proof of claim, obtained a certificate, and

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selected Delta from the provided list.23

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As stated above, “[o]nly those third parties for whose primary benefit the

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contracting parties intended to make the contract may maintain an action.”24 “[I]t is not

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necessary for the parties to the contract to have as their ‘primary object’ the goal of

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Doc. 126-2 at 14.

Doc. 126-2 at 16. The settlement agreement stated that “[u]pon submission of a timely
and valid Proof of Claim . . . a certificate for a dip tube replacement” would be issued. Id. “The
names of authorized service personnel who [would] be available to provide the service” would
be included with the certificate. Id.
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OFW Corp., 893 S.W.2d at 879 (emphasis added).

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benefitting the third parties, but only that the third parties be primary beneficiaries.”25 It

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does not make sense to grant a right to maintain an action on a contract to a third party

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where the assumed “obligation” running to the third party is conditional on something

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beyond and in addition to that party’s performance.

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Defendants raise a similar argument based on the proposition that third party

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beneficiaries “have no greater rights under [a] contract than . . . a party to the

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agreement.”26 Defendants argue that allowing Delta to sue for breach of contract based

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on repairs that were not submitted or approved and where no certificate issued would

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give them greater rights under the settlement agreement than the class members who

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were bound to follow the claim procedure.
Delta’s primary argument in response to defendants’ motion is that the contract

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and various extrinsic evidence demonstrate that defendants assumed “a direct

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obligation to pay the class of approved plumbers for the dip tube repairs.”27 It is evident

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from both the contract and extrinsic evidence that defendants agreed to pay for the dip

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tube replacements. However, defendants’ obligation to pay for the repairs does not give

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rise to third-party beneficiary status because their obligation to pay was conditional and

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attenuated. Payment was conditioned on class members submitting a proof claim,

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issuance of a certificate, and selection of a plumber from the list of authorized service

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personnel that accompanied the certificate. Even in the light most favorable to Delta,

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there was no obligation running from defendants to the authorized service personnel

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until those conditions were fulfilled, and those conditions were not promised

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performance under the settlement agreement. Defendants’ potential obligation to

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compensate authorized service personnel for the dip tube replacements is not sufficient

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to confer third-party beneficiary status.

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Andes v. Albano, 853 S.W.2d 936, 942 (Mo. 1993).
Laclede Inv. Corp. v. Kaiser, 541 S.W.2d 330, 338 (Mo. Ct. App. 1976).
Doc. 130 at 2–3.

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The court’s conclusion is bolstered by the “Protocols, Procedures & Processes

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for Replacing Consumer Dip Tubes” manual and application to perform the dip tube

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replacement work.28 That manual, signed by Delta’s general manager, describes the

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claims procedure and issuance of the certificate as contemplated in the settlement

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agreement. It also describes payment to the authorized service personnel. The manual

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states that “approved plumbing professional[s] [would] be paid by check within 30 days

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of receipt of the dip tube and properly completed Certificate.”29 “Approved plumbing

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professionals [were to] be assigned a vendor number and [would] receive instructions

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for completing the Certificates.”30 The manual thus reinforces the proposition that there

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was no direct obligation to the authorized service personnel sufficient to give rise to

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third-party beneficiary status.

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Delta argues that the issue of whether it complied with the terms of the

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settlement agreement–particularly the procedural terms–is separate and distinct from

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the issue of whether authorized service personnel were intended beneficiaries under the

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agreement. Delta is correct that the two issues are distinct, and also correct that

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whether the authorized service personnel are third-party beneficiaries “is a function of

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the parties’ intent.”31 Compliance or non-compliance with the procedural terms requiring

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submission of a proof of claim and issuance of a certificate might not affect third-party

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beneficiary status in the abstract. However, those terms bear on the present motion

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because they reflect the conditional nature of the obligation that ran from defendants to

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the authorized service personnel. As discussed above, a potential obligation to

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compensate the authorized service personnel for dip tube replacements is insufficient to

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give rise to third-party beneficiary status. Because there was no assurance that the

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See doc. 128-13 at 2.

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Doc. 128-13 at 3 (emphasis added).
Id.
Doc. 130 at 11.

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benefit would flow, the authorized service personnel cannot be considered primary

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beneficiaries.

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Delta also argues that defendants did not support their claim that Delta’s

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customers did not submit a valid proof of claim, that replacement certificates were not

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issued or returned, and that class members did not select Delta from an approved list.

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Those disputed facts would weigh on potential breach and do not affect analysis of the

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third-party beneficiary issue. Delta’s argument that those disputed facts should

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preclude summary judgment only holds if it has standing to enforce the contract as a

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third-party beneficiary. The court has concluded that it does not.

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2. Delta’s Breach of the Implied Covenant of Good Faith & Fair Dealing

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Claim

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“In Missouri, a covenant of good faith and fair dealing is implied in every

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contract.” It functions to “prevent[] one party from acting in a manner that evades the

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spirit of the transaction or that denies the other party the expected benefit of the

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contract.”32 Because Delta is neither a party to the settlement agreement, nor a third-

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party beneficiary thereunder, it does not have standing to enforce the implied covenant

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of good faith and fair dealing.

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B. Delta’s Cross-Motion

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Delta frames the issue in its cross-motion for summary judgment as whether

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defendants intended to pay for the dip tube replacements. The court agrees that Delta

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is a member of the class of authorized service personnel and that authorized service

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personnel were to perform the repairs.

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Delta points to Section 8.3.1 which states that defendants “are to . . . bear all

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administrative costs.”33 “Administrative expenses” are defined elsewhere in the

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agreement to include “disbursements to approved third-party vendors in connection with

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Edoho v. Bd. of Curators, 344 S.W.3d 794, 799 (Mo. Ct. App. 2011).
Doc. 126-2 at 16.

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the carrying out of the terms of the Settlement Agreement.”34 However, while that

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language supports the notion that defendants assumed an obligation to Delta–as a

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third-party vendor–Missouri law requires that there be a “direct obligation.”35 Other

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sections of the contract make clear that defendants had no obligation to authorized

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service personnel unless protocol was followed and a class member selected it to

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perform the dip tube replacement. The procedures set out in the settlement agreement

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functioned as a condition on defendants’ obligation. Because the benefit to authorized

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service personnel was conditional and attenuated, the authorized service personnel are

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not third-party beneficiaries under Missouri law.

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Delta cites Kansas City N.O. Nelson Co. v. Mid-Western Constr. Co.36 In that

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case, the Missouri Court of Appeals determined that a third-party supplier to a sub-

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subcontractor was an intended third-party beneficiary of a contract between the general

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contractor and the subcontractor. The subcontract between the general contractor and

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the subcontractor contained a promise that the subcontractor would pay for all

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materials.37 The court concluded that the supplier was a donee beneficiary of the

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subcontract. Delta analogizes the subcontractor’s promise to pay for materials to

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defendants’ promise to pay for dip tube replacements.

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“A person is a donee beneficiary if the purpose of the promisee in obtaining the

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promise of all or part of the performance thereof is to make a gift to the beneficiary or to

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confer upon him a right against the promisor to some performance neither due nor

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supposed nor asserted to be due from the promisee to the beneficiary.”38 Therefore,

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under Kansas City, the questions are whether the class members obtained the promise

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Id. at 9.

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Chesus, 967 S.W.2d at 106.

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782 S.W.2d 672 (Mo. Ct. App. 1989).
Id. at 673–74.
Id. at 677.

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that defendants would pay for repairs in order to make a gift to the authorized service

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personnel, or to confer a right on the authorized service personnel against defendants

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to some performance not asserted to be due from the class members to the authorized

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service personnel. Payment to the authorized service providers for the dip tube

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replacements would have compensated the authorized service providers for work

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performed and therefore would not have been a gift. The court is unaware of any

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potential performance between the class members and the authorized service

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personnel that could have motivated defendants’ promise to pay for the dip tube

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replacements. Consequently, Kansas City does not compel the conclusion that Delta is

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a third-party beneficiary to the settlement agreement.
Delta argues that defendants’ admissions establish that Delta was an intended

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third-party beneficiary. All of the “admissions” cited by Delta, however, establish at

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most that defendants intended to pay for the dip tube replacements.39 As discussed

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above, that intended benefit did not give rise to third-party beneficiary status.

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V. CONCLUSION
For the reasons above, defendants’ motion for summary judgment at docket 125
is GRANTED. The Clerk shall please enter judgment for defendants.

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Delta’s motion for partial summary judgment at docket 127 is DENIED.

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DATED this 11th day of January 2012.

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/s/
JOHN W. SEDWICK
UNITED STATES DISTRICT JUDGE

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See doc. 127 at 11–16.

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