Who’s On First? Secured Party Not a Third-Party Beneficiary Under Improvement Agreements

by Wendel, Rosen, Black & Dean LLP
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It’s fairly common, particularly for new developments on previously undeveloped property, for public entities to Who's On Firstrequire that the developer agree to construct, install or pay for improvements such as roads, sewage, storm water, electrical and other improvements.

H.N. and Frances C. Berger Foundation v. Perez, Case No. E054948 (June 27, 2013) (a previously “unpublished” case changed to “published” by the California Court of Appeals for the Fourth District this past month), involved such an improvement agreement.

As I mentioned, it is usually the public entity who requires that improvements be made as a condition of approval of a development.  And the Berger Foundation case is no different in that sense.  What is different though, is that it wasn’t the public entity who sued when the improvements weren’t constructed, but rather, a third party.

The Road Improvement Agreements

Berger Foundation involved the construction of road improvements for a development in Riverside, California.  The road, known as Varner Road, was to benefit several properties, including properties owned by Desert Gold Ventures, LLC (“Desert Gold”) which were subject to deeds of trust in favor of the H.N. and Frances C. Berger Foundation (“Foundation”).

In 2006, the road improvements were approved by the County of Riverside Transportation Department (“Department”) in a series of agreements known as the Varner Road Improvement Agreements (“Agreements”).  The following year, the Agreements were modified to include performance bonds issued by Travelers Casualty and Surety Company of America (“Travelers”) to guarantee Desert Gold’s construction of the road improvements (“Performance Bonds”).

In 2009, Desert Gold defaulted on its obligations, and the Foundation acquired the properties in foreclosure.

In 2010, the County of Riverside and and Travelers entered into an agreement whereby some of the road improvements were excluded from the performance bonds.  The Foundation then filed a writ of mandate to have all of the road improvements constructed by requiring the Department to “take such steps as are necessary to assure the completion of the Varner Road Improvement Agreements.”

The Foundation as a Third-Party Beneficiary

In the trial court, the Department challenged the Foundation’s complaint, arguing that the Foundation was neither a party to nor an intended third-party beneficiary of either the Agreements or the Performance Bonds and that the Department had no ministerial duty to enforce the Agreements.  The trial court agreed and the Foundation appealed.

On appeal, the Court of Appeals held that, while a contract made expressly for the benefit of a third-party may be enforced by that party, the burden is on the third-party to show that there was a contract made expressly for the third-party’s benefit (or a class of beneficiaries in which he or she is a member) and that the contract clearly shows that the third-party (or class) was the intended beneficiary.  Moreover, explained the Court, while intent is to be inferrred if possible from the contract itself, the court may also look at the circumstances and negotiations of the parties when making the contract, and if the contract is ambiguous may also consider the subsequent conduct of the parties.

But, here, explained the Court, there was no evidence that the Foundation was intended to be a third-party beneficiary of either the Agreements or the Performance Bonds:

According to the Agreements and Bonds, plaintiff was not a named party, not an intended signatory, or even expressly identified in any capacity, let alone as a third party beneficiary.  The Agreements and the Bonds do not reflect the intent of the contracting parties to confer any of the rights or impose any of the obligations of the contracts to anyoen or any group or class other themselves, their successors or assigns.  More imortant, they do not reference any benefits to be conferred to the third persons in the general class of private property owners of the affected tract.  Instead, the language fo the Agreement is clear: “[Desert Gold], for an in consideration of the approval by [the Department] of the final map of that certain land division known as Tract 34484, hereby agrees, at [Desert Gold's] own cost and expense to furnish all labor, equipment and materials necessary to perform and complete . . . all road and drainage improvements . . . .”

Application of the Writ of Mandate to the Department

The Court further held that the Department had no mandatory or ministerial duty to construct the road improvements.  A writ of mandate, explained the Court, compels the performance of an act which the law requires, and when seeking to enforce a mandatory and ministerial duty to act on the part of an administrative agency or its officer, a plaintiff must show: (1) a clear, present, and sually ministerial duty to act; and (2) that it had a clear, present and beneficial right to have that duty performed.”

But, here, explained the Court, while Government Code section 66462(c) requires that a subdivision performance bond be obtained to guarantee an underlying subdivision agreement, “there is no requirement that the public entity enforce any specific obligations regarding the property’s improvements” and therefore “the public entity has discretion to determine the scope of improvements to be performed and bonded.”  Thus, when Desert Gold defaulted, the Department exercised its discretion when it entered into an agreement with Travelers to modify the scope of improvements to be performed under the Agreements.

Conclusion

So, who’s on first? If you’re a party to an improvement agreement or obligee under a performance bond, you are. If you are a third party beneficiary of such an agreement, you also are. But if you’re not either of these, well, then you’re simply out.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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