This week we’re finishing up a subject relating to different ‘defenses’ available to Defendants in Texas collection cases, and specifically, doctrines known as “estoppel by misrepresentation”, also known as equitable estoppel, and on the other hand, the claim of quasi-estoppel, also known as “estoppel by conduct”.

Another equitable theory not often used, but which will accomplish justice in many cases, are cases in which a third -party beneficiary breach of contract action is brought, for a party’s refusal to pay under a contract.  The issue is whether the third-party is an intended third party beneficiary under the agreement.  The leading case is Stine v. Stewart  80 S.W.3d  586 (2002 Tex).  Stine is a Texas Supreme Court case in which the Trial Court originally concluded that Stine was an intended third party beneficiary under a contract.  The Court of Appeals differed, however, ruling that Stine was only an incidental beneficiary, but the Supreme Court reversed the Court of Appeals, holding that Stine was an intended third party beneficiary of the agreement.  The case involved a divorce in the early 90’s, in which the Stewarts executed an agreement incident to divorce, disposing of marital property, and agreed that if a certain house was sold, certain monies owing to Stine were to be paid upon the sale.  Stine did not sign the agreement.  When one of the Stewarts sold property, leaving net proceeds, Steward did not pay Stine so Stine sued Stewart for breaching the agreement.

The Trial Court heard the evidence and concluded that Stine was an intended third-party beneficiary of the agreement.  When the Court of Appeals reversed, holding that the agreement does not clearly and unequivocally acknowledge the debt owed to Stine, the Supreme Court stated the applicable law.  The Supremes ruled that the third-party may recover on a contract, made between other parties, only if the parties intended to secure a benefit for that third-party, and only if the contracting parties entered into the contract directly for the third-party’s benefit.  The Court further said that to determine the party’s intent, courts must examine the entire agreement when interpreting a contact, and give effect to all of the contract’s provisions so that none are rendered meaningless.  Further, if the agreement states that the third-party beneficiary is a “creditor beneficiary” under the agreement, performance will come to him in satisfaction of a legal duty owed to him by the Promisee.  Such a duty may be indebtedness.  

Obviously, the Stewarts responded that Stine did not have standing to sue under the agreement because she was only an incidental beneficiary.  Stine, on the other hand, contended that the marital agreement acknowledges a $50,000 debt owed to her and recognizes that a note existed, and requires the Stewarts to pay amounts due under said note.  The Supremes concluded that Stine was a third-party creditor beneficiary.  The agreement expressly provided that the Stewarts intended to satisfy an obligation to repay to Stine the $50,000 that the Stewarts owed her.  Thus, the agreement’s terms expressly required the Stewarts to satisfy an existing obligation to pay Stine.  

Importantly, in the Stine case, and contrary to the Stewarts’ argument, a third-party beneficiary does not have to show that the agreement signatories executed the contract solely to benefit her as a non-contracting party.  Rather, the focus is on whether the contracting parties intended to at least in part, discharge an obligation owed to a third-party.  Here, the marital agreement was obviously not for Stine’s sole benefit; however, certain contractual provisions expressly stated the Stewarts intention to pay Stine the money due to her.  Also, under the Tex. Civ. Prac. & Rem Code, Sec.16.065, the Court held that the marital agreement acknowledged a debt owed under a note and created a new obligation.  Additionally, the amount of the obligation, must be susceptible of ready ascertainment.  The Court held that the agreement’s language clearly shows that the Stewarts intended to secure a benefit to Stine, as a third party creditor beneficiary.  The agreement also acknowledged the existence of a legal obligation owed to Stine, and consequently, when Stewart breached the agreement, by refusing to pay Stine the money owed as the contract required, Stine was entitled to sue under the agreement.  The Supremes reversed the Court of Appeals judgment and remanded the case to the Trial Court to render judgment consistent with such opinion.

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*The foregoing is not intended to provide specific legal advice, but instead only as a generalized discussion

Sam Emerick, Collections Attorney

Sam Emerick has over 35 years
experience in Commercial Collections Law,
Factoring Litigation and Wills, Trusts & Probate