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First Bank v. Brumitt

Supreme Court of Texas

May 12, 2017

First Bank, Petitioner,
Richard Brumitt, Respondent

          Argued February 8, 2017

         On Petition for Review from the Court of Appeals for the Fourteenth District of Texas

          Jeffrey S. Boyd Justice

         "As a general rule, parties in Texas may contract as they wish, " Phila. Indemn. Ins. Co. v. White, 490 S.W.3d 468, 475 (Tex. 2016), and only "the parties to an agreement determine its terms, " Royston, Rayzor, Vickery, & Williams, LLP v. Lopez, 467 S.W.3d 494, 503-04 (Tex. 2015). In this case, a plaintiff who was not a party to a written contract claims that the contract permits him to enforce the agreement as a third-party beneficiary. We hold that the contract is unambiguous and does not make the plaintiff a third-party beneficiary. We also hold that the trial court erred by submitting that issue to the jury and by instructing the jury that it could consider extrinsic evidence to add a third-party-beneficiary term to the unambiguous written agreement. We reverse the court of appeals' judgment and remand the case to that court for further consideration of the plaintiffs other claims.

         I. Background

         This case arises from the unsuccessful sale of a Houston-area information-technology company called Southway Systems, Inc.[1] Richard Brumitt, who owned Southway, agreed to sell his stock to another Houston-area information-technology company, DTSG, Ltd.[2] DTSG's owner and president, Don Oprea, initially wanted to purchase Brumitt's stock in two companies, Southway and NetStar Telecommunications. Seeking financing for the purchases, Oprea met with Tim Duffy, president of First Bank's division that handled federal Small Business Administration (SBA) loans. Oprea selected First Bank because he and DTSG already had an ongoing banking relationship with the bank. Shortly after their first meeting in September 2007, Duffy reviewed the companies' financial records and concluded that DTSG could have difficulty qualifying for the amount needed to purchase both of Brumitt's companies. Oprea and Brumitt then agreed that DTSG would acquire Southway but not NetStar.

         At their first meeting, Oprea explained to Duffy that "a sense of urgency" existed and he needed to close on the loan by year's end because Brumitt was anxious to sell Southway and already had pending offers from other interested buyers. Duffy told Oprea that they could close the loan by then because First Bank was a "preferred lender" and had "streamlined the [SBA-lending] process." Unfortunately, things did not go as planned. Over the next fourteen months, First Bank scheduled and postponed numerous closings. By November 2008, the loan still had not closed, and Oprea decided to seek financing elsewhere. Ultimately, Oprea never obtained a loan and DTSG never acquired Southway. By the time of trial in March 2013, Southway no longer had any employees and had essentially failed.

         The parties dispute the reasons for the delays in the loan process. Duffy contends that he and others at First Bank worked diligently to close the loan, but numerous unexpected obstacles arose that were beyond First Bank's control. Although Duffy admits that First Bank made some mistakes in the process, he attributes the various delays to several other events that occurred along the way: Oprea allowed DTSG's registration to expire and made changes to its corporate name and structure;[3] SBA changed the rules that govern its approval process; First Bank's attorney delayed preparing the loan documents; First Bank discovered that Southway had a line of credit with Wells Fargo that had to be included in the loan amount and paid off; DTSG fell behind on payments on its own line of credit with First Bank; the parties agreed to various changes in the loan amount; and First Bank had to "take care of some internal issues."

         Oprea contends that most of Duffy's reasons for the delays were merely excuses and that First Bank never gave the transaction the attention it required. Instead, according to Oprea, Duffy repeatedly made promises that the loan would close, each of which was followed by misrepresentations about why he could not keep those promises. After promising in September 2007 to close the loan by the end of the year, Duffy said in November that it might take until early January 2008. In December 2007, Duffy said the loan "is in approval, " and Oprea understood it would still be completed by year's end. In early January 2008, Oprea emailed Duffy for an update and Duffy's reply encouraged Oprea to "hold tight; it's not over til it's over." In late February, Duffy said the closing would occur in early March. In April, Duffy told Oprea that First Bank could commit to closing the loan in April or May if DTSG reduced the loan amount. In late June, Duffy said they would close no later than July 15. On July 28, Duffy promised to close on August 4. On August 6, Duffy sent an email saying he had to change some things, and although it was "not [his] happiest hour, . . . [the loan] will get done." Finally, after Oprea complained to First Bank's senior vice-president, Duffy texted Oprea in September, saying "you are approved." By October, however, no closing was scheduled and Duffy was still promising that the loan would close soon. In short, Oprea claimed that Duffy "continued to make . . . promises week by week- actually on a weekly basis-that they were going to get the loan closed, " but always had an excuse for why the closing could not occur.

         Throughout these months, Oprea and Brumitt became increasingly agitated, but Oprea did not want to start the process over with another bank. Meanwhile, Oprea and Brumitt had informed Southway's employees of the impending ownership change and were "putting something in place" for the transition, but the continuing delays and increasing uncertainty caused employees to leave. Morale at Southway was "going downhill." In November 2008, Oprea retrieved his file from First Bank, but he returned it a few days later because Duffy promised he would find some way to get the loan done. Although Duffy took steps to determine whether another bank would provide the loan, he told others at First Bank that the loan was a "dead deal" and never scheduled another closing date.

         Oprea and DTSG sued First Bank in October 2009.[4] Brumitt soon intervened as an additional plaintiff, alleging that he was a third-party-creditor beneficiary of the three "loan commitment letters executed by DTSG and First Bank."[5] At trial in 2013, the jury found First Bank liable to both DTSG and Brumitt for breach of contract and for negligent and grossly negligent misrepresentations. The trial court entered judgment based on the jury's verdict, awarding Brumitt $1, 006, 000 as breach-of-contract damages, $250, 000 as damages for negligent misrepresentation, and $250, 000 as exemplary damages for gross negligence. Including attorney's fees and pre-judgment interest, Brumitt's award totaled $1, 815, 460 plus court costs, post-judgment interest, and attorney's fees on appeal.

         First Bank appealed. As to Brumitt's claims, the court of appeals affirmed the judgment on the breach of contract claim, expressly concluding that Brumitt was entitled to recover as a third-party beneficiary of the agreement between First Bank and DTSG. 472 S.W.3d 1, 19 (Tex. App.- Houston [14th Dist.] 2015). The court reversed the judgment on the negligent and grossly negligent misrepresentation claims, however, concluding that Brumitt failed to establish any injury independent from the economic loss he sustained as a result of First Bank's contractual breach. Id. First Bank filed a petition for review, arguing that the court of appeals erred in holding First Bank liable to Brumitt as a third-party beneficiary.[6] Brumitt disagrees, and alternatively urges us to affirm the judgment in his favor based on negligent and grossly negligent misrepresentation. In reply, First Bank asserts that Brumitt waived his alternative argument and this Court must therefore render a final judgment in First Bank's favor on all of Brumitt's claims.

         II. Third-Party Beneficiary

         We begin by addressing the third-party-beneficiary issues. On those issues, we conclude that (A) the agreement between First Bank and DTSG is unambiguous and did not make Brumitt a third-party beneficiary; (B) the trial court erred by submitting that issue to the jury; (C) the trial court also erred by permitting the jury to consider extrinsic evidence when addressing that issue; and (D) Brumitt cannot rely on any alleged oral agreement between First Bank and DTSG as a basis for claiming third-party-beneficiary status.

         Well-established principles govern our analysis of these issues. As a general rule, the benefits and burdens of a contract belong solely to the contracting parties, and "no person can sue upon a contract except he be a party to or in privity with it." House v. Hous. Waterworks Co., 31 S.W. 179, 179 (Tex. 1895). An exception to this general rule permits a person who is not a party to the contract to sue for damages caused by its breach if the person qualifies as a third-party beneficiary. See, e.g., MCI Telecomms. Corp. v. Tex. Utils. Elec. Corp., 995 S.W.2d 647, 651 (Tex. 1999). Absent a statutory or other legal rule to the contrary, [7] a person's status as a third-party beneficiary depends solely on the contracting parties' intent. Stine v. Stewart, 80 S.W.3d 586, 589 (Tex. 2002). Specifically, a person seeking to establish third-party-beneficiary status must demonstrate that the contracting parties "intended to secure a benefit to that third party" and "entered into the contract directly for the third party's benefit." Id.; see also S. Tex. Water Auth. v. Lomas, 223 S.W.3d 304, 306 (Tex. 2007) (per curiam) ("A third party may only enforce a contract when the contracting parties themselves intend to secure some benefit for the third party and entered into the contract directly for the third party's benefit."). It is not enough that the third party would benefit-whether directly or indirectly-from the parties' performance, or that the parties knew that the third party would benefit. Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 421 (Tex. 2011); Lomas, 223 S.W.3d at 306; MCI, 995 S.W.2d at 651. Nor does it matter that the third party intended or expected to benefit from the contract, for only the "intention of the contracting parties in this respect is of controlling importance." Banker v. Breaux, 128 S.W.2d 23, 24 (Tex. 1939). To create a third-party beneficiary, the contracting parties must have intended to grant the third party the right to be a "claimant" in the event of a breach. Corpus Christi Bank & Tr. v. Smith, 525 S.W.2d 501, 505 (Tex. 1975).

         To determine whether the contracting parties intended to directly benefit a third party and entered into the contract for that purpose, courts must look solely to the contract's language, construed as a whole. Southland Royalty Co. v. Pan Am. Petroleum Corp., 378 S.W.2d 50, 53 (Tex. 1964); Citizens Nat'l Bank in Abilene v. Tex. & P. Ry. Co., 150 S.W.2d 1003, 1006 (Tex. 1941). The contract must include "a clear and unequivocal expression of the contracting parties' intent to directly benefit a third party, " and any implied intent to create a third-party beneficiary is insufficient. Tawes v. Barnes, 340 S.W.3d 419, 425 (Tex. 2011); see also Stine, 80 S.W.3d at 589; MCI, 995 S.W.2d at 651; Citizens Nat'l Bank, 150 S.W.2d at 1006. Courts may not presume the necessary intent. To the contrary, "we must begin with the presumption" that the parties contracted solely "for themselves, " and only a clear expression of the intent to create a third-party beneficiary can overcome that presumption. Corpus Christi, 525 S.W.2d at 503-04. If the contract's language leaves any doubt about the parties' intent, those "doubts must be resolved against conferring third-party beneficiary status." Tawes, 340 S.W.3d at 425. Although a contract may expressly provide that the parties do not intend to create a third-party beneficiary, see, e.g., MCI, 995 S.W.2d at 651- 52, the absence of such language is not determinative. "Instead, the controlling factor is the absence of any sufficiently clear and unequivocal language demonstrating" the necessary intent. Tawes, 340 S.W.3d at 428.

         For example, we have applied these principles to conclude that a contract created a third-party beneficiary when:

- the contract expressly stated that one of its purposes was to benefit the specific third parties and "directly guarantee[d]" that the third parties would receive those benefits, City of Hous. v. Williams, 353 S.W.3d 128, 145-46 (Tex. 2011) (quoting In re Moose Oil & Gas Co., 613 F.3d 521, 528 (5th Cir. 2010)) (holding that city's firefighters were third-party beneficiaries of agreement between city and union); and
- the contract expressly provided that the parties intended to satisfy a specific outstanding debt to a particular third party and set forth the parties' agreement among themselves as to how they would satisfy that debt, Stine, 80 S.W.3d at 589-90 (holding that divorcing parties intended to make wife's mother a third-party beneficiary of their divorce agreement, which specified how the parties would repay funds she loaned towards the purchase of their home).

         By contrast, we have applied these same principles to conclude that a contract did not create third-party beneficiaries when:

- the contract failed to identify any "specific, limited group of individuals" to which the consenting parties owed an obligation, Tawes, 340 S.W.3d at 428 (holding that oil-and-gas lessor was not a third-party beneficiary to contract between lessee and investor);
- the contract merely provided that one party, which agreed to purchase a product from the other party, intended to sell the product to the third parties, Lomas, 223 S.W.3d at 306-07 (holding that city's water customers were not third-party beneficiaries of contract between city and water supplier);
- the contract prohibited one party from interfering with third parties' "existing prior rights" but expressly disclaimed any intent to create third-party beneficiaries, MCI, 995 S.W.2d at 649-51 (holding that electric transmission company that had a preexisting right of way along railway was not a third-party beneficiary of ...

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