11.4.3.2 Notes - Martinez v. Socoma Companies, Inc.
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NOTE

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1. The material covered by the Tentative Draft of §145 of the Restatement Second, discussed by the court in its opinion, is now contained in Restatement Second §§302 and 313.

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2. In Zigas v. Superior Court of Calif., 120 Cal. App. 3d 827, 174 Cal. Rptr. 806 (1981), a group of tenants living in a building that had been financed with a federally insured mortgage brought an action against their landlords, seeking damages for an alleged breach of a provision in their landlord's financing agreement with the Department of Housing and Urban Development. Among other things, the agreement forbade the charging of rents in excess of those set out in a HUD-approved schedule. The plaintiffs claimed their landlords, in violation of this provision, had collected excessive rents of more than two million dollars. The trial court dismissed the action on the grounds that the plaintiffs had no right to enforce the provisions of a contract between their landlords and the federal government. On appeal, it was held that the tenants did indeed have a cause of action, under the law of California, as third party beneficiaries. After a lengthy examination of the relevant precedents (in particular, Martinez v. Socoma and Shell v. Schmidt), Justice Feinberg summarized the court's reasons for upholding the plaintiffs' right to sue:

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1. In Martinez, the contract between the government and Socoma provided that if Socoma breached the agreement, Socoma would refund to the government that which the government had paid Socoma pursuant to the contract between them. Thus, it is clear in Martinez that it was the government that was out of pocket as a consequence of the breach and should be reimbursed therefor, not the people to be trained and given jobs. In the case at bench, as in Shell, the government suffered no loss as a consequence of the breach, it was the renter here and the veteran purchaser in Shell that suffered the direct pecuniary loss.

2. Unlike Martinez, too, in the case at bench, no governmental administrative procedure was provided for the resolution of disputes arising under the agreement. Thus, to permit this litigation would in no way affect the "efficiency and uniformity of interpretation fostered by these administrative procedures." (Martinez v. Socoma Companies, Inc., supra, 11 Cal. 3d at p. 402, 113 Cal. Rptr. 585,521 P.2d 841.) On the contrary, as we earlier noted, lawsuits such as this promote the federal interest by inducing compliance with HUD agreements.

3. In Martinez, the court held that "To allow plaintiffs' claim would nullify the limited liability for which defendants bargained and which the Government may well have held out as an inducement in negotiating the contracts." (At p. 403, 113 Cal. Rptr. 585, 521 P.2d 841, fn. omitted.) Here, there is no "limited liability." As we shall point out, real parties are liable under the agreement, without limitation, for breach of the agreement.

4. Further, in Martinez, the contracts "were designed not to benefit individuals as such but to utilize the training and employment of disadvantaged persons as a means of improving the East Los Angeles neighborhood." (At p. 406, 113 Cal. Rptr. 585, 521 P.2d 841.) Moreover, the training and employment programs were but one aspect of a "broad, long-range objective" (id.) contemplated by the agreement and designed to benefit not only those to be trained and employed but also "other local enterprises and the government itself through reduction of law enforcement and welfare costs." (Id.)

Here, on the other hand, as in Shell, the purpose of the Legislature and of the contract between real parties and HUD is narrow and specific: to provide moderate rental housing for families with children; in Shell, to provide moderate priced homes for veterans.

5. Finally, we believe the agreement itself manifests an intent to make tenants direct beneficiaries, not incidental beneficiaries, of [the landlords'] promise to charge no more than the HUD approved rent schedule.

Section 4(a) and 4(c) of the agreement, providing that there can be no increase in rental fees, over the approved rent schedule, without the prior approval in writing of HUD, were obviously designed to protect the tenant against arbitrary increases in rents, precisely that which is alleged to have occurred here. Certainly, it was not intended to benefit the Government as a guarantor of the mortgage. . . .

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Id. at 837-839, 174 Cal. Rptr. at 811-812.

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Justice Feinberg noted in conclusion that

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it would be unconscionable if a builder could secure the benefits of a government guaranteed loan upon his promise to charge no more than a schedule of rents he had agreed to and then find there is no remedy by which the builder can be forced to disgorge rents he had collected in excess of his agreement simply because the Government had failed to act.

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Id. at 841, 174 Cal. Rptr. at 813.

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Do you think the California cases are reconcilable, as Justice Feinberg suggests? In attempting to resolve the issues posed by cases like Martinez and Zigas, is the terminology proposed by the two Restatements an aid, or a source of mischief?

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3. In the Moch case, the water company made a contract with the city to supply water at the city's hydrants. In Zigas, the landlord-mortgagors made a promise to the federal government to abide by the terms of HUD's rent schedule. In the latter case, however, there was also a contractual relation between promisor and beneficiary (though, apparently, not one that by its own terms required the landlords to observe the rent restrictions imposed by HUD). Does this help to explain or justify the different outcome in the two cases? Was there a contractual relation between promisor and beneficiary in Martinez? Does the existence of such a relation necessarily mean that the beneficiary is a creditor beneficiary or even an intended beneficiary? Traditionally, third party beneficiary doctrine has evaluated the rights of the beneficiary on the basis of his relation to the promisee; Moch and Zigas suggest, however, that the beneficiary's relation to the promisor may be of equal importance.

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4. The Supreme Court of Delaware put the doctrine of third party beneficiaries to unusual use in Blair v. Anderson, 325 A.2d 94 (Del. 1974). Plaintiff, a federal prisoner, was incarcerated in a Delaware state prison under a contract between the federal and state government according to which the federal government was to pay for the maintenance and support of federal offenders placed in the state's institutions. In return, the state agreed, among other things, to assume responsibility for the safety of the federal inmates. After being attacked by a fellow prisoner, plaintiff sued the state for damages in both contract and tort. The tort claim was barred by sovereign immunity, but the contract claim was permitted. The court, after finding that the state had waived sovereign immunity as to claims arising from the contract, argued: "while there may be semantic concerns about calling a prisoner a 'creditor' or 'beneficiary' (or both) of a Federal-State incarceration contract, the point is that plaintiff was the very subject of the agreement between the governments." Would you describe plaintiff as an intended beneficiary of the contracting parties? If so, what damages would you award for Delaware's violation of its contract with the federal government? In distinguishing Zigas from Martinez, Justice Feinberg partly relied on the fact that the federal job training program at issue in the latter case included "an administrative procedure . . . for the resolution of disputes." Blair presents a similar question: If the inmates have no standing to sue on the contract, will its policy be enforced?