Gray & Son, Inc. v. Maryland Deposit Insurance Fund Corp.

BISHOP, Judge. Gray & Son, Inc. (Gray) appeals from an order of the Circuit Court for Baltimore City (Kaplan, J.) denying its claims to assets of Old Court Savings and Loan, Inc. (Old Court) held by Old Court’s receiver, the State of Maryland Deposit Insurance Fund Corporation (MDIF). ISSUES Gray asks: I. Whether the trial court erred in ruling that it was not an intended third party beneficiary of a supplementary agreement and an irrevocable letter of credit and, therefore, could not recover from the receivership on the basis of those instruments; II. Whether the trial court erred in refusing to grant summary judgment in its favor. ⁵⁸⁷ FACTS Gray subcontracted to construct roads for two development projects in Baltimore County.

Goldenwoods Partnership-Old Court Joint Venture (Goldenwoods) entered into a public works agreement (PWA) with Baltimore County in 1979 for a cottage development in the Golden Acres subdivision. Pursuant to the PWA, the developer was to “assume the full cost of paving, curb and gutter in this development for up to a 50 foot cross section and the cost of up to 30 feet of the standard street section on all existing or proposed roads abutting the property.” In a supplementary agreement with Baltimore County dated May 17, 1983 the Partnership assigned a savings account passbook from Old Court to the County, in lieu of a deposit, in an amount equal to the aggregate cost of curbs, gutters, and street paving in the development. On June 21, 1983 appellant subcontracted with Golden-woods for the road improvements in Golden Acres. Gray’s work was to be in conformity with the plans and specifications in the original PWA and in accordance with construction and highway specifications adopted by Baltimore County.

All work was subject to the approval of the Director of Public Works for Baltimore County or his representative. Baltimore County notified appellant on January 14, 1985 that the Golden Acres project was accepted as being in accordance with Baltimore County Standard Specifications. The second contract, dated September 13, 1984, is between appellant and Fineland Enterprises, Inc. for the construction of roads and storm drains in The Woods, a residential development project. The County had entered into a Public Works Agreement with Woods Joint Venture and Fineland Enterprises, Inc. for the development of The Woods.

The developers agreed to assume the cost of paving, road and gutter work in the development. On October 23, 1984 in conjunction with this PWA, Old Court Savings and Loan, Inc. issued an irrevocable letter of credit authorizing the County to draw up to $458,973.96. Drafts ⁵⁸⁸ under the letter of credit were to “cover the cost of construction of the roads and storm drains as stipulated” in the PWA. Baltimore County accepted Gray’s work on the project on May 14, 1985.

Old Court Savings & Loan was placed into conservator-ship on May 13, 1985 and into receivership on November 8, 1985 by the Circuit Court for Baltimore City. MDIF was appointed Receiver of the institution. On February 6, 1986 the Circuit Court for Baltimore City ordered that August 1, 1986 would be the last date for creditors (other than depositors) to file claims against Old Court. Subsequently, on September 19, 1986, the Circuit Court entered an Order Establishing Procedures for Exceptions to Claims of Creditors (Other Than Depositors).

On July 16, 1986 Gray filed Statement of Claim No. 22 in the Receivership Proceeding. On April 29, 1988 Gray filed two Statements of Claim, Claim No. 57 and Claim No. 58, based on the alleged indebtedness of Old Court to Gray for $40,213.93 on the Golden Acres Project and for $405,733.30 on The Woods Project. Claims Nos. 57 and 58, individually, contained the same two claims that were included in Claim No. 22, but in greater detail. In support of its statements of claim Gray asserted that the passbook and letter of credit were posted by the developer to guarantee payments that were owed to Gray for its road construction.

Gray further contended that it was a third party beneficiary of Baltimore County’s right to pursue collection of the collateral passbook and letter of credit posted by Old Court Savings and Loan. As Receiver for Old Court MDIF filed exceptions to both claims. The exceptions contended that Gray had no right to benefit under either the passbook or the letter of credit because it had no contractual relationship with Old Court. Further, Gray made no legally sufficient draw or demand on either document.

The circuit court denied Gray’s Request for Entry of Summary Judgment on Claims 57 and 58 and ruled in favor ⁵⁸⁹ of MDIF on the Receiver’s Legal Exceptions to the Statements of Claim Nos. 57 and 58. The court found that: as a matter of law ... Gray is not a third-party beneficiary of the Letter of Credit or Passbook Account (and Supplementary Agreement) on which Gray bases these claims for recovery against the Receiver, and that there is no legal basis set forth in Claim No. 57 and Claim No. 58 to recover on the Letter of Credit, Passbook Account or collateral legal theories advanced by Gray in its Claims and pleadings. DISCUSSION Baltimore County’s development regulations are designed to ensure that public facilities and services are provided to protect and promote public health, safety and welfare.

Baltimore County, Md.Code Art. IV Development Regulations §§ 22-37, 22-38 (1988/89 Cum.Supp.). Unless deferred by the Director of Public Works, id. § 22-71(b), an owner seeking to improve a development shall provide streets, waterlines, landscaping, curbs and gutters at his or her own cost. 1 As part of its scheme to provide adequate public improvements county-wide, Baltimore County generally requires a PWA with a developer to guarantee completion of public ⁵⁹⁰ works in residential or commercial developments. A PWA is “an agreement between the county and the owner and contract purchaser for the construction of water and sewer facilities, storm drains, streets, bridges, and other public improvements, and incorporating all applicable comments of county agencies.” Baltimore County, Md.Code § 22-39 (1988/89 Cum.Supp.). An application for a PWA requires a developer or owner to submit a description and the estimated cost of the necessary improvements to the Department of Public Works.

Id. § 22-74. Before the agreement is signed, “the applicant shall present security to cover his financial obligation, as specified in the public works agreement, for developments which do not require extensions of public water or sewer service.” Id. § 22-71. After the public improvements are certified as complete in accordance with County construction standards, the security shall be released “if the contractor(s) who constructed said improvement(s) has received full payment____” Id. § 22-78(a), (b). 2 On August 1, 1986 Baltimore County filed a statement of claim with the receiver alleging that Old Court Savings and Loan was liable to Baltimore County for, inter alia, funds ⁵⁹¹ represented by the passbook and the letter of credit. The County’s amended statement of claim 3 alleged that: In addition to its liability to Claimant pursuant to the obligations assumed by it in the letters of credit and the passbook, Old Court Savings & Loan, Inc. is liable to Claimant to the extent that Gray & Son, Inc., succeeds in either or both of its claims against Claimant.

Baltimore County, Maryland, has no liability to Gray, independent of the passbook and letters of credit, but has been unable to pay Gray & Son, Inc., from the funds of either security, as a result of the receivership proceedings. Both the County’s invitation to bid and the Baltimore County Code indicate an intention on the part of the County to use the securities to protect subcontractors. The “Information for Bidders” which instructed subcontractors bidding on the Golden Acres project stated: The contractor is advised that an irrevocated [sic] letter of credit for 110% of his bid will be abtained [sic] by the Developer, assuring payment to the contractor, inaccordance [sic] with monthly estimates, smi-final [sic] estimates, and final estimates by the Department of Public Works and submitted to both parties. A copy of the letter of credit is to be atteched [sic] to the documents prior to execution of the contract.

In addition, the Baltimore County Code provides that the security may not be released after completion of the work unless the contractor who constructed the improvement received full payment. Id. § 22-78(b). Gray argues that it is a third party beneficiary to the funds represented by the passbook and the irrevocable letter of credit. Therefore, these funds should be released to Gray because it completed the public works improvements described in the PWA, and it has not been paid.

The narrow issue raised by Gray is whether it is entitled to the securities as a third party beneficiary under the passbook ⁵⁹² and the letter of credit. We do not address the question of whether Gray has a viable claim against Baltimore County. I. Third Party Beneficiary Status Gray contends that the court erred in ruling that it was not a third party beneficiary under either the letter of credit or the passbook account and that it was not entitled to the funds under these documents. A third party beneficiary may recover for breach of contract where the contracting “parties intended to recognize him as the primary party in interest and as privy to the promise.” Marlboro Shirt Co. v. Am.

Dis. Tel. Co., 196 Md. 565, 569 , 77 A.2d 776 (1950) quoting Mackubin v. Curtiss-Wright Corp., 190 Md. 52 , 57 A.2d 318 (1948). But before one can do so it must be shown that the contract was intended for his benefit; and, in order for a third party beneficiary to recover for a breach of contract it must clearly appear that the parties intended to recognize him as the primary party in interest and as privy to the promise.

An incidental beneficiary acquires by virtue of the promise no right against the promisor or the promisee. “In order to recover it is essential that the beneficiary shall be the real promisee; i.e., that the promise shall be made to him in fact, though not in form. It is not enough that the contract may operate to his benefit. Id. (Emphasis added.) Accord, Hamilton v. Board of Education, 233 Md. 196, 199 , 195 A.2d 710 (1963); Shillman v. Hobstetter, 249 Md. 678, 687 , 241 A.2d 570 (1967); Geo.

Byers Sons v. East Europe Import Export, 488 F.Supp. 574, 584 (1980); Comment, Contracts for The Benefit of Third Parties in the Construction Industry, 40 Ford.L.Rev. 315 (1971). In Shillman, supra 249 Md. at 688 , 241 A.2d 570 , the Court quoted from Hamilton & Spiegel, Inc. v. Board of Education of Montgomery County, 233 Md. 196, 199 , 195 A.2d 710 (1963): ⁵⁹³ In determining whether one is a creditor beneficiary (as is true in the case of a donee beneficiary) the intention of the contract, revealed by its terms, in the light of the surrounding circumstances is the controlling