Unpublished Disposition, 904 F.2d 41 (9th Cir. 1986)

No. 88-6527.

United States Court of Appeals, Ninth Circuit.

Before DAVID R. THOMPSON and TROTT, Circuit Judges, and STANLEY A. WEIGEL,^*  District Judge.

MEMORANDUM^** 

SUMMARY

Delta partnerships appeal the district court's judgment holding they were not third-party beneficiaries of an insurance policy obtained by ESI. We affirm.

STANDARD OF REVIEW

The trial court's findings of fact, whether based upon oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses. Fed. R. Civ. P. 52(a); Rozay's Transfer v. Local Freight Drivers, Local 208, 850 F.2d 1321, 1326 (9th Cir. 1988), cert. denied, 109 S. Ct. 1768 (1989). The interpretation of a contract is a mixed question of law and fact. "In general, factual findings as to what the parties said or did are reviewed under the 'clearly erroneous' standard while principles of contract interpretation applied to the facts are reviewed de novo." L.K. Comstock & Co. v. United Eng'rs & Constructors, Inc., 880 F.2d 219, 221 (9th Cir. 1989).

ANALYSIS

1. Were the Delta partnerships third-party beneficiaries of the Lloyd's of London policy obtained by ESI?

Delta claims the district court's holding should be reversed and that Delta should be declared a third-party beneficiary of the Lloyd's of London policy as a matter of law. Delta cites California Civil Code section 1559 which states, in pertinent part:

A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.

California law classifies persons having the right to enforce a contract to which they are not a party as creditor beneficiaries or donee beneficiaries. Martinez v. Socoma Cos. Inc., 11 Cal. 3d 394, 113 Cal.Rptr 585 (1984).

A person cannot be a creditor beneficiary unless the promisor's performance of the contract will discharge some form of legal duty owed to the beneficiary by the promisee.... A person is a donee beneficiary only if the promisee's contractual intent is either to make a gift to him or to confer on him a right against the promisor.

Martinez, 11 Cal. 3d 394, 400-01, 113 Cal. Rptr. 585, 589 (1974). Delta argues that since the purchaser is singled out in the insuring clause as the only party whose warranty right is indemnified against, the contract conclusively identifies the purchaser as an intended beneficiary. We do not agree. Delta asserts that no party other than the purchasers of the windmills could possibly benefit from the claims' proceeds. This is not true. The evidence demonstrates that the insurance was procured to satisfy ESI's creditors. ESI benefited from the policy as it secured ESI's balance sheet, and while it had a duty to repair the windmills, the proceeds of the insurance could be used by ESI in any manner it saw fit.

Delta next claims to be a creditor beneficiary of the policy. We find illustration 9 to section 133 of the Restatement (Second) of Contracts provides a simple example of the governing principle:

B promises A for sufficient consideration to pay whatever debts A may incur in a certain undertaking. A incurs in the undertaking debts to C, D and E. If, on a fair interpretation of B's promise, the amount of the debts is to be paid by B to C, D and E, they are creditor beneficiaries; if the money is to be paid to A in order that he may be provided with money to pay C, D and E, they are at most incidental beneficiaries.

This illustration is directly on point here. As the evidence established, and as the district court found, the Underwriters' policy obligations ran solely to ESI and not to purchasers such as Delta. All insurance proceeds were to be paid directly to ESI, became part of ESI's general assets, and could be used by ESI as it saw fit. Thus, the performance by Underwriters of its contractual promise to ESI does not thereby discharge ESI's legal duties to purchasers such as Delta under ESI's warranty. We hold, therefore, that Delta is not a third-party beneficiary of ESI's indemnity agreement.

Delta's next argument is that California's Insurance Code makes Delta a third-party beneficiary as a matter of law. However, the language of the statute itself makes the provision expressly inapplicable in this case. California Insurance Code section 11580 reads:

Sec. 11580. Insolvency, bankruptcy, or death of insured

A policy insuring against losses set forth in subdivision (a) shall not be issued or delivered to any person in this state unless it contains the provisions set forth in subdivision (b). Such policy, whether or not actually containing such provisions, shall be construed as if such provisions were embodied therein. (emphasis added).

The statute applies only to "policies issued or delivered" in California. These policies were issued and delivered to ESI. ESI is a Colorado corporation with its principal place of business in Colorado. The fact that Delta's windmills were located in California does not mandate the application of section 11580 where as here, the insured and the insurer are located outside California.

2. Was the Lloyd's of London policy assigned to Delta?

Delta claims that the November 20, 1985 letter from ESI requesting assignment of the policy to TERA/owners was effective to transfer the insurance and all claims which had accrued up to that point to TERA and the owners.

It is apparent, however, that the November, 1985 letter was not considered an assignment by either ESI or the underwriters. The last paragraph of the sentence reads "It would be appreciated if you would start the ball rolling to get the assignment procedure underway." The district court found ESI to be in material breach of the contract at the time the assignment was requested. The underwriters could not be expected to consent to the request, for, if they had agreed to the assignment knowing of ESI's material breach, they may have been deemed to have waived those breaches by ESI. Thus the underwriters were acting in good faith in withholding their consent to the assignment.

On January 10, 1986, ESI filed for Chapter 11 bankruptcy. As of that date the underwriters were legally precluded by the automatic stay from transferring the policy or any accrued money owing to ESI. The insurance policy and any accrued funds became property of the estate. Furthermore, the evidence indicates that there were no accrued claims. ESI had not submitted any claims for over two years. In addition, since ESI was in material breach for failure to maintain the windmills, it could not have transferred its rights to collect, because it had no such right.

CONCLUSION

Delta partnerships have not shown that they are third-party beneficiaries. We agree with the district court that the insurance policy was obtained to secure ESI's finances, not to benefit Delta. Neither ESI nor the Underwriter ever demonstrated an express intent to benefit Delta.

Delta's claims that the benefits of the policy were assigned to Delta must likewise fail. There is no evidence that this assignment ever took place, and it is clear that the policy became property of the bankruptcy estate once the petition was filed.

So holding, we need not address Delta's objection to TERA's compromise with Lloyd's of London, since we hold that Delta has no rights which are affected by the compromise. The district court's judgment is

AFFIRMED.