Olson v. Etheridge

686 N.E.2d 563 (1997)


Olson (P) and others sold their farm implements dealership to Etheridge (D). The purchase price was $350,000 for which D issued a promissory note that obligated them to pay annual payments plus 9% interest until the debt was satisfied. About four years later, D sold half of his shares to Engelhaupt (D1). The original debt had not yet been fully paid, and as part of the consideration, D1 assumed ½ of D’s liability under the original agreement which included the original promissory note. The terms of this second sale were known to the court as Agreement II. Both agreements provided for payment in annual installments to P. The place of payment in Agreement II was eventually transferred by D to a different bank to which D was indebted, and D1 protested but complied. P then sued the buyers for their failure to complete payments under the original contract. P and the other sellers sued on their agreement with D and the D-D1 sale agreement. P claimed $76,500. P based this suit against D1 on third party beneficiary law. D, D1 and the new bank, Princeton Bank, eventually made a settlement wherein D1 would pay the bank a considerable sum and the bank would then release its claims against D, and both D and the bank would release any claims they have against D1 over the purchase of shares from D. D1 first argued against the P suit on grounds that they were not third party intended beneficiaries and that all his obligations under the original agreement had been discharged by the D-D1-Princeton Bank settlement. Summary judgment was entered against D1 and he appealed. The appeals court affirmed; the second agreement conferred third party beneficiary status on P because D1 assumed ½ of the debt and that court rejected the discharge of those obligations from the D-D1-Bank agreement of February 10, 1986. The court held that the Bay rule controlled the case in which third party beneficiary rights are subject to immediate vesting and once vested, cannot subsequently be altered or extinguished through a later agreement. Thus, P’s third party beneficiary rights vested when the D-D1 agreement was made and D-D1 no longer had any power to change the agreement without the consent of P. This appeal resulted.