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HOLT HAULING & WAREHOUSING SYS. v. RAPISTAN

February 17, 1978

HOLT HAULING AND WAREHOUSING SYSTEMS, INC.
v.
RAPISTAN, INC.



The opinion of the court was delivered by: DITTER, JR.

 The question in this diversity case is whether plaintiff's claim to be a third-party creditor beneficiary of a contract is barred by res judicata. For the reasons hereafter stated, I conclude plaintiff's arguments were fully considered by the courts of Pennsylvania which determined that under state law plaintiff was not a third-party beneficiary. Therefore, defendant's motion for judgment on the pleadings must be granted.

 I. Factual and Procedural Background1

 In March, 1970, the Pennsylvania Liquor Control Board (PLCB) awarded to defendant, Rapistan, Inc., a contract for the furnishing and installation of a conveyor system to handle cases of liquor in a PLCB warehouse. *fn2" Five months thereafter, plaintiff, Holt Hauling and Warehousing Systems, Inc. (Holt), became the warehouse operator. *fn3" The system was installed on September 6, 1970, and warehouse operations began one month later. A dispute between Holt and PLCB on the one hand and Rapistan on the other arose almost immediately after the system was put into effect because it was not attaining those levels of production specified in Rapistan's bid proposal. *fn4" As a result, the final contract payment to Rapistan was withheld. In addition, Holt and PLCB entered into modification agreements, which required PLCB to pay Holt increased rates and to reimburse Holt for additional expenses. In return, Holt dropped an action it had instituted against PLCB before the Pennsylvania Board of Arbitration of Claims. PLCB then instituted an action on June 8, 1973, against Rapistan in the Pennsylvania Commonwealth Court, *fn5" advancing claims on its own behalf and also "to the use of" its contractor, Holt. *fn6" With respect to its claim for Holt, PLCB asserted that Holt was a third-party beneficiary of the PLCB-Rapistan contract. Rapistan responded with preliminary objections, contesting Holt's status as a third-party beneficiary. The court agreed, finding that Holt was at best an incidental beneficiary which had acquired no rights under the contract. Therefore, PLCB had not shown Holt came within the Pa.R.C.P. 2002(b) exception which permits a party to a contract to enforce the rights of one whom the contract intends to benefit. The "use of" cause of action in the PLCB complaint was therefore dismissed. *fn7"

 This dismissal was then appealed to the Pennsylvania Supreme Court, where the parties once again briefed and argued whether Holt was a third-party beneficiary. While awaiting the court's decision, Holt filed the present action, alleging that it was a third-party creditor beneficiary of the PLCB-Rapistan contract and seeking over $11 million in damages. Thereafter, the Pennsylvania Supreme Court affirmed the lower court decision with respect to Holt's status, while it reversed the dismissals of the other counts of the complaint. PLCB applied for reargument, urging the court to hear additional oral argument and to adopt a more liberal third-party beneficiary rule as the law in Pennsylvania. PLCB also requested permission to file an amended complaint which would contain sufficient additional facts to state a cause of action satisfactorily. Both the application for reargument and request for leave to amend the complaint were denied without opinion.

 Defendant then filed the present motion for judgment on the pleadings, asserting that the Pennsylvania state courts had determined by final order that Holt was not a third-party beneficiary of the contract, has no cause of action against Rapistan, and is barred by res judicata and collateral estoppel from attempting to relitigate its case in this court. Plaintiff responds by arguing that the Pennsylvania Supreme Court never made a determination of its claim on the merits, but only agreed with the Commonwealth Court's determination that the complaint was deficient in certain respects under the state pleading rules, thereby divesting the Commonwealth Court of jurisdiction. In addition, Holt contends that Pennsylvania's restrictive view of third-party beneficiary law had been previously modified by the Pennsylvania Supreme Court, that the amended complaint would have fit within the modified law, and the court refused to allow an amendment because the jurisdictional barrier still would not have been overcome. Despite plaintiff's argument, I find that the state courts fully addressed its claim, concluding that it was not a creditor beneficiary of the PLCB-Rapistan contract. Moreover, I disagree that the law has been modified in the way plaintiff contends.

 II. The State Court Decisions

 The principal case outlining Pennsylvania's third-party beneficiary rule is Spires v. Hanover Fire Insurance Co., 364 Pa. 52, 56-57, 70 A.2d 828, 830-31 (1950), where the court held:

 
To be a third party beneficiary entitled to recover on a contract it is not enough that it be intended by one of the parties to the contract and the third person that the latter should be a beneficiary, but both parties to the contract must so intend and must indicate that intention in the contract ; in other words, a promisor cannot be held liable to an alleged beneficiary of a contract unless the latter was within his contemplation at the time the contract was entered into and such liability was intentionally assumed by him in his undertaking; (footnote omitted) the obligation to the third party must be created, and must affirmatively appear, in the contract itself. . . (emphasis supplied).

 See also Burke v. North Huntingdon Twp. Municipal Authority, 390 Pa. 588, 596, 136 A.2d 310, 314-15 (1957). Criticism of the requirement that the intent to benefit a third party must be expressed in the contract itself has been growing, however, and an argument could be made that Pennsylvania is retreating from the rigid Spires rule. In Silverman v. Food Fair Stores, Inc., 407 Pa. 507, 509-10, 180 A.2d 894, 895 (1962), Justice O'Brien found that

 
"[the] question whether a contract was intended for the benefit of a third person is one of construction. The intention of the parties in this respect is determined by the terms of the contract as a whole, construed in the light of circumstances under which it is made." 12 Am.Jur., Contracts § 20, p. 832, § 280, cited in Mowrer v. Poirier & McLane Corp., 382 Pa. 2, 114 A.2d 88 (1955).

 Yet two years later, in a case interpreting an insurance policy, Justice O'Brien explained his ruling in Silverman by stating that "for anyone to be a third party beneficiary entitled to recover on a contract, both parties to the contract must so intend and indicate that intention in writing." Farmers National Bank of Ephrata v. Employers Liability Assurance Corp., Ltd., 414 Pa. 91, 95, 199 A.2d 272, 274 (1964). Judges Cercone and Jacobs, dissenting in Hillbrook Apartments, Inc. v. Nyce Crete Co., 237 Pa.Super. 565, 579, 352 A.2d 148, 155 (1975), argued that the rule was nothing more than "an exposition of an archaic view of the parol evidence rule" and out of tune with the clear weight of authority.

 The Commonwealth Court was apparently aware of this criticism and cited Silverman for the proposition that the parties' intention must be determined by reference to the contract and the circumstances under which it was made. But it is clear that the court applied the Spires standard:

 
We have carefully considered the agreement between the LCB [PLCB] and Rapistan, and, while it certainly contemplates that Rapistan's equipment would be operated by a third party, we can find no clear indication that such third party was intended to have the status of a creditor beneficiary. At best, such third party would be simply an incidental beneficiary and would acquire no rights under the contract against either party thereto (emphasis ...

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