A family foundation has standing to sue a bank for breach of its custodianship agreement between the bank and a foundation donor when the bank’s delay in transferring stock may have cost the foundation about $1.6 million in lost value. The bank had argued that the foundation had no standing to sue because it was not a party to the custodianship agreement.  An appellate court in Massachusetts has ruled that the foundation was an intended beneficiary of the agreement and could pursue the case for its damages.  (The James Family Charitable Foundation v. State Street Bank and Trust Company, Appeals Court of MA, No. 10-P-1616, 10/28/11.)

Hamilton James had requested the bank to transfer 800,000 mutual fund shares to his family foundation on February 13, 2007, but the bank sent instructions to the foundation’s broker rather than to the mutual fund.  Despite many inquiries, the bank did not discover the error until February 22 and the funds did not arrive in the foundation’s account until March 1. By the time the shares were sold, the foundation claimed it lost more than $1.6 million because of the delay. 

The foundation sued for damages.  A trial court dismissed the claim, but the Appeals Court has reversed.

The Appeals Court said that Massachusetts had adopted “the intended beneficiary theory of standing” from the Restatement (Second) of Contracts, a summary of the common law rules of contracts promulgated by the American Law Institute, and had recognized the basic principle since 1851.  It also recognized that while an “intended beneficiary” has standing, a “merely incidental” beneficiary has no standing.  Citing the Restatement, it said that a beneficiary of a promise [in this case the promise of the bank-promisor to transfer stock upon request by the donor-promisee] is an intended beneficiary “if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.”

“There is no dispute that James (the promisee) intended to give the foundation the benefit of the promised performance (the transfer of the shares),” the Court said. “The issue, therefore, is whether giving the foundation a right to performance under the contract is ‘appropriate to effectuate the intention of the parties’.”

The Court went on to say that “it makes no difference that foundation was not identified as an intended beneficiary at the time the agreement was entered into. The nature of the arrangement was that State Street [Bank] agreed to carry out future instructions as they were received, on terms that would not be given until the future, and for the benefit of those who would only later be identified. Although we would reach the same result had this been the first time James instructed State Street to make a transfer for the benefit of the foundation, the case is all the stronger when we consider that he had given such instructions several times before.  The foundation was not unknown to State Street as an intended beneficiary of James’s instructions pursuant to the agreement.”

The Court limited its holding to reversing the trial court’s grant of summary judgment to dismiss the case. It did not rule on whether the contract had been breached or, if so, whether the foundation had suffered damages.

YOU NEED TO KNOW

For the bank, this is like being on the wrong side of one of those “heads I win, tails you lose” situations.  If the value of the shares had gone up $1.6 million during the delay, it seems highly unlikely that the foundation would have sued or offered to give the gain back to the bank.  But the case does open the opportunity for claims by those damaged by the failure of a custodian to execute on orders promptly as requested a donor.