STATE OF MINNESOTA
IN COURT OF APPEALS
State Farm Mutual Automobile
Filed October 6, 1998
Benton County District Court
File No. C697891
Steven R. Schwegman, William V. Faerber, Quinlivan, Sherwood, Spellacy & Tarvestad, P.A., 400 South First Street, Suite 600, P.O. Box 1008, St. Cloud, MN 56302 (for appellant)
Michael O. Burns, 619 Mall Germain, Suite 215, St. Cloud, MN 56301; and
Greg Engel, 925 South First Street, St. Cloud, MN 56301 (for respondent)
Considered and decided by Toussaint, Chief Judge, Kalitowski, Judge, and Thoreen, Judge.
Appellant State Farm Mutual Automobile Insurance Company (State Farm) challenges the summary judgment granted to respondent Douglas Stewart in this declaratory judgment action. State Farm claims rights as a third-party beneficiary resulting from a liability release agreement executed by Stewart and another insurance carrier. Because State Farm was only an incidental beneficiary, it acquired no rights and we affirm.
Cars driven by Stewart and Todd Haffner collided on August 23, 1996. The car driven by Haffner was owned by Alice Skaja and insured by Milbank Insurance Company (Milbank). Haffner had his own automobile insurance with State Farm.
Stewart suffered serious injuries in the accident, required multiple surgeries, and missed several months of work. Because Stewart's damages exceeded Skaja's policy limits and because Stewart had unrefuted evidence that Haffner was at fault, Milbank agreed to settle Stewart's claim against Skaja. On January 21, 1997, Stewart and Milbank executed a Pierringer release, by which Stewart released all claims against Milbank, Skaja, and Haffner, in return for Milbank paying Skaja's policy limit of $30,000. Haffner was not a party to the release, and State Farm was neither a party to nor mentioned in the release.
When the release was signed, Stewart and his counsel were unaware that Haffner had automobile insurance coverage with State Farm. Milbank knew of Haffner's coverage, but did not disclose it to Stewart because they assumed he was aware of it. A few days after signing the release, Stewart learned of Haffner's policy with State Farm. Stewart's counsel quickly obtained Milbank's consent to a revised release, which was then prepared, executed, and backdated to January 21, 1997. It released Skaja and Milbank, but not Haffner.
In July 1997, State Farm commenced a declaratory judgment in its own name, seeking to enforce the original release. On October 28, 1997, Stewart and Milbank executed a third settlement agreement and Drake release, wherein they spelled out their understandings and interpretations regarding the prior Pierringer releases. The Drake release stated that Haffner was released from personal liability except as to his State Farm policy coverage limits, and that Stewart only intended to collect from State Farm or another third party.
The district court granted summary judgment in favor of Stewart. It concluded that State Farm was not a beneficiary entitled to benefits resulting from the original release signed by Stewart and Milbank and had no right to enforce it or prevent its rescission or modification. This appeal followed.
On appeal from a summary judgment, we ask two questions: (1) whether there are any genuine issues of material fact and (2) whether the district court erred in applying the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990). There are no disputed material facts in this case. An insurance settlement or release agreement is a legal contract. Karnes v. Quality Pork Processors, 532 N.W.2d 560, 562 (Minn. 1995). As such, the construction of such a release is a question of law subject to de novo review on appeal. Turner v. Alpha Phi Sorority House, 276 N.W.2d 63, 66 (Minn. 1979).
State Farm contends that it had a right as a third-party beneficiary to enforce the original agreement releasing its insured, Haffner. Ordinarily, non-parties or "strangers" to a contract acquire no rights under the contract. Wurm v. John Deere Leasing Co., 405 N.W.2d 484, 486 (Minn. App. 1987). An exception to this rule involves a third-party beneficiary of a contract. Dufresen v. American Nat'l Bank & Trust Co., 374 N.W.2d 763, 766 (Minn. App. 1985). However, a third-party beneficiary is not simply any non-signatory to a contract who stands to benefit from its execution. A beneficiary of a contract must meet the "intent to benefit" test or the "duty owed" test in order to qualify as a third-party beneficiary under contract law. Cretex Cos., Inc. v. Construction Leaders, Inc., 342 N.W.2d 135, 138-39 (Minn. 1984). A beneficiary of a contract not meeting either of these tests is an incidental beneficiary and has no right to enforce the contract. Wurm, 405 N.W.2d at 486. The application of the "intent to benefit" test to these facts was correctly rejected by the district court and State Farm does not pursue this argument on appeal. Therefore, State Farm may only qualify as a third-party beneficiary, if at all, under the "duty owed" test.
The district court correctly concluded that State Farm did not meet the "duty owed" test. An entity is a third-party beneficiary to a contract under the duty owed test if the promisor's performance discharges a duty owed by the promisee to the entity. Cretex, 342 N.W.2d at 138-39; Chard Realty, Inc. v. City of Shakopee, 392 N.W.2d 716, 720 (Minn. App. 1986), review denied (Minn. Nov. 19, 1986). State Farm does not claim that either Stewart or Milbank, the two parties who signed the release, owed State Farm a duty, much less that any such duty was discharged by the release. Rather, State Farm argues that its policyholder, Haffner, was a party to the original release because his liability was extinguished by it. State Farm contends that Haffner owed a standard duty to cooperate with State Farm under his UIM policy that was invoked by the release. Therefore, State Farm concludes that Haffner was a party who, through the release, discharged a duty owed to it (State Farm).
State Farm's argument fails. It attempts to qualify as a third-party beneficiary under the duty owed test without ever defining that test. Under the test, if the promisor's performance discharges a duty owed by the promisee to the entity, that entity is a third-party beneficiary to the contract. Cretex, 342 N.W.2d at 138-39; Chard Realty, 392 N.W.2d at 720. State Farm's first error is that, as the district court found, Haffner was not a party to the release. Haffner did not sign the release, was not involved in its negotiation, and did not retain counsel. At the time State Farm initiated this action and its previous action in Haffner's name, Haffner could not even be located. Second, even if Haffner was a party to the release, the duty he owed to State Farm, to cooperate in the reasonable settlement of any claims, was not the same duty Stewart promised to discharge in the release. State Farm, therefore, does not qualify as a third-party beneficiary under the duty owed test.
Although it is not necessary to consider the effect of the second and third releases executed by Stewart and Milbank, we point out that even if we assume that State Farm was a third-party beneficiary, any rights it may have acquired from the first release were legally extinguished by the subsequent releases. Parties to a contract may voluntarily agree to modify it. See Minnesota Ltd., Inc. v. Public Utils. Comm'n of Hibbing, 296 Minn. 316, 318, 208 N.W.2d 284, 285 (1973). The record is not clear whether State Farm was even aware of the first release at the time of execution of the second release. State Farm makes no claim it relied on the first release or changed its position prior to the modification.
Stewart challenges, by notice of review, the district court's denial of his motion for attorney fees. In addition, he requests attorney fees on appeal. The district court's ruling on a motion for attorney fees will not be reversed absent an abuse of discretion. Radloff v. First Am. Nat'l Bank, 470 N.W.2d 154, 156 (Minn. App. 1991). It is not clear whether Stewart's district court motion for fees was made under Minn. R. Civ. P. 11 or Minn. Stat. § 549.211; however, the same standard of review applies to both types of fees motions. Id. The district court did not abuse its discretion in denying trial court attorney fees to respondent.
We deny Stewart's request for attorney fees on appeal.
* Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. Art. VI, § 10.