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Fleet Bank v. Harriman
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Decision: 	1998 ME 275
Docket: 	Wal-98-115
on Briefs: 	November 20, 1998
Decided:	December 23, 1998




	[¶1]  Gregory and Kathryn Harriman appeal from a judgment of
foreclosure entered in favor of Fleet Bank of Maine after a nonjury trial in
the Superior Court (Waldo County, Marsano, J.).  On appeal, the Harrimans
contend that Fleet was not entitled to foreclose under the terms of its
guaranty contract with the federal government.  We affirm the judgment.
	[¶2]  The Harrimans are dairy farmers who reside in Troy.  In 1990,
having sold their previous farm, they sought a loan to finance the purchase of
the farm in Troy.  They initially requested a direct loan from the Farmer's
Home Administration (FmHA), now called the Farm Services Agency (FSA),
of the United States Department of Agriculture.  FmHA was not making
direct loans, so they applied for an FmHA-guaranteed loan from Fleet.  Fleet
applied to FmHA for a guaranty, and FmHA issued a Conditional Commitment
for Guarantee dated June 12, 1990.  Attached to that document was
Schedule A, which stated, in part: 
The lender agrees that, if liquidation of the account becomes
imminent, the lender will consider the borrower for an Interest
Rate Buydown under Exhibit D of Subpart B of 7 CFR Part 1980,
and request a determination of the borrower's eligibility by
FmHA.  The Lender may not initiate foreclosure action on the
loan until 60 calendar days after a determination has been made
with respect to the eligibility of the borrower to participate in
the Interest Rate Buydown Program.
Fleet and Gregory Harriman signed the Conditional Commitment for
Guarantee on June 15, 1990.{1}  On the same day, in consideration of a
$155,000 loan from Fleet, the Harrimans executed a promissory note
secured by a mortgage on the farm.
	[¶3]  The Harrimans stipulated at trial that they defaulted on the note
and mortgage by failing both to make required payments and to pay real
estate taxes on the property.  Apparently no effort was made to investigate
the Harrimans' eligibility for the Interest Rate Buydown Program (IRBP).  In
November 1995 Fleet brought this foreclosure action.
	[¶4]  The Harrimans resist foreclosure solely on the grounds that Fleet
had not considered them for the IRBP as required by the guaranty contract. 
They contend that they were parties to the contract.  The trial court found,
and we agree, that the contract is unambiguous.  Its interpretation,
therefore, is a question of law.  See F.O. Bailey Co. v. Ledgewood, Inc., 603
A.2d 466, 468 (Me. 1992).  
	[¶5]  The Harrimans were not parties to the guaranty contract; it was
solely between FmHA and Fleet.  We have held that "[t]he undertaking of a
guarantor is his own separate and independent contract, distinct from the
principal debtor."  Casco Northern Bank v. Moore, 583 A.2d 697, 699 (Me.
1990) (citing International Harvester Co. v. Fleming, 109 Me. 104, 108, A.
843, 845 (1912)); see also Top Line Distribs., Inc. v. Spickler, 525 A.2d
1039, 1040 (Me. 1987) ("A guaranty contract is an undertaking collateral to
a principal obligation and binds only those who are parties to the guaranty
contract itself.").  At least two federal courts interpreting guaranty contracts
for FmHA-guaranteed private loans similar to the one here have concluded
that the borrowers were not parties to the guaranty.  See Parker v. United
States Dep't of Agric., 879 F.2d 1362, 1364 (6th Cir. 1989); Schuerman v.
United States, 30 Fed. Cl. 420, 426 (1994).{2}  In light of these precedents,
the language of the guaranty contract in this case, and the very nature of a
guaranty contract, the trial court did not err in its conclusion that the
Harrimans were not parties to the guaranty.
	[¶6]  The Harrimans also argue that they are third­p;party beneficiaries
of the guaranty contract.  In determining whether a party is entitled to
enforce a contract as a third­p;party beneficiary we have utilized the definition
of "intended beneficiary" in the Restatement:
(1) Unless otherwise agreed between promisor and promisee, a
beneficiary of a promise 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 promise 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.

(2) An incidental beneficiary is a beneficiary who is not an
intended beneficiary.
Restatement (Second) of Contracts § 302 (1981), quoted in F.O. Bailey, 603
A.2d at 468.
	[¶7]  This means the Harrimans must demonstrate that in order to
effectuate the intention of Fleet and FmHA, it is appropriate to recognize
that the Harrimans have a right to performance and the circumstances
indicate that FmHA, as the promisee, intended to give the Harrimans the
benefits of the promised performance.  The "promised performance" at
issue here is the promise of forebearance by Fleet of foreclosure for a period
of 60 days while the eligibility of the Harrimans for the IRBP is determined. 
The intention of FmHA is ascertained from the written instrument and the
circumstances under which it was executed.  See F.O. Bailey, 603 A.2d at
468.  The Harrimans must show more than that they benefitted from the
contract; they must show that FmHA  had a "clear and definite" "intent that
they receive an enforceable benefit under the contract[]."  Id.   We have
In assessing the relevant circumstances, courts must be careful
to distinguish between the consequences to a third party of a
contract breach and the intent of a promisee to give a third
party who might be affected by that contract breach the right to
enforce performance under the contract.  If consequences
become the focus of the analysis, the distinction between an
incidental beneficiary and an intended beneficiary becomes
obscured.  Instead, the focus must be on the nature of the
contract itself to determine if the contract necessarily implies
an intent on the part of the promisee to give an enforceable
benefit to a third party.
Devine v. Roche Biomedical Labs., 659 A.2d 868, 870 (Me. 1995).  
	[¶8]  The record contains no evidence about the intent of either Fleet
or FmHA.   Indeed, the federal regulations supply the terms of the guaranty
contract.  See 7 C.F.R. §§ 1980.6, 1980.61, part 1980, subpart A, apps. E, F,
subpart B, exh. D (II), (XVIII)(G) (1998); see also 7 U.S.C.A. § 1999(g)
(1988) (every contract of guaranty on a farm loan shall contain a condition
that the lender may not initiate foreclosure until 60 days after a
determination of whether the borrower is eligible for the interest rate
reduction).  Neither FmHA nor Fleet could deviate from those terms, and
therefore, to an extent, the intention of the parties is substituted by the
legislative and regulatory intentions.  It was the intention of Congress and
the Department of Agriculture to assist family farms by providing incentives
to banks to loan money for family farms and by providing mechanisms to
assist farmers in meeting those loan obligations.  See 7 U.S.C.A. § 1998
	[¶9]  The Harrimans were beneficiaries of the guaranty because it
allowed them to get a loan they could not have otherwise obtained.  They
were also beneficiaries of the foreclosure forebearance condition because
they would have benefitted, if only by delaying the inevitable, had Fleet
requested from FmHA a determination of their eligibility for the IRBP
before commencing foreclosure.  There is, however, no indication that
either FmHA or Fleet had a "clear and definite" intent to give the
Harrimans an enforceable benefit.  F.O. Bailey, 603 A.2d at 468.  In fact, had
Congress intended to give borrowers a mechanism to enforce the condition
it could have given them a cause of action, but it has not done so.  The
terms of the guaranty prevent FmHA from paying on its guaranty when the
forebearance condition is breached by the bank, but it does not "necessarily
impl[y] an intent on the part of the promisee to give an enforceable benefit
to a third party."  Devine, 659 A.2d at 870.  A breach by Fleet could give
FmHA or its successor a defense to an action by Fleet to enforce the
guaranty, but it gives the Harrimans no defense to the foreclosure.
	[¶10]  That conclusion is consistent with the holdings of other courts
that have found that borrowers are not intended third­p;party beneficiaries of
federally-guaranteed private loans.  See Parker v. United States Dep't of
Agric., 879 F.2d 1362, 1366 (6th Cir. 1989) (FmHA-guaranteed loan);
United States v. Healy, 923 F. Supp. 1424, 1428-29 (D. Kan. 1996) (loan
guaranteed by Small Business Administration); United States v. Martin, 344
F. Supp. 350, 356 (E.D. Mich. 1972) (SBA-guaranteed loan); Alder v. First
Nat'l Bank & Trust, 491 N.W.2d 686, 689 (Neb. 1992) (SBA-guaranteed
loan).  In a case interpreting the same Conditional Commitment for
Guarantee involved in this case, the Court of Federal Claims came to the
opposite conclusion and held that the borrowers were entitled to enforce
the conditions in the contract between FmHA and the Bank.  See
Schuerman v. United States, 30 Fed. Cl. 420, 427-433 (1994).  To reach
that conclusion, the Schuerman court abandoned its precedents and held
that a third­p;party beneficiary can enforce performance if the parties
intended the contract to benefit him, whether or not they intended to give
him an enforceable right to that benefit.{3}  See id.   That holding is directly
contrary to the legal standard enunciated by this Court in Devine and F.O.
Bailey, and we decline to adopt it in this case.
	The entry is
			Judgment affirmed.

Attorney for plaintiff: Michael S. Haenn, Esq. P O Box 915 Bangor, ME 04402-0915 For defendants: Gregory A. Harriman Kathryn P. Harriman RFD # 1, Box 1140 Troy, ME 04987 Attorneys for party-in-interest: Jay P. McCloskey , United States Attorney Frederick C. Emery, Jr., Asst. U.S. Atty. P O Box 9718 Portland, ME 04104-5018
FOOTNOTES******************************** {1} . Gregory Harriman actually signed in two places: his signature appears immediately below that of the Bank, but there is a footnote on his signature line, on the printed form, which states that the signature is not required "in B&I and RH-MF cases." That refers to Business & Industry and Rural Home-Multi-Family. This was a farm loan, and therefore Harriman's signature was not required. His signature also appears on Schedule A under the Addendum for Highly Erodible Land and Wetland Conservation. {2} . In Parker the borrowers did not sign the guaranty. See 879 F.2d at 1364. In Schuerman the borrowers reviewed the guaranty and agreed to accept its terms. See 30 Fed. Cl. at 423. {3} . The new test announced in Schuerman for third­p;party beneficiaries has been rejected by the Federal District Court for the District of Maine. See Hodgdon v. United States, 919 F. Supp. 37, 40 (D. Me. 1996).