Modern: Question with Sample Answer
Chapter 12: Third Party Rights and Discharge
12–2. Question with Sample Answer: Assignment.
Five years ago, Hensley purchased a house. At that time, being unable to pay the full purchase price, she borrowed funds from Thrift Savings and Loan, which in turn took a mortgage at 6.5 percent interest on the house. The mortgage contract did not prohibit the assignment of the mortgage. Then Hensley secured a new job in another city and sold the house to Sylvia. The purchase price included payment to Hensley of the value of her equity and the assumption of the mortgage debt still owed to Thrift. At the time the contract between Hensley and Sylvia was made, Thrift did not know about or consent to the sale. On the basis of these facts, if Sylvia defaults in making the house payments to Thrift, what are Thrift’s rights? Discuss.
Sample Answer:
Thrift is a creditor beneficiary. To be a creditor beneficiary one must be the creditor in a previously established debtorcreditor relationship, and then the debtor’s subsequent contract terms with a third party must confer a benefit on the creditor. The contract made between the debtor and third party is not made expressly for the benefit of the creditor (as is required for a donee beneficiary). Rather, it is made for the benefit of the contracting parties. In this case, the original mortgage contract created a debtorcreditor relationship between Hensley and Thrift. Hensley’s contract of sale in which Sylvia agreed to assume the mortgage payments conferred a benefit on Thrift as to payment of the debt. The primary purpose of the contract was strictly to benefit the contracting parties. Hensley was to receive money for the sale of the house, and Sylvia was to receive the low mortgage interest rate. Thrift still has the house and lot as security for the loan, can hold Hensley personally liable for the mortgage note, and as a creditor beneficiary can hold Sylvia personally liable on the basis of her contract with Hensley to assume the mortgage.