Summary of a Recent
Judicial
Development in
Farm Credit
Farmers Not Third-Party Beneficiaries to
Agreement Between
Farm Service Agency and Bank
Alfred N. MilamNational AgLaw Center Graduate Assistant
Summary of Decision
In Ortega v. City National Bank, 97 S.W.3d 765 (Tex. App. 2003), the Texas Court of Appeals held that Jose and Rene Ortega were not third-party creditor beneficiaries entitled to bring an action to enforce an agreement between the Farm Service Agency and a commercial lending institution to participate in the federal farmer loan guarantee program.
Background
In May of 1995, City National Bank (Bank) loaned $93,800 to Jose and Rene Ortega for the 1996 crop year. See id. at 769. The loan was guaranteed by the Farm Service Agency (FSA). See id. The Ortegas failed to make any payments on the loan. See id. In January of 1996, the bank made another loan to the Ortegas in the amount of $115,000, which was also guaranteed by the FSA. See id. The terms of the loan agreement provided that "this promissory note will be used for three consecutive crop years, with the second and third years being advanced only after the preceding crop year's advance has been paid in full." Id. The Ortegas failed to fully repay the 1995 and 1996 loans, although they did provide some crop insurance proceeds to the Bank. See id.
In order to obtain funds sufficient to secure a lease agreement for 300 acres of land, the Ortegas requested financing for the 1997 crop year. See id. The Bank notified the Ortegas that it could not give them a non-FSA guaranteed line of credit, due to the uncertainty of there being sufficient water in their area. See id. The FSA informed the Ortegas that they could not get an advance on the FSA guaranteed line of credit, because they did not have the debt-credit ratio required to obtain a FSA guarantee. See id. The Bank restructured the Ortegas' loan to sufficiently alter the Ortegas' debt-credit ratio so that they could qualify for a FSA guarantee line of credit. See id. at 770. However, it was too late for the Ortegas to secure the 300 acres. See id. They brought an action against the Bank for breach of contract. See id. After the Bank filed a motion for summary judgment, the Ortegas replaced their breach of contract claim with a third-party beneficiary action for breach of contract between the Bank and the FSA. See id.
Arguments
The Ortegas argued that they were third-party creditor beneficiaries of the "Agreement for Participation in Farmer Programs Guarantee Loan Programs of the United States Government" entered into between the Bank and the FSA. Id. at 772-73. The Ortegas asserted that the objectives of the loan program, as described in 7 C.F.R. § 1941.2, created a legal duty owed to them by the FSA, so that the agreement was entered into for their benefit and made them third-party creditor beneficiaries with a right to enforce the agreement between the Bank and the FSA. See id. at 776. The Bank argued that the Ortegas were not intended third-party beneficiaries to the agreement and as a matter of law were not third-party beneficiaries of agreements for federal loan guarantees made between the FSA and the Bank. See id. at 773.
Analysis and Holdings
The court held that the objectives of the federal farm loan guarantee program did not create a legal duty that the FSA owed to the Ortegas. See id. The court stated under Texas law, "before a third party may enforce or recover under an agreement, the agreement itself must demonstrate a clear intent to convey a direct benefit to that third party in satisfaction of an existing legal obligation." Id. at 776. The court stated there was no language in the agreement at issue in this case that does so. See id. Thus, the court held that the trial court did not err in granting summary judgment on the Ortegas' breach of contract claim.
The case was decided on January 23, 2003; this summary was posted Apr. 8, 2005.