Washington Tennis & Education Foundation, Inc. (WTEF) is a nonprofit organization operating in the District of Columbia that provides athletic and academic programs for children from low-income families in the region. In October 2010, WTEF entered into a contract (the Architect Agreement) with Clark Nexsen, Inc., an architecture and engineering firm, under which Defendant agreed to provide architectural design and construction oversight services for Plaintiff’s new tennis and education campus in southeast Washington, D.C., known as the East Capitol Campus. In December 2011, WTEF formed a new entity, WTEF East, as a “supporting organization” that enabled WTEF to secure an additional \($2\) million for the project. In early 2012, WTEF and Clark Nexsen entered into an agreement in which WTEF assigned “all of [its] right, title, and interest” in the Architect Agreement to WTEF East. From that point on, WTEF East was referred to as the project’s “Owner” in all future amendments to the Architect Agreement.
Numerous problems arose with the construction of the East Capitol Campus. In November 2015, WTEF filed suit against Clark Nexsen alleging various design defects in the finished project. WTEF alleged that Clark Nexsen had breached the Architect Agreement and violated its duty of professional care. Clark Nexsen filed a counterclaim for unpaid invoices in the amount of \($47,514.71.\) Clark Nexsen moved for summary judgment on the grounds that WTEF lacks standing to bring the suit due to the fact that it transferred “all of [its] right, title, and interest” to WTEF East.
JUDGE MEHTA Defendant’s argument that Plaintiff lacks standing is uncomplicated. Defendant contends that, by virtue of Plaintiff’s assignment of “all of [its]
right, title and interest” under the Architect Agreement to WTEF East, Plaintiff is no longer a party to the Architect Agreement. Instead, WTEF East and Defendant are the sole parties to the Architect Agreement and, as such, only WTEF East has standing to enforce the Agreement or to sue Defendant for breach of any common law duty arising therefrom. Furthermore, Plaintiff, although related to WTEF East, is a separate and distinct legal entity that cannot sue on WTEF East’s behalf. In short, Defendant contends that Plaintiff assigned away its standing to sue Defendant for claims arising from the Architect Agreement.
Two prudential standing principles guide the court’s analysis. First, under what is known as the “shareholder standing rule,” a parent corporation cannot bring an action on behalf of its subsidiary. “No shareholder—not even a sole shareholder—has standing in the usual case to bring suit in his individual capacity on a claim that belongs to the corporation.” Am. Airways Charters, Inc. v. Regan, … Second, “a stranger to a contract may not sue to enforce its terms.” Flack v.
Laster, 417 …). Generally speaking, only a party to an agreement can seek to hold a counterparty accountable for a breach of the agreement’s terms.
In this case, Plaintiff’s assertion of standing runs headlong into both of these prudential standing principles. First, the shareholder standing rule bars Plaintiff from bringing an action on behalf of its subsidiary, WTEF East, because each is a separate and distinct legal entity. Plaintiff is a District of Columbia nonprofit corporation and WTEF East is a Delaware non-stock corporation. Although the two entities are related—Plaintiff is the sole member of WTEF East—each entity has its own board of directors and keeps its own books and records. These corporate formalities must be respected. As a result, Plaintiff cannot assert claims on behalf of WTEF East; WTEF East must do so itself. Second, the general rule against allowing third parties to enforce contracts likewise operates to deny Plaintiff standing. In early 2012, Plaintiff assigned “all of [its] right, title and interest” in the Architect Agreement to WTEF East.
Consequently, as of the effective date of that assignment, Plaintiff was no longer a party to that agreement. If Defendant breached the Architect Agreement, then only WTEF East, as the sole counterparty to that contract, can seek to enforce it. As a “stranger” to the agreement, Plaintiff cannot do so itself.
Plaintiff attempts to avoid this straightforward analysis in three ways, none of which are convincing. First, Plaintiff claims that “there is not a dime’s worth of difference between WTEF and WTEF East” and therefore Plaintiff has standing to sue. “Although WTEF East exists on paper, it has no employees and puts on no programs for the community[,]” and “WTEF East was nothing more than a financing tool for the New Market Tax Credits.” Plaintiff also insists that the Assignment Agreement was “merely a formality.” Although Plaintiff would like to have its cake and eat it, too, the “noble function” of the shareholder standing rule is to prevent such guile. Here, the establishment of WTEF East enabled Plaintiff to secure an additional \($2\) million in financing for the East Capitol Campus.
WTEF East owns the East Capitol Campus, holds it as an asset on its books and records, and leases the facility to its parent, Plaintiff. Plaintiff cannot now ignore that deliberate corporate structuring, or “reverse pierce” the corporate veil, simply because it now works to its disadvantage.
Next, Plaintiff insists that WTEF East’s status as a supporting foundation to Plaintiff under the tax code confers standing to sue upon Plaintiff. Plaintiff, however, cites no authority for that novel proposition. WTEF East’s mere designation as a supporting entity under the Internal Revenue Code cannot, absent express direction from Congress, alter settled principles of prudential standing. Thus, the mere fact that WTEF East is a supporting entity of Plaintiff does not confer standing upon Plaintiff.
Last, Plaintiff argues that it has standing to sue because it is a third-party beneficiary of the Architect Agreement, but that argument is both untimely and meritless. First, it comes too late. Plaintiff did not assert its purported standing as a third-party beneficiary in either its Complaint or its Opposition to Defendant’s Motion for Summary Judgment, but instead raised it for the first time in its Reply in Support of its Motion to Add WTEF East as a Co-Plaintiff. Accordingly, Plaintiff waived any attempt to re-characterize itself as a third-party beneficiary. Second, even if the court were to consider the belated argument, Plaintiff does not come close to establishing third-party beneficiary status. A third party has standing to enforce a contract if the parties “directly and unequivocally intend to benefit [that] third-party.” Here, the Architect Agreement expressly disclaims any third-party beneficiary. Section 10.5 of the Agreement states: “Nothing contained in this Agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the Owner [Plaintiff] or Architect.” Moreover, the Assignment Agreement does not identify Plaintiff as a third-party beneficiary to either the Architect Agreement or the Assignment Agreement itself. To the contrary, it actually names Defendant as the third-party beneficiary. In short, having assigned away all of its rights under the Architect Agreement, Plaintiff has “no rights left to invoke” and no standing to sue.
Defendant’s motion for summary judgment GRANTED.
CRITICAL THINKING:
Is there any ambiguity that that could have been interpreted in a different way to preserve a right for the plaintiff to sue?
ETHICAL DECISION MAKING:
If we think of this decision as setting a precedent, which kinds of stakeholders benefit from this decision, and which are harmed?