Zigas v. Superior Court

California Court of Appeal · 1981 · Contracts

120 Cal. App. 3d 827 (1981)

Updated July 26, 2026

Contractsthird-party beneficiarygovernment contractsHUDNational Housing Actstate lawstandingrestitution

Facts

Petitioners were tenants in a San Francisco apartment building financed through a federally insured mortgage under the National Housing Act. They alleged their landlords had agreed with HUD to file a maximum rental schedule and not charge more than the HUD-approved rents without prior HUD approval. According to the complaint, the landlords nevertheless charged rents and fees above the approved schedule and collected more than $2 million in excess charges. The tenants sued under California law as persons harmed by breach of that agreement and sought, among other relief, damages and restitution.

Issue

Whether tenants of a HUD-financed apartment project may, under California law, sue their landlords as third-party beneficiaries or in restitution for charging rents above the HUD-approved maximums required by the landlords' agreement with HUD. A related question was whether state or federal law governs that standing issue.

Rule

When a suit between private litigants seeks to enforce rights allegedly arising from a contract between a federal agency and a private party, and no issue of federal governmental liability is involved, state law governs whether an intended third-party beneficiary may sue. Under California law, a member of the class intended to benefit from a government contract has standing if the contract and surrounding circumstances manifest an intent that the promisor's performance directly benefit that class and that compensation or return of money exacted in violation of the contract be available upon breach; where the promisor has retained funds it was not entitled to retain, the injured beneficiaries may also seek restitution.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Sacramento, Willow Crest Housing, LLC obtained favorable financing through a federal housing program. In a regulatory agreement with a federal housing agency, Willow Crest promised not to charge tenants more than an approved rent schedule without prior written approval, but tenants allege it charged higher monthly parking and storage fees; they sue only Willow Crest in California court for damages and restitution under California contract principles.

Which law should most likely govern whether the tenants have standing to sue as third-party beneficiaries?

Explanation. State law governs. The controlling rule is that when private litigants seek to enforce rights arising from a contract between a federal agency and a private party, and the case raises no question about liability of the United States or federal responsibilities under the contract, state law determines third-party-beneficiary standing. The mere fact that the contract arose under a federal program does not itself require a uniform federal rule.