                              In the
 United States Court of Appeals
                  For the Seventh Circuit
                          ____________

No. 01-2156
BETTY DECKARD, et al.,
                                            Plaintiffs-Appellants,
                                 v.

GENERAL MOTORS CORP.,
                                              Defendant-Appellee.
                          ____________
            Appeal from the United States District Court
     for the Southern District of Indiana, Indianapolis Division.
          No. IP 99-1385-C-Y/S—Richard L. Young, Judge.
                          ____________
  ARGUED DECEMBER 6, 2001—DECIDED OCTOBER 1, 2002
                   ____________


  Before CUDAHY, EASTERBROOK and EVANS, Circuit Judges.
  CUDAHY, Circuit Judge. Betty Deckard, Michael W.
Deckard, Frank Pershing, Donna Shields and Brian
Shields (the plaintiffs) appeal from the order of the dis-
trict court dismissing their claims against General Mo-
tors Corporation (GM) arising from an automobile acci-
dent. We reverse.


                                 I.
  On August 16, 1997, Karen Watson, while driving her
1992 Toyota Tercel, failed to stop at a stop sign and struck
a 1994 GMC Jimmy truck driven by Betty Deckard. The
Jimmy was occupied by passengers Donna Shields, Brandi
2                                                No. 01-2156

Shields and Sherry Pershing (who was pregnant with
Adrianna1). As a result of the impact of the collision, the
Jimmy rolled over and all of its occupants, except Brandi,
were ejected. Betty Deckard and Donna Shields were
seriously injured; Sherry and Adrianna Pershing were
killed.
  On February 4, 1998, the plaintiffs in settling their
claims against Karen Watson and her insurer, United
Farm Bureau Mutual Insurance Company (Farm Bu-
reau), signed release agreements. Betty and her husband,
Michael Deckard, and Donna and her husband, Brian
Shields, signed the same form release agreements that
purported to release:
    . . . United Farm Bureau Mutual Insurance and all
    other persons, firms or corporations liable or who might
    be claimed to be liable . . . from any and all claims,
    demands, damages, actions, causes of action or suits of
    any kind or nature whatsoever, on their own behalf
    and on behalf of their children, and particularly on
    account of all injuries, known and unknown . . . which
    resulted or may in the future develop from an acci-
    dent which occurred on or about the 16th day of Au-
    gust, 1997, in or near Bedford, Lawrence County, Indi-
    ana . . . .
Separate App. to Appellant’s Br., Exhibit 4, at 3 (empha-
sis added). Although Betty Deckard and Donna Shields
allegedly incurred over $200,000 and $40,000, respectively,
in medical expenses, the Deckards and the Shields settled
their claims for $5,000 each.
  Frank Pershing also signed release agreements to settle
claims arising from the death of his wife Sherry and his


1
  Adrianna is referred to in some documents as Andrea or
Adriana. We use the name Adrianna because that is the name the
appellants use in their appellate brief.
No. 01-2156                                                  3

unborn daughter Adrianna. With respect to the claims
arising from the death of Sherry, Frank purported to re-
lease:
    . . . United Farm Bureau Mutual Insurance and all
    other persons, firms or corporations liable or who
    might be claimed to be liable . . . on account of all
    injuries, death and damages suffered directly to Sherry
    Pershing and for the loss of services of said Sherry
    Pershing to Frank Pershing which resulted or may
    in the future develop from an accident which occurred
    on or about the 16th day of August, 1997, in or near
    Bedford, Lawrence County, Indiana . . . .
Id. at 1 (emphasis added). Frank Pershing received $42,500
in settlement of these claims with respect to Sherry. He
received an additional $42,500 in exchange for settling
the claims arising out of the death of Adrianna.2
  On August 12, 1999, the plaintiffs filed an automotive
products liability suit against GM claiming that the Jimmy
was improperly designed. On March 1, 2000, GM filed a
motion to dismiss pursuant to Rule 12(b)(6) of the Fed-
eral Rules of Civil Procedure, alleging that the release
agreements that the plaintiffs entered into with Farm
Bureau also released GM.
  On March 27, 2000, Farm Bureau entered into agree-
ments captioned “Rescission Agreement and Release” with
the plaintiffs, purporting to rescind the original release
agreements and to enter into new release agreements
that specifically excluded GM from being released.



2
  Frank Pershing signed a different, more narrowly worded,
release agreement with respect to the claims arising from
Adrianna’s death. That release agreement is not the subject of
this appeal. Pershing’s claims against GM on behalf of Adrianna
are still pending.
4                                                No. 01-2156

   On March 31, 2001, the district court entered a judgment
and order granting GM’s motion. The district court con-
cluded that the plaintiffs intended to release GM when
they signed the original release agreements with Farm
Bureau. The district court also rejected the plaintiffs’
attempt to rescind the original release agreements. The
order was made final pursuant to Rule 54(b) of the Fed-
eral Rules of Civil Procedure on May 29, 2001. The plain-
tiffs appeal.


                             II.
  This court has jurisdiction under 28 U.S.C. § 1291 over
an appeal from a final order of a district court. Although
the district court’s order is cast in terms of a motion
to dismiss, both parties submitted evidence outside the
pleadings for the district court’s consideration, and so, pur-
suant to Rule 12(b) of the Federal Rules of Civil Procedure,
GM’s Motion to Dismiss was converted into a Motion for
Summary Judgment. A motion to dismiss was improper
since release is an affirmative defense, Fed. R. Civ. P. 8(c),
and the existence of a defense does not undercut the ade-
quacy of the claim. See Gomez v. Toledo, 446 U.S. 635, 639-
41 (1980). We review de novo a summary judgment under
Rule 56. Scherer v. Rockwell Int’l Corp., 975 F.2d 356, 359
(7th Cir. 1992). Summary judgment should be granted only
where “the pleadings, depositions, answers to interrogato-
ries, and admissions on file, together with the affidavits,
if any, show that there is no genuine issue as to any
material fact and that the moving part is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(c). In
making this determination, we draw all justifiable in-
ferences in favor of the nonmoving party. Karazanos v.
Navistar Int’l Transp. Corp., 948 F.2d 332, 335 (7th Cir.
1991). Since this case arises from the diversity jurisdic-
tion of a federal court sitting in Indiana, we apply Indiana
No. 01-2156                                              5

contract law to interpret the purported release and rescis-
sion agreements. See Strachan v. Nisbet, 202 F.2d 216, 218
(7th Cir. 1953).


                            A.
  There are two sets of release agreements in this case. GM
argues that the original release agreements control the
disposition of this case, while the plaintiffs argue that
the new release agreements (which specifically exclude
GM from being released) control. The plaintiffs also argue
that the district court erred in concluding that the re-
scission agreements that they entered into with Farm
Bureau did not effectively rescind the original release
agreements. We conclude that the rescission agreements
did not rescind the original release agreements and that
the original release agreements control this case.
   The purpose of rescission is to return contracting par-
ties to their pre-contract position. Am. Standard Ins. Co.
v. Durham, 403 N.E.2d 879, 881 (Ind. Ct. App. 1980).
However, an exact or literal return to the status quo is
not necessary. Econ. Leasing Co. v. Wood, 427 N.E.2d 483,
486 (Ind. Ct. App. 1981). Rescission can arise under two
circumstances: (1) it may be effected by mutual agreement
and (2) it may be granted unilaterally because of fraud,
illegality, mutual mistake or a contract provision provid-
ing for rescission. Id. The parties by mutual consent may
rescind a contract at any stage of performance. Id. In its
order, the district court held that the rescission agree-
ments did not rescind the original release agreements be-
cause the parties involved were not returned to their pre-
contract positions. Attached App. to Appellants’ Br. at 11-
15. The district court stated that the parties could not
return to their pre-contract positions because the origi-
nal release agreements had been fully performed, and
the plaintiffs had not returned the settlement proceeds
to Farm Bureau. Id. Further, the district court concluded
6                                               No. 01-2156

that the rescission agreements were not valid because
they were not supported by new consideration.
  While both parties, on appeal, disagree about whether
the parties to the original release agreements could re-
turn to their pre-contract positions, both parties failed to
address whether the plaintiffs could enter into any rescis-
sion agreements once GM acted upon the original release
agreements.
  “Generally, only parties to a contract or those in privity
with the parties have rights under the contract.” OEC-
Diasonics, Inc. v. Major, 674 N.E.2d 1312, 1314-15 (Ind.
1996). However,
    One not a party to the contract may nonetheless en-
    force it by demonstrating that the parties intended to
    protect him under the agreement by the imposition
    of a duty in his favor. To be enforceable, it must clear-
    ly appear that it was the purpose or a purpose of the
    contract to impose an obligation on one of the con-
    tracting parties in favor of the third party. It is not
    enough that performance of the contract would be of
    benefit to the third party. It must appear that it was
    the intention of one of the parties to require perfor-
    mance or some part of it in favor of such third party
    and for his benefit, and that the other party to the
    agreement intended to assume the obligation thus
    imposed.
Id. at 1315. OEC-Diasonics recognizes that third-party
beneficiary contracts exist under Indiana law. Stated in
another way, a third-party beneficiary contract is formed
when (1) the parties intend to benefit a third party, (2) the
contract imposes a duty on one of the parties in favor of
the third party and (3) the performance of the terms of
the contract renders a direct benefit to the third party.
Kiltz v. Kiltz, 708 N.E.2d 600, 602 (Ind. Ct. App. 1999).
No. 01-2156                                                      7

    Under Indiana law,
     “the parties to a contract entered into for the benefit of
     a third person may rescind, vary, or abrogate the con-
     tract as they see fit, without the assent of the third
     person, at any time before the contract is accepted,
     adopted, or acted upon by [the third person], and such
     rescission deprives the third person of any rights un-
     der or because of such contract.”
Seavey v. Estate of Fanning (In re Estate of Fanning), 333
N.E.2d 80, 84 (Ind. 1975) (quoting 17 Am. Jur. 2d Contracts
§ 317 (1946)). Thus, if the original release agreements
were third-party beneficiary contracts that were intended
to benefit GM by releasing all claims against GM, then the
plaintiffs and Farm Bureau cannot rescind or vary3 the
original release agreements once GM acted upon its alleged
right in the original release agreements by, for example,
moving to dismiss the plaintiffs’ complaint, unless GM
assents. On the other hand, if the original release agree-
ments were not third-party beneficiary contracts because
they were not intended to benefit GM, then the rescission
agreements are redundant and the plaintiffs can sue GM
on their automotive liability claim whether or not the


3
   The plaintiffs’ simultaneous entries into rescission agreements
and into new release agreements may be seen as an attempted
modification of the original release agreements. See Restatement
(Second) of Contracts, § 89 cmt. b (1981) (noting that parties oc-
casionally seek to modify an existing contract by simultaneously
rescinding the existing contract and entering into a new con-
tract). Interpreting the transaction between the plaintiffs and
Farm Bureau in this manner would allow the intent of the par-
ties to be effectuated. While contracts not fully performed may
be modified without new consideration, see id. § 89, the plaintiffs
would still be barred from modifying the original release agree-
ments without the assent of GM under Indiana law, see Estate of
Fanning, 333 N.E.2d at 84.
8                                                    No. 01-2156

rescission agreements have been executed. Thus, the con-
trolling agreements in this case are the original release
agreements.4


                                B.
  The district court concluded that the original release
agreements unambiguously released GM. On appeal, the
plaintiffs argue that the court erred in reaching this
conclusion. Further, the plaintiffs contend that the dis-
trict court erred in failing to consider extrinsic evidence
on whether the parties intended to release GM.
   Under Indiana law, release agreements are to “be inter-
preted in the same manner as any other contract docu-
ment, with the intention of the parties regarding the
purpose of the document governing.” Huffman v. Monroe
County Cmty. Sch. Corp., 588 N.E.2d 1264, 1267 (Ind.
1992). “Until Huffman, a release of one tortfeasor operated
as a release of all, regardless of the parties’ intent.” Pelo
v. Franklin Coll., 715 N.E.2d 365, 366 n.1 (Ind. 1999).
After Huffman, however, “[a] release executed in exchange
for proper consideration works only to release those par-
ties to the agreement unless it is clear from the document
that others are to be released as well.” Huffman, 588
N.E.2d at 1267. To determine the parties’ intent, “[t]he
contract must be read as a whole.” OEC-Diasonics, 674
N.E.2d at 1315. “The interpretation of a release is de-
termined by the terms of the particular instrument, in
light of all facts and circumstances.” Id. at 1314. Where


4
  The plaintiffs also argue that the district court abused its
discretion by not rescinding the original contract on equitable
grounds. In light of our holding that the rescission agreements
would not be valid absent the assent of GM, the district court
did not abuse its discretion in refusing to rescind the original re-
lease agreements.
No. 01-2156                                                9

a contract is unambiguous, “ ‘the intent of the parties
should be determined from the language employed in the
document.’ ” Id. (quoting Thomas v. Thomas, 577 N.E.2d
216, 219 (Ind. 1991)).
   The original release agreements stated that the plain-
tiffs were releasing “all other persons, firms or corpora-
tions liable or who might be claimed to be liable . . . on
account of all injuries . . . which might have resulted . . .
from an automobile accident.” The intermediate appellate
courts of Indiana have held that such language in a re-
lease agreement is plain and unambiguous in its intent
to release third parties who satisfy that language. See
Estate of Kelly Spry v. Greg & Ken, Inc., 749 N.E.2d 1269
(Ind. Ct. App. 2001) (holding that a release of “any other
person, firm, corporation charged or chargeable” barred
dramshop claims against a tavern); Stemm v. Estate of
Dunlap, 717 N.E.2d 971 (Ind. Ct. App. 1999) (holding that
the release of “all other persons and organizations who
are or might be liable” barred claims against the second
driver in an accident); Dobson v. Citizens Gas & Coke Util.,
634 N.E.2d 1343 (Ind. Ct. App. 1994) (holding that a re-
lease of “all other persons, firms or corporations liable
or who might be claimed to be liable” barred claims
against landowner). Thus, the district court did not err
in its initial conclusion that the plain language of the
original release agreements released GM. The district
court, however, did err in failing to consider extrinsic evi-
dence of the parties’ intent to release GM.
  Parol evidence in Indiana follows the general rule that
parol evidence may not be used “to vary or contradict
a written contract complete on its face.” State Highway
Comm’n v. Wilhite, 31 N.E.2d 281, 282 (Ind. 1941). The
parol evidence rule “excludes evidence of prior or con-
temporaneous oral [and written] agreements which would
vary a written contract.” R.W. Gascoyne, Annotation,
Applicability of parol evidence rule in favor of or against
one not a party to contract of release, 13 A.L.R.3d 313,
10                                              No. 01-2156

§ 2b (2001); see also Restatement (Second) of Contracts
§ 213 cmt. a (1981) (noting that the parol evidence rule
“renders inoperative prior written agreements as well as
prior oral agreements”). Indiana, however, recognizes ex-
ceptions to the parol evidence rule. One of these excep-
tions is that the parol evidence rule does not apply to
persons other than the parties to the instrument. Wilhite,
31 N.E.2d at 282; see also Burns v. Thompson, 91 Ind.
146, 150 (1883) (“[I]n respect to strangers, written instru-
ments, usually having no binding force, and the familiar
rule against the variation of such instruments by parol
evidence applies only to parties and privies.”); White v.
Woods, 109 N.E. 761, 762-63 (Ind. 1915) (same); Cooper v.
Cooper, 730 N.E.2d 212, 216 (Ind. Ct. App. 2000) (“[T]he
admissibility of parol evidence to vary the terms of a
written instrument does not apply to a controversy be-
tween a third party and one of the parties to the instru-
ment.”).
  In Wilhite, the State Highway Commission appealed from
an award of the Industrial Board granting compensation
for personal injuries suffered in an automobile accident
to the appellee, Wilhite. Wilhite was employed by the Com-
mission to operate a mowing machine drawn by a team of
horses. He had sustained injuries when a motor vehicle
driven by Wilbur Shelton for Samuel Barnett had “collided
with the team, killing one of the horses, damaging the
harness and moving machine, and inflicting personal in-
juries upon the appellee.” Wilhite, 31 N.E.2d at 281. In
settling the claims arising out of this accident, Wilhite
executed a release which stated:
     It is further understood and Agreed, that this release
     is intended to cover all actions, causes of action,
     claims and demands for, upon, or by reason of any
     damage, loss or injury which may be traced either
     directly or indirectly to the aforesaid accident, as now
     appearing or as may appear at any time in the fu-
No. 01-2156                                             11

   ture, no matter how remotely they may be related to
   the aforesaid accident. And this Release is executed
   with the full knowledge and understanding on my or
   our part that there may be more serious consequences,
   damages or injuries as the result of the accident afore-
   mentioned than now appear; and that more serious
   and permanent injuries, even to the extent of death,
   may result from the injuries sustained in the accident
   aforementioned.
Id. at 281-82 (emphasis added). The Commission argued
that this release covered Wilhite’s personal injury claims.
Thus, under a state law that barred double recovery, the
Commission argued that Wilhite was not entitled to
compensation on account of his personal injuries since
he already received compensation for his personal injuries
as part of his settlement with Barnett.
  Despite the plain language of the release, the Supreme
Court of Indiana permitted the admission of parol evi-
dence that supported “a finding that the release of the
appellee’s claim for personal injuries was not within the
contemplation of the parties thereto, and that the part
thereof referring to personal injuries was included through
mutual mistake of the parties.” Id. at 282. Wilhite had
sought to admit evidence that his “personal injuries
were not at that time thought to be consequential and
that no mention was made of these [injuries],” that his
“personal injuries were not mentioned” in a conversa-
tion between him and Barnett’s insurance carrier and
that he had “received a letter from the insurance com-
pany offering him $116 in settlement of his claim for the
loss of his horse and the damage to his harness and mow-
ing machine.” Id. at 281. The court held that this evi-
dence, “offered by the appellee as to the circumstances
under which the release was executed[,] was proper.” Id.
at 282. Therefore, under Wilhite, the district court here
12                                              No. 01-2156

should have considered parol evidence in determining
whether the plaintiffs intended to release GM.
   GM argues that Wilhite and its predecessors do not
apply to this case for three reasons. First, GM argues that
it is not a stranger to the contract because it is within
the class of “all corporations liable or might be claimed to
be liable.” This is unpersuasive. GM is a stranger to the
contract because it was not involved in the drafting of
the agreements, did not sign the agreements and was not
in privity with any of the parties that did so. Black’s Law
Dictionary 1421 (6th ed. 1990) (defining “strangers” as a
term intended to refer to third persons generally and “[i]n
its general legal signification . . . opposite to the word
‘privy.’ ”); id. at 1122 (defining “third parties” as a “term
used to include all persons who are not parties to the
contract, agreement, or instrument of writing by which
their interest in the thing conveyed is sought to be af-
fected”); cf. 13 A.L.R.3d 313, § 1a, n.4 (noting that a third
person who is claiming a right under or through a party
is not a stranger to the contract). And third-party bene-
ficiaries can be strangers to a contract. See Jackman
Cigar Mfg. Co. v. John Berger & Son Co., 52 N.E.2d 363,
367 (Ind. App. 1944) (“[A] stranger to the contract and the
consideration may maintain a suit to enforce . . . an
agreement when it clearly appears that it was the pur-
pose, or a purpose, of the contract to impose an obligation
on one of the contracting parties in favor of such third
party.”). GM also argues that, unlike the strangers in
Burns, White and Wilhite, GM is seeking to enforce the
contract for its own benefit. But the “stranger to the con-
tract” exception is not limited to the facts of those cases.
Rather, the “stranger to the contract” exception applies in
cases “where the controversy is between third parties, or
one party to the instrument and a third party.” White, 109
N.E. at 763 (quoting Josephson v. Gens, 141 N.Y.S. 524
(N.Y. App. Term 1913)). Finally, GM argues that it is not
No. 01-2156                                              13

seeking to vary or contradict the plain language of the
release agreements. This argument appears to be that
Indiana would apply the “stranger to the contract” excep-
tion to the parol evidence rule only to those contracts that
are ambiguous. This is incorrect since Indiana already
recognizes that parol evidence can be considered if the
contract is ambiguous. See, e.g., Huffman, 588 N.E.2d
at 1267 (holding that where “contradictory references
cloud the intent of the document . . . . parol evidence may
be utilized to determine the parties’ true intentions re-
specting the document’s application”). The “stranger to
the contract” exception is an additional exception to the
parol evidence rule. For example, in Wilhite, despite the
plain and unambiguous language of the contract, the court
held that parol evidence could be used to determine the
intent of the parties. Wilhite, 31 N.E.2d at 282. While
commentators have criticized the “stranger to the contract”
exception to the parol evidence rule, see 13 A.L.R.3d
313, § 2c (arguing that the parol evidence rule should
apply both to strangers and to parties), Wilhite, White and
Burns have not been overruled in Indiana.
   Because the district court did not examine any parol
evidence, it is difficult for us to determine whether there
was sufficient evidence to support a finding that the
plaintiffs did not intend to release GM from claims aris-
ing out of the automobile accident. We do, however, note
some factors which may bear on the questions of intent.
Putting aside the plaintiffs’ other claims against GM and
looking only at the actual medical expenses incurred by
Betty Deckard and Donald Shields, the huge disparity
between those expenses (over $240,000) and the amounts
paid out in settlement to them ($10,000) may indicate
that Deckard and Shields did not intend to release their
automotive liability claims against GM. Further, the De-
cember 18, 1997, letter from Farm Bureau to the plain-
tiffs also indicates that the intent of the parties was to
14                                                 No. 01-2156

release only the named insureds (Mr. and Mrs. Watson)
and the permissive user (Karen Watson, the driver of the
car during the accident) from liability and not to release
GM.5 Such a letter, being a prior expression of the par-
ties’ intent, would be admissible as parol evidence in this
case. Finally, a powerful bit of evidence could be inferred
from the answer to the question: “Was Watson at any risk
of suit by GM?” The reason why an insurer such as Farm
Bureau might want a general release is to protect its in-
sured Watson, the reckless driver. There would be little
point in settling Deckard v. Watson if the next suit would
be GM v. Watson. If there was no risk that GM would
proceed against Watson or the insurer, this would be
strong evidence that the original release fails to reflect the
actual deal, for no one had any reason to make a gift to
GM. If the parties can with such parol evidence as is
admissible in Indiana prove that they did not intend to
release GM, then the plaintiffs have asserted a set of
facts that, if true, would entitle them to relief. Thus, the
district court erred in dismissing the plaintiffs’ complaint.


                              III.
  For the foregoing reasons, we REVERSE the judgment
of the district court and REMAND for further proceedings
not inconsistent with this opinion.




5
  We reach this determination without reference to the purported
“Rescission Agreement and Release” documents. These documents
are not barred by the parol evidence rule because they were writ-
ten after the original agreements were signed. They might, how-
ever, be barred by the general rule that a court should only look
within the “four corners” of a document.
No. 01-2156                                        15

A true Copy:
      Teste:

                   ________________________________
                   Clerk of the United States Court of
                     Appeals for the Seventh Circuit




               USCA-00-R-006—10-1-02
