551 F.2d 370 (D.C. Cir. 1976), 75-1976, Trans-Bay Engineers & Builders, Inc. v. Hills

Docket Nº:75-1976.
Citation:551 F.2d 370
Party Name:TRANS-BAY ENGINEERS AND BUILDERS, INC., Appellant, v. Carla A. HILLS, Secretary of Housing and Urban Development, et al.,
Case Date:December 30, 1976
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

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551 F.2d 370 (D.C. Cir. 1976)



Carla A. HILLS, Secretary of Housing and Urban Development, et al.,

No. 75-1976.

United States Court of Appeals, District of Columbia Circuit

December 30, 1976

Argued Sept. 29, 1976.

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Myron P. Curzan, Washington, D. C., with whom J. Bradway Butler and Kenneth V. Handal, Washington, D. C., were on the brief for appellant.

Richard A. Graham, Asst. U. S. Atty., Washington, D. C., with whom Earl J. Silbert, U. S. Atty., John A. Terry and Robert M. Werdig, Jr., Asst. U. S. Attys., Washington, D. C., were on the brief for federal appellees.

Morton W. Schomer, Arthur I. Cantor and Barry P. Rosenthal, Washington, D. C., were on the brief for appellee Advance Mortg. Corp.

Before McGOWAN, LEVENTHAL and ROBB, Circuit Judges.

Opinion for the Court filed by Circuit Judge LEVENTHAL.

LEVENTHAL, Circuit Judge:

Plaintiff-appellant, Trans-Bay Engineers & Builders, Inc. (Trans-Bay), is a minority owned business engaged in construction and general contracting work in the Oakland-San Francisco Bay Area. Trans-Bay seeks certain sums of money retained as a "holdback" during the construction of a housing project financed pursuant to § 236 of the National Housing Act, 12 U.S.C. § 1715z-1. The District Court entered summary judgment for defendants, the Secretary of Housing and Urban Development (HUD), 1 and Advance Mortgage Corp. (Advance). 2 In our view, Trans-Bay is conditionally entitled to recover the retained amounts, and we remand the case for further proceedings.


In 1971, Trans-Bay contracted with More Oakland Residential Housing, Inc. (MORH), a non-profit corporation, to build a 231 unit housing project in Oakland, California for low and moderate income families. The project, known as MORH Phase II, was to be federally insured and subsidized pursuant to § 236 of the National Housing Act.

  1. The Statutory Scheme

    Section 236 was enacted by Congress to make rental housing available to low income families at reduced rentals. It is a two pronged program by which the Secretary (1) provides mortgage insurance for conventional private lenders, to induce them to make loans to builders and (2) subsidizes the monthly interest accruing on the mortgage loan, to the extent necessary to reduce the interest rate to an effective equivalent of one percent per annum.

    If the § 236 project owner is a non-profit corporation, HUD will insure a mortgage covering 100 percent of the replacement cost of the project. This permits participation in the program by organizations with limited financial resources. Those without sufficient assets to cover the initial planning and development expenses are eligible for an HUD seed money loan. Since the interest on the construction loan is incorporated into the principal of the insured mortgage, § 236 projects generally require no operating income until they are completed.

    Risk to the mortgage lender under § 236 is reduced not only by the mortgage insurance provided by HUD, but also by the lender's ability to sell the mortgage upon final endorsement to the Government National Mortgage Association (GNMA). For a fee paid at HUD's initial closing 3 the lender obtains a GNMA commitment to buy the mortgage at a fixed discount rate.

    The rentals charged by the project owner vary according to family income, ranging from a minimum "basic rent," a rental covering pro rata operating expenses and interest payments, to the maximum "fair market rental," as determined without any

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    interest subsidy. However, amounts collected by the owner in excess of the basic rent must be turned over to HUD's residual receipts fund.

  2. The Events of This Project

    The initial closing of this MORH Phase II project was held in the HUD office in San Francisco on December 22, 1971. It was preceded by nearly a year of preliminary negotiations between the parties. The project owner, MORH, is a non-profit California corporation embodying a consortium of local community groups in Oakland. 4 At the time of the initial closing, MORH's only significant asset was a previous § 236 housing project 5 which was itself subject to a 100% 40 year HUD insured mortgage. Advance Mortgage Corporation, a Delaware Corporation, provided the mortgage financing for the project. The Secretary was represented by the Federal Housing Administration (FHA), an organizational sub-unit of HUD.

    Among the many documents executed at the initial closing were the Construction Contract, the Building Loan Agreement and the Regulatory Agreement. 6

    The Construction Contract, signed by Trans-Bay and MORH, called for a construction period of 17 months, commencing within 10 days of the initial closing, and payments on cost-plus-fixed-fee basis, not to exceed $4,703,790. The Building Loan Agreement, signed by MORH and Advance, defined the circumstances under which Advance would disburse loan funds to MORH. The Regulatory Agreement, signed by MORH and HUD, covered the owner's use of the loan funds, rental rates and many other obligations.

    Construction began and proceeded in a timely manner. On May 25, 1973, MORH Phase II was inspected by the architects and certified to be one hundred percent completed. This certification was endorsed on May 31 by a representative of the Secretary.

    The Construction Contract authorized the payment of monthly draws incremental payments based upon completed construction, but minus a 10% retention or "holdback". 7 By June 12, 1973, all authorized construction draws had been paid to Trans-Bay. The retained amounts totaled $467,306.

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    The Construction Contract provided that the holdback "shall be payable" to the contractor 30 days after construction was completed provided certain preconditions were met. 8 All of the preconditions were fully met within the thirty day period ending June 30, 1973.

    Subsequent to June 30, 1973, Trans-Bay made numerous requests to Advance and HUD for the release of the $467,306. In October 1973, Advance and HUD agreed to release one half of that amount, 9 leaving $233,653 which is at issue here. HUD took the position that the remainder of those funds could not, in the normal course, be released until after a "final closing" 10 of the mortgage financing had occurred for the project. Such an event has never taken place, and is no longer possible because of the project owner's default.

    MORH, the project owner, was unable to meet the interest payments it owed to Advance after September 1, 1973. Advance filed a formal notice of project default with HUD on January 16, 1974, and several months thereafter, informed HUD of its election to assign the outstanding mortgage to HUD, pursuant to statutory provisions. 12 U.S.C. § 1713(g). Both prior to that date and subsequently, the parties attempted to negotiate an arrangement which would permit MORH's default to be worked out and make all parties, including Trans-Bay, whole. However, following the district court's denial of Trans-Bay's request for a preliminary injunction, Advance assigned the mortgage to HUD on December 24, 1974. Approximately $300,000 remained in the undisbursed mortgage fund at the time of assignment. Subsequently, HUD foreclosed the mortgage.

  3. Positions of Parties

    Trans-Bay seeks recovery against the Secretary and Advance as a third party beneficiary to the Building Loan Agreement, and alternatively under theories of suretyship, and equitable lien/unjust enrichment.

    The Secretary claims that MORH's default, the lack of privity between Trans-Bay and HUD, the absence of a final closing, and unclean hands preclude Trans-Bay's recovery. The Secretary also alleges a lack of jurisdiction in this court to decide this litigation.


  4. Tucker Act Limitation

    We reject appellees' challenge to the district court's jurisdiction. It is argued that 28 U.S.C. § 1346(a)(2) limits the district court jurisdiction in suits based on contractual claims against the United States to claims not exceeding $10,000. 11

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    Ordinarily, persons suing the United States or a Government agency on a contract claim rely on 28 U.S.C. § 1346(a)(2), which waives the defense of sovereign immunity subject to certain limitations. However, Trans-Bay relies on the waiver of sovereign immunity provided in12 U.S.C. § 1702 (part of the National Housing Act). Section 1702 provides that in carrying out the provisions of the housing law pertinent to this case, the Secretary of Housing and Urban Development shall "be authorized in his (her) official capacity, to sue and be sued in any court of competent jurisdiction, State or Federal." Since Trans-Bay need not rely on or invoke28 U.S.C. § 1346 and its waiver of immunity, it is not restricted to the $10,000 limitation on the district court's jurisdiction provided by § 1346. 12

    There is authority to the effect that § 1702 couples a waiver of sovereign immunity and a grant of subject matter jurisdiction in the federal district court. 13 There are also rulings that it is not a grant of jurisdiction. 14

    We need not pursue this question for we have other statutes that establish jurisdiction in the district court, once the barrier of sovereign immunity is hurdled by § 1702. In view of the waiver of sovereign immunity, the court has authority to dispose of this action even though a judgment against the Secretary establishing plaintiff's entitlement may affect funds in the accounts of the Government's officers charged with HUD's application of funds.

  5. Diversity Jurisdiction

    We begin by approving the district court's ruling that there is diversity jurisdiction under 28 U.S.C. § 1332. HUD asserts (Br. at 20) that "the Secretary, indeed the United States, is not a citizen of any state for the purpose of establishing diversity jurisdiction." This suit is against the Secretary in her...

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