Marcus Garvey Square, Inc. v. Winston Burnett Const. Co. of California, Inc.

• Decision Date: 18 January 1979
• Docket Number: 76-1515,Nos. 76-2827,s. 76-2827
• Citation: 595 F.2d 1126
• Parties: MARCUS GARVEY SQUARE, INC., Petitioner-Cross Defendant, v. WINSTON BURNETT CONSTRUCTION CO. OF CALIFORNIA, INC., Respondent-Cross Complainant-Appellant, v. HOME SAVINGS AND LOAN ASSOCIATION, a California Corporation, Defendant-Cross Complainant-Appellee. WINSTON A. BURNETT CONSTRUCTION COMPANY OF CALIFORNIA, INC., Cross- Complainant-Appellant, v. HOME SAVINGS AND LOAN INC., Federal Housing Administration, Patricia Roberts Harris, * Secretary of Housing and Urban Development, Does One through Ten, Inclusive, Cross-Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1126

595 F.2d 1126

MARCUS GARVEY SQUARE, INC., Petitioner-Cross Defendant, v. WINSTON BURNETT CONSTRUCTION CO. OF CALIFORNIA, INC., Respondent-Cross Complainant-Appellant, v. HOME SAVINGS AND LOAN ASSOCIATION, a California Corporation,

Defendant-Cross Complainant-Appellee.

WINSTON A. BURNETT CONSTRUCTION COMPANY OF CALIFORNIA, INC., Cross- Complainant-Appellant, v. HOME SAVINGS AND LOAN INC., Federal Housing Administration, Patricia Roberts Harris, ^* Secretary of

Housing and Urban Development, Does One

through Ten, Inclusive,

Cross-Defendants-Appellees.

Nos. 76-2827, 76-1515.

United States Court of Appeals, Ninth Circuit.

Jan. 18, 1979.

As Amended on Denial of Rehearing April 18, 1979.

Ron W. Fields (argued), San Francisco, Cal., J. Warren Johnson, San Mateo, Cal., for respondent-cross complainant-appellant.

William T. McGivern, Jr., Asst. U. S. Atty. (argued), San Francisco, Cal., for defendant-cross complainant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before ELY, TRASK and TANG, Circuit Judges.

TANG, Circuit Judge:

This is a cross-complaint by a general contractor against the building owner, mortgage lender, and several federal agencies connected with the building project to recover the balance allegedly due under the construction contract. The case was originally filed in California Superior Court and was removed pursuant to 28 U.S.C. § 1442(a). The district court granted summary judgment in favor of the cross-defendants on the grounds that the court lacked jurisdiction. This court has jurisdiction pursuant to 28 U.S.C. § 1291.

I.

The facts of this case were largely stipulated. In 1969, the Federal Housing Administration (FHA), a subdivision of the Department of Housing and Urban Affairs (HUD), began negotiations for the construction of a low and moderate income housing project in San Francisco's Western Addition district. In their final form, the plans called for the construction of a 101 unit apartment complex, to be named Marcus Garvey Square (the Square). A non-profit California corporation, Marcus Garvey Square, Inc. (MGS), was created to own the Square. MGS was composed of various community groups and had no other assets. The project was to be financed by a mortgage from Home Savings & Loan (Home), a California corporation, which would be insured by the FHA and HUD pursuant to § 236 of the National Housing Act, 12 U.S.C. § 1715z-1. Winston A. Burnett Construction Co. (Burnett), another California corporation, was to be the general contractor.

On September 1 and 10, 1970, a number of documents relating to this project were executed. For the purposes of this litigation the crucial documents were:

1) A construction contract between MGS and Burnett which called for construction of the Square by September 10, 1971 at a price not to exceed $1,710,040.00.

2) A Building Loan Agreement between MGS and Home, whereby Home agreed to provide $2,175,300.00 for the project.

3) A Mortgagor's Agreement between Home, MGS, and the Secretary of HUD, whereby HUD agreed to insure the mortgage.

Burnett had earlier arranged for payment and performance bonds which ran to MGS and were assignable to the Secretary. Boise Cascade Co. (Boise) agreed to indemnify the bonding company for any losses suffered on these bonds. All of these documents, and almost all of those connected with the project, were HUD or FHA specified and approved.

Construction began on September 18, 1970. Pursuant to the contractual arrangements, Burnett would requisition a progress payment from MGS on an FHA form, MGS would certify the amount to Home, and Home would then obtain FHA insurance for the amount of that particular progress payment. The FHA was committed to provide mortgage insurance, but only as advances were made and only for amounts actually advanced. Ten per cent of each progress payment was retained by Home, to be paid over when the Square was completed.

For reasons not specified in the record, construction of the Square was delayed. On October 11, 1971, Boise notified HUD that Burnett had been merged into Boise and Boise had assumed all Burnett's rights and obligations. Boise completed the Square January 20, 1972, more than four months late. The last FHA insurance certificate was issued March 2, 1972, and counting the amount Burnett received from that advance, Burnett received a total disbursement of $1,540,150.32. Under the construction contract, MGS still owed Burnett $169,889.68, primarily the contract retentions.

However, the day before this last insurance certificate was issued, MGS defaulted on its loan. Allegedly, the late construction was a major factor in the default. Home notified HUD of its intention to assign the mortgage to HUD and receive insurance benefits. The assignment was executed October 27, 1972, and it transferred all Home's interest in the project to the Secretary of HUD. On instructions from HUD, Home had reduced the principal amount of the loan by the amount of funds not disbursed, including the contract retentions, before the assignment. The mortgage HUD was assigned therefore, did not include the retentions.

MGS brought suit against Burnett in California Superior Court for either the damages from the late construction or enforcement of an arbitral award for those damages. Burnett counter-claimed for the contract retentions, and cross-complained against Home, HUD, FHA, and the Secretary. The action was removed to the district court pursuant to 28 U.S.C. § 1442(a). Since none of the parties had briefed the matter, the court ordered them to file cross motions for summary judgment on the issue of jurisdiction. A final judgment was entered July 9, 1976, granting summary judgment to Home and the federal defendants. ¹ The court found it lacked jurisdiction, but added that Burnett would not prevail on the merits. Burnett brings this appeal.

II.

The issues presented by this appeal are primarily jurisdictional. In order to decide those jurisdictional issues, we assume that Burnett would be entitled to the full amount withheld from it. This may or may not be the case. There are allegations that Burnett is liable for liquidated damages for the late construction, and also for defects in the Square. Presumably these liabilities, if established, would be off-set against amounts due Burnett on the construction contract. We express no opinion on the validity of those claims, or the propriety of off-setting them. Those are matters for the court that hears this case on the merits.

In order to understand the jurisdictional problems presented, it is necessary to analyze Burnett's claims. It should be stressed at the outset that Burnett seeks money damages only, specifically the amounts alleged to be due under the construction contract. Burnett offers several theories for its recovery of this money. Burnett claims to be a third party beneficiary of both the Building Loan Agreement and the Mortgagor's Agreement, to have an equitable lien on the undisbursed mortgage proceeds, and to be entitled to payment as a completing surety. Burnett also argues that the Secretary is obligated to pay Burnett under provisions of the National Housing Act, 12 U.S.C. § 1715z-3 and 12 U.S.C. § 1713(L ). These various theories will be referred to as the contract theories (third party beneficiary, equitable lien, and suretyship) and the statutory theory (claims based on the National Housing Act).

III.

With respect to the statutory theory, it is clear that the district court had jurisdiction. If this part of the suit had been filed in the district court as a separate action, the district court would have had jurisdiction under 28 U.S.C. § 1331, federal question jurisdiction, as the statute is the alleged basis of Burnett's claim. We proceed therefore to the merits of the statutory theory.

The Square was built pursuant to § 236 of the National Housing Act 12 U.S.C. § 1715z-1. Burnett argues that the provisions of 12 U.S.C. § 1715z-3 and 12 U.S.C. § 1713(L ) (as incorporated by 12 U.S.C. § 1715z-3(a)(2)) require the Secretary to complete housing projects where the Secretary acquires the mortgage, by assignment or otherwise, and to pay the expenses incurred in connection with that completion. Since the Secretary is obliged to pay for completion, it should make no difference whether completion occurs before or after the Secretary acquires the project. We are not persuaded by this argument.

Under the National Housing Act, the Secretary assumes no obligation to any party involved in a mortgage transaction except the mortgagee. Compare, United States v. Neustadt, 366 U.S. 696, 709, 81 S.Ct. 1294, 6 L.Ed.2d 614 (1961); United States v. Longo, 464 F.2d 913 (8th Cir. 1972). HUD, in its role as mortgage insurer, does not guarantee a profit to anyone. Henry Barracks Housing Corp. v. United States, 281 F.2d 196, 150 Ct.Cl. 689 (1960); Deseret Apartments v. United States, 250 F.2d 457 (10th Cir. 1957). Clearly these statutes were not intended to protect a general contractor like Burnett from any identifiable harm. The fact that the Secretary may complete a housing project under these sections does not mean that an enforceable right to compel completion exists. Yet such a right would have to exist for Burnett to prevail here.

Even if such a right existed, it is doubtful that Burnett could enforce it on the facts presented here. The Square was complete before the Secretary acquired the mortgage. As we read § 1713(L ), it gives the Secretary authority to incur various expenses after a project is acquired; it says nothing about the Secretary's liability for expenses incurred by the mortgagee before the Secretary acquired the mortgage. We hold that Burnett has failed to state a claim under the National Housing Act.

IV.

The contract theories present difficult jurisdictional problems. These difficulties arise because two separate distinctions must be made, and are often confused in the case la...