C.H. Sanders Co., Inc. v. BHAP Housing Development Fund Co., Inc.

• Decision Date: 08 May 1990
• Docket Number: Nos. 1016,D,1017,s. 1016
• Parties: C.H. SANDERS CO., INC. and Bristol Construction Corp., a Joint Venture, Appellees/Cross-Appellants, v. BHAP HOUSING DEVELOPMENT FUND COMPANY, INC., and Samuel R. Pierce, Secretary of Housing and Urban Development, Defendants, Samuel R. Pierce, Secretary of Housing and Urban Development, Appellant/Cross-Appellee. ockets 89-6249, 89-6251.
• Court: U.S. Court of Appeals — Second Circuit

Page 114

903 F.2d 114

C.H. SANDERS CO., INC. and Bristol Construction Corp., a Joint Venture, Appellees/Cross-Appellants, v. BHAP HOUSING DEVELOPMENT FUND COMPANY, INC., and Samuel R.

Pierce, Secretary of Housing and Urban

Development, Defendants,

Samuel R. Pierce, Secretary of Housing and Urban

Development, Appellant/Cross-Appellee.

Nos. 1016, 1017, Dockets 89-6249, 89-6251.

United States Court of Appeals, Second Circuit.

Argued March 21, 1990.

Decided May 8, 1990.

Frederick Cohen, New York City (John S. Wojak, Jr., and Ross & Cohen, New York, N.Y., on the brief), for appellees C.H. Sanders Co. and Bristol Const. Corp., a Joint Venture.

Samuel Kirschenbaum, Garden City, N.Y. (Ira Levine, and Kirschenbaum & Kirschenbaum, Garden City, N.Y., on the

brief), for appellant Samuel R. Pierce in No. 89-6249.

Thomas A. McFarland, Asst. U.S. Atty., Brooklyn (Andrew J. Maloney, U.S. Atty., Brooklyn, N.Y., on the brief), for appellant Samuel R. Pierce in No. 89-6251.

Before TIMBERS, NEWMAN and PRATT, Circuit Judges.

TIMBERS, Circuit Judge:

The defendants in the district court in this action were Samuel R. Pierce, the Secretary of the United States Department of Housing and Urban Development ("the Secretary" or "HUD") and BHAP Housing Development Fund Company, Inc. ("BHAP"), a non-profit corporation organized for the purpose of constructing a facility for the elderly in Brooklyn. The Secretary is the sole appellant/cross-appellee. The plaintiffs in the district court were C.H. Sanders Co., Inc. and Bristol Construction Corp. (collectively "Sanders"), a joint venture; they are the appellees/cross-appellants in this Court.

The Secretary appeals from that part of a judgment entered September 25, 1989, in the Eastern District of New York, I. Leo Glasser, District Judge, which granted Sanders' motion for summary judgment on its first cause of action which sought foreclosure of a mechanic's lien filed by Sanders. The judgment also denied the Secretary's motion for summary judgment which would have dismissed Sanders' entire complaint. Sanders cross-appeals from that judgment to the extent that it denied Sanders' motion for summary judgment on its second cause of action which sought direct enforcement of an arbitration judgment against HUD and granted the Secretary's cross-motion for dismissal of that claim for lack of subject matter jurisdiction.

On appeal, HUD claims that granting summary judgment on the lien foreclosure claim is error due to several outstanding issues of material fact and due to the court's flawed construction of the New York Lien Law. On cross-appeal, Sanders claims that, not only is there federal subject matter jurisdiction over the second cause of action relating to the arbitration award, but that HUD has consented to the suit in the district court.

For the reasons which follow, we affirm on HUD's appeal which relates to the lien foreclosure claim, and we reverse and remand on Sanders' cross-appeal which relates to enforcement of the arbitration judgment.

I.

We summarize only those facts and prior proceedings believed necessary to an understanding of the issues raised on appeal.

This action arises out of the construction and renovation of a federally funded housing project known as the Brooklyn Home for Aged People ("the Project"), located at 1095 St. John's Place, Brooklyn, New York, which BHAP owned. BHAP is essentially a non-profit, assetless, community organization organized specifically for the Project. It obtained funding for the Project from HUD under Sec. 202 of the National Housing Act, 12 U.S.C. Sec. 1701q (1988), pursuant to which HUD agreed to provide a low-cost mortgage in the amount of $4,364,100. In return, HUD received a security interest in the property and retained substantial control over the Project. To implement their agreements, on or about December 14, 1981 BHAP and HUD executed a building loan agreement, building loan mortgage, and mortgage note and regulatory agreement.

That same day, simultaneous with the execution of the agreements referred to above, BHAP entered into a construction contract ("the Agreement") with Sanders as general contractor, under which Sanders agreed to furnish all services and materials necessary to complete the Project. The Agreement, which was prepared by HUD, required that all claims and disputes be resolved by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. Although the Secretary was not a party to the Agreement, HUD was given substantial control over the Project, including the right to interpret the Agreement itself and "to determine compliance therewith." In addition, BHAP agreed to use HUD forms as a condition for obtaining the HUD mortgage loan.

Sanders worked on the project for several years, although the actual date that it halted work is unclear. In any event, on January 17, 1986, Sanders requested arbitration, claiming that BHAP breached the Agreement. Sanders sought to recover $1,848,010 claimed to be due under the Agreement, representing a contract balance ($212,045), extra work performed at the request of BHAP ($121,353), and additional costs for labor and materials furnished to the Project. BHAP counterclaimed for $1,974,506.94, claiming that the work performed by Sanders was inadequate and defective. On January 21, 1986, Sanders filed a Notice of Mechanic's Lien in the amount of $1,161,528 in the Kings County clerk's office, pursuant to N.Y.Lien Law Sec. 3 et seq. (McKinney's 1966).

Sanders could not compel HUD to submit to arbitration as HUD was not formally a party to the contract. Prior to the arbitration hearings, however, by letters dated August 26, 1986, October 8, 1986, and November 6, 1986, counsel for Sanders advised HUD of the scheduled hearings and requested HUD's participation therein, stating that HUD could be held liable for any arbitration award rendered against BHAP. HUD declined. It stated that it considered the arbitration to be "essentially a private dispute" between BHAP and Sanders.

On April 23, 1987, after six hearings, the arbitrators found for Sanders and awarded $406,000, plus interest from April 1, 1985. In a decision dated October 1, 1987, the New York Supreme Court confirmed the award, which totaled $502,328.86 with interest and costs.

In November 1987, Sanders commenced the instant action. The complaint alleged two causes of action. The first sought foreclosure of Sanders' mechanic's lien in the amount of the arbitration award, claiming priority over HUD's mortgage because of HUD's admitted failure to comply with the provisions of the lien law. The second cause of action sought direct enforcement of the arbitration award against HUD, claiming that, since BHAP was organized as a "shell" corporation without assets, HUD was liable under general equitable principles.

On April 8, 1988, Sanders moved for summary judgment on the ground that there were no genuine issues of material fact relevant to the disposition of either cause of action. HUD cross-moved for summary judgment, seeking dismissal of both causes of action. By a separate cross-motion, HUD sought dismissal of the second cause of action on the ground that the district court lacked subject matter jurisdiction.

On July 20, 1989, the district court granted summary judgment in favor of Sanders on the first cause of action, holding that Sanders was entitled to foreclose on its lien in the amount of the arbitration award as confirmed. It based its decision on its finding that BHAP in effect was HUD's alter ego.

The court dismissed the second cause of action, holding that it lacked subject matter jurisdiction to entertain Sanders' direct claim against HUD.

This appeal followed.

II.

We turn first to the question whether the district court erred in dismissing Sanders' second cause of action for lack of subject matter jurisdiction. At the outset, we observe that an action against the sovereign is properly before the district court only if there was both a grant of subject matter jurisdiction and a valid waiver of sovereign immunity. Falls Riverway Realty v. City of Niagara Falls, 754 F.2d 49, 54 (2 Cir.1985); S.S. Silberblatt, Inc. v. East Harlem Pilot Block--Building 1 Housing Development Fund Co., 608 F.2d 28, 35 (2 Cir.1979). We consider these issues separately.

(A)

We must determine whether the district court had subject matter jurisdiction to consider Sanders' second cause of action for direct enforcement against HUD of the state court judgment which confirmed the arbitration award. Sanders contends that the district court had "federal question" jurisdiction pursuant to 28 U.S.C. Sec. 1331 (1988). It asserts that enforcement of the judgment claim "arises under" Sec. 202 of the National Housing Act, 12 U.S.C. Sec. 1701q (1988), and requires the application of federal common law. We agree.

Our analysis begins with the substance of Sanders' second cause of action. Sanders sought a monetary recovery from HUD in the amount of the state court judgment on the ground that, since HUD was liable for the debts of its assetless creation (BHAP), it was bound by the award rendered in the arbitration proceeding between BHAP and Sanders. Under federal common law, Sanders contended, it had "equitable rights generated by HUD's course of activities pursuant to federal statutes, including the contracts it has sponsored, and prescribed for others, as a condition of federal aid." Trans-Bay Engineers and Builders, Inc. v. Hills, 551 F.2d 370, 377 (D.C.Cir.1976).

The district court granted the Secretary's motion to dismiss the enforcement claim, holding that it lacked subject matter jurisdiction. The court correctly rejected 12 U.S.C. Sec. 1702 as a basis for subject matter jurisdiction over the enforcement claim. Section 1702, as the court observed, is only a waiver of sovereign immunity and not an independent grant of jurisdiction. Mundo Developer, Ltd. v. Wicklow Associates, 585...