Chicago Title Ins. Co. v. SHERRED VILLAGE ASSOC., Civ. No. 76-56 P.

• Decision Date: 14 June 1982
• Docket Number: Civ. No. 76-56 P.
• Citation: 544 F. Supp. 320
• Court: U.S. District Court — District of Maine
• Parties: CHICAGO TITLE INSURANCE COMPANY, et al., Plaintiffs, v. SHERRED VILLAGE ASSOCIATES, et al., Defendants.

544 F. Supp. 320

CHICAGO TITLE INSURANCE COMPANY, et al., Plaintiffs, v. SHERRED VILLAGE ASSOCIATES, et al., Defendants.

Civ. No. 76-56 P.

United States District Court, D. Maine.

June 14, 1982.

COPYRIGHT MATERIAL OMITTED

Charles Harvey, John W. Philbrick, Verrill & Dana, Portland, Maine, Donald Memmer, Gladys Bryer, Chicago Title Ins. Co., Chicago, Ill., for plaintiffs.

Duane D. Fitzgerald, Bath, Maine, John J. Flaherty, Keith A. Powers, Portland, Maine, Charles W. Smith, Saco, Maine, Paula D. Silsby, Asst. U. S. Atty., Portland, Maine, Nancy Christopher, Geoffrey Patton, HUD, Washington, D. C., for defendants.

OPINION AND ORDER OF THE COURT

GIGNOUX, Chief Judge.

This action, seeking a declaratory judgment on the respective priorities of a mechanic's lien and a mortgage assigned to the Department of Housing and Urban Development (HUD), is before the Court for the second time, on a remand from the Supreme Court for reconsideration in light of that Court's intervening decision in United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). The Court concludes that state lien priority law is to be adopted as the federal rule of decision, and, accordingly, that the mechanic's lien is superior to the mortgage in the present case.

I FACTUAL SETTING

Sherred Corporation, as contractor for Sherred Village Associates (Sherred), the owner and developer of the Sherred Village moderate income housing project in Bath, Maine, entered a contract in 1971 with Hercoform Incorporated pursuant to which Hercoform, as prime subcontractor, agreed to provide and erect prefabricated housing units for the project. In 1972, Sherred obtained mortgage financing for the project from the New England Merchants National Bank, whose loan was insured by HUD under Section 236 of the National Housing Act, 12 U.S.C. § 1715z-1. A regulatory agreement between HUD and the developer was recorded along with the mortgage on the day the latter was executed. Chicago Title Insurance Company insured the developer's title in the mortgaged property for the benefit of the Bank; among the risks insured against were liens superior to the mortgage.

Following completion of the project in 1973, Hercoform filed in the Sagadahoc County, Maine, Registry of Deeds a mechanic's lien claim for $440,986.03 in assertedly unpaid bills on the project. On the day the lien was recorded, December 20, 1973, Hercoform also commenced an action in the Sagadahoc County Superior Court to enforce its claim.

When Sherred defaulted on its payments in 1974, the Bank assigned its mortgage to HUD. In the assignment the Bank warranted to HUD that the mortgage would have priority over all mechanics' and materialmen's liens recorded after the date on which the mortgage was recorded.

It is undisputed that under Maine law Hercoform's lien has priority over the mortgage, since Hercoform, with the consent and knowledge of Sherred, performed services as subcontractor before the mortgage was given and timely filed its lien claim and complaint. 10 M.R.S.A. §§ 3251 et seq.; Lyon v. Dunn, 402 A.2d 461, 463 (Me.1979). Prior to any resolution of Hercoform's state court suit, however, the Bank and Chicago Title brought the present action in this Court under the Declaratory Judgment Act, 28 U.S.C. § 2201, seeking a declaration that the government's mortgage lien takes priority over Hercoform's mechanic's lien. Hercoform and HUD were named as defendants.

Following an evidentiary hearing, this Court ruled on February 16, 1977, that the traditional federal "first in time, first in right" and choateness doctrines applied as the rule for determining lien priority in this case. Accordingly, the Court held that the mortgage assigned to HUD by the Bank was entitled to priority over the mechanic's lien asserted by Hercoform. After an affirmance by the First Circuit Court of Appeals, 568 F.2d 217 (1st Cir. 1978), the Supreme Court granted certiorari, vacated the judgment, and remanded the case, 441 U.S. 901, 99 S.Ct. 1987, 60 L.Ed.2d 370 (1979), for further consideration in light of United States v. Kimbell Foods, Inc., supra. In an order entered May 22, 1979, the First Circuit remanded the action to this Court. Following a request by HUD, which has joined with plaintiffs Chicago Title and the Bank in asserting the priority of the mortgage over the mechanic's lien,¹ this Court ordered the record reopened and conducted an evidentiary hearing with respect to the operation of the HUD Section 236 program under which this project was undertaken.

Section 236 of the National Housing Act, 12 U.S.C. § 1715z-1, establishes a program to facilitate the construction of rental housing for lower income families. Under the program, the Secretary of Housing and Urban Development is authorized to insure mortgages and to make interest reduction payments that effectively reduce the rate of interest on the projects to as little as 1%. Not surprisingly, the program is rather complicated and involves a number of participants.²

Typically, a project originates with an application from a nonprofit or limited distribution sponsor to the appropriate field office of the Federal Housing Administration (FHA)³ seeking issuance of a site appraisal and market analysis (SAMA) letter. 24 C.F.R. § 236.5. Representatives from the field office visit and appraise the site and assess the marketability of the proposal. If the project appears feasible, the FHA issues a SAMA letter inviting the sponsor to submit an application for a conditional commitment.

At that point, the sponsor must find an FHA-approved lender, 24 C.F.R. §§ 236.1, 221.528, 203.1-203.9, who is willing to initiate the loans needed for construction and permanent financing of the project. The sponsor and lender apply to HUD for a conditional insurance commitment, setting out in the application a broad description of the project, including estimated construction and operating costs; providing detailed estimates of operating expenses and other financial considerations; and identifying other participants, including the contractor and architect, if known. 24 C.F.R. §§ 236.1, 221.509; FHA Form No. 2013. In reviewing the application, the FHA field office examines the experience and previous record of the various named participants to ensure their reliability and ability to complete the project, runs an initial check on the accuracy of the estimated costs, and carefully considers the feasibility of the particular project.

If the FHA accepts the project, it issues a conditional commitment for insurance, subject to compliance by the sponsor (mortgagor) and lender (mortgagee) with a long list of requirements prior to issuance of a firm commitment and initial closing. Among those requirements are: the mortgage; certificates from the mortgagor and mortgagee; a policy of title insurance running to the mortgagee and HUD (although this requirement may be waived by the Commissioner of the FHA if title insurance is unavailable, 24 C.F.R. §§ 236.1, 221.563); assurance of completion of the project, typically in the form of either performance and payment bonds or a completion assurance agreement (and meeting at a minimum the requirements set forth in 24 C.F.R. § 221.542, as incorporated by id. § 236.1); assurance of completion of off-site facilities; a detailed cost breakdown; and evidence of compliance with local zoning requirements. See FHA Form No. 3618. The required mortgage form specifies that the mortgagor "will not voluntarily create or permit to be created ... any lien or liens inferior or superior to the lien of this Mortgage and ... will keep and maintain the property free from the claim of all persons supplying labor or materials ...." FHA Form No. 4125-B, ¶ 15; see 24 C.F.R. §§ 236.1, 221.520. The mortgagor certifies to the FHA that the mortgaged premises are free and clear of all liens other than the insured mortgage, unless the FHA has specifically agreed to an exception, FHA Form No. 2433; and the mortgagee agrees to abide by all applicable FHA regulations, FHA Form No. 2434.

In deciding whether to initiate a loan, the mortgagee is authorized both by regulation, 24 C.F.R. §§ 236.1, 221.542, and by HUD instructions, see Initial Closing Commitment for Project Mortgage Insurance, HUD Handbook 4430.1, ¶ 1-12, to require of the mortgagor whatever additional security, including personal indemnity agreements, it deems necessary to assure completion of the project. Before it can receive FHA mortgage insurance benefits in the event of default, however, the mortgagee must warrant that "the mortgage is prior to all mechanics' and materialmen's liens filed on record subsequent to the recording of the mortgage, regardless of whether such liens attached prior to the recording date," and that the mortgage is prior to any other liens which may have attached or arisen subsequent to the recording of the mortgage. 24 C.F.R. §§ 236.251, 207.258.

Construction loans on Section 236 projects frequently are advanced by the mortgagee itself;⁴ but on the permanent loans the mortgagee often relies on the secondary mortgage market, where the primary participant is the Government National Mortgage Association (GNMA), a government corporation within HUD.⁵ In a typical such case, after the FHA has issued a commitment on a project, but prior to the initial closing, the mortgagee seeks a commitment from GNMA to purchase the permanent loan. See GNMA Sellers Guide § 917. Before it will agree to purchase a loan, GNMA requires a commitment for mortgage insurance from FHA and has the Federal National Mortgage Association (FNMA), a private corporation established by Congress with various responsibilities in the secondary mortgage market, act as its agent and review documents submitted by the mortgagee to ensure compliance with GNMA purchasing requirements. GNMA Sellers Guide § 604. In addition, GNMA requires the mortgagee to enter a Selling Contract, GNMA Form 301, which includes a...