International Paper Co. v. Whitson

• Decision Date: 13 January 1978
• Docket Number: No. 76-1429,76-1429
• Citation: 571 F.2d 1133
• Parties: INTERNATIONAL PAPER COMPANY, a corporation, Plaintiff-Appellant, v. Edmund R. WHITSON, a/k/a Ray Whitson, and Carolyn J. Whitson, United States of America, Secretary of Housing and Urban Development of Washington, D. C., and Advance Mortgage Corporation and Roosevelt Savings Bank of the City of New York, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1133

571 F.2d 1133

INTERNATIONAL PAPER COMPANY, a corporation, Plaintiff-Appellant, v. Edmund R. WHITSON, a/k/a Ray Whitson, and Carolyn J.

Whitson, United States of America, Secretary of Housing and

Urban Development of Washington, D. C., and Advance Mortgage

Corporation and Roosevelt Savings Bank of the City of New

York, Defendants-Appellees.

No. 76-1429.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted July 18, 1977.

Decided Oct. 7, 1977.

Rehearing Denied Jan. 13, 1978.

Dean G. Constantine, Oklahoma City, Okl. (Warren E. Slagle, Kansas City, Mo., and D. C. Johnston, Jr., Oklahoma City, Okl., on brief), for plaintiff-appellant.

Raymond E. Tompkins, John S. Odell, and John E. Green, Oklahoma City, Okl. (David L. Russell, U. S. Atty., Oklahoma City, Okl., on brief), for defendants-appellees.

Before McWILLIAMS, DOYLE and MARKEY. ^*

MARKEY, Chief Judge.

Appeal from a March 22, 1976 judgment of the United States District Court for the Western District of Oklahoma in favor of lender-parties to construction loan contracts, Advance Mortgage Corporation (Advance), Roosevelt Savings Bank of the City of New York (Roosevelt) and the United States of America, Secretary of Housing and Urban Development (HUD), and against a materialman claiming as a third-party beneficiary of the contracts, International Paper Company (IPC). We reverse.

Background

The Timber Ridge Apartments, an apartment complex in Edmond, Oklahoma, was to be owned by Edmund R. Whitson and Carolyn J. Whitson (Owners) and was to be constructed by Edmund R. Whitson (Whitson). Construction was financed through a note and mortgage given to Advance and insured by HUD, pursuant to Section 221(d)(4) of the National Housing Act. 12 U.S.C. § 1715l (d)(4). IPC was a supplier of materials to the project through an agreement with the Owners.

On January 24, 1972, HUD issued a firm commitment for insurance advances in the amount of $845,100. Executed at initial closing on February 22, 1972, were a Building Loan Agreement, Completion Assurance Agreement, Mortgagee's Certificate, Mortgage, and Mortgage Note. The mortgage lender was Advance. Pursuant to 24 C.F.R. § 221.547, the Building Loan Agreement provided that no construction contract need be executed, because the mortgagor was also the contractor, but the Building Loan Agreement identified those documents which would comprise the "Construction Contract" referred to in the loan documents. The Completion Assurance agreement, given in lieu of performance and payment bonds, provided assurance for performance of the Contractor's obligations under the "Construction Contract" and for completion of the project in accordance with the "Construction Contract." The agreement was secured by a Completion Assurance Fund (Fund) in the amount of $68,101, supplied by Whitson in the form of two unconditional, irrevocable letters of credit.

Following initial closing, construction began. Advance assigned all of its right, title, and interest in the project to Roosevelt, but continued to act as loan servicing agent for Roosevelt.

Encountering financial difficulties, Whitson could not complete the project with the original loan balance and so notified Advance and Roosevelt. Roosevelt assigned the mortgage to HUD and claimed the mortgage insurance proceeds. By instruments dated June 11, 1974, and October 29, 1974, Roosevelt assigned all of its right, title, and interest in the project to HUD. In its settlement with Roosevelt, HUD deducted from the insurance proceeds an amount representing the Fund. ¹

On October 4, 1974, in the District Court of Oklahoma County, Oklahoma, IPC sued the Whitsons, HUD and E. D. Hill Surveying and Engineering Company, ² to foreclose its lien for materials furnished the project. On November 6, 1974, the action was removed by HUD to the United States District Court for the Western District of Oklahoma. HUD filed an Answer and a Counterclaim for foreclosure of its mortgage lien upon the property. IPC filed an Amended Complaint on March 21, 1975, adding Advance and Roosevelt as parties defendant.

Liability of the lenders, Advance and Roosevelt, and HUD, is predicated on the theory that IPC is a third-party beneficiary of their agreements with the Owners.

HUD moved for a summary judgment that its mortgage lien was prior to IPC's materialman's lien. The court granted HUD's motion. Following the trial, HUD foreclosed and the property was sold.

In its Memorandum Opinion, the trial court denied IPC's claim against Advance, Roosevelt and HUD but decided that IPC was entitled to a judgment for $132,629 against the Owners. IPC appeals from that part of the judgment denying its claim against Advance, Roosevelt, and HUD.

Issues

The issues are: (1) whether IPC is a third-party beneficiary of the agreements here involved, and (2) whether, if so, Advance, Roosevelt, or HUD is liable to IPC.

OPINION

The trial court held, and we agree, that the substantive law of Oklahoma is applicable. Though state law has been held inapplicable in cases involving mortgages insured by and assigned to HUD, United States v. Merrick Sponsor Corp., 421 F.2d 1076 (2d Cir. 1970), United States v. Stadium Apts., Inc., 425 F.2d 358 (9th Cir. 1970), cert. denied, 400 U.S. 926, 91 S.Ct. 187, 27 L.Ed.2d 185, those cases did not involve a third-party beneficiary. Moreover, state law is preferable to the attempted fashioning of a rule of federal common law, absent a significant conflict between a federal interest and state law. Wallis v. Pan American Corp., 384 U.S. 63, 86 S.Ct. 1301, 16 L.Ed.2d 369 (1966).

Some district courts have declined to apply state law in determining whether a third-party is a beneficiary under circumstances similar to those here. In United States v. Chester Heights Associates, 406 F.Supp. 600 (D.S.C.1976) and in Travelers Indemnity Co. v. First National State Bank of New Jersey, 328 F.Supp. 208 (D.N.J.1971), the courts applied what they viewed as federal law concerning rights of third-party beneficiaries. In Chester Heights the court quoted the guiding rule found in United States v. View Crest Apts., Inc., 268 F.2d 380 (9th Cir. 1959), cert. denied, 361 U.S. 884, 80 S.Ct. 156, 4 L.Ed.2d 120, to the effect that "(l)ocal rules limiting the effectiveness of the remedies available to the United States for breach of a federal duty cannot be adopted." 268 F.2d at 383. ³ No impairment of the federal foreclosure remedy is involved here. HUD succeeded in establishing its lien priority and foreclosed on its mortgage.

(1) Third-Party Beneficiary

In Oklahoma, when a contractor provides a performance bond to an owner, under a building contract, the intent of the contracting parties controls the determination of whether the bond is for the benefit of unnamed third-party subcontractors and materialmen. In determining that intent, the principal contract and the bond must be construed together. Gibbs v. Trinity Universal Insurance Co., 330 P.2d 1035 (Okl.1958); Aetna Casualty & Surety Co. v. Tucker, 174 Okl. 343, 50 P.2d 339 (1935).

In Gibbs, a construction construction contract required the contractor to pay all materialmen and laborers. The owner required the contractor to obtain a performance bond to assure completion of the project, and the construction contract was incorporated in the performance bond. The Oklahoma Supreme Court, rejecting the argument that the performance bond was made only for the protection of the owner, held that because the construction contract bound the contractor to pay materialmen and because the bond was conditioned on performance of the contract, the bond was intended for the benefit of the materialmen. The materialman recovered from the performance bond surety the unpaid balance due on his contract with the contractor, even though the materialman was not named and the owner was the only named obligee in the bond, and even though Okla.Stat. tit. 15 § 29 provides: "A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it." ⁴

The distinctions between the facts here and those in Gibbs are insignificant. Though there is no actual "construction contract" between the owner and the contractor, the owner being his own contractor, ⁵ there is a principal contract which parallels the construction contract in Gibbs. The principal contract is defined in the Building Loan Agreement as including the Building Loan Agreement, the "General Conditions of the Contract for Construction" (AIA Document A201) and the "Supplementary Conditions of the Contract for Construction" (FHA Form 2554). ⁶ And though there is no performance bond per se in the instant case, the Completion Assurance Agreement, secured by letters of credit, served the function served by the performance bond in Gibbs. That the Completion Assurance Agreement may have served an additional function as a payment bond ⁷ is of no moment when, as here, the Agreement assures, on its face, the performance of the contractor's obligations and completion of the project, ⁸ the precise function of a performance bond.

Thus, the relationship between the performance bond and construction contract in Gibbs is the same as that between the secured Completion Assurance Agreement and the "Contract" (as defined by the Building Loan Agreement) in the instant case. Under the Oklahoma contract law, therefore, determination of intent requires that the terms of the Building Loan Agreement and those of the Completion Assurance Agreement be construed together. As in Gibbs, where the contractor agreed to pay subcontractors for materials or labor, the contractor, Whitson, was here obligated to pay the subcontractors. AIA Document A201, incorporated in the Building Loan Agreement, provides, at Article IV, paragraph 4.1:

Unless otherwise specifically noted, the Contractor shall provide and pay for all labor, materials, equipment, tools, construction equipment and machinery,...