Koppers Co., Inc. v. Garling & Langlois

• Decision Date: 21 March 1979
• Docket Number: No. 76-2606,76-2606
• Citation: 594 F.2d 1094
• Parties: KOPPERS COMPANY, INC., Plaintiff-Appellant, v. GARLING & LANGLOIS et al. and Lawyers' Title Insurance Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1094

594 F.2d 1094

KOPPERS COMPANY, INC., Plaintiff-Appellant, v. GARLING & LANGLOIS et al. and Lawyers' Title Insurance Corporation, Defendant-Appellee.

No. 76-2606.

United States Court of Appeals Sixth Circuit.

Argued June 23, 1978.

Decided March 21, 1979.

John P. Williams, Butzel, Long, Gust, Klein & Van Zile, Donald B. Miller, Detroit, Mich., for plaintiff-appellant.

Steven J. Fishman, Hammond, Ziegelman, Sotiroff & Fishman, Malcolm D. Brown, Detroit, Mich., for defendant-appellee.

Before MERRITT, Circuit Judge, and CECIL and PECK, Senior Circuit Judges.

MERRITT, Circuit Judge.

The plaintiff furnished labor and materials in the construction of a Michigan apartment complex. The project is now in default, and numerous subcontractors, including plaintiff, have not been paid for their work. The actors in the case are the owner of the project, Garling & Langlois; the construction lender, Graham Mortgage Company; the general contractor, Mega Construction Company; the disbursing agent of the construction loan proceeds, Lawyers Title Insurance Corporation, who is the defendant; and the subcontractor, Koppers Company, Inc., the plaintiff. The subcontractor has sued the disbursing agent on state law claims for damages for misapplication of construction loan proceeds. The District Court entered summary judgment in favor of the disbursing agent on all claims. We affirm.

I.

The transaction giving rise to the dispute between Koppers and Lawyers was arranged as follows: Graham, the lender, agreed to advance approximately $2,265,000 to G & L, the owner, who agreed to use the funds to construct a multifamily luxury apartment complex, known to the parties as Plaza South Phase II. As security for the loan, the owner granted the lender a mortgage on the property and improvements to be constructed. The mortgage was insured by the Secretary of the United States Department of Housing and Urban Development under the National Housing Act, 12 U.S.C. §§ 1701 Et seq. (1976). Under the terms of the building loan agreement and mortgage executed between the lender and the owner, the proceeds of the loan were to be advanced in installments as the construction progressed, less 10% "holdback." To that end, the lender separately engaged Lawyers Title Insurance Corporation, which had insured the lender's mortgage as a first lien against the property, to police the loan fund disbursements to the owner. The owner contracted separately with Mega Construction Company for Mega to serve as general contractor for the project; and the general contractor, in turn, entered into various subcontracts, including the one with Koppers, for materials and labor.

When the project went into default in the Fall of 1971, Koppers Company had not been paid for the approximately $46,000 worth of materials and labor it had supplied the project under its contract with the general contractor. On October 7, 1971, Koppers filed a lien for that amount against the Plaza South property under Michigan's mechanic's lien statute, Mich.Comp.Laws Ann. § 570.1 (1967). A few months later, in February 1972, Koppers brought suit in the Circuit Court of Wayne County, Michigan, for a determination of the rights and priorities of the various lien claimants in the property and for foreclosure of its own mechanic's lien. The United States Department of Housing and Urban Development, which had taken an assignment of the Graham mortgage pursuant to its mortgage insurance obligations, was one of the defendants in Koppers' mechanic's lien foreclosure suit, and, on petition of the United States, the action was removed to the United States District Court for the Eastern District of Michigan. Once in federal court, Koppers filed an amended complaint, containing five separate counts. The first count merely restated the removed mechanic's lien foreclosure suit against the Secretary of HUD and the other lienholders, but the remaining counts stated new claims against various other parties.

The third count of the amended complaint the claim with which we are here concerned charged that Lawyers, the disbursing agent, had participated with the owner, G & L, in a fraudulent diversion of the construction loan proceeds to pay off the owner's indebtedness on another, similar construction project. The claim sought damages from Lawyers for violation of a duty the disbursing agent assertedly owed all subcontractors on the Plaza South Phase II project, including Koppers, to see that the loan proceeds were properly applied to construction of the project and payment of those supplying labor and materials.

Lawyers answered by denying generally any wrongdoing, but the thrust of its motion for summary judgment on this count was that, as disbursing agent for the project lender, its sole duty was to the lender and that it owed no duty, and therefore could not be held for a breach of any duty, to Koppers or any other subcontractor. Koppers, on the other hand, argued that the disbursing agent's duty to the subcontractors arose from several distinct sources of Michigan law.

The District Court rejected all of Koppers' theories of recovery, and granted the motion for summary judgment. Koppers appeals that ruling, entered pursuant to Fed.R.Civ.P. 54(b) as a final judgment eligible for immediate review under 28 U.S.C. § 1291 (1976), and urges upon us the same arguments, founded wholly upon state law, that it sought to persuade the District Court warranted a trial of its claim for damages against the disbursing agent. ¹

II.

We think the District Court properly granted summary judgment. None of the legal theories urged by Koppers in the District Court supported the claim for damages against the disbursing agent. We consider each in turn.

A. Koppers' first claim is that all of the subcontractors to the Plaza South Phase II project were creditor third party beneficiaries of the building loan agreement executed between Graham, the lender, and G & L, the owner of the project. The essence of the agreement was that the lender promised to advance a sum of money to the owner, in return for the owner's promise to apply the money to the construction of the improvements which were to secure the loan. Koppers concedes that it was not a third party beneficiary of the lender's covenant to make the owner a construction loan. ² The claim is rather that Koppers and the other subcontractors were third party beneficiaries of the owner's reciprocal covenant to use the proceeds of the loan to pay for the construction of the project.

The short answer to this claim is that Lawyers was not a party to the agreement between the lender and the owner and thus may not be sued by a third party beneficiary for its breach. A third party beneficiary of a promise stands in the shoes of the promisee and is afforded the right under the common law and Mich.Comp.Laws Ann. § 600.1405 (1967) to enforce the promise against the promisor. Here, the owner made the promise upon which Koppers seeks to rely. Thus, even assuming Koppers does qualify as a creditor third party beneficiary of that promise, that status would entitle Koppers to bring suit on the promise only against the owner, not against Lawyers, who was not a party to the promise made by the owner but was merely acting under a separate agreement as disbursing agent for the promisee, the lender.

B. Koppers' second theory of recovery also invokes third party beneficiary principles. It is that all of the subcontractors were creditor third party beneficiaries of the contract between the lender and Lawyers, under which Lawyers agreed to serve as the lender's agent for the disbursement of the construction loan proceeds to the project owner. By participating in the owner's diversion of the loan proceeds from the purposes prescribed by the construction loan agreement and other building documents, the disbursing agent, it is argued, breached its agreement with the lender and should be answerable in damages to the third party beneficiaries of the disbursing agreement. This theory fails for several reasons.

First, the nature of the relationship between the lender and Lawyers under the disbursing agreement, as revealed by the extensive discovery had by Koppers in this case, was one of principal and agent. That is, Lawyers agreed merely to act as the lender's agent for the performance of the lender's promise to the owner to make the construction loan. Under long-settled principles of contract law, agency agreements do not create any rights in third parties, even a party as to whom the principal owes some performance and for whose benefit the principal has retained an agent to render it. ³

Furthermore, as we have already noted, Koppers has conceded that it cannot be deemed a third party beneficiary of the lender's promise to the owner to make the construction loan. That being the case, we fail to see how Koppers can claim any greater right under the disbursing arrangement between Lawyers and the lender, which merely bound Lawyers...