Mursor Builders, Inc. v. Crown Mountain Apartment Assocs.
| Decision Date | 05 October 1978 |
| Docket Number | Civil No. 74/731,Civil No. 75/67 |
| Citation | 15 V.I. 53 |
| Parties | MURSOR BUILDERS, INC., Plaintiff v. CROWN MOUNTAIN APARTMENT ASSOCIATES; THE SECOND COLUMBUS CORPORATION; AMERICAN MOTOR INNS, INC.; ROGER F. MORAN; EVELYN J. MORAN; IRVIN RUBIN; THE LEADER MORTGAGE COMPANY; and PATRICIA ROBERTS HARRIS, Secretary of Housing and Urban Development, Defendants THE SECOND COLUMBUS CORPORATION, Plaintiff v. IRVIN RUBIN; ROGER F. MORAN; and EVELYN J. MORAN, Defendants |
| Court | U.S. District Court — Virgin Islands |
Builder not paid full amount due it under construction contractwith developer sued for monies alleged due. The District Court, Young, J., held that builder could not recover from federal government, which had guaranteed mortgage and been assigned it upon developer's default, undisturbed mortgage loan proceeds, where builder helped induce government's participation by material factual misrepresentations and had a remedy against developer, which was still economically viable.
[COPYRIGHT MATERIAL OMITTED]
[COPYRIGHT MATERIAL OMITTED]
[COPYRIGHT MATERIAL OMITTED]
[COPYRIGHT MATERIAL OMITTED]
MARIA A. TANKENSON HODGE, ESQ., St. Thomas, V.I., for Mursor Builders, Inc.
RONALD T. MITCHELL, ESQ. (PALLME, ANDUZE, MITCHELL & DOW), St. Thomas, V.I., for the Leader Mortgage Company
GERALD K. CARLISLE, ESQ. (CARLISLE, REIMER, BIRGE & MORRISON), Cleveland, Ohio, for the Leader Mortgage Company
MICHAEL LEHTONEN, ESQ., St. Thomas, V.I., for Roger F. Moran
SAMUEL H. HALL, JR., ESQ., St. Thomas, V.I., for Irvin Rubin
ELIZABETH LANGER, ESQ., THOMAS K. MOORE, ESQ., St. Thomas, V.I., for Patricia Roberts Harris, Secretary of Housing and Urban Development
MEMORANDUM OPINION WITH JUDGMENT ATTACHED
The legal and factual issues presented by this lawsuit are multiple. Nevertheless, one such issue and the policy considerations underlying my disposition thereof warrant particular mention at the outset.
In an effort to stimulate the development of multidwelling housing complexes, the federal government offers mortgage insurance to private financing of multiple housing building construction. As an added inducement, the government covenants to accept assignment at relatively financially attractive terms of any such mortgage loan in the event of default. An unfortunate by-product of this federal program is the making of financing available to individuals who, were it not for the protective aegis of the federal loan insurance, would be deemed poor financial risks. The government, recognizing the inevitability of this unfortunate by-product, imposes stringent disclosure requirements upon the borrower, the lender and the building contractor. Notwithstanding these strict requirements, full disclosure is not always made, the project sponsor (and borrower) often defaults on its loan repayment obligations and the lender, in order to be "bailed out," usually assigns its interest under the building loan agreement to the government. And often after the assignment there remains undisbursed mortgage loan proceeds and monies due the building contractor for work performed. Said scenario reflects the factual development giving rise to this litigation.
[1] In recent years contractors have successfully contended that, as third-party beneficiaries of the building loan agreement between the sponsor and lender, they areentitled to recover from the undisbursed mortgage loan proceeds assigned to the federal government the amounts due them under the construction contract. Indeed, this Court constituted the forum of one of the earliest of such successes. American Fidelity Fire Insurance Co. v. Con-strucciones Werl, Inc., 12 V.I. 325, 407 F.Supp. 164 (D.V.I. 1975). However, based upon the entire factual picture painted by this lawsuit, the Court cannot countenance recovery by plaintiff from the government under said legal theory. The decision of the Court is a function, inter alia, of two overriding considerations. First, the government's participation in the development of the subject housing project was induced in large measure by numerous material factual misrepresentations made by or chargeable to the contractor. Second, the project sponsor, despite having defaulted under the building loan agreement, remains an economically viable entity and thereby represents an adequate source of recovery for plaintiff. The Court is of the opinion that under such circumstances plaintiff cannot obtain legal redress from the public purse, but rather must look to the parties with whom it directly contracted for any recovery it might have.
In 1970 Irvin Rubin ("Rubin") and Roger F. Moran ("Moran"), experienced local realtors, agreed to develop an apartment complex on Plot Number two, Estate Con-tant, St. Thomas. Formulation of the initial plans encompassed nearly six months and spawned the organization of The Second Columbus Corporation ("Second Columbus") with Rubin as corporate president, Moran as vice-president and each of said individuals as fifty percent (50%) shareholders. The sole asset of the corporation was the afore-described unimproved realty, then encumbered by a ninety-five thousand dollar ($95,000.) purchase money mortgage lien.
Among those who initially discussed the proposed development, officially named, "Crown Mountain Apartments" but commonly referred to as "The Towers", were Frank J. Murphy, president of Mursor Builders, Inc. ("Mursor Builders"), a Pennsylvania construction corporation, and Kim Kelsick of The Leader Mortgage Company ("Leader"), a private mortgage lender with its principal offices in Ohio. At a relatively early stage in the discussions it became the express agreement of the parties to utilize federal mortgage insurance made available by the Federal Housing Authority ("FHA"), an organizational unit of the Department of Housing and Urban Development ("HUD"), pursuant to § 207 of the National Housing Act, 12 U.S.C., § 1701, et seq. Murphy advised the parties that it would be necessary to secure an FHA insurance commitment which would permit the allocation of $2,316,-000. for construction costs.
On November 24, 1970, Rubin and Moran, through the offices of Second Columbus, and Leader submitted an FHA form 2013 application for project mortgage insurance. Project costs were represented at $2,622,000. with $2,316,-000. thereof attributable to costs of construction. Additionally, the applicants represented to FHA that the Towers project would be accorded one hundred percent (100%) real estate tax exempt status by the local government. Following a federal project feasibility study FHA advised the applicants that the economics of their proposal supported a maximum project cost of $2,607,578., that FHA would insure $2,346,800. thereof, and that of said insurable amount $1,889,806. could be allotted for costs of construction. The sponsors were further advised that, contingent upon substantiation of their purported tax exemption benefits, they would be required to effect an equity invest-merit of $143,364. The sponsors were invited by FHA to submit an application for a conditional commitment for project mortgage insurance in accordance with the above-described FHA feasibility determinations.
At the urging of Leader, FHA subsequently amended its feasibility determinations to increase maximum project cost to $2,722,222., the insurable portion thereof to $2,454,-000., and the construction budget to $2,003,850. FHA also advised the applicants that, having failed to substantiate their claimed tax exempt status, they would be required to contribute an equity investment of $353,418., an increase of $210,054. from the initial feasibility determination.
It was the desire of Rubin and Moran to effect the development of the Towers with a minimum of personal cash expenditure and investment. The FHA study left them short of funds in three principal areas: (1) there remained an unsatisfied mortgage indebtedness of $95,000. on the subject property; (2) FHA required an equity investment from the sponsors which exceeded by approximately $210,-000. the financial resources available to them; and (3) costs of construction exceeded by $312,150. the construction budget permitted by FHA. As to the latter deficiency, Leader suggested the possibility of reallocating the funds available on various FHA form 2013 budget line items. Moran was amenable to said proposal.1 However, Murphy questioned the parties' ability to reallocate line items without FHA approval.
On March 8, 1971, Murphy wrote to Rubin regarding the FHA feasibility determinations. Murphy noted that despite FHA's allocation of $2,003,850. for construction costs, total construction cost allowances under the feasibility let-ter equalled $2,135,121.2 Murphy noted that the difference of $180,879. could be satisfied through a supplementary agreement between the contractor and sponsors. Murphy suggested several possibilities: that the sponsors make a cash payment of said amount to Mursor Builders; that the sponsors extend a second priority mortgage on the subject realty to Mursor Builders; that Mursor Builders take an equity position in Second Columbus; or that some combination of the aforesaid proposals be effected. Murphy, aware of FHA restrictions on the financial relationship of a contractor and project sponsors, closed his letter with the caveat that any outside agreement should not be such as to create an "identity of interest" or otherwise destroy the arm's length nature of the parties' business dealings. A copy of the aforesaid correspondence was transmitted to Kelsick at Leader.
During the ensuing months various proposals were exchanged by Second Columbus and Mursor Builders as to how to satisfy the construction cost deficiency, and Leader was advised at various times that said problem would be solved by Mursor Builders and the project sponsors.
In April of 1971 Rubin and Moran, in their personal capacities and on behalf of Second Columbus, formed a limited...
To continue reading
Request your trial