Pankow Const. Co. v. Advance Mortg. Corp.

Decision Date13 May 1980
Docket NumberNo. 76-3730,76-3730
Citation618 F.2d 611
PartiesPANKOW CONSTRUCTION CO., a California Corporation, Plaintiff-Appellant, v. ADVANCE MORTGAGE CORPORATION, a Delaware Corporation, Defendant-Appellee, v. PACHECO VILLAGE PROPERTIES, a partnership, and Leo S. Wou, Third-Party Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Peter V. Shackter, Bohnert, McCarthy, Flowers, Roberts & Damir, San Francisco, Cal., for plaintiff-appellant.

Jan T. Chilton, Severson, Werson, Berke & Melchior, San Francisco, Cal., for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before BROWNING and CHOY, Circuit Judges, and CHRISTENSEN, * District Judge.

BROWNING, Circuit Judge:

This is an action against a mortgage lender (Advance), brought by a general contractor (Pankow) to recover the balance allegedly due under a contract between Pankow and a construction project developer (Pacheco). The district court denied recovery. We affirm.

In the spring of 1972, Pacheco embarked upon a plan to build a residential apartment complex in Novato, California. After obtaining a commitment from HUD to insure the mortgage loan under section 221(d)(4) of the National Housing Act, 12 U.S.C. § 1715l (d)(4), Pacheco entered into a Building Loan Agreement with Advance and a Construction Contract with Pankow.

In January 1974, Pacheco defaulted on interest payments due Advance, allegedly because of Pankow's construction delays. Advance then ceased disbursements under the Building Loan Agreement, leaving Pankow partially unpaid. Negotiations among Pacheco, Advance and Pankow for an overall settlement were unsuccessful. However, Pacheco and Advance agreed upon a course of action. Advance disbursed $277,139 to Pacheco as a final loan advance. Pacheco simultaneously delivered a cashier's check for $251,297 to Advance. Advance applied $193,998 of this amount against interest due under the Building Loan Agreement (thus curing Pacheco's default), and paid the balance to the various government entities involved in providing insurance for the mortgage. Since the project was by then complete and the loan thus reinstated, HUD allowed the project to go to "final closing." Advance then assigned the loan to the Government National Mortgage Association (GNMA). No claim was made on the mortgage insurance and no assignment of the note and mortgage was made to HUD.

Pankow sought to recover from Advance the balance due under the Construction Contract on the theory that Pankow was a third party beneficiary of the Building Loan Agreement between Advance and Pacheco, and that as a fully performing contractor, Pankow was entitled to an equitable lien on the construction loan funds. The district court granted summary judgment for Advance on the ground that third party beneficiary and equitable lien claims against funds for payment of construction costs are barred by California Civil Code § 3264.

Pankow then sought to amend its complaint to add four new theories of recovery: that Advance had wrongfully induced Pacheco to breach the Construction Contract that Advance was unjustly enriched by Pankow's uncompensated performance; that the exchange of funds between Advance and Pacheco constituted a fraudulent conveyance; and that Advance had failed to marshal assets. The district court dismissed these proposed amendments, holding they did not state grounds upon which relief could be granted under California law.


Pankow first contends that under a federal common law rule, the general contractor on a housing project financed with federally-insured mortgage funds may assert a claim against the mortgage lender on third party beneficiary and equitable lien theories. 1 Pankow argues that the district court erred in applying a contrary state law rule. 2

It is sometimes appropriate to resolve a particular issue arising in a diversity case 3 on the basis of a federal rather than a state rule of law. Miree v. DeKalb County, 433 U.S. 25, 29, 97 S.Ct. 2490, 2493, 53 L.Ed.2d 557 (1977). 4 Application of a federal rule is appropriate "where a uniform national rule is necessary to further the interests of the Federal Government," ibid., citing Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943), or where there is a "significant conflict between some federal policy or interest and the use of state law," id. at 31, 97 S.Ct. at 2495, quoting Wallis v. Pan American Petroleum Corp., 384 U.S. 63, 68, 86 S.Ct. 1301, 1304, 16 L.Ed.2d 369 (1966). See also Bank of America v. Parnell, 352 U.S. 29, 33-34, 77 S.Ct. 119, 121, 1 L.Ed.2d 93 (1956). State rules will not be applied "to thwart the purposes of statutes of the United States." Sola Electric Co. v. Jefferson Co., 317 U.S. 173, 176, 63 S.Ct. 172, 174, 87 L.Ed. 165 (1942).

In this case, there is no compelling need for a uniform federal rule, either with respect to the federal mortgage insurance program generally or with respect to the particular issues before us. No court has perceived a need for uniform federal common law rules to govern all facets of government lending programs. 5 It is evident from the face of the National Housing Act and its implementing regulations that Congress intended state law to apply to some aspects of these programs. 6 Nor is there any apparent need for a uniform rule regarding a contractor's remedies against the mortgage lender. No showing has been made that a uniform rule would ease HUD's administrative burdens. And since disputes between the contractor and the mortgage lender over loan proceeds are wholly between private parties, a uniform federal rule is not required to protect the financial interests of the United States. 7

Pankow argues that even though there may be no need for uniformity per se, the California rule should be rejected because it interferes with the purposes of section 221 of the National Housing Act. We disagree. The purposes of the federal statute would be furthered rather than frustrated by application of the California rule.

Section 221 of the National Housing Act was designed "to assist private industry in providing housing for low and moderate income families and displaced families." 12 U.S.C. § 1715l (a). Congress sought to accomplish this purpose by encouraging private investment in the construction of such housing. Government insurance was provided to guarantee repayment of the mortgage loan if the project owner defaulted. Investors were placed virtually in a "no risk" position.

Section 3264 of California Civil Code 8 was also designed to protect investors in construction projects. Enacted as part of California's comprehensive Mechanics' Lien Law, Cal.Civ.Code § 3082 et seq., this section was drafted in response to mortgage lender protests against state court decisions holding that even after completion of construction, a lien claimant may have an equity interest in the building loan account that is prior and superior to the rights of both the lender and the builder. See M. Marsh, California Mechanics' Lien Law Handbook, § 5.27 at 182-83 (3d ed. 1979). The California legislature's solution was to limit the rights that might be asserted "with respect to any fund for payment of construction costs." Section 3264 provides that claims upon construction loan funds by persons furnishing services or material are confined to those based on statutory mechanics' lien and stop notice procedures, and that "no person may assert any (other) legal or equitable right with respect to such fund, other than a right created by direct written contract between such person and the person holding the fund."

In Boyd & Lovesee Lumber Co. v. Western Pacific Financial Corp., 44 Cal.App.3d 460, 118 Cal.Rptr. 699 (1975), the manner in which section 3264 accommodated the interests of the various claimants and the mortgage lender is described as follows:

The former at least have remedies by mechanics lien against the property, unbonded stop notice against the owner, and action upon the contract against the person or persons personally ordering the labor or material. The latter are relieved of the expense and risk of policing the ultimate distribution of construction funds and can concentrate on their primary duty of providing construction loans at lesser expense to the borrower and ultimately to the consuming public.

44 Cal.App.3d at 465, 118 Cal.Rptr. at 702. "Because of these considerations," the court concluded, "we hold that section 3264 abolishes all theories of equitable liens or trust funds." Ibid. 9

By limiting the remedies that contractors, subcontractors, materialmen and laborers have against mortgage lenders on construction projects, the California statute encourages private investment in such projects. Thus, the California statute furthers the same purpose as the mortgage insurance program of the National Housing Act.

Pankow argues, however, that by limiting a contractor's remedies against the mortgage lender, the California rule discourages contractors from participating in housing projects and thus frustrates the ultimate purpose of the National Housing Act, particularly because HUD's standard construction contract, used in section 221(d)(4) projects, requires the contractor to waive its right to assert any mechanics' liens.

The argument is not without weight. It was one of the stated objectives of the National Housing Act to encourage "a prosperous and efficient construction industry." S.Rep.No.281, 87th Cong., 1st Sess., (1961) reprinted in (1961) U.S.Code Cong. & Admin.News, pp. 1923, 1924. Moreover, it is obvious that participation by construction contractors as well as mortgage lenders is essential to the success of National Housing Act programs. Nonetheless, we believe the California rule limiting the contractors' remedies should be applied in suits involving projects insured under the Act. There are a number of reasons for this conclusion.

It is indisputable that the...

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