TAYLOR WOODROW BLITMAN, ETC. v. SOUTHFIELD, ETC.

• Citation: 534 F. Supp. 340
• Decision Date: 22 February 1982
• Docket Number: Civ. A. No. 75-3895-N.
• Parties: TAYLOR WOODROW BLITMAN CONSTRUCTION CORPORATION, Plaintiff, v. SOUTHFIELD GARDENS COMPANY, et al., Defendants.
• Court: U.S. District Court — District of Massachusetts

534 F. Supp. 340

TAYLOR WOODROW BLITMAN CONSTRUCTION CORPORATION, Plaintiff, v. SOUTHFIELD GARDENS COMPANY, et al., Defendants.

Civ. A. No. 75-3895-N.

United States District Court, D. Massachusetts.

February 22, 1982.

Harold Stahler, Guterman, Horvitz, Rubin & Rudman, Boston, Mass., for plaintiff.

William E. Hughes, Asst. U. S. Atty., John T. Daley, Dane, Howe & Brown, and Snyder, Tepper & Berlin, Steven J. Comen, Herman Snyder, Boston, Mass., for defendants.

Allen B. Schwartz, Boston, Mass., for defendants Allen and Louis Schwartz.

Douglas G. Moxham, Hale & Dorr, Boston, Mass., for Walter K. Winchester.

John Carberry, Albert Cullen, Nesson & Csaplar, Boston, Mass., for defendant Mass. Housing Finance Agency.

MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT

DAVID S. NELSON, District Judge.

This action arises out of the construction of a § 236 low income housing project. Two contracts were involved. A construction contract between the owner of the housing project (Southfield) and Taylor Woodrow Blitman Construction Corporation (plaintiff) for construction of the housing project, and a building loan agreement between the owner and a state financing agency (MHFA) for financing the construction of the housing project. As a result of the default of the owner in its payments to the plaintiff for the work performed in constructing the project, plaintiff seeks to recover certain monies from the Department of Housing and Urban Development (HUD), the assignee of MHFA under the building loan agreement. As the basis for recovering against HUD, plaintiff asserts claims of third party beneficiary and unjust enrichment. Both plaintiff and HUD have moved for summary judgment.

STATEMENT OF FACTS

The facts of this case are typical of housing construction ventures undertaken under § 236 of the National Housing Act (12 U.S.C. § 1715z-1).¹ On December 23, 1970, three agreements were made. Plaintiff entered into a joint venture agreement with South Construction Company (South) under which the two companies would serve as general contractor for the Southfield Gardens housing project.² At the same time, the joint venture of plaintiff and South (known as Taylor-South) entered into a construction contract with Southfield Gardens, (Southfield) the owner of the project, to construct the housing project on Southfield's property. Finally, Southfield entered into a building loan agreement with the Massachusetts Housing Finance Agency (MHFA), in which MHFA agreed to finance Southfield's project in exchange for a note and mortgage on the project. Under the construction contract, Southfield was to make monthly payments as the work progressed, less a 10% retainage. A parallel provision in the building loan agreement between Southfield and MHFA provided that MHFA would provide monthly advance to Southfield less a 10% retainage, so that it could pay the contractor.³

Construction began on the project on the same day that the agreements were executed. On June 12, 1972, HUD certified that the project was substantially completed. At that time, MHFA still possessed a 5% retainage under the building loan agreement which amounted to $189,046.⁴ On February 1, 1974, Southfield defaulted on the loan by failing to make an interest payment.⁵ MHFA assigned the mortgage and note to HUD on November 17, 1975, and HUD paid MHFA $4,770,860.03 in insurance benefits. In making the insurance payment, HUD reduced the amount of insurance benefits paid to MHFA by $189,046, the amount which was retained by MHFA. In assuming the note and mortgage, HUD succeeded to the rights and obligations of MHFA. Plaintiff seeks to recover from HUD the $189,046 which MHFA had retained under the building loan agreement.

PLAINTIFF'S CLAIM FOR RELIEF

There is no direct contract between plaintiff and HUD which would make HUD liable to plaintiff for the retained funds which plaintiff seeks in this action. However, plaintiff contends that it is entitled to the funds under two theories. First, it contends that it is a third party beneficiary of the building and loan agreement between Southfield and MHFA, and second, that it is entitled to an equitable lien on the retained funds on the theory that HUD has been unjustly enriched. HUD, in response, mounts a multi-pronged attack on plaintiff's assertions, contending that (1) plaintiff is precluded from bringing the suit because the court lacks jurisdiction, (2) plaintiff has an adequate remedy at law, (3) plaintiff's third party beneficiary claim fails because (a) plaintiff is not a third party beneficiary of the building loan agreement (b) even if plaintiff is a third party beneficiary, HUD has a defense against Southfield which is applicable to plaintiff, and (4) plaintiff's unjust enrichment/equitable lien theory fails because (a) plaintiff is not a non-profit corporation (b) plaintiff has unclean hands (c) there is no unjust enrichment to HUD and (d) there is no res which can be the subject of an equitable lien.

I find that this court does have jurisdiction to hear this case, but that plaintiff is not entitled to recover against HUD on either a third party beneficiary claim or on the basis of unjust enrichment.

DISCUSSION OF THE LAW

The Jurisdictional Question

Defendant relies on Marcus Garvey Square, Inc. v. Winston Burnett Construction Co., 595 F.2d 1126 (9th Cir. 1977) as the basis for its claim that this court does not have jurisdiction to hear this case. Marcus Garvey involved a similar suit on a § 236 housing project. The court in that case found no jurisdiction because the suit was against the United States and it had not waived its immunity, and there was no res in HUD's possession on which to base a recovery. The short answer to this argument is that the First Circuit has specifically disagreed with Marcus Garvey and has determined that this court does have jurisdiction in this type of case. See Armor Elevator Co., Inc. v. Phoenix Urban Corporation, 655 F.2d 19, 20-1 (1st Cir. 1981); see also S. S. Silberblatt, Inc. v. East Harlem Pilot Block, 608 F.2d 28, 35-6 (2d Cir. 1979); Industrial Indemnity, Inc. v. Landreau, 615 F.2d 644, 645-6 (5th Cir. 1980).

Third Party Beneficiary Claim

It is well established under federal common law that one who is not a party to a contract may nevertheless have enforceable claims under the contract if the contract was made for his direct benefit.⁶ See Holbrook v. Pitt, 643 F.2d 1261, 1270 (7th Cir. 1981) and cases cited therein. However, if the agreement was not intended to benefit the third party, he is an "incidental" beneficiary with no enforceable rights. Id. As the First Circuit has stated

In deciding whether a nonparty should have a remedy for breach of contract, a court should ask whether the character of the benefit that will result to the putative third party beneficiary is such that his expectations of a pecuniary benefit are reasonable and whether enforcement by him will produce the result intended by the promisee at the least cost to society. Pstragowski v. Metropolitan Life Ins. Co., 553 F.2d 1, 5 (1st Cir. 1977).

In order to hold the promisee accountable, there must be a legally binding promise for the third party's benefit. Cf. Aetna Casualty and Surety Co. v. United States, 655 F.2d 1047, 1055 (Ct.Cl.1981). For if there is no promise by which the promisee intends to be bound, it is unreasonable for the third party to rely on it. See Restatement of Contracts 2d § 302, and compare § 302 Illus. 11 at 443 with Illus. 19 at 444.

In this case, plaintiff claims to be the beneficiary of the building loan agreement between the owner (Southfield) and the lender (MHFA). However, an analysis of the building loan agreement indicates that plaintiff was unreasonable in relying on it for recovery against the lender.

The agreement first addresses the issue of payment as follows:

the balance due the Borrower hereunder shall be payable at such time after completion as the commissioner authorizes the release of the holdback. However, the Lender may withhold final payment until after the expiration of any period which mechanics and materialmen may have for filing liens. (emphasis added). Building loan agreement para. 4(b).

The plaintiff contractor cannot look to this section for recovery on a third party claim. First, there is no promise by the owner to pay the contractor. Rather, there is simply an option given to the lender (MHFA) to withhold the final payment until the mechanics and materialmen have been paid. Apart from this problem, however, the "agreement" was simply not made for plaintiff's benefit. The clause refers to mechanics and materialmen, those laborers and suppliers who worked for plaintiff, and not plaintiff itself.

Paragraph 6 provides

Before any advance hereunder, the Lender may require the Borrower to obtain from the contractor and all subcontractors and materialmen dealing directly with the principal contractor acknowledgments of payment and releases of liens down to the date covered by the last advance, and concurrent with the final payment for the entire project. (emphasis added).

Again there is no binding commitment by any party to insure payment to the contractor. Rather, there is a nonbinding option given to the lender to require acknowledgments of payments and releases of liens prior to the final payment. Since there is no legally enforceable promise for his benefit, the contractor could not have reasonably relied on this as a basis to expect either party to pay him in event of the owner's default. Plaintiff cannot, therefore, assert a third party beneficiary claim with respect to paragraph 6 of the contract.

The last paragraph on which plaintiff might have relied is 14(a) which provides

The Borrower shall, as a condition precedent to any advance hereunder, submit to the Lender ... (ii) with the final application for advance, certifications ... that the project has been fully constructed in accordance with the provisions of this agreement and

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