Travelers Indem. Co. v. First Nat. State Bank of NJ

• Decision Date: 16 June 1971
• Docket Number: Civ. A. No. 292-68.
• Citation: 328 F. Supp. 208
• Parties: The TRAVELERS INDEMNITY COMPANY, a body corporate, Plaintiff, Martin C. Mareiniss, James E. Masterson, and Joseph F. Walsh, as Co-Trustees in the pending Chapter XI Proceedings of Carnell Construction Corp., Intervening Plaintiffs, v. The FIRST NATIONAL STATE BANK OF NEW JERSEY, a national banking corporation, and Robert C. Weaver, Secretary of Housing and Urban Development, an Executive Department of the United States of America, Defendants.
• Court: U.S. District Court — District of New Jersey

328 F. Supp. 208

The TRAVELERS INDEMNITY COMPANY, a body corporate, Plaintiff Martin C. Mareiniss, James E. Masterson, and Joseph F. Walsh, as Co-Trustees in the pending Chapter XI Proceedings of Carnell Construction Corp., Intervening Plaintiffs, v. The FIRST NATIONAL STATE BANK OF NEW JERSEY, a national banking corporation, and Robert C. Weaver, Secretary of Housing and Urban Development, an Executive Department of the United States of America, Defendants.

Civ. A. No. 292-68.

United States District Court, D. New Jersey.

June 16, 1971.

COPYRIGHT MATERIAL OMITTED

Lum, Biunno & Tompkins, by Charles Hoens, Jr., Newark, N. J., for Travelers Indemnity Co.

Martin C. Mareiniss, James E. Masterson, Joseph F. Walsh, by John J. Bracken, Newark, N. J., cotrustees for Carnell Const. Corp.

Bertram M. Light, Jr., Newark, N. J., for First Nat. State Bank of New Jersey.

Herbert J. Stern, U. S. Atty., by Carolyn N. Arch, Asst. U. S. Atty., for Secretary of Housing and Urban Development.

OPINION

WORTENDYKE, District Judge:

Upon appropriate cross motions for summary judgment and upon a written stipulation of facts entered into by counsel for the respective parties, the claims between the parties have been submitted to the Court and decision thereon reserved at the conclusion of the oral arguments on the motions. Since that stipulation has been filed only a brief review of the facts will be necessary. This case involves the same housing project as described in United States v. Munroe Towers, Inc., 286 F.Supp. 92 (D.N.J. 1968).

The intervening plaintiffs are co-trustees in Bankruptcy for Carnell Construction Corp. (formerly DeMatteis International Construction Co., and hereinafter Carnell). The plaintiff Travelers Indemnity Company (Travelers) is a surety company that issued a Dual-Obligee Bond on behalf of the general contractor Carnell to guarantee the performance of the Construction Contract (Exhibit D). During the construction period Munroe Towers, Inc. (Munroe) was the owner of real property situate in Asbury Park, and the owner-mortgagor of the building erected thereon, and the defaulting mortgagor under a $4,174,500.00 construction mortgage, on which the defendant First National State Bank of New Jersey (Bank) is the mortgagee. The Bank assigned the mortgage to the defendant Robert C. Weaver, Secretary of Housing and Urban Development (Secretary) on October 4, 1966 in accordance with the provisions of the National Housing Act, Title 12 U.S.C. § 1713(g) and 24 C.F.R. § 207.258. The Secretary had insured the said mortgage.

At various times during the period in question, the parties executed numerous documents and agreements. These documents and agreements are set out in Schedule A attached hereto. In addition to the documents described in Schedule A, certain other documents are incorporated in the stipulation of facts (without specific reference). These are delineated in Schedule B.

Defaults in mortgage interest payments occurred during construction, when the building was near completion and the mortgage was assigned to the Secretary. Thereafter, the general contractor, Carnell, completed construction of the Munroe project.

Subsequent to October 4, 1966 the construction project was accepted by the owner-mortgagor, Munroe, with the approval of the Secretary and of the Bank. At the time of acceptance all improvements had been completed. On October 29, 1966 the United States of America as insurer and assignee of the mortgage loan filed a complaint in this Court to foreclose the said mortgage.

Travelers has paid the sum of $262,833.29 to materialmen and suppliers of Carnell in connection with the work performed on the Munroe Towers project. An additional claim of a subcontractor, Melrose Electric Company, has been settled for the sum of $25,000 upon payment of which the total of payments made under Travelers' bond will reach the sum of $287,833.29.

The various plaintiffs' complaints are substantially similar in the variety and number of legal theories of liability asserted. The substance of the controversy would seem to be who is entitled to certain funds formerly held by the Bank and now in the possession of the Secretary as its assignee. These funds were retainages and escrow deposits required by Title 12 U.S.C. § 1713(g) (4) and (5) to be remitted to the Secretary in conjunction with an assignment to him.

Plaintiffs allege in their complaints in this action that, due to the failure of the Bank to give the requisite notice of default of Munroe Towers and to release the funds due and owing to Munroe and Carnell, contractor Carnell was unable to make payments to its creditors, including labor and material subcontractors in connection with the project, and that on or about April 15, 1967 a petition for arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. was filed in behalf of Carnell and is still pending. Plaintiffs further allege that upon the default of Carnell in payment of its job creditors the surety became obligated to satisfy the claims of all persons having contracts directly with Carnell for labor and material furnished in connection with the construction of the project. Plaintiffs further charge that as a direct result of the Bank's failure to notify Carnell of the default of Munroe and to release the funds, plaintiff Travelers has been presented with numerous claims under its Bond and has been compelled to and will be compelled to make payments to various claimants. Therefore Travelers alleges that by virtue of said payments and claims it has become, as surety upon its Bond, subrogated to the rights of Carnell and the laborers and materialmen on the project.

Plaintiffs also allege that the monies which the Bank failed to release were trust funds for the benefit of Carnell and the laborers and materialmen on the project which were diverted by the Bank in an amount of $409,897.25 for which it claims recovery from the Bank and the Secretary of Housing and Urban Development as their respective liabilities may appear.

Although the parties did not discuss this suit as one substantially grounded in contract, we so view it. This Court deems the plaintiffs to be creditor third party beneficiaries of the building loan agreement, and the Secretary to be the assignee of the said agreement. The various pertinent statutes, regulations and agreements set up an elaborate system enabling the mortgagee to retain a portion of the funds payable under the building and loan agreement to insure the mortgagor's performance of his obligation to erect the project; upon completion of the project the disposal of the funds is also provided for. These various statutes and regulations and the building loan agreement are incorporated into the mortgage; accordingly when the mortgage was assigned so were the rights and duties arising under it as well as those arising under incorporated agreements.

Jurisdiction over the Secretary is vested in this Court by virtue of Title 12 U.S.C. § 1702 which in pertinent part provides:

"The Secretary shall * * * be authorized in his official capacity, to sue and be sued in any court of competent jurisdiction, State or Federal." emphasis added

This Court's jurisdiction to entertain a suit on an express contract is not limited by the Tucker Act, Title 28 U.S.C. § 1346, as settled by Ferguson v. Union National Bank of Clarksburg, W. Va., 126 F.2d 753 (4 Cir. 1942). See also George H. Evans and Co. v. United States, 169 F.2d 500 (3 Cir. 1948); Seven Oaks v. F. H. A., 171 F.2d 947 (4 Cir. 1948). Diversity jurisdiction is the basis for the claim against the defendant Bank. 28 U.S.C. §§ 1332 and 1348.

The law governing the parties' particular relationship to the bilateral building loan agreement is federal. See Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943); United States v. Allegheny County, 322 U.S. 174, 64 S.Ct. 908, 88 L.Ed. 1209 (1944). We will therefore disregard all of the State law cited by the respective parties.

On July 17, 1964 the Bank and Munroe executed various agreements one of which was a bilateral executory contract, a building loan agreement (Exhibit C), whereby the Bank became obligated to extend credit in the form of a loan in the aforesaid amount to be secured by a mortgage and note, and Munroe became obligated to erect the aforesaid project. In addition to these covenants, the contract, in pertinent part, provides:

"(4) * * * Upon completion of the improvements * * * the balance due the Borrower hereunder shall be payable upon the expiration of 30 days from the date of final completion and acceptance of the project by the Lender with the approval of the Commissioner * * *.

(5) * * * and the Borrower covenants that it will receive all advances hereunder as a trust fund to be applied first for the purpose of paying for the cost of the improvements before using any part of the total of the same for any other purpose, but nothing herein shall impose upon the Lender any obligation to see to the proper application of such advances by the Borrower.

* * * * * *

(10) If the Borrower at any time prior to the completion of the project abandons the same or ceases work thereon for a period of more than twenty (20) days or fails to complete the erection of the project strictly in accordance with the Drawings and Specifications, except as to changes approved herein provided by the Lender and the Commissioner, or make changes in the Drawings and Specifications without first securing written approval of the Lender and the Commissioner, or otherwise fails to comply with the terms hereof, any such failure shall be a default hereunder, at the option of the Lender, and the Lender may terminate this agreement, or the Lender, at its option, at any time thereafter may enter into possession of the premises and perform any and all work and labor necessary to complete improvements * * *. The Borrower hereby assigns and quit claims to the

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