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TRANS-BAY ENGRS. & BUILDERS, INC. v. LYNN

May 20, 1975

TRANS-BAY ENGINEERS & BUILDERS, INC., Plaintiff,
v.
JAMES T. LYNN and ADVANCE MORTGAGE CORPORATION, Defendants



The opinion of the court was delivered by: SMITH

 Smith, Judge.

 Plaintiff, a general contractor, brought this action against the mortgagee and the federal insurer of a low-and moderate-income housing project, seeking certain sums retained as a "holdback" during construction as well as payment for various modifications in the building plans. Plaintiff's motion for a preliminary injunction against the assignment of the mortgage to the Secretary of Housing and Urban Development (hereinafter Secretary or HUD) was denied by previous order of this Court. The case is before the Court on plaintiff's Motion for Partial Summary Judgment (as to the retention amount, with interest thereon), defendant Advance Mortgage Corporation's Motion for Summary Judgment, and defendant Lynn's Motion to Dismiss or, in the Alternative, for Summary Judgment.

 Plaintiff Trans-Bay Engineers & Builders, Inc. is engaged in construction and general contracting work in the San Francisco Bay area. In 1971 Trans-Bay entered into an agreement to build a 231-unit housing project in Oakland, California for low-and moderate-income families. The construction contract was made with a non-profit, community-based group, More Oakland Residential Housing, Inc. (MORH). *fn1" MORH, the project owner, also entered into a mortgage and building loan agreement in the amount of approximately $6,000,000 with Advance Mortgage Corporation. HUD undertook to insure the mortgage between Advance Mortgage and MORH and to subsidize the project with monthly interest reduction payments pursuant to section 236 of the National Housing Act, 12 U.S.C. § 1715z-1 (1970). The parties signed these basic agreements on December 22, 1971, at the "initial closing," and construction began soon thereafter.

 Trans-Bay completed construction of the project on schedule, and on June 29, 1973, delivered to HUD the contractor's cost certification of the project. Relying on a provision in its construction contract with MORH, Trans-Bay sought release of the funds retained during periodic construction advances, amounting to 10% of project costs, or $467,301. *fn2" HUD officials notified Trans-Bay that approval of the owner's cost certification as well as final closing arrangements were necessary before the final amount due to Trans-Bay would be released from the mortgage proceeds. On August 10, 1973, MORH submitted the owner's cost certification to HUD, which was approved on October 10, 1973. Upon approval of the cost certification, Trans-Bay received approximately one-half of the retention amount. The remaining $233,653 has not been released despite requests by Trans-Bay and various negotiations carried on by the parties.

 After September 1, 1973, MORH was unable to meet its interest payments to Advance Mortgage. Advance Mortgage filed a formal notice of project default with HUD on January 16, 1974, and several months thereafter informed HUD of its election to assign the outstanding mortgage to HUD, pursuant to statutory provisions. 12 U.S.C. § 1712(g); 24 C.F.R. § 207.258 (1974). Following this Court's denial of plaintiff's motion for a preliminary injunction, Advance Mortgage assigned the mortgage to HUD on December 24, 1974. Approximately $300,000 remained in undisbursed mortgage funds at the time of assignment.

 A threshold matter to be considered is the jurisdiction of this Court over the action. Since the case at its core concerns matters of contract, there is no federal question jurisdiction under 28 U.S.C. § 1331(a), nor is 28 U.S.C. § 1337 applicable, providing for jurisdiction over proceedings arising under Acts regulating commerce. The fact that sections of the National Housing Act and the implementing regulations thereof are invoked by the parties does not transform a basic contract dispute into an action "[arising] under the . . . laws . . . of the United States." See Lindy v. Lynn, 501 F.2d 1367, 1369 (3d Cir. 1974). Nor can HUD-prepared forms or HUD's status as mortgage insurer serve to confer jurisdiction upon this Court.

 12 U.S.C. § 1702, also relied upon, is not a jurisdictional grant. The statute's authorization of the Secretary in carrying out provisions of the National Housing Act to "sue and be sued in any court of competent jurisdiction" operates to confer standing, waive sovereign immunity, and provide an exception to the otherwise exclusive jurisdiction of the Court of Claims. By its own terms, 12 U.S.C. § 1702 presupposes jurisdiction in the court where a suit is brought.

 On the merits, Trans-Bay advances several arguments upholding its claim of entitlement to the retention amount plus interest. First, as a third party beneficiary to the building loan agreement between Advance Mortgage and MORH, Trans-Bay claims a contractual right to payment from the undisbursed mortgage proceeds. Second, in view of the surety nature of the retention fund, Trans-Bay asserts that its rights vested immediately upon completion of construction and thus cannot be destroyed by a subsequent default. Third, Trans-Bay relies upon traditional equitable lien and unjust enrichment theories in support of its right to recovery. The Court finds that a careful reading of the terms of the various contracts demonstrates the error of plaintiff's claim of entitlement to the retention amount under the above theories, and accordingly rules for defendants in this cause.

 Under Trans-Bay's construction contract with MORH, the retention sum was payable 30 days after completion of work, provided there was inspection and approval of the project, issuance of certificates of occupancy and permissions to occupy, and submission of a contractor's cost certification statement. *fn3" Trans-Bay complied with each of these conditions and asserts that it was unable to obtain full payment of the retention sum. However, it is not the construction contract that Trans-Bay is suing upon in this action. Trans-Bay relies upon the building loan agreement between Advance Mortgage and MORH for its cause of action against the mortgagee and HUD. Hence, recovery is conditioned upon the terms of that contract and Trans-Bay's ability to invoke those terms as a third party beneficiary. The clear, apparently favorable provisions of the construction contract cannot avail Trans-Bay in a suit based upon the building loan agreement. *fn4"

 Trans-Bay cites Travelers Indem. Co. v. First Nat'l State Bank, 328 F. Supp. 208 (D.N.J. 1971), in support of its claim to standing as a third party beneficiary and its present right to the retention amount. In Travelers the court held that the surety and trustees in bankruptcy of a construction company could sue the mortgagee and its assignee, HUD, for retainages withheld during construction. The court found plaintiffs to be creditor beneficiaries of a building loan agreement under both traditional contract doctrines governing third parties and explicit HUD regulations specifying the mortgagee's obligations. 328 F. Supp. at 211-14.

 This Court is in accord with the Travelers holding that a contractor may sue as a creditor beneficiary of a financing agreement made on its behalf. However, a third party beneficiary is bound by the terms and conditions of the contract that it invokes. If a promise is conditional the right of the beneficiary is a conditional right. 4 Corbin on Contracts § 818 (1951). The beneficiary cannot accept the benefits and avoid the burdens or limitations of a contract. Nor can the language of a single regulation be read in such an absolute way as to nullify conditions and restrictions imposed by a contract. *fn5" In short, the Travelers court either did not consider or did not have before it the limitations in the building loan agreement which are present in the instant case.

 Paragraph 4(e) of the building loan agreement provides: "The Lender shall, in accordance with the provisions of this agreement, continue to advance to the Borrower funds out of the proceeds of the loan as long as the loan remains in balance and the Borrower is not in default hereunder or under the Note or Mortgage." (Emphasis added.) MORH concededly went into default on its mortgage payments, and thus Advance Mortgage was under no obligation to continue disbursing mortgage funds. As a third party beneficiary, Trans-Bay ...


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