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UNITED STATES v. MILL ASSN.

January 25, 1978

UNITED STATES of America, Plaintiff,
v.
MILL ASSOCIATION, INC., et al., Defendants; MARCH CONSTRUCTION CO., INC., Plaintiff, v. Patricia HARRIS, the Secretary of the United States Department of Housing and Urban Development, Defendant.



The opinion of the court was delivered by: BARTELS

I

These are two motions for summary judgment under Fed.R.Civ.P. 56 arising out of the default of Mill Association ("Mill") on a mortgage of a group practice medical facility insured by the Federal Housing Administration ("FHA"). In the first action, the United States seeks to foreclose on the mortgage, and in the second, March Construction Co. ("March"), which built the facility, seeks recovery of sums due it for the construction.

FACTS

 Mill is a private, non-profit corporation formed for the purpose of providing group practice medical services. It had no significant assets other than the heavily mortgaged land in Freeport, L.I., on which its group practice facility was to be constructed. In order to finance construction of the facility, it was necessary for Mill to seek a commitment from the FHA to insure the mortgage that Mill expected to obtain from a commercial lender. The FHA investigated Mill's proposal and, after Mill had acted on certain FHA criticisms, issued a commitment to insure. Mill thereupon executed a building loan agreement and mortgage with Chemical Bank, which was subsequently insured by FHA.

 In the meantime, Mill had entered into a construction contract with March to be financed by the building loan agreement, to which reference was made in the construction contract. March began work under the contract immediately and received payments in accordance therewith in installments equal to the incremental value of the work done less 10% (later 5%) holdback. March also did off-site work on sidewalks and curbs, to be paid for out of $ 10,000 held in escrow by Chemical for that purpose, and did certain extra work under change orders. March claims, and the government does not deny, that March completed work in February, 1972, and obtained all necessary permits and certificates and thus became entitled to payment in full under the contract thirty days thereafter. Final payment was not forthcoming, however, and Mill eventually went into default.

 Although the Federal Housing Commissioner eventually approved release of the balance due March under the contract, Chemical did not release the funds to Mill for payment to March, but instead exercised its option under the insurance agreement to assign the mortgage to the FHA. As part of this assignment procedure Chemical turned over to the FHA all sums held by it in connection with the mortgage, including $ 100,506.20 in undisbursed mortgage proceeds and $ 10,000 from the off-site escrow account.

 MOTION TO FORECLOSE

 Jurisdiction over this action is based on 28 U.S.C. § 1345. Since there is no genuine dispute on any material fact as to the government's right to foreclose the mortgage and since March has failed to show as a matter of law that it has a lien on the premises superior to the mortgage, the government's motion for summary judgment must be granted.

 1. March claims that it has an equitable lien on the premises because it started work under the construction contract prior to execution of the building loan agreement and mortgage but with an understanding that the property would stand as security for its work. However, the building loan agreement, upon which March relied for payment, stated that the mortgage would be a valid first lien. The circumstances thus fail to reveal any written agreement for a lien or any clear intention of the parties that any oral lien would be valid or would continue beyond execution of the building loan agreement and mortgage. See Penn Oil P. R. Co. v. Willrock Producing Co., 267 N.Y. 427, 196 N.E. 385 (1935).

 2. Nor does March have a mechanic's lien under the New York Lien Law. March's lien, even if timely filed in December, 1972, would be extinguished by operation of law after one year unless extended. The discontinued earlier action brought by the United States to foreclose the mortgage did not extend the life of the lien, because March was not named as a defendant therein, and there is no showing that a lis pendens was filed by anyone. March's mechanic's lien is thus extinct. See N.Y. Lien L. §§ 13, 17, 19.

 RECOVERY OF SUMS DUE MARCH

 Jurisdiction over March's claims against the Secretary of H.U.D. is based on 28 U.S.C. § 1331, since this action is governed by federal common law. Trans-Bay Engineers & Builders, Inc. v. Hills, 179 U.S.App.D.C. 184, 551 F.2d 370 (D.C. Cir. 1976). We find that March should recover the sums specified for the reasons given below.

 1. We find that the principles set forth in Trans-Bay, supra; Spring Construction Co. v. Harris, 562 F.2d 933 (4th Cir. 1977), and F. W. Eversley & Co. v. East N. Y. Non-Profit H. F. D.C., 409 F. Supp. 791 (S.D.N.Y.1976), control the decision of this case. We therefore hold that March is entitled to recover the sums due it for the holdback and off-site construction work as a third-party beneficiary to the building loan agreement and as holder of an equitable lien in the undisbursed mortgage proceeds and in the off-site escrow fund. We believe that the intent to benefit the contractor is clear, noting, for instance, the statement in the building loan agreement that, in compliance with the New York Lien Law, Mill would hold the advances in trust for March. The fact that March may not have submitted an application for final payment until after Mill's default in July, 1972, is immaterial, for such a submission was simply a minor housekeeping detail or contractual immateriality which cannot affect the substantive rights of the parties. Moreover, there is a question of unjust enrichment resulting to the United States. Although it is doubtful that the United States will recover the losses it suffered on its insurance of this project, it would still be unjustly enriched were it permitted to obtain by foreclosure a building constructed by March which has not been completely paid for by Mill or with the mortgage monies.

 2. Trans-Bay, Spring And Eversley, supra, involved insurance of mortgages for low income housing, while this case involved the insurance of a mortgage for a group medical practice facility under Title XI of the National Housing Act, 12 U.S.C. §§ 1749aaa Et seq. We believe that this is a distinction without a difference and that the same principles should be applied in both cases.

 (a) Mill was essentially a no-asset non-profit corporation made viable solely by FHA support. Title XI was enacted to facilitate the financing of group practice facilities, for Congress had found that group practice was a means of reducing hospital utilization, making more efficient use of scarce manpower and expensive diagnostic equipment, and making a range of medical services conveniently available in the face of increasing specialization. H.R.Rep.No. 1931, 89th Cong., 2d Sess., 1966 U.S.Code Cong. & Admin.News, pp. 3999, 4027.

 (b) The FHA exercised control over the financing and operation of this project comparable to that exercised over the low-income housing involved in Trans-Bay And Spring ; for example, as noted in the construction contract and building loan agreement, even the installment payments to the contractor were subject to the approval of the Federal Housing Commissioner before they could be released under the building loan agreement. The Commissioner's approval was also required before any work could be subcontracted.

 (c) The fact that the FHA could insure only 90% Of the mortgage, as compared with insurance of 100% Of low-income housing mortgages, is irrelevant, since March is seeking recovery not out of the insurance proceeds paid by the government to Chemical but out of the undisbursed proceeds held by Chemical under the building loan agreement and assigned to the FHA together with the mortgage. These monies were held for ultimate payment to March which accordingly had an equitable lien thereon.

 3. The government's claim that sovereign immunity bars any recovery by March must be rejected. Congress provided that the Secretary could "sue and be sued" under the National Housing Act in 12 U.S.C. § 1702, and the Supreme Court has held that this waiver of sovereign immunity is to be broadly interpreted. F. H. A. Region No. 4 v. Burr, 309 U.S. 242, 60 S. Ct. 488, 84 L. Ed. 724 (1940). Although the funds in question are kept in a treasury account, Cf. Burr, supra, they are disbursable at the discretion of the Secretary of H.U.D. and indeed are funds originating not from the United States but from Chemical Bank under its contract of insurance with the FHA and are thus not protected by the sovereign's immunity. The government's reliance on Modular Technics Corp. v. South Haven Dev. Fund Co., Inc., 403 F. Supp. 204, Aff'd mem., 538 F.2d 311 (2d Cir. 1976), is misplaced, for in that case the contractor contended that an implied contract had been created between itself and the FHA by reason of the heavy involvement of the FHA's agents in the project. The Court there reasoned that the FHA agents had no authority to make such a ...


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