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S. S. SILBERBLATT, INC. v. EAST HARLEM PILOT BLOCK

November 8, 1978

S. S. SILBERBLATT, INC., and S. S. Silberblatt, Inc., on behalf of itself and all other persons entitled to share in funds allocated for the improvements of real property owned by East Harlem Pilot Block Building 1 Housing Development Fund Company, Inc., East Harlem Pilot Block Building 2 Housing Development Fund Company, Inc., East Harlem Pilot Block Building 3 Housing Development Fund Company, Inc., and East Harlem Pilot Block Building 4 Housing Development Fund Company, Inc., Plaintiffs,
v.
EAST HARLEM PILOT BLOCK Building 1 Housing Development Fund Company, Inc., East Harlem Pilot Block Building 2 Housing Development Fund Company, Inc., East Harlem Pilot Block Building 3 Housing Development Fund Company, Inc., East Harlem Pilot Block Building 4 Housing Development Fund Company, Inc., Patricia Roberts Harris, as Secretary of the United States Department of Housing and Urban Development and Chemical Bank, Defendants



The opinion of the court was delivered by: POLLACK

Defendant Chemical Bank made a $ 39-million construction loan to the East Harlem defendants secured by a mortgage of the property for construction by S. S. Silberblatt, Inc. of Taino Towers. The loan was insured by HUD. Silberblatt undertook to complete construction by February 29, 1976. Failure to complete the project on time was a stipulated default under the loan agreement and Silberblatt so understood. The project was not completed in February 1976; it was only 92.8% Completed as of July 7, 1976.

On March 19, 1976, Chemical declared East Harlem to be in default on the building loans because of failure to complete the project on time and refused to advance further monies under the loan agreement including funds to pay Silberblatt's last requisition which was approved by the architect and HUD. Silberblatt then suspended its performance under the construction contracts because the approved requisition dated March 5, 1976 was not paid.

 On July 8, 1976 Chemical assigned its interests in the loan agreements and mortgages to HUD together with undisbursed loan proceeds that had been held as retainages. Silberblatt was entitled to be paid monthly for all labor and materials furnished, less a 10% Retainage payable upon completion of the project.

 On August 18, 1977, HUD agreed with the owners to complete the project and authorized a maximum expenditure of $ 16,363,740 for that purpose. Yunque Development Corporation agreed to do the work. That amount represents undisbursed mortgage proceeds of $ 4,302,890.34 and an additional $ 12,060,849.66 of new money committed by HUD. The project is currently being completed.

 Silberblatt brought suit against East Harlem, HUD and Chemical in state court on July 9, 1976 asserting a claim under the New York Lien Law for the moneys due it for the balance of the Construction Contracts ($ 455,009.40), for materials in inventory ($ 300,000.00), for the retainages due under the Construction Contracts ($ 3,370,480.10); for expenses and liabilities of Silberblatt due to failure of the defendants to make timely payments due it ($ 4,599,346.24) and for "approved change orders" ($ 1,164,161.59). Silberblatt also sought therein to enjoin the transfer of the mortgage proceeds to HUD. That suit was removed to this Court by HUD pursuant to 28 U.S.C. §§ 1441, 1442(a)(1). HUD has asserted counterclaims against Silberblatt based on its failure to complete the project on time and in the amount of $ 15-million. East Harlem has asserted a similar counterclaim against Silberblatt in the amount of $ 12.5-million.

 HUD's motion for summary judgment is predicated on two cardinal points. One, that the Building Loan Agreement binding on Silberblatt as a third party beneficiary thereof provides that if necessary upon a default of the owner to timely complete the project by the stipulated date, HUD may step in and complete the project and use the mortgage funds that have not been advanced to the owner including amounts otherwise payable therefrom to the defaulting contractor for labor and materials supplied and moneys withheld as retainages to complete construction. The relevant provision, paragraph (9), of the Building Loan Agreement reads as follows:

 
the Borrower hereby constitutes and appoints the Lender its true and lawful attorney-in-fact, with full power of substitution in the premises, to complete the project in the name of the borrower. The Borrower hereby empowers said attorney as follows: (a) To use any funds of the Borrower, including any balance which may be held in escrow and any funds which may remain unadvanced hereunder for the purpose of completing the project . . . .
 
The Borrower hereby assigns and quitclaims to the Lender all sums unadvanced under the Mortgage and all sums due in escrow conditioned upon the use of said sums for the completion of the project, such assignment to become effective only in case of the Borrower's default.

 Upon assignment from Chemical, the Secretary of HUD succeeded to the rights and obligations of the "Lender" in the foregoing provision (P (18) of the Building Loan Agreement). Silberblatt concedes that HUD has spent or committed itself to spend more than the amount of the escrow and retainage funds held under the loan agreement to complete construction.

 Two. The second principal point made by the Secretary on her motion relates to Silberblatt's claims for damages for delay. The Secretary contends that these are barred from suit herein by the doctrine of sovereign immunity, 28 U.S.C. §§ 2679(a) and 1346(b) and must be pursued within the terms of the Federal Tort Claims Act. Further, that Silberblatt's claim for additional work may not be maintained because the changes were not approved as required by the construction contract nor was the mortgage increased to cover the alleged change orders and Silberblatt's claim against the Secretary could only be asserted against undisbursed mortgage proceeds. Cf. F. W. Eversley & Co., Inc. v. East New York Non-Profit H. D. F. C., Inc., 409 F. Supp. 791, 793-94 and n.2, 800 (S.D.N.Y.1976) (Werker, J.).

 Silberblatt disputes the two cardinal points mentioned above on which HUD relies for dismissal of this suit against it.

 1. Silberblatt claims an equitable lien against the undisbursed mortgage proceeds on hand at the time of the default arising from the failure to complete construction. Plaintiff's claim for relief against HUD is founded on the doctrine of several recent cases generally known as the Trans-Bay doctrine. Properly stated in the Court's opinion that doctrine holds that where a contractor has satisfactorily completed performance of his contractual obligation, a default by the mortgagor will not bar its recovery from HUD of retainages from any undisbursed mortgage proceeds that have been assigned to the Secretary, and an equitable lien will be impressed on such funds in favor of the contractor. Silberblatt's key difference with this formulation is that it contends that the cases do not require Completion of the construction contract for imposition of such an equitable lien. Analysis of every case applying an equitable lien as against a contractual right of HUD to use undisbursed mortgage funds shows that equitable liens were imposed where construction of the project was completed by the contractor or his privy to HUD's satisfaction. In those circumstances the government's holdback rights were held not to be narrowly defined by the strict contractual provisions but were held subject to equitable lien for the benefit of the contractor regardless of other contractual breach or insolvency of the owner. Travelers Indem. Co. v. First National State Bank of New Jersey, 328 F. Supp. 208 (D.N.J.1971) (contractor Completed construction, project accepted as complete by bank and HUD); American Fidelity Fire Ins. Co. v. Construcciones Werl, Inc., 407 F. Supp. 164 (D.V.I.1975) (contractor's surety Completed construction and occupancy certificate issued); Trans-Bay Engineers & Builders, Inc. v. Hills, 179 U.S.App.D.C. 184, 551 F.2d 370 (1976) (construction of project Completed to HUD's satisfaction within time fixed by construction contract); F. W. Eversley & Co., Inc. v. East New York Non-Profit H. D. F. C., Inc., 409 F. Supp. 791 (S.D.N.Y.1976) (Werker, J.) (contractor Completed Construction required; occupancy certificates issued); Bennett Constr. Co., Inc. v. Allen Gardens, Inc., 433 F. Supp. 825 (W.D.Mo.1977) (builder brought project to full and final Completion to the satisfaction of HUD); United States v. Mill Ass'n, Inc., 480 F. Supp. 3 (E.D.N.Y. 1978) (Bartels, J.) (builder Completed construction and obtained all necessary permits and certificates).

 In assessing the relative priorities where a project remains uncompleted and HUD has undertaken to complete it, the equities compel the holding that retainages and escrowed funds were intended to secure completion and where HUD completes the project it is equitably entitled thereto, as in this case, in priority to any claims of the contractor who has not completed the project. Clearly all parties contemplated that the retainages would be used for completion of the project and not payment of contractor's claims. This purpose of the retainage fund has been fully recognized in the cases.

 
The amount held back was held for two reasons: first, to stimulate completion of the construction according to the timetable, and second, to insure that a fund would be available to complete the project if the contractor defaulted in ...

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