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GIVOH ASSOCS. v. AMERICAN DRUGGISTS INS. CO.

May 5, 1983

GIVOH ASSOCIATES & KZHB Associates, Plaintiffs,
v.
AMERICAN DRUGGISTS INSURANCE COMPANY & International Fidelity Insurance Company, Defendants and Third-Party Plaintiffs, v. VIDAR DRYWALL CORPORATION, Volvo Construction Co., Inc., Simeon Fensterheim, Diane Fensterheim, Stephen Schwartz, Sandra Schwartz, Lawrence Wecker, Peggy Wecker, Bernard Mondry, Alan Sherman, Barbara Sherman, Harry Alex Meltzer, and The Secretary of the United States Department of Housing and Urban Development, Third-Party Defendants



The opinion of the court was delivered by: BRAMWELL

DECISION AND ORDER

 BRAMWELL, District Judge.

 BACKGROUND

 This action, originally brought in State Supreme Court, began as a lawsuit by Givoh Associates ("Givoh") and KZHB Associates ("KZHB") against the defendants on a contractors' performance bond. Givoh and KZHB are limited partnerships, each of which is engaged in the rehabilitation of two separate buildings in Brooklyn, New York. Givoh is engaged in the rehabilitation of a building at 658 Montgomery Street and KZHB is engaged in the rehabilitation of a building at 349 Crown Street. The work was to be performed by two prime contractors, Vidar Drywall Corporation ("Vidar") and Volvo Construction Co., Inc. ("Volvo") each of whom was to perform work on both projects. In order to finance the projects, Givoh and KZHB entered into Building Loan Agreements with Huntoon Paige Associates, under which Huntoon Paige agreed to loan $1,214,000 for each project. *fn1" Givoh and KZHB agreed to pay off the loan according to notes endorsed by third party defendant, the United States Department of Housing and Urban Development (HUD) and secured by mortgages on the projects. On September 27, 1978, KZHB, both construction companies, and the two surety defendants, entered into a performance bond in the amount of $190,028. On October 3, 1978, Givoh, both construction companies, and the two sureties entered into a similar performance bond in the amount of $207,274.

 By the terms of the Building Loan Agreements and pertinent HUD regulations, Huntoon would only release money periodically to either Givoh or KZHB pursuant to a certain procedure. Specifically, the parties were required to complete certain forms. In addition, the supervisory architect, third party defendant Alex Meltzer, was required to send Huntoon reports of all inspections he had made since the preceding disbursement. Following this, HUD would have to approve the forms and the title insurer would have to give notification of clear title. Only after all these steps were completed would money be disbursed.

 Huntoon's disbursements to Givoh for the Montgomery Street Project proceeded on schedule until October of 1979. A requisition for funds was submitted to Huntoon on October 15, 1979. At that time, however, the title company discovered that taxes on the property were unpaid and so it would not give Huntoon notification of clear title. On December 6, 1979, after the taxes were paid and Huntoon received notice of clear title, Huntoon made the requested disbursement. On December 13, 1979, three liens were filed against the Montgomery Street Project. Accordingly, the requisition of December 13, 1979 was not paid until February 15, 1980 when the title company was satisfied that the record was clear. This was the last requisition ever submitted on the Montgomery Street Project.

 Similarly, KZHB suffered several delays in the payments on the Crown Street Project. KZHB's disbursement request submitted on October 15, 1979 was not acted on until December 5, 1979 because HUD took over a month to process the request. The last requisition submitted by KZHB was delayed because liens were filed against the project. Huntoon finally received notification of clear title on February 15, 1980 and payment was made.

 Thus, despite occasional delays, all of the disbursements for the Montgomery and Crown Street Projects were eventually made.

 The Building Loan Agreements set November 27, 1979 as the date both projects were to be completed. However, construction was not completed until well into 1980. In addition, the March 1, 1980 interest payment on the building loans was not made to either Givoh or KZHB. Therefore, under the terms of the Consolidated Mortgage Notes, the building loans went into default on April 1, 1980. The loans were never reinstated. Subsequent to the defaults, on December 16 and 22, 1980, Huntoon assigned all of its right, title and interest in the Montgomery and Crown Street Projects to HUD.

 The dispute which forms the basis of this action began when Volvo and Vidar allegedly defaulted in performing their obligations under the construction contracts. Givoh and KZHB thereafter demanded of the defendant co-sureties that they remedy the defaults and complete the work pursuant to the performance bonds. The sureties have already paid approximately $39,000 to certain subcontractors and materialmen who made claims under the payment bonds on these projects. The sureties did, however, refuse to pay for completion of the projects and the instant action thereafter ensued in the state court. It was subsequently removed to this court upon motion by HUD, one of the third-party defendants. *fn2"

 There are several motions presently before the court. In the first, the defendant surety companies have moved to dismiss the plaintiff's complaint. This motion is based on the theory that Givoh and KZHB either improperly released contract funds or failed to make payments strictly in accordance with the terms of the performance bond agreements with the result that the sureties were released from all liability under the bonds.

 The second motion is made by third party defendant Harry Meltzer, the architect on the projects, to dismiss the complaint against him.

 The third party complaint against Mr. Meltzer brought by the sureties alleges that the sureties relied on his professional services to their detriment. In his motion to dismiss, Mr. Meltzer asserts that he had no ...


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