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BERKS PRODS. CORP. v. LANDREAU

UNITED STATES DISTRICT COURT, EASTERN DISTRICT OF PENNSYLVANIA


September 24, 1981

BERKS PRODUCTS CORPORATION, Chelten Manufacturing Company, D.B. Diefenderfer and Brother, Inc., Eastern Energy Savers, Inc. (formerly known as Eastern Industrial Insulation Company, Inc.), Esterly Contracting Company, Inc., D.S. Gitto Lathing/Plastering/Stucco Contractors, Harvey B. Good, Randy Kurtz Landscaping, Kurtz Brothers Concrete, Inc., Kurtz Precast Corporation, Manpower Inc. of Reading, Modernfold of Reading, Inc., J.C. McGinn Construction Company, Peerless Products, Inc., Scheler and Shifflet, D.E. Stoltzfus Construction Company, Thoro System Waterproofing, Inc., and Windsor Service, Inc.
v.
Moon LANDREAU, Secretary Department of Housing and Urban Development, Banco Mortgage Company, Donald Barsky, Melvin B. Miller, Resab and Vantage/Barsky, a Joint Venture, Paul Restall, Revere House Associates Phase I, Title Services, Inc., and Vantage Development Corporation

The opinion of the court was delivered by: CAHN

MEMORANDUM

This action involves claims by subcontractors for payment for labor and materials supplied during the construction of a multifamily apartment complex in Berks County, Pennsylvania, which was developed as a low and moderate income housing project under § 221(d)(4) of the National Housing Act, 12 U.S.C. § 1715l(d)(4). Before me are motions to dismiss on behalf of certain defendants including: (i) the Secretary of the Department of Housing and Urban Development ("HUD"), (ii) Donald Barsky, Vantage Development Corporation ("Vantage"), Revere House Associates-Phase I ("Revere House"), and the Joint Venture ("Joint Venture") composed of Resab, Inc. and Vantage/Barsky, and (iii) Paul Restall, who plaintiffs allege is the president and sole shareholder of Resab, Inc.

 For the reasons stated herein, I will deny HUD's motion to dismiss under Fed.R.Civ.P. 12(b)(1) for claims arising under the National Housing Act for which jurisdiction is alleged under 28 U.S.C. § 1331 and § 1337, but will grant its motion to dismiss under Fed.R.Civ.P. 12(b)(6) for failure to allege facts justifying relief under the National Housing Act. I will also reject plaintiffs' argument that their contract claims arise under the National Housing Act or federal common law. I hold, however, that plaintiffs have stated a claim against HUD in contract, which claim is governed by state law. Because plaintiffs' amended complaint eliminated the Tucker Act, 28 U.S.C. § 1346, as a basis for jurisdiction, I will dismiss plaintiffs' contract claims against HUD. Upon an appropriate motion, however, I will grant plaintiffs leave to reinstate their contract claims against HUD provided they amend their complaint to assert jurisdiction under § 1346 for claims of less than $ 10,000.

 I will grant the private defendants' motions to dismiss for lack of subject matter jurisdiction under Fed.R.Civ.P. 12(b)(1). Lack of a substantial federal claim makes pendent jurisdiction inappropriate here. Finally, although defendants Banco Mortgage Company and Title Services, Inc. and Melvin Miller have not moved to dismiss plaintiffs' claim, I will dismiss plaintiffs' claim against these three defendants sua sponte for lack of subject matter jurisdiction, there being no federal question or complete diversity of citizenship in this case.

 The dismissal under Fed.R.Civ.P. 12(b)(6) of plaintiffs' claims against HUD arising under the National Housing Act will be with prejudice. All other dismissals will be without prejudice.

 I. THE PARTIES

 Plaintiffs are a group of eighteen subcontractors who claim that they have not been paid for labor and materials they allegedly supplied to the project. Plaintiffs are corporations and individuals that appear to be citizens of the Commonwealth of Pennsylvania.

 Defendant Revere House owns the project. Revere House is a limited partnership with two general partners, Vantage and Barsky, and twenty-one limited partners. Defendant Melvin Miller is the escrow agent of the subscription funds of the limited partners of Revere House. Defendant Barsky is the president and chief operating officer of Vantage. Barsky and Melvin Miller are both citizens of Pennsylvania. Vantage is a corporation organized under the laws of Delaware, with its principal place of business in Pennsylvania. The amended complaint does not allege the citizenship of the limited partners of Revere House.

 The prime contractor of the project was a joint venture composed of Resab, Inc., now insolvent, and defendants Vantage and Barsky. Paul Restall is alleged to be the president and sole shareholder of Resab, Inc. Banco Mortgage Company, an Iowa corporation with its principal place of business in Minnesota, is the construction lender and mortgagee. Defendant Title Services, Inc. ("Title") was the disbursing agent of the construction loan proceeds. The complaint does not allege Title's state of incorporation, but states that its principal place of business is in Minnesota. Defendant HUD insured the mortgage under the National Housing Act. In this connection HUD investigated the economic viability of the project. Many of the agreements between parties other than plaintiffs hereto were in the form mandated by the Act and the rules and regulations promulgated under it. 12 U.S.C. § 1715l.

 II. FACTS

 I assume all facts pleaded by plaintiffs to be true for the purposes of these motions.

  The defendants contemplated that the project would be financed by a mortgage insured by HUD under § 221(d) of the National Housing Act. The Joint Venture was formed to be the general contractor in order to provide the identity of interest between owner and contractor which allowed the parties to forego posting a surety bond for the completion of the project. The various defendants executed a number of agreements among themselves, many in forms prescribed by HUD, including a construction contract between Revere House and the Joint Venture; a building loan agreement setting forth terms and conditions for the mortgagee's advancement of construction funds; a regulatory agreement for multifamily housing projects between Revere House and HUD; a completion assurance agreement approved by HUD between Revere House, the Joint Venture and Banco; and a construction loan disbursement agreement between Revere House, the Joint Venture, Banco and Title.

 During the course of the construction of the project HUD was required to monitor the construction and the financial arrangements pursuant to its obligations under the Act and regulations. HUD was required to approve progress payments under the building loan agreement.

 When Resab, Inc. began to fail in its obligations, Revere House became the contractor. HUD had the power under 24 C.F.R. § 221.513 to withhold final endorsement of the building loan to secure payment to subcontractors, but did not exercise this power. Plaintiffs allege that HUD failed to do this despite the fact that it knew there were outstanding claims by plaintiff subcontractors. It is for this reason that HUD required the defendants to set up an escrow account pursuant to the escrow agreement concerning completion assurance funds. The agreement gave HUD power to control the escrowed funds. Plaintiffs allege that the funds required by the escrow agreement were never set up. Plaintiffs do not allege that HUD now has or controls any such escrow funds.

 III. DISCUSSION

 The complaint consists of twenty-nine counts. The first fourteen counts are against HUD alone or together with other defendants and charge violations of the National Housing Act, breach of contract, breach of duties under the National Housing Act and breach of fiduciary duties. All but count three of the first fourteen counts refer to a breach of a fiduciary duty created either by the National Housing Act or by the contract. Only count three speaks directly of breach of contract. Various other counts charge the private defendants with breach of contract and unjust enrichment. Plaintiffs seek equitable and monetary relief for all of the defendants.

 Plaintiffs claim subject matter jurisdiction exists for their claims against HUD under 12 U.S.C. § 1702, 28 U.S.C. § 1331(a), and 28 U.S.C. § 1337. *fn1" Although plaintiffs pleaded Tucker Act jurisdiction over breach of contract claims against HUD in their original complaint, the amended complaint eliminated allegations of jurisdiction under 28 U.S.C. § 1346. Plaintiffs plead jurisdiction on the claims against the private defendants under §§ 1331, 1337 and would have this court invoke pendent jurisdiction to consider those claims in the event the court decides they do not arise under National Housing Act or federal common law.

 A. PLAINTIFFS' CLAIMS AGAINST HUD DISMISSED

 1. NO JURISDICTION UNDER NATIONAL HOUSING ACT

 The National Housing Act carries no independent grant of subject matter jurisdiction. 12 U.S.C. § 1702 states, in relevant part:

 

The Secretary (of HUD) shall, in carrying out the provisions of ... (the National Housing Act), be authorized, in his official capacity, to sue and be sued in any court of competent jurisdiction, State or Federal.

 A number of courts have held that this "sue and be sued" clause is not an independent jurisdictional grant. Bor-Son Building Corp. v. Heller, 572 F.2d 174 (8th Cir. 1978); Lindy v. Lynn, 501 F.2d 1367, 1369 (3d Cir. 1974); Ames-Ennis, Inc. v. Midlothian Ltd. Partnership, 469 F. Supp. 939 (D.Md.1979); Ghent v. Lynn, 392 F. Supp. 879 (D.Conn.1975). Therefore, plaintiffs must meet the requirements of another jurisdictional provision in order for this court to entertain its suit.

 2. COURT HAS LIMITED SUBJECT MATTER JURISDICTION UNDER § 1331(a) and § 1337

 Stated simply, this is a case of dissatisfied subcontractors seeking compensation for work performed. The facts alleged make it clear that plaintiffs' primary complaint is contractual or quasi-contractual in nature, and is most appropriately directed against the private defendants with whom they had contractual relationships. Plaintiffs have attempted to argue that HUD breached a duty to the plaintiffs. Such duty is alleged to arise under the National Housing Act, which is an act affecting commerce within the meaning of § 1337, and under contracts with parties other than the plaintiffs to which HUD was also a party.

 a. § 1331/s 1337 JURISDICTION EXISTS FOR CLAIM OF DUTY UNDER NATIONAL HOUSING ACT

 I hold that whether or not the National Housing Act gives rise to any duty by HUD to plaintiff subcontractors is an important federal question over which I take jurisdiction. This is precisely the question I believe counsel for HUD was referring to when he commented in his letter of December 22, 1980, that plaintiffs' complaint alleges a "cause of action raising issues of great concern to the Secretary and to the counsel of the Department."

 b. NO § 1331/s 1337 JURISDICTION FOR DUTIES ARISING UNDER CONTRACTS TO WHICH HUD WAS A PARTY *fn2"

 Although plaintiffs take care to characterize their claims under contracts between HUD and other defendants or between defendants on forms prescribed by HUD as based on theories of fiduciary duties springing from the contracts, it is clear that these claims are contract claims. Whether the plaintiffs have a right to enforce these contracts as third-party beneficiaries is a contract claim pure and simple and is not a federal question and does not implicate the National Housing Act. Lindy v. Lynn, 501 F.2d 1367 (3d Cir. 1974). But see cases cited in footnote 6 infra.

 Moreover, I also reject plaintiffs' claim that any alleged contractual duties arise under federal common law and that this satisfies § 1331 jurisdictional requirements. Federal common law is invoked when a policy underlying a federal statute requires uniform administration of the type of claim at issue. On the facts as currently pleaded by plaintiffs, the contract most likely giving rise to a duty by HUD to plaintiffs is the completion assurance contract creating the escrowed funds. No federal policy requires the uniform administration of this kind of escrow contract which is frequently used in standard construction arrangements and which is customarily interpreted by state courts. Lindy v. Lynn, 501 F.2d at 1369. Therefore, the contract claims do not arise under federal common law.

  In sum, I have jurisdiction under § 1331 and § 1337 limited to consideration of whether the National Housing Act and the regulations promulgated thereunder give rise to any duty by HUD to the plaintiffs. Duties based purely on contracts arise neither under the National Housing Act nor under federal common law. *fn3"

 3. PLAINTIFFS' CLAIMS THAT HUD BREACHED A FIDUCIARY DUTY TO THEM DISMISSED ON MERITS FOR FAILURE TO STATE CLAIM

 Assuming: (i) that the National Housing Act and regulations adopted thereunder imposed affirmative duties upon HUD to supervise and complete the project; (ii) that HUD required the establishment of an escrow fund pursuant to an agreement which HUD itself signed when it discovered that the owner could not provide the certification, as required by the regulations, that there would be no outstanding obligations regarding construction; (iii) that HUD nevertheless failed to enforce the terms of the escrow agreement; (iv) that the escrow agreement was created pursuant to authority granted HUD by the regulations; (v) that plaintiffs relied upon HUD's representations and course of conduct which plaintiffs felt indicated that HUD would protect plaintiffs' interests plaintiffs still have not shown and are unable to show that HUD had any duty to them created by the National Housing Act.

 Congress intended the National Housing Act to benefit the public and the occupants of the residential units built under the Act. The procedures required by 12 U.S.C. § 1715l(d) are designed for the protection of HUD's insurance fund. HUD's primary responsibility is to protect the rights of homeowners. H.R. (Conf.) Rep.No.2271, 83d Cong., 2d Sess. 66-67, reprinted in (1954) U.S.Code Cong. & Ad.News 2723, 2828. The National Housing Act does not mention any duties owed by HUD to contractors or subcontractors. This is also reflected in the regulations. The regulations make clear that under these provisions HUD is to provide insurance for private lenders, not to make loans or build houses. 24 C.F.R. § 200.5. Regulations under the relevant sections of the National Housing Act refer only to rights and obligations to the mortgagee and not to builders or subcontractors. 24 C.F.R. §§ 221.251 to 325. At least one court has held that, under the National Housing Act, HUD assumes no obligation to any party except the mortgagee. Marcus Garvey Square v. Winston Burnett Const., 595 F.2d 1126 (9th Cir. 1979); See DSI Corp. v. Secretary of HUD, 594 F.2d 177 (9th Cir. 1979). The purpose of the Act is to promote financing by private lenders of designated types of housing projects. *fn4" I therefore hold that the National Housing Act imposes no fiduciary duty by HUD to plaintiff subcontractors. *fn5"

 I therefore will dismiss with prejudice the following counts of plaintiffs' complaint as to HUD: counts one, four, six, eight, ten and twelve, which expressly allege violation of a duty by HUD to plaintiffs under the National Housing Act or federal common law; counts five, seven, nine, eleven, thirteen and fourteen, which allege breach of an unspecified fiduciary duty which is nonexistent to the extent it is alleged to arise under the National Housing Act; and counts two and three to the extent that these ambiguously drafted counts are intended to claim a breach of a duty by HUD to plaintiffs that arose under the National Housing Act or federal common law.

 4. CONTRACT CLAIMS AGAINST HUD COGNIZABLE UNDER § 1346 ONLY

 As stated it is conceivable that plaintiffs have a claim against HUD for improper administration of the completion assurance contract which created an escrow fund to assure payment to plaintiff subcontractors. However, as stated above, the question of whether plaintiffs are third-party beneficiaries under this and other similar contracts is strictly a contract question and does not arise under either the National Housing Act or federal common law. This means that the only proper basis of jurisdiction for this claim is 28 U.S.C. § 1346. Despite plaintiffs' withdrawal from their amended complaint of § 1346 as a ground for jurisdiction, I will, upon an appropriate motion, grant plaintiffs who have claims under $ 10,000 leave to amend to plead § 1346 jurisdiction. Plaintiffs who have claims over $ 10,000 may either decrease the amount of their claims or may take their claims against HUD under these contracts to the Court of Claims. Therefore, as to counts two and three of plaintiffs' complaint as to HUD, I will dismiss without prejudice. *fn6"

  5. CONCLUSION

 In sum, I hold there are no meritorious federal claims or federal questions raised here. The National Housing Act imposes no duty by HUD to plaintiffs. Although HUD is not in privity of contract with any of the plaintiffs here, it is possible that plaintiffs might make out a contract claim against HUD on a third-party beneficiary theory. Federal common law is not required to interpret any of HUD's contracts with others which may affect plaintiffs' rights and questions of interpretation of these contracts do not "arise under" federal law. Therefore, plaintiffs may remain in this court to litigate this contract theory only to the extent they satisfy the jurisdictional requirements of the Tucker Act.

 B. CLAIMS AGAINST PRIVATE DEFENDANTS DISMISSED

 1. PLAINTIFFS PLEAD JURISDICTION AGAINST THE OWNER-CONTRACTOR DEFENDANTS UNDER A THEORY OF PENDENT JURISDICTION

 Pendent party jurisdiction has two requirements. First, plaintiffs' claim must be pendent to a substantial federal claim, and second, the claim must arise out of a common nucleus of operative facts. Aldinger v. Howard, 427 U.S. 1, 96 S. Ct. 2413, 49 L. Ed. 2d 276 (1976) (applying United Mine Workers v. Gibbs, 383 U.S. 715, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966), test to pendent party situation), overruled on other grounds Monell v. Department of Social Servs., 436 U.S. 658, 98 S. Ct. 2018, 56 L. Ed. 2d 611 (1978). I need not reach the second prong of the test because my dismissal of plaintiffs' federal law claims against HUD makes it clear that no substantial federal claim exists. However, were I to reach it, or if plaintiffs elect to proceed under the Tucker Act, I would hold that plaintiffs' claims against the private defendants do not arise from the same nucleus of operative facts as the HUD claims. Plaintiffs have direct contractual relationships with many of the private defendants. Interpretation of these contracts is an entirely different inquiry than noncontractual or third-party beneficiary-type duties owed by HUD. Therefore, all of plaintiffs' claims against Barsky, Miller, the Joint Venture, Paul Restall, Revere House, and vantage will be dismissed without prejudice for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1). Plaintiffs have an adequate remedy against all private defendants in state court. Plaintiffs' primary debtors, if any, are the general contractor and any parties with whom they were in privity of contract. Since there are many solvent parties among these primary obligors, it is unlikely that plaintiff will need to pursue the mortgage insurer HUD, which has at best a very tenuous secondary liability to these plaintiffs.

 2. BANCO, TITLE AND MILLER DISMISSED SUA SPONTE

 Although escrow agent Miller did not move for dismissal of plaintiffs' claims against him, these claims are dismissed for lack of subject matter jurisdiction because his citizenship is not diverse from that of plaintiffs and there is no federal question jurisdiction. In addition, plaintiffs plead diversity jurisdiction against defendants Banco and Title. While it is true that defendants Banco and Title are or appear to be of diverse citizenship from all plaintiffs, 28 U.S.C. § 1332(a) requires complete diversity of all plaintiffs and all defendants, which is not present here. Therefore, plaintiffs' claims against Banco and Title are dismissed without prejudice pursuant to Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction based either on a federal question or complete diversity of citizenship. *fn7"

 IV. CONCLUSION

 As must be clear from the above opinion, plaintiffs' case is essentially a contract dispute among a number of private parties. These private parties interacted with HUD in part pursuant to HUD's objectives under the National Housing Act, but these interactions had little to do with the private defendants' possible liability to plaintiffs. The fact that HUD was involved in the same project as plaintiffs does not create any statutory duty by HUD to plaintiffs. HUD's mission is to help promote low income housing construction by insuring loans to builders and owners of worthy projects. The National Housing Act is not designed to guarantee that subcontractors receive payment on HUD-insured projects. Marcus Garvey Square v. Winston Burnett Const., 595 F.2d 1126, 1130 (9th Cir. 1979) and cases cited therein. Cf. United States v. Neustadt, 366 U.S. 696, 709, 81 S. Ct. 1294, 1301-02, 6 L. Ed. 2d 614 (1961) (National Housing Act not intended to provide warranty of value of home to purchaser). Subcontractors are not entitled to rely on HUD's duties under the National Housing Act to guarantee payment. At most, plaintiffs have a third-party beneficiary contract claim against HUD and a state court contract action against the private defendants.


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