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BERKS PRODS. CORP. v. LANDREAU

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.

 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. ...


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