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J.J. Deluca Company, Inc. v. United States Department of Housing & Urban Development

2008 WL 723329 (U.S. Dist. Ct. D. N.J. 2008) (Unpublished)

LOANS; THIRD PARTY BENEFICIARIES — A contractor may assert claims as a third party beneficiary of a building loan agreement between a mortgagor and mortgagee of a HUD-insured project.

A developer was organized for the sole purpose of constructing an assisted living facility in a municipality. The developer obtained a mortgage from a private lender to secure a loan to construct the facility. The loan was insured by the United States Department of Housing & Urban Development (HUD). A general contractor was hired to build the facility. The developer entered into a construction contract with the general contractor and the developer also entered into a building loan agreement with a lender in which it was required to complete the construction by a date certain and use advances from the mortgage to pay all costs associated with the project, all in accordance with federal law.

During the course of construction, there were delays. Numerous change orders were approved by HUD. This resulted in increased construction costs. The developer defaulted on its mortgage note and the note was assigned to HUD. HUD did not draw the balance of the building loan proceeds. The lender made a claim against HUD for mortgage insurance benefits resulting from the default, and HUD settled the claim. The general contractor sought payment from HUD for the assigned undisbursed mortgage proceeds representing the difference between the total project cost approved by HUD and the monies already paid the general contractor on the project. Essentially, there were the costs incurred as the result of change orders that were deemed necessary, but they had not been approved by HUD.

The Court, on summary judgment, found in favor of the general contractor. Though it found that HUD was not a party to the governing contract, equitable principles permitted the Court to hold HUD liable to a party with whom it had not specifically contracted. The Court concluded that a contractor may assert claims as a third party beneficiary of a building loan agreement between a mortgagor and mortgagee of a HUD-insured project. It noted that the building loan agreement did not require that final endorsement of the mortgage loan had to occur before the holdback monies could be disbursed to the general contractor, and the general contractor completed the project vesting its rights about six months before the default. The Court found that the general contractor’s construction of the assisted living facility conferred a benefit on HUD. Further, allowing HUD to retain such a benefit without full compensation to the general contractor would be unjust. Accordingly, the Court concluded that the general contractor was entitled to recover the outstanding balance of the costs it incurred in completing the project, and the general contractor possessed an equitable lien attached to the undisbursed mortgage proceeds in the amount of the outstanding balance owed to the general contractor.

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