Opinion ID: 349352
Heading Depth: 1
Heading Rank: 2

Heading: contractual remedies

Text: 13 Plaintiff clearly has no cause of action against HUD based on the construction contracts between it and the two owners, because HUD was not a party to those agreements. Instead, plaintiff asserts that it is a creditor third party beneficiary of the building loan agreements between the two owners and the mortgagee. Under this theory, plaintiff would assume the legal positions of the mortgagors, possessing the same rights and obligations as the mortgagors. The obligation of HUD to pay the retainages to the plaintiff is premised on the fact that HUD assumed the obligations of the mortgagee upon the assignment of the building loan agreements from VNB to HUD, after the project collapsed. 14
15 During oral argument, defendant conceded that had plaintiff completed or been wrongfully prevented by HUD from completing the projects, the plaintiff would be a creditor third party beneficiary under the building loan agreements. 2 Although we intimate no opinion on whether completion or wrongful prevention of completion by HUD is a necessary prerequisite to third party beneficiary status in this case, our holding that defendant waived any defense of nonperformance it may have possessed eliminates the necessity of considering the aforesaid as possible bars to plaintiff's third party beneficiary status. See part II(C) infra. 16
Defendant's own regulations provide that: 17 The mortgagee shall be obligated, as a part of the mortgage transaction, to disburse the principal amount of the mortgage, to, or for the account of the mortgagor or to his creditors for his account and with his consent. 18 24 C.F.R. § 221.512. The implications of this section accompanied with the assignment of the building loan agreement to HUD were aptly stated by the district court in Bennett, supra: 19 Inasmuch as HUD assumed the obligations of lender or mortgagee upon (the mortgagee's) assignment and pursuant to paragraph 18 of the building loan agreement, 1 it is equally obligated by regulation to dispurse (sic) proceeds to the mortgagor or the mortgagor's creditors. 20 Bennett, supra at 832-33. 21 In this case, the relevant statutory provisions and contractual clauses are almost identical to those in Bennett. Because we agree with the district court's reasoning therein, we hold that plaintiff is entitled to damages as a creditor third party beneficiary of the building loan agreement, unless defendant raises an effective bar to plaintiff's recovery. 22
23 Defendant raises several contentions in opposition to plaintiff's recovery under the third party beneficiary theory. The thrust of all these contentions is that even if HUD is primarily obligated to pay the retainages to plaintiff under the third party beneficiary theory, plaintiff's failure to complete the contract is a bar to recovery. The mortgagee was not required to pay the 10% holdback to the mortgagor under the building loan agreement until such time after completion as the commissioner authorizes the release of the holdback. Building Loan Agreement P (4)(b). Inasmuch as under the third party beneficiary theory, the plaintiff assumes both the rights and obligations of the mortgagor, defendant asserts that the ultimate incompleteness of the contract bars recovery. 24 Although defendant correctly states the general principles of contract law relating to third party beneficiaries, we hold that defendant waived any defense of nonperformance it may have possessed. It was stipulated by both parties that: 25 On or about September 1, 1971, after construction began, Don Sprinkle for Spring Construction Co., Inc., called the attention of all interested parties to the fact that no provision was made for connection of the site of the two projects to the sewer treatment facility being constructed. 26 Plaintiff's Factual Contention (30), incorporated into the Pre-Trial Order stipulations by the Amendment to Pre-Trial Order, Amendment to Stipulations. Therefore, at the latest, defendant knew about the sewer problem on or about September 1, 1971. 27 After the date that the defendant unquestionably had knowledge of the sewer problem, it allowed, even encouraged the plaintiff to continue construction, and as a necessary result thereof, plaintiff continued to incur the 10% holdback of contract payments. Defendant encouraged continued construction even though it had knowledge of the very condition which eventually led to the shutdown of the project. 3 In such a situation, HUD will not now be heard to say that the failure of the plaintiff to fully perform the contract bars recovery. Defendant's actions implicitly, if not explicitly, waived such a defense of nonperformance. Cf. Bennett, supra at 834-35; American Fidelity, supra at 182. 4 When HUD first became aware of the sewer problem, at the latest, September 1, 1971, it could have withdrawn its insurance of mortgage advances until such time as arrangements could have been made for the sewer connections, or it could have advised Spring to continue work at its own risk, or it could have made such other conditions as seemed appropriate at the time. Plaintiff then could have decided whether to continue operating under the contract at its own risk and chance losing the 10% holdback, or to pull out and attempt to collect the retainages withheld until that date. HUD provided plaintiff with no such choice, but urged Spring to continue construction with the assurance that the problem of sewer connections could be worked out later. 28 Therefore, we hold that the plaintiff is entitled to recover as a third party beneficiary of the building loan agreement, and that HUD, by its conduct, waived any defense of nonperformance.