Modern American Mortgage Corp. v. Skyline Park

614 F.2d 1009

Opinions

HATCHETT, Circuit Judge:

This appeal concerns a mortgagee, owner, and contractor, in a contractual dispute relating to the Federal Housing Administration’s Insurance of Mortgages under the National Housing Act, 12 U.S.C. § 1701 et seq. The district court in a diversity judgment granted relief against the appellee contractor but denied relief as to the appellee owner. Because our interpretation of the contract finds the mortgagee responsible for its own loss, we find neither the owner nor the contractor liable. Accordingly, we affirm in part and reverse in part.

Appellant, Modern American Mortgage Corp., the Lender, is the mortgagee. Appellee, Skyline Park, a Texas General Partnership, (Sam A. Leake, individually, Sarah H. Leake, individually) is the owner. Appellee, George W. Tucker, d/b/a Empire Construction, is the contractor.

On November 17, 1970, FHA issued its Commitment for Insurance of Advances for the private financing of a mobile park, Sky line Park. Pursuant to this commitment, a mortgage loan transaction, consisting of a Building Loan Agreement, Construction Contract, Completion Assurance Agreement, and Note and Deed of Trust, was executed and delivered between the mortgagee, the owner, and the contractor.

The Building Loan Agreement contains the basic terms and conditions under which the mortgagee was responsible for advancing funds for the construction of the project. The only parties to the agreement were the mortgagee and the owner. The agreement provides that the mortgagee would make the loan, that the owner would complete the project by November 8, 1971, and that the owner would furnish the mortgagee the assurance of completion in the form specified by FHA regulations. 24 C.F.R. § 207.19(c)(7).

Footnotes

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The Construction Contract was between the owner and the contractor. It states that the contractor should furnish to the owner a Completion Assurance Agreement, in the amount of $49,643. Article 6 says “Such assurance of completion shall run to the Owner and Lender as obligees and shall contain a provision whereby the security agrees that any claim or right of action that either the Owner or Lender might have thereunder may be assigned to the Commissioner.” The Construction Contract defines substantial completion as the “date that the FHA Chief Underwriter signs the final Project Inspection Report.” The Construction Contract further states that in the event of failure of the owner to perform his obligations to the mortgagee, and “in the event the mortgagee elects not to undertake completion, the contractor’s obligations under this contract shall terminate.”

The Completion Assurance Agreement provides that the contractor deposit with the mortgagee a fund of $49,643, in the form of an irrevocable letter of credit, to assure the contractor’s completion of the project. The agreement states that this fund was to be used by the mortgagee “to indemnify the Owner or the Lender, as the case may be, for any expenses, loss or damage suffered or sustained as the result of any default by the contractor in the performance of the Construction Contract.” (Emphasis added). The fund could only be disbursed upon prior written approval of the Federal Housing Commissioner, or his authorized agent. The agreement states that it was additional security for the performance by the contractor of his obligations.

The Note and Deed of Trust, states that the owner assumed no personal liability for the payments.

The Completion Assurance Agreement letter of credit expired in part on June 1, 1972, and in full on June 1, 1973. The mortgagee requested more than once that the contractor renew the letter of credit, but such requests were refused.

Though the project was essentially completed from a construction perspective, problems with the utility hook-ups, beyond the scope of this suit, prohibited the FHA Chief Underwriter from signing the final Project Inspection Report.

The mortgagee was in default in March, 1974, by reason of nonpayment of principal, interest, and escrow funds, and the property was foreclosed at a sale conducted under the loan documents. After foreclosure, the FHA deducted the amount of the assurance of completion fund from the amount the mortgagee was otherwise entitled to under the FHA Mortgage Insurance.

The mortgagee brought this action to establish joint and several liability against the owner and contractor for losses incurred after foreclosure and upon assignment of the mobile home project to FHA. Liability was sought to be established on the basis of the Building Loan Agreement, the Construction Contract, and the Completion Assurance Agreement.

After a non-jury trial, the district court found that the parties agreed that the owner’s responsibility was confined to insuring the deposits of the 'irrevocable letter of credit in the amount of $49,643. The court found the contractor liable for the $49,643 and the owner not liable.

The trial court found liability on the basis that the contractor failed to fully perform the Construction Contract; that the contractor breached the Completion Assurance Agreement by not replacing the expired letter of credit; and that the contractor’s failure to perform the Construction Contract was the cause of the mortgagee’s loss.

The mortgagee accepts the trial court’s finding concerning the contractor and additionally asserts that the contractor was liable until the project was completed.

This court must decide whether the trial court properly interpreted the contract. Our duty is to interpret the contract under the applicable law. Based on our interpretation; we affirm the finding of the trial court that the owner is not liable.

To determine whether the trial court properly found the contractor liable, we need decide: (1) whether the trial court erred in finding that the contractor failed to fully complete the Construction Contract; and (2) whether the trial court erred in finding that the contractor breached the Completion Assurance Agreement.

The parties agree that the Texas law is controlling. We are thus bound to interpret the four simultaneously executed documents as one contract, attempting to reconcile the various parts to discern the intent of the parties. Guadalupe-Blanco River Authority v. City of San Antonio, 145 Tex. 611, 200 S.W.2d 989 (1947); Republic Ins. Co. v. Hope, 557 S.W.2d 603 (Tex.Civ. App.1977).

Because this case involves a dispute in contractual interpretation where extrinsic evidence, in the form of relevant testimony, was considered, our standard of review is determined by Thornton v. Bean Contracting Co., Inc., 592 F.2d 1287 (5th Cir. 1979) where this court decided:

[Generally] the interpretation of a contract is a question of law, not fact, and appellate review is not limited to the ‘clearly erroneous’ rule. First National Bank of Miami v. Insurance Co. of North America, 495 F.2d 519 (5th Cir. 1974); Makofsky v. Cunningham, 576 F.2d 1223 (5th Cir. 1978). An exception to this rule is the situation in which extrinsic evidence has been used in interpreting an ambiguous contract. See Valley Cement Industries, Inc. v. Midco Equipment Co., 570 F.2d 1241 (5th Cir. 1978); Makofsky, supra.

592 F.2d at 1290.

We hold that the trial court was clearly erroneous in finding that the contractor failed to complete the Construction Contract and in finding that the contractor breached the Completion Assurance Agreement by not replacing the expired letter of credit. Fed.R.Civ.P. 52(a).

I.

The contractor fully completed his obligation under the Construction Contract. Article 2D of the Construction Contract provides: “The date of substantial completion shall be the date the FHA Chief Underwriter signs the final Project Inspection Report . . . Under our interpretation of the contract, that definition of substantial completion is applicable only to the owner and mortgagee. The definition of substantial completion applicable to the contractor is found in art. 2C of the Construction Contract: “substantially completed in accordance with the Drawings and Specifications.” The contractor finished everything called for in the drawings and specifications. He satisfied the definition of completion applicable to him. The mobile home park project was not completed because the utility companies failed to install the utility mains. The contractor was not at fault. He fully met his obligation to install the service lines to which the utility mains would connect. Both the owner and the mortgagee acknowledged that the contractor satisfied his Construction Contract obligations. At oral argument, the owner admitted that the contractor had fully performed. The owner also disclosed at oral argument, that in an affidavit in another lawsuit, he had admitted that the contractor not only completed the Construction Contract, but that the contractor had performed extra work in repairing certain damages done by the utility companies. The mortgagee also stated at oral argument that the contractor fulfilled his obligation. In its brief to this court, the mortgagee conceded that “there had never been a failure by Tucker to perform under the Construction Contract.”

We conclude that the trial court erred in finding that the contractor had not fully performed.

II.

The contractor did not breach the Completion Assurance Agreement. The contractor was under no duty to replace the expired letter of credit where the mortgagee elected not to undertake completion of the project. The Construction Contract provided that the “[T]he Lender may, as attorney-in-fact for the Owner, undertake the completion of the project in accordance with this Contract. In the event the Lender elects not to undertake such completion, the Contractor’s obligations under this contract shall terminate.” The Completion Assurance Agreement stated that “the Funds shall at all times be under the control of the Lender” and that the “Lender shall maintain such Fund . . . .” The mortgagee undertook this responsibility when it asked the contractor to renew the letter of credit.

The mortgagee was responsible for its own loss. It had a contractual duty to maintain the fund. Any obligation the contractor might have had was terminated when the mortgagee chose not to finish the project.

We agree with the trial court that the completion assurance fund was not solely for the benefit of the mortgagee.

The Completion Assurance Agreement stated that there can be no financing of the mobile home park “unless the Contractor shall first furnish proper assurance to the Owner and the Lender.” The $49,643 fund is described in the agreement as existing “to secure or indemnify the Owner or Lender.” (Emphasis added). The Construction Contract provided that “such assurance of completion shall run to the Owner and the Lender as obligees.”

At oral argument the mortgagee acknowledged that the fund was for the benefit of both the mortgagee and the owner.

Consequently, we affirm the trial court’s finding of no liability for the owner and reverse the finding of liability for the contractor.

AFFIRMED IN PART AND REVERSED IN PART.

24 C.F.R. § 207.19(c)(7) provides:

The mortgagee may accept, in lieu of a cash deposit required by paragraphs (c)(1), (3), (4), and (6) of this section, an unconditional irrevocable letter of credit issued to the mortgagee by a banking institution. In the event a demand under the letter of credit is not immediately met, the mortgagee shall forthwith provide cash equivalent to the undrawn balance thereunder.