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JM Mechanical Corp. v. United States

decided: September 2, 1983.


On Appeal From The United States District Court For The District Of New Jersey

Before Hunter and Higginbotham, Circuit Judges, and Stapleton,*fn* District Judge.

Author: Hunter


HUNTER, Circuit Judge:

This is an appeal from a final order of the United States District Court for the District of New Jersey granting the United States Department of Housing and Urban Development's ("HUD") motion to dismiss the complaint of the JM Mechanical Corp. ("JM"), based on the Federal Tort Claims Act (FTCA), 28 U.S.C. §§ 2671-2680 (1976), against HUD under Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction and dismissing the case with prejudice. We will reverse and remand.


HUD was the insurer of a mortgage on a project known as Corinthian Towers, pursuant to § 221(d)(4) of the National Housing Act of 1934, 12 U.S.C. § 1715l(d)(4) (1976 & Supp. V 1981). See also 24 C.F.R. § 221 (1982); App. at A2. The purpose of that section of the Act is to "assist private industry in providing housing for low and moderate income families and displaced families." 12 U.S.C. § 1715l(a) (1976). As insurer of the mortgage, HUD could, in its discretion, acquire the mortgage from a lender upon a default by the mortgagor. 12 U.S.C. § 1715l(g)(3) (1976); see also 12 U.S.C. § 1715l(g)(1), (2) (1976). Pursuant to HUD regulations the mortgagor must furnish assurances of completion of the project, which include corporate surety bonds for payment and performance. All surety companies issuing such bonds must be satisfactory to HUD. 24 C.F.R. § 221.542(a) (1982); see App. at A23.

The mortgagor and owner of the Corinthian Towers project was 67 Corinthian Associates. The general contractor was Index Construction Company. Index obtained payment and performance bonds for the project which listed Fidelity and Deposit Company of Maryland as surety. Those bonds were dated November 27, 1978. Thereafter, on June 20, 1980, Index defaulted under the terms of its construction contract causing all work on the project to cease.

HUD had learned on February 7, 1979, that Fidelity and Deposit Company of Maryland, the alleged surety of the payment and performance bonds, denied the validity of the bonds. The revelation occurred after construction had begun but before JM became a subcontractor on the project. HUD allowed construction to continue without the required assurances of payment. It informed no one of this turn of events. However, by letter dated October 15, 1980 it explained its actions as follows:

You are correct that HUD regulations require the provision of a payment and performance bond on every project in excess of $500,000 where HUD mortgage insurance involved. In the case of Corinthian Towers, our bonding requirements were met at the time of the initial loan closing. Subsequently, during construction, it became apparent that the bond that had been presented to the Department was a forgery and was not valid. Our review of the situation at that time indicated that none of the parties to the insured transaction were culpable in providing the fraudulent bond. Since the developer was not able to obtain a replacement bond at that point, HUD had no viable alternative but to allow construction to proceed without the normal performance and payment bond.

Letter from Lawrence B. Simons, Assistant Secretary, HUD, to Herbert Hoffman, Executive Vice President, Subcontractor's Trade Ass'n (October 15, 1980), reprinted in App. at A28.

JM became a heating, ventilating and air conditioning system subcontractor on the Corinthian Towers Project on May 29, 1979. JM had previously worked on HUD funded projects, as well as with the principals of Index. While JM had no direct contacts with HUD, JM alleged in its complaint that the principals of Index had represented to JM that Index had "acquired payment and performance bonds from a reputable bonding company and that these bonds had been reviewed and approved by the defendant HUD." JM began work on the project unaware of the absence of valid surety bonds. Thereafter Index breached its contractual commitment before JM was fully paid for the work performed. It was only after the default, when work on the project was halted, that JM learned from Index that the bonding on the project was allegedly counterfeit.

In an effort to secure payment, JM filed suit against Index in New Jersey state court. A judgment was entered against Index for the balance due JM in the amount of $78,880.02 together with interest. That judgment remains unsatisfied. JM Mechanical Corp. v. Index Construction Co., Nos. L-67474-80, J-13,647-81 (N.J. Super. Ct. Law Div. 1981).

Thereafter, on January 25, 1982, JM filed suit against HUD for the $78,880.02 it had yet to recover from Index. JM alleged in its complaint that "defendant HUD represented that it guaranteed the mortgage on the project and that the general contractor complied with its rules and regulations including the posting of appropriate payment and performance bonds," Complaint para. 5, and that JM "relied upon the aforesaid assurance of the defendant HUD and entered into its contract with the general contractor," Complaint para. 6.

JM further stated three other claims in its Complaint:

9. The defendant HUD was negligent in its investigation and verification of the payment and performance bonds, was negligent in the enforcement of its own regulations, was negligent in failing to notify subcontractors that the bonds had been declared counterfeit and was negligent in failing to secure another surety bond or other assurances of payment as required by Federal Regulations.

10. As a direct and proximate result of the aforesaid, there is a balance due to the plaintiff on its contract in the amount of $78,880.02 which was the reasonable value of the labor and materials devoted for which the plaintiff has not been paid. WHEREFORE, plaintiff demands Judgment against the defendant HUD for the sum of $78,880.02 together with interest, counsel fee and costs of suit.

Complaint paras.9, 10.

On June 14, 1982, HUD moved for summary judgment to dismiss the complaint alleging that any wrongful conduct on the government's part fell within the exception to the availability of a cause of action for damages pursuant to the FTCA involving actions for ...

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