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Colorado First Construction Co. v. United States Dep't of Housing and Urban Development

February 15, 2006

COLORADO FIRST CONSTRUCTION CO., A COLORADO CORPORATION, PLAINTIFF,
v.
UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; ALPHONSO JACKSON, IN HIS CAPACITY AS SECRETARY OF THE UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, AND MIDLAND LOAN SERVICES, INC., A DELAWARE CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Lewis T. Babcock, Chief Judge

ORDER

Defendants United States Department of Housing and Urban Development and the Secretary of the United States Department of Housing and Urban Development, Alphonso Jackson, (collectively "HUD") move to dismiss the complaint by Colorado First Construction Co., ("CFC") for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1), to refer CFC's claims to the bankruptcy court under D.C.COLO.LCivR 84.1 and for failure to join an indispensable party under Fed. R. Civ. P. 12(b)(7). For the reasons discussed below, defendants' motion is GRANTED.

I. BACKGROUND

The underlying dispute in this case involves the claims of a general contractor, CFC, against a federal agency, HUD, and a lending company, Midland Loan Services, Inc. ("Midland") for money CFC claims it is owed for work it performed for a real estate developer, Platte View Farm, LLC, ("PVF"), not a party in this case, for the construction of an apartment complex known as Platte View Farms Apartments in Brighton, Colorado.

As alleged in CFC's complaint, the facts of this case are as follows. Platte View Farms Apartments was a HUD-sponsored project, developed according to HUD guidelines and procedures. Under this HUD framework, HUD provided federal loan guarantees to a lender, Midland. Midland entered into a Building Loan Agreement ("Loan Agreement") with a developer, PVF. PVF in turn entered into a Construction Contract Cost Plus ("Construction Contract") with a contractor, CFC.

These agreements, while separate documents and signed by different parties, were all part of a unified HUD process and contained inter-related provisions. The Construction Contract, HUD form 92442-A, between CFC and PVF, states that CFC will be paid monthly based on its estimated costs, plus a fee of $266, 222, but not to exceed $13,676,256. These monthly payments are subject to the approval of HUD and Midland. PVF will withhold ten percent of each monthly installment and pay CFC this "hold back" when CFC completes the contract work and obtains any necessary state or local government approvals, and after HUD issues a Permission to Occupy designation. The Contract contains an acknowledgment by CFC that "the work under this contract is to be financed by a Building loan" as described in the Building Loan Agreement between PVF as borrower and Midland as lender.

Under the Loan Agreement, HUD Form 92441, PVF applies monthly for advances of mortgage proceeds corresponding to the amounts CFC requests in the Construction Contract. This provision uses the precise verbatim language as the Construction Contract regarding the monthly advances and the hold back. While HUD is not a signatory to the Loan Agreement, PVF acknowledges in the Loan Agreement that Midland is receiving mortgage insurance from HUD. The loan agreement also states that if PVF defaults on its loan any funds not yet advanced to PVF will automatically be assigned to Midland, and Midland may complete the project as PVF's attorney-in-fact, with authority to pay all existing bills and claims.

CFC asserts that neither HUD nor Midland dispute that it has completed all of the contractual and regulatory requirements for receiving the hold back. CFC claims that it is owed $1,415,475.69 plus accrued interest (the "amount owed,") most of which constitutes hold back. CFC contends that PVF has refused to pay CFC the amount owed, and so on December 19, 2003 CFC commenced an arbitration proceeding against PVF. On October 11, 2004 PVF and CFC entered into a stipulated award under which PVF was to pay CFC $1,600,000. PVF did not comply with this stipulated award, and on February 11, 2005 CFC obtained a court order from the Adams County, Colorado District Court making the stipulated award an Order of the Court. On or about February 11, 2005, PVF filed for bankruptcy under Chapter 11 of the Bankruptcy Code.

CFC has also tried unsuccessfully to obtain the money owed from Midland and from HUD. CFC recounted to HUD in a seven page letter February 22, 2005 the history of this transaction and why CFC believes it is entitled to payment of the hold back from HUD. According to an affidavit of Christopher Downs, counsel to CFC, CFC had several conversations with HUD officials to try to obtain the hold back; all unsuccessful.

CFC filed this action April 25, 2005, making claims against Midland and HUD for (1) recovery as a third party beneficiary of the agreements between Midland and PVF and of HUD's Firm Commitment letter to Midland backing its advances to PVF; (2) promissory estoppel, asserting that it relied on HUD and Midland's commitment to pay the hold back; (3) negligent misrepresentation (only against HUD), claiming that HUD represented to CFC that it would pay CFC in full if CFC completed its contract performance; (4) breach of implied in-fact contract, since HUD and Midland breached their obligation to CFC to pay the hold back; (5) unjust enrichment/quantum meruit, since Midland and HUD used and enjoyed the benefits of CFC's work, and (6) negligent loan administration, asserting that HUD and Midland knew or should have known that the loan proceeds were insufficient to pay for the project.

On July 6, 2005 HUD filed this motion to dismiss CFC's tort claims for lack of subject matter jurisdiction, to transfer the case to bankruptcy court as a related proceeding under D.C.COLO.LCivR 84.1, or in the alternative, to dismiss the case for inability to join PVF as an indispensable party under Fed. R. Civ. P. 12(b)(7). On August 9, 2005 Midland filed a motion joining those portions of the motion relating to transfer to bankruptcy court and dismissal under Rule 12(b)(7). In an Order dated February 6, 2006, I dismissed CFC's promissory estoppel claim against Midland.

Both HUD and CFC refer to related pleadings in the United States Bankruptcy Court for the District of Colorado. HUD's motion states that PVF's Statement of Financial Affairs lists CFC as a creditor holding a claim of $1.6 million, and shows Midland holding a secured claim of $18,348,255.00, with HUD as the assignee of the claim. PVF's financial disclosure statement, excerpts of which are attached as an exhibit to HUD's reply brief, claims that CFC did not meet the conditions precedent to the Stipulated Award, and so PVF does not consider the award to be binding. PVF also argues the Court Order is void because it filed for bankruptcy on February 11, 2005, the same day on which the District Court entered its Order. PVF's excerpted financial disclosure statement states that on June 10, 2005 CFC filed an adversary proceeding in the bankruptcy court against PVF, HUD and Midland, seeking a judgment to equitably subordinate the claims of Midland and/or HUD to the claims of CFC in the Bankruptcy case. According to HUD, CFC's complaint in bankruptcy court makes many of the same factual allegations as here:

(1) promissory estoppel, (2) breach of implied in fact contract, (3) negligent misrepresentation and (4) negligent loan administration. Midland has filed a motion to dismiss this complaint under Fed. R. Bankr. P. 7012, which PVF has joined.

II. STANDARD OF REVIEW

HUD files this motion under Fed. R. Civ. P. 12(b)(1) for "lack of jurisdiction over the subject matter." As courts of limited jurisdiction, federal courts may only adjudicate cases that the Constitution and Congress have granted them authority to hear. See U.S. Const. art. III, § 2; Morris v. City of Hobart, 39 F.3d 1105, 1110 (10th Cir. 1994). Statutes conferring jurisdiction on federal courts are to be strictly construed and doubts are to be resolved against federal jurisdiction. United States ex rel. King v. Hillcrest Health Center, Inc., 264 F.3d 1271, 1280 (10th Cir. 2001), cert. denied, 535 U.S. 905, 122 S.Ct. 1205, 152 L.Ed. 2d 143 (2002). Accordingly, there is a presumption against our jurisdiction, and the party invoking federal jurisdiction bears the burden of proof. Penteco Corp. Ltd. Partnership -- 1985A v. Union Gas System, Inc., 929 F.2d 1519, 1521 (10th Cir. 1991).

A Rule 12(b)(1) motion to dismiss "must be determined from the allegations of fact in the complaint, without regard to mere conclusory allegations of jurisdiction." Groundhog v. Keller, 442 F.2d 674, 677 (10th Cir. 1971).When a defendant contests jurisdiction, the plaintiffs have "the burden of proving jurisdiction exists." Wenz v. Memery Crystal, 55 F.3d 1503, 1505 (10th Cir. 1995). "Where, as in the present case, there has been no evidentiary hearing, and the motion to dismiss for lack of jurisdiction is decided on the basis of affidavits and other written material, the plaintiff[s] need only make a prima facie showing" of jurisdiction Id.

I discuss the standards governing Fed. R. Civ. P. 19 and D.C.COLO.LCivR 84.1 when I address those ...


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