Levin v. Stratford Plaza, Inc.

Markell, J., delivered the opinion of the Court. These are cross-appeals from a decree construing contracts between the parties for the construction of an apartment house project by plaintiff for defendant and referring the case to an auditor to state an account determining the amount due from one party to the other. This is the net result of somewhat unusual and complicated proceedings, which need not be outlined since no jurisdictional or procedural questions have been raised. Pending these appeals plaintiff was adjudicated bankrupt; its case is now being conducted by its trustee ²⁹⁷ in bankruptcy.

Either the bankrupt or the trustee, or both, (as the case may be) will be referred to as plaintiff. The bill was filed against the corporation defendant and Jacob L. Zellan. Zellan is a non-resident, was not served with process, has not appeared and is not before the court except as a witness. The corporation defendant alone will be referred to as defendant.

Harry A. Rosefeld was plaintiff’s president and apparently its principal stockholder, spokesman and representative. About October, 1947, a tract of undeveloped land in Prince George’s County was purchased by Rosenfeld and associates, Zellan says for about one cent per square foot, and conveyed to a corporation controlled by them. Part of this tract, 62,382 square feet, was on October 27, 1947 sold to Zellan, and on January 5, 1948 conveyed to him, for $17,078.97, about 27 cents per square foot. Zellan was “sold” the idea of the apartment house project, and at the same time the land.

On November 3, 1947 a comprehensive contract was executed between Zellan, as “Owner”, and plaintiff, as “Builder”. By this contract (1) the Owner authorized the Builder forthwith to engage named architects to prepare commitment drawings and specifications for an apartment house project on the land, as required by Federal Housing Administration for mortgage insurance under section 608 of the National Housing Act, 12 U. S. C. A. § 1743. The Owner agreed (2) upon completion of the drawings and specifications, to sign all necessary applications, furnish all documents and pay all fees required by the Federal Housing Act. The Builder was to have the exclusive right to select the mortgage lender in whose name application was to be filed.

The Owner agreed (3) forthwith to pay the Builder $2500 “on account of the Builder’s fee hereinafter mentioned”, out of which payment the Builder agreed to pay the architects all sums due them for preparing the commitment plans and specifications “in the event the apartment project is not constructed by the Builder; and if the Owner shall elect not to accept the F.H.A. loan, and ²⁹⁸ shall not construct said project thereunder”, the $2500 payment “shah be deemed to be in full payment to the Builder”, and to the architects, “of any and all services performed by them for the Owner hereunder, and this agreement shall thereupon terminate and be of no further force and effect”. If the commitment of the F.H.A. is issued, and “the Owner elects to have the project constructed under said Commitment”, the Owner agrees (4) to engage the architects to prepare final working drawings and specifications and to pay them a fee equal to $65 for each apartment unit in the project and (5) to engage the Builder, “as general contractor, * * * upon the terms, and at the fee”, stated, viz., “to pay, or cause to be paid, to the Builder for its services as general contractor in connection with the construction, an amount equal to all ‘costs of construction’ plus a fee * * * equal to five per cent of such costs of construction”, the $2500 already paid to the Builder and the architects to be deducted from their respective fees; “* * * if the Owner elects to have said project built as aforesaid, the Owner agrees to enter into a contract with the Builder, or cause such contract to be entered into by any corporation organized by the Owner to own said project, under which contract the Builder is to be employed as general contractor as aforesaid, at a fee in the amount set forth above. Said contract shall provide that the owner shall deposit in a special trustee bank account with the Builder, from time to time, funds * * * [to] be drawn against by either the Builder or Owner for this project only, * * * in a total amount equal to * * * $800 for each apartment unit * * * in said project, in order to make available to the Builder adequate operating capital for the construction of said project, * * * said fund * * * [to] be in addition to the proceeds of the construction loan insured by the F.H.A., and in part cover the retained percentages thereunder all of which * * * loan proceeds shall also be made available to the Builder to defray the costs of construction of said project. In the event the project is to be owned by a corporation the ²⁹⁹ construction contract referred to above shall be guaranteed by the parties hereto of the first part, insofar as the same refers to the obligations of the Owner.

The term ‘costs of construction’ as used herein, is hereby defined to mean each and every item of cost, expense of disbursement paid or laid out by the Builder on account of the actual construction and development of said project, including but not limited to, any and all payments of disbursements for labor and material, rental of equipment used in the construction, subcontractor’s bills, surveyor’s and engineer’s fees, utility services, field office costs, supervision, Federal, State and Municipal licenses, taxes, Social Security and Unemployment taxes, insurance premiums, and any and all other expenditures which the Builder is called upon to make necessary to and in connection with the project,” with exceptions not now material. The Builder agreed to “take prompt action and use the utmost diligence in obtaining the loan * * * and all the necessary measures to complete all preliminary steps and * * * actual construction * * * in the shortest reasonable time and with the minimum cost to the Owner” and to “build the building in accordance with the plans and specifications and in the most economical, but workmanlike manner. * * * in no event is its total compensation or fee to be more than five per cent of the F.H.A. loan.” The $2500 was paid by Zellan to plaintiff, defendant was organized by Zellan to own the property, and application was filed with F.H.A. On February 24, 1948 F.H.A. issued (on a printed form) its “Commitment for Insurance”, a lengthy letter addressed to Metropolitan Mortgage Company, “mortgagee”, Zellan, “sponsor”, and defendant, “proposed mortgagor”, stating that it finds the project to be eligible for insurance under section 608, and subject to its Rules and Regulations and to specified conditions, will endorse as insured a credit instrument, secured by a first mortgage upon the land and property included in the project, in an amount not exceeding $343,800. The conditions specified are many ³⁰⁰ and lengthy, including delivery to F.H.A. of many instruments, among them “(c) Four conformed copies of the Construction Contract between the Mortgagor and the general contractor whereby the project is to be built (F.H.A. Form 2442-W)Before May 4, 1948 F.H.A. abandoned this requirement. Plaintiff and defendant, however, did in fact execute such a contract; apparently F.H.A. was not given a copy.

The commitment for insurance was based on F.H.A.’s “Project Analysis”, on a printed form, also dated February 24, 1948, which included, inter alia, “Estimated Replacement Cost of Property” and “Determination of Maximum Insurable Mortgage”, each itemized. Section 608 provides that the insured mortgage “shall involve a principal obligation in an amount— * * * (B) not to exceed 90 per centum of the amount which the Commissioner estimates will be the necessary current cost of the completed property or project, including the land; the proposed physical improvements; utilities within the boundaries of the property or project; architects’ fees; taxes and interest accruing during construction; and other miscellaneous charges incidental to construction and approved by the Commissioner: Provided, That such mortgage shall not in any event exceed the amount which the Commissioner estimates will be the cost of the completed physical improvements on the property or project, exclusive of off-site public utilities and streets, and organization and legal expenses; and (C) not to exceed $1,500 per room for such part of such property or project as may be attributable to dwelling use: Provided, That the Commissioner may increase this amount to $1,800 where in his discretion cost levels so require.” Act of May 22, 1946, c. 268, sec. 10, 60 Stat, 214; U. S. Code Anno., Title 12, § 1743, as in effect in 1948 prior to August, 1948. In practice (whether correctly or not) the Commissioner has construed “the necessary current cost of the completed property or project” as meaning present “replacement cost”, and not actual cost already incurred plus estimated further cost, of a particular ³⁰¹ project. Thus in the “estimated replacement cost” land, which a few months ago had cost Rosenfeld about one cent per square foot and had been sold to Zellan for about 27 cents, was included at “fair market price”, $30,000, about 48 cents per square foot, and was the basis of a mortgage loan of about $27,000, about 43 cents.

The “estimated replacement cost” also included “builder”, at 5%, $15,186, “architect”, at 5%, $15,945, and “carrying charges; financing:” (e.g., interest, taxes, insurance) aggregating $15,318. Under the contract of November 3, 1947 the total architects’ fee would be $2600, i.e., $65 for each of 40 apartments. The total “estimated replacement cost”, including land, was $384,000, 90 per cent of which is $345,600. At $1800 per room, the maximum amount insurable for the project (which contained 191 rooms) was $343,800, the amount of the commitment.

Rosenfeld told Zellan (or so Zellan says) he could build the project for less than $1700 per room, it would eventually cost Zellan nothing (over and above the mortgage loan), and Zellan would get “change” out of the loan proceeds, after reimbursement for his cash advances, including perhaps the cost of the land. If Rosenfeld’s expectations as to building costs could have been realized, the project (exclusive of land) would have cost much less than $354,000 or $343,800, the speculation would have been a success for both parties, plaintiff would have got a good profit, defendant the entire equity in the project (subject to the 391 month installment mortgage), ultimately without any outlay by either. The purpose of F.H.A. was to stimulate housing construction, not to make profits by insuring sound loans. Cf.

United States v. Emory, 314 U. S. 423, 435 , note 9 to dissenting opinion, 62 S. Ct. 317 , 86 L. Ed. 315 . This purpose presumably was furthered by making possible such projects of speculators with little capital and no credit. A “Trade Payment Breakdown”, dated April 27, 1948, was signed for defendant by plaintiff’s vice-president and accepted by F.H.A. It was prepared by F.H.A. on a ³⁰² printed form. It contains thirty-four items, aggregating a “Total Estimated Cost of On-site Construction Exclusive of Fees, $325,882”, an item “Contractor’s Fee” left blank, and “Total Estimated Cost of On-Site Const.

Inch Contractor’s Cash Fee (Total Payment Breakdown Items), $325,882.” Apparently this total figure had been given to F.H.A. by Zellan or his brother-in-law, Harry Friedman, defendant’s secretary and counsel, and the breakdown was prepared by apportioning the total. The breakdown was the proportionate basis for progress payments out of loan proceeds. The F.H.A. estimator who prepared it testified that it “has nothing to do with the contract” to build the building. It is, however, referred to, as an exhibit and “as a part of the contract”, in the “construction contract” which was executed on May 4, 1948 and had been required by F.H.A. in such transactions until May 1948, when this requirement was abandoned.

Zellan and Friedman profess to have relied on Rosenfeld’s “representations” regarding the venture and “what a wonderful thing it was”. Friedman says he “thought it was the opportunity of a lifetime.” However, they were not unaware of the risk in a cost-plus building speculation. They insisted on a maximum price. Under the November, 1947 contract Zellan could abandon the project and terminate the contract, without loss or payment other than the $2500 payment and the land purchase, already made.

About April 15, 1948 plaintiff and Zellan agreed upon a price of $325,882, which was arrived at by Friedman by subtracting from the amount of the loan ($343,800), the sum of the item “carrying charges; financing:” ($15,318) in the “estimated replacement cost of property” and the architects’ fee under the November, 1947 contract ($2600). Although Friedman says he suggested a “ceiling” contract, there is nothing to indicate that Rosenfeld seriously considered a maximum price without a minimum. Friedman and Zellan say Rosenfeld tried to convince them that a cost-plus contract would be better for them than a “lump sum” ³⁰³ contract because they would “have change left over.” When the price of $325,882 was agreed upon, a “lump sum” contract, not a “ceiling” contract, was prepared by Friedman and on May 4, 1948 was executed by plaintiff and defendant. Settlement of the mortgage loan was made at the Washington office of F.H.A. on May 4, 1948.

Metropolitan Mortgage Company (of Washington), addressed as “mortgagee” in the “commitment for insurance”, acted only as a broker. Irving Trust Company (of New York) was the lender. A letter, dated April 23, 1948, from Friedman to a vice-president of Irving Trust Company and counsel for F.H.A., enumerated as enclosed therewith copies of 18 “papers required in the closing”. One of the 18 items contained the note, “Note 1: F.H.A. does not require a Construction Contract.

However, there will be an agreement between Republic Engineering Corporation as the builder, and Stratford Plaza, Inc., as the owner, which will be indemnified by Mr. Zellan.” Another item was, “contract for off-site improvements between sponsor and contractor to be guaranteed by 100 per cent bond.” This contract was required by F.H.A. The contract price for the off-site improvements was $6062. Apparently there is no controversy