Whitehead v. DerwinskiWhitehead v. Derwinski
Appellant, the Secretary of the Department of Veteran Affairs (“VA“), appeals from the summary judgment against him in a class action on behalf of veterans1 in the state of Washington from whom the Department of Veteran Affairs is seeking to collect deficiencies remaining after default and foreclosure on VA-guaranteed home loans. The district court held that the VA‘s rights, as guarantor, against the debtor could not exceed the lender‘s rights, and therefore found the VA‘s claims against the veterans barred by Washington‘s antideficiency law.
Although we disagree with the district court that the VA has no right to indemnity, the VA may, in the state of Washington, choose whether to instruct a lender to pursue judicial foreclosure, under which the debtor may be held personally liable for the full amount of the debt, or non-judicial foreclosure, in which case no deficiency may be collected.
I
The Department of Veteran Affairs provides housing assistance to veterans by guaranteeing home loans made to veterans by private lenders. See generally
If a veteran defaults on a loan, the lender must give the VA thirty days notice before foreclosing.
The VA must reimburse the lender for certain losses remaining after the foreclosure sale.
Washington law governed the foreclosures at issue in this action. Washington provides two foreclosure methods. In a non-judicial foreclosure under
On the other hand, judicial foreclosure under
The VA instructs Washington lenders to proceed by non-judicial foreclosure. Even though the procedure does not permit the lender to seek a deficiency judgment against the debtor, the VA has attempted to collect the amount of any loss it incurs in reimbursing the lender for deficiencies remaining after foreclosure by asserting a right to indemnity.
The appellee class of veterans brought suit, claiming that under Washington law the non-judicial foreclosure sale satisfies its obligations both to the lender and to the VA. The VA maintains that under federal law it possesses both a right of subrogation, which depends on the debtor‘s obligation to the lender, and an independent right to indemnity arising from its agreement with the debtor.
On cross-motions for summary judgment, the district court granted summary judgment for plaintiffs.
II
We review a district court‘s grant of summary judgment de novo. See Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir.1989); State Farm Fire & Casualty Co. v. Martin, 872 F.2d 319, 320 (9th Cir.1989).
III
A
Federal law governs questions involving the rights of the United States arising under nationwide federal programs. United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979). The VA‘s rights, as guarantor, upon default by a debtor are governed by
[T]he Administrator may ... pay to [the lender] the guaranty not in excess of the pro rata portion of the amount originally guaranteed. If the Administrator makes such a payment, the Administrator shall be subrogated to the rights of the holder of the obligation to the extent of the amount paid on the guaranty.
The regulations interpreting the statutory provisions include a section headed “Subrogation and indemnity.”
The Secretary shall be subrogated to the contract and the lien or other rights of the holder to the extent of any sum paid on a guaranty or on account of an insured loss, which right shall be junior to the holder‘s rights as against the debtor or the encumbered property until the holder shall have received the full amount payable under the contract with the debtor.
The VA‘s primary claim in this case is that it has a right to indemnity from the debtor independent of its right to seek subrogation on the basis of the lender‘s claim. The district court held, “The government‘s right to indemnification goes no farther than the borrower‘s obligation to the lender.” Whitehead v. Turnage, 701 F.Supp. 795, 796 (W.D.Wash.1988) (citing United States v. Vallejo, 660 F.Supp. 535, 539-40 (W.D.Wash.1987)).
The Supreme Court also interpreted the statutory and regulatory scheme as providing an independent right to indemnity.
Moreover, the recognition of a loss to the guarantor merely because of a failure of the lender‘s rights against the principal is incompatible with the background of general surety laws against which the statute was drawn....
For these reasons, we are constrained to agree with the uniform construction of the lower courts, including that of the two courts below, that the statute affords an independent right of indemnity to the Veterans Administration.
Finally, we find untenable respondent‘s argument that the applicable Regulation does not support recovery because there was no debt due from the veteran at the time of payment on the guaranty.... The Regulation is merely declaratory of a surety‘s customary right of indemnity for amounts paid pursuant to an obligation of the guarantor assumed with the consent of the principal. This right is in general unaffected by defenses of the principal which are not available to the guarantor.
United States v. Shimer, 367 U.S. 374, 387-88, 81 S.Ct. 1554, 1562-63, 6 L.Ed.2d 908 (1961) (emphasis in original) (citing, inter alia, Decisions of the Administrator of Veterans’ Affairs, No. 625 at 1154). See also United States v. Rossi, 342 F.2d 505, 506 (9th Cir.1965); McKnight v. United States, 259 F.2d 540, 543 (9th Cir.1958).
In reaching this conclusion, the Court noted, “Relief from liability in these circumstances would convert a guaranty into a grant of aid. But the entire history of the ‘home loan’ provisions of the statute is inconsistent with an intent to make outright grants, rather than loans of cash or credit, to returning servicemen.” Shimer, 367 U.S. at 387, 81 S.Ct. at 1562 (citation omitted). The VA therefore argues that this history establishes a right of indemnity which is unaffected by any state foreclosure law.
The VA finds additional support in the loan documents. The form warns that, unless the veteran follows established procedures for transferring the loan, he will remain liable on the note and must “repay any guaranty claim which the VA may be required to pay your lender on account of default in your loan payments. The amount of any such claim payment will be a debt owed by you to the Federal Government. This debt will be the object of established collection procedures.” VA Form 26-1820; VA Form 26-1802a. The same documents state that they are governed by federal law. Thus, the VA claims that debtors are aware that they will be liable in case of default and will not be protected by state law.
Appellees argue that the statutory and regulatory schemes do not establish a right to indemnity independent of the VA‘s right to subrogation. The statute speaks expressly of subrogation and is silent as to indemnity. See
Appellees point to
In addition, appellees argue that the loan documents do not fairly warn veterans that in the event of foreclosure they may be liable for an amount greater than the amount that would be owed under state law. First, the document states that established collection procedures will be used--implying that in the event of foreclosure the VA will look to state law remedies. See VA Form 26-1820; VA Form 26-1802a. Second, the warning applies to assumption of loans, not foreclosures. Id. However, the documents do imply a foreclosure situation, albeit with a third party who has improperly assumed the loan. Id.
Given Shimer and its progeny, appellees’ arguments are not persuasive. Courts have consistently interpreted
B
The VA argues that its right to indemnity is independent of lenders’ rights to collect deficiencies under Washington law and also displaces any state law which would preclude it from proceeding personally against the debtor. It relies on United States v. Shimer, 367 U.S. 374, 387-88, 81 S.Ct. 1554, 1562-63, 6 L.Ed.2d 908 (1961), United States v. Rossi, 342 F.2d 505, 506 (9th Cir.1965), and McKnight v. United States, 259 F.2d 540, 543 (9th Cir.1958). However, these cases are not dispositive in this case.
In Shimer, the Supreme Court reversed the Third Circuit‘s determination that a lender‘s failure to comply with a Pennsylvania statute barred the lender‘s claim against the debtor, and thus barred the VA‘s rights as well. 367 U.S. at 388, 81 S.Ct. at 1563. In upholding the VA‘s right to collect against the debtor, the Court found that federal law completely displaced the Pennsylvania law which the debtor asserted barred the lender‘s claim. Both the state statute and the federal regulations provided a detailed, comprehensive method of calculating the amount that the lender was required to set off against the VA‘s guaranty as a result of the foreclosure sale. The Court stated, “[T]he method of determining these credits is ... specified in the Regulations, indeed spelled out in Sec. 36.4320 in such great detail that there can be little doubt of an administrative intent that such method should provide the exclusive procedure.” Id. at 379, 81 S.Ct. at 1558 (citation omitted). The regulation at issue provided that the amount realized by the lender at the foreclosure sale was to be credited to its guaranty claim against the VA. Id. It further
specifie[d] the way in which the Veterans’ Administration can require the mortgagee to credit more than the amount received at the foreclosure sale and thereby protect itself against the very risk the Pennsylvania Deficiency Judgment Act was designed to alleviate--the risk of having to make good its guaranty simply because the mortgaged property is sold for an inadequate price at a judicial sale.
Id. at 379, 81 S.Ct. at 1558. The regulation authorized the Administrator to specify a minimum bid price before the sale, which would also be the minimum amount which would be credited on the guaranty claim. Id. at 380, 81 S.Ct. at 1559. It gave the lender the option of selling any property it purchased at or below this minimum amount to the Veterans’ Administration for the specified minimum amount. Id. at 380, 81 S.Ct. at 1559. If the Administrator did not specify a minimum amount, the lender was to credit the net proceeds of the sale against the guaranty. Id.
The Court found that this complex, comprehensive scheme,
while intended to remedy the same abuses at which the Pennsylvania Deficiency Judgment Act is directed, is, of course, inconsistent with the Pennsylvania procedures which provide for a judicial determination of the amount to be credited against an outstanding debt and do not obligate the guarantor to purchase the mortgaged property at its judicially determined value.
Id. at 380-81, 81 S.Ct. at 1559-60. Because of the inconsistency, the Court concluded, “We have no doubt that this regulatory scheme, complete as it is in every detail, was intended to provide the whole and exclusive source of protection of the interests of the Veterans’ Administration as guarantor and was, to this extent, meant to displace inconsistent state law.” Id. at 381, 81 S.Ct. at 1560 (emphasis added); see also Fidelity Fed. Savings & Loan v. de la Cuesta, 458 U.S. 141, 153, 102 S.Ct. 3014, 3022, 73 L.Ed.2d 664 (1982) (“[W]here Congress has not completely displaced state regulation in a specific area, state law is nullified to the extent that it actually conflicts with federal law.“).
Unlike the regulation in Shimer, the regulations at issue here do not provide a scheme for foreclosure “complete in every detail.” While the regulations provide for an independent right of indemnity, they do not establish specific foreclosure procedures. In contrast to the tightly woven regulation addressed in Shimer, the regulations addressing foreclosure procedures are a loose framework that takes its substance and specificity from applicable state or local laws. See, e.g.,
Also unlike the Pennsylvania statute addressed in Shimer, the state statutes at issue in this case do not actually conflict with the federal regulations. If lenders proceed by judicial foreclosure under
The VA argues that our interpretation of Shimer in United States v. Rossi, 342 F.2d 505, 506 (9th Cir.1965), enables it to choose the non-judicial foreclosure alternative under Washington law, but nevertheless proceed personally against the debtor by exercising its indemnity right under federal law. In Rossi, the veteran transferred his mortgage to a third party but remained liable on the note. Id. When the third party defaulted, the lender foreclosed without notifying the veteran. The VA then attempted to collect against the veteran, who argued that the failure to comply with state notice requirements precluded a judgment against it. Id. In finding the veteran liable for the deficiency, we stated,
In United States v. Shimer, it was held that the procedures outlined in the regulations governing guaranty procedures were intended by Congress to provide a uniform system for determining the Administrator‘s obligation as guarantor and to displace state law in their operation, and that they provide an independent right of indemnity to the Veterans Administration, regardless of the failure of a lender‘s rights against the principal.... Thus the district court‘s conclusion that this action was one for a deficiency judgment to be governed by the notice and other provisions of California law cannot stand.
Id. (citations omitted).
The Rossi, opinion did not point out a specific conflict between a state statute and a federal provision.5 However, California, unlike Washington, precludes lenders from collecting deficiency judgments under any circumstances. See Jones v. Turnage, 699 F.Supp. 795, 799 (N.D.Cal.1988), appeal docketed, No. 89-15053 (9th Cir. Nov. 11, 1989);
The VA‘s participation in what is, in effect, a choice of remedy under Washington law further distinguishes this case from Rossi. In Rossi, the debtor protested that he did not receive notice of foreclosure as required by state law, and the VA was thus precluded from proceeding against him. 342 F.2d at 506. Yet the VA was not responsible for the lack of notice; the lender, proceeding against the third party in foreclosure, failed to notify the veteran debtor. Id. In contrast, the VA in this case affirmatively instructed Washington lenders to proceed by way of non-judicial foreclosure--choosing a path that precluded the collection of a deficiency under Washington state law.
McKnight v. United States, 259 F.2d 540 (9th Cir.1958), also involved California‘s antideficiency law. The VA sued a veteran to recover its loss after foreclosure on a federally guaranteed mortgage. The veteran claimed the action was one for a deficiency judgment, and was therefore precluded by California‘s antideficiency law. We found the VA‘s claim valid on the basis of its right to indemnity.
There was a finding below that the facts of this case establish that defendant herein was sued on his independent contract of indemnity and not for any deficiency judgment. We need not determine whether West‘s Ann. California Code of Civil Procedure Sec. 580b does or does not apply....
We rely on the general proposition that the subject matter of this litigation arises under the federal law and cannot be impaired by a state statute.
Like Rossi, McKnight, is distinguishable in that the California law prevented the collection of a deficiency under any circumstances. While
Because it provides an alternative which allows the VA to exercise its primary right to subrogation and receive the full measure of protection without displacing state law, the Washington scheme is consistent with federal law. The federal regulations protect the VA‘s ability to collect deficiencies remaining after foreclosure by providing both a right to subrogation and a right to indemnity.
Washington‘s two paths to foreclosure, see
It is appropriate to adopt this consistent state scheme as the federal rule of decision. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 728-29, 99 S.Ct. 1448, 1458-59, 59 L.Ed.2d 711 (1979). Because the VA directs the lender‘s choice between the two methods available in Washington, it is in complete control of its ability to be made whole. Given the availability of the judicial foreclosure alternative, which allows the VA to exercise its primary right to subrogation and proceed directly against the debtor, the VA may not choose the non-judicial foreclosure alternative, and then resort to its right to indemnity. The federal statutory and regulatory scheme contemplates reliance on state foreclosure procedures. Where state procedures preclude holding the debtor personally liable, the VA retains its right to do so by way of indemnity. Where, as in the state of Washington, state foreclosure procedures afford the VA identical protections, there is no conflicting state law to displace.
C
Developments in the law subsequent to Shimer and Rossi support this result. The Supreme Court has acknowledged that federal regulations as well as federal statutes can preempt state law, but it has been reluctant to infer preemption solely from the comprehensiveness of a regulatory scheme. See Hillsborough County v. Automated Medical Laboratories, 471 U.S. 707, 717-18, 105 S.Ct. 2371, 2377, 85 L.Ed.2d 714 (1985); Siuslaw Concrete Constr. Co. v. Washington Dep‘t of Transp., 784 F.2d 952, 957 (9th Cir.1986). Rather, state laws remain effective if consistent with federal legislation. See Hillsborough, 471 U.S. at 713, 105 S.Ct. at 2375. As in Hillsborough and Siuslaw, the state legislation at issue in this case does not directly conflict with the federal provisions.
In the context of other federal lending programs, this circuit has become increasingly protective of states’ interests in applying antideficiency laws. Early cases rejected the application of state laws.6 However, in United States v. MacKenzie, 510 F.2d 39 (9th Cir.1975) (en banc), we upheld the application of a state antideficiency law in foreclosure on a Small Business Administration (SBA) loan. While we did not expressly overrule Stadium Apartments, see id. at 42 n. 4, we distinguished it on the ground that SBA loans were individually negotiated, unlike the form FHA and VA loans in Stadium Apartments and Branden, respectively. Id. at 42.
We subsequently held state laws providing debtors rights of redemption and defenses to claims arising from default applicable to SBA loans. See Great Southwest Life Ins. Co. v. Frazier, 860 F.2d 896 (9th Cir.1988) (upholding debtor‘s right to assert defense provided by Idaho law to SBA‘s claims against her); Dupnik v. United States, 848 F.2d 1476 (9th Cir.1988) (upholding application of Arizona redemption rights upon foreclosure of SBA loan); United States v. Crain, 589 F.2d 996, 999-1000 (9th Cir.1979) (upholding debtors’ right to assert defense provided by Arizona law to SBA‘s claim against them and citing MacKenzie, 510 F.2d at 41-42); see also United States v. Ellis, 714 F.2d 953 (9th Cir.1983) (upholding application of Washington law providing for redemption rights in foreclosure on Farmers Home Administration loan). In United States v. Stewart, 523 F.2d 1070 (9th Cir.1975), a case involving an individually-negotiated VA loan,7 we followed MacKenzie and held that the California law applied to prevent collection of a deficiency.8 Id. at 1072.
These cases evidence this court‘s increased willingness to recognize the application of state law in the context of federal programs. The shift in our analysis has been prompted, to some degree, by the Supreme Court‘s decision in United States v. Kimbell Foods, Inc., 440 U.S. 715, 728-29, 99 S.Ct. 1448, 1458-59, 59 L.Ed.2d 711 (1979).9 In Kimbell Foods, the Court held that in some circumstances, state law provides the appropriate federal rule for decision. When no distinct federal statute or properly promulgated regulations apply and displace existing state law, the courts must decide either to adopt state law or to fashion a federal rule, looking to: “(1) whether the issue requires ‘a nationally uniform body of law‘; (2) ‘whether application of state law would frustrate specific objectives of the federal programs‘; and (3) whether ‘application of the federal rule would disrupt commercial relationships predicated on state law.’ ” Mardan Corp. v. C.G.C. Music, Ltd., 804 F.2d 1454, 1458 (9th Cir.1986) (quoting Kimbell Foods, 440 U.S. at 728-29, 99 S.Ct. at 1458-59). Applying the Kimbell Foods test in this case demonstrates that the Washington foreclosure law is the appropriate federal rule of decision for VA loans made in that state.
The VA argues that the VA loan guaranty program is national in scope and provides uniform procedures, including uniform guaranty agreements. However, the VA regulations themselves contemplate application of state law to foreclosure procedures. See
Adopting the Washington law does not “frustrate specific objectives of the federal program.” Id. The remedy provided by the federal statute is subrogation, which allows the VA to pursue whatever rights a lender has, including proceeding personally against debtors to collect deficiencies remaining after foreclosure.
The VA claims that forcing it to elect judicial foreclosure will increase its administrative costs. “The fact that increased costs may result from the adoption of state law regarding debtor and creditor rights is not controlling. Both the Supreme Court and this court have adopted state law despite added costs to loan programs when state law did not jeopardize other federal interests.” United States v. Ellis, 714 F.2d 953, 955 (9th Cir.1983) (citing Kimbell Foods, 440 U.S. at 740, 99 S.Ct. at 1464; Yazell v. U.S., 382 U.S. 341, 352-57, 86 S.Ct. 500, 506-09, 15 L.Ed.2d 404 (1966); Crain, 589 F.2d at 999-1000; MacKenzie, 510 F.2d at 42). Indeed, the VA has instructed lenders in Washington to proceed by way of judicial foreclosure during the pendency of this suit.12
Allowing the VA to ignore Washington law “would disrupt commercial relationships predicated on state law.” Kimbell Foods, 440 U.S. at 729, 99 S.Ct. at 1459. In adopting the dual foreclosure scheme, the Washington legislature balanced the debtors’ and lenders’ rights. See Donovick v. Seattle-First Nat‘l Bank, 111 Wash.2d 413, 757 P.2d 1378, 1379-80 (1988) (en banc). “Non-judicial foreclosure obviously provides significant advantages to a creditor seeking to liquidate security for a defaulted loan; these advantages have been conferred by the legislature in return for the creditors’ relinquishment of the right to obtain a deficiency judgment.” United States v. Vallejo, 660 F.Supp. 535, 538 (W.D.Wash.1987). Allowing the VA to instruct lenders to foreclose non-judicially under Washington law, and then use its federal right to indemnity to override the consequences of that instruction, circumvents the balance the state legislature intended in designing and adopting the two foreclosure options.
Conclusion
Although we disagree with the district court‘s determination that the VA has no right to indemnity, the court correctly held that the VA may not proceed personally against the debtor when it instructs the lender to foreclose nonjudicially under Washington law. Because the Washington scheme is consistent with the federal statutes and regulations, we adopt it as the federal rule of decision. The remedies available to the VA through judicial foreclosure were consistent with federal objectives. The VA, however, chose to instruct lenders to proceed by non-judicial foreclosure, and it was bound by the results of that choice as mandated by the federal rule of decision.
AFFIRMED.
Notes
all Veterans or widows of Veterans or other individuals eligible for home loan guarantees or insurance provided pursuant to Title 38, United States Code, Chapter 37, against whom a claim has been or will be made by the United States, pursuant to 38 C.F.R. 36.4323(e) or pursuant to a written indemnity agreement, which claim has been or will be generated because of a claim paid by the United States to a lender who submitted such claim to the United States because of a non-judicial foreclosure conducted in the State of Washington and in accordance with Chapter 61.24 Revised Code of Washington.
[A]n individual who pays a fee under section 1829 of this title, or who is exempted under section 1829(c)(1) of this title from paying such fee, with respect to a housing loan guaranteed or insured under this chapter that is closed after December 31, 1989, shall have no liability to the Secretary with respect to the loan for any loss resulting from any default of such individual except in the case of fraud, misrepresentation, or bad faith by such individual in obtaining the loan or in connection with the loan default.
Id. at Sec. 304(a), 103 Stat. at 2073. As a result of the new legislation, our decision in this case will only impact veterans whose loans closed prior to December 31, 1989.
This change reflects Congress’ recognition that, under the former legislation, the various state schemes applied, with varying results as to the collection of deficiency judgments. Although Congress apparently has decided that a uniform federal rule is necessary prospectively, the fact that it did not make the new legislation retroactive implies that under the legislation applicable in this case, it did not see a pressing need for a uniform federal rule.