Carter v. Derwinski

• Citation: 987 F.2d 611
• Decision Date: 24 September 1992
• Docket Number: No. 91-35530,91-35530
• Parties: Dale L. CARTER; David A. Johnson; Fred Emery; James R. Straw, on behalf of all in the State of Idaho similarly situated, Plaintiffs-Appellees, v. Edward J. DERWINSKI, Secretary of the Department of Veterans Affairs, or his successor, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 611

987 F.2d 611

61 USLW 2562

Dale L. CARTER; David A. Johnson; Fred Emery; James R Straw, on behalf of all in the State of Idaho similarly situated, Plaintiffs-Appellees, v. Edward J. DERWINSKI, Secretary of the Department of Veterans Affairs, or his successor, Defendant-Appellant.

No. 91-35530.

United States Court of Appeals Ninth Circuit.

Argued and Submitted En Banc Sept. 24, 1992 ^*.

Decided March 4, 1993.

Malcolm L. Stewart, U.S. Dept. of Justice, Washington, DC, for defendant-appellant.

David A. Leen, Leen & Moore, Seattle, Washington, Margaretta Eakin, Portland, OR, for plaintiffs-appellees.

Appeal from the United States District Court for the District of Idaho.

Before: HUG, FLETCHER, FARRIS, D.W. NELSON, BEEZER, BRUNETTI, KOZINSKI, NOONAN, THOMPSON, LEAVY and TROTT, Circuit Judges.

KOZINSKI, Circuit Judge:

We took this case en banc to consider whether Whitehead v. Derwinski, 904 F.2d 1362 (9th Cir.1990), should remain the law of the circuit.

Background

In recognition of the debt we owe the men and women who have served in our country's armed forces in time of conflict, the Department of Veteran's Affairs ("VA") offers them home loan guarantees on terms substantially more favorable than those prevailing in the market. See generally 38 U.S.C. §§ 3701-3733. When a veteran takes advantage of the VA guarantee program, two legal relationships are established, both of which are governed by federal law. First, the VA promises to reimburse the lender if the veteran defaults, up to the face value of the guarantee. 38 C.F.R. § 36.4321. Second, the veteran promises to reimburse the VA for any amount the VA pays the lender. Id. § 36.4323(e). This is an obligation owed directly to the VA, which it may recover by subrogating itself to any remaining rights of the lender, id. § 36.4323(a), or by pursuing an independent right of indemnity against the veteran, id. § 36.4323(e).

In the event of default, the lender must follow the VA's instructions, if any, as to the appropriate method and timing of foreclosure. Id. § 36.4324(f). Foreclosure of the property is to be done in accordance with state law. See 38 U.S.C. § 3720(a)(6). Idaho, like many other states, has a two-tier foreclosure scheme. One option is judicial foreclosure, which requires a judicial determination of the fair market value of the property, to protect the debtor from an unfairly low appraisal. Idaho Code §§ 6-101 et seq. The lender may then seek a deficiency judgment for any remaining amount. Alternatively, a lender may foreclose nonjudicially by selling the property on the open market. Id. §§ 45-1502 et seq. Nonjudicial foreclosures are easier and faster for the lenders than judicial ones. Deficiency judgments are still permitted after nonjudicial foreclosure, but only if a fair market value determination is sought within three months of foreclosure. Id. § 45-1512. After that, no further judgments may be collected. See Tanner v. Shearmire, 115 Idaho 1060, 1063, 772 P.2d 267, 270 (Ct.App.1989).

Plaintiffs are Idaho veterans who defaulted on their guaranteed loans. They brought a class action to enjoin the VA from collecting deficiency judgments against them following nonjudicial foreclosure where the lender fails to obtain a fair market valuation within three months; they also sought the return of monies previously collected in this manner. On cross-motions for summary judgment, the district court held that the VA had forfeited its right to recover from the veterans. See Carter v. Derwinski, 758 F.Supp. 603 (D.Idaho 1991). Relying on our decision in Whitehead v. Derwinski, 904 F.2d 1362 (9th Cir.1990), the court held that the VA's primary right of subrogation had been lost through its failure to obtain a fair market valuation after its election of nonjudicial foreclosure. 758 F.Supp. at 608. The court therefore entered judgment for the veterans.

The VA appealed, and a three-judge panel of this court heard oral argument. Recognizing a potential conflict between Whitehead and United States v. Shimer, 367 U.S. 374, 81 S.Ct. 1554, 6 L.Ed.2d 908 (1961), the panel withdrew submission; a majority of the nonrecused regular active judges then voted to hear the case en banc, 970 F.2d 662 (9th Cir.1992).

Discussion

A. Whitehead v. Derwinski involved the Washington foreclosure scheme, which is similar to Idaho's. Like Idaho, Washington allows both judicial and nonjudicial foreclosures. Washington permits deficiency judgments after a judicial foreclosure, Wash.Rev.Code Ann. § 61.12.040, but prohibits them altogether after a nonjudicial foreclosure, id. §§ 61.24.040, 61.24.100. Because judicial foreclosure is much more cumbersome, the VA instructed Washington lenders to foreclose nonjudicially. Whitehead, 904 F.2d at 1364. Nonetheless, the VA tried to assert its right of indemnity against the veterans; the veterans sued to prevent the VA from collecting. We held that Washington's prohibition against deficiency judgments after nonjudicial foreclosure wasn't preempted by the VA regulations providing for subrogation and indemnity, and that the VA had lost its right to a deficiency judgment against the veterans.

In so holding, we first decided that the VA possesses a direct right of indemnity independent of its derivative right of subrogation: "Federal regulations governing the loan give the VA a right to indemnity as well as a right to subrogation derived from the lender's claims." 904 F.2d at 1367 (emphasis added). Consistent with this independent right of indemnity, Whitehead recognized that a state law prohibiting all deficiency judgments would be preempted, because it would eliminate the possibility of recovering from the veteran. Id. at 1368-69; see also Connelly v. Derwinski, 961 F.2d 129, 130 (9th Cir.1992) (Oregon foreclosure procedure forbidding any deficiency judgment preempted); Shepherd v. Derwinski, 961 F.2d 132 (9th Cir.1992) (same for Arizona). At the same time, however, Whitehead significantly restricted the scope of this indemnity right by holding the right of subrogation was primary, while the right of indemnity was merely a backstop. 904 F.2d at 1369. So long as the state provided at least one foreclosure route that offered a possibility of a deficiency judgment--even if it made foreclosure more burdensome or costly--the VA's right of subrogation was fully protected and the state scheme wasn't preempted. Id. at 1371.

The district court held that Whitehead controlled this case. In Idaho, as in Washington, the VA could have instructed lenders to foreclose judicially; moreover, unlike in Washington, the Idaho lenders could also have preserved their right to a deficiency judgment by obtaining a fair market valuation within three months of nonjudicial foreclosure. The VA therefore forfeited its right to proceed against the veterans by way of indemnity. Under Whitehead, we would have to affirm the district court's judgment.

B. Whitehead 's central assumption--that the VA's right of indemnity is secondary to its primary right of subrogation--warrants scrutiny. The relevant statute provides that "[i]n the event of default ... the Secretary shall be subrogated to the rights of the holder of the obligation to the extent of the amount paid on the guaranty." 38 U.S.C. § 3732(a)(1). Although the statute itself only mentions subrogation, the regulation implementing it also gives the Secretary a right of indemnity:

(a) 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....

(e) Any amounts paid by the Secretary on account of the liabilities of any veteran ... shall constitute a debt owing to the United States by such veteran.

38 C.F.R. § 36.4323 (emphasis added).

Consistent with this regulation, courts have repeatedly held that the VA has a right of indemnity. In United States v. Shimer, 367 U.S. 374, 81 S.Ct. 1554, 6 L.Ed.2d 908 (1961), the Supreme Court considered whether a Pennsylvania statute, which prohibited deficiency judgments until a state court valuation of the property was obtained, was inconsistent with regulations governing the calculation of the amount of guarantee the VA pays the lender. The veteran argued that, because the statute provided only for subrogation, the VA couldn't seek a deficiency judgment against him outside the state law procedure. Shimer flatly rejected this contention: "[T]he statute affords an independent right of indemnity to the Veterans' Administration." Id. at 387, 81 S.Ct. at 1563. ¹ While Whitehead recognized that the Secretary has both a right of indemnity and a right of subrogation, 904 F.2d at 1364-67, it nonetheless assumed the right of indemnity was secondary to the right of subrogation: "The VA's primary right against the debtor is the statutory right to subrogation. When a state antideficiency law precludes collection by way of subrogation, the VA may exercise its independent indemnity right, which displaces the effect of state law." Id. at 1369. Whitehead construed the right of indemnity to be merely a surrogate for the right of subrogation, available only when subrogation was impossible, i.e., in those states that prohibit all deficiency judgments. ² So long as the VA could instruct lenders to foreclose in a way that would protect the lender's right to collect a deficiency judgment, the VA's "primary" right of subrogation would be preserved, rendering the indemnity right unnecessary. Whitehead framed the issue as involving a "choice of remedy," id. at 1368; when the VA elects foreclosure that interferes with or prohibits its indemnity right, it's bound by that decision. Thus, in a state like Washington or Idaho,

[b]ecause the VA directs the lender's choice between the two methods available ... 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...