Jones v. Turnage

• Decision Date: 14 November 1988
• Docket Number: No. C-87-4702 JPV.,C-87-4702 JPV.
• Citation: 699 F. Supp. 795
• Parties: Bruce M. JONES, Dennis Ray Link and Sharon R. Link, individually and on behalf of all others in the State of California similarly situated, Plaintiffs, v. Thomas TURNAGE, or his successor, Administrator of the Veterans Administration; the United States of America; The Veterans Administration; and Leo Wurschmidt, Director, San Francisco Regional Office of the Veterans Administration, Defendants.
• Court: U.S. District Court — Northern District of California

699 F. Supp. 795

Bruce M. JONES, Dennis Ray Link and Sharon R. Link, individually and on behalf of all others in the State of California similarly situated, Plaintiffs, v. Thomas TURNAGE, or his successor, Administrator of the Veterans Administration; the United States of America; The Veterans Administration; and Leo Wurschmidt, Director, San Francisco Regional Office of the Veterans Administration, Defendants.

No. C-87-4702 JPV.

United States District Court, N.D. California.

November 14, 1988.

David M. Madway, Seymour Farber, Madway, Blumberg, Farber & Smith, Berkeley, Cal., for plaintiffs.

John R. Bolton, Asst. Atty. Gen., J. Christopher Kohn, Robert M. Hollis and Ruth A. Harvey, Attys., Civil Div., Dept. of Justice, Washington, D.C., Joseph P. Russoniello, U.S. Atty., Judith A. Whetstine, Asst. U.S. Atty., Chief, Civ. Div., George Christopher Stoll, Asst. U.S. Atty., San Francisco, Cal., for defendants.

MEMORANDUM OF OPINION and ORDER GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT and DENYING PLAINTIFFS' CROSS-MOTION FOR SUMMARY JUDGMENT

VUKASIN, District Judge.

Defendants' motion for summary judgment and partial dismissal and plaintiffs' cross-motion for summary judgment came before the Court on August 11, 1988. The motions were submitted on the pleadings. Having reviewed the pleadings submitted in support of and in opposition to these motions, the Court makes the following determinations.

I. BACKGROUND

Plaintiffs Bruce M. Jones and Dennis Ray Link are United States Armed Services veterans who bought houses through the Veterans Administration's ("VA's") loan guaranty program. At the time they purchased their homes, they signed agreements with the VA in which they promised to reimburse the VA for any moneys paid by the VA on their behalf. Plaintiff Sharon R. Link is Dennis Link's wife; she never signed an indemnity agreement with the VA.

Plaintiffs failed to make payments on their loans from private lenders, and the loans were subsequently foreclosed. The private lending institutions sold the mortgaged property for less than the outstanding balance on the loan; accordingly, a deficiency was left. Pursuant to its guaranty with the mortgagee, the VA paid the deficiency.

Both Jones and Mr. Link requested waivers of their loan guaranty debt, which the VA denied. Plaintiffs apparently had opportunities to appeal the VA's initial denial of the waiver requests to the Board of Veteran Appeals, but elected not to do so.

Plaintiffs then filed a complaint in this Court, seeking an injunction pursuant to California's Anti-Deficiency Law (Cal.Code Civ.Proc. § 580b) barring defendants from collecting from plaintiffs the deficiencies left after the sale of their residences and compelling the VA to return funds previously collected or withheld. The complaint was filed as a class action, on behalf of all other veterans or widows of veterans eligible for VA loan guaranties and against whom a claim by the VA has been or will be made to collect a deficiency following a foreclosure on the class member's residence. The Court has not made any decision as to certification of this class.

Defendants now move for summary judgment, seeking an order of this Court that plaintiffs' claims are barred as a matter of law. Alternatively, defendants United States, the Veterans Administration, and Leo Wurschmidt, Director of the San Francisco Regional Office of the VA, move for dismissal of all claims against them on the ground that this Court lacks jurisdiction over them. Plaintiffs have filed a cross-motion for summary judgment, seeking a finding that California's Anti-deficiency Law applies to defendants' claims against plaintiffs, and is not preempted by federal law.

II. DISCUSSION

A. The VA Home Loan Guaranty Program

The VA offers veterans the opportunity to obtain guaranties of home loans from non-VA lenders. See 38 U.S.C. §§ 1801-32. A veteran may obtain a VA guaranty upon payment to the VA of 1% of the total loan amount. Id. § 1829(a). A VA guaranty offers the veteran certain advantages. Often lenders do not require a down payment on the house, and the interest rate, set by the VA Administrator, is usually below the market rate. Id. § 1803(c); 38 C.F.R. § 36.4311 (1987). The VA regulations also limit the closing costs, charges, and fees assessed veterans. 38 C.F.R. § 36.4312 (1987).

The VA's guaranty obligates it upon the veteran's default to reimburse the mortgagee. 38 C.F.R. § 36.4321(a) (1987). Should the mortgaged property's net value fall short of the total indebtedness, the United States becomes liable under the guaranty for the deficiency. 38 U.S.C. § 1816(c)(8); 38 C.F.R. § 36.4321 (1987). When this action was filed, the United States' maximum liability for each loan guaranty was the lesser of 60% of the total loan or $27,500. 38 U.S.C. §§ 1803(a)(1), 1810(c); 38 C.F.R. § 36.4302(a) (1978).

If a lender meets the requirements of 38 U.S.C. § 1802(d), the loan may be guaranteed without the VA's prior approval. In that case, the veteran applies for a guaranty through the lender, and the lender determines whether the veteran qualifies for a VA home loan guaranty. If the veteran qualifies, the agreement between the VA and the veteran is set forth on VA Form 26-1820 — "Report of Home Loan Processed on Automatic Basis."

If the lender does not meet the requirements of 38 U.S.C. § 1802(d) or if the lender is unsure whether the veteran's credit is sufficient for a VA guaranteed loan, the loan is processed on a non-automatic basis. In that case, the veteran and lender jointly apply for a guaranty by submitting VA Form 26-1802a — "VA Application for Home Loan Guaranty" — to the VA. The VA then reviews the application and determines whether the veteran qualifies for a VA guaranty. If the guaranty is approved, the loan is guaranteed upon the veteran's and the lender's signature on VA Form 26-1876 — "Certification of Loan Disbursement."

The regulations governing the "Report of Home Loan Processed on Automatic Basis" and the "VA Application for Home Loan Guaranty" (collectively referred to as the "indemnity agreements") provide that they are governed by federal law. 38 C.F.R. § 36.4334 (1987). The regulations provide that any provision of the loan instruments inconsistent with the regulations is automatically amended to conform to the regulations. Id. The indemnity agreements also provide that they are governed by federal law and that the veteran will be liable for all amounts paid by the VA because of a veteran's default.

If the veteran defaults on loan payments, the note holder may foreclose on the property. The holder is required to inform the VA that the veteran has failed to make the required payments and that it intends to foreclose. Id. §§ 36.4315(a), 36.4317. Although the VA retains substantial control over how the sale is conducted, id. §§ 36.4302, 36.4324, the VA may begin and prosecute foreclosure proceedings only if the note holder fails to exercise reasonable diligence in foreclosing the property. Id. § 36.4319(f).

If a deficiency remains after the sale of the property, the VA must reimburse the holder up to the amount of the guaranty. Id. § 36.4321. After the VA pays on its guaranty, the VA has two alternative remedies to recover the amount paid. Id. § 36.4323(a), (e). First, the VA becomes subrogated to the note holder's rights and may pursue any causes of action the note holder may have had against the defaulting veteran. The VA's rights are junior to the holder's rights until the holder has received the full amount payable on the original contract with the veteran. Id. § 36.4323(a). Second, the VA has an independent right of indemnification which permits it to proceed directly against the veteran for the amount paid on the guaranty. See id. § 36.4323(e).

Once the debt is established, the VA must deduct the amount of indebtedness from the benefits received by the veteran through participation in a VA-administered benefits program. 38 U.S.C. § 3114. The veteran has several avenues of challenging the VA's right to collect the debt before collection begins. See 38 C.F.R. §§ 1.911 et seq.

B. The California Anti-Deficiency Law

Foreclosures on homes purchased with the proceeds of a VA-guaranteed loan are conducted by the note holder in accordance with the law of the state in which the property is located. 38 U.S.C. § 1820(a)(6); 38 C.F.R. §§ 36.4319, 36.4320 (1988). Under California law, the holder of a loan may foreclose either judicially or non-judicially, so long as there is a power of sale provision in the mortgage or deed of trust. Cal. Civ.Code §§ 2931, 2924.

California Code of Civil Procedure § 580b prohibits any deficiency judgment from lying after a sale of real property for failure of the purchaser to complete his contract of sale, or under a deed of trust, or mortgage, on a dwelling, given to the vendor to secure payment of the balance of the purchase price of real property, or under a deed of trust or mortgage. Code of Civil Procedure § 580d bars judgments for any deficiencies upon a note secured by a deed of trust or mortgage upon real property where the real property was sold by the trustee or mortgagee under a power of sale provision.

As plaintiffs have noted, the California Legislature has also barred waivers of certain preforeclosure and antideficiency protections. Id. § 2953. California courts have held that contractual waivers of the bar on deficiency judgments are contrary to public policy. Palm v. Schilling, 199 Cal.App.3d 63, 244 Cal.Rptr. 600, 608-09 (1988). While § 580b generally does not prevent the lender from collecting a deficiency from a guarantor of the debt, e.g., Gottschalk v. Draper Companies, 23 Cal. App.3d 828, 830, 100 Cal.Rptr. 434, 436 (1972), there is an exception to this rule where the guarantor is in reality the principal debtor. Valinda Builders v. Bissner, 230 Cal.App.2d 106, 111, 40 Cal.Rptr. 735, 738 (1964). Plaintiffs cite one case which stated in dicta...