Mt. Vernon Cooperative Bank v. Gleason, 6736.

• Decision Date: 19 October 1966
• Docket Number: No. 6736.,6736.
• Citation: 367 F.2d 289
• Parties: MT. VERNON COOPERATIVE BANK, Plaintiff, Appellant, v. John F. GLEASON, Administrator of Veterans Affairs, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

367 F.2d 289 (1966)

MT. VERNON COOPERATIVE BANK, Plaintiff, Appellant, v. John F. GLEASON, Administrator of Veterans Affairs, Defendant, Appellee.

No. 6736.

United States Court of Appeals First Circuit.

October 19, 1966.

Timothy H. Donohue, Boston, Mass., with whom Karl J. Hirshman and Sherburne, Powers & Needham, Boston, Mass., were on brief, for appellant.

Robert V. Zener, Atty., Dept. of Justice, with whom John W. Douglas, Asst. Atty. Gen., Paul F. Markham, U. S. Atty., and Morton Hollander, Atty., Dept. of Justice, were on brief, for appellee.

Before ALDRICH, Chief Judge. McENTEE and COFFIN, Circuit Judges.

COFFIN, Circuit Judge.

This action, removed to the district court, seeks a declaratory judgment that defendant Administrator may not recover, on the ground that the appropriate papers were forged by an interloper, a payment made to a bank under a Veterans Administration guaranty of a veteran's home loan.

Henry Alfred Hopkins and a female companion, representing themselves to be a veteran named Harry Gilmore and his wife Charlie, applied to the appellant bank for an $11,000 home mortgage loan. They presented stolen discharge papers made out to Gilmore and a certificate of eligibility for guaranty made out by the defendant. The bank procured a credit inquiry which erroneously reported that "Gilmore" was then working at an auto body shop and had been for fourteen months.¹ "Gilmore" signed the bank's loan application, which contained the usual condition permitting the bank to withdraw from the transaction "if other transactions develop facts respecting the security or the responsibility of the applicant unsatisfactory to the bank", and the bank forwarded the papers to the defendant with a request that the defendant issue a loan guaranty certificate. On the guaranty application form the bank's treasurer subscribed to the printed statement that "All information reflected in this application is true to the best of my knowledge and belief."

The defendant thereupon issued the requested loan guaranty certificate, committing the Administration to guarantee sixty per cent of the bank's loan to Gilmore, and the bank completed the loan. Both parties to this action acted completely in good faith, without suspecting the forgery. After three payments, Hopkins-Gilmore defaulted.² The bank foreclosed a year later, and the Administration paid its share of the loss. Three years later the Administration discovered the forgery and claimed recovery of the amount it had paid. The bank refused, and the Administration finally set off part of the amount claimed against an unrelated debt due the bank on another loan guaranty. The bank then brought this action, which was tried on a stipulation of the above facts.

The relevant statute and regulation are set forth in the margin.³ The district court denied plaintiff's motion for summary judgment and entered judgment for the defendant.

We start with the proposition that in the absence of a statute, the government would be entitled to sue for the recovery of a payment made by mistake. Wisconsin Central R. R. v. United States, 1896, 164 U.S. 190, 17 S.Ct. 45, 41 L.Ed. 399. This would be the case even if the payment resulted from the carelessness of a government official. Cabel v. United States, 1 Cir., 1940, 113 F.2d 998. In such a case, where the disbursement of public funds is concerned, the government is not under the obligation of showing either that the recipient was unjustly enriched or that the balance of equities otherwise lies in its favor. The several cases cited by the appellant are not persuasive, either because no loss resulted to the public purse or because the court did not consider the right of the government to recovery.⁴

In the instant case, the purpose of the guaranty given by the defendant was to underwrite a loan for a veteran. Because of the forgery this purpose was not realized. Because the mortgagor was not an eligible veteran, it is clear that the Administration would not have been legally obliged to pay, and that the payment was made only because of an erroneous understanding of the facts. To refer to the situation in Cabel v. United States, supra, it is as if the government made refunds on merchandise to meet a supposed obligation which did not in fact exist.

This brings us to the question whether the statute and the implementing regulation, 38 U.S.C. § 1821; 38 C.F.R. § 36.4325(a), supra note 3, limit the Administration's affirmative right of recovery or the equivalent right to recovery via set-off. As the whole statute indicates, the first sentence of section 1821, the incontestability provision, concerns only the Administration's certificate that a particular veteran is eligible for a guaranty and that his avowed purpose in seeking the loan comes within the permitted statutory purposes, and that he is entitled to a specified maximum amount. For example, section 1802 sets forth the circumstances under which a veteran is entitled to the guaranty and criteria for computing the amount of guaranty available; sections 1810, 1812, and 1813 deal with the authorized purposes, such as purchase of a home, farm, or business property. Records available to the Administration enable it to check on all three requirements.

The thrust of plaintiff's argument is that the first sentence is not limited to the formal application of the three criteria stated, but that the conclusive effect of a guaranty is subject only to the language of the second and third sentences of section 1821 — the statutory "defenses" of fraud and material misrepresentation and the "partial defenses" which may be established by regulation. Plaintiff further argues that regulation 36.4325(a) goes beyond the statute in providing that "there shall be no liability" and that even this language provides no basis for affirmative recovery or set-off. Finally, plaintiff cites 38 C.F.R. § 36.4325(c), which specifically gives a right of recovery to the government when a lender has been guilty of misrepresentation and fraud, to suggest that the Administrator has officially recognized the difference between avoidance of liability on a fraudulently obtained instrument and affirmative recovery. In short, plaintiff argues that the government has bound itself to treat a loan guaranty according to the generally accepted law of negotiable instruments, under which payment is final even if the payor might have raised valid defenses. Cf. Price v. Neal, K.B., 1762, 3 Burr. 1354, 97 Eng.Rep. 871; UCC (1962 ed.) § 3-418.

While some portions of the regulations might have been more skillfully drawn than others, we cannot lightly infer a restriction on a prior right of the government, unless "* * * Congress has `clearly manifested its intention' to raise a statutory barrier." United States v. Wurts, 1938, 303 U.S. 414, 416, 58 S.Ct. 637, 638, 82 L.Ed. 932. That the defendant has consistently interpreted the regulation to justify recovery after payment as well as refusal to make a payment is indicated by various intra-agency legal memoranda, dating from 1950, preserved in the record here. For example, in November and December, 1950, the Loan Guaranty Officer in San Francisco was advised by his chief attorney that "* * it appears that the wife's signatures to...