U.S. v. Davis

• Decision Date: 18 May 1992
• Docket Number: No. 91-1678,91-1678
• Citation: 961 F.2d 603
• Parties: UNITED STATES of America, Plaintiff-Appellant, v. Charles DAVIS, individually and on behalf of all others similarly situated, Defendant/Third-Party Plaintiff-Appellee, v. Edward DERWINSKI, or his successor, Administrator of the Veterans Administration, Third-Party Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 603

961 F.2d 603

60 USLW 2664

UNITED STATES of America, Plaintiff-Appellant, v. Charles DAVIS, individually and on behalf of all others

similarly situated, Defendant/Third-Party Plaintiff-Appellee, v. Edward DERWINSKI, or his successor, Administrator of the

Veterans Administration, Third-Party Defendant-Appellant.

No. 91-1678.

United States Court of Appeals Seventh Circuit.

Argued Jan. 9, 1992.

Decided April 3, 1992.

Order, April 20, 1992. Rehearing and Rehearing En Banc Denied

May 18, 1992.

John E. Fryatt, U.S. Atty., Chris R. Larsen, Asst. U.S. Atty., Office of the U.S. Atty., Milwaukee, Wis., Mark Stern, Malcolm L. Stewart (argued), Department of Justice Civ. Div., Appellate Section and Ann Southworth, U.S. Atty., Department of Justice, Civ. Div., Washington, D.C., for the U.S. and Edward Derwinski, or his successor, Administrator of the Veterans Administration.

David Leen (argued), Leen & Moore, Seattle, Wash. and Charles H. Barr, Milwaukee, Wis., for Charles Davis, individually and on behalf of all others similarly situated.

Alan Lee and James E. Doyle, Atty. Gen., Office of the Atty. Gen., Wisconsin Dept. of Justice, Madison, Wis., for the State of Wis.

Before CUDAHY and KANNE, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

ESCHBACH, Senior Circuit Judge.

Wisconsin's real estate foreclosure law allows lenders to choose between two different foreclosure routes. Route one gives the borrower a long redemption period but allows the lender to preserve its right to collect a deficiency judgment from the borrower. Route two provides for expedited foreclosure but requires the lender to forego its right to a deficiency judgment. This case involves an attempt by the Department of Veterans' Affairs (VA) to exercise its federal indemnity right to seek reimbursement from a veteran for a loan guaranty payment the VA made to a private lender on the veteran's behalf after the veteran's property was foreclosed by the lender. The question is whether the VA retains its federal indemnity right even though it allows a lender to choose route two, that is, expedited foreclosure and waiver of deficiency. For the reasons below, we hold that the VA may exercise its indemnity right to seek reimbursement for guaranties paid pursuant to its legal obligation. Accordingly, we reverse the injunction the district court entered to prohibit the VA from collecting such reimbursement and remand for further proceedings consistent with this opinion.

I. FACTS

Two statutory schemes, the VA's home loan program and Wisconsin's foreclosure law, are pertinent to this case. We discuss each in turn. Under the VA's nationwide loan guaranty program, the VA has provided housing assistance to qualified veterans since 1944 by guaranteeing home loans made to veterans by private lenders. See Title III of the Servicemen's Readjustment Act of 1944, Pub.L. No. 346, 58 Stat. 284, 291 (codified as amended at 38 U.S.C. §§ 1801-33) [hereinafter Servicemen's Readjustment Act]. ¹ The VA has promulgated regulations governing all aspects of its loan guaranty program. See 38 C.F.R. part 36 (1988). Veterans are charged a one percent guaranty fee for a VA loan pursuant to 38 U.S.C. § 1829(a). In return, they are guaranteed a maximum interest rate that is usually below the market rate, see 38 U.S.C. § 1803(c); 38 C.F.R. § 36.4311, as well as limits on closing costs, loan origination, escrow and other fees, see 38 C.F.R. § 36.4312. Additionally, lenders usually forego the requirement of a down payment on a VA loan in return for the VA's guaranty. The VA's guaranty, by increasing the private lender's comfort level with the loan, induces them to make loans (or offer terms) which they otherwise might decline.

If a veteran defaults on loan payments, the lender ² may foreclose on the property. The VA regulations do not set forth a foreclosure procedure; foreclosure is effected according to the law of the state in which the property is located. See 38 U.S.C. § 1820(a)(6); 38 C.F.R. §§ 35.4319, 36.4320. The lender must give the VA thirty days' notice before beginning foreclosure proceedings. 38 C.F.R. § 36.4317. The VA then has fifteen days in which to give the lender instructions regarding the foreclosure proceeding. 38 C.F.R. § 36.4324(f). If the lender forecloses in accordance with the VA's instructions, ³ and a deficiency ⁴ remains after the sale of the property, the VA must reimburse the lender up to the amount of its guaranty. 38 C.F.R. § 36.4321.

Veterans participating in the VA program sign a contract with the VA that establishes the VA's right to seek reimbursement from the veteran for any payments the VA must make to private lenders pursuant to its guaranty of the veteran's loan. This guaranty agreement is governed by federal law. ⁵ The federal regulations adopted pursuant to this law provide two alternative courses by which the VA may recover from the veteran the amount paid on the guaranty. First, the VA becomes subrogated to the rights of the lender and can pursue any causes of action the lender might have had against the defaulting veteran. 38 U.S.C. § 1832; 38 C.F.R. § 36.4323(a). Under this subrogation right, the VA's rights are strictly derivative from the lender's rights. If, for instance, the lender could collect a deficiency judgment from the veteran, then the VA could step into the shoes of the lender and do so as well. Of course, if the lender's rights to a deficiency judgment against the veteran fail, then the VA's rights through subrogation fail as well. Second, the VA may pursue its indemnity right under its guaranty contract with the veteran to recover any amounts paid on the guaranty. 38 U.S.C. § 1832; 38 C.F.R. § 36.4323(e). ⁶ This indemnity right is a contractual one, arising directly from the contract between the veteran and the VA rather than deriving from the lender/veteran relationship.

Aside from these federal rights, Wisconsin's foreclosure law is also relevant to this case. Wisconsin law provides two statutory mechanisms by which a lender may foreclose on the mortgaged property of a debtor who is in default. The lender may demand in his complaint of foreclosure that judgment be rendered "for any deficiency which may remain due to him after sale of the mortgaged premises...." Wis.Stat. § 846.04. If the lender proceeds under this section, the debtor is given twelve months to redeem the property. ⁷ Alternatively, the lender may choose expedited foreclosure if the borrower has previously so agreed. Under this route, the lender "may elect by express allegation in the complaint to waive judgment for any deficiency which may remain due to [him] after sale of the mortgaged premises," in which case a six-month redemption period applies. Wis.Stat. § 846.101. ⁸ It is this second route with which we are primarily concerned.

Charles Davis is a veteran of the United States Navy who bought a home in Wisconsin through the VA's loan guaranty program. When Davis purchased his home, he executed loan documents and a mortgage with a private lender as well as a guaranty agreement with the VA. When Davis defaulted on his home loan, the lender foreclosed on his property pursuant to the second, expedited route as permitted by Davis' mortgage agreement. The lender subsequently sold Davis' property at a foreclosure sale for less than the outstanding balance on Davis' loan. Thus, a deficiency of approximately $23,000 remained. Because the VA had contractually guaranteed Davis' loan for more than the remaining deficiency, the VA reimbursed the lender for the entire deficiency pursuant to its guaranty of Davis' loan. The VA then sought recovery of that amount from Davis under its federal indemnity right. ⁹

In response to the VA's attempted recovery, Davis denied liability and filed a third-party class action complaint against Edward Derwinski, the Secretary of Veterans Affairs, challenging the VA's right to recover payments it has made pursuant to its loan guaranties. Davis asserts that just as the VA lost its subrogation right when the lender foreclosed under section 846.101, it also lost its indemnification right. He argues that the VA was required to direct the lender to foreclose under section 846.04, rather than section 846.101, if it wanted to preserve its indemnification right. After both Davis and the VA filed cross-motions for summary judgment, the district court agreed with Davis, essentially finding that the VA was "estopped" from asserting its indemnity right when it allowed a lender to foreclose under section 846.101. The district court entered an order which certified the class and subclasses proposed by Davis, denied the VA's motion for summary judgment, granted summary judgment for one of Davis' subclasses, permanently enjoined the VA from collecting indemnity payments from any veterans whose property was foreclosed pursuant to section 846.101, and ordered the VA to refund indemnity payments previously collected. Based on that injunction, the United States and Derwinski appealed. See 28 U.S.C. § 1292(a).

II. DISCUSSION

We do not write on a clean slate in this case. First, the VA has long interpreted its enabling legislation, see Servicemen's Readjustment Act § 504, as providing it a federal indemnity right that is unaffected by state foreclosure law. See Decisions of the Administrator of Veterans' Affairs, No. 625 at 1154 (Jan. 22, 1945); 38 C.F.R. § 36.4323(e); see also VA Form 26-1820; VA Form 26-1820a. The VA's interpretation of the statute is controlling unless "plainly erroneous or inconsistent with the regulation." Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414, 65 S.Ct. 1215, 1217, 89 L.Ed. 1700 (1945). Second, the Supreme Court has previously considered, and upheld, the VA's right of indemnity against veterans for amounts it must pay lenders pursuant to its guaranty obligation. In United States v. Shimer, 367 U.S. 374, 81 S.Ct. 1554, 6 L.Ed.2d 908 (1961), the Supreme Court considered the VA's home loan program...