U.S. v. Harvey

• Citation: 659 F.2d 62
• Decision Date: 15 October 1981
• Docket Number: No. 80-7547,80-7547
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Lebron HARVEY, Defendant-Appellant. UNITED STATES of America, Plaintiff-Appellee, v. Sherman FARLEY and Audrey Faye Farley, Defendants-Appellants. . Unit B *
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 62

659 F.2d 62

UNITED STATES of America, Plaintiff-Appellee, v. Lebron HARVEY, Defendant-Appellant.

UNITED STATES of America, Plaintiff-Appellee, v. Sherman FARLEY and Audrey Faye Farley, Defendants-Appellants.

No. 80-7547.

United States Court of Appeals, Fifth Circuit.

Unit B ^*

Oct. 15, 1981.

Myron N. Kramer, and Donald M. Dotson, Atlanta, Ga., for Sherman Farley & Audrey Faye Farley.

James E., U. S. Atty., Barbara A. Harris, Asst. U. S. Atty., Atlanta, Ga., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before HILL and VANCE, Circuit Judges, and LYNNE ^**, District Judge.

JAMES C. HILL, Circuit Judge:

Appellants Lebron Harvey and Sherman and Audrey Farley were defendants in consolidated proceedings in the district court brought by the United States to foreclose on deeds to secure debt executed in favor of the Veterans Administration. The appellants raised as a defense the failure of the VA properly to service their accounts in accordance with VA loan servicing manual M-26-3 and sought to enjoin the foreclosure. In the Harvey case the government simultaneously moved for summary judgment and to dismiss the counterclaim seeking an injunction. The government also filed a motion for judgment on the pleadings against the Farleys. Resolving these motions in the government's favor, the district court concluded that the provisions of the VA manual were not mandatory and therefore did not grant the appellants a right to bar or enjoin foreclosure. Accordingly, a judgment of foreclosure and sale was entered against both appellant Harvey and the Farleys on May 22, 1980. From this judgment appeal has been taken. For the reasons set forth below, we affirm.

I. FACTS

On September 17, 1976, Lebron Harvey purchased a home in Decatur, Georgia from the Veterans Administration under its vendee loan program. Harvey executed both a promissory note in favor of the VA and a Deed to Secure Debt, which provided for acceleration of the indebtedness and a power of sale without notice in the event the debtor failed to make the agreed payments. The Harvey account went into default in November, 1977. In January, 1978 a VA employee made a personal visit to the Harvey home, but no payment was received until March. In spite of three letters from the VA to appellant Harvey about his growing default, and another attempted personal visit, appellant did not respond to the VA's contacts and forwarded only two more payments. When the Harvey account was five months in arrears, the matter was referred to the United States Attorney for foreclosure, and foreclosure proceedings were instituted ¹ when the account was seven months past due.

The facts in the Farley case are similar. The Farleys purchased a VA home and executed a promissory note and deed to secure debt in April, 1978. Their first payment was late, as was their second payment, which was made initially with a check that bounced. In August, 1978, in response to a note left at their home by a VA representative, the Farleys contacted the VA about their default and made arrangements to bring their account current. Contrary to the arrangement, however, the August payment was not received until November. Meanwhile, the VA sent the Farleys a letter about their problem in making payments, to which the Farleys did not respond. In mid-November, the check for the October payment was not honored by the Farleys' bank. In February, 1979, when the account was five months in arrears and in response to a VA letter advising them of the institution of foreclosure proceedings, the Farleys offered to pay half of the accrued arrearage. The VA refused the proposed plan. ²

The primary issue presented by this joint appeal is whether the servicing provisions of the VA loan servicing manual ³ create a right in the borrower/mortgagor that can be enforced in defense to a foreclosure action or in an action to enjoin foreclosure. We hold that they do not.

II. THE VA MANUAL DOES NOT CREATE SUBSTANTIVE RIGHTS IN THE BORROWER/MORTGAGOR

The VA manual is an internal agency publication issued to employees engaged in loan servicing operations to provide procedural information and policy guidelines. Paragraph 2.20(e) of the manual states: "After the reasons for default have been determined, indulgence may be extended for a reasonable time to a worthy borrower who is unable immediately to begin the liquidation of his arrearage." On the basis of this and other provisions regarding field servicing, appellants claim that the VA was under an obligation running in favor of appellants to extend, reamortize, or forbear on their loans before foreclosing and that the VA thus failed to fulfill a mandatory condition precedent to foreclosure. To prevail on this argument, appellants must establish that the VA manual imposes a foreclosure avoidance duty on the VA and thereby creates a correlative right in the mortgagor to this performance.

At the outset we note the clearly permissive rather than mandatory language of the manual's instructions. On its face the manual does not purport to create a binding obligation. Indeed, the manual states in paragraph 2.18(c) that it sets forth only "preferable" provisions for servicing defaulted loans and recognizes that "strict compliance with these procedures may be impracticable or even impossible under certain conditions." See Brown v. Lynn, 392 F.Supp. 559, 562 (N.D.Ill.1975) (holding non-mandatory the foreclosure avoidance and servicing provisions of HUD guidebook because of permissive language, indicating lack of agency intent to make provisions binding, and failure formally to promulgate guidebook as agency regulation). ⁴

Furthermore, "(i)n order for a regulation to have the 'force and effect of law,' it must have certain substantive characteristics and be the product of certain procedural requisites." Chrysler Corp. v. Brown, 441 U.S. 281, 301, 99 S.Ct. 1705, 1717, 60 L.Ed.2d 208 (1979). More specifically, the regulation must be a substantive or legislative-type rule i. e. one "affecting individual obligations," Morton v. Ruiz, 415 U.S. 199, 232, 94 S.Ct. 1055, 1073, 39 L.Ed.2d 270 (1971) which has been issued by the agency pursuant to statutory authority and promulgated in accordance with the procedural requirements of the Administrative Procedure Act. Chrysler Corp. v. Brown, 441 U.S. at 302-303, 99 S.Ct. at 1718.

Appellants have failed to convince us that the VA manual has the "force and effect of law." First, it is questionable that the loan servicing provisions can be characterized as a substantive rule; they more aptly fall into the category of general statement of agency policy. See 5 U.S.C. § 553(d) (1976). Moreover, appellants have not identified any statute directing the VA to implement a "foreclosure avoidance" duty by legislative-type regulations, nor have they established that the manual was promulgated or required to be promulgated using the notice and comment procedures of the Administrative Procedure Act. See Charles v. Krauss Co., Ltd., 572 F.2d 544, 549 (5th Cir. 1978); Gatter v. Cleland, 512 F.Supp. 207 (E.D.Pa.1981) (VA manual and circulars regarding VA guaranteed loan program). Indeed, appellants concede, Brief of Appellants at 10, that the manual's provisions are not formal agency regulations. ⁵

In the context of both VA loan servicing provisions and other agencies' internal operating policies, other courts have likewise refused to give such internal policy pronouncements the force and effect of law. In holding that the VA's decision not to refund a guaranteed loan was an action committed to agency discretion and therefore not subject to judicial review, the district court in Gatter v. Cleland, 512 F.Supp. 207 (E.D.Pa.1981), concluded that the refunding provisions of the VA manual and circulars did "not possess the necessary characteristics of binding agency law." Likewise, in Fitzgerald v. Cleland, 498 F.Supp. 341 (D.Me.1980), aff'd in part and rev'd in part on other grounds, 650 F.2d 360 (1st Cir. 1981), another mortgagor's challenge to a VA decision not to refund his defaulted guaranteed loan, the court stated that the VA Regulations Manual "is intended only to assist VA employees in the servicing of a guaranteed loan and is merely a non-enforceable policy pronouncement." Id. at 351. ⁶

Similarly in Chasse v. Chasen, 595 F.2d 59 (1st Cir. 1979), the First Circuit held that it lacked federal question jurisdiction in a suit to enforce a policy pronouncement issued by the Commissioner of Customs. The court cited the lack of statutory authority either in the statute itself or by implication from legislative history to create enforceable federal rights by issuance of a policy pronouncement. Id. at 62-63. The Third Circuit held a Soil Conservation guide and handbook, similar to the VA manual in question here, to be nonbinding in Concerned Residents of Buck Hill Falls v. Grant, 537 F.2d 29 (3d Cir. 1976). It reasoned that "since the Guide and the Handbook are merely internal operating procedures, rather than regulations officially promulgated under the APA or otherwise, they do not prescribe any rule of law binding on the agency." Id. at 38. Finally, in Feldman v. United States Dep't of Housing and Urban Development, 430 F.Supp. 1324 (E.D.Pa.1977), and Brown v. Lynn, 392 F.Supp. 559 (N.D.Ill.1975), unpublished, internal HUD loan management handbooks were found to be nonbinding, with both courts noting the lack of publication in the Federal Register and lack of agency intent to create mandatory duties.

Having concluded that the loan servicing provisions of the VA manual involved in this case do not have the force and effect of law, we also note that appellants cannot claim that the...