United States v. Whitney, CIV-83-1257T.

• Decision Date: 11 February 1985
• Docket Number: No. CIV-83-1257T.,CIV-83-1257T.
• Parties: UNITED STATES of America, Plaintiff, v. George WHITNEY, Defendant.
• Court: U.S. District Court — Western District of New York

602 F. Supp. 722

UNITED STATES of America, Plaintiff, v. George WHITNEY, Defendant.

No. CIV-83-1257T.

United States District Court, W.D. New York.

February 11, 1985.

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Salvatore R. Martoche, U.S. Atty., Buffalo, N.Y. (Frank P. Geraci, Jr., Asst. U.S. Atty., Rochester, N.Y., of counsel), for plaintiff.

Solin, Polito & Anderson, Rochester, N.Y. (Richard F. Anderson, Rochester, N.Y., of counsel), for defendant.

MEMORANDUM DECISION and ORDER

TELESCA, District Judge.

BACKGROUND

In this action, the United States seeks to collect from a veteran, defendant George Whitney, a deficiency which arose out of the foreclosure of a mortgage by Community Savings Bank on property originally purchased by Whitney. The mortgage was guaranteed by the Veterans' Administration. As a condition of securing the mortgage, Whitney agreed to remain personally liable on the mortgage debt, even though there might be a subsequent transfer of the property and assumption of the mortgage by others.

Four years after Whitney sold the property, the last purchaser of the property defaulted, and Community Savings Bank foreclosed. There is no dispute that the veteran Whitney was not a party to the foreclosure proceeding brought by Community. The property was purchased by the V.A., which later resold it. The sale was insufficient to satisfy the unpaid balance of the mortgage, and the V.A. reimbursed Community for the deficiency.

The United States now seeks summary judgment against Whitney for the deficiency incurred (approximately $4,000.00). Defendant has cross-moved for summary judgment, claiming that he was released from liability since he was never made a party to the original foreclosure proceeding and hence denied due process of law.

DISCUSSION

I.

It is undisputed that Whitney was never made a party to the mortgage foreclosure proceeding. In a letter dated June 6, 1978, James Wolfe, Loan Service Representative for the V.A., acknowledged that defendant and his wife "were not listed in the summons and complaint by bank attorneys". Plaintiff does not deny that no efforts were made, either by the bank or the Government, to notify Whitney of the default of the mortgage or the subsequent foreclosure. Rather, the Government has taken the position that there is no duty on either the V.A. or the mortgagee to notify the veteran liable for a mortgage which is being foreclosed. That position, which is contested by Whitney, must be addressed with respect to both New York State law and Federal constitutional law.

A. New York Mortgage Procedure

1. The applicable law

Under New York law, as discussed more fully below, a person responsible for the payment of a debt secured by a mortgage is entitled to personal service of notice of the mortgage foreclosure. Before turning to the applicable provisions of New York law, the threshold question to be resolved is whether the notice requirements under state law are applicable to the foreclosure of a mortgage guaranteed by the Veterans' Administration, and otherwise generally governed by federal regulations. (38 C.F.R. Section 36.4300 et seq.)

In United States v. Shimer, 367 U.S. 374, 81 S.Ct. 1554, 6 L.Ed.2d 908 (1961), the United States brought an action against a veteran for reimbursement of a deficiency incurred after foreclosure of a mortgage guaranteed by the V.A. The veteran argued that, under the Pennsylvania Deficiency Judgment Act, he was discharged from any obligation by the failure of the mortgagee to bring a proceeding to obtain a court determination of the fair market value of the mortgaged property within six months of the foreclosure sale. The Supreme Court disagreed, holding that the foreclosure of a mortgage guaranteed by the V.A. is governed by federal regulations, and is not subject to a state law requiring judicial appraisal of the mortgaged property. "The Regulations promulgated by the Veterans' Administration make clear that they were intended to create a uniform system for determining the Administration's obligation as guarantor, which in its operation would displace state law." Id., at 377, 81 S.Ct. at 1557.

In subsequent cases involving the foreclosure of mortgages guaranteed by the V.A., several circuit courts have summarily rejected the application of state laws governing mortgage foreclosure, citing Shimer for the proposition that V.A. regulations "displace state law" — apparently proceeding on the unwarranted assumption that the federal regulations preempt state law altogether in this area. See, e.g., Mortgage Associates, Inc. v. Cleland, 653 F.2d 1144, 1147 (7th Cir.1981)¹; United States v. Rossi, 342 F.2d 505 (9th Cir.1965).² The Fifth Circuit also adopted and relied upon such an interpretation of Shimer in United States v. Wells, 403 F.2d 596, 597-8 (5th Cir.1968) in concluding that "The national loan program of the Veterans' Administration cannot be subjected to the vagaries of the various state laws which might otherwise control all or some phases of the loan program." (emphasis added). For the following reasons, I respectfully disagree, and conclude that a more discriminating analysis of federal preemption is demanded by Shimer.

Although the supremacy clause of the United States Constitution, Article VI, Clause 2, reserves a superior status for federal law, it is settled that the preemptive effect of federal statutes and regulations may be either partial or complete in any given area of law. Fidelity Federal Savings and Loan Association v. de la Cuesta, 458 U.S. 141, 153, 102 S.Ct. 3014, 3022, 73 L.Ed.2d 664 (1982). "Congress' intent to supersede state law altogether", Id., may be inferred, for example, in a field of law "in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject," or where "the scheme of federal regulation may be so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it". Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447 (1947). Neither inference is permissible in the case of V.A. regulations governing mortgage foreclosure, however, and neither inference has ever been drawn by the Supreme Court.

Although the court held in Shimer that V.A. regulations "displace state law" in the field of mortgage foreclosure, the court never implied that state regulation of the area had been "completely displaced".³ Indeed, the opposite conclusion is compelled by the V.A. regulations themselves, which explicitly contemplate that at least some aspects of foreclosure procedure will continue to be governed by state and local law.⁴ On the contrary, the Supreme Court's holding in Shimer was based on its conclusion that the rival schemes under Pennsylvania law and federal regulations for calculating the value of mortgaged property were "intended to remedy the same abuses" and therefore "inconsistent". Shimer, 367 U.S. at 380, 81 S.Ct. at 1559. The court concluded that the V.A. regulations were, "to this extent, meant to displace inconsistent state law". Id., at 381, 81 S.Ct. at 1559 (emphasis added). As the Court of Appeals from this Circuit has correctly observed, the Shimer court "refused to apply the Pennsylvania statute to the Veterans' Administration on the ground that the Pennsylvania scheme was inconsistent with Veterans' Administration regulations". United States v. Merrick Sponsor Corp., 421 F.2d 1076, 1079 n. 1 (2d Cir.1970).⁵

For the foregoing reasons, I conclude that the V.A. regulations governing mortgage foreclosure were not intended to completely displace all state laws in that field. As Shimer and its legitimate progeny have recognized, "where Congress has not completely displaced state regulation in a specific area, state law is nullified to the extent that it actually conflicts with federal law". Fidelity Federal Savings and Loan Association, supra, 458 U.S., at 153, 102 S.Ct., at 3022. Next to be resolved, therefore, is whether such a conflict exists between the V.A. regulations and a state law requiring notice of a foreclosure to the original veteran mortgagor. As the Supreme Court has stated, "such a conflict arises when compliance with both federal and state regulations is a physical impossibility, or when state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress". Id. (citations and quotation marks omitted). These two criteria must be considered individually.

It is clear that there would be no "physical impossibility" in complying with both the notice provisions of the V.A. regulations and the New York law requiring notice to the mortgagor. The pertinent federal statutes and regulations outline the notice which must be given to the Veterans' Administration concerning guaranteed loans to veterans,⁶ but they are completely silent as to whether the veteran himself is to receive any notice of the foreclosure, or how such notice is to be given. Consequently, there would be no inherent incompatibility in providing notice to the mortgagor, as required by New York law, while complying fully in every detail with all of the federal regulations concerning V.A. home loans.

Even where state and federal law are logically compatible, the state law might still be "inconsistent", and therefore preempted, where it poses an obstacle to the accomplishment of the full purposes and objectives of the federal scheme. Fidelity Federal Savings, supra, 458 U.S., at 153, 102 S.Ct., at 3022. Indeed, this was precisely the sort of "inconsistency" found by the Supreme Court in Shimer between Pennsylvania and federal law, after noting that there was (at least in theory) no logical inconsistency between the two. Shimer, supra, 367 U.S. at 382-83, 81 S.Ct. at 1560. The court reasoned that federal statutes and regulations in this area of law, broadly stated, evidenced two congressional objectives: (...