Whitehead v. Derwinski

• Decision Date: 04 June 1990
• Docket Number: No. 89-35069,89-35069
• Citation: 904 F.2d 1362
• Parties: Harold D. WHITEHEAD; Carole M. Underwood; James C. Jensen, Jr.; Gregory M. Smith; Paul D. Brady, Plaintiffs-Appellees, v. Edward J. DERWINSKI, Secretary of the Department of Veteran Affairs * ; United States of America; U.S. Department of Veterans Affairs ** ; Richard F. Murphy, Director, Seattle Regional Office of the Veterans Administration, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1362

904 F.2d 1362

Harold D. WHITEHEAD; Carole M. Underwood; James C. Jensen Jr.; Gregory M. Smith; Paul D. Brady, Plaintiffs-Appellees, v. Edward J. DERWINSKI, Secretary of the Department of Veteran Affairs ^*; United States of America; U.S Department of Veterans Affairs ^**; Richard F Murphy, Director, Seattle Regional Office of the Veterans Administration, Defendants-Appellants No. 89-35069.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 7, 1990.

Decided June 4, 1990.

Mark B. Stern, Dept. of Justice, Civ. Div., Washington, D.C., for defendants-appellants.

David A. Leen, Leen & Moore, Seattle, Wash., for plaintiffs-appellees.

Appeal from the United States District Court for the Western District of Washington.

Before BROWNING, ALARCON and RYMER, Circuit Judges.

RYMER, Circuit Judge:

Appellant, the Secretary of the Department of Veteran Affairs ("VA"), appeals from the summary judgment against him in a class action on behalf of veterans ¹ in the state of Washington from whom the Department of Veteran Affairs is seeking to collect deficiencies remaining after default and foreclosure on VA-guaranteed home loans. The district court held that the VA's rights, as guarantor, against the debtor could not exceed the lender's rights, and therefore found the VA's claims against the veterans barred by Washington's antideficiency law.

Although we disagree with the district court that the VA has no right to indemnity, the VA may, in the state of Washington, choose whether to instruct a lender to pursue judicial foreclosure, under which the debtor may be held personally liable for the full amount of the debt, or non-judicial foreclosure, in which case no deficiency may be collected. Wash.Rev.Code Ann. Secs. 61.24.040, 61.24.100 (Supp.1989). The VA has chosen to instruct Washington lenders to pursue nonjudicial foreclosure. Because this method, under Washington law, does not allow the lender to collect a deficiency judgment, the VA cannot proceed against the debtor by way of its statutory right to subrogation. See 38 U.S.C.A. Sec. 1832 (West Supp.1989). However, it could have chosen the other path, exercised its statutory subrogation right, and collected in full against the debtor. Therefore, Washington law is consistent with federal law in providing the VA a full remedy against the debtor. Accordingly, in this case, Washington state law provides the federal rule for decision, and the VA is bound by the consequences of the path it chooses under that law. We affirm.

I

The Department of Veteran Affairs provides housing assistance to veterans by guaranteeing home loans made to veterans by private lenders. See generally 38 U.S.C.A. Secs. 1801-33 (West 1979 & Supp.1989); 38 C.F.R. Part 36 (1989). Federal law governs the guaranty agreement between the veteran and the VA. See VA Form 26-1820; VA Form 26-1802a.

If a veteran defaults on a loan, the lender must give the VA thirty days notice before foreclosing. 38 C.F.R. Sec. 36.4317. The VA then has fifteen days in which to give the lender instructions as to the proceedings. ² 38 C.F.R. Sec. 36.4324(f). The statute does not establish a federal foreclosure proceeding, but instead contemplates foreclosure under state or local law. See 38 U.S.C.A. Secs. 1820(a)(6), 1832; 38 C.F.R. Secs. 36.4319, 36.4320.

The VA must reimburse the lender for certain losses remaining after the foreclosure sale. 38 C.F.R. Sec. 36.4321. The VA may then recover from the borrower the amount the VA paid to the lender. ³ 38 C.F.R. Sec. 36.4323(a), (e) (any amounts paid by the VA on account of liabilities of the veteran "constitute a debt owing to the United States" by the veteran); VA Form 26-1820; VA Form 26-1802a.

Washington law governed the foreclosures at issue in this action. Washington provides two foreclosure methods. In a non-judicial foreclosure under Wash.Rev.Code Ann. Sec. 61.24.040, the proceeds of the foreclosure sale are deemed to satisfy the debtor's obligation to the lender in full; the lender may not proceed personally against the debtor to collect any deficiency. Wash.Rev.Code Ann. Sec. 61.24.100.

On the other hand, judicial foreclosure under Wash.Rev.Code Ann. Sec. 61.12.040 allows the lender to seek a deficiency, see Wash Rev.Code Ann. Sec. 61.12.070, but also provides the debtor significant rights: (1) the right to a court order providing a minimum price at which the property can be sold in foreclosure, Wash.Rev.Code Ann. Sec. 61.12.060; (2) the right to redeem the property within one year, Wash.Rev.Code Ann. Sec. 6.23.020, and (3) homestead rights, Wash. Const. art. XIX, Sec. 1. See Donovick v. Seattle-First Nat'l Bank, 111 Wash.2d 413, 757 P.2d 1378, 1381 (1988) (en banc) (Dore, J., dissenting). Judicial foreclosure is more time-consuming and more expensive. See id. at 1380; see also id. at 1381-82 (Dore, J., dissenting).

The VA instructs Washington lenders to proceed by non-judicial foreclosure. Even though the procedure does not permit the lender to seek a deficiency judgment against the debtor, the VA has attempted to collect the amount of any loss it incurs in reimbursing the lender for deficiencies remaining after foreclosure by asserting a right to indemnity.

The appellee class of veterans brought suit, claiming that under Washington law the non-judicial foreclosure sale satisfies its obligations both to the lender and to the VA. The VA maintains that under federal law it possesses both a right of subrogation, which depends on the debtor's obligation to the lender, and an independent right to indemnity arising from its agreement with the debtor.

On cross-motions for summary judgment, the district court granted summary judgment for plaintiffs.

II

We review a district court's grant of summary judgment de novo. See Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir.1989); State Farm Fire & Casualty Co. v. Martin, 872 F.2d 319, 320 (9th Cir.1989).

III

A

Federal law governs questions involving the rights of the United States arising under nationwide federal programs. United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979). The VA's rights, as guarantor, upon default by a debtor are governed by 38 U.S.C.A. Sec. 1832. The statute provides for a right to subrogation.

[T]he Administrator may ... pay to [the lender] the guaranty not in excess of the pro rata portion of the amount originally guaranteed. If the Administrator makes such a payment, the Administrator shall be subrogated to the rights of the holder of the obligation to the extent of the amount paid on the guaranty.

Id. at Sec. 1832(a)(1).

The regulations interpreting the statutory provisions include a section headed "Subrogation and indemnity." 38 C.F.R. Sec. 36.4323. The section first discusses subrogation.

The Secretary shall be subrogated to the contract and the lien or other rights of the holder to the extent of any sum paid on a guaranty or on account of an insured loss, which right shall be junior to the holder's rights as against the debtor or the encumbered property until the holder shall have received the full amount payable under the contract with the debtor.

38 C.F.R. Sec. 36.4323(a). The VA's right to subrogation is dependent on the lender's right, so that in a Washington non-judicial foreclosure, where the lender has no right to collect a deficiency, the VA has none either.

The VA's primary claim in this case is that it has a right to indemnity from the debtor independent of its right to seek subrogation on the basis of the lender's claim. The district court held, "The government's right to indemnification goes no farther than the borrower's obligation to the lender." Whitehead v. Turnage, 701 F.Supp. 795, 796 (W.D.Wash.1988) (citing United States v. Vallejo, 660 F.Supp. 535, 539-40 (W.D.Wash.1987)).

38 C.F.R. Sec. 36.4323(e) provides: "Any amounts paid by the Secretary on account of the liabilities of any veteran guaranteed or insured under the provisions of 38 U.S.C. Chapter 37 shall constitute a debt owing to the United States by such veteran." See also VA Form 26-1820; VA Form 26-1802a. In 1945, the Administrator of the Veterans' Administration, interpreting the forerunner of the current regulation, ⁴ stated that, as guarantor, the VA "is entitled to recover indemnification from the principal debtor. This is true, notwithstanding that the creditor could not at the time the guarantor sues the principal debtor maintain a suit against the latter." See Decisions of the Administrator of the Veterans' Administration, No. 625 at 1154, 1157 (Jan. 22, 1945). The Administrator'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).

The Supreme Court also interpreted the statutory and regulatory scheme as providing an independent right to indemnity.

Moreover, the recognition of a loss to the guarantor merely because of a failure of the lender's rights against the principal is incompatible with the background of general surety laws against which the statute was drawn....

For these reasons, we are constrained to agree with the uniform construction of the lower courts, including that of the two courts below, that the statute affords an independent right of indemnity to the Veterans Administration.

Finally, we find untenable respondent's argument that the applicable Regulation does not support recovery because there was no debt due from the veteran at the time of payment on the guaranty.... The Regulation is merely declaratory of a surety's customary right of indemnity for amounts paid pursuant to an obligation of the guarantor assumed with the consent of the principal. This right is in general unaffected by defenses of the principal which are not available to the guarantor.

United States v. Shimer, 367 U.S. 374, 387-88, 81 S.Ct. 1554, 1562-63, 6...