BVA9507530 DOCKET NO. 93-08 345 ) DATE ) ) On appeal from the decision of the Department of Veterans Affairs Regional Office in Roanoke, Virginia THE ISSUE Waiver of recovery of loan guaranty indebtedness. WITNESS AT HEARING ON APPEAL Appellant ATTORNEY FOR THE BOARD Barry F. Bohan, Counsel INTRODUCTION The appellant served almost six years in the United States Navy from July 1976 to July 1982. This appeal arose from an April 1992 decision of the Committee on Waivers and Compromises of the Department of Veterans Affairs Regional Office in Roanoke, Virginia (VARO) which denied the appellant's request for waiver of recovery of loan guaranty indebtedness in the amount of $21,467.76, plus accrued interest, based on a finding of bad faith on his part. In March 1993, a personal hearing, at which the appellant testified, was conducted before the undersigned member of the Board at the Department of Veterans Affairs Regional Office in San Francisco, California. CONTENTIONS OF APPELLANT ON APPEAL The appellant contends, in substance, that the new house which he purchased was grossly substandard and that VA violated its own regulations in failing to require the builder to make satisfactory repairs. In essence, he contends that his refusal to continue to make monthly loan payments was justified under the circumstances and did not constitute bad faith. DECISION OF THE BOARD The Board, in accordance with the provisions of 38 U.S.C.A. § 7104 (West 1991), has reviewed and considered all of the evidence and material of record in the veteran's files. Based on its review of the relevant evidence in this matter, and for the following reasons and bases, it is the decision of the Board that waiver of recovery of loan guaranty indebtedness should be denied, based on a finding of bad faith on the part of the appellant. FINDINGS OF FACT 1. In April 1988, the appellant and his spouse purchased a new house, using a home loan which was guaranteed, in part, by VA. 2. Due to dissatisfaction with the house, the appellant intentionally defaulted on his monthly loan payments. Foreclosure proceedings were initiated. 3. In November 1990, the property was sold at a substitute trustee's sale for an amount less than the unpaid principal balance, accrued interest, and expenses of foreclosure. 4. VA paid the lender's loan guaranty claim, and the related loss to the government, in the amount of $21,467.76, was charged as a debt to the appellant. 5. The appellant refused to perform the mortgage obligation with knowledge of the probable consequences and thereby caused a loss to the government. CONCLUSIONS OF LAW 1. After default, there was a loss of the property which served as security for the VA guaranteed loan. 38 U.S.C.A. § 5302 (West 1991); 38 C.F.R. § 1.964(a) (1993). 2. The appellant's bad faith precludes consideration of waiver of recovery of the loan guaranty indebtedness. 38 U.S.C.A. § 5302 (West 1991); 38 C.F.R. §§ 1.964, 1.965 (1993). REASONS AND BASES FOR FINDINGS AND CONCLUSIONS The appellant is seeking a waiver of recovery of the loan guaranty indebtedness in the amount of $21,467.76, plus accrued interest. Initially, the Board finds that the appellant has presented a claim which is supported by evidence which leads to the belief that it is well grounded. 38 U.S.C.A. § 5107(a) (West 1991) and Murphy v. Derwinski, 1 Vet.App. 78 (1990). Furthermore, it is believed that the appellant's claim has been adequately developed for appellate purposes by VARO. The evidence has been carefully reviewed and the Board finds that the loan guaranty indebtedness in the amount of $21,467.76 was properly established. Schaper v. Derwinski, 1 Vet.App. 430 (1991). In the interest of clarity, the Board will first review the chronological history of this case, as presented in the evidence of record, as well as the appellant's hearing testimony. The issue presented on this appeal will then be discussed. History of the case On April 7, 1988, the appellant and his spouse purchased a new house in Newport News, Virginia from a builder for $125,080, using a home mortgage loan which was guaranteed, in part, by VA. 38 U.S.C.A. §§3701 et seq. (West 1991). The property was secured by a Deed of Trust Note and Deed of Trust. The appellant evidently moved into the house on or about April 8, 1988. On May 4, 1988, the appellant and his spouse wrote to the builder, alleging 218 claimed defects in the house. Thereafter, the builder attempted to make repairs to the house on numerous occasions. The builder described the appellant as "very hard to work with and hard to please." In June 1988, the appellant complained to VARO, appending the list of 218 alleged deficiencies in materials and workmanship. In August 1988, VA completed a field inspection of the house, and in September 1988 VA asked the builder to correct 18 items which it deemed to be deficient. The builder attempted to correct those items, but not to the satisfaction of the appellant. In November 1988, the Director of the VA Loan Guaranty Service wrote to the appellant, informing him that the only authority VA had in dealing with construction deficiencies was to refuse to appraise future buildings. The appellant was further informed that VA did "not have the authority to force the builder to make further corrections to your house." It was suggested that if the appellant was dissatisfied with the house he bought, he could seek an appropriate remedy through the courts. Also in November 1988, VARO notified the builder that VA would refuse to appraise any property constructed or listed for sale by the builder because "Veterans Administration has determined that you have used construction methods or practices which were unfair or unduly prejudicial to the veteran purchasers. The [appellant's] house does not conform to the plans and specifications submitted to VA for appraisal. There were many substitutions but no change orders or any other form of notification were provided to VA." A January 1989 internal VA memorandum emphasized that the suspension was due to the builder's improper substitution of items such as water heaters, pipes and windows which could have resulted in a cost savings to the builder, not because of the builder's alleged failure to make repairs to the appellant's house. The builder defended itself by stating, in substance, that the substituted items were superior to the items in the plans and specifications filed with VA and that if it was remiss it was only to the extent of failing to file updated paperwork with VA. The builder denied "sharp dealing". The suspension was lifted by VA in January 1989 and the builder was placed on a one year probation period. One of the terms of the probation was that the builder "continue to pursue a satisfactory resolution of the [appellant's] construction complaint." A dispute settlement hearing pursuant to provisions contained in the homeowner's warranty was conducted at the house in December 1988 at the appellant's request. Under the provisions of the warranty, the homeowner had to accept the inspector's decision as a final resolution of all items presented. The appellant and his spouse refused to do so, and his claim was voided. Also in December 1988, the builder wrote to the appellant and his spouse, offering to repurchase the house. The appellant demanded $145,898.10, including such items as "food 08/27/88-09/15/88 - $172.34" and "postage - $242.05", as well as reimbursement of mortgage payments for one year. In January 1989, the builder counter offered $131,305.88. Of record is a report of contact with the appellant, dated January 1989, which was signed by the Chief of the Construction and Valuation Section at VARO. The appellant made it clear that he expected compensation for his expenses and/or inconvenience and that he would not accept the builder's settlement offer. The appellant evidently wanted the suspension against the builder to be continued while he negotiated a settlement. The appellant filed a lawsuit against the builder in the Circuit Court of the City of Norfolk in February 1989, asking for monetary damages in the amount of $200,000 and punitive damages in the amount of $200,000. In an October 1989 letter to President George Bush, the appellant stated: "we filed litigation against the builder as we were prodded by the V.A. to do.... Money hungry lawyers and a deaf ear from government because we are now in litigation." Also of record is an undated memo to file, apparently written in early 1990, by a VARO employee. The builder had informed VARO that the appellant had dropped his lawsuit. According to the builder, the appellant had retained two attorneys, each of which had "refused to go any farther without a fee payment." Of record is a May 1989 article in a local newspaper which detailed the appellant's problems with the builder. The article noted that, among many other items, the appellant and his spouse were dissatisfied that a wall in the family room was not level. The builder straightened it with two by fours. The appellant maintained that the entire wall should have been knocked out and replaced. After the arbitrator found that the wall was within construction standards, the appellant and his spouse refused to accept his decision. The article also quoted a spokesperson for VA as saying that the suspension of the builder was for "administrative irregularities and sloppy paperwork" and that the substituted items did not lessen the value of the appellant's home. There was no indication in the article that any of the builder's other buyers was dissatisfied with the quality of its workmanship or materials. Throughout this period, the appellant wrote numerous letters to the builder, VARO, VA Central Office and various state and federal elected officials, bitterly complaining about his situation. In essence, he alleged that the builder had provided a house which was substandard in numerous ways. He maintained that it was VA's responsibility to rectify the matter to his complete satisfaction. In a December 1989 letter to Jonathan R. Steinberg, Chief Counsel, United States Senate Committee on Veterans Affairs, he set forth his contentions at length. He castigated VA for allowing "builders to deal in this manner as long as they straighten up their paper work." He included a list of defects in the house and another list of alleged failures of VA to follow its own rules. He stated that VA "should be able to intercede on a veteran's behalf, as we continue to have further problems with this house." In March 1990, the appellant and his spouse again applied for arbitration under the homeowners warranty. The dispute settler's decision dated March 29, 1990 found that the builder was responsible for making some repairs. The builder professed to be willing to make the repairs, but could not locate the appellant and had been informed that the appellant and his spouse had moved. The appellant stopped making loan payments in March 1990 and vacated the premises in April 1990. A July 1990 foreclosure appraisal described the house as follows: "there are no functional or external inadequacies noted." The property was sold for $110,245 at a foreclosure sale in November 1990. In March 1991, the lender filed a claim under the loan guaranty, which was satisfied, in part, by VA. The appellant was charged with responsibility for loan guaranty indebtedness in the amount of $21,467.76. The appellant requested a waiver of recovery of the charged loan guaranty indebtedness in November 1991. In the April 1992 decision which is the subject of this appeal, the VARO Committee on Waivers and Compromises denied the appellant's request for waiver, based on a finding of bad faith on his part. The Committee noted that the appellant had ceased making home loan payments even though he was evidently financially able to do so, because of the dispute with the builder over materials used in construction. The Committee further noted that VA had asked the builder to correct eighteen items and the builder had done so. In addition, the builder had agreed to make additional corrections, based on the recommendation of the warranty arbitrator, but the appellant would not agree to this. Finally, the builder had offered to repurchase the property at cost plus $6,000, but the appellant refused the offer and held out for cost plus $20,000. The appellant's hearing testimony The appellant testified at a hearing before the undersigned member of the Board in March 1993. He stated that he had moved out of the house in April 1990. He noted that he had first offered a deed in lieu of foreclosure, which had been rejected. He further noted that he had attempted to sell the house, although he was not specific concerning his efforts in that direction. This member then asked the appellant about VARO's finding of bad faith. The appellant responded by stating: "We tried dealing with everyone -- everyone in the state and people out of state. And we could get nowhere. And the place was coming apart....We couldn't take it anymore." [hearing transcript, page 4]. With respect to his rejection of the arbitrator's settlement, the appellant stated, in effect, that he wanted all the items he believed were problems to be taken care of, and since some items were not included in the arbitrator's correction list, he rejected the settlement. With respect to the builder's offer to buy back the house at cost plus $6,000, the following colloquy occurred: Q. Did you in fact ask or make an offer of some kind for $20,000 more than the...base price? A. $125. We said okay, $145. We were trying to deal. We figured we'd start out high and he started out low and we [would have] some meeting of the mind in the middle and everyone would be happy....But that never happened. [hearing transcript, p 10] The appellant also confirmed that he dropped his lawsuit against the builder. He expressed dissatisfaction with the way first one lawyer and then another had handled the matter. He indicated that "all along, we were asking VA to...pursue what hadn't been done." [hearing transcript, page 12] Analysis A waiver of recovery of a debt may be authorized in a case in which collection of the debt would be against equity and good conscience. 38 U.S.C.A. § 5302(b) (West 1991); 38 C.F.R. § 1.964 (a)(2) (1993). "Equity and good conscience" involves a variety of elements, including the elements of the fault of the debtor, balancing of faults of the debtor and VA, and undue hardship. 38 C.F.R. § 1.965 (a) (1993). In essence, however, "equity and good conscience" means fairness to both the appellant and to the government. Under pertinent law and VA regulations, however, no debt may be waived under the standard of equity and good conscience if bad faith is found to exist on the part of the debtor. 38 U.S.C.A. § 5302(c) (West 1991); 38 C.F.R. § 1.965 (b) (1993). In other words, if bad faith is found, the elements of equity and good conscience are not for consideration, since the granting of waiver of recovery is precluded by law. "Bad faith" is defined in VA regulations as "unfair or deceptive dealing by one who seeks to gain thereby at another's expense. Thus, a debtor's conduct in connection with a debt arising from participation in a VA benefits/services program exhibits bad faith if such conduct, although not undertaken with actual fraudulent intent, is undertaken with intent to seek an unfair advantage, with knowledge of the likely consequences, and results in a loss to the government." 38 C.F.R. § 1.965(b) (1993). VA guidelines refer to bad faith as a willful intention to either seek an unfair advantage or to neglect or refuse to fulfill some duty or contractual obligation. VBA Circular 20-90-5, (February 12, 1990). A determination of bad faith may be based on the circumstances which led to the default and the foreclosure, as well as the appellant's attitude toward contractual obligations, and his actions or omissions with respect to avoiding foreclosure, as indicated by the evidence of record. The Board acknowledges that this case presents some very unusual elements. It is clear that the appellant and his spouse relentlessly pursued the builder and VA through the corridors of government due to alleged defects in the house. The appellant's litigation efforts against the builder were much less intense, however. Ultimately, he moved from the property, leaving the lender, who he never complained about, with the indebtedness. VA then paid lender the under the loan guaranty and charged the appellant with responsibility for the indebtedness. Although there is no question that some deficiencies did exist in the house, observers such as the warranty arbitrator found that much less was substandard than was alleged by the appellant. Of particular interest is the report of the July 1990 appraisal, which identified no inadequacies at all with respect to the property. There is also nothing on the record which indicates that there were major and/or widespread problems with the quality of other houses built by this builder. Given these circumstances, the question which comes to mind is the motivation of the appellant. One answer is that he may have viewed the alleged construction deficiencies as a basis for realizing some extra funds out of the situation. To that end, he rejected as inadequate the builder's numerous efforts to correct the alleged defects, asked for and then rejected an arbitration settlement, and then rejected the builder's offer to buy back the house at cost plus $6,000. He also apparently sought to use VARO as a weapon against the builder and attempted to exert pressure on VARO through a letter writing campaign to the President, Congress and the upper echelons of the VA hierarchy. Even though the builder was indeed penalized by VARO with a two month suspension because of paperwork irregularities, the appellant still remained dissatisfied with VARO's efforts. This was possibly because, as was hinted at in the January 1989 report of contact, and more explicitly suggested by his hearing testimony, the suspension was lifted before the appellant could continue with negotiations which he hoped would give him $20,000 over cost of the house. Thereafter, his own litigation efforts, which of necessity would have entailed out of pocket expenses to him, faltered. Characteristically, he cast blame on VA for "prodding" him to bring the lawsuit and on his attorneys for their failure to pursue his case to a successful conclusion. He then discontinued loan payments and moved out of the house. Although the appellant has denied bad faith, the evidence of record is replete with evidence of his intransigence and desire to gain an advantage at the expense of others including VA. It is clear that he deliberately refused to continue making payments on his home loan, not because of any financial inability to do so, but because he could not or would not accept responsibility for his purchase of the house. In the Board's opinion, the appellant's actions constituted a deliberate effort to neglect a contractual obligation and shift the financial consequences to the government. Even if one accepts, for the sake of argument, that the house contained dozens, indeed hundreds, of defects, the proper course of action was against the builder in the courts, not an abandonment of the property and the mortgage obligation. As it is, the evidence before the Board suggests that the defects, such as they were, became a mere excuse for manipulative and self-serving behavior on the part of this appellant. It is therefore the conclusion of the Board that a waiver of loan guaranty indebtedness should not be granted, based on our finding of bad faith on the part of this appellant. The elements of the standard of equity and conscience are therefore not for consideration. ORDER Waiver of recovery of loan guaranty indebtedness is denied. J. J. SCHULE Member, Board of Veterans' Appeals The Board of Veterans' Appeals Administrative Procedures Improvement Act, Pub. L. No. 103-271, § 6, 108 Stat. 740, ___ (1994), permits a proceeding instituted before the Board to be assigned to an individual member of the Board for a determination. This proceeding has been assigned to an individual member of the Board. NOTICE OF APPELLATE RIGHTS: Under 38 U.S.C.A. § 7266 (West 1991), a decision of the Board of Veterans' Appeals granting less than the complete benefit, or benefits, sought on appeal is appealable to the United States Court of Veterans Appeals within 120 days from the date of mailing of notice of the decision, provided that a Notice of Disagreement concerning an issue which was before the Board was filed with the agency of original jurisdiction on or after November 18, 1988. Veterans' Judicial Review Act, Pub. L. No. 100-687, § 402 (1988). The date which appears on the face of this decision constitutes the date of mailing and the copy of this decision which you have received is your notice of the action taken on your appeal by the Board of Veterans' Appeals.