BVA9505536 DOCKET NO. 93-12 377 ) DATE ) ) On appeal from the decision of the Department of Veterans Affairs Regional Office in Jackson, Mississippi THE ISSUE Waiver of recovery of loan guaranty indebtedness. ATTORNEY FOR THE BOARD Christopher P. Kissel, Associate Counsel INTRODUCTION This matter comes before the Board of Veterans' Appeals (the Board) on appeal from a decision of the Committee on Waivers and Compromises (the Committee) of the Jackson, Mississippi, Department of Veterans Affairs Regional Office (VARO) issued in November 1990. In a subsequent December 1991 decision, the Committee determined that there was no fraud, misrepresentation or bad faith involved in the creation of the indebtedness; however, after grant of a partial waiver in the amount of $5,849.96, they concluded that collection of the remaining portion of the indebtedness, in the amount of $5,000.00 plus interest, would not be against the principle of equity and good conscience. CONTENTIONS OF APPELLANT ON APPEAL The appellant contends, in substance, that enforcement by VA of payment of the loan guaranty indebtedness would be against the standard of equity and good conscience because he was without fault in the creation of the loan guaranty indebtedness. He further argues that recovery of the outstanding indebtedness would result in undue financial hardship. 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 claims file(s). 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 the loan guaranty indebtedness was validly established. However, for the following reasons and bases, it is the decision of the Board that the appellant is entitled to a retroactive release of liability under the provisions of 38 U.S.C.A. § 3713(b) (West 1991). FINDINGS OF FACT 1. In April 1987, the appellant and his wife purchased a house in Gautier, MS, using a mortgage loan which was guaranteed by VA. 2. In April 1987, the appellant conveyed his interest in the house on an assumption basis by warranty deed, but without benefit of release of liability. 3. Starting in September 1988, the transferees defaulted on loan payments. Mortgage foreclosure proceedings were subsequently initiated and in September 1989, the property was sold at a foreclosure sale for an amount less than the unpaid principal balance, accrued interest, and expenses of foreclosure. 4. Reasonable efforts were made to furnish the appellant notice of the default prior to the initiation of foreclosure proceedings. 5. VA paid the lender's loan guaranty claim, and the related loss to the government, in the amount of $10,849.96, was charged as a debt to the appellant. 6. The warranty deed executed in April 1987 between the appellant and the transferees provided that the buyers assumed and agreed to pay the specified mortgage according to its terms and conditions. 7. The original loan was current at the time the transferees acquired the property. 8. There is no evidence that the transferees were not creditworthy at the time of conveyance of the property. 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) (1994). 2. The loan guaranty indebtedness in the amount of $10,849.96 was validly established. 38 U.S.C.A. § 3732 (West 1991); 38 C.F.R. §§ 1.911, 36.4323 (1994). 3. A retroactive release of liability is warranted. 38 U.S.C.A. §§ 3713(b), 5302 (West 1991); 38 C.F.R. § 36.4323(g) (1994). REASONS AND BASES FOR FINDINGS AND CONCLUSIONS 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, the undersigned finds that the appellant's claim has been adequately developed for appellate purposes by VARO and that a disposition of the case is now in order. I. Factual Background In April 1987, the appellant and his wife jointly purchased a house in Gautier, MS, using a mortgage loan which was guaranteed by the Department of Veterans Affairs (VA). 38 U.S.C.A. §§ 3701 et seq. (West 1991). On the same day they purchased the property (April 9), they sold the house on an assumption basis by warranty deed without benefit of release of liability. In November 1988, the mortgage holder notified VA that monthly mortgage payments had not been made since September 1, 1988. VA sent notice to the appellant at his last known address of the transferees' default by letter in May 1989; however, that letter was returned as "[m]oved, not forwardable." Thereafter, in July 1989, VA sent a similar notice to the appellant at his mother's last known address; that address was taken from the appellant's February 1987 loan application documents pertaining to his reported name and address of a "next of kin." Mortgage foreclosure proceedings were subsequently initiated and the property was sold at a foreclosure sale in September 1989. VA paid the lender's loan guaranty claim, and the related loss to the government, in the amount of $10,849.96, was charged as a debt to the appellant. In November 1989, the appellant was found to be responsible for the outstanding loan guaranty indebtedness and collection efforts were initiated. The appellant filed a request for waiver of the loan guaranty indebtedness in November 1990. He stated the following concerning the circumstances of the sale of the property to the transferees: We applied for a VA Loan on the house and were approved to assume notes on the loan. However, before we were approved, my husband accepted a job in another part of the state. I contacted the realtor, John Thomas of Pascagoula, Ms. and informed him that we would not be buying the house. Several days later, Mr. Thomas called me and told me that he had a couple who would like to buy the house, however, they did not want to wait 6 weeks to be approved through the Veterans Administration. Mr. Thomas asked me if we would buy the house and then sell it to these people on the same day. Mr. Thomas assured us that this was legal, and we did not consult a lawyer as we trusted him. As indicated above, his waiver request was denied by decision of the Committee of VARO in November 1990. In December 1991 decision, the Committee determined that there was no fraud, misrepresentation or bad faith involved in the creation of the indebtedness; however, after grant of a partial waiver in the amount of $5,849.96, they concluded that collection of the remaining portion of the indebtedness, in the amount of $5,000.00 plus interest, would not be against the principle of equity and good conscience. II. Analysis The Board has carefully reviewed the law, VA regulations and Court decisions pertaining to the recovery of loan guaranty indebtedness. We have been guided, in large measure, by the Court's analysis in Schaper v. Derwinski, 1 Vet.App. 430 (1991). As we read Schaper, VA must examine, sequentially, three potential bases for relief: validity of the debt, retroactive release of liability, and waiver of recovery of the debt. Validity of the indebtedness The Board notes that United States v. Whitney, 602 F. Supp. 722 (W.D.N.Y. 1985) extends due process considerations to VA loan guaranty cases, such as this, in which a veteran transfers interest in property subject to a VA loan guaranty. Whitney stands for the proposition that a transferor veteran may not be held liable by the mortgagee if he or she did not receive "meaningful" or "adequate" notice under state law. Whitney, at 732, 733 (citing Mennonite Board of Missions v. Adams, 462 U.S. 791, 103 S. Ct. 2706, 2711-2, 77 L. Ed. 2d 180 (1983)). Moreover, the Whitney court held that due process considerations under both the Fifth and Fourteenth Amendments of the United States Constitution were applicable in VA loan guaranty transferee cases. Whitney, at 731-33. Whitney, however, dealt with a situation in which the transferor veteran received no notice of a transferee's default. In this case, the appellant was sent timely notice of the transferees' default. In May 1989, VARO sent a letter to the appellant informing him of the transferees' default. The letter was sent to his last known mailing address which he provided at the time of the purchase and transfer of the subject property in April 1987. In July 1989, VA sent a similar notice to the appellant's reported next of kin address, which in this case was his mother's last known address. Whitney held that due process requires that "[t]he means employed to notify the mortgagor must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it." Whitney, 602 F. Supp. at 732 (quoting Mullane v. Central Hanover Bank and Trust Company, 339 U.S. 306, 314 (1950)). In view of the efforts VA made to contact the appellant at the addresses cited above, the Board believes that the appellant was provided meaningful notice, both timely and adequate in nature, of the default. The constitutionality of a foreclosure procedure depends not on the subjective understanding of the property owner, but on the objective propriety of the procedures used. Therefore, a claimed lack of subjective knowledge does not as a matter of course deprive one of due process. Buzinski v. Brown, 6 Vet.App. 360, 365 (1994). Accordingly, in view of the above findings, the Board concludes that the loan guaranty indebtedness of $10,849.96 was validly established and therefore was enforceable against the appellant by VA. Retroactive release of liability In transferee cases, such as this, another legal mechanism exists for determining that a veteran does not have the responsibility to repay an indebtedness under a VA guaranteed loan: retroactive release of liability. 38 U.S.C.A. § 3713 (West 1991). In several cases, the Court has emphasized the role a retroactive release of liability may play where a veteran has disposed of property to a transferee without having obtained a release of liability. 38 U.S.C.A. § 3713(b) (West 1991); 38 C.F.R. § 36.4323(g) (1994); Travelstead v. Derwinski, 1 Vet.App. 344, 347-8 (1991); Schaper v. Derwinski, 1 Vet.App. 430, 434-6 (1991); and Carlson v. Derwinski, 2 Vet. App. 144 (1992). In pertinent part, 38 C.F.R. § 36.4323(g) (1994) reads as follows: [T]he Secretary may relieve the veteran of such liability if he determines that: (1) A transferee either immediate or remote is legally liable to the Secretary for the debt of the original veteran- borrower established after the termination of the loan, and (2) The original loan was current at the time such transferee acquired such property, and (3) The transferee who is liable to the Secretary is found to have been a satisfactory credit risk at the time he acquired the property. In this case, the appellant secured a loan that was guaranteed by VA. The secured property was sold to the transferees, who pursuant to the terms of the conveyance, agreed to pay the outstanding balance due on the mortgage according to its terms and conditions, which included indemnifying VA for any claim arising from the guaranty of insurance of the indebtedness. Therefore, the transferees assumed the loan and became liable to VA. It is obvious that the loan was current at the time of transfer since the transfer occurred on the day of purchase. With respect to whether the purchasers were a satisfactory credit risk at the time of conveyance of the property, the Board notes that there is no evidence to suggest otherwise. In Travelstead v. Derwinski, 1 Vet.App. 344 (1991), the Court indicated that the law requires VA to look at the facts as they existed at the time of the transfer, not after the transfer, in order to determine whether a veteran would have been entitled to a release of liability had he or she applied for it at the time of the transfer. Further, in Schaper v. Derwinski, 1 Vet.App. 430, 435 (1991), the Court noted that the laws and regulations require the Secretary to look back and make a hypothetical determination as to what decision would have been made on a release of liability request made contemporaneous with the transfer. As such, the transferees' subsequent default in this case is not a factor taken into account in arriving at that determination. The Board concludes that the transferees were creditworthy at the time they acquired the subject property in April 1987. Accordingly, the appellant is released from his liability to VA under the provisions of 38 U.S.C.A. § 3713(b) (West 1991). In view of the favorable action concerning retroactive release of liability, consideration of the issue of waiver of the loan guaranty indebtedness is rendered moot. ORDER The home loan guaranty indebtedness charged to the appellant was validly established. A retroactive release of liability under the home loan guaranty under the provisions of 38 U.S.C.A. § 3713(b) is granted. KENNETH R. ANDREWS, JR. 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.