Citation Nr: 0000755 Decision Date: 01/10/00 Archive Date: 01/19/00 DOCKET NO. 96-31 682A ) DATE ) ) On appeal from the Department of Veterans Affairs Regional Office in Houston, Texas THE ISSUE Waiver of recovery of loan guaranty indebtedness in the amount of $14,487.47 plus accrued interest. WITNESSES AT HEARING ON APPEAL Appellant and spouse ATTORNEY FOR THE BOARD Jeanne Schlegel, Associate Counsel INTRODUCTION This appeal comes from an April 1996 decision of the Committee on Waivers and Compromises (COWC) of the Department of Veterans Affairs (VA) Regional Office in Houston, Texas (the RO) which denied the appellant's request that VA loan guaranty indebtedness in the original amount of $14,487.47, plus accrued interest thereon, be waived. The RO determined that the appellant had demonstrated bad faith with respect to the creation of the loan guaranty debt. The appellant and his spouse testified at a personal hearing held before the undersigned Board member at the RO in April 1999. In June 1999, this case was remanded in order for the RO to apply Richards v. Brown, 9 Vet. App. 255, 257 (1996) which had been decided subsequent to the RO's decision in this case. In August 1999, the RO issued a Supplemental Statement of the Case which found that the appellant had not demonstrated bad faith. Waiver of the charged loan guaranty indebtedness was denied based on equity and good conscience. The case was thereupon returned to the Board. FINDINGS OF FACT 1. In May 1982, the appellant and his spouse purchased a home in Houston Texas, using a home loan which was guaranteed, in part, by VA. 2. The appellant defaulted on his home loan payments in July 1984 and although several unsuccessful attempts to contact the appellant and cure the situation were made by the lender and VA, foreclosure proceedings were initiated. 3. The property was sold at a foreclosure sale for an amount less than the unpaid principal balance, accrued interest, and foreclosure expenses. In June 1985, the lender filed a claim under the loan guaranty, which was satisfied by VA. 4. Indebtedness in the amount of $19,802.65 plus interest was subsequently charged to the appellant as loan guaranty indebtedness to the VA. Installment payments on the account which were made starting in 1989 and which were subsequently stopped, reduced the debt to $14,487.47 plus interest. 5. Recovery of the total amount of the indebtedness, $14,487.47 plus interest, would not result in undue hardship and is not contrary to considerations of equity and good conscience. 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) (1999). 2. There is no showing of bad faith on the part of the appellant in the creation of the loan guaranty debt and no statutory bar to a waiver of the loan guaranty indebtedness. 38 U.S.C.A. § 5302 (West 1991); 38 C.F.R. §§ 1.964, 1.965(b)(2) (1999). 3. Recovery of the loan guaranty indebtedness in the amount of $14,487.47 plus accrued interest would not be against equity and good conscience. 38 U.S.C.A. § 5302 (West 1991); 38 C.F.R. §§ 1.964, 1.965(a) (1999). REASONS AND BASES FOR FINDINGS AND CONCLUSIONS The appellant is seeking to preclude recovery of VA loan guaranty indebtedness in the amount of $14,487.47, plus accrued interest. In the interest of clarity, the Board will initially review the factual background of this case; then review the relevant law and regulations; and finally analyze the claim and render a decision. Preliminary Matters Initially, the Board finds that the appellant has presented a well-grounded claim. 38 U.S.C.A. § 5107(a) (West 1991) and Murphy v. Derwinski, 1 Vet. App. 78 (1990). Further the Board finds that VA statutory duty to assist the appellant in the development of his claim has been satisfied. When there is an approximate balance of positive and negative evidence regarding the merits of an issue material to the determination of the matter, the benefit of the doubt in resolving each such issue shall be given to the claimant. 38 U.S.C.A. § 5107(b); 38 C.F.R. § 3.102 (1999). In Gilbert v. Derwinski, 1 Vet. App. 49, 53 (1990), the United States Court of Appeals for Veterans Claims (Court) stated that "a veteran need only demonstrate that there is an "approximate balance of positive and negative evidence' in order to prevail." To deny a claim on its merits, the evidence must preponderate against the claim. Alemany v. Brown, 9 Vet. App. 518, 519 (1996), citing Gilbert, 1 Vet. App. at 54. The United States Court of Appeals for the Federal Circuit has recognized the Board's "authority to discount the weight and probity of evidence in light of its own inherent characteristics and its relationship to other items of evidence." Madden v. Gober, 125 F.3d 1477, 1481 (Fed.Cir. 1997). Factual Background In May 1982, the appellant and his spouse purchased a house in Houston, Texas, using a mortgage loan in the amount of $65,000.00 which was guaranteed, in part, by VA. The property was secured by a Deed of Trust and Deed of Trust Note. The initial mortgage payment was due in July 1982. In October 1984, the RO received a Notice of Default from the mortgage holder indicating that the appellant had ceased making loan payments starting in July 1984. According to the mortgage holder, the appellant had not contacted them and had not responded to five letters and notices sent from July to September 1984. The reason for the default was listed as unknown, due to lack of contact with the mortgagor. A visit to the property revealed that it appeared to have been vacant and that there was a sign in the window indicating that the property was for sale by owner. The notice also showed that there was no phone number listed for the for the mortgagor and that no future payments were expected and that accordingly, foreclosure proceedings would be initiated. A Notice of Intention to Foreclose was issued in October 1984. In November 1984, the RO contacted the appellant and advised him that he could contact the RO for assistance or advice; however, apparently no reply was received. A foreclosure appraisal report dated in January 1985 showed that the reasonable value of the property in February 1982 was $65,000.00 and that the reasonable value of the property in January 1985 was $63,700.00. The devaluation of the property was attributed to market depreciation, and there was no indication that it was caused by disrepair. In February 1985, the RO wrote to the appellant, notifying him of pending foreclosure and requesting that he contact the lender and/or take steps to prevent foreclosure. There is no indication in the record that the appellant responded to this communication or otherwise attempted to contact VA during the period of default and foreclosure. In April 1985, a Notice of Acceleration and Intent to Foreclose was issued to the appellant and his spouse by a law firm retained by the lender to collect the debt. The property was sold at a foreclosure sale in May 1985 for an amount less than the unpaid principal balance plus accrued interest and foreclosure expenses. In June 1985, the mortgage holder filed a claim under the VA loan guaranty, which was satisfied by VA. In March 1986, the appellant was informed that he owed VA $19,787.47 under the loan guaranty. In April 1986, the appellant contacted VA by letter, stating that the loan default took place because "[w]e simply got in over our heads and could not make it." He indicated that since he and his spouse had left the house they had paid off several bank notes and credit card charges which were making it impossible to meet the demands of the home. Also submitted in April 1986 by the appellant was a copy of a letter which was sent from the appellant to the mortgage company in November 1984. Therein the appellant indicated that he and his spouse were no longer able to afford their home. The letter stated that unsuccessful attempts to sell the house had been made through two different real estate agencies and five newspaper ads. The appellant opined in the letter that the reason that the house failed to sell was because the builder of that home had lower the price of the same model new houses by $10,000.00 and more and that several features had also been added. Also of record is a copy of a listing agreement showing that the appellant and his spouse had enlisted the assistance of a real estate company in September 1983 to sell the house A financial status report (FSR) was also submitted by the appellant in April 1986. He indicated that he was employed as a police officer and that his spouse was employed as a credit union employee. It was reported that the appellant and his spouse had 3 dependents aged 15, 16, and 17. The appellant's total monthly net income was listed as $1,746.76 and the monthly net income of his spouse as $1433.42, for a total combined monthly net income of $3,180.18. Total monthly expenses were listed as $3,149.89, including $550.00 for rent; $400.00 for food and gasoline; $270.00 for utilities and heat; $35.00 for telephone; $20.73 for insurance; $100.00 for clothing; $50.00 for medical expenses; $575.00 for other living expenses; and approximately $1,150.00 in installment contracts. Included in the appellant's assets were 3 cars, two of which were purchased 1983 and 1986 with a total approximate value of $13,000.00. The FSR also showed that the appellant purchased a timeshare in 1983, resulting in a $4,000.00 debt and a second timeshare in 1985 resulting in a $7000.00 debt. It did not appear that any of the appellant's installment debts were past due. The difference between the combined monthly net income and expenses was $30.29. He indicated that he could pay $10.00 a month in satisfaction of the debt to the VA. In a February 1987 decision, the COWC denied the appellant's request for a waiver of the charged indebtedness in the amount of $19,802.65 plus interest, based upon a finding of bad faith on the part of the appellant, and thereby precluding the grant of a waiver. The appellant did not appeal that decision. It appears that subsequently, a payment schedule was worked out and the appellant paid down the debt in the amount of approximately $4,800. In February 1996, the appellant's spouse requested that waiver of the indebtedness be considered again, indicating that the appellant suffered from health problems and could no longer work. She indicated that payments had been made on the debt since 1989, but that she could no longer afford to make payments on her salary alone. She indicated that the appellant had applied for Social Security benefits. In April 1996, an updated FSR was submitted which showed that the appellant was permanently disabled from September 1995 and that his spouse was employed as a credit union employee. It was reported that the appellant and his spouse had 2 dependents, their grandchildren, aged 8 and 10. The appellant's total monthly net income, largely consisting of disability compensation, was listed as $1,581.11 and the monthly net income of his spouse was shown as $1959.84, for a total combined monthly net income of $3,540.95. Total monthly expenses were shown as $3521.91, including $573.00 for rent; $1000.00 for food; $300.00 for utilities and heat. Other living expenses including totaled $589.00, including $369.020 for car and life insurance; $100.00 for gasoline and 100.00 for babysitting. Approximately $1,221.00 in monthly installment contract debt was listed including a debt of $20,000.00 in 1985 which was for the purpose of home improvements. It was noted that some medical costs could not be estimated and were not included. The appellant's assets included 2 cars, of model years 1991 and 1994 with a total approximate value of $21,000.00. Approximately $1700.00 cash on hand and in the bank was listed. Real estate owned was valued at $90,000. The total assets amounted to $112,700. The difference between the combined monthly net income totaled as $3540.95 and expenses totaled as $3521.91 was $19.04. In the April 1996 COWC decision which is being appealed, it was determined that there was evidence of bad faith on the appellant's part because: (1) he knew, or should have known, that decisions he made, including the purchase of three timeshares, caused him to be overextended financially; (2) he failed to cooperate with the lender and with VA concerning the default; and (3) he abandoned the property and did not provide VA with a forwarding address or telephone number. Waiver of the charged loan guarantee indebtedness was therefore denied. In his August 1986 Appeal to the Board, the appellant contended that he had tried to sell the property prior to vacating it, but had been unsuccessful. He further contended that he had contacted VA "at least 6 times . . . and were told that they . . . could not help us." The appellant denied being contacted by VA prior to the foreclosure. The appellant also referred to his health and financial problems. The appellant and his spouse testified at a personal hearing before the undersigned Board member at the RO in April 1999. The appellant's spouse testified that she was unemployed in 1984 at the time of the default resulting in a $25,000 - $30,000 decrease in income and that she had four children to support. The appellant and his spouse stated that they contacted the VA when they could not make payments but were offered no assistance or advice. The appellant's spouse testified that the mortgage company was contacted but that they were not able to offer assistance and she indicated that they left the house in September 1994. In June 1999, the case was remanded for readjudication in light of the decision made by the Court of Appeals for Veterans Claims (Court) in Richards v. Brown, 9 Vet. App. 255, 257 (1996). As indicated previously, in its April 1996 decision, which was made pre-Richards, the COWC determined that there was bad faith on the part of the appellant in the creation of the charged indebtedness. The RO's basis for its finding of bad faith on the appellant's part based on findings that (1) he failed to communicate/cooperate with the lender and with VA; (2) he abandoned the property; and (3) he overextended his finances through purchases of items such as timeshares, thus leading to default and foreclosure. It was concluded in that determination that the appellant's actions "are deemed to be representative of a willful intention to neglect or refuse to fulfill his contractual obligations pursuant to the terms of the VA guaranteed loan." However, under Richards "bad faith" was defined exclusively as "unfair or deceptive dealing by one who seeks to gain thereby at another's expense. A debtor's conduct in connection with a debt arising from participation in 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." See 38 C.F.R. § 1.965(b) (1997); Richards v. Brown, 9 Vet. App. 255, 257 (1996). Essentially, therein the Court held that the operative language in 38 C.F.R. § 1.965(b)(2) limited bad faith to cases in which there was an intent to seek an unfair advantage. Prior to the Richards decision, a determination of bad faith could also have been predicated on a mere negligent failure to fulfill a duty or contractual obligation; however, in Richards it was held that this could not be an appropriate basis for a bad faith determination. Richards, 9 Vet. App. at 257. Accordingly, the April 1996 COWC determination was contrary to the Court's subsequent holding in Richards and therefore the claim was remanded for re-adjudication in order to apply that holding. In the August 1999 Supplemental Statement of the Case, the COWC determined that bad faith had not been shown, applied the considerations of equity and good conscience, and determined that a waiver of the debt was not warranted. Analysis Before discussing the question of entitlement to a waiver of the charged loan guaranty indebtedness, focusing on the standard of equity and good conscience, the Board will briefly deal with several preliminary matters. Creation of the debt The appellant does not contend, and the record does not show, that the debt in this case was not validly incurred. There is no question that the appellant defaulted on his mortgage loan, and that the required procedures for foreclosure were followed. The Board finds that the loan guaranty indebtedness was properly established. See Schaper v. Derwinski, 1 Vet. App. 430 (1991). Fraud, misrepresentation or bad faith Since the Board reviews cases on a de novo basis, the Board must also review the August 1999 COWC's finding that there was no evidence of fraud, misrepresentation, or bad faith on the part of the appellant. If there is an indication of fraud, misrepresentation or bad faith in the creation of indebtedness, waiver of the debt is automatically precluded, and further analysis is not warranted. 38 U.S.C.A. § 5302; 38 C.F.R. § 1.964. The Court has held that the Board must independently address this preliminary consideration before addressing whether waiver would be appropriate under the applicable criteria of 38 C.F.R. § 1.965(a). See Ridings v. Brown, 6 Vet. App. 544 (1994). Having independently reviewed the evidence of record the Board in light of the applicable regulation 38 C.F.R. § 1.965(b) (1999); and the decision made in the case of Richards v. Brown, 9 Vet. App. 255, 257 (1996), the Board does not find any evidence of fraud, misrepresentation, or bad faith on the part of the appellant. Considerations of equity and good conscience Waiver of loan guaranty indebtedness may be authorized if collection of the debt would be against equity and good conscience. 38 U.S.C.A. § 5302(b); 38 C.F.R. § 1.964. In essence, "equity and good conscience" means fairness to both the appellant and to the government. "Equity and good conscience" involves a variety of elements. The elements to be considered are 1) fault of the debtor; 2) balancing of faults; 3) undue hardship; 4) defeat the purpose; 5) unjust enrichment; and 6) changing position to one's detriment. 38 C.F.R. § 1.965. The list of elements contained in the regulation is not, however, all inclusive. See Ridings v. Brown, 6 Vet. App. 544, 546 (1994). By "fault of the debtor" is meant the actions of the debtor which contributed to creation of the debt. 38 C.F.R. § 1.965(a)(1). The evidence reflects that the appellant's first mortgage payment was due in July 1982 and the last payment was made in July 1984, leading to foreclosure. In assessing the matter of fault with respect to the issue of waiver of overpayment, clearly, under the facts presented, it is clear that the appellant failed to make mortgage payments for a number of months, despite being contractually obligated to do so. In the appellant's favor there is evidence of record that an attempt to sell the property was made prior to foreclosure and that the property was maintained in good condition. However, the evidence also shows that the appellant and his spouse financially overextended themselves after the purchase of the property for which a VA loan had been secured, that they did not respond to attempts to reach them by VA and the lender in order to discuss the situation, and that they incurred a significant amount of debt after the default. Although the appellant and his spouse have indicated that the VA and the mortgage company were contacted prior to foreclosure in order to try to receive assistance, the record reflects that according to the mortgage holder, the appellant had not contacted them and had not responded to five letters and notices sent from July to September 1984. Further, there is no record of any contact with VA prior to foreclosure. There is of record correspondence from VA dated in November 1984 offering to assist the appellant; this letter appears to have been generated in response to the notice of default and notice of intention to foreclose generated by the lender rather than any effort on the part of the appellant to contact the RO. Furthermore, and significantly, the record reflects that the appellant incurred additional debt in 1983 in order to purchase both a timeshare and an automobile. In mid-1984, the couple then chose to stop paying the mortgage on the house. The record further reflects that in 1985, having already defaulted on the loan, the appellant purchased a second timeshare. The evidence also reflects as shown in an April 1996 FSR, that in 1985 the appellant also became indebted in the amount of $20,000 for a home improvement loan. The Board is of course aware of the testimony of the appellant and his spouse concerning financial problems they were experiencing at the time of the default on their mortgage problems in mid-1984 [see the April 1999 hearing transcript, pages 4-7]. However, it is clear that such financial difficulties were due, at least in part, to overextension of the part of the appellant. Such actions on the appellant's part clearly contributed to the creation of the loan guaranty indebtedness. In addition, the record indicates that the lender and the RO repeatedly attempted to contact the appellant, with no response. The Board accordingly concludes that the appellant's lack of cooperation constituted fault which led to the creation of the loan guaranty indebtedness. Accordingly, the appellant was at fault in the creation of the debt. With respect to a balancing of faults, the fault of the appellant is as described above. The VA, on the other hand, has carried out its responsibilities as prescribed by law. The VA notified the appellant in a timely fashion at every step of the process and cooperated with the lending institution. Foreclosure appears to have been accomplished with minimal delay. The appellant and his spouse have argued that when he approached the VA prior to foreclosure they received no assistance to help prevent foreclosure. This is not reflected in the evidence of record, which does not show that VA was contacted by the appellant prior to foreclosure and does show that VA was willing to work with the couple to prevent foreclosure. After reviewing the record on appeal, the Board can find no indication that the action or inaction of the VA contributed in any way to the loss of the property, nor has the appellant pointed to any such actions on the part of VA which would outweigh his own actions in this matter. The third element to be considered is "undue hardship," described as "[w]hether collection would deprive debtor or family of basic necessities." 38 C.F.R. §1.965(a)(3). In April 1996, the most recent FSR of record was received listing net monthly income of $3,540.95 and monthly expenses of $3,521.91, leaving a positive balance of $19.04. The monthly expenses included estimates for food, housing and utilities in the amount of $1,873.00. The Board finds that the monthly expenses for food, estimated as $1,000.00 a month, to be excessive for a family of two adults and two dependents aged 8 and 10. An estimate of $500.00 to $600.00 a month would not deprive a family of four or even nearly so of adequate sustenance. The Board is also puzzled with respect to the $100 spent monthly for babysitting, since the appellant is permanently disabled and does not work. Presumably, he would be available for babysitting duties. The monthly expenses also included installment contracts and other debts in the amount of approximately $1221.00, which included medical and insurance payments, as well as payments made on an automobile and for consumer credit debt on a car and a truck. The FSR showed that the installment debts included making payments on a sizable home improvement loan, a debt which was initially incurred in 1985, just one year following the appellant's default on the VA loan, despite the fact that he was well aware of his indebtedness and potential obligation to repay the VA in the amount of over $14,000.00. The Board wishes to emphasize that the appellant undertook a legal obligation to repay VA in the event of a default on the guaranteed loan. He cannot relieve himself of that obligation by subsequently burdening himself with installment consumer debt for non-necessary items. The Board wishes to stress that the appellant owes his government at least as much deference as he does to his other creditors. The appellant is reminded of this fact particularly in light of the statement submitted by the appellant in April 1986, in which he indicated that since he and his spouse had left the house (and defaulted on the loan), they had paid off several bank notes and credit card charges which "were making it impossible" to meet the demands of the home loan. The financial information also indicated that the appellant has assets totaling over $112,000.00, including $90,000 in real estate and two automobiles worth $21,000. Based on the above evidence, the Board has concluded that there is at least $250 available each month to repay the indebtedness to VA, if the household expenditures, including food expenses and installment indebtedness, were carefully monitored. Thus the evidence of record does not indicate that the appellant cannot repay the entire amount of the loan guaranty indebtedness without financial hardship with prudent budgeting and if he is allowed to make payments in monthly installments over a period of five years. See 38 C.F.R. § 1.917. The fourth element to be addressed is whether recovery of the overpayment would defeat the purpose for which the benefits were intended. 38 C.F.R. § 1.965(a)(4). There is no indication contained in the record that recovering the loan guaranty debt owed to the VA would in any way defeat the purpose of the laws and regulations providing home loan guaranty entitlement to veterans. This principle is thus inapplicable to this case. The fifth element to be considered is "unjust enrichment," which means that failure to make restitution would result in unfair gain to the appellant. See 38 C.F.R. § 1.965(a)(5). As noted above, in both the year prior to and subsequent to the default the appellant purchased timeshare properties and in both 1983 and 1986 automobiles were purchased. To allow retention of money owed to the Federal government under such circumstances would result in an unfair gain to the appellant and would result in unjust enrichment. The sixth element to be considered is whether reliance on VA benefits resulted in the veteran relinquishing a valuable right or incurring a legal obligation. 38 C.F.R. § 1.965(a)(6). The appellant has not claimed that he relinquished any right or incurred any legal obligation or that he relied upon the VA to his detriment, nor do the facts show such. The Board has identified no additional factors which should be considered in adjudicating the claim for a waiver of the indebtedness. The Board notes that the appellant's spouse has indicated and the evidence shows that the appellant's health is ailing and that this fact should be considered. Although the Board is sympathetic to this fact it does not provide an excuse from the debt incurred, even if the appellant is not currently working. Moreover, even though he is not able to work, the most recent FSR dated in 1996 revealed that he receives a fairly sizable monthly disability benefits. In summary, having reviewed the entire record, and for the reasons and bases discussed above, the Board is of the opinion that the preponderance of the evidence is against the appellant's claim. Gilbert v. Derwinski, 1 Vet. App. 49, 57 (1990). Considerations of equity and good conscience, which is intended to reach a result that is not unduly favorable or adverse to either the claimant or the Government, dictate that a waiver of the debt is not warranted. The Board believes that recovery of the entire debt would clearly not deprive the appellant and his spouse of basic necessities, or create undue hardship, if payments of approximately $250 are made over a five year period. Accordingly, the standard of equity and good conscience calls for repayment of the entire amount of the loan guaranty indebtedness in the amount of $14,487. 47, plus accrued interest thereon. ORDER Waiver of recovery of loan guaranty indebtedness is denied. Barry F. Bohan Member, Board of Veterans' Appeals