BVA9503996 DOCKET NO. 93- 08 813 ) DATE ) ) On appeal from the decision of the Department of Veterans Affairs Regional Office in Houston, Texas THE ISSUE Waiver of recovery of loan guaranty indebtedness. REPRESENTATION Appellant represented by: The American Legion ATTORNEY FOR THE BOARD L. M. Barnard, Counsel INTRODUCTION The veteran served on active duty from May 1965 to November 1968. This appeal arises from a May 1992 decision of the Houston, Texas, Department of Veterans Affairs (VA), Regional Office (RO), Committee on Waivers and Compromises, which denied the appellant's request for a waiver of loan guaranty indebtedness in the amount of $14,324.47, plus accrued interest. CONTENTIONS OF APPELLANT ON APPEAL The appellant contends, in essence, that he did not act in bad faith when he defaulted on the loan. He asserts that he defaulted on this property because at the time of the default he was fighting for custody of his son. This entailed spending a great deal of money on legal expenses, as well as on a bigger home to accommodate his son. He also claimed that he attempted to rent the house, but was unable to keep renters who were reliable. Therefore, he alleges that he did not act in 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 appellant's folder and loan guaranty file. 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 request for a waiver of recovery of loan guaranty indebtedness may not be considered, based on a finding of bad faith on the part of the appellant. FINDINGS OF FACT 1. In February 1983, the appellant purchased a home in Pasadena, Texas, using a home loan which was guaranteed, in part, by VA. 2. The first uncured default was December 1, 1989. Foreclosure proceedings were subsequently initiated. 3. In February 1991, the property was sold at a Trustee's sale for an amount less than the unpaid balance, accrued interest, and expenses of foreclosure. 4. VA paid the lender's loan guaranty claim, and the related debt to the government, in the amount of $14,324.47 was charged to the appellant. 5. The appellant's acts of omission at the time of the default on the loan exhibit willful neglect of a contractual obligation with knowledge of the probable consequences and an intent to seek an unfair advantage that did result in 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. §§ 5107(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. §§ 5107(a), 5302 (West 1991); 38 C.F.R. § 1.964, 1.965 (1993). REASONS AND BASES FOR FINDINGS AND CONCLUSIONS The appellant is seeking waiver of recovery of loan guaranty indebtedness in the amount of $14,324.47, plus accrued interest. 38 U.S.C.A. § 5302(b) (West 1991). 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 found that the appellant's claim has been adequately developed for appellate purposes by the RO and that the undersigned may proceed to a disposition of the case. Finally, it is also found, after a careful review of the evidence, that the loan guaranty indebtedness in the amount of $14,324.47 was properly established. Schaper v. Derwinski, 1 Vet.App. 430 (1991). History of the case In February 1983, the appellant purchased a home in Pasadena, Texas for $23,500, using a mortgage 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 and Deed of Trust Note. The lender notified VA in February 1990 that the loan was in default; the first uncured default was December 1, 1989. The Notice of Default indicated that the veteran's attitude towards his default was poor. There had been no contact with appellant. All letters that had been sent to the property were unanswered and there was no phone listing for the home. In March 1990, a Notice of Intention to Foreclose was provided. This notice again stated that there had been no contact with the appellant. All correspondence had been ignored by the appellant, and messages that had been left had not been returned. Since the loan holder had been unable to make arrangements for reinstatement of the loan, foreclosure was recommended. In April 1990, VA contacted the appellant and suggested that he call to discuss the default. It was not until May 1990 that the appellant called VA. He stated that he had been unable to sell or rent the property. He apparently discussed a Deed in Lieu of Foreclosure and a compromise, and discussed his liability. However, there is no indication that any specific course of action was discussed. That same month, VA notified the lender that the default appeared to be insoluble. Therefore, liquidation action was recommended. In October 1990, the value of the property was assessed. The value was noted to be $15,550 "subject to repairs," and $13,000 "as is." A property inspection report from February 1991 stated that the home was vacant and locked. It was specifically noted that the home was not for sale. The electricity and the water had been turned off. There was trash in the yard that needed to be picked up. That same month, the property was sold at a Trustee's sale for $11,415. In March 1991, the mortgage holder filed a claim under the loan guaranty. Another property inspection report from April 1991, noted that the area where the house was located was depressed. The house itself needed painting inside and out, the paneling needed to be repaired, and the back porch was rotting, as was some of the wood around the windows. The property did not meet the minimum requirements due to settlement. The home was missing window screens, internal doors, light globes, an oven and a range. The appellant finally contacted VA in December 1991 and said that he wanted to work out a compromise. He stated that he might be able to borrow enough money to make a lump payment. On the claim for a waiver that the appellant filed in April 1992, he stated that in 1985 he had found out that his ex-wife was abusing his son, and that a costly custody fight ensued. As part of his custody bid, he moved out of the property in question and purchased a larger home in order to accommodate his son. He stated that he tried to rent the property in question, but that the rental income did not cover the monthly mortgage payments. Also, some renters failed to pay at all. He asserted that he did contact the mortgage holder at the time, but that he was told that, since the VA had guaranteed the loan, the holder did not work with individuals. Therefore, he was unable to work out a repayment plan. In May 1992, the RO's Committee on Waivers and Compromises issued a decision that found that a waiver of the indebtedness was precluded due to their finding of bad faith on the part of the appellant. Analysis A waiver of loan guaranty indebtedness 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) (1993). "Equity and good conscience" involves a variety of elements. Particular emphasis, however, is placed upon the elements of the fault of the debtor and undue hardship. 38 C.F.R. § 1.965(a)(1),(3) (1993). In essence, however, "equity and good conscience" means fairness to both the appellant and to the government. Under pertinent law and regulations, however, no debt may be waived under the standard of equity and good conscience if bad faith is found to exist. 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 unfair advantage, with knowledge of the likely consequences, and results in a loss to the government." 38 C.F.R. § 1.965(b) (1993). In general, "bad faith" implies actual or constructive fraud, or neglect or refusal to perform some contractual obligation, prompted not be honest mistake but by some interested motive. Black's Law Dictionary 139 (6th ed. 1990). 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 undersigned has carefully reviewed the evidence of record. That record reveals that VA was notified of the default in February 1990. At that time, it was noted that the appellant's attitude towards the default was "poor." It was noted that there had been no contact with him. Letters sent to the home in question had gone unanswered and there was no phone number listed for the property. The March 1990 Notice of Intention to Foreclose indicated that there had still been no response from the appellant. All correspondence had been ignored and all messages left for him had not been returned. Thus, the mortgage holder stated that they had been unable to make arrangements for the reinstatement of the loan. The first contact with the appellant was not until May 1990, when he called the RO. While he discussed the various options, such as a Deed in Lieu of Foreclosure and a compromise, no commitment to a specific course of action was made. There was then no further contact from the appellant until a letter dated December 1991. At that time, he said that he was interested in a compromise, stating that he might be able to borrow enough money to make a lump payment. There was no other reference to such a compromise by the appellant. His next contact with the RO was his request for a waiver, submitted in April 1992. In this correspondence, he alleged that he had tried to contact the mortgage holder at the time of the default, but that he had been told that, since the loan was guaranteed by VA, the holder would not work with an individual. He also indicated that he had stopped making payments on the property in question because he had to buy a larger home as part of his attempt to gain custody of his son. It is also noted that property inspection reports dated in February and April 1991 suggest that the property was deteriorating because of a period of vacancy. In fact, there had been a $10,000 drop in value since the original purchase by the appellant. The property was noted to be settling. The back porch and the wood around the windows was rotting. Internal doors, window screens, light globes, and the oven and the range were missing. By April, it was stated that the property did not meet minimum property requirements due to settling. It is the finding of the undersigned that the appellant has demonstrated bad faith in connection with this default. He stopped making mortgage payments without good reason and made no attempt to mitigate the loss to the government. In fact, the lender noted his poor attitude toward rectifying the situation. While the appellant alleged that the lender refused to work with him, the objective evidence reveals that the opposite is true. Both the Notice of Default and the Notice of Intention to Foreclose indicate that the appellant refused to respond to correspondence concerning his default sent to him by the lender. Additionally, he provided no information at the time of the default as to his employer or his monthly income and obligations, thus demonstrating his intent to avoid his obligation to repay this debt. Moreover, the appellant apparently simply vacated the property, without any attempt made to sell it. While he alleges that he rented the property he still did not offer to cure the default by working out a plan with the lender. The amount of deterioration noted by February and April 1991 suggests that the property had been empty for quite some time, which is also suggested by the radical loss of value of the home. The appellant also asserted in April 1992 that he had defaulted after incurring expenses as part of the legal battle to secure custody of his son. However, he has submitted no objective evidence of these expenses or of the circumstances that were beyond his control and directly led to default. When the defaulted he must have known that foreclosure would follow. The financial status report from April 1992 showed that he had cash in the bank, had bonds, and owed no debts to other creditors. Finally, it is noted that the appellant called once in May 1990 and discussed the various options available to avoid the indebtedness. However, no specific commitment was made, and there is absolutely no indication that any further contact was made in order to pursue any of the noted options. Apparently, the appellant decided the property was no longer large enough for his needs, and he simply "walked away" from his obligation. The evidence of record does not establish that the default was beyond the control of the appellant. Because of the finding of bad faith, the standard of equity and good conscience, including the element of financial hardship, is not for consideration. ORDER Waiver of recovery of loan guaranty indebtedness is denied. 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.