BVA9501785 DOCKET NO. 93-01 249 ) DATE ) ) On appeal from the decision of the Department of Veterans Affairs Regional Office in Pittsburgh, Pennsylvania THE ISSUE Recovery of the loan guaranty indebtedness. REPRESENTATION Appellant represented by: Disabled American Veterans ATTORNEY FOR THE BOARD Michael A. Pappas, Associate Counsel INTRODUCTION The appellant had active service from July 1953 to November 1955. He is a service-connected disabled veteran, currently evaluated as 100 percent disabled. This matter came before the Board of Veterans' Appeals on appeal from a decision on waiver of indebtedness of the Department of Veterans Affairs (VA) Pittsburgh, Pennsylvania, Regional Office's Committee on Waivers and Compromises (RO). We note that the appellant's loan guaranty indebtedness was originally established in January 1989 in the amount of $9,316.42, plus accrued interest. Following a supplemental claim, the indebtedness was revised in June 1989 to $9,696.42, plus accrued interest. In their initial determination on waiver of indebtedness in September 1989, the RO denied a waiver based upon a finding that the appellant was materially at fault in the creation of the debt. That decision was not timely appealed and became final. Collection of the indebtedness ensued through the partial withholding of the appellant's disability benefits. Effective December 18, 1989, 38 U.S.C.A. § 3102 (1989) [now 38 U.S.C.A. § 5302 (West 1991)] was revised by the Veterans' Benefits Amendments Act of 1989, Public Law 101-237. The elements of "fraud, misrepresentation, or bad faith" replaced "material fault or lack of good faith" as elements which automatically preclude the granting of a waiver. Thereafter, the appellant requested a reconsideration of the RO's prior denial. The amount of the indebtedness then existing, $5,877.42, plus accrued interest, became the subject of the waiver reconsideration. As explained in a February 1991 statement of the case, the decision of the RO established no finding of fraud, misrepresentation, or bad faith; nevertheless a waiver was denied based upon a determination that the appellant was at fault in the creation of the debt, there was no fault on the part of the VA, and that the collection of the indebtedness would not cause the appellant undue financial hardship. Essentially, it had been found that collection of the indebtedness would not be against the principles of "equity and good conscience." It is this decision that is currently on appeal to the Board. The appeal was received and docketed at the Board in January 1993. The appellant has been represented throughout his appeal by Disabled American Veterans. That organization submitted additional argument to the Board in April 1993, and the case is ready for appellant review. In December 1992, the appellant, through his local representative, expressly challenged the validity of the loan guaranty indebtedness by the assertion of a defense based upon lack of notice and due process. It was claimed that in January 1988, the appellant had informed the VA of his move to Florida and his change of address, and that the notice of his default and of the subsequent foreclosure were not provided to him at that new address. In the summary of evidence contained within the February 1991 statement of the case, the RO indirectly considered the issue. Although, the RO did not formally conclude in their decision that lack of notice was not an appropriate defense to the collection of the debt, their findings of fact provide a sound basis for such a conclusion. Essentially, the appellant has invoked the principles of United States v. Whitney, 602 F.Supp. 722 (W.D.N.Y. 1985). Whitney involved the attempted enforcement of collection of a loan guaranty indebtedness from a veteran who had sold certain real property used as security for the VA guaranteed loan to a third party four years prior to the foreclosure action. The veteran in Whitney was not in title to the property, was not the defaulting party, and was not made a party to the foreclosure as required by New York state law. The case before the Board is clearly distinguishable. At the time of the initial default in December 1987, the appellant was the record owner and still in title to the subject property; as such, he must be considered the defaulting party with actual knowledge of the default. On February 5, 1988, the note holder provided to the appellant proper statutory notice of their intention to foreclose, together with an offer of homeowner's emergency mortgage assistance. A review of the record establishes that on February 16, 1988, the appellant signed a certified return receipt, acknowledging the receipt of such documents from the note holder. Further, the legal action initiated by the note holder in April 1988 was a Complaint in Mortgage Foreclosure. It was certified in the Complaint that the appellant was served at his last address known to the note holder, that of the subject property. The judicial foreclosure itself appears to have been properly conducted under the auspices of state court review, and a judgment was entered against the appellant. In light of the foregoing, the Board finds that the appellant's challenge to the validity of the debt based upon the assertion of lack of notice or due process is not well-grounded. Accordingly, the Board limits its review to the issue of waiver of recovery, as shown in the initial page of this decision. CONTENTIONS OF APPELLANT ON APPEAL The appellant asserts that the RO committed error in denying his request for a waiver of recovery of his loan guaranty indebtedness since he was not at fault in its creation, and the insistence upon his repayment of the indebtedness would create a severe financial hardship. The appellant, through his authorized representative, specifically alleges that, because of the nature of his service-connected disability, a severe neuropsychiatric disorder, he could not fully appreciate the circumstances that led to his foreclosure. He asserts that because he did not trust anyone in the Pittsburgh area, he moved away from the subject property to Florida in order to obtain treatment for his condition. Thereafter, he was never informed of the initial foreclosure action on the VA guaranteed loan. Ostensibly, because of this lack of notice, he could not take the requisite steps to rectify that problem. Consequently, he should not be considered at fault and the debt should be waived. With respect to his financial status, the appellant simply contends that the collection of the indebtedness through the withholding of his VA disability compensation benefits would result in an 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 appellant's claims 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 the preponderance of the evidence is against the appellant's request for a waiver of recovery of his loan guaranty indebtedness in the amount of $5,877.42, plus accrued interest. FINDINGS OF FACT 1. All relevant evidence necessary for an equitable disposition of the appellant's appeal has been obtained by the RO. 2. There was a default in the appellant's VA guaranteed loan necessitating a foreclosure sale of the subject property, resulting in the appellant's loan guaranty indebtedness of $9,696.42, plus accrued interest. At the time of the appellant's request for the reconsideration of his waiver request under the Veterans' Benefits Amendments Act of 1989, Public Law 101-237, his indebtedness had been reduced to $5,877.42, plus accrued interest, through the partial withholding of his disability benefits. 3. The appellant was not without fault in the creation of the loan guaranty indebtedness. The appellant's fault was only partially reduced because of his neuropsychiatric disorder. The appellant failed to act in mitigation of his fault. 4. The appellant would be unjustly enriched if a waiver of recovery of his loan guaranty indebtedness were granted. 5. The appellant's income, with consideration of the costs of life's basic necessities, is sufficient to permit repayment of his loan guaranty indebtedness without resulting in excessive financial difficulty, and repayment of that indebtedness would not be inequitable. 6. Requiring the appellant to repay his loan guaranty indebtedness will not defeat the purpose of the award of disability compensation benefits to the appellant. CONCLUSIONS OF LAW 1. There was a loss after default of the property which constituted the security for the loan. 38 U.S.C.A. §§ 5107(a), 5302 (West 1991); 38 C.F.R. § 1.964(a) (1993). 2. Recovery of the appellant's loan guaranty indebtedness, in the amount of $5,877.42, plus accrued interest, would not violate the principles of equity and good conscience. 38 U.S.C.A. §§ 5107(a), 5302; 38 C.F.R. § 1.965(a) (1993). REASONS AND BASES FOR FINDINGS AND CONCLUSIONS The appellant's claim is "well grounded" within the meaning of 38 U.S.C.A. § 5107(a). That is, he has presented a claim which is not inherently implausible. The Board is also satisfied that all relevant facts have been properly developed. No additional assistance to the appellant is required to comply with the duty to assist mandated by 38 U.S.C.A. § 5107(a). Factual Background The documentary evidence before the Board supports the following factual summary: In May 1987, the appellant purchased a home in Pittsburgh, Pennsylvania from [redacted] for $27,500.00, utilizing a 9.5 percent VA guaranteed loan in the amount of $27,000.00, expending $1,107.30 in the transaction. [Redacted] netted $25,747.72 in cash from the sale. Monthly mortgage payments, including principal, interest, tax, and insurance were projected to total $294.75. In conjunction with the purchase of the property, the appellant executed a VA Application for Home Loan Guaranty, VA Form 26-1802a. In that document, he certified and agreed to repay the VA any claim which VA would be required to pay the note holder on account of default under the terms of the loan. He also acknowledged that he was aware that he would not be relieved from his indemnity obligation to the VA unless a creditworthy appellant was found to assume the loan and substitute his entitlement for the appellant's. Coincidentally, he indicated that [redacted] was his nearest living relative. In qualifying for the loan, the appellant's gross monthly income was reported to be $1,355, derived exclusively from VA disability compensation. He reported assets totaling $11,033, and liabilities totaling $3,125. At the time of the purchase, the appellant was service connected for a neuropsychiatric disorder, "schizophrenic reaction, paranoid type." As recently as November 1986, he had been adjudicated competent, and a 100 percent disability rating had been confirmed and continued. The appellant first defaulted on the subject loan with the October 1, 1987 payment. By November 18, 1987, he was two months' delinquent. The note holder contacted his mother, who indicated that he had left for Florida two months prior. She was apparently able to contact the appellant who then entered into a reinstatement plan. On December 1, 1987, he directed an initial payment to the note holder covering the prior two month arrearage, but he failed to follow through on the second payment in the plan one month later. The first uncured default on the loan occurred with the December 1, 1987 payment. On January 7, 1988, the appellant executed a request for direct deposit of his VA disability benefits payment into an existing bank checking account at a bank in Florida. He listed his address in Cocoa Beach, Florida. The request was received by the VA on January 19, 1988. A Notice of Default was issued by the note holder to the VA on February 5, 1988. It indicated that the appellant was in default on his VA guaranteed loan, and that he continued to occupy the subject property. The monthly mortgage payments for principal, interest, tax, and insurance was noted to be $273. The reason given for the default was the appellant's "disregard for obligation." It was noted that a "broken reinstatement letter" had been sent to the appellant on January 14, 1988, and that "Notice of intent to foreclose and Act 91 letters" were sent to the appellant on February 5, 1988. The appellant's attitude toward the default was considered unconcerned. In fact, on February 5, 1988, the note holder did send the appellant two letters addressed to the subject property. One was headed as a "Notice of Intention to Foreclose," while the other was headed "Important: Notice of Homeowner's Emergency Mortgage Assistance Act of 1983." The essence of these letters was to provide the appellant with notice that he was in serious default on the subject loan, that the note holder had the intention to foreclose, and that he had several options that he could pursue, if done within 30 days. On February 18, 1988, the appellant signed a "return receipt" acknowledging the receipt of certified correspondence that had been directed to him by the note holder on February 5, 1988. It must be presumed that the foregoing letters were contained within the certified correspondence in question. On February 25, 1988, following numerous attempts to telephone the appellant, the VA directed him a letter, addressed to the subject property. It indicated that the VA had been informed by the note holder that they were proceeding with foreclosure. It offered assistance to the appellant in protecting his interest. A Complaint in Mortgage Foreclosure was filed by the note holder's attorney in April 1988. The appellant was named as the defendant in the judicial action. In May 1988, the note holder contacted the VA to inform them that, despite numerous attempts, there had been absolutely no contact with, or response from, the appellant. Certified mail had been returned and his telephone had been disconnected. A liquidation appraisal of the property was made in September 1988; the home was valued in "as is" condition at $24,500. A foreclosure sale of the subject property was held in October 1988. Following the sale, the VA acquired the subject property for the specified bid amount of $21,900.00. Subsequently, the VA paid the note holder on the loan guaranty, and a loan guaranty indebtedness of $9,316.42, plus accrued interest, was established. Following a supplemental claim, the indebtedness was revised in June 1989 to $9,696.42, plus accrued interest. The appellant was notified of his indebtedness in January 1989; collection of the indebtedness was initiated by the VA through the withholding of a portion of the appellant's disability compensation. In March 1989, the appellant requested a waiver, and the withholding was temporarily suspended. Pursuant to his application for a waiver request, in July 1989, the appellant filed a financial status report. He reported that he was unemployed and received income solely from VA compensation benefits. He indicated that he was divorced with no dependents. The appellant reported a monthly net income of $1,468. He reported his monthly expenses totaled $1,164. After payment of monthly expenses, a net balance of $304 resulted. He indicated that he could apply $100 towards the VA loan guaranty indebtedness. He reported assets with a total value of $275. His reported debts totaled $15,800. He indicated that he was in arrears for the full amount of all debts. The VA loan guaranty indebtedness was not included in his list of debts. On December 21, 1988, the appellant underwent a special VA psychiatric examination in which schizophrenia, chronic, paranoid type, was diagnosed. It was noted that the appellant appeared "to have a good sense of resources available to him through his family, and was able to utilize these moderately well." "However, some slight evidence of difficulties in logic and reasoning were apparent in the appellant's explanation or lack of adequate explanation for many of his approaches to his problems (i.e., his travels to Florida for treatment.)" Although no referenced to his competency was made, a February 1989 rating decision confirmed and continued the prior disability rating of 100 percent. In November 1988, the VA was able to resell the subject property for the sales price of $24,960.00. In November 1990, the appellant filed a financial report, detailing his expenses. He reported that his income was $1,287, per month, derived solely from VA compensation benefits. He indicated that he had no dependents. He reported his monthly expenses totaled $1,161, including a total of $425 for housing, $136 for utilities, and $600 for food. After payment of monthly expenses, a net balance of $126 resulted. He claimed to have expenses of $480 per year to the pharmacy. Analysis The law and regulations authorize a waiver of collection of a loan guaranty indebtedness from an appellant where he has been found to be free from fraud, misrepresentation, or an indication of bad faith, and both of the following factors are found to exist: (1) After default there was a loss of the property which constituted security for the loan, and (2) collection of the indebtedness would be against equity and good conscience. 38 U.S.C.A. § 5302(b); 38 C.F.R. § 1.964(a). The standard "equity and good conscience" will be applied when the facts and circumstances in a particular case indicate a need for reasonableness and moderation in the exercise of the Government's rights. The decision reached should not be unduly favorable or adverse to either side. The phrase "equity and good conscience" means arriving at a fair decision between the obligor and the Government. In making this determination, consideration will be given to the following elements, which are not intended to be all- inclusive: (1) The fault of the debtor, (2) balancing of faults between the debtor and the VA, (3) undue hardship of collection on the debtor, (4) a defeat of the purpose of an existing benefit to the veteran, (5) the unjust enrichment of the veteran, and, (6) whether the veteran changed positions to his detriment in reliance upon a granted VA benefit. 38 U.S.C.A. § 5302; 38 C.F.R. § 1.965(a). The RO found the appellant to be free from fraud, misrepresentation or an indication of bad faith, and the Board concurs with that preliminary finding. In the evaluation of whether equity and good conscience necessitate a favorable waiver decision, the Board must consider all of the specifically enumerated elements applicable to a particular case. However, the issues of fault, unjust enrichment, undue financial hardship, and whether collection of the indebtedness defeated the purpose of an existing benefit to the veteran are more significant to the case before us. Furthermore, although not an explicit element of equity and good conscience, the Board also looks to whether the appellant attempted to mitigate the indebtedness. VA's working definition of "fault" is "The commission or omission or an act that directly results in the creation of the debt." (Veteran's Benefits Administration Circular 20-90-5, February 12, 1990) Fault should initially be considered relative to the degree of control the appellant had over circumstances leading to the foreclosure. If control is established, even to a minor degree, the secondary determination is whether the debtor's actions were those expected of a person exercising a high degree of care, with due regard for the debtor's contractual responsibilities to the Government. The age, financial experience and education of the debtor should also be considered in these determinations. The appellant and his representative have argued that, because of the appellant's difficulties in logic and reasoning at the time of the creation of the loan guaranty indebtedness, he should not be considered at fault in its creation. According to their theory, his seemingly impulsive move to Florida was a manifestation of his disability, and it was that move that resulted in the default and foreclosure, and ultimately, in the loan guaranty indebtedness. The Board does not concur with these opinions. Clearly, the appellant was in direct control of the debt obligation prior to the initial uncured default and throughout the foreclosure process. The foregoing argument advanced by the appellant's representative could only be construed as challenging whether the appellant was competent. According to VA regulatory criteria, the definition of a mentally incompetent person is "one who because of injury or disease lacks the mental capacity to contract or to manage his or her own affairs, including disbursement of funds without limitation." 38 C.F.R. § 3.353 (1993). In the instant case, the appellant had been both diagnosed and adjudicated as competent by the VA throughout the time period in question. That determination has never been challenged by the appellant. The appellant has been found "to have a good sense of resources available to him through his family, and was able to utilize these moderately well." Instead, the appellant simply failed to act responsibly, and chose to lay the blame for his failure to meet his mortgage obligation on the fact that he moved to Florida to seek treatment for his neuropsychiatric disability prior to his initial uncured default. Regardless of his underlying excuse, the appellant was in direct control of the situation and was required to take those actions expected of a person exercising a high degree of care, with due regard to his contractual responsibility to the Government. The evidence indicates that following the move to Florida, he was able to enter into a reinstatement payment plan and adhere to it for at least a short period of time. Thereafter, however, the appellant failed to cooperate with the note holder, and never consulted the VA. He unilaterally made a choice as to how he would allocate his income. The Board finds that the decision was taken to the detriment of his contractual responsibility to the Government. Nevertheless, in terms of the appellant's financial experience, education, and existing disability, the Board does find that the appellant's fault was reduced. The appellant's reduced fault must be balanced by his failure to make any attempt to mitigate the amount of his indebtedness. Under certain circumstances, a debtor may be credited for a reduced degree of his fault. In the instant case, however, the appellant made no attempt to reduce the financial harm his choice caused others, namely the VA. The Board also finds evidence of the potential for the appellant's unjust enrichment. The appellant failed to make a mortgage payment after December 1, 1987. The appellant resided in the premises through February 1988. Having done so, he received at least 4 months of free home occupancy. Valued in terms of the monthly mortgage payments, $273, the appellant saved over $1,000 in mortgage or rental payments. This must be considered an asset that would be obtained unjustly if a waiver of the appellant's loan guaranty indebtedness were granted. Finally, the Board must analyze the appellant's financial status and determine the actual impact of loan guaranty payments on his ability to discharge his responsibilities to provide himself with the basic necessities of life. Following this analysis, the Board may factor in the various aspects discussed above in a determination whether equity and good conscience would necessitate a waiver of the appellant's indebtedness. The Board has objectively reviewed the financial data provided by the appellant and finds that it substantiates the fact that the collection of his debt obligation over several years through the partial withholding of his VA disability benefits will not seriously impair his abilities to provide himself with the basic necessities of life. The appellant receives substantial compensation based upon his 100 percent disability rating. It is significant to note that the appellant's loan guaranty indebtedness was at one time being recouped exclusively through the partial withholding of his VA disability compensation; yet the financial status report that was submitted demonstrates that the appellant did not incur substantial indebtedness during the repayment period. His more recent financial data demonstrates that he has not minimized his expenditures to the greatest extent possible. A payment of $600 per month for food must be considered excessive for a single individual. With prudent budgeting, however, the appellant could realize a larger monthly surplus. He should then be able to repay the indebtedness over time without significantly impairing or curtailing funding for the basic necessities of life. The appellant had previously reported a monthly surplus of $300, and indicated that he could apportion $100 of that surplus towards his loan guaranty indebtedness. The Board believes that he could conservatively afford a monthly payment of $250 and still be able to afford all other quoted expenses for necessities. Typically, loan guaranty debts are paid off over a five-year (60 month) period. On that basis, a realistic projection of the appellant's foreseeable financial status is that he would be able to pay at least a similar amount per month, over that five-year period, toward the loan guaranty indebtedness, and meet the desired goal even more rapidly. This is not to say that he will not experience certain inconveniences as a result of the payment of the indebtedness to the Government. Obviously, additional finances would be beneficial to his quality of living. There is no evidence, however, that he will be forced to endure a lack of food, clothing, warmth, or shelter as a result of the collection of the appellant's debt. Although not explicitly contended by the appellant, it can be argued that failing to waive the loan guaranty indebtedness would defeat the purpose of the VA disability compensation to which the appellant is entitled. The purpose of a VA compensation benefit is to afford supplemental income for a beneficiary. If the curtailment of these benefits would leave the appellant without the principal means of support, then that curtailment would defeat the purpose of the benefit. Presuming that only a relatively minor portion of the compensation benefits will be withheld from the appellant's substantial compensation ($250 or less), the Board must conclude that the recovery of the appellant's loan guaranty indebtedness will not defeat the purpose of his VA disability compensation benefits. The Board has determined that the fault of the appellant in the creation of the loan guaranty indebtedness was reduced, but still significant. The VA was entirely without fault, but has absorbed a substantial loss in this transaction. The appellant made no attempt to mitigate the amount of that loss and should bear the burden of its repayment. It has also been determined that he was unjustly enriched as a direct result of his actions, and that he has the financial ability to repay the indebtedness. It is noted that the RO denied a waiver based upon a finding that the appellant was at fault in the creation of the indebtedness, and that its collection would not result in an undue hardship. Under the principles of "equity and good conscience," the RO was free to choose whichever of the specifically enumerated elements found in 38 C.F.R. § 1.965(a) they deemed appropriate. They were also able to consider pertinent elements that are not specifically enumerated. The weight to be accorded each element in arriving at their determination was at their discretion, provided that the determination was not unduly favorable or adverse to the obligor or the Government, and was generally fair. The Board believes that the RO arrived at a fair determination that was not unduly favorable or adverse to either the Government or the appellant. The Board finds, therefore, that under the principles of equity and good conscience, taking into consideration, as a whole all of the specifically enumerated elements of 38 C.F.R. § 1.965(a), it will not be unfair to recover $5,877.42, plus accrued interest, of the appellant's loan guaranty indebtedness. The decision of the RO is affirmed for the reasons and bases cited herein. ORDER Waiver of recovery of the appellant's loan guaranty indebtedness, in the amount of $5,877.42, plus accrued interest, is denied. RENÉE M. PELLETIER 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.