BVA9507160 DOCKET NO. 93-09 983 ) DATE ) ) On appeal from the decision of the Department of Veterans Affairs Regional Office in Fort Harrison, Montana THE ISSUE Recovery of the loan guaranty indebtedness. REPRESENTATION Appellant represented by: Lino A. Marsillo, Attorney at Law ATTORNEY FOR THE BOARD Michael A. Pappas, Associate Counsel INTRODUCTION The appellant served on active duty from October 1942 to May 1945. This matter came before the Board of Veterans' Appeals (the Board) on appeal from a decision of the Fort Harrison, Montana, Department of Veterans Affairs (VA) Regional Office's Committee on Waivers and Compromises (RO). A March 1992 decision on waiver of indebtedness by the RO denied the appellant's request for a waiver of his loan guaranty indebtedness in the amount of $23,717.71, plus accrued interest. In their decision, the RO found there to be an indication of "bad faith" on the part of the appellant, a finding under VA laws and regulations that precludes the further consideration of a waiver. The appeal was received and docketed at the Board in May 1993. The appellant has been represented throughout his appeal by Lino A. Marsillo, Attorney at Law. REMAND The RO's finding that the appellant acted in bad faith in the creation of the loan guaranty indebtedness was based essentially upon two underlying determinations. The first was that the appellant never intended to make the subject property (used as security for the VA guaranteed loan) his primary residence as he had agreed. The second was that, at the time of the initial default on the VA guaranteed loan, the appellant had collected rental payments without applying those payments to the loan debt. In October 1992, the appellant was afforded a hearing before the RO on the issue of whether he acted in "bad faith" in the creation of the loan guaranty indebtedness. He testified that, at the time of his purchase in 1979, it was his original intention to live in the subject property. Following the purchase, however, according to the appellant, financial circumstances precluded his ability to do so. He further stated that, in 1980, he entered into a Contract for Deed with his nephew. By the terms of that contract, his nephew had agreed to tender payments toward the purchase of the subject property to the appellant over an unspecified time period in exchange for the future delivery of a Deed to the property. The appellant's nephew was given the immediate possession of the subject property and the imputed right to collect the rents. In November 1992, the RO requested that the appellant furnish a copy of the Contract for Deed, together with a current financial status report. A copy of the letter of request contained in the loan guaranty file was annotated by the RO as follows: "If the statements in the hearing transcript are true, willful intent could not be proven for 'bad faith'. Wait for copy of Contract for Deed." In April 1993, following the receipt of the requested evidence, the RO affirmed their prior denial without explanation. The Board notes that the receipt of the requested evidence was subsequent to the December 1992 statement of the case. According to pertinent regulatory criteria, evidence submitted by an appellant which is accepted by the Board must be referred to the RO for review and preparation of a supplemental statement of the case unless this procedural right is waived by the appellant. Since such a waiver was not provided in this case, this evidence must be referred back to the RO. 38 C.F.R. § 20.1304(c) (1994). Further, in consideration of the potential impact attributed to that evidence by the RO, the Board believes that a more detailed reasons and bases for the finding of "bad faith" is required. To that end, the Board believes that further development of the issue of "bad faith" is also in order. The law precludes a waiver of recovery of an overpayment or a waiver of collection of an indebtedness where an indication of any one of the following elements is found to exist: (1) Fraud, (2) misrepresentation, or (3) bad faith. 38 U.S.C.A. § 5302(c). Upon this finding, any contention or evidence relating to equity and good conscience necessitating a waiver, such as it relates to undue hardship, etc., becomes "moot". Black's Law Dictionary 127 (6th ed., 1990), defines "bad faith" as: ". . . generally implying or involving actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation prompted by some interested or sinister motive. VA's working definition of "bad faith" is a willful intention to either seek an unfair advantage or to neglect or refuse to fulfill some duty or contractual obligation. Veterans Benefits Administration Circular No. 20-90-5, New Standards for Waiver Consideration (February 12, 1990). Circular 20-90-5 further states that: [I]n the home loan program, bad faith would most likely exist when a veteran/obligor abandons a VA guaranteed property despite having the financial ability to make mortgage payments. Although the referenced circular describes one likely circumstance in which "bad faith" may be found, there can be others. In the present case, the Board is particularly interested in an investigation of the appellant's intentions at the time of his purchase of the subject property, and the financial status of the appellant at the time of the initial default. Verification of the bases for the appellant's claims that he had every intention to reside in the subject property, and that he did not have the financial assets to meet the existing mortgage obligation at the time of the initial default, would be pertinent to the appellant's allegation that he was free from an indication of "bad faith". The Board notes that at the time of his purchase of the subject property in 1979, the veteran's listed assets included real estate known as 4624 South Avenue, Missoula, Montana, that he valued at $180,000, three vehicles, a motor home, a jet boat, a horse trailer, snow cats, six horses, and furniture and household goods valued at $40,000.00. The appellant indicated at the time that his home at "4624 South Avenue" was "pending sale." The subject property that was purchased with the VA guaranteed loan was a duplex valued at $97,109, situated on 1.092 acres, consisting of two living units, each with a living area of 1,265 square feet, with two bedrooms per unit. The appellant claims that it was his intention to move into one of the duplex units, and rent out the other. The record demonstrates, however, that the appellant never moved into the subject property and remained at "4624 South Avenue" until at least 1991. The appellant should be asked, through his attorney, to provide an explanation as to why it was that he wished to move out of a home valued at $180,000, and move into one of the duplex units. He should be asked to provide any and all documentation of the efforts that were made to sell "4624 South Avenue". He should also be asked to provide documentation of any efforts that were made to liquidate or otherwise dispose of his other assets. If no such efforts were made, the appellant should be asked to explain what he believed that he was going to do with those assets while he was residing in the duplex unit. The appellant should be asked to document his purported disposition of "4624 South Avenue", and if it was sold, his disposition of the assets. The Board believes that, if the appellant is found by the RO to be free from an indication of "bad faith" it would be advisable, in terms of judicial economy, if he were then to be required to provide verification of his current financial status. With respect to the contingent requirement that the appellant provide such verification, if it is determined by the RO that there was no indication of bad faith on the part of the appellant in the creation of the loan guaranty indebtedness, then a waiver can be considered in terms of whether the principals of "equity and good conscience" necessitate a waiver. It is important to remember that in an evaluation of whether "equity and good conscience" necessitates a favorable waiver decision, although not exhaustive, there must be considered all of the specifically enumerated elements found in 38 C.F.R. § 1.965(a) (1994). A fundamental area of consideration contained within the specifically enumerated elements is whether there would be imposed an undue hardship of collection upon the veteran-appellant. The proper analysis of "undue hardship" should take into consideration not only the appellant's current financial picture, but also a realistic projection of his status in the foreseeable future. VA has a duty to assist a veteran in the development of facts pertinent to his claim. 38 U.S.C.A. § 5107(a) (West 1991); 38 C.F.R. § 3.103(a) (1994). Evidence relevant to the appellant's intended use of the subject property in 1979, the appellant's financial picture in 1989, and his current financial status, and the verification of that information are crucial to the issue of whether there is an indication of bad faith on the part of the appellant in the creation of the loan guaranty indebtedness, or if there is no such indication, whether "equity and good conscience" necessitates a favorable waiver decision. As such, VA's duty to assist a veteran includes a reasonable effort to obtain that information. However, "[T]he duty to assist is not always a one- way street. If a veteran wishes help, he cannot passively wait for it in those circumstances where he may or should have information that is essential in obtaining the putative evidence." Wood v. Derwinski, 1 Vet.App. 190 (1991). Under the circumstances, the Board is compelled to remand this case to the RO for the following actions: 1. Initially, the appellant and his attorney should be provided a copy of this remand. The appellant should be asked, through his attorney, to provide an explanation as to why it was that he wished to move out of a home valued at $180,000, and move into one of the subject property's duplex units. He should be asked to provide any and all documentation of the efforts that were made to sell "4624 South Avenue", including, but not limited to dated newspaper advertisements, and real estate listing contracts. He should also be asked to provide documentation of any efforts that were made to liquidate or otherwise dispose of his other assets that included three vehicles, a motor home, a jet boat, a horse trailer, snow cats, six horses, and furniture and household goods valued at $40,000.00. If no such efforts were made, the appellant should be asked to explain what he believed he was going to do with those assets while he was residing in the duplex unit. The appellant should be asked to document his purported disposition of "4624 South Avenue", including a copy of any contract for its sale, and if it was sold, his disposition of the assets. 2. The RO should also request from the appellant complete copies, including all scheduled attachments, of his Federal income tax returns for 1989. Complete copies of any corporate or trust tax returns filed by, or on behalf of any corporation in which the appellant was a principal, or in which the appellant was a principal trust beneficiary should also be provided. 3. Following the receipt of the requested information, or after allowing a reasonable time for its production, the RO should review the case to determine whether consideration of a waiver is precluded based upon a finding that there was an indication of fraud, misrepresentation or bad faith on the part of the appellant in the creation of the indebtedness. If consideration is so precluded, the appellant and his attorney should be issued a supplemental statement of the case discussing any new evidence and the reasons and bases for the decision. 4. If, on the other hand, the appellant is found to be free from a finding of an indication of fraud, misrepresentation or bad faith in the creation of the indebtedness, the appellant should be provided with another financial status report form (VA Form 4-5655) and asked to provide a current financial status report. The RO should also request from the appellant complete copies, including all scheduled attachments, of his Federal income tax returns for 1993 and 1994, along with the updated financial status report. Complete copies of any corporate tax returns filed by, or on behalf of any corporation in which the appellant is a principal should also be provided. The current financial status report should include financial information of any Trust property in which the appellant has an interest as a beneficiary. To the extent possible, the appellant should provide written documentation or verification of all items contained in the financial status report, particularly the monthly expenditures applied to other creditors. 5. The appellant's claim should be reviewed by the RO. If the benefit sought continues to be denied, the appellant and his attorney should be provided with a supplemental statement of the case. That supplemental statement of the case should specifically address those of the six elements found in 38 C.F.R. § 1.965 which the RO considers to be pertinent to the determination of whether the appellant should be accorded a waiver of his loan guaranty indebtedness under the standards of "equity and good conscience." In particular, the fault of the appellant, the possibilities for unjust enrichment, and the possibility of undue hardship should be addressed. Since the appellant is a compensated veteran, of particular importance in this case may be whether the collection of the indebtedness would defeat the purpose of an existing benefit to the appellant. The RO should also identify any other elements that should be applied to the facts and circumstances of this case indicating a need for reasonableness and moderation in the exercise of the Government's rights, such as whether the appellant attempted to mitigate the amount of the indebtedness through efforts to avoid foreclosure or through the proper maintenance of the subject property. If the benefit sought is not granted, the appellant and his attorney should be given an adequate opportunity to respond prior to the forwarding of the appeal to the Board. The purpose of this remand is to procure clarifying data and to ensure due process of law. The Board intimates no opinion, legal or factual, as to the determination warranted in this case by reason of this remand. No action by the appellant is required, until he is so notified. 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. (CONTINUED ON NEXT PAGE) Under 38 U.S.C.A. § 7252 (West 1991), only a decision of the Board of Veterans' Appeals is appealable to the United States Court of Veterans Appeals. This remand is in the nature of a preliminary order and does not constitute a decision of the Board on the merits of your appeal. 38 C.F.R. § 20.1100(b) (1994).