BVA9506337 DOCKET NO. 93-12 219 ) DATE ) ) On appeal from the decision of the Department of Veterans Affairs Regional Office in Montgomery, Alabama THE ISSUE Waiver of recovery of loan guaranty indebtedness. ATTORNEY FOR THE BOARD Barry F. Bohan, Counsel INTRODUCTION The appellant served on active duty in the United States Army from July 1973 to October 1976. This appeal arose from a December 1992 decision of the Committee on Waivers and Compromises of the Department of Veterans Affairs Regional Office in Montgomery, Alabama (VARO) which denied the appellant's request for waiver of loan guaranty indebtedness in the amount of $9,114.34, plus accrued interest, based on its finding of bad faith on the part of the appellant. CONTENTIONS OF APPELLANT ON APPEAL The appellant contends, in substance, that he defaulted on his home loan payments because of his unemployment. He denies any intentional bad faith and claims to be without fault in the creation of the loan guaranty indebtedness. Additionally, he contends that collection of the loan guaranty indebtedness would cause him and his family 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 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 waiver of the charged loan guaranty indebtedness should be granted, based on the standard of equity and good conscience. FINDINGS OF FACT 1. In July 1987, the appellant and his spouse purchased a house using a home loan which was guaranteed, in part, by VA. 2. Due to under employment and financial difficulties, the appellant defaulted on his monthly loan payments. Mortgage foreclosure proceedings were initiated. 3. In August 1991, the property was sold at a foreclosure sale for an amount less than the unpaid principal 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 $9,144.34, was charged to the appellant. 5. The appellant's actions in this case did not constitute bad faith. 6. To require recovery of the charged loan guaranty indebtedness from the appellant would be unfair. 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. Recovery of the charged loan guaranty indebtedness would be against equity and good conscience. 38 U.S.C.A. § 5302 (West 1991); 38 C.F.R. §§ 1.964, 1.965(a) (1994). REASONS AND BASES FOR FINDINGS AND CONCLUSIONS The appellant is seeking waiver of recovery of charged loan guaranty indebtedness in the amount of $9,114.34, plus accrued interest. 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, we find that the appellant's claim has been adequately developed for appellate purposes by VARO and that we may therefore proceed to a disposition of the case. The evidence has been carefully reviewed and the Board finds that the loan guaranty indebtedness in the original amount of $9.114.34 was properly established. Schaper v. Derwinski, 1 Vet.App. 430 (1991). In the interest of clarity, the Board will first briefly review the chronological history of this case. The issue presented in this appeal will then be discussed. History of the case In July 1987, the appellant and his spouse purchased a house in Northport, Alabama, for $49,500, using a home mortgage loan which was guaranteed, in part, by VA. 38 U.S.C.A. §§3701 et seq. (West 1991). The property was secured by a Mortgage Note and Mortgage. The first monthly mortgage payment was made in September 1987. In January 1991, the lender notified VARO that the mortgage loan had gone into default, starting with the November 1990 payment. The reason for default was "reduced income--hours cut at work". Mortgage foreclosure proceedings, which the appellant did not contest, were initiated, and the property was sold for $44,456 at a foreclosure sale in August 1991. In November 1991, the lender filed a claim under the loan guaranty, which was satisfied, in the amount of $9,114.34, by VA in April 1992. In September 1992, the appellant requested a waiver of the charged loan guaranty indebtedness. His request was denied in the December 1992 decision of the Committee on Waivers and Compromises which is the subject of this appeal. In essence, the Committee found that the appellant had demonstrated bad faith because he abandoned the property which was the subject of the VA guaranteed loan. The appellant's statements The Board has carefully considered the appellant's statements. In his September 1992 request for waiver, he stated that he was terminated by his employer and was forced to accept employment at a lesser salary and with no medical insurance. He eventually found a better job in Texas. He admitted: "I made the decision to abandon my home and start anew." In essence, the appellant indicated that he lost the house because of financial circumstances which were beyond his control. In his April 1993 appeal to the Board, the appellant denied any bad faith. He stated that he had informed the lender by telephone of his financial problems. He stated: "I simply did not know what to do; I was destitute....Therefore, I made the decision to abandon the property and relocate in Texas." Analysis A waiver of recovery 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 (1994). "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) (1994). In essence, however, "equity and good conscience" means fairness to both the appellant and to the government. Bad faith Under pertinent law and VA regulations, no debt may be waived under the standard of equity and good conscience if fraud, misrepresentation, or bad faith is found to exist on the part of the debtor. 38 U.S.C.A. § 5302(c) (West 1991); 38 C.F.R. § 1.965 (b) (1994). 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 an unfair advantage, with knowledge of the likely consequences, and results in a loss to the government." 38 C.F.R. § 1.965(b) (1994). In general, "bad faith" implies actual or constructive fraud, or neglect or refusal to perform some contractual obligation, prompted not by 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. After having carefully considered the evidence, the Board is of the opinion that the appellant's conduct did not constitute bad faith, as that term is used in the VA regulations. The Board discerns no willful intention to seek an unfair advantage of the government, nor did there appear to be a neglect or refusal to pay the VA guaranteed loan. Rather, the evidence indicates that the appellant made monthly mortgage loan payments for over two years and then discontinued such payments due to loss of his job. Although he might have handled the situation in such a way as to have kept the lender better informed, the appellant's actions are consistent with those of an individual who was overwhelmed by circumstances, rather than someone who was trying to take advantage of the lender and the Government. Equity and good conscience Before moving on to a discussion of this case with respect to the standard of equity and good conscience, the Board must determine whether the case should be remanded to VARO for further development and adjudication. The basis for such determination is whether the appellant would be prejudiced by the lack of such development and adjudication at the Regional Office level. Bernard v. Brown, 4 Vet.App. 384, 394 (1993). It is clear that the appellant has been fully apprised of all applicable laws and regulations and has been afforded ample opportunity to present argument to VARO and to the Board. The appellant has, in fact, been quite thorough and specific in his contentions with respect to the elements of the standard of equity and good conscience. The Board therefore has concluded that a decision on the merits with respect to the standard of equity and good conscience will not prejudice the claimant or violate VA's statutory duty to assist. 38 U.S.C.A. § 5107(a) (West 1991); O.G.C. Prec. 6-92 (March 6, 1992). It is noted that the appellant has expressed concern to his elected representatives about the impact of the charged indebtedness and desires an early resolution of this case. The primary elements of the standard of equity and good conscience are the element of fault and the element of financial hardship. The other elements of the standard have been considered and found not to be applicable to this case. With respect to the appellant's fault, by his own admission he merely made one telephone call to the mortgage company and then abandoned the property. He did not attempt to work with the lender or with VA with respect to a repayment plan, offer a deed in lieu of foreclosure, or otherwise attempt to salvage the situation. The Board had concluded that the appellant demonstrated some fault with respect to the creation of the loan guaranty indebtedness. Turning to the element of financial hardship, the Board has carefully reviewed the appellant's statements, as well as the Financial Status Report (VA Form 4-5655) which he filed in September 1992. The appellant works as a mechanic for a trucking firm. He is married and has four children, ranging in age from 16 years to 7 years. His spouse does not work. His monthly income does not cover family expenses, and the family survives financially because of help from parents. There are virtually no assets and absolutely no liabilities. Based on the foregoing information, it is the Board's conclusion that enforcement of collection of any part of the charged loan guaranty indebtedness would cause the appellant and his family financial hardship. Accordingly, the Board believes that waiver of the entire loan guaranty indebtedness in the amount of $9,114.34, plus accrued interest, is justified under the standard of equity and good conscience. ORDER Waiver of recovery of loan guaranty indebtedness 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.