Citation Nr: 0007798 Decision Date: 03/23/00 Archive Date: 03/28/00 DOCKET NO. 97-28 694 ) DATE ) ) On appeal from the Department of Veterans Affairs Regional Office in Los Angeles, California THE ISSUE Entitlement to waiver of recovery of loan guaranty indebtedness in the amount of $21,365.82 plus interest. WITNESS AT HEARING ON APPEAL Appellant ATTORNEY FOR THE BOARD N.J. Ferrante, Associate Counsel INTRODUCTION The appellant served on active duty from December 1979 to August 1981. This matter comes before the Board of Veterans' Appeals (Board) on appeal from a decision on waiver of indebtedness of the Los Angeles, California Department of Veterans Affairs (VA) Regional Office's Committee on Waivers and Compromises (RO). This matter was before the Board in July 1999 at which time it was remanded for additional development. That development has been completed to the extent possible and the matter is now before the Board for final appellate disposition. FINDINGS OF FACT 1. All relevant evidence necessary for an equitable disposition of this appeal has been obtained. 2. In March 1985, the appellant and his former spouse purchased a residence utilizing a private loan guaranteed in part by the VA, and secured by a Deed of Trust on the subject property. 3. In May 1987 the appellant conveyed the property to a third party (transferee) who reportedly paid $2,000.00 in overdue payments owed by the appellant. 4. In December 1993 there was a default on the VA guaranteed loan necessitating a foreclosure sale of the subject property and resulting in a loan guaranty indebtedness in the amount of $21,365.82. 5. There is no evidence of fraud, misrepresentation or bad faith which would preclude waiver of indebtedness. 6. The appellant was only minimally at fault in the creation of the loan guaranty indebtedness. 7. The appellant would be unjustly enriched by $2,000.00 if recovery of the entire overpayment were waived. 8. The appellant has sufficient funds to permit repayment of $2,000.00 of the loan guaranty indebtedness without resulting in undue financial hardship to the appellant and repayment of that portion of the loan guaranty indebtedness would not be inequitable. CONCLUSIONS OF LAW 1. There was a loss on disposition of 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. A partial waiver of the appellant's resulting deficiency indebtedness to VA in the amount of $ 19,365.82, plus accrued interest, is consistent with the principles of equity and good conscience,. 38 U.S.C.A. § 5302; 38 C.F.R. § 1.965(a). 3. Recovery of the remainder of the appellant's resulting indebtedness to VA, in the amount of $ 2,000.00, plus accrued interest, does not violate the principles of equity and good conscience. 38 U.S.C.A. § 5302; 38 C.F.R. § 1.965(a). REASONS AND BASES FOR FINDINGS AND CONCLUSIONS The record reflects that the appellant and his ex-spouse purchased a home in California in March 1985 for $54,000 using a private loan guaranteed by the VA. The application for the VA home loan guaranty which was signed by the appellant, advises that even though a third party may agree in writing to assume liability for the mortgage payments, the assumption agreement would not relieve the appellant from liability to the holder of the note. In May 1987 the appellant conveyed the property to a third party who reportedly agreed to assume the payments under the guaranteed loan and to pay approximately $2,000.00 in past due payments. The transferee deed and settlement sheet from the sale are not associated with the loan guaranty folder. The Committee on Waivers and Compromises specifically requested the documents following the July 1999 Board remand, but the Loan Service indicated that the documents may be lost. The appellant did not obtain a release of liability from VA when he conveyed the property to the transferee. The transferee defaulted on the guaranteed loan in December 1993. In May 1994 the Bankruptcy Court issued an order terminating an automatic stay so as to allow the note holder to proceed with foreclosure of the property. The property was subject to foreclosure in November 1994 and the note holder filed a claim under the guaranty in February 1995. Subsequently VA paid the claim creating a $21,365.82 loan guaranty indebtedness. In 1997 the appellant submitted a VA form 20-5655 financial status report. The appellant reported that he was married with two dependents. He had been employed as a Registered Nurse at a Hemodialysis Center since May 1996. Prior to that he had been a Licensed Vocational Nurse at a different hemodialysis center since February 1987. His spouse was not employed. The appellant's reported total monthly net income was $2968.62 and his total monthly expenses were $3,357.25. The reported monthly expenses included $845.84 for a mortgage payment, $440.00 for food, $304.00 for utilities, $561.62 for other unspecified living expenses and $1205.79 for monthly payments on installment contracts and other debts. Net monthly income less expenses resulted in a figure of - $388.63. The appellant indicated that he could pay $50.00 per month on the VA debt. He reported assets of $78,160, plus two automobiles. He reported liabilities of $159,081.04. At a hearing before the undersigned Member of the Board via a video teleconference from the Los Angeles, California RO in June 1999, the appellant testified that at the time he sold the property [in May 1987] he was behind on his home mortgage payments and had asked VA for assistance. Transcript (Tr.) at page 2. He was advised that the best thing for him to do was to sell the home or have someone assume the loan. Id. The appellant contacted a realtor who introduced him to a third party who agreed to assume responsibility for liability under the loan. Tr. at . 3. At no time during the transfer was he advised by either the realtor, or VA that a release of liability was necessary. Id. After the transfer he found out that the transferee was the fiancé of his real estate agent. Id. He further testified that in 1993 he received a letter from Banc Plus Mortgage regarding the transferee's default under the loan and the pending foreclosure. Id. The appellant contacted the bank who informed him that he had nothing to worry about because the transferee was responsible under the loan. Id. In 1994 the appellant received notice from the VA that he was responsible for repayment of $21,365.82. Id. The appellant contacted VA in response to the notice and for the first time was informed that a release of liability should have been acquired when he conveyed the property to the transferee. Id. He testified that the VA had never previously informed him that a release was necessary, and that he couldn't read the paperwork associated with the original loan because his ex-spouse had destroyed it before they separated. Id. The appellant's testimony also outlined the chronology of events: he bought the house in March 1985, and conveyed it to the transferee in 1987. The default occurred in 1993, 6 years after he sold the home. Tr. at p. 4. The appellant learned of the default 3 or 4 weeks after he purchased a new home with his current spouse. Tr. at p. 5. When the appellant sold the home he did not make any money on the sale, but the transferee agreed to pay about $2000.00 in overdue payments to make the mortgage current. Tr. at p. 6. With regards to his current financial status the appellant testified that he would not be able to repay the debt because he was paying on a second mortgage he took out on his current house to pay for his education, and that he had three year- old child and spouse to provide for with his job as a registered nurse. Tr. at p.8. The appellant also testified that the subject property decreased in value over the period between 1985 and 1993 due to the discovery of a geologic fault nearby which was uncovered by an earthquake in the area. Tr. at pp. 9-10. When he learned that the transferee had defaulted, he attempted to contact him and learned that the transferee had entered bankruptcy and that his lawyers advised him not to transfer the property back to the appellant, so that the appellant could attempt to satisfy the loan. Tr. at p. 10. Analysis The Board notes that the settlement sheet, transferee deed, and other documents regarding the appellant's sale of the subject property, are not of record. Reasonable attempts to recover these documents have been made and the loan service has indicated that many documents from that time period were lost. 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 an indication of fraud, misrepresentation, or 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 appellant, (5) the unjust enrichment of the appellant, and, (6) whether the appellant 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 any indication of fraud, misrepresentation or bad faith, and the Board concurs with that preliminary finding. In the evaluation of whether equity and good conscience necessitates a favorable waiver decision, the Board must consider all of the specifically enumerated elements applicable to a particular case. The issues of fault, unjust enrichment and undue financial hardship are most relevant to the instant case. VA's working definition of "fault" is "The commission or omission of 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. In the present case, the appellant was not the owner of the subject property at the time of the default and subsequent foreclosure, nor did he have any relationship to the transferees. His control had ceased upon the transfer of the subject property to the transferee over seven years prior. Consequently, he was not in direct control of the property and debt obligation at the most critical point in the creation of the debt. The question arises at to whether the appellant could be considered indirectly responsible based upon his actions prior to the sale of the subject property. The record does not indicate what if any steps appellant took to ensure that the transferee was financially able to fulfill the obligations under the financing agreement. However the record does show that the transferee honored the terms of the financing agreement sufficiently to avoid default for over 7 years. Consequently, culpability for the foreclosure cannot be assigned based upon to whom the appellant sold the subject property. The Board does find that the appellant should be assigned a minor degree of fault for failing to obtain the required release of liability when he conveyed the property to the transferee. The Board recognizes that the appellant was not particularly cognizant of his rights and duties and no professional offered advice in this regard, however these unfortunate circumstances do not change the terms of the guaranty application which the appellant signed in March 1985. The Board has reviewed the record to determine if there exist other factors, outside of the appellant's control, which contributed to the creation of the indebtedness. The Board notes that at the time the appellant purchased the property in March 1985, it's value as determined by the market data approach was $54,000. In July 1995, the appraised value of the house was $32,000 in "as is" condition. According to the appellant's testimony, real estate values were negatively impacted in the area due to the recent discovery of a nearby geological fault line uncovered by an earthquake in the area. The July 1995 appraisal also indicates that the value of the property was diminished by an addition to the structure which was incomplete and not in compliance with applicable codes, and by the presence of several vacant properties nearby. One of the specifically enumerated elements to be considered under 38 C.F.R. § 1.965(a) is "the unjust enrichment of the appellant." The appellant was relieved of $2,000 of past due payments when he transferred the subject property in 1987. This had the effect of allowing him to live "rent free" in the subject property for a period of time. It would be inequitable for the appellant to keep that benefit in view of the fact that the Government suffered such a large loss as an eventual consequence of his actions. Prior to an equitable ascertainment of the amount of the indebtedness that should be waived, and the amount that can be collected, it is incumbent upon the Board to analyze the financial data provided by the appellant and determine if collection of the loan guaranty indebtedness not waived herein would seriously impair his ability to provide himself with the basic necessities of life. The Board is particularly mindful of the principle that the appellant is expected to accord a debt to the Government the same regard given to any other debt. The Board notes that in the May 1997 Financial Status Report, the appellant indicated that he could pay $50.00 per month towards VA debt. The Board also notes that at least one of the debts listed on the report, the debt to a jeweler which required a $50.00 per month payment, had an outstanding balance of $619.26 and should be completely repaid at this time. Furthermore, the proper analysis of undue hardship must take into consideration not only the appellant's present financial picture but also a realistic projection of his status in the foreseeable future. The appellant is relatively young and is a Registered Nurse. He can reasonably expect to have many more years of substantially gainful employment. He should be able to repay the indebtedness not waived herein over time without significantly impairing or curtailing funding for the basic necessities of life. It appears from the record that the appellant could conservatively afford a minimum monthly payment of $100 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. A realistic projection of the appellant's foreseeable financial status is that he would be able to pay a like amount over that five-year period toward the loan guaranty indebtedness. On that basis, the potentially collectable amount would total $6,000. The Board finds, therefore, that it would not impose an undue hardship if the that amount were collected. The Board must determine, however, whether it would be equitable to do so. The Board has assigned the appellant only a minor degree of fault in the creation of the loan guaranty indebtedness. The Board has determined that the appellant was unjustly enriched, but only by about $2,000. In light of these equities, it would be proper to ask appellant to bear at least a partial burden, appropriate in degree, of the repayment since he has the financial ability to do so. We find that under the principles of equity and good conscience, taking into consideration all of the specifically enumerated elements of 38 C.F.R. § 1.965(a), it would be unfair to recover the entire $6,000.00 the Board found he could pay. The end result would be unduly adverse to the appellant. The Board finds that recovery of $2000.00, which represents the amount of the overdue payments on the note which were paid by the transferee at the time of the conveyance, would appropriately reflect the degree of the appellant's fault in the creation of the debt and satisfy the principles of equity and good conscience. In according the appellant a substantial partial waiver of his loan guaranty indebtedness in the amount of $19,365.82, plus accrued interest, the Board has taken into consideration the responsibility he accepted upon obtaining the VA guaranteed loan, his degree of fault, his attempts at mitigation of the amount of the indebtedness, his current financial status, and the market climate in which the loan guaranty indebtedness was created. It also must be noted that the Government has incurred a significant loss in this transaction. The Board finds that a preponderance of the evidence substantiates that it would not be against the principles of equity and good conscience to recover the remainder of the appellant's loan guaranty indebtedness not waived herein, in the amount of $2,000.00, plus accrued interest. 38 U.S.C.A. § 5302; 38 C.F.R. § 1.965(a). ORDER Waiver of recovery of part of the appellant's loan guaranty indebtedness in the amount of $19,365.82, plus accrued interest, is granted. Waiver of recovery of the remainder of the appellant's loan guaranty indebtedness in the amount of $2,000.00, plus accrued interest, is denied. THOMAS J. DANNAHER Member, Board of Veterans' Appeals