Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-94-06446/USCOURTS-ca10-94-06446-0/pdf.json

Parties Involved:
William H. Dixon
Appellant
Roger L. Norwood
Appellant
United States of America
Appellee

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

FILED 1Jaltd Stl'el Co\lr' of Appeall Tenth Clreui& 

OCT 2 3 1995 

PATRICK FISHER. 

Clerk 

WILLIAM H. DIXON and ROGER L. NORWOOD, 

Plaintiffs-Appellants, 

V. No. 94-6446 

UNITED STATES OF AMERICA, 

Defendant-Appellee. 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE WESTERN DISTRICT OF OKLAHOMA 

(D.C. No. CIV-93-1924-W) 

Submitted on the briefs: 

Michael T. Braswell, Oklahoma City, Oklahoma, for PlaintiffAppellants. 

Mark B. Stern and Mark C. Niles, Attorneys, Appellate Staff, Civil 

Division, Department of Justice, Washington, D.C., for DefendantAppellee. 

Before BALDOCK, HOLLOWAY, and BRORBY, Circuit Judges. 

HOLLOWAY, Circuit Judge. 

After examining the briefs and appellate record, this panel 

has determined unanimously to grant the parties' request for a 

decision on the briefs without oral argument. See Fed. R. App. P. 

Appellate Case: 94-6446 Document: 01019280713 Date Filed: 10/23/1995 Page: 1 
34(f) and lOth Cir. R. 34.1.9. The case is therefore ordered 

submitted without oral argument. 

I. 

Plaintiffs-appellants William H. Dixon and Roger L. Norwood 

are veterans who purchased homes using mortgages guaranteed 

through the Veterans Administration (VA) Home Loan Guaranty 

Program. The mortgages of both veterans went into default and 

were foreclosed upon through judicial proceedings in the State of 

Oklahoma. Neither of the lenders sought deficiency judgments 

against the veterans. 

Pursuant to its guaranty, the VA paid Mr. Dixon's lender 

approximately $27,500 and established an administrative debt 

against him in that amount. See 38 C.F.R. § 36.4323(e). A debt 

in the amount of $23,000 was established against Mr. Norwood after 

similar payment by the VA to his lender. Mr. Norwood later filed 

for relief under Chapter 7 of the Bankruptcy Code, and his debt to 

the VA was fully discharged. Nonetheless, the VA has refused to 

reinstate fully Mr. Norwood's eligibility to participate in the 

Guaranty Program. 

Plaintiff veterans brought this action against the United 

States seeking to enjoin the collection of the debts owed by them 

to the VA and to require the VA to reinstate fully their benefits 

under the Guaranty Program. Plaintiffs also sought certification 

of a class of similarly situated plaintiffs. By counterclaim, the 

VA sought a money judgment against plaintiff Dixon for the amount 

of its loss under its guaranty agreement with his lender. 

2 

Appellate Case: 94-6446 Document: 01019280713 Date Filed: 10/23/1995 Page: 2 
The district court granted summary judgment in favor of the 

United States. In so doing, the court ordered that judgment be 

entered against Mr. Dixon in the amount the VA had paid on his 

behalf plus interest, and further ordered that plaintiff Norwood's 

VA eligibility to participate in the Guaranty Program not be 

reinstated until the VA's loss on his loan is paid in full. See 

Appellants' App. at 133-34. These orders rendered it unnecessary 

for the district court to address plaintiffs' class certification 

issues. The plaintiffs appealed. We turn to their appellate 

arguments. 

II. 

We review a grant of summary judgment de novo, applying the 

same legal standard as the district court. James v. Sears. 

Roebuck & Co., 21 F.3d 989, 997-98 (lOth Cir. 1994). Thus, the 

judgment will be affirmed if there are no genuine issues of 

material fact and if the moving party is entitled to judgment as a 

matter of law. Hagelin for President Committee v. Graves, 25 F.3d 

956, 959 (lOth Cir. 1994), cert. denied, 115 S. Ct. 934 (1995). 

Plaintiffs argue that their lenders' failure to obtain 

deficiency judgments against them extinguished any further 

obligation they may have had to reimburse the VA. This is 

incorrect. We 

judgment against 

subrogation fail 

agree that if the lenders' rights to a deficiency 

the veterans fail, the VA's rights through 

as well. 

603, 606 (7th Cir. 1992). 

See United States v. Davis, 961 F.2d 

However, the VA is not restricted 

solely to subrogation as a means of recovery. There are, in fact, 

two lines of potential recovery available to the VA against a 

3 

Appellate Case: 94-6446 Document: 01019280713 Date Filed: 10/23/1995 Page: 3 
veteran for whose benefit it has had to pay under a guaranty. Id. 

As noted above, under certain circumstances, the VA can be 

subrogated to the rights of the lender. 38 U.S.C. § 3732(a) (1). 

Because foreclosures must be done according to state law, Carter 

v. Derwinski, 987 F.2d 611, 612 (9th Cir.) (en bane) (citing 

38 U.S.C. § 3720 (a) (6)), cert. denied, 114 S. Ct. 78 (1993), the 

lenders here needed to have secured deficiency judgments under 

Oklahoma law to preserve rights against plaintiffs to which the VA 

could later be subrogated.1 Because no deficiency judgments were 

obtained here, the VA has no subrogation rights against 

plaintiffs. 

In the alternative, however, the VA has an independent 

contractual right of indemnity against plaintiffs. See Carter, 

987 F.2d at 613 (quoting United States v. Shimer, 367 U.S. 374, 

387 (1961)). This right is entirely separate from the subrogation 

right and fully enforceable "[r]egardless of the method by which a 

lender proceeds against a defaulting veteran " Id. at 616. 

"[T]he VA always possesses a right of indemnity against the 

veteran for the amount of guarantee paid to the lender." Id. 

Thus, while adherence to Oklahoma law governing post-foreclosure 

personal liability would have been crucial had the VA attempted to 

claim subrogation rights, it is irrelevant here because the VA is 

proceeding under its independent indemnity right, governed 

entirely by federal law, see id., and unaffected by state 

1 

Under Oklahoma law there is a strict requirement that a 

motion for a deficiency judgment must be made within ninety days 

after a foreclosure sale or no right to recover any deficiency 

"shall exist." 12 Okla. Stat. § 686 (1991). 

4 

Appellate Case: 94-6446 Document: 01019280713 Date Filed: 10/23/1995 Page: 4 
deficiency judgment requirements. Thus, their lenders' failure to 

obtain deficiency judgments against them does not relieve 

plaintiffs of their independent indemnification obligations to the 

VA. 

III. 

In a separate line of argument, plaintiffs point to 

38 C.F.R. § 36.4324(f), which provides that, if a lender is 

requested by the VA to preserve personal liability and fails to do 

so, that lender cannot recover on the VA's gu~ranty.2 Plaintiffs 

maintain that the VA directed the lenders to preserve personal 

liability against them, that the lenders failed to do so by 

failing to secure deficiency judgments, and thus the VA's 

obligation was released. Any payment by the VA, reason 

plaintiffs, was therefore gratuitous and not chargeable to them. 

The plaintiffs rely on United States v. Davis, 961 F.2d 603 (7th 

Cir. 1992), appeal after remand, 34 F.3d 417 (7th Cir. 1994), 

2 Section 36.4324(f) provides in relevant part: 

The release of the personal liability of any 

obligor on a guaranteed or insured obligation resultant 

from the act or omission of any holder without the prior 

approval of the Secretary shall release the obligation 

of the Secretary as guarantor or insurer, except when 

such act or omission consists of . (2) an election 

and appropriate prosecution of legally available 

effective remedies with respect to the repossession or 

the liquidation of the security in any case . . . if 

holder shall have given such notice as required by 

§ 36.4317 of this part [notice of intention to 

foreclose] and if, after receiving such notice, the 

Secretary shall have failed to notify the holder within 

15 days to proceed in such manner as to effectively 

preserve the personal liability of the parties liable, 

or such of them as the Secretary indicates in such 

notice to the holder . . . . 

5 

Appellate Case: 94-6446 Document: 01019280713 Date Filed: 10/23/1995 Page: 5 
cert. denied, 115 S. Ct. 1360 (1995); and United States v. Church, 

736 F.Supp. 1494 (N.D.Ind. 1990). 

The VA does not assert that the Davis and Church cases were 

wrongly decided. However, we need not decide whether the rule of 

those cases should be followed by us because the record in this 

appeal does not support the application of that rule. We will 

assume, arguendo, the validity of the rule that the VA's right of 

indemnity can be extinguished if the lender has, contrary to the 

VA's instructions, permitted the right of subrogation to be lost, 

but the VA has nevertheless gratuitously reimbursed the lender 

under the terms of its guaranty. We agree with the position taken 

here by the VA that the factual predicate for the rule of the 

Davis and Church cases was not established in the district court. 

In a letter from the VA to Talman Horne Mortgage Corp. 

regarding Mr. Dixon's mortgage, the VA's concern was plainly with 

pursuit of a deficiency judgment against any transferees and not 

against Mr. Dixon. See Appellants' App. at 32. The record 

regarding Mr. Norwood's guaranty is less clear. The VA instructed 

the lender to "proceed in such a manner so as to preserve your 

rights in personam against those liable on the note so as to 

protect the Administrator's rights of subrogation as set out in 38 

Code of Federal Regulations section 36.4323(a) . 11 Id. at 33. The 

letter continued: "If a deficiency judgment is required, we will 

notify you. 11 There is no evidence in the record, however, 

that any notice requiring the lender to procure a deficiency 

judgment against Mr. Norwood was ever sent or received. 

6 

Appellate Case: 94-6446 Document: 01019280713 Date Filed: 10/23/1995 Page: 6 
Although the first quoted sentence of the VA's letter to 

Norwood's lender does lend some support to his position, we find 

the letter is insufficient to support a finding that the lender 

disregarded an instruction by the VA to pursue a deficiency 

judgment. Instead, the second quoted sentence makes clear that 

the VA was not instructing the lender to pursue a deficiency 

judgment at that time. Because there is no evidence that the VA 

ever issued such an instruction, we conclude that the lender did 

not forfeit its rights under the guaranty agreement. 

Consequently, the VA's reimbursement to the lender was not 

gratuitous, and Norwood's reliance on the rule of Davis and Church 

is unavailing. 

We are persuaded that the record does not support the 

plaintiffs' interpretation of the undisputed facts. The VA's 

communications to the lenders did not give instructions or make a 

request to the lenders to preserve personal liability of the 

plaintiffs to them, and the VA's right of indemnity was not 

impaired. 

IV. 

Finally, plaintiff Norwood argues that, because his debt to 

the VA was discharged in bankruptcy, his loan availability under 

the Guaranty Program should be fully reinstated. We disagree. 

A veteran loses his eligibility to have his previously used 

loan-guaranty entitlement restored where the VA has incurred an 

unreimbursed loss because of that veteran's transactions pursuant 

to the Guaranty Program. In Mr. Norwood's case, the VA calculated 

7 

Appellate Case: 94-6446 Document: 01019280713 Date Filed: 10/23/1995 Page: 7 
his eligibility according to the dictates of 38 U.S.C. § 3702(b), 

which provides in relevant part: 

In computing the aggregate amount of guaranty or 

insurance housing loan entitlement available to a 

veteran under this chapter, the Secretary may exclude 

the amount of guaranty or insurance housing loan 

entitlement used for any guaranteed, insured, or direct 

loan, if 

(1) (A) The property which secured the loan 

has been disposed of by the veteran or has been 

destroyed by fire or other natural hazard; and 

(B) the loan has been repaid in 

Secretary has been released from liability 

loan, or if the Secretary has suffered a 

loan, the loss has been paid in full . . 

full, or the 

as to the 

loss on such 

38 U.S.C. § 3702(b) (emphasis added). Because the loss suffered by 

the Secretary due to Mr. Norwood's default has not been repaid in 

full, Mr. Norwood's present eligibility was reduced accordingly. 

Contrary to Mr. Norwood's suggestion, the VA's position here 

is not in derogation of bankruptcy law and a "back door attempt to 

collect on a debt." See Reply Br. at 6-7. Reduction of 

Mr. Norwood's eligibility for loan guaranty is not an attempt to 

collect a discharged debt. It is a refusal to advance otherwise 

available benefits. 

The amount the VA paid on behalf of Mr. Norwood is merely 

available to it for setoff against the amount of his original 

guaranty eligibility. The fact that Mr. Norwood is precluded from 

participating in the Guaranty Program in its full and unencumbered 

scope is not a debt that was discharged in bankruptcy. See Newman 

v. Veterans Admin. (In re Newman), 35 B.R. 97, 99 (Bankr. W.D.N.Y. 

1983). The VA is correct in maintaining that it is not seeking to 

recover the amount of Mr. Norwood's debt, nor is it seeking to 

8 

Appellate Case: 94-6446 Document: 01019280713 Date Filed: 10/23/1995 Page: 8 
• 

avoid the effect of his bankruptcy proceeding. The VA is not 

contending that Mr. Norwood is legally obligated to pay the 

discharged debt, and it does not seek indemnification from him. 

Mr. Norwood is simply not eligible for the full amount of guaranty 

benefits until the loss incurred by the VA is repaid. 

As noted above, the district court ordered Mr. Norwood's 

eligibility to participate in the Guaranty Program to be withheld 

until payment was made in full. The VA acknowledges, however, 

that plaintiff is still entitled to loan guaranty benefits in the 

amount of $16,250. See Appellee's Br. at 28 n.10. To make this 

clear, the order of the district court is MODIFIED to state that 

plaintiff Norwood's eligibility for loan guaranty benefits has not 

been eliminated and remains at $16,250. In all other respects, 

the judgment of the United States District Court for the Western 

District of Oklahoma is AFFIRMED. 

9 

Appellate Case: 94-6446 Document: 01019280713 Date Filed: 10/23/1995 Page: 9