Opinion ID: 522954
Heading Depth: 2
Heading Rank: 1

Heading: Contingent Liability

Text: 12 The Tax Court held that it did not need to rule on the validity of the Secretary's waiver because the uncertainty as to its validity rendered CRLC's 1978 interest obligation contingent and thus not deductible. Although the Tax Court did not reach the validity issue, we address this point initially. The taxpayers argue that a party may not exercise rights of which it has divested itself by contract. They contend that the language of section 5.01 of the Indenture, coupled with section 5.28, divested the Secretary of the power to waive the interest, and thus her purported waiver was ineffective. The taxpayers claim that this language contracted away any statutory power which the Secretary may have had to make the purported waiver. 13 The Commissioner counters that the Secretary's waiver of CRLC's 1978 interest obligations was valid because she had statutory authority to pursue her claim under section 726 of the New Communities Act and under HUD regulations which allow the Secretary to amend or waive all nonconsensual terms and conditions in the Indenture. The Commissioner also contends that the waiver was valid under the complete provisions of the agreement. 14 The Secretary's letter of January, 1978, in which she purported to waive interest due in 1978, began, Under my authority and under the provisions of Section 5.28 of the Indenture of Mortgage   . The statement provides the Secretary with two possible bases, statutory and contractual, under which her authority to waive the interest might exist.
15 The Secretary's statutory authority to act is derived from section 726 of the New Communities Act and the regulations promulgated by HUD under the Act. Section 726 states that [n]otwithstanding any other provision of law, the Secretary shall also have power to pursue to final collection by way of compromise or otherwise all claims acquired by him in connection with any security, subrogation, or other rights obtained by him in administering this part. 42 U.S.C. Sec. 4527(3) (1982). The regulations provide that the Secretary may waive or amend all 16 terms and conditions in the Project Agreement, Indenture, and other Project Documents that do not specifically require the consent of all or a portion of the holders of the guaranteed debt obligations    as he shall deem necessary or desirable to    protect the security interests of the United States or to otherwise preserve his ability to carry out the purposes of the Act. 17 24 C.F.R. Sec. 3720.65 (1984) (removed May 7, 1984). 18 We agree with the Commissioner that the phrase by way of compromise or otherwise in the statute manifests Congress's intent that the Secretary have broad latitude to pursue collection of a claim. Here, interest was waived in an effort to expedite foreclosure by depriving the taxpayers of their motivation to delay the proceedings. In addition, the regulations provide the Secretary with specific authority to waive any provision of the Indenture in order to protect the security interests of the federal government. Together, these provisions supply ample statutory authority for the Secretary's waiver. 19 The taxpayers contend that the language of the Indenture Agreement divested the Secretary of the statutory authority to waive or modify interest obligations owed to her. We disagree. Nowhere in the Agreement does the Secretary specifically relinquish her statutory authority. Rather, the language of the Agreement reiterates, with specificity, that authority by providing for certain waiver powers.
20 The taxpayers assert that, under section 5.28 of the Indenture Agreement, the Secretary was without authority to waive the 1978 interest obligations. They contend that, under section 5.28, only sections 5.02 and 5.04 through 5.27 may be waived by the Secretary, and therefore the Secretary is precluded from waiving interest due under section 5.01. While this may be true, it is irrelevant. 21 Section 5.01 requires CRLC to pay principal and interest on the debentures to the debentureholders. CRLC failed to do so, and in accordance with its guarantee, NCDC cured the debenture defaults. Section 5.25 requires CRLC to pay interest on the amount of any guarantee payment made by the Secretary. Consequently, CRLC's duty to pay interest shifted from payment to the debentureholders, under section 5.01, to payment to NCDC, under section 5.25. Under the explicit language of section 5.28, section 5.25 may be waived. See supra note 4. Thus, the Secretary's reference to section 5.28 as authority to waive the interest due her was accurate.
22 The November 4 notice of the Secretary's waiver contained the following language: Nor are we    waiving the right to reinstitute prospectively on written notice to the Company the accrual of interest on all or any of the amounts owing to the Secretary by the Company. The taxpayers contend that, even if the Secretary had the authority to waive the 1978 interest obligations, this language made it revocable and thus ineffective. We agree. 23 Irrevocability is the essence of a waiver provision. Where a party intentionally relinquishes a known right by waiver, he cannot, without consent of his adversary, reclaim it. A waiver, once established, is irrevocable even in the absence of any consideration therefor. Engstrom v. Farmers & Bankers Life Ins. Co., 230 Minn. 308, 41 N.W.2d 422, 424 (1950) (citations omitted). 24 Intent is an essential element of a waiver and can be gleaned from the declarations of the parties or inferred from the facts. Id.; Anderson v. Twin City Rapid Transit Co., 250 Minn. 167, 84 N.W.2d 593, 603 (1957). The language of the Secretary's waiver notice explicitly communicated her intent not to be irrevocably bound by the attempted waiver. In addition, her subsequent actions confirmed that the waiver was intended to be revocable, when in 1980 she in fact revoked the waiver and reinstated the interest due. For a waiver to be effective, the right allegedly waived must be gone beyond recall. Twin City, 84 N.W.2d at 603. We conclude, therefore, that the Secretary's waiver was ineffective. 25 The Commissioner argues that regardless of whether the waiver was legally effective, the uncertainty as to its validity during the taxable year rendered the partnership's liability contingent. We disagree. The waiver was either valid or invalid from the outset. Because we have already concluded that the Secretary's waiver was not effective, further discussion of the contingency issue is unnecessary.