Court Opinion

ID: 9007181
Source: CourtListenerOpinion
Date Created: 2022-11-27 13:42:40.793264+00
Date Added: 2024-06-11T17:11:19.883992
License: Public Domain

BEEZER, Circuit Judge,
with whom Circuit Judges HUG, FLETCHER and BRUNETTI join, dissenting:
Because I conclude the VA may not recover amounts paid on its guaranty after the VA authorizes the veteran’s release from liability, I would affirm the district court’s order enjoining the VA’s collection activities and compelling the return of funds impermissibly collected.
I
An eligible veteran may obtain a loan secured by residential property from a private lender that is guaranteed by the VA. The VA is a compensated guarantor. 38 U.S.C. § 3729. If the veteran defaults on the loan, the VA, as guarantor, may pay losses sustained by the lender as determined under VA regulations. 38 C.F.R. § 36.4321. The regulations require the lender to notify the VA before foreclosing and to allow the VA to instruct the lender on how to proceed. 38 C.F.R. §§ 36.4317, 36.4324(f)(2). If the lender releases the veteran from liability without the VA’s pri- or approval, the VA is generally released from liability on its guaranty. 38 C.F.R. § 36.4324(f). State law governs any foreclosure. 38 U.S.C. § 3720(a)(6); 38 C.F.R. §§ 36.4319, 4320.
Each plaintiff Idaho veteran purchased residential real property with a VA guaranteed loan. Each loan became delinquent in repayment and was in default. At the VA’s direction, the lender initiated a nonjudicial foreclosure. The lender did not seek a deficiency judgment within the three month period set forth under Idaho law. Idaho Code (IC) § 45-1512. The VA could have instructed the lender to foreclose judicially and seek a deficiency judgment. IC §§ 6-101; 45-1503. A deficiency judgment would have fixed the amount of remaining liability, if any, to be imposed upon the veteran after foreclosure. IC §§ 6-108, 45-1512. Under Idaho law, failure to obtain such a judgment after foreclosure bars action to collect any asserted debt relating to the loan. Frazier v. Neilsen & Co., 769 P.2d 1111, 1114 (Idaho 1989).
The amounts paid by the VA pursuant to its guaranty gave rise to a statutory subro-gation to the lender’s causes of action against the veteran. 38 U.S.C. § 3732(a)(1). If the lender had obtained a deficiency judgment, this subrogation right would have allowed the VA to attempt collection from the veteran. Instead, the VA asserted a federal right of indemnity and began various collection activities against the veteran.
II
In United States v. Shimer, 367 U.S. 374, 386-88, 81 S.Ct. 1554, 1562-63, 6 L.Ed.2d 908 (1961), the Supreme Court emphasized the role that equitable principles of surety law play in defining the VA’s recovery rights and at no point indicated that the recovery rights extend beyond their equitable underpinnings. Shimer simply does not stand for the inequitable proposition that the VA may recover amounts paid on its guaranty after authorizing the veteran’s release from liability.
Although the VA’s rights of recovery by way of subrogation and indemnity may, in some sense, have equal footing, the rights certainly stand on different ground. The subrogation right works as an equitable assignment of the lender’s claims, with the VA taking any such claims subject to defenses of the veteran. Laurence P. Simpson, Handbook on the Law of Surety-*618ship 211 (1950); Restatement of the Law of Security § 141. Thus, recovery under the subrogation right may be defeated by operation of law if, for example, the statute of limitations bars recovery.
In Shimer, the Court stated that the indemnity right flows from the “ordinary concomitants of a guaranty relationship” and that 38 C.F.R. § 36.4323(e) is “merely declaratory of a surety's customary right of indemnity.” 367 U.S. at 386, 387-88, 81 S.Ct. at 1562-63. As such, the indemnity right is rooted in the equitable concept that direct recovery by the VA may prevent unjust enrichment of the veteran. Simpson, supra, at 225-26. The indemnity right thus is generally unaffected by defenses of the veteran that are not available to the VA. Simpson, supra, at 227. For instance, the VA may recover under the indemnity right even though the veteran has been discharged by operation of law. Id.
Under surety law, if the VA consents to the veteran’s release from liability, the VA retains its liability on the guaranty and loses its rights of subrogation and indemnity from the veteran. Simpson, supra, at 301. Manifest inequities would result if the VA could consent to the veteran’s release from liability yet retain recovery rights. As occurred here, the VA would be free to decide when it was advantageous to determine a deficiency without involvement of a court or the veteran, pay that self-determined deficiency, and be made whole on a full recovery from the veteran.
Nothing in Shimer detracts from the equitable principles that govern the VA’s rights of recovery. The Supreme Court does not say that the VA may recover after authorizing the veteran’s release from liability. Moreover, the rights of recovery outlined in Shimer allow the VA to control its losses. In a state like California, which prohibits deficiency judgments, the lender’s deficiency claim is barred by operation of law upon foreclosure. The VA, with no opportunity to recover through subrogation and not having consented to the veteran’s release from liability, may still recover under the indemnity right. Simpson, supra, at 231.
In states like Idaho that allow deficiency judgments, the VA may instruct the lender to seek such a judgment and recover under the subrogation right. The indemnity right permits recovery if the VA retained liability even though the lender released the veteran from liability without the VA’s pri- or approval. See 38 C.F.R. § 36.4324(f)(2). If the VA instructs the lender to release the veteran from liability, however, the VA waives the subrogation and indemnity rights and may not recover amounts paid on its guaranty.
Because here the VA authorized release from liability, the veteran has no obligation to reimburse the VA. The VA directed the foreclosure and does not contend that the veteran was released from liability without its prior approval. In these circumstances, nothing in § 36.4323(e), or the principles of suretyship that support the VA’s rights of recovery, permit the VA to recover amounts paid on its guaranty.