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United States v. Charles Davis, Defendant/third-Party v. Jesse Brown, Secretary of Veterans Affairs, Third-Party
Citations: 34 F.3d 417; 1994 U.S. App. LEXIS 23067; 1994 WL 460592Docket: 93-3104
Court: Court of Appeals for the Third Circuit; August 24, 1994; Federal Appellate Court
Charles Davis, the defendant and third-party plaintiff, appeals the district court's denial of his motion for summary judgment and the granting of summary judgment in favor of the United States and Jesse Brown, Secretary of the Department of Veterans Affairs (VA). The case is being reviewed by the Seventh Circuit after a prior remand for further proceedings. The court affirmed the district court's decision, maintaining jurisdiction under 28 U.S.C. § 1291. Previous rulings established that the VA retains its right to indemnity from veteran debtors regardless of a lender's choice of foreclosure method in Wisconsin, which can eliminate the VA's subrogation rights. The VA's home loan program guarantees loans for veterans who pay a fee, and Wisconsin law allows lenders two methods for foreclosure, one of which provides a longer redemption period for debtors. The appeal primarily focuses on the requirement that lenders must notify the VA 30 days before foreclosure to preserve the VA's right to reimbursement for any deficiency post-sale. If a lender fails to follow this protocol, any release of personal liability for the veteran debtor will also release the VA's obligations as guarantor, unless the lender has complied with the notification requirements and the VA has not instructed otherwise within the specified timeframe. A lender who does not adhere to the VA's instructions or fails to secure the VA Secretary's approval before releasing a debtor from a deficiency obligation forfeits the right to reimbursement for any deficiency. If the VA reimburses such a lender, the payment is considered "gratuitous," and the VA loses its right to indemnification from the veteran borrower. In the case of Davis, it was found that while the VA could maintain its right to seek indemnification, it was necessary to determine which lenders failed to comply with VA instructions. Upon remand, the district court ruled that all lenders had followed VA instructions, thus entitling the VA to indemnity from the class members. The court interpreted a form letter from the VA as indicating that lenders should protect subrogated rights, which led to the conclusion that lenders could not proceed under a specific expedited remedy (Sec. 846.101) without losing the right to collect deficiencies. However, the district court also noted that the VA's ongoing dealings effectively allowed and encouraged lenders to use this expedited remedy, which amounted to "prior approval of the Secretary." Consequently, the VA's payments were deemed non-gratuitous, allowing it to seek indemnification from veteran debtors. The veterans acknowledged the VA's course of dealing but presented three legal arguments asserting that the VA's payments were still gratuitous. They argued that the case was similar to Church, where the VA was denied indemnification after paying a lender that did not follow proper procedures. In that case, the lender had notified the VA of foreclosure intentions, received a form letter, and later entered a forbearance agreement, yet still proceeded to foreclose. The case at hand distinguishes itself from the precedent set in Church due to the VA's course of dealing, which supported lenders in utilizing Wisconsin's six-month foreclosure process. The court in Church only considered the letters from the VA, whereas here, the VA's broader interactions provide additional evidence of 'approval by the Secretary' as required under Sec. 4324(f). The defendants argue that an 'informal understanding' between lenders and VA employees does not equate to 'prior approval by the Secretary' and that the district court's decision allowed the VA's 'blanket approval' to negate the requirements of Sec. 4324(f). While the court acknowledges that the VA's dealings may constitute 'blanket approval,' it emphasizes that Sec. 4324(f) hinges on whether 'prior approval' was obtained, not the exceptions to its general rule. The veterans assert that the VA's policies necessitate written approval for such actions, but the court clarifies that Sec. 4324(f) does not explicitly require written consent. Therefore, the VA's course of dealing could meet the approval requirement despite lacking formal written authorization. The veterans further claim that the VA should not be held to its course of dealing if it contradicts written instructions, positing that the VA would prevail in a hypothetical lawsuit against a lender. However, the court finds this argument unpersuasive, maintaining that the VA's prior letter does not form part of the contract but is integral to its performance. Consequently, the VA remains obligated to fulfill its guaranty commitments to lenders regardless of conflicting instructions. The district court's findings were upheld, leading to the affirmation of its ruling.