VA Loans: DEFICIENCY allowed. Connelly v.J Dervinski, 961 F.2d 129 (9th Cir, 1991) Once again we are asked to determine, once again, whether a state anti-deficiency scheme is preempted by Department of Veteran Affairs (VA) regulations that authorize the VA to collect deficiencies on VA-guaranteed home loans. This case involves Oregon law, which forbids a deficiency judgment after either a judicial or a non-judicial foreclosure sale. See Or.Rev.Stat. § 86.770(2). Same result in Shepherd v. Dervinski, 961 F.2d 132 (9th Cir, 1992) (an Arizona case) also see In United States v. Rossi, 342 F.2d 505 (9th Cir.1965), we held that a California anti-deficiency law, which in all material respects is identical to Oregon law, is preempted by the VA regulations. Id. at 506. Subsequently, in Whitehead v. Derwinski, 904 F.2d 1362 (9th Cir.1990), we held that a Washington anti-deficiency law, which permits a deficiency judgment after a judicial, but not a non-judicial sale, is not preempted by the VA regulations. Id. at 1369. In Whitehead, we distinguished the Washington anti-deficiency law from the California anti-deficiency law. Id. at 1368. Because the Oregon anti-deficiency law is materially different from the Washington anti-deficiency law, but identical to the California anti-deficiency law, we hold that this case is controlled by Rossi and that the Oregon law is preempted by the VA regulations.

It is evident that a state’s anti-deficiency statute is irrelevant to VA-guaranteed home loans. This is consistent with the basic principle that federal law governs the rights of private citizens who contract in loans transactions with the United States. United States v. Kimbell Foods, Inc., 440 U.S. 715, 727, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). There is nothing to suggest that this principle and the analysis undertaken in Carter would not also apply to other federal loan programs. See United States v. Einum, 821 F.Supp. 1283, 1284 (W.D.Wis.1992) (FmHA loans).

U.S. v. Rezzonico, 32 F. Supp. 1112 (D.Ct. Ariz. 1998) that sheds a little more light on the issue. In that case the FmHA guaranteed the loan, and the court follows Carter v Derwinski, 987 F.2d 611 (9th Cir.), a case in which the court held that “the VA always has a right of indemnity against the veteran for the amount of guarantee paid to the lender….[t]he VA’s right to indemnity derives from a contract independent of the mortgage. As indemnitor the veteran is in the same position as the guarantor….” Rezzonico, at 1115 (quoting Carter, 987 F.2d at 616-7). The Rezzonico court applied the same reasoning to the FhMA as the line of cases finding no preemption with respect to the VA.
Throw Cippolline, Medtronic, and the Chevron two part defenses into the mix and you have a first class briefing nightmare on any preemption issue. Predicting the outcome in these cases is anybody’s guess.

Servicemembers Civil Relief Act (SCRA) (this may be out of date – check the current law)
Section 303 – Mortgages and trust deeds

(a) MORTGAGE AS SECURITY- This section applies only to an obligation on real or personal property owned by a servicemember that–
(1) originated before the period of the servicemember’s military service and for which the servicemember is still obligated; and
(2) is secured by a mortgage, trust deed, or other security in the nature of a mortgage.

(b) STAY OF PROCEEDINGS AND ADJUSTMENT OF OBLIGATION- In an action filed during, or within 90 days after, a servicemember’s period of military service to enforce an obligation described in subsection (a), the court may after a hearing and on its own motion and shall upon application by a servicemember when the servicemember’s ability to comply with the obligation is materially affected by military service–
(1) stay the proceedings for a period of time as justice and equity require, or
(2) adjust the obligation to preserve the interests of all parties.

(c) SALE OR FORECLOSURE- A sale, foreclosure, or seizure of property for a breach of an obligation described in subsection (a) shall not be valid if made during, or within 90 days after, the period of the servicemember’s military service except–
(1) upon a court order granted before such sale, foreclosure, or seizure with a return made and approved by the court; or
(2) if made pursuant to an agreement as provided in section 107.

(1) MISDEMEANOR- A person who knowingly makes or causes to be made a sale, foreclosure, or seizure of property that is prohibited by subsection (c), or who knowingly attempts to do so, shall be fined as provided in title 18, United States Code, or imprisoned for not more than one year, or both.
(2) PRESERVATION OF OTHER REMEDIES- The remedies and rights provided under this section are in addition to and do not preclude any remedy for wrongful conversion otherwise available under law to the person claiming relief under this section, including consequential and punitive damages.

789 words|3.9 min read|Categories: |By |Published On: August 29th, 2022|Last Updated: August 29th, 2022|

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