STALEY, Circuit Judge.
Is the amount the Veterans Administration can recover on its contract of indemnity with a Pennsylvania veteran limited to the amount which the veteran owes his mortgagee at foreclosure, and must that amount be computed in accordance with Pennsylvania law, including the Pennsylvania Deficiency Judgment Act?
The facts as taken from the stipulation entered into by the parties are as follows: Appellee, George E. Shimer, obtained a loan of $13,000 from the Excelsior Saving Fund and Loan Association (Association) on January 12, 1948, to purchase residential realty in Whitemarsh Township, Montgomery County, Pennsylvania. The loan was evidenced by a bond and secured by a mortgage on the property issued to the Association on the same date, January 12, 1948, both having been executed by George E. and Mildred F. Shimer, his wife. The loan was to be repaid with interest at 4 per cent per annum in monthly installments of $78.78 over a term of twenty years. Within a month appellee, an eligible veteran, applied to the Veterans Administration (V.A.) for guaranty of said loan pursuant to the provisions of Title III of the Servicemen's Readjustment Act of 1944, as amended, 59 Stat. 626, 38 U.S.C. § 694 et seq. (now 38 U.S.C. § 1801 et seq.), on V.A. Form 4-1820, "Home Loan Report." Shortly thereafter, on February 11, 1948, the V.A. approved the application and issued V.A. Form 4-1899, "Loan Guaranty Certificate," guaranteeing "subject to the Servicemen's Readjustment Act of 1944, as amended, Public Law 268, 79th Congress, and the regulations issued thereunder to the date of this certificate, 37.38 per cent of the indebtedness outstanding from time to time under the loan identified above." Pursuant to the provisions as applied to this $13,000 loan, the guaranty amounted to $4,000. Appellee defaulted on May 12, 1948, and continued in default. On April 12, 1949, the Association filed a Notice of Intention to Foreclose with the V.A., and on May 12, 1949, entered judgment in the Court of Common Pleas of Montgomery County, Pennsylvania, at No. 351, April Term, 1949, to foreclose the mortgage on the property purchased with the loan.
This action was initiated in the District Court for the Eastern District of Pennsylvania by the United States to recover the sums paid by the V.A. to the Association. The government asserted it was entitled to recover under either of two counts. The first count was based on its rights as a subrogee of the Association,
On appeal the government contends that it is entitled to indemnity for the loss which it suffered as guarantor of the loan on the basis of a valid regulation binding upon the appellee that is not impaired or limited in any way by the provisions of Pennsylvania law concerning deficiency judgments. The government asserts that "the court below has grafted onto the rights and liabilities running between the United States and defendant [appellee] in their independent contract of indemnity, state law considerations which have point only respecting the relationship between defendant and the bank in the first instance, or secondarily between the defendant and the bank's subrogee. We think it clear that state law control of this latter relationship can affect only those rights which the subrogee takes through the bank, and can not affect other rights independently transacted." (Emphasis supplied.)
We agree with the government that an independent indemnity relationship was created by the veteran's application for guaranty of his loan. We further agree that the terms of that guaranty are governed by the Servicemen's Readjustment Act of 1944, as amended, (Veterans Act) and the regulations promulgated pursuant thereto. Although Section 506 of the Act, 38 U.S.C. (1952 ed.) § 694g, entitled "Procedure on default," authorizes payment of the guaranty by the V.A. in the case of each and every default, it does not purport to spell out the amount which is to be paid; it merely refers to the guaranty. The House Report of the Committee of Conference, dated December 17, 1945, U.S.Code Cong.Serv., 79th Cong., 1st Sess. (1945) 938-939, in considering the procedure on default, stated that "In the event the veteran defaulted in payment of his loan and after suit on foreclosure and sale the deficiency was determined, then upon notification from the lender, the Administrator would pay to the lender its guaranty not in excess of $2,000 and not in excess of the deficiency, and be subrogated to the rights of the lender to the extent of the amount paid on the guaranty." (Emphasis supplied.)
Although the government concedes, as we have heretofore noted, that state law applies to the basic indebtedness between the mortgagor and the mortgagee, it maintains that state law does not apply to the indemnity agreement between the veteran and the government. It seemingly asserts that it can recover under the indemnity agreement whatever amount it paid to the mortgagee. The amount payable under the indemnity agreement, however, is limited to the amount which the V.A. under the statute is required to pay on its guaranty and not the amount which it actually pays. As we have indicated, the amount which it is legally required to pay is the deficiency on foreclosure. That deficiency represents the then indebtedness between the mortgagor and the mortgagee.
The government principally relies on a regulation, since modified, which stated that "Any amounts paid to the creditor by the Administrator pursuant to the guaranty shall constitute a debt due to the United States by the veteran on whose application the guaranty was made * * *." 38 Code Fed.Regs. (1944 Supp.) § 36.4043. This is hardly persuasive, for that regulation was modified to read "Any amounts paid by the Administrator on account of the liabilities of any veteran guaranteed or insured under the provisions of the act shall constitute a debt owing to the United States by such veteran." 38 Code Fed.Regs. (1949 ed.) § 36.4323(e). In any case, even under the earlier regulation the amounts to be paid were regulated by the guaranty, and this was intended only to reimburse the mortgagee in an amount not to exceed the loss he might suffer through default computed as of the date of foreclosure. See 38 Code Fed.Regs. (1956 rev.) § 36.4320(a) (3) (iii) and (4) (d). Since the section in the regulations upon which the government relies, i. e., 38 Code Fed.Regs. (1949 ed.) § 36.4323(e), refers to the "liabilities of any veteran" (to the mortgagee) and the entire Veterans Act refers to an underlying obligation created by state law, we are convinced that federal law requires a referral to the state law in this instance.
In addition, Section 36.4321, entitled "Computation of guaranty claims; subsequent accounts," specifically indicates such a procedure in subsection (a), for it provides:
The second string to the government's bow is the administrative decision rendered in 1945 by the Administrator of Veterans' Affairs, 1 Decisions of Administrator of Veterans' Affairs No. 625, pp. 1154-1164 (Jan. 22, 1945). Basically, this administrative opinion is concerned with states where the mortgagee is completely barred from proceeding against the mortgagor even for an actual deficiency in the event of default. It is worthy of note that Pennsylvania does not do so, but merely limits the recovery by the mortgagee to the amount of the actual deficiency after giving credit for the fair market value of the property taken over by the mortgagee. We agree with the opinion insofar as it asserts that Congress intended the Veterans Act to be beneficial to veterans throughout the country. Of course, in those states where no deficiency judgments are permitted and thus the mortgagee is completely deprived of its right to collect the full amount of indebtedness, the Act would be ineffectual. In such cases the state law must be presumed to be inapplicable.
The V.A. also relies upon the case of McKnight v. United States, 9 Cir., 1958, 259 F.2d 540. It claims that case holds that all state laws upon the subject of deficiency judgments are superseded by the Veterans Act. There the court held that it need not determine whether the California Deficiency Judgment Act, West's Ann.Cal.Code Civ.Proc. § 580b, applied because under settled principles of mortgage law, "the value of the mortgagor's equity in the mortgaged property is fixed by the amount bid at the foreclosure sale, and * * * in the absence of fraud, a mortgagor has no right to compel the mortgagee to account to him for any profit made upon a subsequent resale of the premises." 259 F.2d at page 544.
One other aspect of the Pennsylvania Act deserves our attention. It provides that if no action is taken within the six-month period, not only is the indebtedness to the mortgagee satisfied but the obligor, guarantor, or anyone else liable directly or indirectly to the mortgagee is released. This strikingly points up the difference between the Pennsylvania and California Acts, for the latter has been held not to apply to guarantors. Security-First National Bank of Los Angeles v. Chapman, 1940, 41 Cal.App.2d 219, 106 P.2d 431.
The government's contention that it paid the entire amount of its guaranty prior to the end of the six-month period leads once again to the central question. On what basis did it compute the indebtedness of the mortgagor to the mortgagee so that the amount to be paid under the guaranty, in accordance with the statute and regulations, could have been ascertained? Until the mortgagee indicated, by taking steps under the Pennsylvania Act that it was not satisfied that the fair market value of the property which it then held
The judgment will be affirmed.
FootNotes
"`* * * The act, recognizing plaintiff's right to recover the full amount of the judgment, merely provides for an inquiry in regard to a transaction which occurred subsequent to the judgment, to wit, [what occurred at] the sheriff's sale, in order to ascertain what amount of payment plaintiff has received, such an inquiry being analogous to the trial of an issue of payment raised as a defence * * *.'" 35 A.2d at page 280.
"* * * [T]he defendant is entitled to have the judgment against him satisfied of record, for it has been discharged as completely and effectually as if it had been actually paid off in cash." 35 A.2d at page 280.
"We merely recognize and give effect to the repayment of the judgment debt which the plaintiff has already received through his purchase at the sheriff's sale of a property of the defendant which is now presumed in law to have been worth the full amount of the judgment." 35 A. 2d at page 281.
"It was the receipt of a property worth the amount of the judgment which discharged it. The Deficiency Judgments Act merely compelled effect to be given to that fact. We do not know, nor do we think it important, whether the property was actually worth the full amount of the judgment. It may be assumed that it was, for, if it was not, the plaintiff would have moved, before the expiration of the period of limitation prescribed by the Act, to have a lesser value fixed for the property. However that may be, the Act itself has now created a conclusive presumption that the property was worth at least one hundred percent of the judgment." 35 A.2d at page 281.
In accord, Union Trust Co. of New Castle v. Tutino, 1945, 353 Pa. 145, 44 A.2d 556; Pennsylvania Co. for Insurances on Lives and Granting Annuities v. Scott, 1942, 346 Pa. 13, 29 A.2d 328, 144 A.L.R. 849.
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