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UNITED STATES v. WHITNEY

February 11, 1985

UNITED STATES of America, Plaintiff,
v.
George WHITNEY, Defendant.



The opinion of the court was delivered by: TELESCA

MEMORANDUM DECISION and ORDER

TELESCA, District Judge.

 BACKGROUND

 In this action, the United States seeks to collect from a veteran, defendant George Whitney, a deficiency which arose out of the foreclosure of a mortgage by Community Savings Bank on property originally purchased by Whitney. The mortgage was guaranteed by the Veterans' Administration. As a condition of securing the mortgage, Whitney agreed to remain personally liable on the mortgage debt, even though there might be a subsequent transfer of the property and assumption of the mortgage by others.

 Four years after Whitney sold the property, the last purchaser of the property defaulted, and Community Savings Bank foreclosed. There is no dispute that the veteran Whitney was not a party to the foreclosure proceeding brought by Community. The property was purchased by the V.A., which later resold it. The sale was insufficient to satisfy the unpaid balance of the mortgage, and the V.A. reimbursed Community for the deficiency.

 The United States now seeks summary judgment against Whitney for the deficiency incurred (approximately $4,000.00). Defendant has cross-moved for summary judgment, claiming that he was released from liability since he was never made a party to the original foreclosure proceeding and hence denied due process of law.

 DISCUSSION

 I.

 It is undisputed that Whitney was never made a party to the mortgage foreclosure proceeding. In a letter dated June 6, 1978, James Wolfe, Loan Service Representative for the V.A., acknowledged that defendant and his wife "were not listed in the summons and complaint by bank attorneys". Plaintiff does not deny that no efforts were made, either by the bank or the Government, to notify Whitney of the default of the mortgage or the subsequent foreclosure. Rather, the Government has taken the position that there is no duty on either the V.A. or the mortgagee to notify the veteran liable for a mortgage which is being foreclosed. That position, which is contested by Whitney, must be addressed with respect to both New York State law and Federal constitutional law.

 A. New York Mortgage Procedure

 1. The applicable law

 Under New York law, as discussed more fully below, a person responsible for the payment of a debt secured by a mortgage is entitled to personal service of notice of the mortgage foreclosure. Before turning to the applicable provisions of New York law, the threshold question to be resolved is whether the notice requirements under state law are applicable to the foreclosure of a mortgage guaranteed by the Veterans' Administration, and otherwise generally governed by federal regulations. (38 C.F.R. Section 36.4300 et seq.).

 In United States v. Shimer, 367 U.S. 374, 81 S. Ct. 1554, 6 L. Ed. 2d 908 (1961), the United States brought an action against a veteran for reimbursement of a deficiency incurred after foreclosure of a mortgage guaranteed by the V.A. The veteran argued that, under the Pennsylvania Deficiency Judgment Act, he was discharged from any obligation by the failure of the mortgagee to bring a proceeding to obtain a court determination of the fair market value of the mortgaged property within six months of the foreclosure sale. The Supreme Court disagreed, holding that the foreclosure of a mortgage guaranteed by the V.A. is governed by federal regulations, and is not subject to a state law requiring judicial appraisal of the mortgaged property. "The Regulations promulgated by the Veterans' Administration make clear that they were intended to create a uniform system for determining the Administration's obligation as guarantor, which is its operation would displace state law." Id., at 377, 81 S. Ct. at 1557.

 In subsequent cases involving the foreclosure of mortgages guaranteed by the V.A., several circuit courts have summarily rejected the application of state laws governing mortgage foreclosures, citing Shimer for the proposition that V.A. regulations "displace state law" -- apparently proceeding on the unwarranted assumption that the federal regulations preempt state law altogether in this area. See, e.g., Mortgage Associates, Inc. v. Cleland, 653 F.2d 1144, 1147, (7th Cir.1981); *fn1" United States v. Rossi, 342 F.2d 505 (9th Cir.1965). *fn2" The Fifth Circuit also adopted and relied upon such an interpretation of Shimer in United States v. Wells, 403 F.2d 596, 597-8 (5th Cir.1968) in concluding that "The national loan program of the Veteran["] Administration cannot be subjected to the vagaries of the various state laws ...


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