Short Sale, Foreclosure and Strategic Default


Wednesday, December 31, 2008

Anti deficiency statutes, CCP 580b, purchase money loans and home improvement loans

John Bilotta - Administrative Offset Decision - HUD

Petitioner was notified by Due Process Notice that the Secretary of the U.S. Department of Housing and Urban Development (HUD) intended to seek administrative offset of any Federal payments due to Petitioner or to seek administrative wage garnishment of Petitioner's pay in satisfaction of a delinquent and legally enforceable debt allegedly owed to HUD. Administrative offset is authorized by 31 U.S.C. § 3720A; administrative wage garnishment is authorized by 31 U.S.C. § 3720D. The claimed debt has resulted from a defaulted loan that was insured against non-payment by the Secretary pursuant to Title I of the National Housing Act. 12 U.S.C. § 1703.

Petitioner has made a timely request for a hearing concerning the existence, amount or enforceability of the debt allegedly owed to HUD. The Administrative Judges of this Board have been designated to conduct a hearing to determine whether the debt allegedly owed to HUD is legally enforceable pursuant to 24 C.F.R. § 20.4(b). As a result of Petitioner's request, referral of the debt for offset or issuance of a wage withholding order was temporarily stayed by the Board.

31 U.S.C. § 3720A and 31 U.S.C. § 3720D provide Federal agencies with remedies for the collection of debts owed to the United States Government. The burden of proof is on the Government to prove the existence or amount of the alleged debt. 31 C.F.R. § 285(f)(8)(i). The Secretary has filed a Statement with documentary evidence supporting his position that Petitioner is indebted to the Department in a specific amount.

Petitioner does not dispute the existence or amount of the debt incurred pursuant to an installment note insured by the Secretary under Title I of the National Housing Act, 12 U.S.C. § 1703, or that the debt is delinquent. Rather, Petitioner asserts that the debt is not legally enforceable against him because: (1) he "believed the foreclosure covered [Petitioner's] obligation to HUD"; (2) enforceability of the debt would violate "California Anti-Deficiency statutes as reflected in California Code of Civil Procedure sections 580a, 580b, and 580d"; and (3) financial hardship. (Petitioner's letters dated January 13, 1999 and February 20, 1999 respectively).

First, Petitioner contends that he believed the foreclosure sale "covered [Petitioner's] obligation to HUD." (Petitioner's letter dated January 13, 1999). There is no documentary evidence submitted by Petitioner to support this contention. The home improvement note was a separate instrument and was a trust junior to that of the one held by Petitioner. There is no evidence that HUD received proceeds from any subsequent sale of the foreclosed real property. If satisfaction of a senior deed of trust through a foreclosure sale prevents a junior trust holder from enforcing a junior trust deed on the same real property, the junior trust holder may collect the debt, now unsecured, by initiating collection efforts based on the obligations in the loan note. Kimberly S. (King) Thede, HUDBCA No. 89-4587-L74 (April 23, 1990) citing Alan Juel, HUDBCA No. 87-2065-G396 (January 28, 1986). Therefore, the Secretary is entitled to separately enforce the debt against Petitioner under the assigned note.

Second, Petitioner questions the debt "based on the belief that [the debt] is in violation of California Anti-Deficiency statutes as reflected in California Code of Civil Procedure sections 580a, 580b, and 580d." (Petitioner's letter dated February 20, 1999).

Generally, deficiency judgments are unavailable after a trustee's sale of property under a deed of trust. Cal. Code Civ. Proc. § 580(d) (West 1999). However, junior trust deed holders like HUD, who are "sold out" by a senior's foreclosure sale, are not precluded by the one-action rule from pursuing a separate action on their note unless the note constitutes a "purchase money" note. Robert P. Long, HUDBCA No. 97-C-SE-W64 (October 15, 1997) citing Patricia J. Sherban, HUDBCA No. 96-C-SE-V78 (September 12, 1997) and Donald W. Conley v. Robert C. Matthes, 56 Cal. App. 4th 1453, 66 Cal. Rptr. 2d 518 (1997). Where the vendor secures a deed of trust or mortgage to secure the purchase price of real property, such transaction is deemed a purchase money. James T. Palm v. John R. Schilling, 199 Cal. App. 3d 63, 244 Cal. Rptr. 600 (1988); Cal. Code Civ. Proc. § 580(b). In this case, the home improvement loan was not secured towards the purchase of Petitioner's home, but rather to undertake improvements made to the home. The home improvement note does not constitute a purchase money note. Therefore, HUD is not prevented from seeking to enforce the deficiency on the home improvement note after the sale. Only the foreclosing lienholder was barred from taking a deficiency action against Petitioner by virtue of California's anti-deficiency law. In re the Marriage of Oropallo v. Oropallo, 68 Cal.App. 4th 997, 80 Cal. Rptr. 2d 669 (1998).

Furthermore, Section 726 of the California Code of Civil Procedure do not bar a deficiency action on a home improvement note. Section 726 of the California Code of Civil Procedure, under the "one form of action rule," protects the debtor against a multiplicity of suits and compels competitive bidding to test the value of all security for the debt. United Cal. Bank v. Tijerina, 25 Cal. App. 3d 963, 102 Cal. Rptr. 234 (1972). However, the "one form of action" rule of section 726 does not apply to a sold-out junior lienor. Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35, 38-39, 378 P.2d 97, 27 Cal. Rptr. 873 (1963). There is no reason to compel a junior lienor to go through foreclosure and sale when there is nothing left to sell.

Neither Section 580 nor Section 726 of the California Code of Civil Procedure are applicable to a junior lien. Id. Therefore, I find that HUD is not barred by the California Code of Civil Procedure Sections 580 and 726 from taking a deficiency action against Petitioner on the remaining obligation of the home improvement loan.

Finally, Petitioner maintains that the debt is not enforceable against him because of financial hardship. Petitioner states that "[a] wage garnishment would definitely put [Petitioner] out of business . . . and that [Petitioner's] debt load does not leave [Petitioner's] family with any real extra money on a monthly basis." (Petitioner's letter dated January 13, 1999). However, this Board must determine whether, as a matter of law, this debt is legally enforceable against Petitioner. Unfortunately, evidence of hardship, no matter how compelling, cannot be taken into consideration in determining whether the debt is legally enforceable. Anna Filiziana, HUDBCA No. 95-A-NY-T11 (May 21, 1996).

While Petitioner may wish to negotiate repayment terms with the Department, this Board is not authorized to extend, recommend, or accept any payment plan or settlement offer on behalf of the Department. Petitioner may want to discuss this matter with Lester J. West, Director, HUD Albany Financial Operations Center, 52 Corporate Circle, Albany, NY 12203-5121. His telephone number is 1-800-669-5152, extension 4206. A review of Petitioner's financial status may be conducted if Petitioner submits to that HUD Office a Title I Financial Statement (HUD Form 56142).

Petitioner may also request the Department to propose a repayment schedule. If the Department's repayment proposal is unacceptable, Petitioner has a right to seek Board review of the proposal. This Board is authorized to review "the terms of the repayment schedule [if the terms] are unlawful [or] would cause a financial hardship to the debtor . . . ." 31 C.F.R. § 285(f)(8)(ii).


I find the debt which is the subject of this proceeding to be legally enforceable against Petitioner in the amount claimed by the Secretary. The Order imposing the stay of referral of this matter to the IRS for administrative offset or to the U.S. Department of Treasury for issuance of a wage withholding order is vacated.

It is hereby ORDERED that the Secretary is authorized to seek collection of this outstanding obligation by means of administrative offset of any Federal payments due to Petitioner or by means of issuance of a wage withholding order.

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