Posting for

Tuesday, April 24, 2001

by: Bert Rush

brush@firstam.com

SUPREMACY CLAUSE/NON-JUDICIAL FORECLOSURE/VA HOME LOAN GUARANTY PROGRAM/HUD

A federal trial court in California has voided a non-judicial foreclosure conducted by a homeowners' association to collect delinquent assessments against property owned by the U.S. Department of Veterans Affairs, on grounds the procedure violated the Property and Supremacy clauses of the U.S. Constitution.

The case is Yunis v. United States Department of Veterans Affairs, 118 F.Supp. 1024 (U.S.D.C., C.D. Calif. 2000). Here's what happened.

In 1992 Mr. and Mrs. Zoltan Buky purchased a home on Sky Meadow Street in Riverside, California, financed with a VA mortgage loan. The property was subject to recorded CC&Rs creating the "Sky Meadows (homeowners') Association" which, among other things, required payment of association assessment fees.

In 1996, the mortgage lender foreclosed and sold the property to the VA as provided by the federal Home Loan Guaranty Program. The VA's total acquisition costs were $85,093. The grant deed (into the VA) specified that tax statements should be mailed to the VA's Los Angeles office.

But, almost as soon as its deed was recorded, the VA transferred responsibility for management of its Riverside County properties to a newly opened San Diego office.

When assessment fees became delinquent, the Sky Meadows Association (pursuant to its CC&Rs) perfected an assessment lien against the VA property, and proceeded (by mailing, posting and recording of notices) to schedule a trustee's sale. The mailed notices were received by the VA's L.A. office, but otherwise plans for the foreclosure escaped notice of the San Diego office.

On August 1, 1997, the VA listed the property for sale at $67,000, and it promptly received three offers of $67,100, $67,111 and $68,000, respectively. On that same day, the trustee appointed by Sky Meadows posted a "Notice of Trustee's Sale" on the property.

On September 11, 1997, the trustee's sale was held, and the successful bidder was Muhammad Yunis (a trustee of the "Sky Meadows Street Trust") who paid $2,186.75-just one cent more than was due in assessment fees.

Learning of the trustee's sale, the VA offered to pay all delinquent assessments while asserting that its interest in the property was unaffected by the sale. Yunis responded by filing suit to quiet title.

On cross motions for summary judgment, there were virtually no factual issues to be resolved. It was clear that procedures followed by Sky Meadows were in compliance with state laws, and likewise clear that the VA would pay any assessments that were due.

The federal trial court ruled in favor of the VA, first deciding that governing law in this case must be federal law, because federal constitutional issues are involved. The Court cited the Property Clause of the U.S. Constitution (Article IV, Section 3, clause 2), which provides in part:

"...the Congress shall have Power to

dispose of and make all needful Rules

and Regulations respecting the

Territory or other Property belonging

to the United States...."

The Court explained that the power of Congress to control the disposition of property of the U.S. is absolute and limitless, and, for reasons of public policy, it cannot yield to "authority of another sovereignty against the consent of the Government. (Cite.)" In further support, the Court cited the Supremacy Clause of the U.S. Constitution (Article IV, clause 2), which provides in part:

"...this Constitution, and the laws

of the United States which shall be

made in Pursuance thereof;...shall be

the supreme Law of the land; and the

judges in every state shall be bound

thereby...."

From this, the Court concluded that title to property owned by the U.S. may not "pass" unless the federal government "acts." In this connection, the Court cited Rust v. Johnson, 597 F.2d 174 (9th Cir. 1979), where it was held that a city's attempt to enforce a street improvement lien by conducting a non-judicial foreclosure against property of the United States (i.e., the beneficial interest under a deed of trust held by Fannie Mae) was unconstitutional (under the Supremacy Clause), because procedures followed under state law did not "protect" the "federal interest." Said the Court,

"In sum, the (U.S.) Supreme

Court has resolved the heart of the

case before us, 'We hold the true

principle to be this, that whenever

the question in any Court, state or

federal, is, whether a title to land

which had once been the property of

the United States has passed, that

question must be resolved by the laws

of the United States....' (Citing

Wilcox v. Jackson, 38 U.S. 498, 516

(1839.)"

In this case, though, the Court found there is no federal law that clearly applies. Therefore, in the absence of federal law the Court said it would exercise its power to (a) fashion a federal rule of law to be applied nationally, or (b) to decide that in cases such as this the federal government should defer to state laws.

Naturally, plaintiff Yunis argue for the latter, relying mainly on decisions of the U.S. Supreme Court in United States v. Brosnan, 363 U.S. 237 (1960), and United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979).

In Brosnan, the Supreme Court held that in the absence of Congressional action it was appropriate to defer to state laws to determine whether a federal tax lien was wiped out by a non-judicial foreclosure. (But note: In 1966--after the Brosnan decision--Congress acted in this area by passing 26 U.S.C. section 7425--giving the IRS a right of redemption following a non-judicial sale of property affecting a federal tax lien.)

Likewise, in Kimbell Foods the Supreme Court held that questions of lien priority involving liens arising from lending functions of the Small Business Administration and the Farmer's Home Administration should be decided under "the ready-made body of state law...until Congress strikes a different accommodation."

But the Yunis Court distinguished Brosnan and Kimbell Foods, and declined to follow their holdings, primarily on grounds that these cases involved mere lien rights rather than ownership interests. And, the Court added, here the homeowners' association has another means to recover the delinquent assessments, by suing the United States under the "sue and be sued" provisions of the VA Home Loan Guaranty Program (38 U.S.C. section 3720[a][1]).

Having decided not to defer to state laws, the Court held that an appropriate "uniform federal rule of decision" to apply in cases such as this is that "only the VA may dispose of its own property." In so holding, the Court said it was most persuaded by the purpose behind the VA Home Loan Guaranty Program: "(T)o facilitate home ownership for eligible veterans." Said the Court,

"To allow such a sale under state

law in the context of this case

would be detrimental to the national

interest of providing eligible

veterans with financial assistance

in obtaining home loans from private

mortgage lenders." Yunis, at p.

1027.

The Yunis case has a companion case, titled Secretary of Housing and Urban Development v. Sky Meadow Association, 117 F.Supp.2d 970 (U.S.D.C., C.D. Calif. 2000). This latter case involves the very same homeowners' association, but this time up going up against HUD and the federal Single Family Mortgage Insurance Program. Both cases were decided by the same judge, and the decisions are identical except for differences in their facts that the judge considered immaterial.

Comment: I suspect (but don't know) that these decisions have been appealed by the Sky Meadows Association. If so, one would expect the Ninth Circuit to feel compelled to follow its earlier leanings in the Rust case, and affirm the trial court decisions.

These are interesting cases for students of Constitutional law, but I would think the holdings here will be limited (in their precedential value) to other cases involving homeowners' associations, and perhaps local tax assessors.

From the standpoint of title folk, these cases are a reminder (if we need one) that we should exercise great care when we are asked to insure following a non-judicial foreclosure sale conducted by a homeowners' association.