## Facts

- Dale Carter and other Idaho veterans obtained VA-guaranteed home loans from private lenders and later defaulted.
- After default, lenders completed nonjudicial foreclosures under Idaho law.
- The VA paid lenders under the loan guaranty and then sought to recover deficiency amounts from the veterans.
- Idaho law limits deficiency recovery after nonjudicial foreclosure by requiring a fair-market-value determination within three months of the trustee’s sale; absent timely valuation, no deficiency may be recovered.
- The VA did not obtain the required fair-market-value determinations within the statutory period but nonetheless pursued collection, invoking statutory subrogation and a regulatory indemnity theory.
- Veterans sued to stop collection, contending the VA forfeited any deficiency claim by failing to comply with Idaho’s valuation deadline.

## Issues

1. Whether the VA’s post-payment recovery from a veteran is primarily governed by statutory subrogation, making the VA subject to the same state-law deficiency limits binding the original lender.
2. Whether the VA may instead rely on an independent regulatory indemnity theory to collect a deficiency when state law would bar the lender (and thus the VA as subrogee) from doing so.
3. Whether the VA’s failure to obtain a timely fair-market-value determination under Idaho law extinguishes any deficiency right it could assert as subrogee.

## Decision

- The Ninth Circuit (en banc) affirmed the judgment for Carter and similarly situated veterans.
- The court held the VA’s primary recovery mechanism is statutory subrogation, which places the VA in the lender’s position and subjects it to state-law limits on deficiency claims.
- Because the VA did not timely obtain Idaho’s required fair-market-value determination, it lost any right to recover a deficiency as subrogee.
- The court rejected the VA’s attempt to use regulatory indemnity to collect a deficiency that state law would bar, limiting prior circuit authority to the extent it suggested otherwise.
- The injunction preventing the VA from collecting the deficiencies was upheld.

## Legal Principles

- Subrogation gives the subrogee no greater rights than the creditor whose claim is asserted; state-law limitations that bind the lender also bind the VA when it sues as subrogee.
- When Congress supplies subrogation as the statutory recovery mechanism for a federal guarantor, an agency regulation cannot expand recovery rights to defeat state debtor protections.
- State deficiency restrictions tied to timely fair-market-value determinations operate as substantive limits on deficiency recovery after nonjudicial foreclosure; failure to comply eliminates the deficiency claim.
- A federal guarantor cannot use an indemnity theory to evade state foreclosure rules where doing so would effectively enlarge the lender’s extinguished rights.

## Conclusion

The en banc court held that the VA, after paying under its home-loan guaranty, must pursue recovery primarily through statutory subrogation and is bound by Idaho’s deficiency limitations; having missed the state-law fair-value deadline, the VA could not collect a deficiency by recasting the claim as regulatory indemnity.


Carter v. Derwinski, 987 F.2d 611 (9th Cir. 1993) (en banc)