PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: DUDLEY M. MOORHOUS, JR.,
Debtor.

EARL DORFMAN; SHARON DORFMAN,
Plaintiffs-Appellants,                                               No. 95-2552

v.

DUDLEY M. MOORHOUS, JR.;
DOROTHY MOORHOUS,
Defendants-Appellees.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Claude M. Hilton, District Judge.
(CA-95-529-A, BK-94-10003-AA)

Argued: February 2, 1996

Decided: March 5, 1997

Before WIDENER, WILKINS, and MICHAEL, Circuit Judges.

_________________________________________________________________

Affirmed by published opinion. Judge Widener wrote the opinion, in
which Judge Wilkins and Judge Michael concur.

_________________________________________________________________

COUNSEL

ARGUED: Joel S. Luber, CAPLAN & LUBER, Paoli, Pennsylvania,
for Appellants. Alan Miles Winterhalter, ALAN M. WINTER-
HALTER & ASSOCIATES, P.C., McLean, Virginia, for Appellees.
OPINION

WIDENER, Circuit Judge:

Plaintiffs Earl and Sharon Dorfman, husband and wife, appeal from
an order of the district court affirming the memorandum and order of
the bankruptcy court published as In re Moorhous , 180 B.R. 138
(Bankr. E.D. Va. 1995). Defendants are Dudley M. Moorhous, the
debtor and a retired Air Force colonel, and Dorothy Moorhous, his wife.1
The bankruptcy court held that a series of agreements purporting to
assign a number of installments of Col. Moorhous's military retire-
ment pay in exchange for lump sum advances from the Dorfmans
were "not effective to vest ownership of such pay in the Dorfmans."
180 B.R. at 150. As a result, the court also held that no basis had been
shown to impose a constructive trust on Col. Moorhous' retired pay,
denied injunctive relief, and held that Col. Moorhous did not become
liable for conversion when he ceased to remit his retired pay to the
Dorfmans. 180 B.R. at 151-52. In an earlier order granting summary
judgment in favor of the Moorhouses on plaintiffs' claim for breach
of contract, the bankruptcy court held that any contractual liability
under the agreement had been discharged in bankruptcy, 180 B.R. at
152.

We affirm.

The parties accept, as do we, the statement of facts set forth in the
bankruptcy court's published opinion.

The facts show that Col. Moorhous sought money for investment
purposes and consequently placed an ad in the November 17, 1989
edition of a national newspaper that read as follows:

          WILL PAY 17% ANNUALLY!

           For $190,000 for 15 years, paying $3,250/mo from govern-
           ment retirement.
_________________________________________________________________
1 Plaintiffs' complaint initially named the United States Air Force as an
additional defendant. They voluntarily dismissed this claim. 180 B.R. at
152.

                     2
The Dorfmans, who reside in Pennsylvania, responded to the ad,
and after a period of negotiations with Col. Moorhous in Virginia,
obtained the services of an attorney. Col. Moorhous did not engage
counsel.

The transaction, as Col. Moorhous proposed it, involved the "ex-
change of his right to the proceeds of his vested pension" for a speci-
fied period of months in return for a lump sum cash payment. 180
B.R. at 145 n.4. The attorney doubted whether an assignment of the
right to military retired pay could be enforced and made written
inquiry to the Headquarters Air Force Accounting and Finance Center
(AFAFC) in March, 1990. His letter described the proposed transac-
tion as the "advance [of] a certain sum of money to [Col. Moorhous]
in exchange for his irrevocable assignment of a certain fixed number
of future pension payments," and asked the following questions about
the nature of the right to retired pay and the legality of the proposed
arrangement:

          3. Whether there is any law, regulation, ruling, or other
          authority which would prohibit Mr. Moorhous from entering
          into the type of transaction described above. (A proposed
          form of agreement incorporating the deal is enclosed).

          4. Whether you will honor a direction by Mr. Moorhous
          to make direct deposits of his pension into a bank account
          designated by our client (not in the name of Mr. Moorhous).
          Please forward the appropriate forms to accomplish same
          (Form #1199A?).

          5. Will you accept an irrevocable designation of direct
          deposit for a stated period of time, or one revocable only
          upon signed co-authorization by our client.

          ....

          7. Under what circumstances, if any, could Mr. Moorhous'
          retirement pay be terminated, suspended, reduced in
          amount, or otherwise impacted by his acts alone, or by
          actions outside his control. For example - divorce, judgment
          creditors, bankruptcy, Act of Congress.

                    3
Letter from Luber to AFAFC of March 8, 1990. Before a written
reply was received, the attorney learned by telephone from personnel
at AFAFC that "the Air Force would only disburse retired pay to the
retired member or by direct deposit to an account in the retired mem-
ber's name." 180 B.R. at 142.

Despite the verbal refusal of the Air Force to recognize a right of
payment in anyone but Col. Moorhous, Luber drafted an agreement
circumventing the bank account restrictions and purporting to transfer
the right without waiting for a written reply to his inquiry. The parties
executed the agreement on April 18, 1990. The Air Force replied in
writing on April 24, 1990, confirming that the right to retired pay
could not be transferred:

          c. Question 3. Retired pay is not a vested pension. It is
          a statutory right governed by law enacted by congressional
          legislation. Retired pay can be disbursed only to the Air
          Force retiree. The disbursement of funds after receipt by the
          retiree is at his discretion.

          d. Question 4 and 5. Direct deposits to a financial insti-
          tution can be made in Colonel Moorhous' name only and
          must be at his request. He and the financial institution must
          complete a Standard Form 1199A and send it to AFAFC.

          ....

          f. Question 7. Retired pay terminates upon the retiree's
          death. However, it may be waived in full or partially in lieu
          of Department of Veterans Affairs (VA) compensation or
          civil service retirement. It may be reduced partially or in full
          by dual compensation or pay cap offsets if he should be
          employed by the Federal Government. An act of Congress
          may also stop or change retired pay, and the retiree's pay
          may be garnished for debts owed to the U.S. government or
          by court order for various reasons.

Letter from AFAFC to Luber of 4/24/90.

                     4
Under the agreement drafted by the attorney and executed April 18,
1990, the Dorfmans paid $125,000 in exchange for an irrevocable
assignment of 112 1/2 consecutive monthly payments of Col. Moor-
hous's retired pay. We are told by the Dorfmans at oral argument that
the first money was paid to Col. Moorhous on April 18-20, 1990. The
agreement circumvented the Air Force's direct deposit restrictions by
requiring Col. Moorhous to establish an account at a Pennsylvania
bank, issue orders purporting to be irrevocable to the Air Force to
deposit his retired pay into that account, and give irrevocable authori-
zation to the bank to transfer the payment into an account in the Dorf-
mans' name each month. The Dorfmans required as security a first
mortgage on two lots in St. John's County, Florida; a third deed of
trust on the Moorhous's home in Springfield, Virginia; a collateral
assignment of a $250,000 life insurance policy on Col. Moorhous's
life; and a pledge of the corporate stock Col. Moorhous purchased
with the proceeds of the Dorfmans' advance. The decision of the
bankruptcy court did not disturb this security, and it is not an issue
on appeal.

Subsequent loans by the Dorfmans and a bill from the attorney
resulted in amendments to the agreement that increased the number
of installments of retired pay assigned by Moorhous.

The arrangement functioned for some months, from May 1990
through October 1993, during which time the bankruptcy court esti-
mated that the Dorfmans received in excess of $137,981. In October
1993, Col. Moorhous, experiencing financial difficulties, submitted a
new direct deposit form to the Air Force, directing that his retired pay
be deposited in a Virginia Bank. The Dorfmans filed suit in the
United States District Court for the Eastern District of Pennsylvania
the following month. In January, 1994, Col. Moorhous filed a chapter
7 bankruptcy petition in the United States Bankruptcy Court for the
Eastern District of Virginia, which stayed the Dorfmans' suit in Penn-
sylvania. Col. Moorhous received a discharge on April 22, 1994. The
Dorfmans obtained a confessed judgment against Mrs. Moorhous who
then filed her own chapter 7 petition in October, 1994 and received
a discharge on January 31, 1995.

The Dorfmans filed this action as an adversary proceeding on April
12, 1994, seeking a declaratory judgment that Col. Moorhous

                    5
breached the agreement; an injunction to require him to repay the
installments of retired pay missed since November, 1993 and reinstate
the direct deposit to the Pennsylvania bank; damages for breach of
contract and conversion; and the imposition of a constructive trust
upon the retired pay received by the Moorhouses after October 31,
1993. The bankruptcy court granted summary judgment for the Moor-
houses on the breach of contract claim on the grounds that any liabil-
ity for breach had been discharged in bankruptcy. Following a two
day trial, the court entered judgment for the Moorhouses on all
remaining counts.

The principal question presented in this appeal is whether the
agreement constituted a valid assignment of an interest in property
that could be enforced, post-petition, against the Moorhouses. In its
opinion, the bankruptcy court accepted the parties' characterization of
the transaction at the time the agreement was entered into as an annu-
ity rather than a loan, which bankruptcy would clearly discharge, on
the grounds that Col. Moorhous knew that the Dorfmans, following
the attorney's advice would not have entered into a transaction struc-
tured as a loan. The court reasoned, however, that if retired pay was
compensation for the retiree's current - though reduced - military ser-
vice, the assignment would not survive the filing of the bankruptcy
petition. The court was reluctant to base its holding on this rationale
in light of the principle, announced by the Supreme Court in Barker
v. Kansas, 503 U.S. 594 (1992), that for state tax purposes under a
federal statute that waives intergovernmental tax immunity, military
retirement benefits are considered deferred pay for past services
rather than current pay. See Barker, 503 U.S. at 605.

Instead, the court looked to 37 U.S.C. § 701, which provides in per-
tinent part:

          (a) Under regulations prescribed by the Secretary of the
          military department concerned, a commissioned officer of
          the Army, Navy, Air Force, or Marine Corps may transfer
          or assign his pay account, when due and payable.

          ....

                    6
          (c) An enlisted member of the Army, Navy, Air Force, or
          Marine Corps may not assign his pay, and if he does so, the
          assignment is void.

          (d) The Secretary of the military department concerned,
          may allow a-

          (1) member of the Army, Navy, Air Force, or
          Marine Corps . . . .

          to make allotments of his pay for the support of his relatives,
          or for any other purpose that the Secretary concerned con-
          siders proper . . . .

37 U.S.C. § 701. Contrasting the statute's use of the permissive word
"may" with respect to officer pay assignments with § 701(c)'s abso-
lute prohibition of pay assignments by enlisted men, the bankruptcy
court concluded that Congress "intended to require an implementing
regulation by the Secretary of the service concerned as a precondition
to assignments of pay by officers." 180 B.R. at 150.

The parties agreed that the Secretary of the Air Force had never
issued regulations addressing assignments of pay. After examining
the current regulations concerning both active duty and retired pay for
all services, the Department of Defense Financial Management Regu-
lation (DoDFMR),2 the court noted that the only means allowed for
the payment of debts by retirees are allotments, see 37 U.S.C.
§ 701(d), which the retiree may terminate at any time. Further, autho-
rized allotments were restricted to a limited class of creditors that did
not include the Dorfmans. The court thus concluded that the Secretary
of Defense also had not issued regulations permitting the assignment
_________________________________________________________________
2 The regulations examined by the bankruptcy court are divided into
two volumes. Volume 7A, dated December 12, 1994, and entitled "Mili-
tary Pay Policy and Procedures Active Duty and Reserve Pay" deals with
active duty and reserve pay. Volume 7B, dated November 30, 1992, and
entitled "Department of Defense Military Retired Pay Manual" applies to
retired pay. Although effective after the date of the transaction here ques-
tioned, Vol. 7B contains no regulation authorizing assignment of retired
pay.

                    7
of an officer's retired pay and held that the "attempted assignment by
Col. Moorhous of his military retired pay was not effective to vest
ownership of such pay in the Dorfmans." 180 B.R. at 150.

The court held that the provision "when due and payable" in
§ 701(a) was most reasonably construed to mean"that Congress
intended to permit assignments only of pay that is due and payable
at the time the assignment is made," 180 B.R. at 150, noting that other
circuits had adopted that construction. See United States v. Smith, 393
F.2d 318 (5th Cir. 1968); Smith v. Commanding Officer, 555 F.2d
234, 235 n.1 (9th Cir. 1977). The bankruptcy court's denial of a con-
structive trust, injunctive relief, and damages for conversion followed
directly from its conclusion that the purported assignment had not
actually transferred any property right to the Dorfmans.

The Dorfmans present a number of arguments to show that the
assignment was valid, only two of which merit consideration. First,
they contend it was error to construe the statute's due and payable
provision to limit assignments only to pay that is due and payable at
the time the assignment is made. Pointing to the fact that retired pay
is disbursed by electronic funds transfer shortly after the end of the
month during which the pay is earned and becomes due, the Dorf-
mans argue that the limitation "is an absurd reading of the statute, and
essentially renders the statute a nullity." Second, they contend that 37
U.S.C. § 701(a) authorizes officers to assign their pay without requir-
ing the service secretary to promulgate an implementing regulation,
and that any regulation that prohibits this statutory right is invalid.

Turning first to the construction of the words "due and payable,"
we agree with the Fifth Circuit and the bankruptcy court that "no ser-
viceman may assign his pay in advance of the date it becomes due
and payable." United States v. Smith, 393 F.2d at 321. The limitation
is but a corollary of general legal principles governing the pay of pub-
lic officials:

          [I]t is a well settled general rule that an assignment by a
          public officer of the unearned salary, wages, or fees of his
          office is void as against public policy . . . . In accordance
          with the general rule, and also in view of statutes and regu-
          lations forbidding an officer to assign his pay account before

                    8
          due, an army or navy officer cannot assign his unearned pay,
          including the unearned half pay of a retired officer.

6A C.J.S. Assignments § 26 (1975) at 623-25 (citing cases). The pub-
lic policy justification arises from the concern that unforeseen finan-
cial embarrassments, following the assignment of an officer's future
pay, may prevent the officer from rendering the services for which he
has been retained. 6A C.J.S. Assignments§ 26 (1975) at 624; Swenck
v. Wyckoff, 20 A. 259, 260 (N.J. 1890)(officer may not assign
unearned retired pay). The restriction is of long standing in English
jurisprudence, Swenck, 20 A. at 260, and with respect to American
forces, has existed since at least 1835, at which time Army Regula-
tions stated "[o]fficers shall not pass away or transfer their pay-
accounts for any amount not actually due at the time." Army Regula-
tions of 1835, Reg. 11 Art. XLVIII (quoted in 15 Op. Att'y. Gen. 271,
273 (1877).

Also, as Smith points out, at p.321, under the Anti-Assignment Act,
31 U.S.C. § 3727, an officer's assignment of his future pay is invalid
in the form present here. This conclusion is consistent with the due
and payable restriction in 37 U.S.C. § 701(a). Section 3727(b) autho-
rizes the assignment of a claim against the United States, such as an
officer's pay account, "only after [the] claim is allowed, the amount
of the claim is decided, and a warrant for payment of the claim has
been issued." 31 U.S.C. § 3727(b). None of these conditions was met
in the present case.

The predecessor statute to current § 701(a) was 10 U.S.C. § 891,
enacted March 2, 1907, the substantive provision of which is, in
essence, not different from § 701(a).

          All commissioned officers of the Army may transfer or
          assign their pay accounts, when due and payable, under such
          regulations and restrictions as the Secretary of War may pre-
          scribe.

10 U.S.C. 891.

Not only the Army Regulations of 1835 referred to above, but
according to the opinion of the attorney general in which they are

                    9
quoted, subsequent Army regulations of 1841, 1857, and 1863 repro-
mulgated these procedures. Op. Att'y. Gen. at 273.

Briefly, since 1907, under a statute, when 10 U.S.C.§ 891 was
enacted, and at least as far back as 1835, absent a statute, no statute
or regulation of any of the armed forces has authorized the assign-
ment of any officer's pay before it is due and payable. The advice
which the Dorfmans' attorney received from the Air Force at the very
beginning of this transaction, well before any money was advanced,
was consistent with this position. We are thus of opinion that the
attempted assignment of the retired pay of Col. Moorhous was
invalid.

In view of our holding that the bankruptcy court did not err in con-
cluding that the purported assignment of Col. Moorhous's retired pay
did not vest ownership of that pay in the Dorfmans, we affirm the
denial of a constructive trust, injunctive relief, and damages for
conversion3 for the reasons sufficiently stated in the opinion of the
bankruptcy court.

The judgment of the district court is

AFFIRMED.




_________________________________________________________________
3 The bankruptcy court found that any claims of the Dorfmans for con-
version regarding military pay received by Col. Moorhous prior to filing
for bankruptcy was not timely filed. The court noted that Fed.R.Bankr.P.
4007(c) required the Dorfmans to file a complaint as to the dischargea-
bility of such a debt by April 5, 1994, and, because no complaint was
filed until April 12, 1994, any claim they had for damages as a result of
Col. Moorhous' failure to pay out the pension was discharged. 180 B.R.
at 152. Even if we construe the Dorfman's brief as contesting this deci-
sion on appeal, we affirm on the basis of the bankruptcy court's opinion.

                    10
