                                                                                  April 7, 1978


78-93       MEMORANDUM FOR THE COUNSEL TO THE
            PRESIDENT

            Veterans— Benefits— Effect of Upgraded Discharges
            (38 U.S.C.A. 3103)


   This memorandum supplements our March 14, 1978, memorandum to you
regarding implementation of Pub. L. 95-126, 91 Stat. 1106 (1977), 38
U .S.C .A . 3103 (1979), which deals with receipt of veterans’ benefits by
persons who obtained upgraded discharges. In that memorandum, we con­
cluded that there is one substantial constitutional issue raised by the statute. At
a March 22 m eeting,1 a second constitutional question, involving the effect of
this statute on Veterans Administration (VA) loan guaranties, was raised.2 We
were asked to consider whether the operation of the new law, insofar as it has
retroactive consequences, might violate notions of due process under the Fifth
Amendment. Our conclusion is that the drafters of Pub. L. 95-126 did not
intend to alter the obligations of the Veterans Administration that took effect
before October 8, 1977, the date the statute was enacted, and that therefore no
serious constitutional issue arises. The VA should take appropriate steps to
guard against issuance of a guaranty on behalf of a veteran whose eligibility for
VA benefits was terminated by Pub. L. 95-126.3
   1.     Section 5 o f Pub. L. 95-126 sets forth the schedule for the implementa­
tion of its various provisions. For example, with regard to a person whose
original discharge was within one o f the barred categories of 38 U .S.C .A .
§ 3102(a) (1976) and who obtained an upgraded discharge through the Special
Program, the termination o f VA benefits took effect on October 8, 1977, when
Pub. L. 95-126 was enacted. However, § 5(2) (B), which is applicable to such



   'O n March 22, our Office discussed this m atter with m em bers of President C arter’s staff and
personnel from the Veterans Administration.
  2The Veterans Adm inistration has not determ ined the num ber o f persons whose discharges were
upgraded through the Special Program who have received a certificate o f eligibility for a
VA-guaranteed loan.
   3A recent VA circular, DVB Circular 20-78-18 (M arch 24, 1978), para. 11, indicates that such
steps are to be taken, after a final determ ination of ineligibility has been made by the VA
Adjudication Division.

                                               401
persons, states that “ the United States shall not make any claim to recover the
value of any [VA] benefits . . . provided [before October 8, 1977].”
   Different effective-date provisions apply with regard to persons whose
original discharges were not within a barred category. With respect to those
individuals who obtained upgraded discharges through the Special Program and
who, on October 8, 1977, were “ receiving [VA] benefits,” § 5(2) (A ).(i)
provides that such benefits shall not be terminated until (1) the day when a final
adverse “ second determ ination” is made, (2) 90 days after a preliminary
adverse “ second determ ination,” or (3) April 7, 1978, whichever is earliest.4
Section 5(2) (A) (ii) states that the United States shall make no claim to recover
the value o f VA benefits provided before such earliest day.
   2.     Regarding VA benefits that are in the form of payments of money,
application of the foregoing provisions is relatively clear. Less clear, however,
is their application to loan guaranties. With respect to a loan guaranty, the
questions become what is the “ benefit” to the veteran and at what stage has the
benefit been “ received” or “ provided.” A veteran who makes a request for a
 loan guaranty, will, if he is found to be eligible, receive from the VA a
certificate o f eligibility. He may then submit that certificate to a lender. After a
loan is closed, the VA issues a certificate of guaranty. Such a certificate is, by
virtue o f 38 U .S.C . § 1821 (1976), “ conclusive evidence o f the eligibility of
the loan for guaranty . . . ” and, absent fraud or material misrepresentation, the
VA is bound by the certificate.
   It might be asserted that a person who obtained a certificate of eligibility, at
that point, “ received” a “ benefit” within the meaning o f § 5 of Pub. L.
95-126. In our view, a more sound interpretation is that there is no such
“ benefit” until a loan has been closed and a certificate of guaranty has been
issued. In the latter situation, the rights and obligations of the parties have
become fixed. In contrast, a certificate o f eligibility would seem merely to
represent a potential benefit.
   Our interpretation is consistent with the legislative history of Pub. L. 95-126.
Our review of that history revealed only one statement concerned with the
effect on loan guaranties. During the debate on the bill initially passed by the
Senate, the Chairman of the V eterans’ Affairs Committee said:5
         I also wish to make clear . . . that there is no intent in this
     legislation to diminish the G overnm ent’s obligations— incurred prior
     to the date of enactment in the cases o f persons whose discharges
     were previously upgraded under the special program— under such
     provisions as the home-loan guaranty program under chapter 37 of
     title 38, United States Code.




    “No such grace period is provided, how ever, for persons whose discharges were upgraded
 through the Special Program , but who were not receiving VA benefits on O ctober 8, 1977.
    5123 Cong. Rec. S. 28196 (Sept. 8, 1977).


                                          402
If the Government’s obligations are “ incurred” when a certificate of guaranty
has been issued, it seems clear that there was no intent in the legislation to
disrupt the operation of that guaranty.
   The next issue relates to the manner in which the statute, as we construe it,
should be applied by the V A .6 Any certificate o f guaranty issued before
October 8, 1977, to a person upgraded through the Special Program should not
be affected.7 Significantly different is the situation in which a veteran (whose
discharge was upgraded through the Special Program) obtained a certificate
before October 8, 1977, but not a guaranteed loan. Under our reading of § 5,
such a person had not received a “ benefit” by October 8. Accordingly, the
proper course for the VA is to revoke such certificate o f eligibility.8
   Another possible category would be that o f the individual (who went through
the Special Program) who obtained a VA-guaranteed loan after October 8,
 1977. Since we do not have evidence today that there are persons in this
situation, we need not decide what the proper course for the VA would be. If,
however, this situation is found to exist, we have serious doubts about whether
the VA should attempt to cancel the guaranty. There would, of course, be a
problem of apparent inconsistency with Pub. L. 95-126 if such guaranties have
been granted. Nonetheless, an effort by the VA to cancel such a guaranty would
run directly counter to the incontestability provision, 38 U .S.C . 1821 (1976),
and such action might have serious ramifications for the entire guaranty
program. Also there is the possibility that continuing the guaranty may never
result in a monetary loss for the G overnm ent.y
   Thus, Pub. L. 95-126, as we interpret it, does not call for alteration of fixed
obligations of the VA with respect to loan guaranties. Therefore, constitutional
issues which might otherwise arise10 are not presented.
   3.    With respect to the constitutionality o f Pub. L. 95-126 as it affects VA
benefits generally, we adhere to the views expressed in our March 14
memorandum. As shown by the facts alleged in the Furnish case, which is the
pending case discussed in our earlier memorandum, denial of VA educational
assistance to persons who relied on receipt of such assistance can result in
substantial hard sh ip ." Nonetheless, we do not think that the existence o f such
hardships renders the statute unconstitutional.


  bSee DVB Circular 20-78-18 (M arch 24, 1978). para. I I.
  7ln this respect, there would be no distinction between persons covered by the barred categories
and other (nonbarred) veterans.
  “There w ould, o f course, be no such revocation if the veteran had received a favorable “ second
determ ination.’'
  ^The guaranty com es into play only in the event o f a default by the veteran. Even then, to the
extent of any amount paid on the guaranty, the VA is subrogated to the rights o f the holder o f the
obligation. 38 U .S.C . 1816 (1976).
   wSee, Lynch v. United States, 292 U .S. 571, 579-80 (1934) (statute abrogating contractual
obligations o f the United States regarding war risk insurance held unconstitutional).
   " F o r some persons whose “ second determ ination’’ is favorable, the award of educational
assistance will be retroactive to the date o f their application for benefits. A veteran receiving
benefits on April 7, 1978, who later receives a favorable second determ ination would have the
benefits restored back to April 7. See DVB Circular 20-78-18, para. 15. f.

                                               403
   Pertinent cases indicate that Congress has broad power to modify or to
withdraw such benefits. C f., Flem m ing v. N estor, 363 U.S. 603 (1960) (social
security old-age benefits); R ichardson v. Belcher, 404 U.S. 78, 80-81 (1971)
(social security disability benefits); Ziviak v. U nited States, 411 F. Supp. 416,
422 (D. M ass.) a j f d m em ., 429 U .S. 801 (1976) (VA benefits for survivors).12
Here, Congress has not required the recovery of benefits as provided in the
past. Congress reviewed the actions of the Department o f Defense and the VA
relating to eligibility for VA benefits and determined that different standards
and procedures should be used in regard to upgrading of discharges. As a
result, many persons have lost or will lose entitlement to such benefits.
However, there does not appear to be a proper basis for holding that Congress
lacks the power to impose such changes.


                                                       Larry A. H am m ond
                                              A cting A ssistant A ttorney G eneral
                                                              Office o f L egal Counsel




   l2In Ziviak v. United States, supra. 4 1 1 F. Supp. at 422, the district court said:
          It appears to be well settled that veterans have no vested right to receive Veterans'
     Adm inistration benefits. G enerally, the Suprem e Court stated:
         Pensions, com pensation allow ances, and privileges are gratuities. They involve
        no agreem ent o f parties; and the grant o f them creates no vested right. The
        benefits conferred by gratuities may be redistributed or withdrawn at any time in
        the discretion o f C ongress.
    Lvnch v. United States. 292 U .S. 571. 577, 54 S. Ct. 840. 842. 78 L. Ed. 1434, 1439
    (1934).

                                               404
