April 7, 1978

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 concluded 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 of Pub. L. 95-126 sets forth the schedule for the implementation of its various provisions. For example, with regard to a person whose 

original discharge was within one of the barred categories of 38 U.S.C.A. 

§ 3102(a) (1976) and who obtained an upgraded discharge through the Special 

Program, the termination of VA benefits took effect on October 8, 1977, when 

Pub. L. 95-126 was enacted. However, § 5(2) (B), which is applicable to such

78-93 MEMORANDUM FOR THE COUNSEL TO THE

PRESIDENT

'On March 22, our Office discussed this matter with members of President Carter’s staff and 

personnel from the Veterans Administration.

2The Veterans Administration has not determined the number of persons whose discharges were 

upgraded through the Special Program who have received a certificate of eligibility for a 

VA-guaranteed loan.

3A recent VA circular, DVB Circular 20-78-18 (March 24, 1978), para. 11, indicates that such 

steps are to be taken, after a final determination of ineligibility has been made by the VA 

Adjudication Division.

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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 determination” 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 of 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 of 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 of 38 U.S.C. § 1821 (1976), “ conclusive evidence of 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 of § 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 of 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 Veterans’ Affairs Committee said:5

I also wish to make clear . . . that there is no intent in this 

legislation to diminish the Government’s obligations— incurred prior 

to the date of enactment in the cases of 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, however, for persons whose discharges were upgraded

through the Special Program, but who were not receiving VA benefits on October 8, 1977.

5123 Cong. Rec. S. 28196 (Sept. 8, 1977).

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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 VA.6 Any certificate of 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 of eligibility.8

Another possible category would be that of 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 Government.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 of 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 hardship." Nonetheless, we do not think that the existence of such 

hardships renders the statute unconstitutional.

bSee DVB Circular 20-78-18 (March 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 would, of course, be no such revocation if the veteran had received a favorable “ second 

determ ination.’'

^The guaranty comes into play only in the event of a default by the veteran. Even then, to the 

extent of any amount paid on the guaranty, the VA is subrogated to the rights of the holder of the 

obligation. 38 U .S.C. 1816 (1976).

wSee, Lynch v. United States, 292 U.S. 571, 579-80 (1934) (statute abrogating contractual 

obligations of 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 of their application for benefits. A veteran receiving 

benefits on April 7, 1978, who later receives a favorable second determination would have the 

benefits restored back to April 7. See DVB Circular 20-78-18, para. 15. f.

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Pertinent cases indicate that Congress has broad power to modify or to 

withdraw such benefits. Cf., Flemming v. N estor, 363 U.S. 603 (1960) (social 

security old-age benefits); Richardson v. Belcher, 404 U.S. 78, 80-81 (1971) 

(social security disability benefits); Ziviak v. United States, 411 F. Supp. 416, 

422 (D. Mass.) a jf 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 of 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.

L a r r y A . H a m m o n d

Acting Assistant Attorney General

Office o f Legal 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' 

Administration benefits. Generally, the Supreme Court stated:

Pensions, compensation allowances, and privileges are gratuities. They involve 

no agreement of parties; and the grant of them creates no vested right. The 

benefits conferred by gratuities may be redistributed or withdrawn at any time in 

the discretion of Congress.

Lvnch v. United States. 292 U .S. 571. 577, 54 S. Ct. 840. 842. 78 L. Ed. 1434, 1439 

(1934).

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