Disabled American Veterans v. U.S. Dept. of Veterans Affairs, 1367

Citation962 F.2d 136
Decision Date13 April 1992
Docket NumberD,No. 1367,1367
PartiesDISABLED AMERICAN VETERANS, et al., Appellees, v. UNITED STATES DEPARTMENT OF VETERANS AFFAIRS, Appellants. ocket 92-6043.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Diogenes P. Kekatos, Asst. U.S. Atty., New York City (Otto G. Obermaier, U.S. Atty., and Gabriel W. Gorenstein, Asst. U.S. Atty., on the brief), for appellant U.S. Dept. of Veterans Affairs.

Joseph C. Zengerle, Washington, D.C. (Stephanie B. Lindquist, and Bingham, Dana & Gould, Washington, D.C.; Joanne D'Alcomo, and Bingham, Dana & Gould, Boston, Mass.; David C. Singer, and Dorsey & Whitney, New York City, on the brief), for appellees Disabled American Veterans, et al.

Ronald S. Hamburg, Arlington, Va., submitted a brief, for amici curiae National Alliance for the Mentally Ill, et al.

Before: TIMBERS, MESKILL, and PRATT, Circuit Judges.

TIMBERS, Circuit Judge:

Appellant United States Department of Veterans Affairs (VA) appeals from an order entered February 3, 1992 in the Southern District of New York, Shirley Wohl Kram, District Judge, 783 F.Supp. 187, granting a motion by appellees Disabled American Veterans, et al. (Veterans) for a preliminary injunction preliminarily enjoining the VA from applying or enforcing Section 8001 of the Omnibus Budget Reconciliation Act of 1990, 38 U.S.C. § 3205 (Supp. II 1990), and denying the VA's motion to dismiss. (Section 3205, as well as other sections of Title 38, recently were recodified by Pub.L. No. 102-40, Title IV, § 402(b)(1), 105 Stat. 187, 238 (May 7, 1991). Section 3205 is now 38 U.S.C. § 5505. For clarity, all references to sections of Title 38 will be to their old section numbers.)

Section 3205, which became effective on November 1, 1990 and expires on September 30, 1992, provides:

"In any case in which a veteran having neither spouse, child, nor dependent parent is rated by the Secretary in accordance with regulations as being incompetent and the value of the veteran's estate (excluding the value of the veteran's home) exceeds $25,000, further payment of compensation to which the veteran would otherwise be entitled may not be made until the value of such estate is reduced to less than $10,000."

The Veterans contend that § 3205 is facially unconstitutional in that it denies them equal protection of the law and due process of law in violation of the Fifth Amendment of the United States Constitution. The VA asserts that the district court lacked subject matter jurisdiction and that the Veterans failed to state a claim upon which relief might be granted. The court held that it had jurisdiction to entertain the Veterans' action, and that the Veterans had demonstrated sufficient risk of irreparable harm and likelihood of success on the merits of their equal protection claim so that their motion for a preliminary injunction should be granted.

On appeal, the VA contends (1) that the district court lacked jurisdiction over the subject matter of this action; and (2) that § 3205 reflects a rational exercise of the legislative powers of Congress and therefore does not violate the Veterans' constitutional right to equal protection of the law.

For the reasons that follow, we vacated, by a separate order entered March 19, 1992, the preliminary injunction enjoining application and enforcement of § 3205.

I.

We shall summarize only those facts and prior proceedings believed necessary to an understanding of the issues raised on appeal.

Section 3205(a) suspends payment of compensation benefits to veterans who (1) have no spouse, child or dependent parent; (2) have estates (excluding the veteran's home) valued in excess of $25,000; and (3) are rated incompetent by the Secretary of the VA in accordance with VA regulations, until the value of such veterans' estates is reduced to less than $10,000. VA regulations define "incompetent" as a person who "because of injury or disease lacks the mental capacity to contract or to manage his or her own affairs, including disbursement of funds without limitation." 38 C.F.R. § 3.353 (1991). Section 3205(b) provides that, if veterans denied benefits subsequently are rated competent for a period of at least 90 days, they are entitled to payment of a lump sum in the amount denied pursuant to § 3205(a). Section 3205 overlays § 3203(b)(1)(A), which terminates compensation to mentally incompetent disabled veterans who live in publicly funded institutions at public expense.

Section 3205 was enacted partly as a means of reducing the federal budget deficit and partly due to concerns that VA benefits were "enriching distant relatives who may have had very little to do with the veteran and were not affected by his service to the United States." (September 1980 letter from the Chairman of the House Committee on Veterans' Affairs requesting an audit by the Comptroller General). The General Accounting Office (GAO) conducted an audit and found that an estimated $541 million in VA-derived funds in incompetent veterans' estates would be inherited by heirs other than spouses, children, or dependent parents. The GAO recommended that Congress enact legislation barring the inheritance of VA-derived funds by individuals other than veterans' surviving spouses, children, or dependent parents. Although such legislation was introduced by the Chairman of the House Committee on Veterans' Affairs in March 1982, it was not enacted into law.

In 1987, the VA's Office of Inspector General (OIG) completed an audit of estates maintained for incompetent veterans in four of the VA's fifty-eight regions in order "to assess the need for program changes to minimize inheritance of VA-derived funds by remote heirs." The OIG estimated that some $648 million in assets derived from such veterans' VA compensation benefits were under the control of fiduciaries who control the estates of a vast majority of mentally incompetent veterans receiving compensation benefits. Fiduciaries typically receive a fee for their services based on a small percentage of the income to, or value of, a veteran's estate. The OIG found that upon the death of these veterans, their assets largely would be distributed under the laws of the various states which permit inheritance by remote heirs. In order to minimize the inheritance of VA-derived funds by remote heirs, the OIG recommended legislation that would reduce the amount of available assets under the direct control of incompetent veterans' fiduciaries.

The OIG also stated that "[i]n addition to reducing funds in veterans' estates subject to inheritance by remote heirs, the recommended legislative change would reduce funds subject to misappropriation by fiduciaries." In support of its statement, the OIG reported that between 1983 and 1987 it had investigated 112 cases, involving funds totalling $1.4 million, where fiduciaries either had misused or stolen the veterans' funds.

In considering the Veterans' motion for a preliminary injunction, the district court assumed that rational basis scrutiny applied to the Veterans' equal protection claim. The district court stated, however, that it reserved judgment on the Veterans' contention, to be made on their motion for summary judgment, that some heightened form of scrutiny is appropriate.

Before reaching the merits of the Veterans' application for a preliminary injunction, the district court addressed the VA's assertion that the district court lacked subject matter jurisdiction. The VA contended that 38 U.S.C. § 211(a) (1988), as recently amended, when read in pari materia with 38 U.S.C. §§ 4061 and 4092 (1988), vests exclusive jurisdiction over this controversy in the newly-created U.S. Court of Veterans' Appeals (COVA). Section 211(a) provides in pertinent part:

"(1) The [Secretary of Veterans Affairs] shall decide all questions of law and fact necessary to a decision by the [Secretary] under a law that affects the provision of benefits by the [Secretary] to veterans or the dependents or survivors of veterans.... [T]he decision of the [Secretary] as to any such question shall be final and conclusive and may not be reviewed by any other official or any other court...."

The district court held that the plain language of § 211(a) indicates that, while it precludes judicial review of decisions of the Secretary, it does not preclude judicial review of facial challenges to federal legislation affecting veterans' benefits such as those asserted by the Veterans in this action. Moreover, the court held that §§ 4061 and 4092, which provide the COVA and the Court of Appeals for the Federal Circuit with "exclusive jurisdiction" over decisions of the Board of Veterans' Appeals and empower the COVA to "decide all relevant questions of law, [and] interpret constitutional, statutory, and regulatory provisions...." do not extend to the COVA exclusive jurisdiction to decide facial constitutional challenges to legislation affecting veterans. The district court therefore proceeded to address the merits of the Veterans' claims that § 3205 deprives them of equal protection of the law.

The court, observing that the legislative history of § 3205 is limited, identified its legitimate legislative objectives as (1) reducing the federal budget deficit; and (2) preventing non-dependent and/or remote heirs of disabled veterans from inheriting VA-funded estates from such veterans. The court rejected the VA's contention that there is a further purpose served by § 3205--namely, preventing misconduct by incompetent veterans' fiduciaries--since it held that "there is no evidence that this was a legislative purpose ever proffered, debated or considered by Congress," and, even if the prevention of fiduciary misconduct were an objective of the legislation, "[t]here is at best anecdotal evidence of a statistically negligible number of investigations of fiduciary misconduct which does not ... provide a rational basis for the...

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