AMERICAN TRAIN. SERV., INC. v. Veterans Administration

• Citation: 434 F. Supp. 988
• Decision Date: 28 June 1977
• Docket Number: No. B-76-1562.,B-76-1562.
• Parties: In the Matter of American Training Services, Inc., Debtor. AMERICAN TRAINING SERVICES, INC., Debtor-in-Possession, Appellant, v. The VETERANS ADMINISTRATION, an agency of the United States Government, and the Department of Education, State of New Jersey, Division of Vocational Education and Training, Appellees.
• Court: U.S. District Court — District of New Jersey

434 F. Supp. 988

In the Matter of American Training Services, Inc., Debtor AMERICAN TRAINING SERVICES, INC., Debtor-in-Possession, Appellant, v. The VETERANS ADMINISTRATION, an agency of the United States Government, and the Department of Education, State of New Jersey, Division of Vocational Education and Training, Appellees.

No. B-76-1562.

United States District Court, D. New Jersey.

June 28, 1977.

COPYRIGHT MATERIAL OMITTED

Archer, Greiner & Read, Haddonfield, N. J., by A. Fred Ruttenberg, Frank R. Demmerly, Jr., Haddonfield, N. J. (On the Brief), for appellant.

U. S. Atty. Jonathan Goldstein by Susan P. Engelman, Newark, N. J., for appellee Veterans Administration.

OPINION

GERRY, District Judge.

This action concerns the applicability of 38 U.S.C. § 3101(a) (1970), and the amendment thereto in Pub.L. 94-502, 90 Stat. 2405 (Oct. 15, 1976), to certain preexisting practices for payment of veterans' educational benefits.

Appellant American Training Services, Inc. ATS is a private vocational training school which sought, as debtor in proceedings for an arrangement under Chapter XI of the Bankruptcy Act, an order in the Bankruptcy Court of this district to enjoin the United States Veterans Administration VA and the New Jersey Department of Education from refusing to continue to pay VA educational benefits on behalf of eligible ATS students who had entered into certain tuition funding arrangements with ATS. Under these arrangements, the student-veterans agreed that their VA educational benefits checks would be sent directly to ATS in the students' names, and they also granted to ATS the power to directly negotiate these checks. The VA refused to make payment under this tuition arrangement pursuant to new regulations effective November 30, 1976, discussed infra.

The court below, the Hon. William Lipkin, Bankruptcy Judge, after hearing testimony and reviewing the evidence, denied the preliminary injunctive relief and dismissed the complaint, finding that this arrangement constituted an unlawful assignment of benefits, prohibited by § 701 of Pub.L. 94-502, 90 Stat. 2405 (Oct. 15, 1976), amending 38 U.S.C. § 3101(a) (1970). This amendment was held to apply retroactively to bar payment under the previously-obtained ATS powers-of-attorney to receive and negotiate the VA benefits checks.¹ Judge Lipkin also held that retroactive application of the amended statute did not violate the Fifth Amendment as a taking of an ATS property interest without just compensation.²

ATS has timely filed its appeal to this court. Pursuant to Bankruptcy Rule 805, ATS requested that this court stay the operation of the bankruptcy court's order pending appeal by restraining the VA from mailing checks directly to the students. This court denied ATS's motion for a stay on February 23, 1977.³

For the reasons which follow, the order of the bankruptcy court will be affirmed, and the appeal will be dismissed.^3a

I. FACTUAL SUMMARY

The bankruptcy court found that American Training Services is engaged in the business of furnishing instruction in driving and handling heavy equipment, and many ATS students are veterans who are eligible for educational assistance benefits from the Veterans Administration.

Upon enrollment, ATS did not require prepayment of tuition, but instead it had the veteran-students designate the ATS address as the address to which the VA educational benefits checks should be sent. These students also executed a power of attorney form in favor of ATS permitting it to endorse and negotiate the students' VA checks when received and to apply the proceeds toward tuition. These procedures are hereafter referred to as the "tuition funding arrangement." The bankruptcy court found that ATS instituted this procedure to protect itself from non-payment by veterans for educational instruction received. Such non-payment was found in the past to be as high as 60 to 70 percent of the tuition owed by the veterans.

Appellant ATS urges that the designation of the address and the execution of the power of attorney served two purposes: first, a veteran-student could enroll in an ATS course without having to make prepayment of tuition; second, ATS was thereby given a "security interest" which secured it from loss should a veteran lack the funds or refuse to pay his tuition.

After ATS filed its Chapter XI petition in bankruptcy court, it also filed a complaint against the Veterans Administration. During the course of settlement negotiations to achieve a continuation of state and federal approval of ATS's educational courses, ATS agreed to complete the train-out of students enrolled prior to August 16, 1976, but to enroll no veterans as new students after that date. Appellant ATS urges that as a result of these negotiations, a settlement agreement was reached whereby the VA and ATS agreed that the preexisting tuition financing procedures could continue throughout the term of the agreement.

The VA informed ATS on November 4, 1976, that pursuant to Pub.L. 94-502, amending 38 U.S.C. § 3101(a) (1970), no benefits checks for enrolled veterans would be paid out unless ATS certified that it holds no power of attorney authorization to negotiate VA educational assistance checks as of December 1, 1976. The effect of the VA's new policy was to prohibit the execution of the existing tuition funding arrangements for direct ATS receipt and negotiation of checks.⁴ ATS would continue, of course, to have a direct remedy against any previously enrolled student who fails to pay his tuition obligations, so long as no VA benefits check is mailed to, or negotiated by, ATS.

ATS filed the action below on November 30, 1976, seeking to enjoin the VA's refusal to pay benefits to or on account of previously enrolled students who had entered into such a tuition funding arrangement prior to the effective date of the amended statute and guidelines.

II. JURISDICTION AND SCOPE OF REVIEW

The VA urges that the bankruptcy court lacked subject matter jurisdiction to entertain the request for relief. Although the basis of its jurisdiction is not articulated in its opinion, the bankruptcy court had power as a court in equity to adjudicate this dispute. A bankruptcy court is a court in equity having all equitable powers unless otherwise provided by the Bankruptcy Act, 11 U.S.C. § 1 et seq., Young v. Higbee Co., 324 U.S. 204, 65 S.Ct. 594, 89 L.Ed. 890 (1945); American United Mut. Life Ins. Co. v. City of Avon Park, 311 U.S. 138, 61 S.Ct. 157, 85 L.Ed. 91 (1940).

The power, where appropriate, to enjoin conduct which impairs property, tangible or not, within the estate of the debtor is implicit in Section 2a(15) of the Bankruptcy Act, 11 U.S.C. § 11(a)(15) (1970). A debtor under Chapter XI, Arrangements, may obtain equitable relief to enjoin or to stay certain suits pending against the debtor, under Section 314 of the Act, 11 U.S.C. § 714 (1970). Equitable relief in excess of the limited scope of Section 314 of the Act is also available to the debtor, however, insofar as such relief derives from Section 2a(15) and the general equity powers of the court of bankruptcy. See 8 Collier on Bankruptcy (14th ed.) ¶ 3.231; see also Continental Illinois Nat. Bank & Trust Co. v. Chicago, R.I. & P. Ry. Co., 294 U.S. 648, 675, 55 S.Ct. 595, 79 L.Ed. 1110 (1935).

Although it is to be remembered that "Congress did not give the bankruptcy court exclusive jurisdiction over all controversies that in some way affect the debtor's estate," Callaway v. Benton, 336 U.S. 132, 142, 69 S.Ct. 435, 441, 93 L.Ed. 553 (1949), there is no demonstration that the controversy involving the debtor's alleged property interest in the present matter either lies outside of, or is merely tangential to, the ATS estate. Indeed, ATS's purported security interest in the tuition funding arrangement appears to be a major asset at the heart of its estate; cf. In re Dolly Madison Industries, Inc., 504 F.2d 499, 502-504 (3d Cir. 1974). Where in the instant case the debtor alleges the impairment of its purported security interest due to the VA's refusal to honor the preexisting procedure for direct payment for services already rendered, to the substantial detriment of the debtor's estate, in interference with the object of effecting an arrangement, the bankruptcy court is not without power to do equity by adjudicating such a dispute. Finally, inasmuch as the debtor's alleged security interest is arguably "property," Security First Nat'l Bank v. Rindge Land & Navigation Co., 85 F.2d 557 (9th Cir.), cert. denied, 300 U.S. 686, 57 S.Ct. 430, 81 L.Ed. 888 (1936), which is within the debtor's estate, the bankruptcy court had jurisdiction to decide the alleged rights of ATS and to consider equitable remedies to avoid impairment of this property interest, 11 U.S.C. § 711 (1970).

Likewise, jurisdiction to review the action of the Veterans Administration in prohibiting use of the tuition funding arrangement with respect to previously-enrolled veteran beneficiaries was not foreclosed by the non-reviewability clause of 38 U.S.C. § 211(a) (1970),⁵ insofar as the plaintiff alleged the unconstitutionality of the congressional decision to amend Section 3101(a) in a manner purportedly depriving petitioner of a property interest without due process. Johnson v. Robison, 415 U.S. 361, 94 S.Ct. 1160, 39 L.Ed.2d 389 (1974); Hernandez v. Veterans Administration, 415 U.S. 391, 94 S.Ct. 1177, 39 L.Ed.2d 412 (1974). "Such challenges obviously do not contravene the purposes of the no-review clause, for they cannot be expected to burden the courts by their volume, nor do they involve technical considerations of Veterans Administration policy," as opposed to individualized challenges to denials of benefits which are prohibited by the no-review clause. Johnson v. Robison, supra, 415 U.S. at 373, 94 S.Ct. at 1169. Jurisdiction over petitioner's constitutional challenge to a decision of Congress is not foreclosed. Id. 367, 94 S.Ct. 1160.

This court...