Klamath Cmty. Coll. v. United States Dep't of Veterans Affairs

• Decision Date: 22 September 2022
• Docket Number: 1:21-cv-01700-CL
• Parties: KLAMATH COMMUNITY COLLEGE, Plaintiff, v. UNITED STATES DEPARTMENT OF VETERANS AFFAIRS and . DENIS MCDONOUGH, in his official capacity as . Secretary of the U.S. Dept, of Veterans Affairs, Defendant.
• Court: United States District Courts. 9th Circuit. United States District Court (Oregon)

KLAMATH COMMUNITY COLLEGE, Plaintiff,
v.
UNITED STATES DEPARTMENT OF VETERANS AFFAIRS and . DENIS MCDONOUGH, in his official capacity as . Secretary of the U.S. Dept, of Veterans Affairs, Defendant.

No. 1:21-cv-01700-CL

United States District Court, D. Oregon

September 22, 2022

FINDINGS AND RECOMMENDATION

MARK D. CLARKE, MAGISTRATE JUDGE.

Plaintiff Klamath Community College (“KCC”) brings this cause of action against the United States Department of Veteran's Affairs (“VA”) under the Administrative Procedures Act and the United States Constitution. The defendant VA moves to dismiss the case for lack of a final agency action and for failing to state a cognizable claim for relief. For the reasons below, the motion (#26) should be DENIED.

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BACKGROUND

Plaintiff KCC challenges Defendant VA's efforts to recover approximately $1.3 million in flight-school tuitions VA paid to KCC under the Post-9/11 G.I. Bill. KCC alleges that the process VA is using to pursue recovery of these payments is procedurally and substantively I defective because VA has not provided KCC an administrative procedure called the School Liability Process (“SLP”). The Amended Complaint asserts claims under the Administrative Procedure Act (“APA”) and a separate claim under the Fifth Amendment Due Process Clause.

1. Statutory and Regulatory Background

a. VA benefits and overpayments

The Post-9/11 Veterans Educational Assistance Act of 2008 (“Post-9/11 G.I. Bill”) provides eligible veterans with education benefits. These benefits include tuition, and money for housing and books. 38 U.S.C. §§ 3301 et seq. VA sends money directly to veterans for housing and books, and pays tuition benefits directly to schools, as required by law. 38 U.S.C. § 3313(h). Veterans can use these education benefits for flight training at a public college or university. 38 U.S.C. § 3313(g)(3)(C).

VA can recover overpayments of education benefits. 38 U.S.C. § 3685. Section 1.911 of title 38, Code of Federal Regulations, specifies the process by which VA generally recovers debts resulting from overpayment of VA benefits, including education benefits. This process includes written notice of the amount of the debt, the reasons for the debt, the right to request waiver or a hearing on the debt, and the right to appeal the decision underlying the debt. 38 C.F.R. § 1.911.

Section 1.911(a) specifies that a separate administrative process - the SLP - applies to “school liability” debts. In the SLP, a Committee on School Liability (the “Committee”)

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determines liability via an administrative process that includes additional steps as compared to 38 C.F.R. § 1.911. These steps include (1) a prehearing conference to discuss the record upon which potential liability is based; (2) a hearing with testimony and evidence before a panel of the Committee; (3) a written decision by the Committee; and (4) if the school disagrees with the Committee's decision, an appeal of any legal or factual errors to the School Liability Appeals Board, which can reverse, affirm, modify, or remand the Committee's decision. See 38 C.F.R. § 21.4009; VA Manual M22-4 (“M22-4”), Part 1 §§ 7.09-7.12.

b. The Treasury Offset Program

Congress requires federal agencies to refer delinquent nontax debts to United States Department of Treasury (“Treasury”) for collection. 31 U.S.C. §§ 3716(c)(6), 3720A(a). To collect referred debts, Treasury operates a centralized Treasury Offset Program (“TOP”). 31 C.F.R. § 285.5(a)(1). TOP reviews payees to see if they have referred debts. See id. § 285.5(b)-(d). If they do, Treasury offsets payment to the payee and pays that amount to the creditor agency. Id. § 285.5(f)-(j). .

Creditor agencies must comply with certain procedures before referring a debt to Treasury for collection by administrative offset to avoid erroneous deprivation. The procedures include giving the debtor (1) written notice of the type and amount of the claim, the intention of the head of the agency to collect the claim by administrative offset, and an explanation of the rights of the debtor under this section; (2) an opportunity to inspect and copy the records of the agency related to the claim; (3) an opportunity for a review within the agency of the decision of the agency related to the claim; and (4) an opportunity to make a written agreement with the head of the agency to repay the amount of the claim. 31 U.S.C. §§ 3716(a)(1)-(4); see also 31 U.S.C. § 3720A(b)(1). After creditor agencies complete these efforts without resolution of the

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debt, Treasury will notify the debtor of the offset, the identity of the requesting creditor agency, and who to contact within the creditor agency about the offset. 31 U.S.C. § 3716(c)(7); 31 C.F.R. § 285.5(g)(3).

2. Factual Background^[1]

Some KCC students receive education benefits under the Post-9/11 G.I. Bill. FAC ¶ 2. KCC's aviation flight programs included the following AAS Degrees (collectively, the “KCC Aviation Programs”): (1) Aviation Science Airplane AAS; and (2) Aviation Science Helicopter AAS. FAC ¶ 25; Scott Deci. ¶ 2. In order for veteran students to use Post- 9/11 G.I. Bill benefits to pay for a particular course of education, that course must be approved. FAC ¶ 24. In Oregon, the VA delegated its authority to approve and monitor programs to Oregon's Higher Education Coordinating Commission SAA (“Oregon's SAA”). See 38 U.S. Code § 3671; FAC ¶ 3; Scott Deci. ¶ 4. KCC received approval for the KCC Aviation Programs from both Oregon's SAA and the VA for all relevant time periods. FAC ¶ 26; Scott Deci. ¶ 5.

Although it varies by year, the VA conducts compliance surveys (i.e., audits) of the programs and recipients subject to funding from the Post-9/11 G.I. Bill. KCC claims that, from at least 2014 to 2016, KCC's annual compliance surveys did not indicate any material discrepancies in the KCC Aviation Programs or the existence of any alleged overpayments of Post-9/11 G.I. Bill benefits. FAC ¶¶ 26, 31, 32; Scott Deci. ¶ 6. On June 29, 2017, Mr. Stewart Land-an Education Compliance Survey Specialist (“CSS”) from the VA's Muskogee office- notified KCC that he was taking over the school's ongoing Annual Compliance Survey and would begin the survey on July 17, 2017. FAC ¶ 34. In addition, he requested documents dating

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back to 2013-a time period already subjected to an Annual Compliance Survey. FAC ¶ 34; Scott Deci. ¶ 7.

On or about July 17-20, 2017, the VA conducted the Annual Compliance survey at KCC (the “July 2017 Compliance Survey”) related to the KCC Aviation Programs. FAC ¶ 36; Scott Deci. ¶ 8. On July 31, 2017, the VA directed Oregon's SAA to suspend the KCC Aviation Programs. Scott Deci. ¶ 9. On August 1, 2017, the CSS emailed KCC stating that the VA would not issue any status letter relating to the 2017 Compliance Survey until it was complete, and that any disagreement regarding the survey findings would be discussed “at the exit interview.” FAC ¶ 38. KCC claims no exit interview was ever conducted. FAC ¶ 39.

On January 3, 2018, KCC learned that its Aviation Programs were approved and reinstated by the SAA. FAC ¶ 41. However, on January 18, 2018, VA sent a letter to KCC citing ten categories of alleged discrepancies in their programs but did not identify any veteran students in the letter. FAC ¶ 42; Scott Deci., ¶ 10.

On April 3, 2018, the VA issued KCC an additional report, (the “April Detailed' Compliance Letter”), to provide information concerning the individual discrepancies listed in the VA's findings letter of January 18, 2018. FAC ¶ 44. The April Detailed Compliance Letter stated:

After [Mr. Land's] consultation with Coach Sherry Scott on October 27, 2017, the decision was made that no benefits (for any class) should be paid for any VA student enrolled in any of the flight degree programs for any period beginning on or after November 1, 2015.

FAC ¶ 45.

Starting in March 2018, VA sent multiple letters notifying KCC of Post-9/11 G.I. Bill tuition benefits that VA overpaid to KCC on behalf of 29 students...