Nicholas J. Larionoff, Jr. v. The United States of America, Nicholas J. Larionoff, Jr. v. The United States of America

*1188 ON PETITION FOR REHEARING

Upon consideration of defendants appellants-cross appellees’ petition for rehearing, it is

ORDERED by the Court that the aforesaid petition for rehearing is denied.

Statement of Circuit Judge McGowan, joined in by Senior Circuit Judge Rives and Circuit Judge Wright, as to why they voted to deny rehearing.

The Government has filed a petition for rehearing and a suggestion for rehearing en banc on the grounds that: (1) the panel opinion “conflict[s] with prior decisions of this Court and with decisions of the Supreme Court holding that public benefits such as the variable reenlistment bonus can never be the subject of ‘contract rights’ and in the discretion of Congress may be reduced or terminated at any time before they are received”; and (2) the panel opinion “has unduly restricted the paramount powers of Congress, has disregarded a clear declaration of congressional purpose, and has significantly restricted the scope of an important constitutional grant of power” in ruling that Congress was not free to abrogate existing contract rights to the VRB. Because we are of the view that neither statement accurately reflects the scope of the panel decision, we deny the petition for rehearing.

Before discussing the three primary contentions pressed upon us by the Government, we note that the petition for rehearing focuses only on named plaintiff Johnson and other members of the class who began serving their periods of extended service after the effective date of the 1974 statute repealing the Variable Reenlistment Bonus system. 1 Admittedly, the Government does seek a reexamination of the other issues to insure a consistent result among all plaintiffs, but the primary emphasis in the petition is on the disposition of the case given the 1974 repeal of the statute, which is discussed at Part II. C. of the panel opinion.

I

The Government first argues that named plaintiff Johnson had no contract right to a VRB award since “the very nature of the statute . . . which authorized the VRB was such as to prevent the VRB from ever becoming the subject of a ‘contractual entitlement’ ”. 2 Petition at 11. The Government takes the position that the VRB is a “gratuity” which may be altered or repudiated at any time. Our problem with this approach is that it fails to address the narrow issue in the case; the question is not whether a VRB can under some circumstances be considered a gratuity, but whether it ripened to a contract right under the circumstances presented in this record. To be sure, in some contexts, reenlistment bonus awards are “gratuities”; the panel does not, and indeed would not, take the position that once having established a VRB award system the Congress cannot terminate it. As to those enlisted personnel who *1189 were planning to reenlist but who took no binding action in that regard prior to the effective date of the repeal, the VRB is a “gratuity” rather than a contract right. This point is illustrated by United States v. Dickerson, 310 U.S. 554 , 60 S.Ct. 1034 , 84 L.Ed. 1356 (1940), which concerned congressional action on June 21 of 1938 suspending for the fiscal year July 1, 1938 to June 30, 1939 a statutorily authorized reenlistment bonus. Dickerson was discharged on July 21, 1938 and reenlisted the very next day. His expectation that he would receive a bonus upon reenlistment did not confer a contractual right to those benefits, and the Court held that he was covered by the congressional action on June 21 prospectively suspending the reenlistment bonus. 3

But we do not read Dickerson to mean that one can never claim a contract right to a benefit which in some contexts has been accurately labeled a gratuity. That just the opposite is true is illustrated by the Supreme Court cases cited by the Government dealing with changes in the salaries of Government officials. For example, in Fisk v. Jefferson Police Jury the Supreme Court noted:

[TJhough when appointed the law has provided a fixed compensation for his services, there is no contract which forbids the legislature or other proper authority to change the rate of compensation for salary or services after the change is made, though this may include a part of the term of the office then unexpired. Butler v. Pennsylvania, 10 How. 402 , 13 L.Ed. 472 .

But after the services have been rendered, under a law, resolution, or ordinance which fixes the rate of compensation, there arises an implied contract to pay for the services at that rate. This contract is a completed contract.

116 U.S. 131, 133-34 , 29 L.Ed. 587, 588 (1885).

The salary cases indicate that once someone agrees to perform certain services in exchange for a given sum of money, and the Government has received that performance — or, as in this case, insists on receiving it 4 — the case is different; the “gratuity” becomes a contractual right. 5

*1190 Thus, our conclusion with respect to the “gratuity” versus “contract right” issue is that mere labels are neither helpful nor determinative. The issue is not whether a given claim to money resembles a “gratuity” in benevolent purpose, but whether the claim sub judice differs from a gratuity fundamentally in legal incidents. See Lynch v. United States, 292 U.S. 571, 576-77 , 54 S.Ct. 840, 842 , 78 L.Ed. 1434, 1438 (1934). Here, unlike the social security and other gratuity cases relied on by the Government, there is an agreement between the parties and the plaintiffs have undertaken a serious commitment in order to acquire the right to a VRB, namely, the promise to spend an additional two years in military service. The Government now seeks to enforce the promise to serve and at the same time label the promise it offered in return a mere gratuity. The cases relied on by the Government do not justify that result. 6

II

The Government raises a second but equally unpersuasive argument as to why named plaintiff Johnson did not have a contract right to a VRB award, namely, that enlisted documents must be construed to incorporate not only the statutes in force at the time the agreement is signed but future changes in those statutes as well. Petition at 8. The Government’s point on this issue is certainly accurate as to regular pay for enlistees, and cases such as Johnson v. Powell, 414 F.2d 1060 (5th Cir. 1969), indicate that the Government’s point has broad applicability. But this does not mean that Congress is without authority to decide to promise a specific sum, rather than an uncertain sum, to achieve a given result, and this is precisely how the panel interpreted the extension agreement. Our review of the legislative history — which is clear — and the regulations — which at times are ambiguous — led us to conclude that Congress intended — and the regulations provided — a promise to pay a specific sum (in the form of a VRB) not dependent on future change.

As we read the petition, the Government does not argue that Congress is without power to establish a VRB scheme not dependent on future change. Instead, it argues that the contract for a VRB is like the normal contract for military pay — that is, a contract which anticipates future changes. *1191 But that is simply to say that the Government disagrees with the panel’s interpretation of the contract; the argument was considered and rejected by the panel, and mere disagreement with the result does not warrant rehearing.

We stress that this is the only point on which we are in conflict with the Fourth Circuit. In Carini v. United States, 528 F.2d 738 (1975), that court took the position that the contract at issue anticipated possible statutory change, a result reached without analysis of the legislative history or applicable regulations. Moreover, as we indicated at footnote 35 in the panel opinion, all four district courts ruling on the issue disagree with the approach taken by the Fourth Circuit. 7

Ill

The final argument raised by the Government is that even if named plaintiff Johnson had a contractual right to a VRB award, Congress was exercising a paramount power in repealing the statute and thus under Lynch v. United States, 292 U.S. 571 , 54 S.Ct. 840 , 78 L.Ed. 1434 (1934), was constitutionally free to abrogate existing contract rights. 8 The Government agrees with the panel’s view that there was a fiscal purpose behind the Act, but maintains that “the Act represents a legitimate exercise of Congress’ paramount power to ‘raise and support armies’ and ‘to make rules for the government and regulation of the land and naval forces.’ ” Petition at 15. This is so because “the purpose of the Act was to provide the Defense Department with the recruitment tools it needed to fill critical skill needs in the new All-Volunteer Force.” Id. at 14. The Government’s analysis of the legislative history indicates that the military departments found, two deficiencies in the then effective bonus scheme: the authorization of a regular, as opposed to variable, reenlistment bonus without regard to speciality; and the failure to provide a VRB for reenlistments subsequent to the first reenlistment.

We have no disagreement with the Government’s assessment of these purposes, but the determinative factor is that they have nothing to do with enlisted personnel who had already agreed to extend their enlistments before Congress repealed the prior statute. The purposes identified by the Government speak in prospective terms and are completely unrelated to men who had already agreed to serve the additional two years; as a result, they cannot be used to justify a change in the terms of already binding extension agreements.

. We think it appropriate to note why the panel “decided to rule on the effect of the new Act on plaintiff Johnson, even though it acknowledged that the matter had not been raised (and had not been briefed or argued).” Petition at 6. The panel reached the issue precisely because it had no other choice; one of the named plaintiffs had entered into his period of extension after the repeal of the statute authorizing the VRB system, and consequently the panel had to satisfy itself that the affirmance of the District Court’s grant of relief as to Johnson and others similarly situated was not barred by the subsequent statutory change. The panel purposefully noted in the opinion that the issue had not been raised to highlight the fact that at no time in the course of this appeal did the parties notify the court of the repeal of the authorizing statute.

. We find somewhat disconcerting the Government’s statement that the panel opinion “does not identify the source” of the contractual entitlement to a VRB, and that as a result the Government has had to assume that the contractual entitlement finding is based on the language in the extension agreements promising the named plaintiffs such “pay” as would accrue to them during their periods of extended service. Petition at 7. As footnote 23 of the panel opinion expressly notes, the Government conceded in its brief that the term “pay” in the extension agreements includes VRB awards, and we reject any new suggestion to the contrary in the petition for rehearing.

. To the same effect are Richardson v. Belcher, 404 U.S. 78 , 92 S.Ct. 254 , 30 L.Ed.2d 231 (1971) and Flemming v. Nestor, 363 U.S. 603 , 80 S.Ct. 1367 , 4 L.Ed.2d 1435 (1960), two cases with which the panel opinion allegedly conflicts. In Belcher , the plaintiff was receiving social security disability benefits of approximately $330 per month when Congress amended the Social Security law to require a reduction in benefits to reflect receipt of state workmen’s compensation benefits. As a result of the amendment, the plaintiff’s disability benefits were reduced to approximately $225 per month. The Court expressly noted that “an expectation of public benefits [does not] confer a contractual right to receive the expected amounts.” 404 U.S. at 80 , 92 S.Ct. at 257 , 30 L.Ed.2d at 234 . In Flemming , the plaintiff’s old age benefits were terminated, as required by statute, when he was deported. The Court there noted: “[E]ach worker’s benefits, though flowing from the contributions he made to the national economy while actively employed, are not dependent on the degree to which he was called upon to support the system by taxation. It is apparent that the noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to beneñts is bottomed on his contractual premium payments.” 363 U.S. at 609-10 , 80 S.Ct. at 1372 , 4 L.Ed.2d at 1443 (emphasis added). Named plaintiff Johnson’s right to the benefit of a VRB is bottomed on his contractual obligation to serve his country for an additional two years, and the VRB award depended directly on his willingness to sign an agreement to extend his service.

The other “gratuity” cases relied on by the Government resemble Belcher and Flemming , rather than the case of the holder of an annuity. See, e. g., Thompson v. Gleason, 115 U.S. App.D.C. 201, 317 F.2d 90 , 96 (1962) (disability benefits); Barnett v. Hines, 70 U.S.App.D.C. 217 , 105 F.2d 96 , cert. denied, 308 U.S. 573 , 60 S.Ct. 88 , 84 L.Ed. 480 (1939) (retirement pay).

. Plaintiff Johnson’s situation differs in one important respect from that of the Government officials in the salary cases: he is not free to leave his job. Compare Embry v. United States, 100 U.S. 680, 685 , 25 L.Ed. 772 , 773 (1879) (“If an officer is not satisfied with what the law gives him for his services, he may resign.”). Consequently, the crucial factor concerning contractual entitlement is not whether named plaintiff Johnson has fully served his two year extension, but whether he is required to do so.

. In this regard, the Government’s citation of Hochman, The Supreme Court and the Consti *1190 tutionality of Retroactive Legislation, 73 Harv. L.Rev. 692 (1960) is slightly misleading. The Government quotes Hochman’s statement that gratuities “may be altered or repudiated at any time until the benefits conferred by them are actually received.” Id. at 724. But Hochman goes on to note that the “key element” with respect to whether a benefit is a gratuity appears to be “the absence of any financial cost in the acquisition of the right based upon the original statute.” Id. at 725. Hochman argues that:

It should be stressed that the reliance required to remove a right from the category of gratuity . . is a financial detriment in the acquisition of the right, and not merely reliance on the right after it accrues, as, for example, the making of a financial commitment in reliance upon the statute. The reason for this stricter requirement is probably similar to that encountered in the cases sustaining the extension of statutes of limitation; the . . . gratuity is given by a statute for public purposes which are not controlled by the merits of the donee’s claim to the right. Under these circumstances, the Court is reluctant to permit the donee to obstruct a reassessment of these purposes by the legislature.

Id. at 726 (footnote omitted). We would find it difficult to conclude that there was no financial cost in the acquisition of the right to a VRB or that the right to a VRB is not controlled by the merits of the enlisted person’s claim — namely, willingness to extend his period of service.

. The Government did not press this gratuity argument in its initial brief. The reason for that may be that as to the other named plaintiffs who began serving their extensions prior to the effective date of the repeal, the termination of the alleged “gratuity” was achieved by military regulation rather than by statute. See Carini v. United States, 528 F.2d 738 , 741 n. 7 (4th Cir. 1975). But if the Government is of the view that only Congress could terminate the “gratuity,” we fail to see how a reexamination of the issues with respect to the named plaintiffs other than Johnson would produce a consistent result. See Petition at 15.

. The Fourth Circuit itself was not pleased with the result it felt obliged to reach: “While we hold there is no enforceable contract right to the payment of the VRBs under the now repealed § 308(g), the situation of these plaintiffs is most appealing. . . . Under the circumstances, the Congress may wish to reconsider their situation and the moral claims they have against the United States.” 528 F.2d at 741-42 .

. The Government maintains that it is not clear that Lynch sets the correct standard, but nevertheless appears to be willing to concede for purposes of this appeal that the Lynch standard applies. Petition at 13 & n. 9. Whether Lynch requires the exercise of a paramount power or something less — whatever that may be — it is clear that abrogation of contract rights for the sole purpose of reducing expenditures is not constitutionally sanctioned. Since in our view that is the only .justification for retroactive termination as to named plaintiff Johnson, we need not rehear the case to consider the issue of the outer limits of the Lynch doctrine.