Kelly v. United States ( 2023 )

Case: 22-1365 Document: 32 Page: 1 Filed: 05/30/2023
United States Court of Appeals
for the Federal Circuit
______________________
MATTHEW R. KELLY,
Plaintiff-Appellant
v.
UNITED STATES,
Defendant-Appellee
______________________
2022-1365
______________________
Appeal from the United States Court of Federal Claims
in No. 1:20-cv-00579-KCD, Judge Kathryn C. Davis.
______________________
Decided: May 30, 2023
______________________
JASON W. MANNE, Manne Law Office, Pittsburgh, PA,
argued for plaintiff-appellant.
WILLIAM PORTER RAYEL, Commercial Litigation
Branch, Civil Division, United States Department of Jus-
tice, Washington, DC, argued for defendant-appellee. Also
represented by BRIAN M. BOYNTON, PATRICIA M.
MCCARTHY, DOUGLAS K. MICKLE.
______________________
Before NEWMAN, REYNA, and STOLL, Circuit Judges.
REYNA, Circuit Judge.
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2 KELLY v. US
Matthew R. Kelly appeals from a decision by the
United States Court of Federal Claims sustaining a deter-
mination by the Board for Correction of Naval Records that
denied Mr. Kelly’s request for military disability retire-
ment pay. Mr. Kelly served eight years in the U.S. Navy
as a diver. In December 2013, he was separated from ser-
vice “Under Honorable Conditions” based on misconduct.
Years later, he sought and received from the Board for Cor-
rection of Naval Records an upgrade in his discharge char-
acterization to “Honorable,” and a change in narrative
reason for separation that omitted the “misconduct” basis.
Mr. Kelly contends that once he obtained the upgrade and
the change in narrative, he became eligible for military dis-
ability retirement pay. The Board for Correction of Naval
Records disagreed, finding that Mr. Kelly was not eligible
for military disability retirement pay. The Court of Fed-
eral Claims affirmed. We vacate the Court of Federal
Claims’ affirmance and remand for a determination con-
sistent with this opinion.
BACKGROUND
Naval Separation and Disability
U.S. military service members are potentially eligible
for two types of post-service disability benefits: military
disability retirement pay and veteran disability benefits.
The Department of Defense administers military disability
retirement pay, see 10 U.S.C. § 1201, and the Department
of Veterans Affairs (“VA”) administers veteran disability
benefits, see 38 U.S.C. § 1110. This appeal involves the
military disability retirement pay administered by the De-
partment of Defense, specifically the U.S. Navy.
Generally, each branch of the military is required to
develop a military disability retirement procedure, includ-
ing evaluating service members’ medical conditions, their
ability to continue service, and their eligibility for military
disability retirement pay or severance payments. See 10
U.S.C. § 1216(a). The evaluation process may result in a
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KELLY v. US 3
disability rating percentage, which is then used to deter-
mine whether the service member is entitled to military
disability retirement pay. See id. §§ 1201(a)–(b).
To receive military disability retirement benefits, a ser-
vice member determined “unfit to perform the duties of the
member’s office, grade, rank, or rating because of a physi-
cal disability” must have at least 20 years of service or a
disability rating greater than 30%. Id. § 1201(a); id.
§§ 1201(b)(3)(A)–(B). A disability rating percentage less
than 30% means the service member is eligible for only a
one-time severance payment, but no continuing benefits.
Id. §§ 1203(a)–(b). The disability rating percentages are
based on “the schedule for rating disabilities in use by the
[VA]” and “take into account all medical conditions,
whether individually or collectively, that render the mem-
ber unfit to perform the duties of the member’s office,
grade, rank, or rating.” Id. § 1216a.
The existence of a VA rating alone does not mean a ser-
vice member is entitled to military disability retirement
pay. Under the statute, there must also be a finding that
the disability is: (a) of a permanent nature or such a degree
to preclude return to that service member’s military duty
within a reasonable period of time, (b) not be the result of
intentional misconduct or willful neglect, and, for service
members with less than 20 years of service, (c) not have
been incurred during a period of unauthorized absence. Id.
§§ 1201, 1203.
The Navy implemented these statutory mandates in its
policies and regulations, including the Secretary of the
Navy Instruction (“SECNAVINST”). Specifically,
SECNAVINST 1850.4E sets out the regulatory regime for
making disability retirement determinations. 1 For this
1The Secretary of the Navy “canceled”
SECNAVINST 1850.4E on June 27, 2019, in
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4 KELLY v. US
regime, the Secretary of the Navy designated the Physical
Evaluation Board (“PEB”) as the entity responsible “to act
on behalf of the [Secretary of the Navy] to make determi-
nations of fitness to continue naval service, entitlement to
benefits, disability ratings, and disposition of service mem-
bers referred” to it from the Navy. SECNAVINST 1850.4E
at 2–3. The process itself is known as the Disability Eval-
uation System (“Evaluation System”).
The Evaluation System process is triggered when a ser-
vice member is referred for medical evaluation by the com-
manding officer, the commanding officer of the medical
treatment facility treating the service member, or the ser-
vice member’s individual medical or dental officer.
SECNAVINST 1850.4E § 3106. A service member cannot
self-refer to the Evaluation System.
There are other restrictions that affect whether a ser-
vice member can be referred to the Evaluation System.
Two such restrictions are pertinent here: SECNAVINST
1850.4E § 1002 and § 3403. Under §§ 1002 and 3403, dis-
ciplinary and misconduct separation “takes precedence
over” any contemporaneous disability separation or refer-
ral to the Evaluation System. As a result, any service
member being processed for misconduct that could result
in, inter alia, administrative discharge due to misconduct
cannot also be referred to the Evaluation System at the
same time. Id. at §§ 1002, 3403. For those already referred
to the Evaluation System, the “disability evaluation shall
be suspended” while the service member is processed for
misconduct. Id. at § 3403. Then, and only if “a punitive
discharge or administrative discharge for misconduct does
not result,” can the Evaluation System process advance.
SECNAVINST 1850.4F. SECNAVINST 1850.4F does not
explicitly state it is retroactive and neither party has ar-
gued it is retroactive for this appeal. Thus, relevant to this
appeal is the pre-canceled SECNAVINST 1850.4E.
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KELLY v. US 5
Id. at § 1002. In other words, service members separated
from service for misconduct are foreclosed from receiving a
disability evaluation from the Evaluation System.
If a service member is referred to the Evaluation Sys-
tem, the PEB is tasked with determining whether the ser-
vice member can reasonably be expected to perform the
requirements and duties of his or her office, grade, rank or
rating in light of the disability. Id. at §§ 3301–3302. The
SECNAVINST provides four considerations to assess in de-
termining whether a service member can reasonably per-
form his or her duties: (1) common military tasks, i.e.,
whether, due to the disability, the member is unable to rea-
sonably perform routine duties expected of his or her office,
grade, rank or rating; (2) physical readiness/fitness tests,
i.e., whether the member’s disability prohibits him or her
from taking all or part of physical readiness/fitness tests;
(3) deployability, i.e., whether the member’s disability pre-
vents him or her from being deployed; and (4) special qual-
ifications, i.e., whether the member’s disability causes the
loss of any specialized qualifications part of the service
member’s current duty. Id. at § 3304.
A finding of fitness or unfitness should be supported by
a preponderance of the evidence. Id. at § 3306. In some
circumstances, performance evaluations are relevant evi-
dence in determining whether a service member can per-
form the duties reasonably expected of him or her. Id. at
§§ 3205, 3303.
If the PEB and relevant medical providers determine
the service member’s conditions rendered him or her unfit
to continue naval service or contributed to the unfitness,
the service member may be assigned a disability rating. Id.
at §§ 3301–3304.
Naval Review Boards
The U.S. Navy abides by a statutory framework to use
administrative boards to adjudicate various petitions by
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6 KELLY v. US
current or former service members. 10 U.S.C. §§ 1552,
1553, 1554, 1554a. Two naval review boards are: the Navy
Discharge Review Board (“Discharge Review Board”) (id.
§ 1553) and the Board for Correction of Naval Records
(“Record Correction Board”) (id. § 1552). The Discharge
Review Board is tasked with reviewing the discharge or
dismissal of former service members and reclassifying a
discharge characterization where necessary. See id.
§ 1553(a); SECNAVINST 5420.174D. The Record Correc-
tion Board is tasked with “correct[ing] any military record”
when “necessary to correct an error or remove an injustice.”
See 10 U.S.C. § 1552(a)(1).
“Where a service member has not been considered or
has been rejected for disability retirement prior to leaving
active service, the service member can pursue disability re-
tirement before a [Record Correction B]oard.” LaBonte v.
United States, 43 F.4th 1357, 1361 n.4 (Fed. Cir. 2022) (La-
Bonte II) (citing Chambers v. United States, 417 F.3d 1218,
1225 (Fed. Cir. 2005)).
Discharge Characterization
A former service member’s discharge status can be de-
terminative of eligibility for benefits. 2 Every service mem-
ber is assigned a status—Honorable, Dishonorable, or an
intermediate status (e.g., general or other than honora-
ble)—upon discharge.
In the Navy, there are two categories of separations
(also referred to as discharges) for enlisted service
2 Discharge characterization impacts a former ser-
vice member’s eligibility for a variety of significant bene-
fits, including VA health care, VA disability payments,
education under the G.I. Bill, and the VA home loan pro-
gram. See, e.g., 38 U.S.C. § 5303; 38 C.F.R. § 3.12; Garvey
v. Wilkie, 972 F.3d 1333, 1336–37 (Fed. Cir. 2020).
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KELLY v. US 7
members: administrative and punitive. There are three
types of administrative discharges: Honorable, Under Hon-
orable Conditions (also termed General Discharge), and
Under Other Than Honorable Conditions. 32 C.F.R.
§ 724.109. A discharge “Under Honorable Conditions (also
termed General)” is “contingent upon military behavior
and performance of duty which is not sufficiently meritori-
ous to warrant an Honorable Discharge.” Id. at
§ 724.109(a)(2). There are also two types of punitive dis-
charges: Bad Conduct and Dishonorable. Id. at § 724.111.
“Liberal Consideration” Policy
On September 3, 2014, the Secretary of Defense issued
guidance to the various military branches’ Record Correc-
tion Boards directing “liberal consideration” for requests
for discharge upgrade where the service member suffered
from Post-Traumatic Stress Disorder (“PTSD”) or related
mental conditions. Memorandum from Secretary of De-
fense Charles Hagel to Secretaries of the Military Depart-
ments (Sept. 3, 2014). 3 Under this guidance, a service
member suffering from mental health issues could present
3 Historical context preceding this liberal considera-
tion policy is worthy of note. A 1980 report, surveying dec-
ades of military discharges across services, determined
that “[d]ifferent philosophies and practices among the ser-
vices for imposing and upgrading discharges have led to
wide disparities, which erode the integrity of the system.”
General Accounting Office, FPCD-80-13, Military Dis-
charge Policies and Practices Result in Wide Disparities:
Congressional Review Is Needed, at Foreword (1980). In
fact, “[m]any of those receiving less than honorable dis-
charges are the ones who can afford it the least—the less
educated and minorities—who are already at a competitive
disadvantage in the labor market.” Id. at 50. In light of
these disparities, Congress sought for a standardized basis
for discharge characterizations. See id. at 92.
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8 KELLY v. US
evidence to mitigate a finding of misconduct, if the evidence
existed at the time of discharge and might have mitigated
the misconduct. See SECNAV M-5420.1. In such in-
stances, the military board assessing the characterization
of discharge must afford the service member liberal consid-
eration. J.A. 1476–78. “[T]his liberal consideration applies
not only to upgrades to the character of a discharge, but
also to requests for changes to the narrative reason for sep-
aration . . . .” LaBonte II, 43 F.4th at 1374. Changes to the
narrative reason for separation can be granted on equity,
injustice, or clemency grounds. Id. (citing Memorandum
from Under Secretary of Defense Robert Wilkie to Secre-
taries of the Military Departments (July 25, 2018)).
On December 12, 2017, the liberal consideration stand-
ard was codified in 10 U.S.C. § 1552(h) to require “review
[of] the claim with liberal consideration to the claimant
that post-traumatic stress disorder or traumatic brain in-
jury potentially contributed to the circumstances resulting
in the discharge or dismissal or to the original characteri-
zation of the claimant’s discharge or dismissal.” Its effect
is retroactive. Doyon v. United States, 58 F.4th 1235, 1245
(Fed. Cir. 2023) (rejecting argument that Ҥ 1552(h) cannot
be retroactively applied to [Mr. Doyon’s] application”).
Factual Background
Mr. Kelly served as a Second Class diver with a E4
rank in the United States Navy. He served from November
12, 2008, to December 20, 2013, during which time he re-
ceived numerous accolades. For example, after Mr. Kelly
was deployed in Haiti, he received an award of the Navy
and Marine Corps Achievement medal and Humanitarian
Service medal for meritorious service. He also participated
in salvage operations off the coasts of Corpus Christi,
Texas and Cherry Point, South Carolina. When he was
first deployed to the Persian Gulf, Mr. Kelly participated
in 41 anti-terrorism force protection inspection dives. His
evaluation for that deployment stated that he was “devoted
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KELLY v. US 9
and [a] tireless performer—[who] ensures mission accom-
plishment.” J.A. 1375; J.A. 1165. Mr. Kelly’s second de-
ployment to the Persian Gulf resulted in 103 dives in a ten-
month period, and an evaluation stating that he was an
“effective team member with job accomplishment as a top
priority” and that he had “excellent performance” such that
he was “recommended for advancement and retention.”
J.A. 1375.
The type of diving performed by Mr. Kelly is extremely
hazardous both because it requires descending into the
ocean at any depth and working in hostile environments.
Navy divers are therefore at risk of numerous injuries, in-
cluding decompression sickness. J.A. 1374. Mr. Kelly suf-
fered various injuries as a result of his dives. J.A. 1372.
In 2010, Mr. Kelly experienced a head trauma after
striking his head during a dive. During a 2012 dive mis-
sion in Nova Scotia, Mr. Kelly’s diving partner was trapped
at 130 feet, so Mr. Kelly climbed 120 feet to the surface to
retrieve a device to free the trapped diver. Mr. Kelly then
descended the 130 feet and successfully freed his diving
partner. This rescue, however, meant Mr. Kelly was below
the surface for an excessive amount of time. As a result,
Mr. Kelly lost consciousness and suffered from hypoxia—a
condition in which the body is deprived adequate oxygen—
and type-2 decompression. He received 6 hours of hyper-
baric chamber treatment afterward.
Following these events, Mr. Kelly reportedly began ex-
periencing emotional and behavioral changes. At the end
of 2012, Mr. Kelly was transferred to the Naval Academy.
In early 2013, Mr. Kelly was counselled for an unauthor-
ized absence and substandard appearance. During this pe-
riod, he was diagnosed with an adjustment disorder,
depressed mood, and anxiety. Between March and July
2013, Mr. Kelly was cited for incidents and/or arrests for
reckless driving, negligent driving, driving while intoxi-
cated, theft (related to an unpaid restaurant bill),
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10 KELLY v. US
disorderly conduct, and resisting arrest. During this pe-
riod, he was also dealing with marital problems.
Following these incidents, the Navy removed Mr.
Kelly’s Second Class Navy Diver classification and as-
signed him the duties of a maintenance technician.
Procedural Background
On December 6, 2013, the Navy notified Mr. Kelly that
it had commenced an administrative separation against
him for commission of a serious offense resulting from his
disorderly conduct and resisting arrest. On December 20,
2013, Mr. Kelly was administratively separated and dis-
charged with a characterization of Under Honorable Con-
ditions (general). The narrative reason for Mr. Kelly’s
separation recited “misconduct” for commission of a “seri-
ous offense.” J.A. 1242.
On February 3, 2015, Mr. Kelly requested that, under
the “liberal consideration” policy, the Discharge Review
Board upgrade his discharge characterization and dispense
of the misconduct-related reason for separation. Mr. Kelly
specifically requested a discharge upgrade from an “under
honorable conditions (general)” to an “honorable” charac-
terization.
On October 14, 2015, the Discharge Review Board
granted Mr. Kelly’s request for relief for equitable reasons
under the “liberal consideration” policy and noted that it
found no procedural error in his initial misconduct-related
separation. J.A. 1028–31. Thereafter, Mr. Kelly’s dis-
charge characterization was honorable, and the reason for
his separation was “[s]ecretarial [a]uthority.” J.A. 1170.
Misconduct was no longer associated with Mr. Kelly’s dis-
charge status.
On December 20, 2016, Mr. Kelly requested that the
Record Correction Board correct his military records to re-
flect disability retirement under 10 U.S.C. § 1201. In sup-
port, he cited the Discharge Review Board’s decision to
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KELLY v. US 11
upgrade his characterization to a fully honorable discharge
and his VA disability rating. 4
On July 19, 2017, the Record Correction Board re-
quested the Director of the Navy Council of Review Boards
to provide comments and recommendations on Mr. Kelly’s
request. In response, an advisor of the Senior Medical Of-
ficer issued an advisory opinion. The medical advisor
stated that the evidence supported that Mr. Kelly was fit
to perform his duties at the time of his separation and that
his misconduct did not result from “a legal[ly] exculpating
level of psychological impairment incident to a potentially
compensable psychiatric condition.” J.A. 1130. The advi-
sor also opined that if Mr. Kelly had been referred to the
Evaluation System, Mr. Kelly would have likely still been
found fit to perform his duties.
On December 12, 2017, Mr. Kelly challenged the advi-
sory opinion. He argued that he suffered from cognitive
and emotional impairment and PTSD that “are more likely
than not” attributable to his service injuries. He also ar-
gued that, under SECNAVINST 1850.4E, he should have
received a referral to the Evaluation System instead of be-
ing administratively separated.
On February 5, 2018, the Record Correction Board de-
nied Mr. Kelly’s request, finding that no error or injustice
warranted correction to his record. First, the Record Cor-
rection Board “found objective evidence in [Mr. Kelly’s]
4 While separately seeking VA disability benefits,
Mr. Kelly received an initial VA Rating Decision in 2014,
which awarded him a 40% disability rating for cognitive
deficits, 30% for major depressive disorder, and 10% for tin-
nitus. These rating percentages were later increased “to
50% and then 70% in Jul[y] 2017.” To receive these rating
percentages, the disabilities themselves had to have been
connected to his service. See 38 U.S.C. § 1110.
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12 KELLY v. US
military record that convinced [the Record Correction
Board] that [Mr. Kelly was] able to perform the duties of
[his] office, grade, rank or rating despite the existence of
[his] diagnosed disabilities.” J.A. 1006. In coming to this
conclusion, the Record Correction Board “relied on the last
two performance evaluations from 2013 which showed [Mr.
Kelly] met acceptable performance standards from 13 May
2013 through [his] discharge on 20 December 2013.” Id.The Record Correction Board agreed with the findings
made by the Discharge Review Board that Mr. Kelly had
been “properly processed and discharged [for his] miscon-
duct.” Id. The Record Correction Board also “found no ev-
idence that supported an argument [that Mr. Kelly was]
not criminally responsible for [his] misconduct” or evidence
“to indicate any mental incompetence.” Id. “This led the
[Record Correction Board] to conclude, even if evidence of
unfitness for continued naval service existed, [Mr. Kelly]
would have been ineligible for disability processing since
[his] misconduct processing would have taken precedence
over a referral to the [Evaluation System].” Id.Mr. Kelly appealed the Record Correction Board’s deci-
sion to the Court of Federal Claims. Mr. Kelly and the gov-
ernment cross-moved for judgment on the administrative
record. The Court of Federal Claims granted the govern-
ment’s motion on the merits. Kelly v. United States, 157
Fed. Cl. 114, 124–35 (2021). In doing so, it reached two
alternative decisions. First, the Court of Federal Claims
found that the Record Correction Board’s decision concern-
ing Mr. Kelly’s fitness to perform his duties was unsup-
ported by substantial evidence. Id. at 124–30. The Court
of Federal Claims determined that remand was appropri-
ate so that the Record Correction Board could consider
whether Mr. Kelly was able to reasonably perform common
duties expected of his office, grade, rank or rating. Id. at
128. In its alternative finding, however, the Court of Fed-
eral Claims reasoned that remand was unnecessary be-
cause Mr. Kelly could not under any circumstance be
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KELLY v. US 13
referred to the Evaluation System (and, hence, be eligible
for disability retirement pay) because misconduct was cited
as the cause for his separation from service. See id. at 130–
33. The Court of Federal Claims also concluded that Mr.
Kelly was not deprived due process by the Record Correc-
tion Board’s decision because there is no recognized prop-
erty interest for military disability retirement under 10
U.S.C. § 1201. Id. at 133–35.
Mr. Kelly timely appealed. We have jurisdiction under
28 U.S.C. § 1295(a)(3).
STANDARD OF REVIEW
We review legal determinations by the Court of Federal
Claims, including judgment on the administrative record,
de novo. Roth v. United States, 378 F.3d 1371, 1381 (Fed.
Cir. 2004). We apply the same standard applied by the
Court of Federal Claims, and do not disturb a determina-
tion of the Record Correction Board’s unless it was arbi-
trary, capricious, contrary to law, or unsupported by
substantial evidence. Id. An agency’s decision is arbitrary
and capricious when the agency decision-maker “entirely
fail[s] to consider an important aspect of the problem, of-
fer[s] an explanation for its decision that runs counter to
the evidence before the agency, or is so implausible that it
could not be ascribed to a difference in view or the product
of agency expertise.” Motor Vehicle Mfrs. Ass’n v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). “We may
not supply a reasoned basis for the agency’s action that the
agency itself has not given.” Id. (quoting SEC v. Chenery
Corp., 332 U.S. 194, 196 (1947)).
DISCUSSION
Mr. Kelly argues on appeal that the Record Correction
Board erred in its denial to correct his military records to
reflect military disability retirement under 10 U.S.C.
§ 1201. Appellant Br. 10. He also argues that the Record
Correction Board’s decision violated his Due Process rights
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14 KELLY v. US
when it refused to grant him a post-separation hearing.
Appellant Br. 10, 17. We address each argument in turn.
Denial to Correct Records
The Record Correction Board denied Mr. Kelly’s re-
quest for a correction in his military records on two sepa-
rate grounds. The Record Correction Board found that Mr.
Kelly was fit to perform his duties at the time of separation
and that, even if he were unfit, his separation for miscon-
duct precluded a referral to the Evaluation System. J.A.
39. For the following reasons, we hold that the Record Cor-
rection Board’s decision to deny Mr. Kelly’s request to cor-
rect his military record to reflect military disability
retirement pay under 10 U.S.C. § 1201 was arbitrary and
capricious and unsupported by substantial evidence.
Mr. Kelly’s Fitness to Perform Duties
We first address the Record Correction Board’s decision
that Mr. Kelly was fit to perform his duties at the time he
was separated from service. In reaching its determination,
the Record Correction Board relied on Mr. Kelly’s last two
performance evaluations conducted in 2013 and found
them conclusive on the question of Mr. Kelly’s fitness. See
J.A. 39. The Court of Federal Claims found that basing the
fitness determination solely on Mr. Kelly’s final two perfor-
mance evaluations produced a deficient and erroneous re-
sult. Kelly, 157 Fed. Cl. at 126–27. We agree.
Mr. Kelly’s “penultimate performance evaluation—cov-
ering the period of March 2013 to May 2013—indicate[d]
that [he] was at the ND2 rating primarily performing the
duties of a Second Class Navy Diver, which included the
‘operation, maintenance, and repair of diving life support
equipment.’” Kelly, 157 Fed. Cl. at 126. The evaluation
explains that Mr. Kelly “met the standards in all categories
of performance traits except for ‘military bearing/charac-
ter,’ in which he fell below standards due to his drunken
operation of a vehicle,” but the evaluation “did not include
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KELLY v. US 15
comments on performance providing any further detail
about [Mr. Kelly’s] duties during this period.” Id. Mr.
Kelly’s final evaluation—covering May 2013 to December
2013—indicated that he was at a different rating, ND3,
“primarily performing the duties of a Maintenance Techni-
cian”—not a Second Class Navy Diver. Id. Again, Mr.
Kelly “met the standards in all categories of performance
traits except for ‘military bearing/character,’” and “no fur-
ther information about his duties during this period was
provided in the comment section.” Id.
We conclude that the Record Correction Board failed to
evaluate all relevant criteria under SECNAVINST
1850.4E § 3304 (common military tasks, physical readi-
ness/fitness tests, deployability, special qualifications).
The Court of Federal Claims correctly found that the two
performance evaluations failed to sufficiently address
whether Mr. Kelly was able to perform the common duties
of a Second-Class Navy Diver at the E4 grade. Id. at 127.
“[C]ommon duties of a Navy diver include descending into
the ocean at any depth and working in, among other condi-
tions, hostile environments that include cold muddy water
where tasks can be completed only by feel.” Id. (citations
and internal quotations omitted). The Court of Federal
Claims determined “that [whether Mr. Kelly] was main-
taining diving equipment . . . does not necessarily equate
to a finding that he was fit to perform work that a member
in his office, grade, rank, or rating would reasonably be ex-
pected to perform.” Id. (citations and internal quotations
marks omitted). The Court of Federal Claims further de-
termined that “[t]he deficiencies in the [Record Correction]
Board’s consideration of [Mr. Kelly]’s common military
tasks are more pronounced given the extra importance it
accorded to his final performance evaluation,” which was
completed at a time when he was “performing duties of a
maintenance technician—not a Second Class Navy Diver.”
Id.
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16 KELLY v. US
The Court of Federal Claims concluded that the Record
Correction Board failed to consider “whether [Mr. Kelly]’s
medical condition affected his deployability or special qual-
ifications as a Navy Diver” as required by SECNAVINST
1850.4E § 3304. Id. at 129–30. Based on the foregoing, the
Court of Federal Claims found that “[r]emand would be ap-
propriate for the [Record Correction Board] in the first in-
stance to reconsider [Mr. Kelly’s] performance evaluation
reports and further explain its determination with respect
to [his] common military tasks.” Id. at 128; see also id. at
130.
We agree with the Court of Federal Claims’ decision to
the extent it found that the Record Correction Board failed
to consider all relevant criteria enumerated in
SECNAVINST 1850.4E § 3304. The full evaluation of all
the criteria set out in SECNAVINST 1850.4E § 3304 is im-
portant, including because a decision under that section af-
fects other related determinations, such as the
establishment of a final disability rating under 10 U.S.C.
§ 1216a(b) (accounting for all medical conditions that ren-
der a member unfit to perform the duties “of the member’s
office, grade, rank, or rating”), and under 10
U.S.C. §§ 1201–1203. Consequently, we conclude that the
Record Correction Board’s decision was arbitrary and ca-
pricious and not supported by substantial evidence.
We also agree with the Court of Federal Claims that
remand is necessary for the Record Correction Board to de-
termine whether Mr. Kelly’s medical condition affected his
deployability or special qualifications as a Navy Diver as
required by SECNAVINST 1850.4E § 3304. This court has
previously found that remand is necessary where the deci-
sion under review fails to address required findings. See
Byron v. Shinseki, 670 F.3d 1202, 1206 (Fed. Cir. 2012)
(holding that “[w]hen there are facts that remain to be
found in the first instance, a remand is the proper course”).
On this basis, we agree with the Court of Federal Claims’
decision to remand to the Record Correction Board to make
Case: 22-1365 Document: 32 Page: 17 Filed: 05/30/2023
KELLY v. US 17
the required findings and consider all related arguments of
the parties.
Mr. Kelly’s Separation for Misconduct
We next turn to the Court of Federal Claims’ alterna-
tive finding that remand was ultimately unnecessary be-
cause Mr. Kelly’s separation for “misconduct” precluded
him from referral to the Evaluation System. Kelly, 157
Fed. Cl. at 124–30. Mr. Kelly argues that the Record Cor-
rection Board never explained why he was precluded from
a record correction when his records show that he was
granted a fully Honorable discharge and that “misconduct”
was removed as the reason for separation. Appellant Br.
10.
The government appears to argue that the Record Cor-
rection Board is entitled to ignore the updates to Mr.
Kelly’s record. See Appellee Br. 19, 25, 38–43. Even as-
suming that the Record Correction Board did not ignore the
updated record, it failed to explain its rationale that an up-
grade in discharge characterization has no legal effect in
future related determinations reached by the Record Cor-
rection Board. The decision is silent as to any analysis con-
cerning the legal impact the upgrade in discharge coupled
with the removal of misconduct had on eligibility for an
Evaluation System referral. Instead, the Record Correc-
tion Board focused on SECNAVINST 1850.4E’s policy that
“misconduct processing would have taken precedence over
a referral to the Evaluation System.” See J.A. 38–40.
We acknowledged that upgrade changes can be rele-
vant in determining eligibility for military disability retire-
ment processing in LaBonte II, 43 F.4th at 1368. The Court
of Federal Claims in that case addressed the question pre-
sented in this appeal: whether a discharge upgrade affects
the application of a military regulation that is triggered un-
der certain separation circumstances. LaBonte v. United
States, 150 Fed. Cl. 552, 561 (2020) (LaBonte I) (analyzing
Army Regulation 635.40). Mr. Robert J. LaBonte pleaded
Case: 22-1365 Document: 32 Page: 18 Filed: 05/30/2023
18 KELLY v. US
guilty in a court-martial proceeding to a charge of desertion
and was separated from the Army with a Bad Conduct Dis-
charge. LaBonte I, 150 Fed. Cl. at 555. He was later
granted clemency and received an upgraded discharge
characterization to “General, Under Honorable Condi-
tions” after it was determined that he suffered from ser-
vice-related PTSD and traumatic brain injury (TBI). Id.
Mr. LaBonte requested that the Army Record Correction
Board correct his records to reflect retroactive military dis-
ability retirement pay. Id. at 556. The Army Record Cor-
rection Board denied the request. Id.
Mr. LaBonte appealed the Army Record Correction
Board’s denial to the Court of Federal Claims. Id. at 555.
The government moved to dismiss on two grounds: (1) that
Mr. LaBonte was not eligible for disability processing un-
der Army Regulation 635-40, and (2) that the Army Correc-
tion Board is without authority under 10 U.S.C. § 1552(f) 5
to correct Mr. LaBonte’s DD-214 Form to reflect military
disability retirement. Id. at 559.
Army Regulation 635-40—similar to SECNAVINST
1850.4E—barred referral to the Evaluation System when
certain separation circumstances linked to delinquent or
bad behavior existed. Specifically, Army Regulation 635-
40 provided that a solider “may not be referred for, or con-
tinue, disability processing if under sentence of dismissal
or punitive discharge.” LaBonte II, 43 F.4th at 1364 (quot-
ing Army Regulation 635-40 at ¶ 4-2).
5 Under 10 U.S.C. § 1552(a)(1), “[t]he Secretary of a
military department may correct any military record of the
Secretary’s department when the Secretary considers it
necessary to correct an error or remove an injustice.” Sec-
tion 1552(f) relates to corrections that involve “records of
courts-martial and related administrative records pertain-
ing to court-martial cases.”
Case: 22-1365 Document: 32 Page: 19 Filed: 05/30/2023
KELLY v. US 19
The Court of Federal Claims determined that a dis-
charge upgrade from “punitive” to “general, under honora-
ble conditions” meant that Mr. LaBonte was no longer
barred from disability-retirement processing under Army
Regulation 635-40. LaBonte I, 150 Fed. Cl. at 560–61. The
Court of Federal Claims dismissed the case, however, be-
cause it agreed that the Army Record Correction Board
lacked statutory authority to grant Mr. LaBonte relief—
i.e., correct his DD-214 Form—under 10 U.S.C. § 1552(f).
Id. at 561–64. Mr. LaBonte appealed the Court of Federal
Claims’ dismissal to this court. LaBonte II, 43 F.4th at
1360.
Although the discharge upgrade determination was not
on appeal before this court, we found in LaBonte II no error
in the Court of Federal Claims’ ruling on that issue. Id. at
1368 (“discern[ing] no error” in the Court of Federal
Claims’ determination that because the “punitive dis-
charge—Bad Conduct Discharge—was no longer reflected
in his official record, AR 635-40, in effect at the time of his
discharge, did not bar him from disability-retirement pro-
cessing.”).
Thus, at a minimum, LaBonte 6 is instructive on the is-
sue in this appeal. See Co-Steel Raritan, Inc. v. Int’l Trade
Comm’n, 357 F.3d 1294, 1307 (Fed. Cir. 2004) (“[D]icta,
which describes statements made by a court that are ‘un-
necessary to the decision in the case, and therefore not
precedential (though [they] may be considered persua-
sive).’” (quoting BLACK’S LAW DICTIONARY (7th ed. 1999)));
see also In re Lalu, 747 F.2d 703, 706 (Fed. Cir. 1984) (find-
ing two cases about a different legal issue and with differ-
ent facts contained dicta that “[wa]s helpful as a guide”).
LaBonte suggests that upgrade changes are a relevant
6 This opinion refers to “LaBonte” when referring to
“LaBonte I” and “LaBonte II” collectively.
Case: 22-1365 Document: 32 Page: 20 Filed: 05/30/2023
20 KELLY v. US
consideration in determining eligibility for military disabil-
ity retirement processing.
Like the service member in LaBonte, Mr. Kelly re-
ceived an upgraded discharge characterization. In fact,
Mr. Kelly’s upgrades changes were significantly more fa-
vorable than those of Mr. LaBonte. Mr. Kelly’s discharge
characterization was upgraded to “Honorable” and his rea-
son of separation changed from “misconduct (serious of-
fense)” to “secretarial authority.” Also, Mr. Kelly was not
seeking correction following any court-martial proceedings
or court-martial convictions.
We see no reason, nor did we receive arguments, as to
why the circumstances surrounding Mr. Kelly’s request
should be treated fundamentally differently than those
surrounding Mr. LaBonte’s request in LaBonte. Both the
Navy and the Army regulations are based on the same stat-
utory framework and both servicemen permissively re-
ceived changes to their discharge characterization and/or
narrative reason for separation under the Liberal Consid-
eration Policy. 7 Under that policy, Congress sought a
standardized basis for discharge characterizations. See su-
pra note 3. The policy sought to permit service members to
7 The government argues that Mr. Kelly waived the
argument that the liberal consideration policy applies here
because he failed to explicitly raise it in his papers before
the Record Correction Board. Appellee Br. 39. We disa-
gree. Mr. Kelly sought liberal consideration in his effort to
change his discharge characterization and narrative rea-
son for separation. J.A. 1372; J.A. 1381. The Discharge
Review Board applied the liberal consideration policy in
granting Mr. Kelly his requested relief. Based on those
changes, Mr. Kelly permissibly sought a record correction
to reflect his potential qualification for military disability
retirement pay. We find no basis for imposing a waiver in
this case.
Case: 22-1365 Document: 32 Page: 21 Filed: 05/30/2023
KELLY v. US 21
present evidence mitigating a finding of misconduct where
such evidence existed at the time of separation.
When the Record Correction Board reviewed Mr.
Kelly’s request for a correction to his military record, the
record reflected that he was discharged with an Honorable
characterization. Importantly, the narrative for the dis-
charge did not (any longer) state that the reason for the
discharge was due to misconduct. And there was mitigat-
ing evidence that Mr. Kelly’s injuries incurred during ser-
vice existed at the time of separation. Yet the Record
Correction Board does not adequately discuss or explain
why it continued to treat Mr. Kelly’s record as containing a
separation for misconduct.
We hold that the Record Correction Board’s failure to
review or evaluate the effect the upgrade change in Mr.
Kelly’s record had on his eligibility for military retirement
disability pay was arbitrary and capricious. When a mili-
tary correction board fails to evaluate the full and complete
record before it, as is the case here, it is acting in violation
of its statutory mandate to correct records when “necessary
to correct an error or remove an injustice.” 10 U.S.C.
§ 1552(a)(1). Such a violation is arbitrary and capricious
because it amounts to “offer[ing] an explanation for the
agency’s decision that runs counter to the evidence before
the agency.” State Farm, 463 U.S. at 43.
The Record Correction Board’s decision is also incon-
sistent with how the Veteran’s Administration treats
changes in discharge characterization. See 38 C.F.R.
§ 3.12. Under the VA framework, provided all other appli-
cable conditions for VA benefits are met, a change in dis-
charge characterization can lead to veteran disability
benefits. For example, “[a]n honorable discharge or dis-
charge under honorable conditions [later] issued through a
board for correction of records . . . is final and conclusive on
the [VA]. The action of the board sets aside any prior bar
to benefits imposed.” Id. § 3.12(e); see also id. § 3.12(h).
Case: 22-1365 Document: 32 Page: 22 Filed: 05/30/2023
22 KELLY v. US
To be clear, VA regulations and VA decisions concern-
ing disability are not binding on matters involving military
disability retirement pay. But we see no principled reason
for such disparate treatment in how the Navy treats
changes in discharge characterization from how the VA
treats those same type of changes. Indeed, the liberal con-
sideration policy was instituted to eliminate such differ-
ences. See General Accounting Office, FPCD-80-13,
Military Discharge Policies and Practices Result in Wide
Disparities: Congressional Review Is Needed, at Foreword
(1980).
We hold that the Record Correction Board’s decision re-
jecting Mr. Kelly’s request to correct his record was arbi-
trary and capricious. 8 We vacate and remand for further
proceedings consistent with this opinion.
Due Process
Since further proceedings to determine Mr. Kelly’s fit-
ness are required, we think it useful and appropriate to
consider Mr. Kelly’s challenge to the Court of Federal
Claims’ decision that Mr. Kelly has no recognized property
interest for military disability retirement under 10 U.S.C.
§ 1201, and therefore was not entitled to a post-separation
hearing. Appellant Br. 10. 9
8 Mr. Kelly also argues that the Record Correction
Board should have retroactively applied a 2016 Navy pol-
icy, which allowed service members who were “being pro-
cessed for any type of involuntary administrative
separation, to be referred to the [Evaluation System],” to
his 2017 claim. J.A. 28; Appellant Br. 14. We need not
reach this issue where we find the Record Correction
Board’s disregard of Mr. Kelly’s record was arbitrary and
capricious.
9 The Due Process Clause of the U.S. Constitution
guarantees that an individual will not be deprived of life,
Case: 22-1365 Document: 32 Page: 23 Filed: 05/30/2023
KELLY v. US 23
Mr. Kelly argues that the requisite interest exists for
military disability benefits for the same reasons we held
such an interest exists for veteran disability benefits in
Cushman v. Shinseki, 576 F.3d 1290, 1296 (Fed. Cir. 2009).
Appellant Br. 17. The Court of Federal Claims and the gov-
ernment distinguish Cushman because it “involved veter-
ans benefits from the Department of Veteran Affairs,
which are based on a wholly distinct statutory scheme.”
Appellee Br. 44; Kelly, 157 Fed. Cl. at 134. We agree with
Mr. Kelly.
In Cushman, we concluded that entitlement to veteran
disability benefits under 38 U.S.C. § 1110 confers a prop-
erty interest protected by the Due Process Clause. Cush-
man, 576 F.3d at 1296–98. We held that due process
attaches to benefits that are nondiscretionary and statuto-
rily mandated. Id. at 1297–98. As to veteran disability
benefits, we noted that “entitlement to veteran’s benefits
arises from a source that is independent from the [VA] pro-
ceedings themselves . . . . Th[e] statutes provide an abso-
lute right of benefits for qualified individuals.” Id.Military disability retirement benefits under 10 U.S.C.
§ 1201 are nondiscretionary and statutorily mandated.
The language of the statute reads: “Upon a determination
by the Secretary concerned that a member described in
subsection (c) is unfit to perform the duties of the member’s
office, grade, rank, or rating because of physical disability
incurred while entitled to basic pay . . . the Secretary may
retire the member, with retired pay.” 10 U.S.C. § 1201(a).
This court has held that the statute, despite employing the
word “may,” is not discretionary. Sawyer v. United States,
liberty, or property without due process of law. U.S.
CONST. amend. V. “To raise a due process question, the
claimant must demonstrate a property interest entitled to
such protections.” Cushman v. Shinseki, 576 F.3d 1290,
1296 (Fed. Cir. 2009).
Case: 22-1365 Document: 32 Page: 24 Filed: 05/30/2023
24 KELLY v. US
930 F.2d 1577, 1580 (1991) (“The word ‘may’ in section
1201 does not convey discretion whether or not to pay . . . .
[The service member] would [be] statutorily . . . entitled to
money, unless the disability is not in the line of duty.”).
And like the statutes providing veteran disability benefits,
10 U.S.C. § 1201 provides a right to military disability re-
tirement benefits to qualified individuals. Thus, if a ser-
vice member is eligible under 10 U.S.C. § 1201, the service
member’s military disability retirement benefits are non-
discretionary and statutorily mandated. See id.Because § 1201 military disability retirement benefits
are nondiscretionary and statutorily mandated, they con-
fer a property interest protected by the Due Process
Clause. We reject the Court of Federal Claims’ determina-
tion that Mr. Kelly lacked a recognized property interest in
his military disability requirement pay.
Mr. Kelly claims that he was denied due process rights
when the government refused his request for a post-sepa-
ration hearing. Appellant Br. 10, 17. We remand for the
Record Correction Board to conduct a new evaluation of fit-
ness at which Mr. Kelly will be free to reassert his request
for a post-separation hearing, if necessary.
CONCLUSION
We agree with the Court of Federal Claims’ finding
that the Record Correction Board’s fitness determination
was arbitrary and capricious and unsupported by substan-
tial evidence. We vacate the Court of Federal Claims’ de-
termination that the Record Correction Board properly
denied Mr. Kelly’s request to correct his record for military
disability retirement because Mr. Kelly’s separation for
misconduct precluded his referral to the Evaluation Sys-
tem. In so doing, we reject the Court of Federal Claims’
conclusion that Mr. Kelly lacked a recognized property in-
terest in his military disability retirement benefits. We re-
mand for the Record Correction Board to explain, in the
first instance, its determination in this case in view of Mr.
Case: 22-1365 Document: 32 Page: 25 Filed: 05/30/2023
KELLY v. US 25
Kelly’s change in discharge characterization and narrative
reason for separation, to determine Mr. Kelly’s fitness un-
der all relevant considerations set out in SECNAVINST
1850.4E § 3304, and to address Mr. Kelly’s eligibility under
the relevant military disability retirement pay statute, 10
U.S.C. §§ 1201, 1203.
VACATED AND REMANDED
COSTS
No costs.