Essex County Div. of Welfare v. O.J.

Citation608 A.2d 907,128 N.J. 632
Parties, 61 USLW 2076 ESSEX COUNTY DIVISION OF WELFARE, Petitioner-Respondent, v. O.J., Respondent-Appellant. ESSEX COUNTY DIVISION OF WELFARE, Petitioner-Respondent, v. J.R., H.S., S.O., L.C., M.S., and S.D., Respondents-Appellants. ESSEX COUNTY DIVISION OF WELFARE, Petitioner-Respondent, v. M.B., Respondent-Appellant.
Decision Date16 July 1992
CourtUnited States State Supreme Court (New Jersey)

Richard W. Foard, III, Newark, for respondents-appellants (Felipe Chavana, Executive Director, Essex-Newark Legal Services, New Brunswick, attorney).

Dennis J. Conklin, Deputy Atty. Gen., for respondent (Robert J. Del Tufo, Atty. Gen., Mary C. Jacobson, Deputy Atty. Gen., of counsel).

The opinion of the Court was delivered by


In this case we address whether and to what extent a minor's personal-injury award deposited into a court-supervised trust account may be considered in determining eligibility of that child's family for Aid to Families with Dependent Children (AFDC). The issue arises by virtue of the appeals, argued together, of eight AFDC recipients, each of whom has at least one minor child who is the beneficiary of a trust fund established with the Essex County Surrogate following settlement of a personal injury case. The Essex County Division of Welfare (ECDW) had notified each of the petitioners that she was required, pursuant to N.J.A.C. 10:81-3.39, to seek release of monies from the trust accounts so that the funds could be considered in determining petitioners' continuing eligibility for AFDC benefits. Petitioners challenged the regulation administratively and then in the Appellate Division. The Appellate Division affirmed the rulings of the Director of the Division of Public Welfare, holding that N.J.A.C. 10:81-3.39 was consistent with federal regulations regarding the trust funds' availability and with N.J.S.A. 44:10-4(a), which governs repayment of benefits. Essex County Div. of Welfare v.O.J., 246 N.J.Super. 537, 544-47, 588 A.2d 403 (1991). We granted the AFDC recipients' petition for certification, 126 N.J. 333, 598 A.2d 891 (1991), and now reverse.


The minor children of O.J., H.S., S.O., L.C., M.S., and S.D. received settlements for injuries sustained in motor-vehicle accidents, and the minor children of J.R. and M.B. received settlements for injuries resulting from lead poisoning. The settlement proceeds were deposited into court-supervised trust funds. Although the record does not specify the amounts deposited for most of the minors, the account in the O.J. case reflected a $2,976 deposit, and the account in the M.B. case reflected a $6,546 deposit.

In 1988 and 1989, ECDW informed petitioners by letter that they were required to petition the Chancery Division to release funds from the trust accounts. If released, ECDW would consider the funds as available when it calculated the families' AFDC benefits. The regulation relied on, N.J.A.C. 10:81-3.39, provides in part:

(a) Members of the [AFDC] eligible family shall take all necessary and reasonable action to avail themselves of funds for support from others who owe or may owe money to them or who are holding funds for them. * * *

1. Any failure or refusal by any person to take required action or to cooperate with the [Child Welfare Agency] in liquidation efforts renders the entire family ineligible for assistance for as long as the failure or refusal continues.

* * * * * *

[3.i.] When a trust fund is not currently accessible and it exists at the time of application, the client must, as a condition of eligibility, make a bona fide presentation of a petition to the appropriate court for release of the funds for current and future support.

At oral argument, the Deputy Attorney General appearing on behalf of ECDW was uncertain about whether Essex County's policy necessarily reflected the approach of other counties, or whether it reflected a specific statewide policy requiring AFDC recipients to apply for release of court-held personal-injury awards for the benefit of minor children.

Each petitioner initially refused to cooperate with ECDW. In the M.B. case, ECDW terminated petitioner's minor son's benefits; in each of the other cases, ECDW terminated the benefits of the respective petitioners and their families. Each petitioner then requested an administrative hearing, and each, with the exception of H.S., agreed to cooperate with ECDW on the conditions that they not forfeit their rights to challenge the validity of the regulation, and that any money withdrawn from the trust funds would be restored if petitioners ultimately prevailed.

In the M.B. matter, the Director of the Division of Public Welfare (Director) reversed an Administrative Law Judge's finding and determined that the regulation was valid. In the O.J. and J.R. cases, the Director adopted the finding of a second Administrative Law Judge, who had upheld the regulation's validity. As noted, the Appellate Division affirmed the Director's rulings, construing N.J.S.A. 44:10-4(a) as prohibiting the use of minors' personal-injury awards only for the purpose of repaying county welfare agencies for past AFDC assistance, but not precluding such awards from being considered in determining eligibility for current and future assistance. 246 N.J.Super. at 544, 588 A.2d 403. Although the Appellate Division observed that "there is much, both in logic and equity, to commend a legislative and executive policy which also insulates a minor's personal injury trust funds from current and future use for the minor's support, just as repayment of past AFDC support is now insulated," in its view the statute could not be so construed. Ibid.


The federal AFDC program provides financial assistance to needy dependent children and their caretaker parents or relatives. In re Rulemaking, N.J.A.C. 10:82-1.2 and N.J.A.C. 10:85-4.1, 117 N.J. 311, 319, 566 A.2d 1154 (1989); Franklin v. New Jersey Dep't of Human Servs., 111 N.J. 1, 8, 543 A.2d 1 (1988). One of AFDC's principal purposes is to assist such parents and relatives "to attain or retain capability for the maximum self-support and personal independence consistent with the maintenance of continuing parental care and protection * * *." 42 U.S.C. § 601. The AFDC program "is based on a scheme of cooperative federalism," King v. Smith, 392 U.S. 309, 316, 88 S.Ct. 2128, 2132-33, 20 L.Ed.2d 1118, 1125 (1968), in which state programs must be administered in accordance with federal statutes and regulations. Lukhard v. Reed, 481 U.S. 368, 371, 107 S.Ct. 1807, 1810, 95 L.Ed.2d 328, 333 (1987); Heckler v. Turner, 470 U.S. 184, 189, 105 S.Ct. 1138, 1141, 84 L.Ed.2d 138, 143 (1985); In re Rulemaking, supra, 117 N.J. at 319, 566 A.2d 1154. In New Jersey, the program's financing reflects contributions of approximately 50% federal, 45% state and 5% county funds. 42 U.S.C. § 603(a)(1); N.J.S.A. 44:10-5; In re Rulemaking, supra, 117 N.J. at 313, 566 A.2d 1154.

Federal law ordinarily controls the treatment of a family's assets in the calculation of AFDC eligibility. As a State choosing to participate in a federally-supported assistance program, New Jersey must comply with the terms of federal legislation and regulations. Hausman v. Department of Insts. and Agencies, 64 N.J. 202, 206-07, 314 A.2d 362, cert. denied, 417 U.S. 955, 94 S.Ct. 3083, 41 L.Ed.2d 674 (1974). Under federal law, a personal-injury award, if "available" to a recipient, is required to be treated as income for AFDC-eligibility purposes except for that portion of an award "earmarked and used for the purpose for which it is paid, i.e., monies for back medical bills resulting from accidents or injury, funeral and burial costs, replacement or repair of resources, etc." 45 C.F.R. § 233.20(a)(3)(ii)(F).

The categorization of funds as either "income" or "resources" for eligibility purposes is particularly significant because of the so-called "lump-sum" rule, which applies only to "available" income. Under that rule, if a family receives income in a given month that exceeds its State's standard of need, the family is ineligible for AFDC for not only that month but for as many months as the money would last if the family spent each month an amount equal to the State standard of need. 42 U.S.C. 602(a)(17). The United States Supreme Court had ruled that States were empowered to treat personal-injury awards as income for AFDC-eligibility purposes. Lukhard, supra, 481 U.S. 368, 107 S.Ct. 1807, 95 L.Ed.2d 328. (The Department of Health and Human Services' regulation now mandating such treatment was adopted while Lukhard was pending.) In Lukhard, the Court upheld the validity of a Virginia regulation that treated personal-injury awards as income, thus bringing such awards within the scope of the lump-sum rule. In upholding the Virginia regulation, the Court rejected the contention that because personal-injury awards "merely compensate for damage to healthy bodies," id. at 380, 107 S.Ct. at 1814, 95 L.Ed.2d at 339, those awards should be regarded as resources rather than income. Acknowledging that the portion of personal-injury awards attributable to pain and suffering, which replace no economic income, will reduce AFDC payments, the Court observed that the AFDC statute was not designed to "compensat[e] for the noneconomic inequities of life." Id. at 382, 107 S.Ct. at 1815-16, 95 L.Ed.2d at 341.

Recognizing that under federal law a personal-injury award, to the extent not "earmarked and used for the purpose for which it is paid," is treated as income for purposes of AFDC eligibility, we now consider whether federal legislation and regulations require us to treat minors' personal-injury settlements deposited in a court-supervised trust account as "available" for AFDC eligibility purposes. Under federal regulations, unless otherwise excluded,

income and resources are considered available both when actually available and when the applicant or recipient has a legal interest...

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