LaMadrid v. Hegstrom

• Decision Date: 26 October 1987
• Docket Number: Nos. 85-3704,85-3719,85-4420,85-4426 and 85-3975,s. 85-3704
• Citation: 830 F.2d 1524
• Parties: Eufemia LaMADRID, for herself and as next friend for her minor son, Joey LaMadrid; Debbie Viskov, Jeremy Gerber, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, v. Leo HEGSTROM, individually and in his official capacity as Director, Department of Human Resources of the State of Oregon; and Keith Putnam, individually and in his official capacity as Administrator, Adult and Family Services Division of the State of Oregon, Defendants, and Margaret Heckler, individually and in her official capacity as Secretary of United States Department of Health & Human Services, Defendants-Appellants. Shirley STREAHL, et al., Plaintiffs-Appellees, v. Leo HEGSTROM, et al., Defendant, and Margaret Heckler, Secretary of the U.S. Department of Health & Human Services, Defendant-Appellant. Carole C. WHITE, Mary Halverson, and Irma Diaz, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, v. Karen RAHM, Secretary, Department of Social & Health Services, Defendant- Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1524

830 F.2d 1524

Eufemia LaMADRID, for herself and as next friend for her

minor son, Joey LaMadrid; Debbie Viskov, Jeremy

Gerber, on behalf of themselves and all

others similarly situated, Plaintiffs-Appellees, v. Leo HEGSTROM, individually and in his official capacity as

Director, Department of Human Resources of the State of

Oregon; and Keith Putnam, individually and in his official

capacity as Administrator, Adult and Family Services

Division of the State of Oregon, Defendants,

and

Margaret Heckler, individually and in her official capacity

as Secretary of United States Department of Health

& Human Services, Defendants-Appellants.

Shirley STREAHL, et al., Plaintiffs-Appellees, v. Leo HEGSTROM, et al., Defendant, and Margaret Heckler, Secretary of the U.S. Department of Health

& Human Services, Defendant-Appellant.

Carole C. WHITE, Mary Halverson, and Irma Diaz, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, v. Karen RAHM, Secretary, Department of Social & Health

Services, Defendant- Appellant.

Nos. 85-3704, 85-3719, 85-4420, 85-4426 and 85-3975.

United States Court of Appeals, Ninth Circuit.

Argued Nov. 6, 1986.

Submission Deferred Nov. 6, 1986.

Resubmitted June 12, 1987.

Decided Oct. 26, 1987.

Richard D. Wasserman, Portland, Or., James R. Watt, Olympia, Wash., P.K. Abraham and Evelyn McChesney, Seattle, Wash., for defendants-appellants.

Lorey H. Freeman and Ira R. Zarov, Portland, Or., Norman R. McNulty, Jr. and Kenneth Isserlis, Spokane, Wash., for plaintiffs-appellees.

Lorenn Walker, Honolulu, Hawaii, for amicus.

Appeal from the United States District Court for the District of Oregon.

Appeal from the United States District Court for the Western District of Washington.

Before ANDERSON, HUG and CANBY, Circuit Judges.

J. BLAINE ANDERSON, Circuit Judge:

This consolidated appeal involves the interpretation of what has been phrased the "lump sum rule" when determining the eligibility of families seeking Aid to Families with Dependent Children (AFDC) benefits. In all three cases, the district courts treated the monies received by appellees as resources rather than income for purposes of determining eligibility for AFDC benefits. On appeal, appellants argue that the lump sum rule requires that personal injury and compensatory awards and life insurance proceeds be treated as income for AFDC. After oral argument, we agreed to defer submission of our decision pending the United States Supreme Court decision in Lukhard v. Reed, 481 U.S. ----, 107 S.Ct. 1807, 95 L.Ed.2d 328 (1987). We affirm in part and reverse in part.

I. BACKGROUND

The AFDC program is a joint federal-state program in which participating states that provide financial assistance to families with needy dependent children are partially reimbursed by the federal government. 42 U.S.C. Secs. 601-615 (West Supp.1987). Although the states are largely free to determine the appropriate standard of need, they must submit to the Department of Health & Human Services (HHS), the administering federal agency, a plan consistent with federal law. Federal law requires states to consider a family's "income and resources" when determining whether or not the family is eligible for benefits, and prohibits them from providing AFDC benefits for any month in which either income or resources exceed state-prescribed limits. 42 U.S.C. Secs. 602(a)(7)(A) and (B), 602(a)(17), 602(a)(18).

Because income eligibility and resource eligibility are separately computed, whether and for how long a family that acquires a sum of money is rendered ineligible for AFDC benefits may depend on whether the sum is classified as income or as a resource. Prior to 1981, however, the importance of the classification was minimized by the HHS requirement that any income received in a given month should be treated as a resource in following months. Thus, a family that received an amount of income that exceeded the State's income limit would be automatically ineligible for one month; whether or not the family remained ineligible in subsequent months would depend on whether enough of the money was spent to bring the amount of the family's nonexempt resources down below the exclusion level. The Secretary of HHS became concerned that this provided an incentive for AFDC recipients who acquired large amounts of income to spend it as rapidly as possible in order to regain eligibility by reducing their resources to a level beneath the State's resource limit. To solve this problem, the Secretary proposed the "lump sum rule."

With the passage of the Omnibus Budget Reconciliation Act of 1981 (OBRA), 95 Stat. 845, as amended, 42 U.S.C. Sec. 602(a)(17) (1982), Congress adopted the "lump sum rule" because it shared the same concern expressed by the Secretary. Under this rule, AFDC recipients who receive an amount of income that exceeds the State's standard of need are ineligible for as many months as that income would last if the recipients spent an amount equal to the State's standard of need each month. Thus, if the State's standard of need is $200.00 per month, a $10,000.00 payment to a recipient would render the recipient ineligible for 50 months. See 45 C.F.R. Sec. 233.20(a)(3)(ii)(F) (1986). Application of the lump sum rule can thus disqualify a family for a considerably longer period of time than before because the ineligibility operates without regard to how quickly a family spends the lump sum.

Because the lump sum rule applies by its terms only to income, the distinction between income and resources took on new importance. If a given sum of money were treated as a resource, the recipient would be ineligible only until enough was spent to bring his resources down to the State's resource limit. If the sum were treated as income, however, no matter how much was spent, the recipient would remain ineligible for the statutory period.

We have consolidated three cases presenting the questions of whether various lump sums paid to appellees are "income" or "resources" for purposes of AFDC. LaMadrid v. Hegstrom is a challenge to Oregon's implementation of the AFDC program in which personal injury awards and settlements are treated as income; Streahl v. Hegstrom challenges Oregon's treatment of life insurance proceeds as income; and White v. Rahm challenges Washington's implementation of the program in which personal injury settlements, workers' compensation, and compensation received under the Washington Victims of Crime Compensation Act are treated as income.

II. LaMADRID v. HEGSTROM

In Reed, the United States Supreme Court reviewed a decision from the Fourth Circuit Court of Appeals holding that a Virginia social services agency could not lawfully treat personal injury awards as income when determining the eligibility of families seeking AFDC benefits. See Reed v. Health & Human Services, 774 F.2d 1270 (4th Cir.1985). Certiorari was granted to resolve the conflict between the Fourth Circuit and the Seventh Circuit which had reached the opposite conclusion in Watkins v. Blinzinger, 789 F.2d 474 (7th Cir.1986).

The Supreme Court, in a 5-4 decision, held that the state's policy of treating personal injury awards as income is consistent with the AFDC statute and implementing regulations. Reed, 481 U.S. at ----, 107 S.Ct. at 1816, 95 L.Ed.2d at 341. Based on this holding, the parties in LaMadrid submit that all issues raised by them have been disposed of, with the exception of their equal protection claim.

In LaMadrid, 599 F.Supp. 1450, the district court ruled that Oregon's treatment of personal injury awards and property damage awards differently under the lump sum rule violates the Federal Equal Protection Clause and the "equitable treatment" regulation which provides that:

[The state plan must] specify the groups of individuals, based on reasonable classifications, that will be included in the program, and all the conditions of eligibility that must be met by the individuals in the groups. The groups selected for inclusion in the plan and the eligibility conditions imposed must not exclude individuals or groups on an arbitrary or unreasonable basis, and must not result in inequitable treatment of individuals or groups in the light of the provisions and purposes of the public assistance titles of the Social Security Act....

45 C.F.R. Sec. 233.10(a)(1) (1986).

Appellees assert that the Reed decision on equitable treatment was limited to the interpretation of a regulation, and was decided entirely on the basis of deference to the agency and the agency's ability to interpret its own regulations. Appellees' Supplemental Brief at 2, LaMadrid (85-3719). This is not true. We find that this decision was not entirely based on deference. After determining that personal injury awards can reasonably be treated as income, the Supreme Court ruled that Virginia's policy of treating personal injury awards as income but property damages as resources was also reasonable. The Court then noted that the former could be viewed as increasing their recipients' well-being, and the latter as merely restoring resources to previous levels. This distinction, coupled with the substantial deference owed to the Secretary's conclusion that Virginia's regulations are consistent with HHS's regulations, see, e.g., Lyng v. Payne, 476 U.S. 926, ----, 106 S.Ct. 2333, 2341, 90 L.Ed.2d 921, 934 (1986), reh'g denied, --- U.S. ----, 107 S.Ct. 11, 97 L.Ed.2d 766, led the Court to reject respondent's inequitable treatment argument. Reed, 481 U.S. at ----, 107 S.Ct. at 1815, 95 L.Ed.2d at 340. Based upon this reasoning, we find that Oregon's policy of treating personal injury awards as income and property damage awards as resources is reasonable and does not violate the equitable treatment provision.

We must now examine how Reed 's interpretation of the equitable treatment regulation affects appellees' equal protection claim. Because neither a fundamental right nor a suspect classification is...