Appeal from the United States District Court for the Eastern District of Pennsylvania Appeal from the United States District Court for the District of New Jersey
Before: SEITZ, BECKER, and ROSENN, Circuit Judges
In 1981, Congress, as part of the Omnibus Budget Reconciliation Act (OBRA), Pub. L. No. 97-35, revised the Aid to Families with Dependent Children (AFDC) program by providing that "specified" AFDC beneficiaries who receive lump-sum income in excess of their monthly standard of need are ineligible for program assistance for a specific period of time regardless of whether the lump sum is still actually available. The issue common to the two cases consolidated for the appeal now before us is whether the "lump-sum" provision applicable to the AFDC program, 42 U.S.C. § 602(a)17, applies to all of its beneficiaries or only those with earned income.
The United States district courts in the two cases at bar came to conflicting conclusions. In Betson v. Cohen, 578 F. Supp. 154 (E.D. Pa. 1983), the United States District Court for the Eastern District of Pennsylvania denied injunctive relief after holding that the provision applied to all AFDC families. On the other hand, the United States District Court for the District of New Jersey in Harris v. Heckler, 576 F. Supp. 915 (D.N.J. 1983), granted summary judgment for the plaintiffs upon holding that the provision applied only to beneficiaries with earned income. The Pennsylvania case presented the additional question of whether personal injury damage awards or settlements are included in the definition of "lump-sum income" under the applicable state and federal law. The district court answered this question in the affirmative.
The Pennsylvania plaintiffs and the New Jersey defendants have appealed. We reverse in the New Jersey case. In the Pennsylvania case, we affirm on the application of the lump-sum provision, but reverse on the question of whether personal injury awards constitute income.
The AFDC program, established by Congress under Title IV-A of the Social Security Act, is a federal-state matching-fund activity that provides financial assistance to needy dependent children and their parents who live with and care for them. The program is operated at the federal level by the Department of Health and Human Services (HHS). In Pennsylvania, it is administered by the Pennsylvania Department of Public Welfare (PDPW) and in New Jersey through the Division of Public Welfare (NJDPW) of the Department of Human Services (DHS). Defendant Walter Cohen is Secretary of the PDPW; defendant Audrey Harris is Director of the NJDPW. Federal defendant Margaret Heckler is Secretary of HHS.
Eligibility for AFDC benefits depends on the financial circumstances of the applicant or recipient. That is, they must have income and resources below applicable limits in order to be eligible for AFDC benefits. In making this determination, the focus is on income and resources that are actually available. See, e.g., Shea v. Vialpando, 416 U.S. 251, 261-62, 40 L. Ed. 2d 120, 94 S. Ct. 1746 (1974); 45 C.F.R. § 233.20(a)(3)(ii)(D). When Congress changed the law in 1981, it altered this scheme somewhat by providing that "specified" AFDC beneficiaries who receive lump-sum income in excess of their monthly standard of need are ineligible for a specific period of time regardless of whether the lump sum is still actually available. The period of disqualification is determined by dividing the state standard of need for assistance to such a family into the amount of the lump sum; the quotient is the number of months of disqualification. See 42 U.S.C. § 602(a)(17).
The plaintiffs are contesting the federal and state regulations passed to implement this section. They contend that, under 42 U.S.C. § 602(a)(17), the "specified" AFDC beneficiaries to whom the lump-sum rule applies are those with earned income. HHS, PDPW, and NJDPW, however, insist that the lump-sum rule applies to all beneficiaries regardless of whether they have earned income. See 45 C.F.R. § 233.20(a)(3)(ii)(D); 55 Pa. Code § 183.44(b)(1)(iii), (iv); N.J.A.C. 10:82-4.15(a).
The instant cases arose after the plaintiffs, AFDC beneficiaries without earned income, received lump sums of money from various sources. In the New Jersey case, plaintiff Essie Mae Harris received $11,568.36 in life insurance proceeds and plaintiff Theresa Eisen received a bequest of $5,329. As for the Pennsylvania plaintiffs, Nancy Betson and Annabelle Woodward received lump sums in settlement of personal injury claims and Cynthia Williams received retirement benefits.*fn1 In all five cases, the plaintiffs believed that the lump-sum provision did not apply to them, and the sums were dissipated in a relatively short time.*fn2 The state agencies, however, applied the lump-sum provision to the plaintiffs and terminated their benefits for periods extending long past the date the funds were exhausted. This therefore left them destitute. The New Jersey district court subsequently granted relief to the plaintiffs there upon finding that the lump-sum disqualification applied only to those with earned income. The Pennsylvania district court denied similar relief.
The Pennsylvania plaintiffs, in addition to arguing tht 42 U.S.C. § 602(a)(17) should apply only to those families with earned income, also contend that compensation for personal injuries is not "income" as that term is used in the federal statute and state regulations. This conflicts with the PDPW's determination that personal injury awards are properly included as a type of lump-sum "income." The Pennsylvania court held that neither the Social Security Act nor the state's own regulations were violated by the PDPW's application of the rule to personal injury awards. Betson, 578 F. Supp. at 159-60.
II. Applicability of § 602(a)(17) to Families Without Earned Income
The standard of review of the district courts' decisions is whether they applied the correct legal precepts in reaching their legal conclusions. This court may exercise an independent review of the question of law ...