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Ahrens v. Bowen

decided: July 14, 1988.


Appeal from a judgment of the United States District Court for the Eastern District of New York, Jacob Mishler, J., dismissing plaintiffs' claims against the Secretary of the Department of Health and Human Services. Reversed and remanded.

Author: Pratt

PRATT, Circuit Judge:

This case presents the novel question of whether federal regulations control determinations of eligibility for state benefits that are distributed and administered by a federal agency. The New York State Department of Social Services and the individual plaintiffs, Stephanie Ahrens and Gladys McCabe, appeal from the district court's denial of their motions for summary judgment and grant of judgment on the pleadings, pursuant to Fed. R. Civ. P. 12(c), in favor of the secretary of the Department of Health and Human Services.


Stephanie Ahrens and Gladys McCabe are recipients of optional state supplementary benefits ("OSS") under the supplemental security income program ("SSI") administered by the Department of Health and Human Services ("HHS"). 42 U.S.C. § 1381 et seq. This statutory scheme authorizes three benefits programs: a federal benefits program, a mandatory state supplementary benefits program, and an optional state supplementary benefits program. States electing to participate in the optional program may enter into an agreement with the federal government under which HHS both administers the OSS payments in conjunction with the federal SSI benefits and bears the administrative costs arising from the agreement. 42 U.S.C. § 1382e(a).

Because the eligibility of the individual plaintiffs, Ahrens and McCabe, for federal SSI benefits is offset fully by pensions they receive from other sources, and they are not entitled to mandatory state supplementary benefits, they receive only the New York State OSS benefits.

New York Social Services Law § 131- o (McKinney 1983 and Supp. 1988) provides that, while most of the OSS benefits are paid directly to the adult home in which the recipients live, a portion of these OSS benefits must be made available directly to the individuals as a personal allowance. When this personal allowance is intentionally withheld New York law provides for recovery of the personal allowance and "additional punitive damages in an amount equal to twice the amount misappropriated or withheld". N.Y. Soc. Serv. Law § 131-o(3). New York law also provides that "[a]ny funds obtained as a result of such an action shall be disregarded in determining such individual's eligibility for or amount of benefits * * * to the extent permitted by federal law and regulation". N.Y. Soc. Serv. Law § 131-o(3).

In 1979 Ahrens and McCabe sued the owner of the adult home in which they live for violating § 131-o by withholding their personal allowances from them. In January 1981 the plaintiffs settled their law suits against the home's owner, and recovered both compensatory and punitive damages: Ahrens received $185 compensatory and $351 punitive and McCabe received $216 compensatory and $432 punitive. Both plaintiffs reported receipt of these payments to the Social Security Administration ("SSA").

In March 1981 the SSA determined that the plaintiffs' OSS benefits had been overpaid because, while the compensatory damages represented no more than what plaintiffs were entitled to in OSS benefits, the punitive damages were, under federal law, countable income that reduced the plaintiffs' eligibility for OSS benefits during February and March 1981. 42 U.S.C. § 1382a(a)(2). The SSA determined that Ahrens had been overpaid $370.66 and that McCabe had been overpaid $352.11 and notified the plaintiffs that the amounts overpaid would be withheld from future OSS payments. Both plaintiffs pursued administrative review by the SSA of the overpayment determinations.

The SSA affirmed the overpayment determinations, finding, in part, that in the absence of a provision in the federal/state agreement providing for disregard of punitive damages recouped under N.Y. Soc. Serv. Law § 131-o, the federal regulations for determination of eligibility must be applied. Plaintiffs contacted the New York State Commissioner of the Department of Social Services, and requested that the commissioner pursue modification of the federal/state agreement. But when the state commissioner requested such a modification, the secretary refused to modify the contract.

In February 1982 Ahrens and McCabe commenced this action against the secretary of HHS claiming that his failure to disregard the punitive damage awards in calculating their income was an abuse of discretion and that, in any event, the secretary should have waived recoupment of the overpayment under 42 U.S.C. § 1383(b)(1), since McCabe and Ahrens had been without fault. The New York State commissioner was also originally named as a defendant, but that claim was dismissed. Four months later, in June 1982, the state commissioner initiated a companion lawsuit against the secretary which was consolidated with the case of Ahrens and McCabe. In September 1985 the plaintiffs moved for summary judgment.

While that motion was still pending, in March 1986, the secretary refunded the benefits previously withheld from Ahrens and McCabe as an exercise of "administrative grace". Then the secretary moved to dismiss the plaintiffs' action under Fed. R. Civ. P. 12(b)(6) and for judgment on the pleadings under Fed. R. Civ. P. 12(c), claiming, as one ground for dismissal, that the plaintiffs' claims were moot because the recouped money had been refunded to them. The secretary also claimed that he had correctly determined that punitive damage awards are countable income and that the plaintiffs had been overpaid.

The district court did not find the plaintiffs' claims to be moot but granted judgment on the pleadings to the secretary finding that federal regulations must be applied in determining eligibility for state OSS benefits and that the punitive damages received by the plaintiffs ...

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