author: SCHWARZER, District Judge.

text:
    Emmett BAKER, Plaintiff, v. KAISER ALUMINUM AND CHEMICAL CORPORATION, a corporation, Does 1 through 100, inclusive, Defendants.
    No. C-83-4226-WWS.
    United States District Court, N.D. California.
    Oct. 10, 1984.

      Herbert L. Michel, Jr., Los Angeles, Cal., for plaintiff.
    Joe C. Creason, Jr., Anne E. Libbin, Pillsbury, Madison & Sutro, San Francisco, Cal., for defendants.
   MEMORANDUM OF OPINION AND ORDER

SCHWARZER, District Judge.

Plaintiff Emmett Baker originally brought this action in state court against defendant Kaiser Aluminum and Chemical Corporation for wrongful discharge. Defendant removed the action to this Court and now moves for summary judgment. FACTS AND PROCEDURAL BACKGROUND

Plaintiff was employed for 15 years by defendant at its San Leandro, California, plant. He was hired initially as an hourly employee and was promoted to shift fore-, man, a salaried position, in approximately April 1975. In January 1982, the San Leandro plant was experiencing problems with theft from the storeroom where tools and spare parts are kept. To remedy these problems, John Fuentes, the San Leandro Production and Maintenance Superintendent, held a special Saturday meeting on January 23, 1982, with all production and maintenance foremen. Plaintiff attended this meeting. Fuentes informed the foremen that the lock on the storeroom door had been changed, that only foremen and storeroom keepers would have keys, and that the foreman would accompany hourly employees to the storeroom at all times on the off-shifts to obtain needed equipment. The foremen were told that they were not to give their keys to non-salaried employees.

In March 1982, on two different occasions, plaintiff gave the storeroom key to a non-supervisory employee to obtain needed parts from the storeroom. Plaintiff asserts that he was unable to leave the floor to accompany the employee. Upon learning of these violations of his order, Fuentes terminated plaintiff on March 23, 1982. At the time that he was terminated, plaintiff was 51 years old and had two more years of service remaining before he qualified for defendant’s early retirement benefits.

Plaintiff originally filed this action in state court. His second amended complaint states the following causes of action: (1) breach of implied-in-fact covenant of employment and benefits; (2) interference with a beneficial contractual relationship; (3) wrongful termination; (4) breach of the implied covenant of good faith and fair dealing.

In September 1983, defendant removed the action to this Court after defendant discovered through the taking of depositions that plaintiff intended to rely on language in employee benefit plans as a basis for his claimed right of employment and to claim that he was terminated in order to prevent him from obtaining early retirement benefits. Defendant contended that such claims would be pre-empted by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. The Court denied plaintiff’s motion to remand on October 24, 1983. Defendant now moves for summary judgment.

DISCUSSION

Plaintiff’s second amended complaint states claims pre-empted by ERISA as well as pendent state claims.

I. ERISA CLAIMS

A. Interference with Beneficial Contractual Relationship

The second cause of action alleges that defendant interfered with “written contracts with various third parties providing certain rights and benefits for employees ... and their spouses.” It became clear in the course of depositions that the “contracts” to which plaintiff refers are defendant’s pension and benefit plans promulgated in accordance with ERISA. Though plaintiff makes no reference to ER-ISA in his complaint, a complaint that is “artfully pleaded” to avoid federal jurisdiction may be recharacterized as one arising under federal law. Franchise Tax v. Construction Laborers Vacation Trust Board, 463 U.S. 1, 103 S.Ct. 2841, 2853, 77 L.Ed.2d 420 (1983). To determine whether a complaint is “artfully pleaded,” the court is not bound to consider only the facts pleaded in the complaint, but may look elsewhere, as in deposition testimony, to ascertain facts that would appear in a well pleaded eomplaint. See Olguin v. Inspiration Consol. Cooper Co., 740 F.2d 1468, 1472 (9th Cir.1984).

Section 514(a) of ERISA provides that ERISA “supersedes any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” 29 U.S.C. § 1144(a). The Supreme Court has held that state law is pre-empted as relating to an employee benefit plan “if it has a connection with or reference to such a plan.” Shaw v. Delta Airlines, Inc., 463 U.S. 85, 103 S.Ct. 2890, 2900, 77 L.Ed.2d 490 (1983). Plaintiff’s claim that he had a contractual right to employment based on defendant’s pension and benefit plans is a question that “relate[s] to employee benefit plans” within Shaw’s broad pre-emption scope.

Defendant points out that its various pension and benefits plans include the following “Limitation on Rights” provision: “Participation in the Plan gives rise to no rights to continued employment by an Employer nor to any claim to any benefit hereunder except as expressly provided in this Plan.” Ottenbacher Deck, Exhs. A, B & C, Defendant’s Motion for Summary Judgment. Plaintiff’s argument appears to assert that this language demonstrates an employment agreement between defendant and plaintiff which does not expressly reserve to defendant the right to terminate an employee without cause or before his benefits have vested.

Plaintiff’s argument is without merit. The language of the “Limitation on Rights” provision does not constitute an employment agreement. The purpose of ERISA is not to guarantee employment; its purpose is to ensure the integrity of employee benefit plans and to protect the rights of plan participants to accrued benefits under those plans. See 29 U.S.C. § 1001(b). The mere fact that defendant provides employee benefit plans for its employees does not place it under a duty to maintain them in its employ. See Craig v. Bemis Company, Inc., 517 F.2d 677, 684 (5th Cir.1975); Shaw v. Kruidenier, 470 F.Supp. 1375, 1388 (S.D.Iowa 1979). The “Limitation on Rights” provision serves to alert employees to this fact.

B. Wrongful Discharge Depriving Plaintiff of Early Retirement Benefits

Plaintiff’s claim that he was wrongfully discharged so as to deny him maximum pension benefits is pre-empted by ER-ISA. Section 510 of ERISA states that it is unlawful for an employer to “discharge ... a participant or beneficiary ... for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan.” 29 U.S.C. § 1140. Section 1140 prevents an employer from arbitrarily discharging an employee whose pension rights are about to vest. See Lojek v. Thomas, 716 F.2d 675, 680 (9th Cir.1983). To recover under § 1140, plaintiff must show that defendant terminated him with the “specific intent” to interfere with his rights under defendant’s benefit plans. Watkinson v. Great Atlantic & Pacific Tea Co., Inc., 585 F.Supp. 879, 883 (E.D.Pa.1984); Titsch v. Reliance Group, Inc., 548 F.Supp. 983, 985 (S.D.N.Y.1982).

Defendant asserts that the termination in no way interfered with plaintiff’s vested pension rights. Plaintiff has been “one hundred percent” vested in defendant’s Retirement Plan since 1977 when he completed 10 years of service with the company. A salaried employee with vested rights under the Retirement Plan can receive any one of three types of retirement, depending upon the circumstances with which he ends employment with defendant: (1) normal retirement (2) early retirement with actuarially reduced pension; (3) “deferred vested pension” applicable to an employee terminated before eligibility for early retirement. Payments begin at age 62, or reduced payments at age 55. Baker Dep. Exhibit 13, Defendant’s Motion for Summary Judgment. At the time that he was terminated, plaintiff was entitled to benefits under the Deferred Vested Pension plan. Further, his benefits under the Supplemental Savings and Retirement Plan and a Tax Credit Employee Stock Ownership Plan were fully vested as soon as he became a participant in these plans.

Plaintiff does not dispute the fact that his pension rights had vested, but rather asserts that defendant terminated him to prevent him from qualifying for early retirement. Defendant contends that it terminated plaintiff for two violations of the storeroom key rule, a legitimate, business-related reason for discharge demonstrating no invidious intent. “No ERISA cause of action [under § 1140] lies where the loss of ... benefits was a mere consequence of, but not a motivating factor behind, a termination of employment.” Titsch v. Reliance Group, Inc., 548 F.Supp. at 985. Plaintiff responds that this reason is pretextual. He points to the “arbitrary and capricious” nature of the discharge. Plaintiff asserts that John Fuentes never stated that the penalty for giving out the storeroom key would be discharge. Baker Dep. 78:27-79:1, Plaintiff’s Opposition to Summary Judgment Motion. John Fuentes had issued orders in the past and had never discharged anyone for violating those orders. Baker Dep. 78:1-78:28. Plaintiff also states that he was forced to give the key to a non-salaried employee, rather than go to the storeroom himself, because of emergency situations on the floor. Baker Dep. 166:1-179:28; 176:1-177:28.

It is undisputed that the reason given plaintiff for his termination was his violation of the storeroom key rule. The question raised is whether the reason given was pretextual. The court must be particularly cautious in deciding whether to grant summary judgment where issues of intent or motivation are involved. Haydon v. Rand Corp., 605 F.2d 453, 455 n. 2 (9th Cir.1979). In Watkinson v. Great Atlantic & Pacific Tea Co., Inc., supra, the district court addressed a, similar claim where a plaintiff alleged that he was discharged to prevent him from attaining enhanced pension rights arising from continued employment. The court stated:

[A]s defendants correctly noted, in order to prevail under the theory plaintiff advances, he must show defendant’s “specific intent” to violate ERISA, (citation omitted.) While this may present a difficult problem of proof at trial, it serves to avoid summary judgment. As a general rule, summary judgment is inappropriate in actions involving state of mind.

585 F.Supp. at 883.

On the other hand, “a party against whom summary judgment is sought is not entitled to a trial simply because he has asserted a cause of action to which state of mind is a material element. There must be some indication that he can produce the requisite quantum of evidence to enable him to reach the jury with his claim.” Hahn v. Sargent, 523 F.2d 461, 468 (1st Cir.1975), cert. denied, 425 U.S. 904, 96 S.Ct. 1495, 47 L.Ed.2d 754 (1976). The only evidence offered by plaintiff is that if he had not been terminated, he would have been able to accrue additional benefits. It is undisputed that no benefits previously earned would have been forfeited by reason of the discharge. Thus, regardless of whether the discharge was arbitrary and capricious, its impact on benefits was only incidental — the resulting loss was simply that which would result from any discharge, i.e. a loss of wages and other benefits earned on account of work to be performed in the future.

II. State Law Claims

Plaintiffs first, third and fourth causes of actions raise state law claims “growing out of the same nucleus of operative facts” and can be considered by this Court under its pendent jurisdiction. United Mine Workers of America v. Gibbs, 383 U.S. 715, 735, 86 S.Ct. 1130, 1143, 16 L.Ed.2d 218 (1966). These causes of action are premised on plaintiffs assertion that plaintiff could only be terminated “for just cause” and that his termination in March 1982 was without cause. Plaintiff patterns his causes of action on the three distinct theories of wrongful discharge that have been developed by the California courts: (1) a cause of action for employer’s breach of an implied-in-fact covenant to terminate only for cause. Pugh v. See’s Candies, Inc., 116 Cal.App.3d 311, 171 Cal.Rptr. 917 (1981); (2) a tort cause of action for wrongful discharge in violation of public policy. Tameny v. Atlantic Richfield Co., 27 Cal.3d 167, 164 Cal.Rptr. 839, 610 P.2d 1330 (1980); (3) a cause of action for the employer’s breach of the implied covenant of good faith and fair dealing which sounds both in tort and contract. Cleary v. American Airlines, Inc., 111 Cal.App.3d 443, 168 Cal.Rptr. 722 (1980).

A. Implied-In-Fact-Contract

The general rule governing employment contracts in California is codified in California Labor Code § 2922: “An employment, having no specified term, may be terminated at the will of either party on notice to the other.” This statute creates a presumption that an employment contract is terminable at will. Pugh v. See’s Candies, Inc., 116 Cal.App.3d at 324, 171 Cal.Rptr. 917. This presumption “is subject, like any presumption, to contrary evidence. This may take the form of an agreement, express or implied, that the ... employment relationship will continue indefinitely, pending the occurrence of some event such as the employer’s dissatisfaction with the employee’s service or the existence of some ‘cause’ for termination.” Id. at 324-25, 171 Cal.Rptr. 917, footnotes omitted. Courts consider a variety of factors in determining whether an implied-in-fact promise of continued employment exists, such as personnel policies, the employee’s longevity of service, and communication by the employer reflecting assurances of employment. Id. at 327, 171 Cal.Rptr. 917.

The Pugh analysis, however, applies only in the absence of an express agreement. A valid express agreement precludes a contradictory implied contract embracing the same subject matter. Crain v. Burroughs Corp., 560 F.Supp. 849, 852 (C.D.Cal.1983); Crossen v. Foremost-McKesson, Inc., 537 F.Supp. 1076, 1077 (N.D.Cal.1982); Hillsman v. Sutter Community Hospitals, 153 Cal.App.3d 743, 754, 200 Cal.Rptr. 605 (1984); Shapiro v. Wells Fargo Realty Advisors, 152 Cal.App.3d 467, 482, 199 Cal.Rptr. 613 (1984).

Plaintiff signed a written agreement with defendant on April 1,1975, at the time he was promoted to shift foreman. See Baker Dep., Exh. A, Defendant’s Motion for Summary Judgment. This agreement states that as a condition of continued employment with defendant, plaintiff agrees to comply with certain requirements regarding confidentiality and development of defendant’s patents. With respect to the term of employment, the agreement states: “Employer employs and shall continue to employ Employee at such compensation and for such a length of time as shall be mutually agreeable to Employer and Employee.”

Plaintiff does not dispute the existence of this agreement but makes two arguments regarding its content.. First, he characterizes the document as a "patent agreement” and contends that it is too “peripheral” a document to qualify as an employment agreement. This argument is without merit; the plain language of the agreement indicates that it covers conditions of employment. See Shapiro v. Wells Fargo Realty Advisors, 152 Cal.App.3d 467, 199 Cal.Rptr. 613 (1984) (stock option agreement with clause relating to conditions of employment is binding contract for termination at will.)

Second, plaintiff contends that even if this document could be characterized as an employment agreement, the provision which states that defendant may employ plaintiff for “a length of time as shall be mutually agreeable to Employer and Employee” is “silent” as to whether termination at will is possible. He relies on Hillsman v. Sutter Community Hospital of Sacramento, 153 Cal.App.3d 743, 200 Cal.Rptr. 605 (1984), for support. In Hillsman plaintiff and defendant entered into an employment agreement in the nature of a “letter of understanding.” The agreement provided in part that “[i]t is further understood that renegotiation or termination of this letter of understanding by either party may be accomplished upon thirty days notice.” Id. at 748, 200 Cal.Rptr. 605. The court found that because the language was silent as to whether the agreement could be terminated with or without cause, the language did not rebut the presumption of California Labor Code § 2922 that employment is terminable at will by either party. The plaintiff argued, however, that there was an implied-in-fact promise between the parties that plaintiff would not be terminated except upon grounds and according to procedures set forth in the defendant’s bylaws. The court rejected defendant’s response that an implied-in-fact covenant cannot contradict an express provision of the letter of understanding, stating that there was no readily ascertainable conflict between plaintiff’s implied contract theory and the express terms of the agreement: “[t]he salient language of the letter agreement simply provides that ‘termination ... by either party may be accomplished upon thirty days notice’____ It does not state, for example, that termination of the agreement could be accomplished ‘for any reason’ or ‘at will’ or ‘without cause.’ ” Id. at 755, 200 Cal.Rptr. 605. The agreement did not preclude plaintiff’s assertion that termination was to be in accordance with the defendant’s bylaws because “the letter’s failure to refer to termination-for-cause created an evidentiary void insufficient to rebut the presumption of employment at will. We now conclude the same void in contract language cannot be used to defeat plaintiff’s expressly pleaded theory of implied contract.” Id.

Unlike the agreement of Hillsman, the instant agreement, providing specifically that employment is to continue only so long as “shall be mutually agreeable to [both parties]” creates a terminable at will arrangement. The identical provision was so interpreted in Murray v. Kaiser Aluminum and Chemical Corporation, 591 F.Supp. 1550 (S.D.W.Va., 1984):

Giving the words “mutually agreeable” their general and ordinary meaning, the construction commanded by the language is inescapable — if either party no longer desires the employment to continue, the employment would no longer be “mutually agreeable” and could be terminated by the party desiring to do so. In short, either plaintiff or Kaiser had the right to unilaterally end the employment relationship____ The Court concludes as a matter of law that Plaintiff was an “at will” employee of Kaiser and, therefore, could be discharged at any time, with or without cause.

Id. 1553-1554.

A Pugh-type implied-in-fact cause requirement is therefore precluded as a matter of law by the express terms of the April 1, 1975 agreement.

B. Wrongful Discharge under Tameny v. Atlantic Richfield Company

An at-will employee may maintain a tort cause of action for wrongful discharge if he can show that his “ ‘employer’s motivation for [a] discharge contravenes some substantial public policy principle.’ ” Tameny v. Atlantic Richfield Co., 27 Cal.3d at 177, 164 Cal.Rptr. 839, 610 P.2d 1330. This requirement can be met by proof that the plaintiff was discharged in retaliation for asserting his statutory right, or his refusal to perform an illegal act at the request of the employer, or because his employer directly violated a statute or public policy by dismissing him. Shapiro v. Wells Fargo Realty Advisors, 152 Cal.App.3d at 477, 199 Cal.Rptr. 613.

Plaintiff contends that defendant discharged him in contravention of “the express public policy of the state of California” in that it discharged him without good cause and wrongfully denied him the opportunity to continue in employment to obtain maximum benefits. In Newfield v. Insurance Co. of the West, 156 Cal.App.3d 440, 203 Cal.Rptr. 9 (1984), the California Appellate court held that such allegations do not establish a cause of action under Tameny, since job security is not, in itself, a substantial public policy sufficient to support a cause of action.for wrongful discharge:

There is no public policy that people are or should be entitled to permanent employment or that an employer is not entitled to discharge an employee. The law as set forth by statute reflects a contrary policy. The general rule codified in Labor Code section 2922 provides that “An employment, having no specified term may be terminated at the will of either party____”
Id. at 444, 203 Cal.Rptr. 9.

To the extent that plaintiff's claim alleges discharge in violation of a public policy regarding employment benefits, it is preempted by § 510 of ERISA. See Section II, B.

Plaintiff, in his Opposition, raises for the first time an allegation that he was discharged because of his religious beliefs. The allegation is merely conclusory, no facts having been presented. Moreover, there is no common law cause of action for employment discrimination in California. Baker’s exclusive remedy for such discrimination is under the California Fair Employment and Housing Act, Govt.Code § 12900 et seq. See Ambrose v. Natomas Co., 155 Cal.App.3d 397, 402, 202 Cal.Rptr. 217 (1984); Strauss v. A.L. Randall Co., 144 Cal.App.3d 514, 519-521, 194 Cal.Rptr. 520 (1983).

C. Breach of the Implied Covenant of Good Faith and Fair Dealing

Finally plaintiff attempts to assert a tort cause of action for breach of the implied covenant of good faith and fair dealing, relying on Cleary v. American Airlines, Inc., supra. In Cleary, plaintiff, an employee of American Airlines for 18 years, brought an action against his employer alleging that he was wrongfully discharged because of his union activities. Plaintiff had no written employment agreement with his employer. The court noted that “the termination of employment without legal cause [after 18 years of service] offends the implied-in-law covenant of good faith and fair dealing contained in all contracts, including employment contracts.” Id. 111 Cal.App.3d at 455, 168 Cal.Rptr. 722. The Cleary decision, however, as Pugh noted, “rested upon the employer’s acceptance of responsibility for refraining from arbitrary conduct, as evidenced by its adoption of special procedures for adjudicating employee grievances.” Pugh v. See’s Candies, Inc., 116 Cal.App.3d at 329, 171 Cal.Rptr. 917. American Airlines had failed to apply those procedures in plaintiff’s case.

In two recent cases, the California appellate court considered the tort, but rejected its application to the facts of those cases. In Shapiro v. Wells Fargo Realty Advisors, supra, the court analyzed the tort in light of its application in Cleary and Sawyer v. Bank of America, 83 Cal.App.3d 135, 145 Cal.Rptr. 623 (1978), the first non-insurance case which considered extending the tort. Shapiro noted that Cleary rested on the fact of plaintiff’s longevity of service together with the expressed policy of the employer of providing specific procedures for adjudicating employee disputes. Neither of these factors was present in Shapiro. In analyzing Sawyer, moreover, the court noted that “the Sawyer court stated that the breach of the covenant of good faith and fair dealing consists of bad faith actions extraneous to the contract, combined with the obligor’s intent to frustrate the obligee’s enjoyment of contract rights.” Id. 152 Cal.App.3d at 478-79, 199 Cal.Rptr. 613, Shapiro concluded that plaintiff had not stated a cause of action under Sawyer because “Shapiro has not alleged facts sufficient to show a bad faith act by Wells Fargo which was extraneous to the employment relationship and was intended to frustrate the enjoyment of contractual rights.” Id. at 479, 199 Cal.Rptr. 613.

In Newfield v. Insurance Co. of the West, supra, plaintiff was discharged two years after entering into an alleged oral employment contract in which it was agreed that he would have a “permanent career” with his employer. The Newfield court held that plaintiff failed to state a cause of action under the implied covenant of good faith and fair dealing because he did not demonstrate any factors such as “longevity of service, established personnel policies, ... policies within the industry, lack of criticism of the employee’s work and oral representation and assurances.” 156 Cal.App.3d at 445, 203 Cal.Rptr. 9. The court stated:

California courts have repeatedly considered situations where violation of the implied covenant of good faith and fair dealing has been alleged as a result of “termination without good cause.” The courts have refused to recognize any such cause of action based on the naked covenant alone____ [T]he rulings were always predicated upon other public policy grounds, statutory violations, or express (or clearly implied) contract grounds, or upon a combination of elements (e.g., especially longevity of service together with some added element (Cleary) 18 years and company policies; (Pugh) 32 years and company policies, faithful service and lack of criticism). Id.

While plaintiff can establish longevity of service and lack of criticism of his work, the crucial additional factor is lacking. Unlike Cleary, here there was no established procedure for adjudicating disputes regarding management employees; unlike Pugh, there was an express written contract providing for termination at will without cause; and unlike Sawyer, there was no act extraneous to the employment relationship. Thus plaintiff has failed to present facts which would sustain a verdict on this theory.

For the reasons stated, plaintiff has failed to demonstrate that, accepting the facts offered by him as having been proved at trial, he would be entitled to recover on any theory of law. Defendant’s motion for summary judgment must therefore be granted.

IT IS SO ORDERED.

      . Plaintiffs reliance on Patsy v. Board of Regents of State of Florida, 457 U.S. 496, 102 S.Ct. 2557, 73 L.Ed.2d 172 (1982) for the proposition that he should not be required to first exhaust his state administrative remedies is misplaced. Patsy applies only to actions brought pursuant to 42 U.S.C. § 1983.

      . Plaintiffs argument that he was discharged without application of the company’s progressive discipline procedures which would have required a prior warning before discharge is without merit. These procedures apply only to hourly employee.

      . Plaintiff derives no assistance from the recent decision in Seaman's Direct Buying Service, Inc. v. Standard Oil Co., 36 Cal.3d 752, 206 Cal.Rptr. 354, 686 P.2d 1158 (1984). The most that can be said of that decision is that it ”recognize[d] that a party to a contract may incur tort remedies when, in addition to breaching the contract, it seeks to shield itself from liability by denying, in bad faith and without probable cause, that the contract exists." 36 Cal.3d at 770, 206 Cal.Rptr. 354, 686 P.2d 1158. This reasoning does not apply here.


source: Caselaw Access Project

author: GETZENDANNER, District Judge:

license: Public Domain

text:
    Sam COHEN, by his next friend Sidney COHEN, on Behalf of himself and all others similarly situated, Plaintiffs, v. Arthur F. QUERN, individually and as Director of the Illinois Department of Public Aid, Patrick Kain, individually and as administrator of the Medical Assistance Program, Illinois Dept. of Public Aid, and Illinois Department of Public Aid, Defendants.
    No. 79 C 2447.
    United States District Court, N.D. Illinois, E.D.
    Dec. 20, 1984.

      Nelson A. Soltman, Wendy Meltzer, Legal Assistance Foundation, Chicago, Ill., for plaintiffs.
    Barbara L. Greenspan, William J. Scott, Thomas O’Laughlin, Chicago, Ill., for defendants.
   MEMORANDUM OPINION AND ORDER

GETZENDANNER, District Judge:

This class action, filed under 42 U.S.C. § 1983, the Declaratory Judgment Act, and Title XIX of the Social Security Act, 42 U.S.C. §§ 1396-1396p, seeks to challenge certain policies of the Illinois Department of Public Aid (IDPA) as violating Title XIX and regulations issued pursuant thereto. The plaintiff class consists of two groups: 1) all medically needy families with dependent children and all medically needy aged, blind, and disabled residents of group care facilities who are eligible for IDPA assistance under Title XIX ; and 2) all eligible applicants for Medicaid in Illinois whose applications have been or are approved on or after June 10, 1979, and who have either paid for (or have had paid for on their behalf) necessary medical care and services in the three-month period prior to their IDPA applications. The matter is currently before the court on the motion of plaintiffs for summary judgment as to Count II of the complaint. This count represents all the issues still pending before the court. For the reasons stated below, the plaintiffs’ motion is granted.

Medicaid: A Brief Overview

In 1965, Congress enacted Title XIX of the Social Security Act, 42 U.S.C. §§ 1396— 1396p (Medicaid), to provide federal subsidies to states financing medical assistance to indigent families with dependent children, and to blind, disabled, or elderly individuals. Under the Medicaid program two basic groups were eligible for Medicaid assistance. The first, termed the “categorically needy,” consisted of persons who also received cash assistance from one of several state-federal cooperative programs: Old Age Assistance, 42 U.S.C. §§ 301-306 (repealed 1974); Aid to Families with Dependent Children (AFDC), 42 U.S.C. §§ 601-615; Aid to the Blind, 42 U.S.C. §§ 1201-1206 (repealed 1974); and Aid to the Permanently and Totally Disabled, 42 U.S.C. §§ 1351-1355 (repealed 1974). See 42 U.S.C. § 1396a(a)(10)(A)(i). In Illinois, the categorically needy were (and are) classified into two groups: AFDC recipients, and Aid to the Aged, Blind and Disabled (AABD) recipients. See Ill.Rev.Stat. ch. 23, § 3-1 (1982). Under Title XIX, all participating states were required to provide benefits to the categorically needy. See generally Winter v. Miller, 676 F.2d 276, 277 (7th Cir.1982).

The second group, termed the “medically needy,” 42 C.F.R. § 435.800, consisted of persons with large medical expenses who met the non-financial requirements for cash assistance (e.g., were aged, blind, or disabled), but who had incomes higher than the maximum eligibility levels for those programs. 42 U.S.C. § 1396d(a). Persons in the medically needy group became eligible for Medicaid by incurring medical expenses equal to the amount by which their total income exceeded the income of those who receive cash welfare assistance. Thus, these persons were required to “spend-down” this excess amount in order to qualify for medical assistance. Providing relief to the medically needy was optional under the 1965 Medicaid program. See Winter, 676 F.2d at 277.

In 1972, Congress amended the Social Security Act to shift some of the financial burden of the categorical assistance programs from the states to the federal government, and enacted the Supplemental Security Income Program, 42 U.S.C. § 1381-1383c (SSI). Under the SSI amendments, which went into effect on January 1, 1974, the aged, blind, and disabled eligible for welfare assistance began to receive cash grants through the federal SSI program rather than from their individual states. The 1972 amendments also raised benefits and eased eligibility criteria under these programs to allow more people to receive general welfare assistance. However, because eligibility for Medicaid was tied to general welfare eligibility, these amendments “threatened to swell the Medicaid rolls and place a large and immediate fiscal burden on participating states.” Winter, 676 F.2d at 278.

Fearful that the higher federal limit governing Medicaid eligibility might cause participating states to abandon the program, Congress enacted § 209(b) of the Act, 42 U.S.C. § 1396a(f), which allowed states the option of limiting Medicaid assistance to those aged, blind, or disabled individuals who would have qualified under the income ceilings in effect on January 1, 1972. States which elect this option, however, are required to provide medical assistance for the medically needy and to incorporate a “spend-down” provision for determining eligibility levels. 42 U.S.C. § 1396a(f). The spend-down ensures that those individuals who would otherwise be eligible under the higher federal limits are allowed to deduct their incurred medical expenses from their income before the state can determine whether 1972 eligibility levels were met. Illinois, along with fifteen other states, elected the 209(b) option. See Schweiker v. Gray Panthers, 453 U.S. 34, 39 n. 6, 101 S.Ct. 2633, 2638 n. 6, 69 L.Ed.2d 460 (1981).

Statement of the Case

The Illinois Department of Public Aid (IDPA), as the state agency responsible for administering the Medicaid program in Illinois, Ill.Rev.Stat, ch. 127, § 48a (1982), is required to follow a plan consistent with the requirements of Title XIX and the regulations promulgated thereunder by the Secretary of Health and Human Services (HHS). Brogan v. Miller, 537 F.Supp. 139, 142 (N.D.Ill.1982). Plaintiffs challenge three aspects of the IDPA’s current plan with regard to IDPA’s definition of “incurred” expenses. First, plaintiffs contend that the IDPA is required by federal law to credit against spend-down all medical expenses for which a Medicaid applicant remains currently liable. Second, plaintiffs contend that IDPA violates federal law by refusing to credit against spend-down incurred medical bills which have been paid by a third party who is not legally responsible for the bills. Finally, plaintiffs contend that IDPA must establish a procedure for making refunds to participating health care providers who have been paid for services which are found to be retroactively covered by Medicaid. These claims will be discussed in turn.

1. Whether IDPA must credit against spend-down all incurred medical expenses for which applicants are currently liable.

IDPA has implemented the spend-down requirement with respect to the aged, blind, and disabled nursing home residents and the AFDC-related medically needy in this case by creating a one month “established period” over which income is compared to the appropriate Medical Assistance-No Grant (MA-NG) standard. AABD Manual, PO-620(3); AFDC Manual, PO-620(3) (Plaintiffs’ Exhibits 8 & 3). Under the IDPA’s regulations, if the expenses concern services provided during the one-month period, they may be credited against spend-down. AABD Manual at PO-620(4); AFDC at PO-620(3). If, however, the expenses concern services provided before the one-month period, only “actual payments made during the current^ period” may be credited. AABD Manual at PO-620(17) (Plaintiffs’ Exhibit 9); AFDC Manual at PO-620.5. As a result, individuals who do not receive a bill until more than a month after the services are provided may not use that bill to establish Medicaid eligibility unless they pay it first.

Plaintiffs challenge this result as violating 42 C.F.R. ¶ 435.732(c)(1), which requires state agencies to credit towards spend-down all “expenses incurred by the individual or financially responsible relatives for necessary medical and remedial services,” and 42 U.S.C. § 1396a(a)(17)(D), which requires state plans to “tak[e] into account, except to the extent prescribed by the Secretary, the costs ... incurred for medical care or for any other type of remedial care recognized under state law.” As plaintiffs note, neither the statute nor the implementing federal regulations state any limit on the age of bills which may be credited towards spend-down, and speak in terms of “incurred” expenses rather than “paid” bills. Since “incurred” generally is defined as “becompng] liable or subject to,” Gadway v. Blum, 567 F.Supp. 772, 775 (N.D.N.Y.1983) (citing Webster’s Third New Int’l Dictionary at 1146), plaintiffs argue that the statute implicitly requires § 209(b) states to credit against spend-down all medical expenses for which the applicant is currently liable, and does not give the states any discretion to impose an age limitation on those expenses in determining Medicaid eligibility.

To support their construction, plaintiffs note that the HHS interpretive guidelines support its position:

[Wjhile the state cannot arbitrarily exclude unpaid bills incurred prior to the initial eligibility period (for which the applicant may, in fact, remain liable) a cut off period could be established for identifying old bills subject to intensive scrutiny.

HCFA Regional Office Manual, Part 6, Medicaid Guidelines, Transmittal No. 31 (June 19, 1979), reported in 1980 Transfer Binder (CCH), Medicare and Medicaid Guide ¶ 30,392, § 2400, Question 3. Additionally, in 1978 the HHS Regional Administrator wrote to IDPA Director Arthur Quern and affirmed its position: “A limit on the age of unpaid bills may not be placed. Current policy requires that bills which are the current liability of the applicant must be counted toward the spend-down liability.” ‘(Plaintiffs’ Exhibit 12). This view was reiterated as recently as September, 1983, when HHS proposed regulatory reforms to allow states to exclude from incurred medical expenses those bills for services provided more than three months prior to a Medicaid application: “[A]ny bills incurred prior to the period for which eligibility is determined, may be applied to the spend-down period only if they are unpaid, and remain a current obigation of the individual.” 48 Fed.Reg. 39959, 39961 (Sept. 2, 1983).

Finally, the plaintiffs note that this very same issue was decided by another judge in this district in favor of aged, blind, and disabled MA-NG applicants who are not in long-term care facilities. Brogan v. Miller, 81 C 6539 (Unpublished Order issued July 7, 1983). In that case, Judge Marvin E. Aspen adopted the Report and Recommendations of Magistrate Jurco, which concluded that “Eligibility exists when the medical expenses are incurred, not paid____ Unpaid medical expenses incurred cannot be conditioned on payment in order to be carried over to the next eligibility period.” Report at 4.

Because HHS is the administrative agency charged with executing Title XIX, its interpretation of its own regulations is, of course, entitled to “great weight,” Udall v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965), and its construction of the statute to be followed “unless there are compelling indications that it is wrong.” New York State Department of Social Services v. Dublino, 413 U.S. 405, 421, 93 S.Ct. 2507, 2516, 37 L.Ed.2d 688 (1973). Such deference is particularly appropriate with regard to Title XIX, since, as the Supreme Court has stated, “Congress conferred on the Secretary exceptionally broad authority to pfescribe standards for applying certain sections of the Act.” Schweiker v. Gray Panthers, 453 U.S. 34, 43, 101 S.Ct. 2633, 2640, 69 L.Ed.2d 460 (1981).

In the present case, IDPA has argued that HHS’s position is inconsistent with the purposes behind the spend-down requirement, namely, to provide Medicaid for those applicants whose present available income is insufficient to meet present medical expenses. According to IDPA, the mere existence of a past medical bill may not have any effect on a client’s present income absent proof that it remains a current obligation of the individual. Because only a payment on the past bill ensures that present available income is actually reduced because of the past bill, IDPA argues that its spend-down policy is a permissible means of insuring that no IDPA applicant has more money available to him than is allowed under the state formula.

In further support of this position, IDPA notes that HHS has approved the state plan under attack in this case, thus in effect determining that the plan complies with applicable statutory and regulatory requirements, which determination should be accorded substantial deference. See Michael Reese Physicians & Surgeons, S.C. v. Quern, 606 F.2d 732, 735-36, aff'd en banc, 625 F.2d 764 (7th Cir.1980), cert. denied 449 U.S. 1079, 101 S.Ct. 860, 66 L.Ed.2d 802 (1981). IDPA also argues that the decision in Brogan is inapposite since the amendments to Title XIX passed in the Omnibus Budget Reconciliation Act of 1981 (OBRA), Pub.L. No. 97-35, explicitly provide the states with “flexibility in establishing eligibility criteria ... to address the needs of different population groups more appropriately.” H.R.Rep. No. 97-208, 97th Cong., 1st Sess. 971, reprinted in [1981] U.S.Code Cong. & Ad.News 1010, 1333.

On balance, the court finds that the interpretation of “incurred expenses” suggested by the plaintiffs and adopted by HHS is consistent with both common sense and the statutory goals of Title XIX, and that IDPA’s objections provide no “compelling indications” to suggest that HHS has misinterpreted its own regulations. See Dublino, 413 U.S. at 421, 93 S.Ct. at 2516. IDPA’s argument that payment is necessary if plaintiffs are to prove that they remain currently liable for old bills in effect conditions crediting of old bills on payment, whereas the statute conditions Medicaid coverage on currency of the debt and not actual reduction of income.

Second, IDPA’s assertion that HHS has approved its plan is overstated. The plan which HHS approved nowhere refers to IDPA’s interpretation of “incurred expenses” but instead concerns itself with general eligibility requirements and income levels. (Plainitiffs’ Exhibit 28). Therefore, IDPA’s position is not entitled to special deference.

Finally, IDPA’s attack on the dispositiveness of Brogan is misconceived. Brogan is relevant to this ease not because institutionalized and non-institutionalized AABD recipients must be treated identically, but because Judge Aspen in that case decided the same issue of statutory construction now before this court. Even assuming that IDPA could show that differential treatment to institutionalized MA-NG recipients allows it to address their needs more appropriately, Brogan would still be persuasive as an interpretation of statutory requirements which apply to both institutionalized and non-institutionalized AABD recipients.

2. Whether IDPA must credit against spend-down medical bills paid for by a third-party not legally obliged to compensate the party who incurred the bills.

IDPA’s obligation to deduct incurred medical expenses against countable income is limited by the provision that bills “subject to payment by a third party” need not be credited toward spend-down. 42 C.F.R. § 435.732(c)(i). This regulatory proviso implements 42 U.S.C. § 1396a(a)(25), which requires the state to treat “the legal liability of third parties to pay for care and services ... as a resource of the individual on whose behalf the care and services are made.” Accordingly, HHS regulations define a third party as “any individual, entity or program that is or may be liable to pay all or part of the medical cost of injury, disease, or disability of an applicant or recipient.” 42 C.F.R. § 433.136(3).

Under IDPA’s current plan, all medical bills for services performed within the established period are excluded from consideration of the spend-down amount if paid for by a non-liable third party:

Payment on a spend-down client’s medical care costs by a person not included in the income standard [i.e., not spouses or children] ... is considered similar to a TPL [third party liability] payment. The portion of the client’s medical care costs paid by the person ... is not considered towards the client’s spend-down obligation. Only the part, if any, not paid, remains as the client’s obligation and may be considered towards meeting spend-down.

IDPA, AABD and AFDC Manuals § PO-620.5.c.3(c) (Plaintiffs’ Exhibits 17 & 18). IDPA has thus interpreted 42 C.F.R. § 435.732(c)(i) as incorporating not only bills for which a third party is legally liable but also those which a third party has voluntarily chosen to pay.

Plaintiffs note that this policy has particularly harsh consequences. Medicaid applicants who cannot receive medication and other supplies on credit and who have otherwise spent down to the 1972 income levels will often turn to non-responsible family members or friends to help them out while the IDPA processes their applications. That these third parties extend resources, however, does not mean that they do not want or expect to be repaid. IDPA policy, by denying credit for incurred medical bills which are paid by someone else, makes it impossible for Medicaid applicants to repay these debts except by living on even less than their protected income level.

Plaintiffs challenge this result on two grounds. First, plaintiffs claim that IDPA’s policy violates 42 U.S.C. § 1396a(a)(17)(D), which forbids state Medicaid agencies to “take into account the financial responsibility of any individual for any applicant or recipient of assistance ... unless such applicant or recipient is such individual’s spouse or is such individual’s child who is under age 21 or ... is blind or disabled____” Although IDPA’s policy relates to the definition of “incurred medical expenses” which must be counted against spend-down, and not to the definition of available income addressed in § 1396a(a)(17)(D), plaintiffs appear to argue that IDPA’s policy nonetheless violates the statute by effectively taking these third-party payments into account in computing an applicant’s benefits level.

Even assuming this latter assertion to be correct, the court seriously doubts whether IDPA’s policy violates § 1396a(a)(17)(D). That section addresses the impropriety of presuming support from non-immediate family members, but does not, at least facially, prevent the states from considering actual payments made by those third parties. The legislative history on this point is instructive:

States may not include in their plans provisions for requiring contributions from relatives other than a spouse or the parent of a minor child or children over 21 who are blind or permanently and totally disabled. Any contributions actually made by relatives or friends, or from other sources, will be taken into account by the State in determining whether the individual applying for medical assistance is, in fact in need of such assistance.

S.Rep. No. 404, 89th Cong., 1st Sess. 78 (1965), reprinted in [1965] U.S. Code Cong. & Ad.News, 1943, 2018. See also Schweiker v. Gray Panthers, 453 U.S. 34, 45, 101 S.Ct. 2633, 2641, 69 L.Ed.2d 460 (1981) (same).

The court finds it unnecessary to decide whether the relieving of debts at issue here may properly be treated as income to the parties benefited, since IDPA presently has no such policy in force and plaintiffs’ second ground for relief is meritorious. Plaintiffs contend that IDPA’s policy regarding medical bills which have been paid for voluntarily by a third party violates IDPA’s obligation to deduct incurred medical expenses from income unless subject to payment by an “individual, entity or program that is or may be liable” for them. 42 C.F.R. §§ 435.732(c)(i); 433.-136(3). As explained below, the court agrees.

In Gadway v. Blum, 567 F.Supp. 772 (N.D.N.Y.1983), the New York Department of Social Services had attempted to treat bills incurred by Medicaid recipients and subsequently written off by hospitals under the Hill-Burton Act, 42 U.S.C. §§ 291 et seq., in a similar manner. In defense of its policy, the state argued that “expenses which are initially encountered but later forgiven cannot be considered incurred expenses” and that such bills were nonetheless not creditable against spend-down for having been “subject to payment by a third party.” Id. at 775. The court rejected both propositions, noting, among other things, that the Hill-Burton program was not a third-party payor within the meaning of the Act. Id.

Because Gadway was ultimately decided on statutory grounds peculiar to the Hill-Burton program, its reasoning is not conclusive with respect to the present case.

Like the Hill-Burton program, however, an unobligated party who voluntarily pays a Medicaid recipient’s incurred bill is not a third party within the meaning of 42 C.F.R. § 433.136. That provision applies only to third parties legally obligated to pay. Hence, IDPA’s treatment of such bills violates the regulatory directive of 42 C.F.R. § 435.732 to deduct all incurred medical expenses against income unless subject to third-party payment, and also the statutory directive that state Medicaid plans shall “tak[e] into account, except to the extent prescribed by the Secretary, the costs ... incurred for medical care____” 42 U.S.C. § 1396a(a)(17)(D) (emphasis added). By refusing to take into account incurred medical expenses which the Secretary has not exempted from consideration, IDPA’s plan runs afoul of Title XIX. Where voluntary third-party payments have been shown to be gifts and not loans, the Medicaid statute apparently allows them to be treated as income to the recipient. IDPA has no discretion, however, to exempt all bills on which such payments are made from the spend-down calculation.

3. Whether IDPA must require medical providers to make refunds to persons who pay medical bills in excess of their spend-down.

Plaintiffs’ final claim is brought on behalf of all Medicaid recipients who have actually paid for their medical bills in the three-month period prior to filing for IDPA assistance. Under 42 U.S.C. § 1396a(a)(34), the IDPA must make “available” medical assistance for a three-month period prior to application as well as prospectively. As implemented by 42 C.F.R. § 435.914(a), this provision requires state Medicaid agencies to “make eligibility for Medicaid effective no later than the third month before the month of application” for individuals who received Medicaid services during the three-month retroactive period and would have been eligible for medical assistance had they applied earlier.

Where the individuals eligible for retroactive assistance under these provisions remain liable for their debts, IDPA policy is to pay that portion of the bills which exceeds the applicant’s spend-down. Where individuals have paid their bills, however, the IDPA considers itself responsible only if the vendor voluntarily refunds the recipient’s earlier payment and bills the IDPA for the services rendered. However, because the private pay rate for medical providers is higher than the Medicaid rate, providers generally do not volunteer to make such refunds. (Plaintiffs’ Exhibit 7, ¶ 10; Defendants’ Memorandum at 7). Because IDPA lacks authority to issue payments to the Medicaid applicants directly, see 42 U.S.C. § 1396a(a)(32), Medicaid applicants who have reduced their assets and income below protected levels during the retroactive period are denied any meaningful method to recover those payments.

Plaintiffs argue that, by not requiring participating doctors to refund amounts already paid and then reimbursing those vendors under the Medicaid fee schedules, IDPA is violating both its duty to make Medicaid “available” for the three months prior to application, 42 U.S.C. § 1396a(a)(34), and its duty to “limit participation in the Medicaid program to providers who accept, as payment in full, the amounts paid by the agency____” 42 C.F.R. § 447.15. In response, IDPA simply argues that neither HHS nor the statute expressly requires it to employ such procedures. IDPA therefore leaves the applicant who has paid bills during the retroactive period to seek reimbursement on his own, despite the apparent difficulty of convincing medical providers to refund prior payments in exchange for a lesser amount.

The position of HHS on this issue is unclear. The Medical Assistance Manual, § 3-10.900, Question 10 (Defendants’ Exhibit A) expressly supports the IDPA’s position:

State payment for retroactive services is required only where persons have not paid for the medical care and services received in the three months prior to the month of application. If the vendor is willing to refund the payment to the recipient and bill the State for the service, the State would then be expected to make payment provided the service was necessary and the person was eligible for coverage when the service was rendered.

In 1979, however, the Regional HEW Office, responding to a petition filed by the Illinois Welfare Rights Organization (IWRO), reached the opposite conclusion:

Medicaid providers must accept payment from the State as payment in full. We believe that this requirement, together with the requirement that the State provide three-month retroactive coverage, impose upon the State an obligation to notify and require vendors who regularly participate in the Medicaid program to refund amounts already paid by recipients for services received during the retroactivity period and then pay those vendors under the Medicaid fee schedules.

(Plaintiff’s Exhibit 25). Three months after this ruling, however, the Regional Office notified the parties that the Central Office had advised that this interpretation might conflict with current federal policy, and that its earlier recommendation should therefore be held in abeyance pending further review. (Plaintiff’s Exhibit 26). Since that time, HHS has taken no position on the matter.

Given HHS’s conflicting signals, the court finds the question an open one, and concludes that IDPA’s refund policy, although not expressly prohibited by regulation, falls short of its duty to make Medicaid “available” and “effective” no later than three months prior to the date of application. Implicit in such a requirement is that Medicaid applicants be eligible for assistance throughout that period on the same terms under which they are eligible after application. Significantly, IDPA does not argue that it can legally limit medical assistance after application to people who do not pay their bills; indeed, IDPA policy regarding bills for services provided within the regular established period requires crediting against spend-down regardless of payment. AABD & AFDC Manuals, PO-620.2. Nor does IDPA argue that its duty to limit participation to providers who accept the Medicaid fee schedule amounts as payment in full does not apply to the retroactive period. Yet, IDPA argues that it may ignore discrepancies in result between the retroactive period and the prospective period because the statute nowhere requires it to compel refunds.

This court cannot acquiesce in so niggardly a view of IDPA’s responsibilities under Title XIX. The purpose of the three-month retroactive period is to “protect[] persons who are eligible for Medicaid but do not apply for assistance until after they have received care, either because they did not know about the Medicaid eligibility requirements, or because the sudden nature of their illness prevented their applying.” H.Rep. No. 92-231, 92d Cong., 2d Sess., reprinted in [1972] U.S.Code Cong. & Ad. News 4989, 5099; see also S.Rep. No. 1230, 92d Cong., 2d Sess. 209 [1972] (same). Rather than protect these people, however, IDPA’s policies preclude retroactive coverage for all those people who either depleted their savings below protected levels or borrowed from others to obtain medical care. By leaving indigent Medicaid recipients to the financial largesse of their medical providers, IDPA is simply failing to ensure that Medicaid providers accept the fee levels they undoubtedly would be required to accept were the services provided after a favorable eligibility determination. Under these circumstances, the court has equitable power to enforce the terms of the statute despite HHS’s failure to act. See Califano v. Yamasaki, 442 U.S. 682, 705 & n. 17, 99 S.Ct. 2545, 2559 & n. 17, 61 L.Ed.2d 176 (1979). Accordingly, where vendors who regularly participate in the Medicaid program have extended medical services and received full payment from eligible applicants in the retroactive period, the IDPA must compel those providers to refund the amounts paid and accept payment by the state as a condition of further participation.

Conclusion

The plaintiffs’ motion for summary judgment is granted. The case is set for status on January 15, 1985, to discuss the execution and implementation of a final order for relief.

It is so ordered.

      . Because of identical relief granted in Brogan v. Miller, 81 C 6539 (N.D.Ill.), the class originally certified by this court was amended to exclude members of the Brogan class: all medically needy aged, blind, or disabled IDPA applicants on or after Sept. 1, 1981 who do not reside in long-term care facilities.

      . Medical Assistance-No Grant (MA-NG) is the term by which the IDPA refers to all individuals who qualify for Medicaid by spending down their income to the 1972 eligibility levels rather than by participating in one of the categorical welfare assistance programs.

      . All CFR references have been updated to the Oct. 1, 1983 compilation (published last April).

      . Just before this opinion was issued, plaintiffs’ counsel informed the court that HHS has reiterated its view that the IDPA may not exclude medical bills for which applicants are currently liable from spend-down simply because they were incurred more than six months prior to the established period. (Letter dated July 27, 1984 from Carolyne Davis, Health Care Financing Administration to Gregory Coler, IDPA Director.) The IDPA asked HHS to reconsider its decision, and a hearing was set for November 6, 1984, 49 Fed.Reg. 38193 (Sept. 27, 1984). The hearing was apparently canceled, and has not been reset. HHS’s recent action therefore supports the conclusion reached by the court.