author: HADEN, Chief Judge.

text:
    Grace Catherine WOLFE, an incompetent, by her next friend, Peggy HEDGES, Plaintiff, v. Henry C. BIAS, Jr. and Sylvia O. Allinder, Defendants.
    Civ. A. No. 84-2339.
    United States District Court, S.D. West Virginia, Charleston Division.
    Dec. 20, 1984.

      Leland T. Sloan, Burgess & Sloan, St. Albans, W.Va., for plaintiff.
    Henry C. Bias, Jr., Gerald R. Lacy, Charleston, W.Va., for defendants.
   MEMORANDUM OPINION AND ORDER

HADEN, Chief Judge.

Now pending is the Plaintiffs application of November 21, 1984, to reconsider this Court’s ruling granting summary judgment in favor of the Defendants Henry C. Bias, Jr. and Sylvia O. Allinder. The Court granted the Plaintiff’s October 31, 1984, motion to set aside summary judgment entered on behalf of the Defendants on Octo.ber 25, 1984. The Court now considers anew the propriety of summary judgment in favor of the Defendants in light of the Plaintiff’s argument and documentation. The Defendants have raised two issues which render the Plaintiff’s cause problematic. First, the Court will consider whether the Plaintiff Peggy Hedges has standing to prosecute this action on behalf of Grace Catherine Wolfe. Second, the Court will consider whether the Defendants have acted under the color of state law as is required in order to maintain an action under 42 U.S.C. § 1983.

As a general rule, a federal court cannot appoint a guardian ad litem in an action in which the infant or incompetent already is represented by someone considered appropriate under the law of the forum state. Developmental Disabilities Advocacy Center, Inc. v. Melton, 689 F.2d 281 (1st Cir.1982); Doe v. Exon, 416 F.Supp. 716 (D.Neb.1975). It has been further held that the decision of whether a person should be appointed rests with the discretion of the Court, and the Court is not obligated to blindly accept the Plaintiff’s assertion that she acts as the incompetent’s next friend. Melton, 689 F.2d at 285.

Rule 17(c), Federal Rules of Civil Procedure, states:

“Whenever an infant or incompetent has a representative, such as a general guardian, committee, or other like fiduciary, the representative may sue or defend on behalf of the infant or incompetent person.”

If the incompetent does have a duly appointed committee, then the second sentence of Rule 17(c), which allows infants or incompetents to proceed by a next friend, does not apply. Further, the Court is obligated to abide by the State’s determination of who shall represent the incompetent. The district court’s power to appoint under Rule 17(c) should not be used to circumvent the mandate in Rule 17(b) to observe state law. 6 Wright & Miller, Federal Practice and Procedure, § 1571 (1971).

W.Va.Code, § 27-11-1 governs the appointment of committees for incompetents. It involves an evidentiary hearing, the appointment of counsel for the purported incompetent, and at least a supportive affidavit by a duly licensed physician. Here, the state has devised a process to determine who shall represent the incompetent. The Court will not circumvent the unchallenged procedure of the state for determining who may represent the incompetent. Finally, W.Va.Code, § 56-4-9 allows only infants to sue by next friend, not incompetent persons.

In the instant case, Sylvia O. Allinder has been duly appointed the committee for Grace Catherine Wolfe pursuant to W.Va. Code, § 27-11-1. The Plaintiff does not challenge the constitutionality of the appointment process itself. Finally even if the Court were inclined to allow someone other than Sylvia O. Allinder to proceed on behalf of Grace Catherine Wolfe, for reasons that will appear later in this opinion, the appointment of Peggy Hedges would not be appropriate.

A second problem which is addressed by the Defendants’ motion for summary judgment is the failure of the Plaintiff to create any genuine issue of material fact with respect to a basic element in § 1983 actions. At a minimum the Supreme Court has required two elements in order to show a cause of action for Section 1983 actions. The first is that the Plaintiff must suffer a deprivation of a right secured by the Constitution and laws of the United States; and, secondly, the deprivation must be taken by the Defendant under the color of state law. Johnson v. Capitol City Lodge No. 74, Fraternal Order of Police, 477 F.2d 601, 602 (4th Cir.1973). While the color of law element does not require that the person be a government official, prevailing in a state proceeding does not confer state action upon the successful party. Dennis v. Sparks, 449 U.S. 24, 27-28, 101 S.Ct. 183, 186, 66 L.Ed.2d 185 (1980). The Plaintiff’s argument that Defendant Bias acted under the color of state law by reason of his membership in the state bar association, (Plaintiff’s Motion to Reconsider, filed October 31, 1984, at p. 5) is without merit. Sumpter v. Harper, 683 F.2d 106, 108 (4th Cir.1982) (the fact that the state licenses individuals to practice, in this case a doctor, does not impute state action to the practitioner’s conduct). The Plaintiff’s case against Allinder is derivative of that maintained against Defendant Bias (Plaintiff’s Motion to Reconsider filed October 31, 1984, at p. 7) and must fail for the same reason. Aside from Defendant Bias’ membership in the state bar, the Plaintiff has not come forward with any facts which would put in issue the question of whether the Defendants acted under the color of state law. Conclusory allegations that the Defendants acted under color of state law will not suffice. District 28, United Mine Workers of America v. Wellmore Coal Corp., 609 F.2d 1083, 1086 (4th Cir.1979); Henzel v. Gerstein, 608 F.2d 654, 659 (5th Cir.1979); Newman v. Bloomingdale’s, 543 F.Supp. 1029, 1032-33 (S.D.N.Y.1982). In particular, representation of a successful adverse party in state litigation does not give rise to state action. Lugar v. Edmondson Oil Co., Inc., 639 F.2d 1058, 1065 (4th Cir.1981); Wilkins v. Rogers, 581 F.2d 399, 405 (4th Cir.1978).

In the documentation which the Plaintiff submits to support her position, the Plaintiff submits an affidavit of her attorney in the present action, and apparently in actions in state court, which shows that Bias was retained by Allinder, that Bias intervened at a hearing held before the Kanawha County Mental Hygiene Commissioner after the Commissioner had stated orally that he would allow Hedges to take Wolfe to her home in Columbus, Ohio, that Allinder was out of state at the time, that the Commissioner reversed his opinion after Bias’ intervention, that Wolfe’s own attorney agreed that Wolfe should be at least temporarily committed for examination, that a physician testified that such examination was necessary, and that the state hospital refused to give Hedges custody of Wolfe. The Plaintiff also submits a portion of the transcript of the hearing before the mental hygiene commissioner of Kanawha County, and that shows in addition to the foregoing, that Hedges came into the State of West Virginia and took $40,000 out of Wolfe’s bank account and that Bias was attempting to restore Wolfe’s estate. The transcript further shows that Hedges herself instituted the incompetency proceedings, the very state action of which Hedges now complains. The transcript further shows that Wolfe was referred to a local hospital for observation.

In the documentation supplied by the Defendants, all of which remains unrebutted by the Plaintiff, contains a civil judgment against Hedges in the amount of $95,000 on behalf of Wolfe, $40,000 in compensatory damages and $55,000 in punitive damages, arising from Hedges’ withdrawal of funds from Wolfe’s bank account. In the opinion by the Honorable Elizabeth V. Hallanan as Special Commissioner for the County Commission of Kanawha County, the Special Commissioner found that Hedges raised no substantive complaint about Allinder’s ability to carry out the fiduciary responsibilities of being appointed the committee for Wolfe. Hedges complained that Allinder should not be appointed the committee because “she just wants to be in charge.” (Defendants’ Exhibit C, Defendants’ Memorandum of Law in Support of their Motion to Dismiss filed October 2, 1984.)

Thus, the Court is presented with a case by an unsuccessful state litigant who is dissatisfied with the result of the incompetency proceeding which she herself initiated. In the state proceeding she concedes that there is no just reason why Allinder should not represent Wolfe.. Further, Hedges attempts to impute state action into the success of her adversaries in the state proceedings, precisely the proposition rejected by the Edmondson Oil case. The cases cited by the Plaintiff which hold that committees for incompetents could be substituted if found hostile to the interests of the incompetent do not help Hedges. Hedges cannot adduce facts which show Allinder’s or Bias’ interests oppose that of the incompetent Wolfe. Quite to the contrary, it is the interests of Hedges, who owes the incompetent $95,000, which are hostile to the interest of Wolfe.

Therefore, upon the undisputed facts, the Plaintiff lacks standing to represent Grace Catherine Wolfe in the above styled action, and the Defendants’ conduct did not occur under the color of state law.

      . W. Va. Code, § 27-11-4 states the duty of the committee in this regard:
      "The committee appointed for any such person unable to manage his business affairs shall take possession of his estate, and may sue or be sued in respect thereto, and for the recovery of debts due to and from such person. The committee shall preserve such estate and manage it to the best advantage, shall apply the personal estate, or so much thereof as may be necessary to the payments of debts of such person____"

      . The Defendants’ motion was filed as a motion to dismiss, but, as noted in this Court’s Opinion entered October 25, 1984, the consideration of matters not in the pleading makes the motion one for summary judgment.

      . The Court accepts at face value the affidavit made out and signed by the Plaintiff’s attorney, although the Court is aware of the dubious propriety of this practice. West Virginia Code of Professional Responsibility Canon 5, DR 5-101(B) (lawyer should not accept case in which he may be called on to testify). While DR 5-102 would appear to warrant withdrawal of the Plaintiff’s attorney, the Court finds the affidavit offered of no consequence in setting forth a genuine issue of fact.


source: Caselaw Access Project

author: SIFTON, District Judge.

license: Public Domain

text:
    UNITED STATES of America, v. S. Richmond DOLE and Clark J. Matthews II, Defendants.
    No. CR-84-00461.
    United States District Court, E.D. New York.
    Dec. 20, 1984.

      Raymond J. Dearie, U.S. Atty., E.D. of N.Y., by Gregory S. Wallance, Asst. U.S. Atty., Brooklyn, N.Y., for the U.S. of America.
    Stephen E. Kaufman, Dominic F. Amorosa, New York City, for defendant Dole.
    Gary P. Naftalis, New York City, for defendant Matthews.
   MEMORANDUM DECISION AND ORDER

SIFTON, District Judge.

Defendants, S. Richmond Dole and Clark J. Matthews II, are each charged in a two-count indictment with a conspiracy to violate the Travel Act, 18 U.S.C. § 1952, through an act of bribery in violation of the laws of the State of New York and to defraud the United States by obstructing the tax collection authority of the Internal Revenue Service. See United States v. Klein, 247 F.2d 908 (2d Cir.1957), cert. denied, 355 U.S. 924, 78 S.Ct. 365, 2 L.Ed.2d 354 (1958). In addition, defendant Matthews is charged in a second count of the same indictment with making false and misleading statements to the shareholders of The Southland Corporation concerning his honesty and loyalty to the company by failing to disclose to them in proxy materials distributed in 1981 in connection with his candidacy to become a director of the company that he had attempted to bribe public officials of New York State and to defraud the Internal Revenue Service by conspiring to deduct monies paid in connection with the bribe attempt as a business expense of the corporation, and that he had lied to the company’s board of directors concerning these matters during the course of a business ethics review conducted by the company’s board of directors.

The matter is presently before the Court on pretrial motions by both defendants seeking dismissal of the indictment, severance on the part of defendant Dole, a change of venue to the United States District Court for the Northern District of Texas, the striking of certain alleged surplusage from the indictment on the part of defendant Matthews, production of so-called Brady material, and an application to compel the United States Attorney to articulate his reasons for declining to waive a jury. Each of these motions is denied, except to the extent set forth below.

DISMISSAL MOTIONS

Both defendants seek dismissal of Count 1 of the indictment on the grounds that it is time-barred and for other reasons. Each of defendants’ contentions, with one exception, has been previously rejected by this Court either prior to or during the trial of indictment numbered CR-83-00515 and related indictments. No basis for reconsideration of those decisions has been brought forward. The one new argument — the contention that the prosecution will not be able to demonstrate that Overt Act 14 of the indictment was committed pursuant to and in furtherance of a conspiracy of which defendant Matthews was a member — cannot be decided in advance of trial. Accordingly, defendants’ motion to dismiss Count 1 of the indictment must be, in all respects, denied.

Defendant Matthews’ motion to dismiss Count 2 of the indictment must likewise be denied. The premise of defendant’s motion is that Count 2 charges him with failure to make so-called “management integrity” or “qualitative materiality” disclosures in Southland’s proxy solicitation materials “without regard to whether the conduct to be so disclosed has or would have a material economic impact (‘quantitative materiality’) on the earnings, assets or liabilities of the company.” Memorandum of Clark J. Matthews II in Support of Pretrial Motions at pp. 2-3. In defendant Matthews’ view, such disclosures are not required under the Federal Securities Laws since (1) the charge sounds essentially in corporate mismanagement as opposed to misrepresentation or fraud, (2) the charge of nondisclosure of qualitatively as opposed to quantitatively material information is so nebulous as to deprive a defendant of fair notice and courts and juries of a workable standard to apply, and (3) disclosure under the circumstances would violate the fifth amendment’s proscription against compelled self-incrimination. None of these arguments is persuasive.

Defendant Matthews correctly notes that numerous cases in this Circuit and elsewhere have recognized the need for some element of objectively adverse interests between the corporation and the individual employee before charges of undisclosed wrongdoing can be elevated from the category of complaints about the way the company is being run to the level of misrepresentation or fraud by corporate managers on the corporation or its stockholders. E.g., Weisberg v. Coastal States Gas Corp., 609 F.2d 650 (2d Cir.1979), cert. denied, 445 U.S. 951, 100 S.Ct. 1600, 63 L.Ed.2d 786 (1980); Gaines v. Haughton, 645 F.2d 761 (9th Cir.1981), cert. denied, 454 U.S. 1145, 102 S.Ct. 1006, 71 L.Ed.2d 297 (1982). As these cases suggest there must be more than “mere bribery” by corporate officials — that something more often being in the form of “bribery plus kickbacks.” Id.

Matthews is likewise accurate in pointing out that in the absence of some objective frame of reference — equivalent to that available from an accountant or economist in assessing quantitative materiality, or from the determination of a jury, grand jury or prosecutor that a crime has been committed in the area of qualitative materiality — a requirement of disclosure of improper conduct material to the determination of an individual’s qualifications for corporate office runs the risk of imposing standards of such vagueness and generality as to deprive both those who have to obey the law and those who are to apply it of the guidance both require. Cf. GAF Corp. v. Heyman, 724 F.2d 727 (2d Cir. 1983), and Sedima, S.P.R.L. v. Imrex Co., 741 F.2d 482 (2d Cir.1984).

The circumstances of this case, however, appear to present both the adversity between corporation and corporate officer implicit in the requirement of “bribes plus kickbacks” (i.e., of corporate wrongdoing plus self-dealing) and the objective indicia of materiality suggested by those cases which have rejected efforts to impose on corporate officers a requirement that they accuse themselves of wrongdoing which no one else has ever called into question. Central to the indictment’s charge are allegations that the wrongdoing was of the sort specifically deemed by the company’s board of directors to be of interest to management in running the company’s business and that the defendant Matthews concealed the requested information specifically from those within the company who considered it material to the way the company was to be run. The fact, in other words, that the undisclosed, improper conduct was hidden in the course of a formal business ethics review by the corporate official charged with primary authority for conducting it places this case in a different factual context than those in which the first hint of interest in the ethical conduct of the officer comes in the form of an after-the-fact suggestion by a dissident stockholder that he would have been interested in the undisclosed information, had it been called to his attention earlier. Thus, defendant Matthews’ claim of surprise or lack of fair notice that the company’s stockholders would be interested in information of the sort alleged to be concealed sounds distinctly unpersuasive in light of the clear expression of interest in that precise type of information by the company’s board of directors then engaged in conducting a business ethics review. Nor is the court or juror left at sea concerning the bearing of information of this type on the running of the company in circumstances in which the directors themselves have determined that, at least in the context of SEC enforcement policies of the time, information of that sort had to be brought to the attention of the company in order to avoid the adverse consequences experienced by other companies whose ethical breaches surfaced in less predictable or manageable ways.

Defendant Matthews also contends that the disclosures sought from him would have violated his privilege against self-incrimination. However, examination of the factors set forth in United States v. Stirling, 571 F.2d 708 (2d Cir.), cert. denied, 439 U.S. 824, 99 S.Ct. 93, 58 L.Ed.2d 116 (1978), makes clear that the disclosures here required were neither compelled not of such an incriminating nature as to provide a basis for excusing defendant’s omissions, if such they were, on fifth amendment grounds. Matthews’ proposed advancement to the board of directors hardly falls in the category of an offer which he could not refuse. It is essentially beyond dispute that the self-reporting required by the SEC’s proxy rules are both essential to the SEC’s regulation of corporate democracy and aimed at a group by no means characterized as “inherently suspect of criminal activities.” Nor is the “general activity” subject to inquiry here, whether viewed as a corporate counsel’s administration of his office, his disbursement of corporate funds, or his conduct of and cooperation in the company’s business ethics review, intrinsically unlawful in nature. Finally, the disclosure of lack of candor with the corporations’ board of directors in the course of a business ethics review — which is at the heart of the matter from the point of view of recipients of the corporation’s proxy material in deciding what position to take with regard to Matthews’ candidacy— does not pose a substantial possibility of incrimination. Defendants’ motions to dismiss the indictment are, accordingly, denied.

SEVERANCE MOTION

Defendant Dole has moved for severance on the ground that out-of-court statements received for limited purposes at his earlier trial will again be offered against him at his joint trial with his new co-defendant. Suffice it to say that there is no reason to believe that defendant Dole would not face the same offer of proof against him whether he is tried alone or with his co-defendant. The error which he foresees from the admission of this proof cannot, in other words, be cured by granting the motion he makes. It is, accordingly, denied.

TRANSFER OF VENUE

Both defendants move for a transfer of venue to the Northern District of Texas pursuant to Rule 21(b) of the Federal Rules of Criminal Procedure. Taking into account the relevant considerations, see Platt v. Minnesota Mining & Mfg. Co., 376 U.S. 240, 84 S.Ct. 769, 11 L.Ed.2d 674 (1964), the motion must be denied. While the considerations relevant to the determination of this motion have changed somewhat since a similar application by defendant Dole was earlier denied by this Court those changes by no means weigh uniformly or decisively in favor of the motion to transfer. This Court’s acquaintance with the matter as a result of the lengthy pretrial and trial proceedings in this District and the attendant saving of judicial time and effort which would be gained by trial here at least equals the consequences of the removal from the case of Mastropieri, the New York based co-defendant, and the addition to the trial of even “a large number” of witnesses from Dallas to defendant Matthews’ good character (whose brief appearances can, as at the first trial, be scheduled to suit their convenience). Whatever the state of the criminal dockets in general in Brooklyn and in Dallas, there can be no doubt that the addition of a criminal trial of these dimensions to the caseload of the Texas court would cause more disruption there than its elimination would aid in resolving the problems created by the overcrowded docket in this District. Accordingly, the motion is denied.

SURPLUSAGE MOTION

Defendant Matthews moves pursuant to Rule 7(d) of the Federal Rules of Criminal Procedure to strike allegations that are said to be irrelevant charges in the indictment. The first of these allegations,' that defendant Matthews was “formerly a staff attorney for the Securities and Exchange Commission,” is, on the face of it, of relevance to a charge that he knowingly and intentionally omitted to make certain disclosures in proxy materials distributed to Southland stockholders in violation of requirements in the laws which it would have been part of his duties at the commission to administer. In all events, the issue of lack of relevance is not so clear as to be resolvable on the basis of a motion in advance of trial. Nor is the prejudice associated with telling a jury that the defendant has had prior government service so apparent that a resolution of the issue in advance of trial is mandated.

The second allegation complained of, namely, that defendant Matthews failed to disclose the bribe conspiracy to the SEC, the FBI, “and others,” is objected to simply because defendant doubts that the government has the proof to support the allegations made. Whether the government does or doesn’t have the evidence to sustain its allegations cannot be determined in advance of trial — as the Court will instruct the jury when the indictment is read to it.

BRADY MATERIAL

The government is directed to advise defendants within ten days of the entry of this Memorandum and Order of any additional information of the type specified at p. 11 of this Court’s Memorandum and Order of February 14, 1984, not previously disclosed.

JURY TRIAL

Defendant Dole has sought to have the government state its reasons for declining to waive a jury in order to permit scrutiny of their validity. While not required to do so, Singer v. United States, 380 U.S. 24, 37, 85 S.Ct. 783, 791, 13 L.Ed.2d 630 (1965), the government has voluntarily complied with this demand. There is no reason to think its statement of the considerations which have led the United States Attorney to his decision is spurious. Nor do the reasons appear invalid or' illegal. Accordingly, no further relief in this respect appears warranted.

Defendants’ motions are denied except as specified herein. The clerk is directed to mail a copy of the within to all parties.

SO ORDERED.


author: PRENTICE H. MARSHALL, District Judge.

text:
    UNITED STATES of America, Plaintiff, v. Gilbert WOLF, Defendant.
    No. 82 CR 274.
    United States District Court, N.D. Illinois, E.D.
    Dec. 21, 1984.
    Thomas M. Durkin, Asst. U.S. Atty., Chicago, 111., for plaintiff.
    Harvey M. Silets, Silets & Martin, Ltd., Chicago, 111., for defendant.
   MEMORANDUM OPINION

PRENTICE H. MARSHALL, District Judge.

This is a prosecution for alleged tax fraud in which it is alleged that defendant Gilbert Wolf willfully understated his personal income and that of his business for the years 1975 and 1976. The United States intends to offer certain evidence obtained from Canadian tax authorities, who in turn obtained it from defendant in the course of an investigation of a Canadian company with which defendant and his company had done business. Defendant has moved to suppress the evidence because of a promise by Canadian authorities that the evidence would not be disclosed to United States tax authorities if defendant answered questions put to him in the United States by Canadian tax investigators. We conducted an evidentiary hearing on defendant’s motion and now grant it.

FACTS

In 1977, Revenue Canada began a criminal tax investigation of a Canadian company, Wilson Auto Electric (“Wilson”). Revenue Canada officials believed that Wilson was involved in a scheme under which it made purchases from certain suppliers in the United States by issuing two checks, one to the supplying company and one to its principal. The principal of the supplier would then “kick back” part of the latter payment to Wilson’s principal, Fred Lewicki. In order to investigate the case, Revenue Canada agents determined to interview the Americans involved in the alleged scheme. One of these was defendant Wolf, principal of a Chicago company, Midwest Generator Co. (“Midwest”).

On December 6, 1977, Revenue Canada forwarded to the Office of International Affairs of the United States Internal Revenue Service (“IRS”) in Washington, D.C. a “collateral request” for assistance in obtaining evidence from Midwest for assistance in the investigation of Wilson. The request was made pursuant to Article XXI of the Canadian — United States Tax Convention of 1942, 56 Stat. 1399 (“Convention”). Revenue Canada asked the IRS to assist in arranging a meeting between Canadian agents and Wolf. Attached to the request was a memorandum prepared by a Canadian agent detailing the alleged kickback scheme as well as copies of invoices and checks allegedly involved in the scheme. The Canadian request was assigned in the regular course of the official business of the IRS to Special Agent Debra Kerwin of the IRS Chicago office. Kerwin promptly telephoned Wolf to set up a meeting.

The government’s evidence at the hearing showed that on September 19, 1977, an IRS computer had selected Midwest’s 1976 tax return for a civil audit. Kerwin learned of. this from Wolf’s accountant in attempting to set up a meeting between Wolf and the Canadian agents. IRS Revenue Agent James Tse had been assigned to conduct the civil audit of Midwest.

In due course, Kerwin arranged a meeting between two Canadian agents, George Burwood and Saul Targownik, and Wolf's attorney Gerald Risner, at Risner’s office on January 23, 1978. Kerwin was present when the meeting began. Risner stated that his purpose was to ascertain whether he should advise his client to submit to an interview. He stated that he saw no benefit to defendant to be obtained from such an interview and that without prior knowledge of the questions to be asked, he would not be able to advise his client. Canadian agent Targownik stated that Revenue Canada was interested in defendant’s explanation of certain transactions between a Canadian company and Midwest. Risner stated that he was concerned that whatever defendant said might be incriminatory and that the information would then be turned over to the IRS. Accordingly, Risner stated that the best advice he could give defendant was not to talk to the Canadian agents. However, Risner repeated that if he knew the specific areas the agents were interested in, he could discuss them with his client and arrive at a final decision. Targownik replied that his practice was to disclose such information only to the subject of the investigation.

Targownik then asked IRS Special Agent Kerwin to leave the meeting. Despite the fact that the Canadian agents were there under her, i.e., the IRS’, auspices, were entitled only to “such information ... as the [IRS] is entitled to under the revenue laws of the United States,” and Risner had tentatively refused to submit his client for interview because his statements might be self incriminatory, Special Agent Kerwin complied with Targownik's request and left the meeting.

Targownik then falsely stated to Risner that the IRS did not yet have any information concerning Midwest’s dealings with Wilson and that if defendant cooperated in explaining the transactions with Wilson, the information given to the Canadians would not be given to the IRS. At the evidentiary hearing, Canadian agent Bur-wood admitted that this was, in his words, a “bluff” — because the Canadian agents knew that the IRS already had certain information, via the memorandum which accompanied the Canadian collateral request. According to Burwood, the Canadians were merely attempting to exercise some leverage in order to obtain the information which they sought.

Risner responded that he still did not see how defendant would benefit from talking to the Canadians. Targownik replied that if defendant did not cooperate, the information Revenue Canada had concerning the transactions would be turned over to the IRS. Again, what Risner did not know was that the IRS already had certain of the information.

Risner then expressed concern that if defendant’s cooperation eventually resulted in defendant having to testify in a Canadian court concerning Midwest, the IRS would be able to obtain the information simply by ordering a transcript of the testimony. Targownik repeated his earlier offer that information provided by defendant to the Canadian authorities would not be disclosed to the IRS. Risner then agreed to talk with defendant and report back to the Revenue Canada agents.

The parties met again the following day. Special Agent Kerwin was not present. Under a procedure proposed by Risner, the Canadian agents reviewed various documents and made a list of specific questions. They then left the room for approximately 30 minutes while Risner and defendant conferred. Risner then informed the agents that defendant would answer their questions. Defendant proceeded to answer all of the questions and provided all of the information requested by the Canadians. In particular, he explained that the reason for certain payments made to him personally was to replenish personal funds he had used to purchase automotive parts which were shipped to Wilson. Apparently the parts had to be paid for in cash. Defendant had thus instructed Lewicki to issue two checks, one to Midwest for the invoice amount of the parts, and one to defendant for the balance not invoiced. Defendant stated, in response to a question by the agents, that he had claimed only a portion of the cash purchases as a business expense.

The Revenue Canada agents had some difficulty comprehending defendant’s explanation, which he amplified with an example:

[Wolf] purchases parts for $10,000. [Midwest] agree[s] to sell to [Wilson] for $12,000. He would personally pay the $10,000 in cash. He would then prepare a purchase invoice for $4000.00 and charge the $4000 to an Account Payable account in his name at Midwest. He then would draw a company cheque to his favour to clear the account payable. He would then invoice [Wilson] for $6000 and he would receive a cheque to his company for $6000 and a cheque to himself personally for $6000. Therefore the same profit is reported.

Govt.Ex. 6 at 4-5. Though under defendants’ example Midwest has the same profit margin and thus pays the same income tax as it would have had the transaction been handled in a more “normal” fashion, the result is that defendant obtained $6000 in his own name. Defendant stated at the meeting with the Canadian agents that he used the checks issued to him to pay for the parts from Midwest’s supplier.

The Revenue Canada agents asked defendant why he did not simply draw a check on Midwest’s account to pay for the parts. Defendant responded that his method had been “stupid” and that he had begun to use the suggested method; he denied, however, that he had ever paid kickbacks to Lewicki.

Dissatisfied with defendant’s oral responses — although there is no evidence that they were untrue — the Revenue Canada agents broadened their inquiry. They requested defendant’s personal financial records (cancelled checks, tubs etc.). After some discussion, defendant and his counsel declined the new request and Revenue Canada’s investigation in the United States was terminated.

Thereafter, the IRS audit of Midwest escalated to a fraud investigation of defendant and Midwest. The IRS fraud investigators made a collateral request of Revenue Canada under the Tax Convention of 1942. In response, Canada provided the IRS with all of the information it had concerning defendant and Midwest, including defendant’s statements made in January 1978.

We have no difficulty finding that the Canadian agents made an offer to Risner that nothing — either defendant’s expected statements or the evidence the agents already had — would be provided to the IRS if defendant cooperated by explaining the transactions his company had with Wilson. Defendant accepted the offer and spoke with the agents. Thus, defendant performed his end of the bargain. Though it was implicit in the agreement that defendant was required to tell the truth (otherwise the agreement would have been meaningless from the Canadians’ view), there is no evidence that defendant did not uphold his end of the bargain. Finally, while defendant did not provide the Canadians with his personal bank records as they requested, the agents’ own testimony and memoranda establish that that was an “afterthought” that they attempted to add to the deal after it had been concluded and defendant had performed.

We also find that the Canadians did not uphold their end of the agreement. The government argues that the agreement not to turn over information to the IRS did not prevent the Canadians from disclosing information pursuant to a properly made collateral request and that the Canadian government could not properly refuse such a request. Article XXI of the Convention does not support the government’s argument. It states that Canadian authorities “may” turn over information when such a request is received. Compliance was not mandatory. The Canadian government could have told the IRS that its agents had agreed not to turn over the requested information.

Thus, there was an agreement between defendant and Revenue Canada that Revenue Canada breached, and the question is whether the United States should be made to bear the consequences of that breach. In the normal motion to suppress, the defendant seeks to exclude evidence that is tainted by wrongdoing on behalf of the government that is prosecuting him, or some affiliated government that operates under the same rules. See Elkins v. United States, 364 U.S. 206, 80 S.Ct. 1437, 4 L.Ed.2d 1669 (1960) (federal government cannot use evidence obtained illegally by state law enforcement officers). Here, however, we are dealing with Revenue Canada, an entity that does not operate under the same rules of law that govern domestic law enforcement authorities. In that sense, the case is somewhat analogous to those involving alleged violations of constitutional standards of conduct by private persons or foreign law enforcement agents operating in their own country.

We begin with cases involving private or foreign searches and seizures. In general, American courts have suppressed evidence obtained by private persons or foreign law enforcement authorities only where domestic authorities have participated in some manner in the illegal conduct. This is illustrated by United States v. Marzano, 537 F.2d 257 (7th Cir.1976), cert. denied, 429 U.S. 1038, 97 S.Ct. 734, 50 L.Ed.2d 749 (1977). Marzano involved a prosecution for theft of $3 million from the vaults of Purolator Security in Chicago. Shortly after the theft, the FBI had traced the defendant and another (who was found not guilty) to Grand Cayman Island in the Caribbean. The two were arrested by Grand Cayman police and flown back to the United States. When they were taken into custody by the Grand Cayman police, money and various other items were taken from them. The defendants motion to suppress evidence was denied because FBI agents, though present at the time, acted “merely as observers and did not substantially participate in the arrest and seizure of evidence.” Id. at 269. Defendants’ argument was that probable cause for the arrest did not exist. The court stated that the same standard applied to private searches and searches by foreign law enforcement officials: the fruits of such searches may be used if American government agents “did not participate in the search.” Id. at 269-70. When the FBI agents arrived on the island, they were informed by local officials that they had no jurisdiction to operate there but could accompany the local police on their investigation. Grand Cayman police took the defendants into custody for violations of local law and asked them to board a plane for Miami after learning that the FBI was willing to pay their airfare. The FBI did not in any way participate in the arrest and search. Id. at 270.

The court rejected the argument that the evidence should be suppressed since “but for” information provided to Grand Cayman police by the FBI, defendants never would have been arrested. The court agreed with the factual predicate of defendants’ argument, but it held that “the law is clear that providing information to a foreign functionary is not sufficient involvement for the Government to be considered a participant in acts the foreign functionary takes based on that information.” M (citing case). Further, the court stated, the FBI agents mere presence at the scene was not sufficient to make them participants in the arrest or search. Nor was the coincidence of these two factors significant. Id.

Defendant in Marzano relied on an earlier Seventh Circuit case, Knoll Associates v. FTC, 397 F.2d 530 (7th Cir.1968), in which the court had held that documents stolen by a private citizen for the purpose of assisting the FTC in a pending proceeding were inadmissible. The court noted that it had distinguished Knoll where the items challenged were acquired for purposes independent of helping the government and where they had been acquired a substantial period of time before being turned over to the government. Since defendant in Marzano was arrested because he violated Grand Cayman law, the court said, Knoll was inapposite. The mere fact that Grand Cayman police also intended to help the United States government did not “transform an otherwise private search into a Government search.” Id. at 271. Finally, the court noted that the purpose of the exclusionary rule under the fourth amendment is to deter violations of that constitutional provision. “No purpose would be served by excluding the evidence taken by [Grand Cayman police] and turned over to the FBI in Grand Cayman,” id., since what an American court did would not alter the arrest and search policies of Grand Cayman police.

In a ease involving legal issues closer to those involved here, the Seventh Circuit declined to enforce against the United States a promise made by state law enforcement agents not to prosecute a person for a particular offense. In United States v. Long, 511 F.2d 878 (7th Cir.), cert. denied, 423 U.S. 895, 96 S.Ct. 196, 46 L.Ed.2d 128 (1975), defendant was arrested by Illinois officials for alleged narcotics and firearms violations. He was charged, however, for narcotics violations only. The district court found that Illinois officials had agreed that if defendant cooperated with them on the narcotics charges, he would not be prosecuted for any firearms violation. Among the firearms charges that could have been brought against defendant were violations of federal law; the district court concluded that Illinois agents who investigated, arrested and charged a defendant with federal violations were, in a functional sense and in the eyes of the defendant, agents of the United States. Accordingly, it dismissed the indictment because it had been brought in violation of the promise made to defendant.

The court of appeals reversed, holding that “the existence of an agency relationship was essential to support the action of the district court,” id. at 881, and none existed. The court stated that it remained the law that “ ‘[t]he government is not bound by acts of persons who never have been, or in fact have ceased to be, its agents.’ ” Id. (quoting Newman v. United States, 28 F.2d 681, 682 (9th Cir.1928), cert. denied sub nom. Boyd v. United States, 279 U.S. 839, 49 S.Ct. 253, 73 L.Ed. 986 (1929)). Defendant had failed to show, the court stated, that there was an agency relationship between the Illinois agents and the federal government, “or even that the federal government was aware of the defendant’s alleged agreement with [the Illinois agents].” Id. at 881-82. Nor did the facts that defendant was arrested for offenses that could be prosecuted under federal law or that state agents frequently testified for the United States in federal prosecutions render the United States responsible for the alleged breach of promise.

Can it be said here that IRS agents did not participate in the conduct of which defendant complains? We think not. The Revenue Canada agents’ meeting with defendant’s counsel Gerald Risner was arranged and conducted under the auspices of the IRS. The initial contacts and arrangement were made by IRS Special Agent Kerwin, who then escorted the Canadian agents to Mr. Risner’s office. Kerwin was present when the Canadian agents initially refused to disclose to Risner the intended content of their inquiry. She, however, knew of the nature of the inquiry from the memorandum accompanying the Canadian collateral request. She was present when Risner stated he was concerned that defendants’ responses might be self incriminatory and would be turned over to IRS. At this point it would not have been inappropriate for Kerwin to terminate the conference for the Canadians were entitled to only such information as the IRS is “entitled to obtain under the revenue laws of the United States.” Article XXI, supra. Under similar circumstances, an IRS agent would be obliged to honor an American taxpayer’s invocation of his constitutional right to remain silent. But instead, Special Agent Kerwin subordinated herself to and complied with the request of the Revenue Canada agents that she depart and leave the meeting to them.

Whether Kerwin knew or was aware of the agreement the Canadian agents made is a close question. She was not directly aware of it in the sense that she heard it made and there is no evidence she was told it existed. However, under the circumstances of the meeting with Risner, the ubiquitous reasonable person to whom the law constantly holds its subjects, would have been aware that some sort of a deal was going to be proffered and concluded after she left the room. Agent Targownik’s request that Kerwin leave was immediately preceded by Risner’s statement that he was concerned that whatever defendant told the Revenue Canada agents might be incriminatory and would be turned over to the IRS. This would have alerted a bystander unfamiliar with tax investigations that defendant was concerned that he risked United States criminal liability by reason of his transactions with the Canadian company. It strains credulity to believe that Kerwin was not aware when she left the room that the Revenue Canada agents would offer not to disclose Wolf’s statements to the IRS.

That Kerwin was aware that the Revenue Canada agents would promise not to disclose defendant’s statements does not mean she similarly was aware that the agents would also promise not to turn over the information they already had concerning the defendant-Wilson transactions. That information was not the subject of Risner’s expressed concern. Moreover, Kerwin already had some, if not all of the documentary information the Canadian government had regarding defendant, via the collateral request memorandum. Thus, we cannot conclude that Kerwin knew or should have known of the promise not to disclose that information.

This distinction is critical. The promise not to disclose defendant’s statements was not deceitful in itself. The promise not to turn over other information was deceitful, since Revenue Canada had already turned over the information to the IRS (we decline to accept agent Burwood’s euphemism “bluff”). Both promises could lead to suppression of defendant’s statements made at the meeting, for it was in reliance on both of them that defendant talked with the Revenue Canada agents on the advice of his counsel. However, a holding that the promise not to disclose defendant’s statements could be “enforced” against the United States would not lead to suppression of the documentary information the Canadian agents already had. That result can flow only from a holding that the second part of the promise can also be “enforced” against the United States. As we have noted, the factual predicate for the latter holding is weaker than for the former, for it cannot be said that Kerwin knew or should have known of the second part of the promise.

The level of participation of American authorities here would be insufficient (indeed, unnecessary) had the conduct occurred in another country. That it occurred on American soil requires a different analysis. The fact that the Canadian authorities filed the collateral request and requested the IRS to set up the meeting with defendant and his counsel, manifests the need for the permission and participation of our government in the Canadian investigation in this country. Though we noted at the evidentiary hearing that there was nothing to prevent the Revenue Canada agents from coming here and talking to defendant without IRS involvement, it is likely that the principle of comity among nations forbids such conduct.

Though there is no rule that American law enforcement officers must supervise the conduct of foreign officers in an investigation in American territory simply because it relates to Americans or an American criminal offense, a different rule should obtain where foreign officers are doing business in this country with the permission and under the auspices of our government. For example, if the Canadians had illegally broken into defendant’s place of business and taken his records and then turned them over to the IRS, we would have no difficulty in suppressing the evidence in a later prosecution. That the persons conducting the search are law enforcement officials who are operating here by the grace of our government is, in our view, sufficient to distinguish such a case from one involving a private search or one like Long in which the federal authorities were completely divorced from the officers who made the promise to the defendant. Private persons conducting private searches and state officers making promises to defendants are, relatively speaking, beyond the control of the federal government, at least until they have been found out. By contrast, when a foreign law officer operates here only under our government permission, he should be held to our standards of conduct. And to allow the United States to benefit from the activity of foreign agents in this country simply because it did not directly participate in the conduct in question would permit our government to permit foreign law enforcement officials to enter our country and conduct their business with impunity, and deliver the fruits thereof to our government for use in a prosecution. That is a notion we should not embrace.

Therefore, the federal government’s participation in the Revenue Canada agents’ visit to the United States and its sponsorship of the Canadian investigation and interrogation, and its awareness of defendant’s apprehension and invocation of his right to remain silent, were sufficient under both Marzano and Long to make the Revenue Canada agents’ promises “enforceable” against the United States.

It is easy to conclude, that the statements defendant made to the Canadian agents must be suppressed. Statements made in reliance upon a promise are considered involuntary and must be suppressed under the fifth amendment. See Brady v. United States, 397 U.S. 742, 753, 90 S.Ct. 1463, 1471, 25 L.Ed.2d 747 (1970); Bram v. United States, 168 U.S. 532, 542-43, 18 S.Ct. 183, 186-87, 42 L.Ed. 568 (1897).

Though we have found no cases involving promises not to disclose existing information, similar promises have been enforced against the governmental entities that made them. For example, in Rowe v. Griffin, 676 F.2d 524 (11th Cir.1982), a paid FBI informant had reported to his FBI contact that he was with three men who killed a civil rights worker, but that he had not participated in the murder. Federal and state officials assured him immunity from prosecution if he testified against the people who committed the murder. The informant held up his end of the bargain. Several years later, new evidence surfaced indicating that the informant had participated in the killing, and a state indictment was returned against him. The court enjoined the state prosecution because it violated the promise that had been made to the informant. It noted that the state had benefitted from the informant’s performance at his end of the bargain, and it stated that

when such a promise induces a defendant to waive his fifth amendment rights by testifying at the trial of his confederates or to otherwise cooperate with the government to his detriment, due process requires that the prosecutor’s promise be fulfilled. We hold that once the defendant’s good faith compliance with the terms of the agreement is established, the state must perform on its side____

Id. at 528.

In United States v. Brimberry, 744 F.2d 580 (7th Cir.1984) the court of appeals held it to be plain error for the trial court to fail to inquire sua sponte as to whether the government’s prosecution of defendant violated an earlier plea agreement under which defendant provided information to the government repeating that “any agreement made by the government must be scrupulously performed and kept.” United States v. Lyons, 670 F.2d 77, 80 (7th Cir.), cert. denied, 457 U.S. 1136, 102 S.Ct. 2965, 73 L.Ed.2d 1354 (1982). So, too, must an agreement such as in the case at bar which is attributable to the government.

See also, e.g., United States v. Rodman, 519 F.2d 1058 (1st Cir.1975) (SEC promised to strongly recommend to U.S. Attorney not to indict defendant in return for cooperation; defendant agreed and complied; SEC did not make recommendation; indictment dismissed); United States v. Sanderson, 498 F.Supp. 273 (M.D.Fla.1980) (promise not to indict in return for cooperation regarding counterfeiting scheme; prosecutors indicted defendant, believing that she had not made full disclosure; court dismissed indictment after finding that defendant had fully complied); United States v. Pascal, 496 F.Supp. 313, 315 (N.D.Ill.1979) (Roszkowski, J.) (defendant agreed to cooperate in DEA investigation in reliance on promise that DEA would recommend that he not be indicted and that indictment was extremely unlikely after such a recommendation; defendant indicted after DEA falsely informed U.S. Attorney that he had not fully cooperated; indictment dismissed); In re John Doe, 410 F.Supp. 1163 (E.D.Mich.1976) (FBI agent promised person that he would not have to testify or answer any questions if he agreed to surrender narcotics; grand jury subpoenaed person after he complied; order entered granting him use immunity; order vacated and agreement enforced).

Here defendant gave up his right not to answer the questions of the Canadian agents in reliance on their promise not to turn over the information they had to the IRS. Defendant lived up to the bargain; the Canadian agents did not. The government argues that defendant’s reliance interest can be fully protected by simply suppressing the statements made at the interview; such a remedy, the government urges, will put the parties in the position they were in before the agreement with the Revenue Canada agents was made. However, in each of the above cases (with the exception of John Doe) it would have been possible to vindicate the promisee’s reliance interest by suppressing the statements made to the government and the fruits of those statements. Instead of employing such a remedy, however, the courts enforced the promisee’s expectancy by granting him the benefit for which he had bargained. That is the remedy we will employ here.

The government has four other arguments why the evidence (all or part of it) should not be suppressed. First, it argues that the Canadian agents’ promise was not within their authority. That argument is foreclosed by United States v. Cook, 668 F.2d 317, 320 (7th Cir.1982) (“the crucial question is not whether the government had the authority to carry out the promise ..., but whether it did in fact make the promise”). Second, in an argument closely related to the first, the government argues that the Convention requires the respective countries to fulfill properly made collateral requests, and thus even if the agents had the authority to make the promise to defendant, it was a promise that could not legally be carried out. We think that Cook answers this argument even if it is firmly based, but for reasons stated earlier we see nothing in the Convention that would deny Canada the ability to turn down a collateral request because of a promise like that made here. Next, the government argues that it had an independent source for the documentary evidence, Silverthorne Lumber Co. v. United States, 251 U.S. 385, 40 S.Ct. 182, 64 L.Ed. 319 (1920), including the Revenue Canada agents’ memorandum describing the scheme, because those materials were attached to the initial Canadian collateral request. However, agents Kerwin and Miele both testified that they did not fully comprehend the information in the documents when they had them, and in any event those documents were later returned to Canada. Thus, the fact that the IRS had some documents before the defendant — Targownik interview does not mean that the government obtained those it now has through an independent source. Nor was the government’s receipt of the documents in response to the IRS’ collateral request a source independent of the broken promise, for had the promise been performed Revenue Canada would have refused the collateral request. Finally, the government argues that it inevitably would have discovered the material. See Nix v. Williams, — U.S.-, 104 S.Ct. 2501, 81 L.Ed.2d 377 (1984). This argument is no different than its “independent source” argument, for the government would not have discovered the documents at all had the Canadians complied with their promise. For these reasons, the government's counterarguments are without merit.

Defendant’s motion to suppress is granted. The government may not use at trial the statements defendant made to the Canadian revenue agents or the documents obtained from Canada pursuant to the government’s collateral request, or any fruits of that evidence. Cause set for report on status on January 2, 1985 at 9:30 a.m.

      . Article XXI provides:
      1. If the Minister [of National Revenue of Canada] in the determination of the income tax liability of any person under any of the revenue laws of Canada deems it necessary to secure the cooperation of the Commission [of the IRS], the Commission may, upon request, furnish the Minister such information bearing upon the matters as the Commissioner is entitled to obtain under the revenue laws of the United States of America.
      2. If the Commission in the determination of the income tax liability of any person under any of the revenue laws of the United States of America deems it necessary to secure the cooperation of the Minister, the Minister may, upon request, furnish the Commissioner such information bearing upon the matter as the Minister is entitled to obtain under the revenue laws of Canada.

      . No argument has been made that the evidence should be suppressed because its use would violate Canadian law. See United States v. Phillips, 479 F.Supp. 423 (M.D.Fla.1979). But see United States v. Morrow, 537 F.2d 120, 140 (5th Cir. 1976). In any event, we do not know whether agreements of the type made and broken here are specifically enforceable against the Canadian government.

      . Knoll has been criticized. See 1 W. LaFave, Search and Seizure, § 1.6(e) at 134-36 (1978).

      . Indeed, it is arguable that these statements should be suppressed even if the promise is not enforceable against the United States. The theory under which statements made in reliance on a promise or due to threats are suppressed is not that the government should be deprived of the benefits of its conduct but rather that the statements cannot be considered credible because they were not voluntarily made. See Brady, 397 U.S. at 754, 90 S.Ct. at 1472 (such confessions are barred not because promise is illegal but because possible impact on defendant is "too great to ignore and too difficult to assess”) Bram, 168 U.S. at 543, 18 S.Ct. at 187. Though there are no federal cases directly on point, most state courts which have addressed the issue have held that the prohibition against admitting involuntarily made statements extends even to statements made to private persons, at least in some circumstances. See, e.g., Hinshaw v. State, 398 So.2d 762, 764 (Ala.Crim.App.1981) (promise by victim not to press charges), People v. Bracy, 98 Misc.2d 346, 413 N.Y.S.2d 969, 975 (Sup.Ct.1979) (involuntary if promisor had apparent power to deliver on offered benefit); Allen v. State, 53 Ala.App. 66, 297 So.2d 391, 397-98 (Ala.Crim.App.) (statement in reliance on promise by one who may be fairly supposed to have power to secure benefit is inadmissible), cert. denied, 297 So.2d 399 (1974); Agee v. State, 185 So.2d 671, 674 (Miss.1966) (offer of reward by private individual renders confession involuntary); State v. Benavidez, 87 N.M. 223, 531 P.2d 957, 960 (1975) (involuntary if defendant might reasonably consider promisor as able to perform); Porter v. State, 206 Ark. 758, 177 S.W.2d 408, 410 (1944) (confession by accused larcenist inadmissible if induced by promise of victim to make it easy on him). But see Steiner v. United States, 134 F.2d 931, 935 (5th Cir.) (lawyer accused of mail fraud made confession to state bar official who offered to try to exert influence to secure leniency; court held that confession was not involuntary), cert. denied, 319 U.S. 774, 63 S.Ct. 1439, 87 L.Ed. 1721 (1943); State v. Triplett, 79 N.W.2d 391 (Iowa 1957) (suggestion by volunteer investigator concerning time defendant would spend in custody if he confessed was merely speculative, and investigator was not in position to influence time of incarceration); Fields v. State, 77 Okl.Cr. 1, 138 P.2d 124, 130 (1943) (only statements made in reliance on promise/threat by government officer, person with authority over defendant, or private person in presence of one of above should be suppressed). We read Steiner, the only federal case we have found on the subject, as holding that in the circumstances there the statements were not involuntarily made, not that a confession to a private person can under no circumstances be suppressed as involuntary.

      . It appears that the Revenue Canada agents’ memorandum was not returned, or perhaps a copy was kept. Thus, this document was obtained independently of the broken promise. However, since the document does not contain any statements of Wolf or Lewicki, we sec no theory under which it would be admissible at trial.


author: KOCORAS, District Judge:

text:
    Dorothy DAVIS, on behalf of herself, her grandchildren, Marvelle and Pirre Harris; Valeria Lewis, on behalf of herself, her minor children, Layton, Dennis, and Monyon Lewis; and, on behalf of all others similarly situated, Plaintiffs, v. Gregory COLER, Director, Illinois Department of Public Aid, in his official capacity; and, Margaret Heckler, Secretary, United States Department of Health and Human Services, in her official capacity, Defendants.
    No. 83 C 6885.
    United States District Court, N.D. Illinois, E.D.
    Dec. 26, 1984.

      Beverly Groudine, Legal Assistance Foundation, Barbara Stob, Legal Assistance Foundation, Thomas Johnson, Uptown Peoples Law Center, Chicago, 111., for plaintiffs.
    Linda Wawzenski, Asst. U.S. Atty., Steven Hogroian, James O’Connell, Owen Field, Sp. Asst. Atty. Gens., Chicago, 111., for defendants.
   MEMORANDUM OPINION

KOCORAS, District Judge:

This case is before the court for rulings on several pending motions. The motions addressed today concern only Counts I and III of the amended complaint. By agreement of the court and the parties, any motions concerning Count II will be addressed only after Count I has been resolved. Because of the number of motions involved, the court will address each motion in the following sequence: (1) plaintiffs’ motion to amend their complaint to add Count III; (2) motions addressed to Count I: defendants’ motion for summary judgment, plaintiffs’ motions for injunctive relief, a class action, and notice to class members of their right to retroactive AFDC benefits; (3) motions addressed to Count III: defendants’ motion for summary judgment on Count III, plaintiffs’ motion for a preliminary injunction and to maintain Count III as a class action.

(1) Motion to File an

Amended Complaint

The plaintiffs filed the original complaint in this case in September 1983. Count I sought declaratory and injunctive relief to secure plaintiffs’ rights under Title IV-A of the Social Security Act. Plaintiffs asserted that defendants promulgated regulations which violated 42 U.S.C. section 602(a)(17). Section 602(a)(17), the lump sum rule, states that “person(s) specified in paragraph 8(A)(i) or (ii) of the statute” become disqualified for benefits as a result of receiving lump sum payments of money. This lump sum disqualification rule requires that when an Aid to Families with Dependent Children (AFDC) recipient receives a non-recurring lump sum payment, that payment renders the person ineligible for monthly benefits for a length of time calculated by the benefits usually received and the amount of the lump sum payment. The plaintiffs alleged that the defendants promulgated regulations, 45 C.F.R. section 233.30(a)(3)(ii)(D) and Illinois Department of Public Aid (IDPA) AFDC Manual '§§ PO and PR 510.2(g) and 615.6, which violate section 602(a)(17) by applying the lump sum disqualification to persons outside the specified scope of paragraph 8(A)(i) or (ii). Count I and the briefs surrounding it focused squarely upon the proper interpretation of who is a person specified in those paragraphs and what type of income does that person receive. Plaintiffs interpreted the persons in the paragraphs to be those who receive earned income in the same month in which they receive the lump sum payment. Defendants asserted that persons who receive any income, earned or unearned, in that same month are subject to the lump sum disqualification.

On June 22,1984, Congress amended this disputed provision. Deficit Reduction Act of 1984, § 2632(b)(1) H.R.Rep. No. 98-861, 98th Cir. Cong.2d Sess. 678-679, U.S.Code Cong. & Admin.News 1984,-, 130 Cong. Rec. H6369, H6554. [hereinafter DRA]. The amendment removed the language of section 602(a)(17) which had formed the focus for the dispute in Count I. Originally, the lump sum disqualification applied to “a person specified in paragraph 8(A)d (i) or (ii).” New language was substituted for that phrase, which now reads that the lump sum disqualification applies to: “a child or relative applying for or receiving aid to families with dependent children, or any other person whose need the state considers when determining the income of a family.” This new language took effect on October 1, 1984. The plaintiffs contend that this amendment is not a mere clarification, but a change in the previously existing law. The defendants assert that the amendment is a clarification of what was previously ambiguous statutory language.

After Congress acted in June, the plaintiffs moved this court, on August 9, 1984, for leave to file an amended complaint. This motion came eleven months after the original filing, and seeks to add a new party plaintiff, the Velez family, and to add an additional claim, Count III. Count III alleges that plaintiffs’ recovery of money damages from a personal injury claim is properly characterized as a “resource” and, therefore, not subject to the lump sum disqualification. Defendants oppose the amendment and argue that all lump sum payments of any type are subject to lump sum disqualification.

The motion to amend the complaint is made pursuant to Federal Rules of Civil Procedure 15, 18(a), and 20. Rule 15 provides that pleadings may be amended “once as a matter of course” when the opposing party has not yet served a responsive pleading. Where a responsive pleading has been served, the party seeking to amend must obtain the written consent of the opposing party or leave of court. In this case, the State defendant filed an answer to the complaint November 21, 1983 and the federal defendant answered on November 30, 1983. Therefore, leave to amend the complaint is squarely within the discretion of this court.

Rule 15(a) further provides that leave to amend “shall be freely given when justice so requires.” In examining a motion for leave to amend the pleadings, the court considers the controlling facts of each particular case. The factors generally used include: evidence of bad faith or an effort to create undue delay; substantial prejudice to the opposing party; the amount of time expired since the original pleadings; and whether the amendment alters the nature and scope of the action and accompanying discovery. Murphy v. White Hen Pantry Co., 691 F.2d 350 (7th Cir.1982); Gregg Communications Systems, Inc. v. American Tel. & Tel. Co., 98 F.R.D. 715 (N.D.Ill.1983). Considerations under Rule 18(a) and 20 are similar, but also require that the new claim arise out of the same subject matter and facts as the original and that joinder of a claim or a party will avoid a multiplicity of suits on similar issues. Resnick v. American Dental Ass’n, 90 F.R.D. 530 (N.D.Ill.1981); Goodman v. H. Hentz & Co., 265 F.Supp. 440 (N.D.Ill.1967).

In this case, plaintiffs seek to join an additional party plaintiff and an additional count. The defendants do not appear to oppose the additional party, but focus upon the third count. The defendants argue that (1) plaintiffs have not justified their delay in bringing the third count; (2) plaintiffs’ position under Count III is “erroneous;” and (3) “no legitimate purpose” will be served by allowing plaintiffs to amend the complaint. Defendants’ arguments do not persuade the court that the motion to amend should not be granted. To do so, the defendants would need to show substantial prejudice to themselves or bad faith and undue delay on the plaintiffs’ part. First, plaintiffs’ delay in filing the third count is not, in itself, determinative where there is no evidence of bad faith in that delay. Gregg Communications Systems, Inc. v. American Tel. & Tel. Co., 98 F.R.D. at 721. Second, the merits of the plaintiffs’ amended claim is not under consideration unless the claim is frivolous, meritless, or futile. At this time, plaintiffs’ claim is legally sufficient. Hale v. Morgan Packing Co., 91 F.Supp. 11 (N.D.Ill.1950). Third, the defendants assert that no legitimate purpose will be served by allowing the third count to stand. However, at least one legitimate purpose, to avoid a separate action on this single statutory provision, will be served.

Therefore, the court finds plaintiffs’ motion to amend its complaint should be granted because it is brought in good faith, will not unduly prejudice the defendants, is legally sufficient, and is related in law and fact to the earlier counts.

(2) Count I Motions

The court has before it both defendants’ motions for summary judgment on Count I of the amended complaint. Summary judgment is appropriate where there are no material disputed issues of fact and one party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Collins v. American Optometric Ass’n, 693 F.2d 636 (7th Cir.1982). In this case, there are no issues of material fact in dispute. The question before the court is one of law— the proper legal interpretation of the application of the lump sum provision, 42 U.S.C. § 602(a)(17). In essence, however, this issue creates two inquiries: the Congressional intent and proper reading of section 602(a)(17) when created in 1981 and the effect of the 1984 amendment to the provision’s original meaning.

The parties integrate these two aspects to fortify their opposing interpretations. First, the plaintiffs urge the court to disregard district court and Courts of Appeals decisions which have already addressed the proper interpretation of the 1981 lump sum rule. Plaintiffs assert these decisions are not persuasive because they were made without the benefit and insight of the 1984 amendments, which plaintiffs argue affirm their original interpretation. Second, plaintiffs argue that the 1984 amendment creates a clear change in the law, not a mere clarification of the earlier provision. Under the plaintiffs’ view, the original provision applied only to those AFDC recipients who also worked or received earned income. These individuals comprise seven per cent of all AFDC recipients. Both parties agree that after the 1984 amendments, the lump sum rule applies to all AFDC recipients. Finally, the plaintiffs discount the post-enactment statements of Senator Dole and Representative Rostenkowski. Their statements describe the amendment as a clarification of the lump sum rule and declare that the original intent of the rule was to apply it to all AFDC recipients. Plaintiffs assert there is no contemporaneous legislative history to lend validity to these views. Therefore, such statements are alleged to be simply reflections of those individuals’ views.

The meaning of the 1981 lump sum rule is key. The 1984 amendment “dooms” plaintiffs’ recovery after October 1, 1984. Therefore, the amendment will, of course, lend meaning to the original provision, but the words and legislative history of the 1981 provision are primary to the court’s decision. The case law preceding the 1984 amendment is certainly relevant to this discussion because Congress would be aware of the legal disputes and the administrative interpretations surrounding the original provision when determining to amend it.

[S]ubsection [2632](b), however, is intended merely to clarify the original intent of the Congress as to the applicability of the lump sum provision. That provision has been interpreted by some courts to apply only to AFDC families having earned income at the time they receive a lump-sum payment. The amendments made by section 2632(b) of the [DRA] are intended to clarify that this provision was always intended to apply to all families, not just those with earned income. 130 Cong.Rec. E 3590 (daily ed. August 10, 1984).

Since 1981, section 602(a)(17) has generated many district court cases and three Circuit Court cases. The majority of the case law has favored the defendants’ interpretation, but has found the language of the provision itself ambiguous, or capable of two meanings. See, e.g., Sweeney v. Murray, 732 F.2d 1022 (1st Cir.1984). The court agrees that the plain language of the provision is the starting point of any statutory interpretation. Consumer Product Safety Commission v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980). After careful consideration, this court finds the language of section 602(a)(17), as it read in 1981, was capable of supporting two different interpretations. It could have applied only to those AFDC recipients who had earned income in that month because of the use of that term in the scope sections of 602(a)(8)(A)(i) or (ii). Alternatively, the language could be viewed as describing those groups of AFDC recipients subject to the lump sum rule and the treatment to be afforded the earned income, if there were any earned income, which could be disregarded in making a determination under section 602(a)(17). Either reading is possible, but both are awkward.

The language of the 1981 lump sum rule was ambiguous and the use of legislative history to interpret it is proper. When Congress created the rule in 1981, the Congressional committee reports indicated two major goals to be met by the legislation. First, Congress sought to revise the effect of pre-OBRA law's treatment of lump sums, which had the unfortunate result of encouraging a family to spend such income as quickly as possible in order to retain AFDC eligibility. S.Rep. 139, 97th Cong., 1st Sess. 505, reprinted in 1981 U.S.Code Cong. & Ad.News 396, 771 (Budget Committee Report). Second, Congress sought to reduce AFDC expenditures by applying the lump sum rule and making certain recipients ineligible as a result. Id. Therefore, as the lump sum rule existed in 1981, its language was ambiguous, but the committee reports made its purposes clear.

The defendants’ interpretation of the statute furthers the goals of Congress and effectuates its intent. Their interpretation applies the rule to the full one hundred percent rather than the seven percent of recipients with earned income. This broad application furthers both stated goals — to eliminate the disincentive of the old rule and to reduce overall AFDC expenditures. Therefore, the language of the 1981 provision read with its legislative history supports defendants’ interpretation and the regulations promulgated pursuant to that interpretation.

The 1984 amendment changed the disputed language in the lump sum rule which had defined the scope of its application. Plaintiffs view this amendment as a clear change — one which expands the previous narrow scope of the rule to now include all AFDC recipients. To support this view, plaintiffs present evidence that contemporaneous amendments in the DRA, such as section 2625, were labeled clarifications, while Section 2632 was not; that the change in the wording is too marked to be considered merely a clarification; that there is no contemporaneous legislative history; and, finally, that post-enactment statement where no other history is present are without authority and reflect only a personal view of the legislators.

The court is not persuaded that the 1984 amendment made the large change in scope of the lump sum rule which plaintiffs perceive. As the earlier analysis showed, the 1981 language itself was capable of referring to all AFDC recipients and the amendment’s language does refer to all AFDC recipients as the proper scope. The amendment, although not labeled a clarification, does clarify the disputed language and reach the interpretation mandated by the legislative history of the 1981 provision. The amendment resolved the series of court cases and is applied prospectively. Therefore, in substance, if not in form, the 1984 amendment is a clarification.

The plaintiffs correctly state that there is no contemporaneous legislative history to accompany the 1984 amendment. Therefore, the sponsors’ statements should be afforded little weight. However, the language of the 1984 amendment itself and its context in the history of the 1981 provision provide a sufficient basis for the court’s interpretation. The language of the amendment is sufficient to form a statutory interpretation of it as a clarification without reference to legislative history. Indeed, the lack of legislative history may even undermine plaintiffs’ position. If such a major change were intended, a change of scope from seven to one hundred percent of the AFDC recipients, Congress would be likely to comment upon such an action.

For the foregoing reasons, the defendants are entitled to judgment as a matter of law on Count I of the amended complaint.

Count III Motions

Count III of the amended complaint is a class action for declaratory and injunctive relief. The named plaintiffs represent those families which have been denied AFDC assistance solely because a family member received a lump sum payment of compensation for a personal injury. The plaintiffs have moved the court for a preliminary injunction and for class certification. The defendants seek summary judgment on this issue. Once again, there are no material disputed questions of fact and the question before the court is whether the defendants are entitled to judgment as a matter of law. Although the provision at issue is not one of great clarity, for the reasons which follow, the court concludes that the defendants are entitled to judgment as a matter of law.

The State defendant, IDPA, has promulgated regulations which apply the lump sum rule, section 602(a)(17), to families receiving personal injury awards, which the State views as income. IDPA AFDC Manual §§ PO and PR 510.2(g) and 615.6. The State has this power as a result of the Federal defendant's current policy which permits the States the option of treating nonrecurring or “windfall” lump sum payments as income or as resources. The Secretary of Health and Human Services is presently revising the guidelines which permit the States this flexibility. New regulations will require that all states treat all “windfall” lump sum payments as income and subject to the lump sum rule. Reply Memorandum of Federal Defendant for Summary Judgment on Count III, at 5. Plaintiffs assert that the lump sum rule was intended to be applied solely to income. They argue that compensation for personal injury is properly viewed not as income, but as a resource and, therefore, not subject to the lump sum rule.

The court’s role in the review of agency action and interpretation of statutes is narrow. Agency action is presumed' to be valid and the court is not to replace the agency’s judgment with its own. Bat terton v. Francis, 432 U.S. 416, 97 S.Ct. 2399, 53 L.Ed.2d 448 (1977); Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971). Therefore, this court may reject the defendants’ interpretation and application of the lump sum rule to personal injury settlements only if the interpretation proposed is without a reasonable basis. Udall v. Tallman, 380 U.S. 1, 85 S.Ct. 792, 13 L.Ed.2d 616 (1965); Connor v. Finch, 314 F.Supp. 364, 369 (N.D.Ill.1970). After a careful review of the agency action, the court finds there is some reasonable basis for the application of the lump sum rule to families which receive lump sum payments to compensate personal injuries.

In this determination, the court does not write upon a clean slate. Both parties have cited district court opinions which they use to affirm their respective positions. Jackson v. Guissinger, 589 F.Supp. 1288 (W.D. La.1984) (upholding application of the lump sum rule to personal injury awards as an option available to the States); Reed v. Lukhard, 591 F.Supp. 1247 (W.D.Va.1984) (finding the lump sum rule applies solely to income and personal injury awards do not qualify as income); Betson v. Cohen, 587 F.Supp. 121 (E.D.La.1983) (concluding that personal injury awards are not expressly excluded from the lump sum rule and, therefore, may be included). The courts have split over the characterization of personal injury awards because two interpretations are not simply semantical differences without effect. If a personal injury award is treated as income and subject to the lump sum rule, the person and family are disqualified for benefits for a certain number of months or even years. 42 U.S.C. § 602(a)(17). If a personal injury award is treated as a personal resource, the recipient of the award is ineligible for benefits only as long as the total unexcluded resources, including the award, exceed one thousand dollars. When the excess is gone, the recipient is again eligible for benefits.

The court’s focus in resolving this issue is upon Congress’ intent in enacting the lump sum rule: did Congress intend to include the large amounts of lump sum payments of personal injury awards within the operation of the lump sum rule? The language of the rule itself, its legislative history, and the administrative interpretation given the rule are all essential to this inquiry. The language of the rule uses the term income throughout it. Federal regulations promulgated pursuant to it provide that the rule shall apply to recipients of “nonrecurring lump sum income.” 45 C.F.R. § 233.20(a)(3)(iii)(D). The statute, however, fails to provide any express definition of income. Neither party disputes that the term income is key in the rule, but both offer definitions of the term which support their interpretation.

Plaintiffs rely upon the ordinary, dictionary definition of the term and argue that the plain meaning of the term requires the agency to classify a personal injury award as a resource, not as income. The Internal Revenue Code is also used to supply a definition for income. The court is neither required to disregard the definition from another statute, nor accept it as the one intended by Congress in another statute. In this context, the court is not persuaded that the best source of a definition for income lies outside the AFDC provisions and regulations themselves. Although not defined in the AFDC provisions, the term’s use in the lump sum rule is best understood within the rule and its legislative history and administrative interpretation.

The defendants argue that the dictionary and Internal Revenue Code cannot provide a definition for the term income as it is employed by Congress in the lump sum rule. They reason that the Secretary of Health and Human Service has the broad discretion to define such terms. The Secretary may, in certain contexts, permit the participating States to define particular terms. The Secretary’s interpretation of the lump sum rule permitted the States the option to determine if “windfall” or nonrecurring lump sum payments were income or a resource. Therefore, the States, such as Illinois, would be free to include personal injury awards as income within the lump sum rule.

The legislative history of the lump sum rule sheds some light on the lack of definition for the term income. In 1981, Congress focused upon the “perverse effect” of the existing rule, which encouraged families to spend a lump sum quickly, within the first month of receipt, and then have the remainder treated as a resource, rather than income available to meet ongoing needs. See fn. 6, infra. This legislative history reveals the purpose of the rule, but also demonstrates the flexibility associated with the definitions of the terms income and resource. Under the old rule, a payment would enter the household as income, but within a month, be transformed into a resource. The terms were and are flexible and capable of changing meaning as the rules they are used in change. Congress and the Secretary left the terms flexible to effectuate the purposes and goals of the AFDC program.

Because of the lack of definitions, both parties’ readings of the lump sum rule and the definition of income are reasonable, although neither is wholly satisfactory. Plaintiffs read the term and rule narrowly and without flexibility. Defendants look to the broad purpose of the rule and the flexible nature of the terms. While either may be reasonable, the purpose of the amendment and the deference to be afforded the agency’s interpretation dictate that defendants’ view prevail. Under defendants’ view the disincentive would most effectively be eliminated. Otherwise, recipients of large “windfall" lump sum payments would remain encouraged to spend the money as quickly as possible to reach the one thousand dollar resource level. This would not encourage families to pro-rate or budget out their monies in the months ahead.

Therefore, the court concludes that defendants are entitled to judgment as a matter of law on the claim presented in Count III of the amended complaint. Because the court has found for the defendants, plaintiffs are not entitled to the injunctive relief sought, nor to a decision on the issue of class certification.

      . The Omnibus Budget Reconciliation Act of 1981 (OBRA) amended 42 U.S.C. § 602(a)(17) to require state AFDC plans to:
      (17) provide that if a person specified in paragraph (8)(A)(i) or (ii) receives in any month an amount of income which, together with all other income for that month not excluded under paragraph (8), exceeds the State's standard of need applicable to the family of which he is a member—
      (A) such amount of income shall be considered income to such individual in the month received, and the family of which such person is a member shall be ineligible for aid under the plan for the whole number of months that equals (i) the sum of such amount and all other income received in such month, not excluded under paragraph (8), divided by (ii) the standard of need applicable to such family, and
      (B) any income remaining (which amount is less than the applicable monthly standard) shall be treated as income received in the first month following the period of ineligibility specified in subparagraph (A).

      . 42 U.S.C. § 602(a)(8)(A)(i) and (ii) require a state AFDC plan to:
      (8)(A) provides that, with respect to any month, in making the determination under paragraph (7), the State agency—
      (i) shall disregard all of the earned income of each dependent child receiving aid to families with dependent children who is (as determined by the State in accordance with standards prescribed by the Secretary) a full-time student or a part-time student who is not a full-time employee attending a school, college, or university, or a course of vocational or technical training designed to fit him for gainful employment;
      (ii) shall disregard from the earned income of any child or relative applying for or receiving aid to families with dependent children, or of any other individual (living in the same home as such relative and child) whose needs are taken into account in making such determination, the first $75 of the total of such earned income for such month (or such lesser amount as the Secretary may prescribe in the case of an individual not engaged in full-time employment or not employed throughout the month).

      . See, e.g., Walker v. Adams, 741 F.2d 116 (6th Cir.1984); Faught v. Heckler, 736 F.2d 1235 (8th Cir.1984); Sweeney v. Murray, 732 F.2d 1022, (1st Cir.1984); Reed v. Lukhard, 591 F.Supp. 1247 (W.D.Va.1984) (presently on appeal by defendant) Atkins v. Toan, 595 F.Supp. 104 (W.D. Mo.1984); Poulin v. Chevrefils, Civ. No. 83-486-D (D.N.H. May 3, 1984); Woodruff v. Perales, Civ. No. 82-1141C (W.D.N.Y. April 25, 1984); David v. Sunn, Civ. No. 84-0016 (D.Ha. March 5, 1984) (in court ruling); Wylie v. Kitchin, 589 F.Supp. 505 (N.D.N.Y.1984); Betson v. Cohen, 587 F.Supp. 121 (E.D.La.1983) (West publishers replaced the 578 F.Supp. 154 with this citation); Harris v. Harris, 576 F.Supp. 915 (D.N.J.1983); Callejas v. McMahon, C-83-3136 EFL (N.D.Ca. Sept. 2, 1983); Douthit v. Heckler, 577 F.Supp. 88 (D.Neb.1983); Clark v. Harder, 577 F.Supp. 1085 (D.Kan.1983); Bowmaster v. Petit, 576 F.Supp. 354 (D.Me.1983); Vermeulen v. Kheder, No. 82-135 (W.D.Mich. June 3, 1982) (in court ruling).

      . Representative Dan Rostenskowki and Senator Robert Dole made identical statements three weeks after the DRA was enacted:

      . The Senate Report explains the primary rationale for the amended lump-sum rule:
      Present Law. — Any payments that meet the definition of income — for example, retroactive social security benefits — are counted as income in the month of receipt and any of the payment that is not spent in that month is usually considered as a resource in the months thereafter.
      Committee amendment. — The committee believes that lump-sum payments should be considered available to meet the ongoing needs of an AFDC family. The present treatment of such payments has the perverse effect of encouraging the family to spend such income as quickly as possible in order to retain AFDC eligibility. The committee amendment would require that such income received in a month be considered available as income in the month it is received and also in future months. S.Rep. No. 139, 97th Cong., 1st Sess. 505, reprinted in 1981 U.S.Code Cong. & Ad. News 296, 771 (Budget Committee Report).

      . The Secretary of HHS emphasized that the purpose of the lump sum was to assure that only families with no other income would be eligible for AFDC. He also emphasized that the lump sum rule was designed to promote individual budgeting responsibility.
      Our next set of proposals is aimed at assuring that the AFDC program is available only as a temporary program to assist families with children who have no other means of support. Before the first dollar of aid is paid, all other sources of income should be pursued and all available income counted____
      We are also introducing proposals to insure that people assume more personal responsibility for planning the use of income to meet their needs. When a large amount of money is received as a lump sum — for example, an inheritance — we will consider it as income available for support not only in the month it is received, but to meet future needs____

        Emphasizing individual responsibility

      We are also introducing proposals to ensure that people assume more personal responsibility for planning the use of income to meet their needs. When a large amount of money is received as a lump sum (for example, an inheritance), we will consider it as income available for support not only in the month it is received but to meet future needs. This would be accomplished by requiring that the lump-sum payment be divided by the State’s standard of need. The recipient would be ineligible for assistance for the number of months that result from that computation. Prepared statement of the Secretary, Senate Committee on Finance, “Spending Reduction Proposals” Part 1 97-1 March 18, 18, 19, 24, 25, 1981 398 p.
      The House Committee’s description of the then-proposed lump sum rule required the States to consider lump sum payments as income. This is the interpretation currently used in the Secretary’s proposed regulations which will deny States the option to treat lump sums as either income or a resource.

        AFDC Proposal 13: Averaging unearned income received as a lump-sum payment.

        Background:

      According to DHHS, lump-sum payments that meet the definition of income, such as retroactive Social Security payments, now are counted as income in the month when received, and if an excess remains, as resources thereafter.

        Proposed Change:

      Require States to consider all lump-sum payments as income available to meet a family needs. The household would be ineligible for AFDC if a lump-sum payment exceeded the standard of need. Any excess sum in the month when received would be carried forward for alter use.

        Impact:

      DHHS estimates that the proposal would remove 5,000 families from AFDC reducing Federal AFDC benefit outlays by $5 million in FY82 and yielding negligible administrative savings. However, it would boost food stamp benefits by an estimated $2 million. Thus, net saving would be $3 million. Staff of House Committee on Ways and Means, 97th Cong., 1st Sess., "Description of the Administration’s Legislative Recommendations Under Jurisdiction of the Ways and Means Committee” III, 53 (Comm. Print 1981).