Marguerite Kelley v. Comm Social Security ( 2009 )


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  •                                                                                                                            Opinions of the United
    2009 Decisions                                                                                                             States Court of Appeals
    for the Third Circuit
    5-15-2009
    Marguerite Kelley v. Comm Social Security
    Precedential or Non-Precedential: Precedential
    Docket No. 08-1652
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    PRECEDENTIAL
    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    _____________
    No. 08-1652
    _____________
    MARGUERITE P. KELLEY,
    Appellant,
    v.
    COMMISSIONER OF SOCIAL SECURITY
    _______________
    On Appeal from the United States District Court
    for the Eastern District of Pennsylvania
    (Civil No. 2:07-cv-1628)
    District Judge: Honorable Lawrence F. Stengel
    ______________
    Argued January 8, 2009
    ________________
    Before: CHAGARES, HARDIMAN, Circuit Judges, and ELLIS,
    Senior District Judge.*
    (Opinion Filed: May 15, 2009)
    ______________
    *
    The Honorable T. S. Ellis III, Senior District Judge,
    United States District Court for the Eastern District of Virginia,
    sitting by designation.
    SCOTT A. DYE (Argued)
    Cohen, Fluhr & Gonzalez
    1429 Walnut Street
    Suite 1500
    Philadelphia, PA 19102
    Counsel for Appellant
    ERIC P. KRESSMAN
    Acting Regional Chief Counsel
    PATRICIA M. SMITH
    Acting Supervisory Regional Counsel
    Social Security Administration
    Office of the General Counsel
    P.O. Box 41777
    Philadelphia, PA 19101
    LAURA MAGID
    Acting United States Attorney
    BEVERLY H. ZUCKERMAN (Argued)
    Special Assistant United States Attorney
    Eastern District of Pennsylvania
    615 Chestnut Street
    Suite 1250
    Philadelphia, PA 19106
    Counsel for Appellee
    ______________
    OPINION OF THE COURT
    ______________
    ELLIS, Senior District Judge.
    This social security appeal presents the novel question
    whether the proceeds of the sale of a marital home—placed in
    escrow by divorcing parties—are a countable resource for purposes
    of assessing eligibility to receive Supplemental Security Income
    (“SSI”) benefits. The Commissioner of Social Security denied
    Marguerite Kelley’s application for SSI benefits on the ground that
    these proceeds were a countable resource rendering her ineligible
    2
    for SSI benefits. The District Court upheld this decision. We
    agree and affirm.
    I.
    Marguerite Kelley suffers from chronic pain and fatigue
    secondary to Crohn’s disease. On March 5, 2003, Kelley applied
    for Disability Insurance Benefits (“DIB”) under Title II of the
    Social Security Act, 42 U.S.C. §§ 401–434. This claim was denied
    on May 23, 2003, and Kelley then requested an administrative
    hearing. On August 6, 2003, Kelley filed an application for SSI
    under Title XVI of the Social Security Act, 42 U.S.C. §§
    1381–1383f. On February 24, 2005, an administrative law judge
    (“ALJ”) held a hearing to review both her DIB and SSI claims.
    At the time of the hearing, Kelley was involved in divorce
    proceedings. She and her husband had sold their marital home
    approximately two years earlier, and by agreement they placed the
    proceeds of the sale in an escrow account until they could reach a
    further agreement on distribution.1 During the hearing, the ALJ
    indicated that he would leave the record open for two weeks during
    which time Kelley could submit any additional materials. Kelley’s
    counsel submitted a brief, attached to which was an affidavit from
    the attorney who represented Kelley in her divorce. 2 Yet, it is
    1
    During the hearing, Kelley stated first that there was a
    court order with regard to the escrow, but then indicated that she
    and her husband created the escrow because they could not initially
    agree on an equitable distribution of the proceeds from the home’s
    sale. (A.R. at 545–46.) Kelley has submitted no evidence showing
    that the escrow account was created by court order or that a court
    order precluded her from accessing the funds.
    2
    In the affidavit, which does not reflect the year it was
    executed, Kelley’s divorce attorney stated that (i) the funds from
    the sale of the Kelley’s marital home had been placed in an escrow
    account; (ii) the current balance of the escrow account was
    $42,088.44; (iii) Kelley had no access to those funds; (iv) the funds
    would be subject to equitable distribution in the divorce action; (v)
    Kelley would, “in all likelihood, not have a claim in excess of 60%
    3
    unclear from the record whether the affidavit was submitted within
    the allotted two weeks and, according to the Commissioner, the
    ALJ excluded it as untimely.3
    On March 24, 2005, the ALJ issued a decision denying
    Kelley’s claim for DIB and SSI.4 The ALJ determined, in pertinent
    part, that Kelley’s “share of the proceeds from the sale of the
    marital home are a countable resource notwithstanding the fact that
    the proceeds are presently being held in an escrow account” and
    accordingly concluded that Kelley was not eligible for SSI. (A.R.
    at 18–19.) Kelley requested review by the Appeals Council and
    submitted to the Appeals Council the same affidavit she had sent
    to the ALJ following the hearing. On March 2, 2007, the Appeals
    Council denied Kelley’s request, making the ALJ’s decision the
    Commissioner’s final decision. See 20 C.F.R. § 416.1481 (stating
    that the ALJ’s decision is binding if the Appeals Council denies a
    claimant’s request for review); see also Welch v. Heckler, 
    808 F.2d 264
    , 267 (3d Cir. 1986) (noting that the ALJ’s decision becomes
    final and eligible for judicial review when approved by the Appeals
    Council). In the course of denying Kelley’s request for review, the
    Appeals Council noted that the additional evidence Kelley
    submitted provided no basis for reversing the ALJ’s decision.
    Kelley then filed this civil action pursuant to 42 U.S.C. §
    405(g). In support of her request for review, Kelley submitted
    of the funds;” and (vi) Kelley had outstanding debts in excess of
    $100,000. (A.R. 510.) The affidavit does not include the escrow
    agreement nor does it describe its terms or provenance.
    3
    The accompanying brief is stamped as having been
    received on March 15, 2005, a fact the Commissioner points to as
    showing that the affidavit was not timely submitted and thus not
    part of the record before the ALJ. Yet, the brief is dated March 10,
    2005, and indicates that it was being transmitted by fax and first-
    class mail, facts Kelley relies on to argue that the materials were
    submitted within two weeks of the hearing.
    4
    Kelley did not appeal the DIB portion of the ALJ’s
    decision.
    4
    three additional documents: (i) a copy of her divorce decree, which
    shows that she and her husband signed a property settlement
    agreement on November 1, 2006, and that their divorce was
    finalized on December 27, 2006; (ii) a letter dated June 7, 2007,
    from her divorce attorney to her mother indicating that Kelley’s
    portion of the escrowed funds had been used to repay her mother,
    who had paid for most of Kelley’s legal fees, and to pay “for other
    fee balances, medical insurance and other bills associated with the
    children” (Appellee’s Supp. App. at 2); and (iii) a July 23, 2007,
    notice of award letter from the Social Security Administration
    indicating that Kelley was eligible to receive SSI as of July 1,
    2007.5 The matter was then referred to a magistrate judge,
    pursuant to 28 U.S.C. § 636(b)(1)(B), who issued a report and
    recommendation concluding (i) that the ALJ correctly determined
    that the escrowed proceeds from the sale of Kelley’s marital home
    constituted a countable resource and (ii) that none of the materials
    submitted by Kelley after the administrative hearing warranted a
    different conclusion. On January 3, 2008, after considering
    Kelley’s request for review and the Commissioner’s response and
    reviewing the report and recommendation, the District Court
    denied Kelley’s request for review and entered judgment in favor
    of the Commissioner. Kelley timely appealed, and we have
    jurisdiction pursuant to 28 U.S.C. § 1291.
    II.
    The sole issue on appeal is whether the proceeds from the
    sale of Kelley’s marital home, placed in an escrow account by
    Kelley and her then-husband pending equitable distribution, were
    properly deemed to be a resource for the purpose of determining
    Kelley’s eligibility for SSI. This issue, for which there is no
    directly apposite authority in this circuit or elsewhere, is a legal
    question, and our review is accordingly plenary. Schaudeck v.
    Comm’r of Social Sec. Admin., 
    181 F.3d 429
    , 431 (3d Cir. 1999).
    5
    The letter indicates that Kelley had reapplied for SSI on
    June 1, 2007, making July 2007 the first month she could receive
    benefits based on that application. See 20 C.F.R. § 416.335.
    5
    Under the Social Security Act, an individual is eligible for
    SSI benefits if (i) she is aged, blind, or disabled and (ii) her
    countable income and resources fall below certain statutory limits.
    42 U.S.C. § 1382(a).6 Since 1989, individuals not residing with a
    spouse have been obliged to show that their countable resources do
    not exceed $2,000 as part of establishing their eligibility for SSI
    benefits. 
    Id. The Social
    Security Administration has defined
    resources as “cash or other liquid assets or any real or personal
    property that an individual (or spouse, if any) owns and could
    convert to cash to be used for his or her support and maintenance.”
    20 C.F.R. § 416.1201(a). Significantly, another regulation
    provides that
    [i]f an individual (and spouse, if any) moves out of
    his or her home without the intent to return, the
    home becomes a countable resource because it is no
    longer the individual’s principal place of residence.
    . . . The individual’s equity in the former home
    becomes a countable resource effective with the first
    day of the month following the month it is no longer
    his or her principal place of residence.
    
    Id. § 416.1212(c).
    The regulation further states that proceeds from
    the sale of a home may only be excluded from an individual’s
    countable resources to the extent the proceeds “are intended to be
    used and are, in fact, used to purchase another home . . . within 3
    months of the date of receipt of the proceeds.”               
    Id. § 416.1212(d)(1).
    Thus, under this regulation, it is clear the ALJ
    properly considered the proceeds from the sale of Kelley’s marital
    home to be a countable resource for the purpose of calculating her
    SSI eligibility.
    Nor is this conclusion altered because Kelley agreed to place
    the proceeds from the sale of her former home in an escrow
    6
    The statue provides that resources listed in 42 U.S.C. §
    1382b(a) may properly be excluded when calculating a claimant’s
    resources. 42 U.S.C. § 1382(a)(1)(B). The parties correctly do not
    argue that § 1382b(a) is applicable here.
    6
    account pending equitable distribution in her divorce. The Social
    Security Act addresses the treatment of trusts in 42 U.S.C. §
    1382b(e), which defines the term “trust” as including “any legal
    instrument or device that is similar to a trust.” 42 U.S.C. §
    1382b(e)(6)(A). Because an escrow account is similar to a trust,
    the escrow account Kelley created with her husband is
    appropriately treated as a trust under § 1382b(e).7 That subsection,
    enacted in 1999 as part of the Foster Care Independence Act, Pub.
    L. No. 106-169, 113 Stat. 1822, separately addresses revocable and
    irrevocable trusts. First, it provides that if an individual has
    established a revocable trust, “the corpus of the trust shall be
    considered a resource available to the individual.” 
    Id. § 1382b(e)(3)(A).
    8 In the case of an irrevocable trust, the statute
    7
    This conclusion is confirmed by the Social Security
    Administration’s Program Operating Manual System (“POMS”).
    The POMS represent “the publicly available operating instructions
    for processing Social Security claims.” Wash. State Dep’t of Soc.
    & Health Servs. v. Guardianship Estate of Keffeler, 
    537 U.S. 371
    ,
    385 (2003). The Supreme Court has stated that “[w]hile these
    administrative interpretations are not products of formal
    rulemaking, they nevertheless warrant respect.” 
    Id. (citing Skidmore
    v. Swift & Co., 
    323 U.S. 134
    , 139–40 (1944); United
    States v. Mead Corp., 
    533 U.S. 218
    , 228, 234–35 (2001)). The
    applicable POMS section reasonably interprets the statutory phrase
    “any legal instrument or device that is similar to a trust” as
    covering any instrument, device, or arrangement that involves (i)
    a grantor; (ii) “who transfers property (or whose property is
    transferred by another);” (iii) “to an individual or entity with
    fiduciary obligations;” (iv) “with the intention that it be held,
    managed or administered by the individual or entity for the benefit
    of the grantor or others.” POMS SI 01120.201B.5; see also POMS
    SI 01120.201G.1. The POMS also explicitly list escrow accounts
    as an example of a legal instrument or device similar to a trust. Id.;
    see also POMS SI 01120.201G.2.
    8
    Another provision in the subsection explains that “an
    individual shall be considered to have established a trust if any
    assets of the individual (or of the individual’s spouse) are
    transferred to the trust other than by will.” 
    Id. § 1382b(e)(2)(A).
    7
    further provides that
    if there are any circumstances under which payment
    from the trust could be made to or for the benefit of
    the individual (or of the individual’s spouse), the
    portion of the corpus from which payment to or for
    the benefit of the individual (or of the individual’s
    spouse) could be made shall be considered a
    resource available to the individual.
    
    Id. § 1382b(e)(3)(B).9
    The Social Security Act’s treatment of trusts and trust-like
    instruments compels the conclusion that the escrowed funds were
    The term “asset” is further defined as including
    (iii) any other payment or property to which the
    individual (or of [sic] the individual’s spouse) is
    entitled but does not receive or have access to
    because of action by—
    (I) the individual or spouse;
    (II) a person or entity (including a court) with
    legal authority to act in place of, or on behalf of,
    the individual or spouse; or
    (III) a person or entity (including a court) acting
    at the direction of, or on the request of, the
    individual or spouse.
    
    Id. § 1382b(e)(6)(C).
    Thus, even if the escrow was created by a
    court, it would still fall within the terms of the statute.
    9
    In explaining this provision, the relevant POMS states that
    “if a payment can be made to or for the benefit of the individual
    under any circumstance, no matter how unlikely or distant in the
    future, the general rule . . . applies (i.e., the portion of the trust
    [from which payment could be made] that is attributable to the
    individual is a resource . . . ).” POMS SI 01120.201D.2.b.
    8
    appropriately deemed to be one of Kelley’s resources. 10 Because
    the terms of the escrow agreement are not in the record, it is
    impossible to determine definitively whether the escrow account
    should be deemed more akin to a revocable or irrevocable trust.
    Yet, the conclusion that the proceeds held in escrow were properly
    counted holds regardless of whether the escrow account is treated
    as a revocable or irrevocable trust. If Kelley’s escrow account was
    more similar to a revocable trust, the statute’s unqualified
    command that “[i]n the case of a revocable trust established by an
    individual, the corpus of the trust shall be considered a resource
    available to the individual” applies. 
    Id. § 1382b(e)(3)(A).
    Even
    assuming the escrow account is properly considered an irrevocable
    trust, it is clear that the escrowed funds were correctly categorized
    as a countable resource given that there were certainly
    “circumstances under which payment from the [escrow account]
    could be made to or for the benefit of” Kelley.                
    Id. § 1382b(e)(3)(B).
    Although the exact terms of the escrow agreement
    were never made a part of the record, Kelley and her then-husband
    clearly created the escrow account with the understanding that
    when they had agreed on an equitable distribution of the proceeds
    from the sale of their marital home and their divorce had been
    finalized, they would each receive either payments from the
    account or the benefit of payments from the account.11 Given this,
    10
    Not addressed here is whether the ALJ appropriately
    counted only Kelley’s share of the proceeds in escrow or whether
    the entire proceeds from the sale of Kelley’s marital home
    constituted a countable resource because, in either event, Kelley’s
    countable resources would have exceeded the $2000 threshold,
    thereby rendering her ineligible for SSI benefits.
    11
    Indeed, the June 7, 2007, letter from Kelley’s divorce
    attorney, submitted only to the District Court, demonstrates that
    this is exactly what happened; Kelley’s share of the funds were
    used to repay a loan from her mother and to pay “for other fee
    balances, medical insurance, and other bills associated with the
    children.” (Appellee’s Supp. App. at 2.) It is important to note that
    we do not rely on this letter, or any of the other materials not part
    of the record before the ALJ, in reaching our conclusion; the
    materials that were before the ALJ provide ample support.
    9
    it is clear that on this record, even assuming the escrow account is
    properly treated as an irrevocable trust, the escrowed funds were
    properly counted as a resource for SSI purposes.
    Kelley advances three arguments against this conclusion,
    none of which persuades. First, Kelley asserts that the escrowed
    funds should not be considered a resource because she had no
    access to the funds. In support of this argument, Kelley relies on
    20 C.F.R. § 416.1201(a), which defines the term resources as “cash
    or other liquid assets or any real or personal property that an
    individual (or spouse, if any) owns and could convert to cash to be
    used for his or her support and maintenance” and further provides
    that “[i]f the individual has the right, authority or power to
    liquidate the property or his or her share of the property, it is
    considered a resource.” Yet, Kelley’s attempt to draw from this
    language the principle that funds are not a countable resource under
    the Social Security Act unless a claimant is able to access the funds
    at will is misguided.12 Although it is certainly true that an asset is
    generally not an individual’s resource if the individual does not
    have the legal right to use the asset for her support and
    maintenance, the regulation defining “resource” must be read in
    Additionally, there is no need to remand to the Commissioner
    pursuant to the sixth sentence of 42 U.S.C. § 405(g) because the
    materials Kelley submitted after the ALJ’s decision support, rather
    than undermine, that decision. See Matthews v. Apfel, 
    239 F.3d 589
    , 593 (3d Cir. 2001) (“[W]hen the claimant seeks to rely on
    evidence that was not before the ALJ, the district court may remand
    to the Commissioner but only if the evidence is new and material
    and if there was good cause why it was not previously presented to
    the ALJ . . . .”); see also Szubak v. Sec’y of Health & Human
    Servs., 
    745 F.2d 831
    , 833 (3d Cir. 1984) (noting that a sixth-
    sentence remand under § 405(g) requires the claimant to show “that
    there [is] a reasonable possibility that the new evidence would have
    changed the outcome of the Secretary’s determination”).
    12
    Miranda v. Barnhart, No. SA-00-CA-1195, 2002 U.S.
    Dist. LEXIS 25892 (W.D. Tex. Mar. 29, 2002), the sole authority
    on which Kelley relies for this interpretation of 20 C.F.R. §
    416.1201(a), is neither controlling nor on point.
    10
    tandem with the later-enacted statutory provision addressing how
    to count the resources of an individual whose assets have been
    transferred to a trust or a legal instrument similar to a trust. And
    that provision makes clear that an individual’s countable resources
    include assets that have been transferred to a trust-like instrument
    to the extent payment from the instrument “could be made to or for
    the benefit of the individual,” regardless of whether the individual
    has access to the funds. See 42 U.S.C. § 1382b(e). Because on this
    record it is clear that there were circumstances under which
    payments could be made from the escrow account to Kelley or for
    her benefit, the question whether she could access the escrowed
    funds at will is immaterial.
    Kelley’s second argument, which also relies on 20 C.F.R. §
    416.1201(a), is that the funds in the escrow account should not
    have been counted as a resource because they could not have been
    used for her “support and maintenance” given that her outstanding
    debts exceeded the escrowed funds. This argument also fails.
    Again, even assuming the escrow account is properly treated as an
    irrevocable trust, the pertinent question under § 1382b(e)(3)(B) is
    whether “there are any circumstances under which payment from
    the trust could be made to or for the benefit of the individual.”
    Here, payments were eventually made from the escrow account to
    pay her outstanding debts, a clear benefit to Kelley. See POMS SI
    01120.201F.1 (“[C]onsider payments to be made . . . to or for the
    benefit of an individual[] if payments of any sort from the corpus
    or income of the trust are paid to another person or entity so that
    the individual derives some benefit from the payment.”). Thus,
    given the applicable statutory language, the fact that her
    outstanding debts exceeded the amount of funds in escrow is
    irrelevant.
    Finally, Kelley argues that the conclusion reached by the
    ALJ is contrary to the underlying beneficent purpose of Title XVI
    of the Social Security Act. The primary purpose of SSI “is to
    assure a minimum level of income for people who are age 65 or
    over, or who are blind or disabled and who do not have sufficient
    income and resources to maintain a standard of living at the
    established Federal minimum income level.” 20 C.F.R. § 416.110.
    Despite Kelley’s argument to the contrary, the result reached here
    11
    does not undermine that basic purpose. Rather, according to the
    House Committee on Ways and Means’s report on the section of
    the bill that became § 1382b(e), Congress amended the Social
    Security Act to address specifically how assets in trusts should be
    counted because of concern that individuals with resources could
    qualify for SSI by sheltering their assets in trust-like instruments.
    See H.R. Rep. No. 106-182(I) (1999), 
    1999 WL 387373
    , at *34.
    The committee report first states that under the law as it existed at
    the time “[a]ssets placed in a trust in which individuals have no
    ownership and to which they have no access no longer meet the
    definition of a resource for SSI purposes” because “SSI regulations
    define resources as cash or other liquid assets, or any real or
    personal property . . . that an individual (or spouse) owns and could
    convert to cash to be used for support and maintenance (i.e., for
    food, clothing, or shelter).” 
    Id. The report
    then notes that the bill
    would change this treatment of assets held in trust because “[a]
    principle underlying virtually all Federal welfare programs is that
    recipients meet a test of low income and low assets” and “to allow
    individuals to protect resources in a trust that could be used to meet
    their needs violates the principle of welfare.” 
    Id. This citation
    to the legislative history of § 1382b(e) is not
    intended to suggest that Kelley was attempting to hide her assets
    when she agreed to place the proceeds from the sale of her marital
    home in an escrow account. Indeed, there is no indication in the
    record of any fraudulent intent. Nonetheless, § 1382b(e) reflects
    Congress’s judgment that when an individual’s assets are
    transferred to a trust-like instrument, those assets should generally
    be counted as a resource in determining SSI eligibility because of
    the potential for fraud. Additionally, Congress tempered the effect
    of § 1382b(e) by exempting special needs trusts and pooled trusts
    and by providing that “[t]he Commissioner of Social Security may
    waive the application of this subsection with respect to an
    individual if the Commissioner determines that such application
    would work an undue hardship (as determined on the basis of
    criteria established by the Commissioner) on the individual.” 42
    12
    U.S.C. § 1382b(e)(4)–(5).13 Subsection § 1382b(e) thus represents
    the balance Congress struck in its assessment of how best to count
    the assets of an individual that have been transferred to a trust or
    trust-like device in determining that individual’s eligibility for SSI,
    and we are bound by that judgment here.
    III.
    For the foregoing reasons, we agree that the ALJ properly
    counted the proceeds from the sale of Kelley’s marital home,
    placed in escrow pending equitable distribution, as a resource that
    rendered her ineligible for SSI. Accordingly, we affirm the
    judgment of the District Court.
    13
    The criteria established by the Commissioner provide that
    “undue hardship exists in a month if [(i)] failure to receive SSI
    payments would deprive the individual of food or shelter; and [(ii)]
    the individual’s available funds do not equal or exceed the Federal
    benefit rate (FBR) plus federally administered State supplement, if
    any.” POMS 1120.203.C.1. Kelley has never argued that she
    satisfied the undue hardship criteria and was therefore eligible for
    a waiver.
    13