Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_14-cv-00647/USCOURTS-caed-2_14-cv-00647-1/pdf.json

Nature of Suit Code: 864
Nature of Suit: Social Security - SSID Title XVI
Cause of Action: 42:405 Review of HHS Decision (DIWC)

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UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

JAMES G. HENDRICKS,

Plaintiff,

v.

CAROLYN W. COLVIN, Commissioner 

of Social Security,

Defendant.

No. 2:14-cv-0647 DAD

ORDER

This social security action was submitted to the court without oral argument for ruling on 

plaintiff’s motion for summary judgment and defendant’s cross-motion for summary judgment.1 

For the reasons explained below, plaintiff’s motion is granted, the decision of the Commissioner 

of Social Security (“Commissioner”) is reversed, and the matter is remanded for further 

proceedings consistent with this order.

PROCEDURAL BACKGROUND

On April 12, 2001, plaintiff filed an application for Disability Insurance Benefits (“DIB”) 

under Title II of the Social Security Act (“the Act”), alleging disability beginning on January 7, 

2001. (Transcript (“Tr.”) at 15, 70-73.) Plaintiff’s application was granted upon initial 

 

1

 Both parties have previously consented to Magistrate Judge jurisdiction over this action 

pursuant to 28 U.S.C. § 636(c). (See Dkt. Nos. 5 & 7.)

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consideration. (Id. at 15.) On February 21, 2006, plaintiff was notified that he was no longer 

entitled to benefits because he had been engaging in “substantial work.” (Id. at 15, 29-35.) That 

decision was affirmed upon reconsideration on June 15, 2006. (Id. at 45-47.) 

Plaintiff requested a hearing and a hearing was held before an Administrative Law Judge 

(“ALJ”) on October 24, 2008. (Id. at 452.) In a decision issued on December 23, 2008, the ALJ 

found that plaintiff’s disability ceased as of April of 2002. (Id. at 18.) After the Appeals Council 

denied plaintiff’s request for review, plaintiff filed a civil action in this court, James Hendricks v. 

Michael J. Astrue, No. CIV S-09-2295 GGH (E.D. Cal. 2009) (“prior action). (Id. at 599-606.) 

On June 8, 2010, plaintiff’s motion for summary judgment in that prior action was granted in part 

by the court and the matter was remanded for further proceedings. (Id. at 605-06.)

On June 19, 2010, in light of the court order granting plaintiff’s motion for summary 

judgment in part in the prior action, the Appeals Council vacated the final decision of the 

Commissioner and remanded the case to an ALJ for further administrative proceedings. (Tr. at 

517.) Another hearing was held before an ALJ on December 16, 2010. (Id. at 615.) Plaintiff was 

represented by an attorney and testified at that administrative hearing. (Id. at 615-17.) 

In a decision issued on March 18, 2011, the ALJ found that plaintiff had engaged in 

substantial gainful activity and been overpaid benefits. (Id. at 500-03.) The ALJ entered the 

following findings in this regard: 

1. The claimant engaged in substantial gainful activity and was 

overpaid benefits in the amount of $84,053.80 during the period of 

July 2002 to March 2006 (20 CFR 404.504). 

2. The claimant is liable for repayment of $84,053.80 during the 

period January 1, 2005 to January 10, 2006 (20 CFR 404.501(a)).

(Id. at 500-03.)

On April 2, 2014, the Appeals Council assumed jurisdiction of the case, affirmed the 

ALJ’s finding that plaintiff had engaged in substantial gainful activity but vacated the ALJ’s 

findings regarding overpayment and repayment. (Id. at 492-94.) Plaintiff sought judicial review 

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pursuant to 42 U.S.C. § 405(g) by filing the complaint in this action.2

LEGAL STANDARD

“The district court reviews the Commissioner’s final decision for substantial evidence, 

and the Commissioner’s decision will be disturbed only if it is not supported by substantial 

evidence or is based on legal error.” Hill v. Astrue, 698 F.3d 1153, 1158-59 (9th Cir. 2012). 

Substantial evidence is such relevant evidence as a reasonable mind might accept as adequate to 

support a conclusion. Osenbrock v. Apfel, 240 F.3d 1157, 1162 (9th Cir. 2001); Sandgathe v. 

Chater, 108 F.3d 978, 980 (9th Cir. 1997).

“[A] reviewing court must consider the entire record as a whole and may not affirm 

simply by isolating a ‘specific quantum of supporting evidence.’” Robbins v. Soc. Sec. Admin., 

466 F.3d 880, 882 (9th Cir. 2006) (quoting Hammock v. Bowen, 879 F.2d 498, 501 (9th Cir.

1989)). If, however, “the record considered as a whole can reasonably support either affirming or 

reversing the Commissioner’s decision, we must affirm.” McCartey v. Massanari, 298 F.3d 

1072, 1075 (9th Cir. 2002). 

A five-step evaluation process is used to determine whether a claimant is disabled. 20 

C.F.R. § 404.1520; see also Parra v. Astrue, 481 F.3d 742, 746 (9th Cir. 2007). The five-step 

process has been summarized as follows:

Step one: Is the claimant engaging in substantial gainful activity? 

If so, the claimant is found not disabled. If not, proceed to step 

two.

Step two: Does the claimant have a “severe” impairment? If so, 

proceed to step three. If not, then a finding of not disabled is 

appropriate.

Step three: Does the claimant’s impairment or combination of 

impairments meet or equal an impairment listed in 20 C.F.R., Pt. 

404, Subpt. P, App. 1? If so, the claimant is automatically 

determined disabled. If not, proceed to step four.

Step four: Is the claimant capable of performing his past work? If 

so, the claimant is not disabled. If not, proceed to step five.

/////

 

2

 Plaintiff filed his original complaint in this action on March 10, 2014, (Dkt. No. 1), and an 

amended complaint on June 6, 2014. (Dkt. No. 8.)

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Step five: Does the claimant have the residual functional capacity 

to perform any other work? If so, the claimant is not disabled. If 

not, the claimant is disabled.

Lester v. Chater, 81 F.3d 821, 828 n.5 (9th Cir. 1995).

The claimant bears the burden of proof in the first four steps of the sequential evaluation 

process. Bowen v. Yuckert, 482 U.S. 137, 146 n. 5 (1987). The Commissioner bears the burden 

if the sequential evaluation process proceeds to step five. Id.; Tackett v. Apfel, 180 F.3d 1094, 

1098 (9th Cir. 1999).

APPLICATION

In his pending motion plaintiff asserts that the ALJ failed to consider the lay witness 

testimony of Shanna Farmer, in violation of the June 9, 2010 court order issued in his prior civil 

action before this court. In that prior action, Hendricks v. Astrue, No. CIV S-09-2295 GGH, 

2010 WL 2353449 (E.D. Cal. June 9, 2010), the court issued an order granting plaintiff’s motion 

for summary judgment, in part, after finding that the ALJ had erred in failing to discuss the 

testimony of Shanna Farmer in his decision. (Tr. at 599-606.)

With respect to Ms. Farmer’s testimony, the court’s June 9, 2010 order in plaintiff’s prior 

civil action summarized her testimony at the December 23, 2008 administrative hearing as 

follows:

Up until a year and a half prior to the October, 2008 hearing, Ms. 

Farmer accompanied plaintiff to work at the phone company, and 

worked right next to his office. She helped him go to breakfast, 

helped feed him, and helped him get up and out of chairs due to his 

instability and tendency to fall. She also made sure if he went to 

the bathroom that he came back out. Ms. Farmer testified that 

plaintiff attended board meetings quarterly, an engineering meeting 

once a week, and a staff meeting every other week. She made sure 

to get him up, out the door and onto the elevator for these meetings. 

There would be other personnel at the other end of the elevator to 

make sure he arrived. Although she did not attend the meetings 

with him, she read the minutes of those meetings and testified that 

most of the time he made no comment at the meetings. Once in a 

while he would state that a light bulb had gone out in the hallway or 

something else of similar insignificance. She further testified that 

his average day at the office was an hour or two, and he mostly just 

sat. He also watched the news on his office television, read 

newspapers and magazines, and slept for an hour. Then he would 

go home. Periodically someone would come in with a board issue, 

but “on a daily basis, nobody came in.” She said that since his 

stroke, he has not touched his desk work or his computer. 

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(Id. at 604-05.) At that time the court ordered that the matter be remanded so that the ALJ could 

consider Ms. Farmer’s testimony and make a determination as to the appropriate weight to be 

afforded that testimony. (Id. at 605-06.) 

As noted above, after the matter was remanded, a second administrative hearing was held 

on December 16, 2010, at which Ms. Farmer also testified. (Id. at 615.) According to Ms. 

Farmer’s testimony at the December 16, 2010 administrative hearing, plaintiff’s work activity 

consisted of going “to breakfast in the morning, which usually takes a couple of hours,” reading 

on his Kindle and napping. (Id. at 654-57.) Ms. Farmer also testified that, since plaintiff suffered 

his stroke, he had not been given a work assignment, aside from “maybe, some past questions on 

past history of the telephone company . . . .” (Id. at 658.)

Plaintiff argues that “[d]espite the specific directive from the Federal Court on Remand to 

discuss and properly weigh the testimony of Shanna Farmer,” the ALJ gave “exactly one sentence 

to that testimony,” in his March 18, 2011 opinion. (Pl.’s MSJ (Dkt. No. 15-1) at 8.3) A review of 

the ALJ’s March 18, 2011 decision which is now subject to review by this court reveals that 

plaintiff’s argument is well taken. In this regard, the ALJ’s March 18, 2011decision 

acknowledged that the court’s June 9, 2010 order in the prior civil action found that “not 

discussing the testimony of the claimant’s personal assistant, Shanna Farmer,” constituted 

harmful error. (TR. at 501.) The ALJ then noted that Ms. Farmer testified “as both hearings . . . 

that she assists the claimant at work,” before moving on to a summary of plaintiff’s activities.4 

(Id.) 

Nowhere in the ALJ’s opinion, however, is there any mention of whether or why the ALJ 

accepted or rejected Ms. Farmer’s testimony. See Rounds v. Commissioner Social Sec. Admin., 

795 F.3d 1177, 1187 (9th Cir. 2015) (“Competent lay witness testimony cannot be disregarded 

without comment and in order to discount competent lay witness testimony, the ALJ must give 

 

3

 Page number citations such as this one are to the page number reflected on the court’s CM/ECF 

system and not to page numbers assigned by the parties.

4

 It is not clear if the ALJ’s brief summary was intended to be a summary of Ms. Farmer’s 

testimony or the ALJ’s summary of plaintiff’s daily activities after considering all the evidence, 

including Ms. Farmer’s testimony. 

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reasons that are germane to each witness.”); Lewis v. Apfel, 236 F.3d 503, 511 (9th Cir. 2001) 

(“Lay testimony as to a claimant’s symptoms is competent evidence that an ALJ must take into 

account, unless he or she expressly determines to disregard such testimony and gives reasons 

germane to each witness for doing so.”). By failing once again to fully evaluate and address Ms. 

Farmer’s testimony, the ALJ failed to comply with the June 9, 2010 order in the prior action 

which required the ALJ to make “a determination as to the weight given this lay testimony . . . .” 

(Tr. at 606.)

After the ALJ issued his March 18, 2011 opinion, plaintiff submitted written exceptions to 

the Appeals Council. (Tr. at 492.) The Appeals Council, thereafter, assumed jurisdiction and 

issued a decision on April 2, 2014.5 (Id. at 488-95.) The Appeals Council found that the ALJ had 

erred with respect to the issues of overpayment and repayment. (Id. at 493.) However, the 

Appeals Council concurred with the ALJ’s “conclusion that claimant performed substantial 

gainful activity” and elected to “not disturb” that finding. (Id.) 

In this regard, the Appeals Council found the ALJ “cured the defect of the first [ALJ’s] 

decision by specifically considering the testimony of the claimant’s assistant, Shanna Farmer, 

with the entire evidentiary record.” (Id.) For the reasons stated above, the court has found that 

the ALJ’s treatment of Ms. Farmer’s testimony constituted error and did not cure the defect of the 

first ALJ’s decision. 

The Appeals Council also found that “even accepting the fact the claimant’s work and 

earnings were subsidized by this assistance,” the ALJ’s finding that plaintiff’s work was “worth 

the substantial gainful activity amounts during the period at issue given his unique expertise and 

skills,” was consistent with the “regulatory provision” that defines “substantial gainful activity as 

 

5

 “When you file written exceptions to the decision of the administrative law judge, the Appeals 

Council may assume jurisdiction at any time, even after the 60–day time period which applies 

when you do not file exceptions. If the Appeals Council assumes jurisdiction, it will make a new, 

independent decision based on the preponderance of the evidence in the entire record affirming, 

modifying, or reversing the decision of the administrative law judge, or it will remand the case to 

an administrative law judge for further proceedings, including a new decision. The new decision 

of the Appeals Council is the final decision of the Commissioner after remand.” 20 C.F.R. 

'404.984(b)(3). 

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work which, although significantly less than that done by unimpaired people . . .who are doing 

the same or similar jobs . . . is still clearly worth the substantial gainful activity amounts . . . .” 

(Id.) The Appeals Council also found that when considered “under an alternative analysis, 

treating the claimant as a self-employed person,” claimant “performed substantial gainful activity 

under test three” of the three tests for “self-employed individuals” because his work was “clearly 

worth the substantial gainful activity amount when considered in terms of its value to the 

business, or compared to the salary that an owner would pay to an employee to do the same work 

he is doing.”6 (Id. at 493-94.) In this regard, defendant argues that any error by the ALJ in 

failing to consider and evaluate Ms. Farmer’s testimony was harmless because the Appeals 

Council found that “even accepting Ms. Farmer’s testimony,” plaintiff’s activities constituted 

substantial gainful activity, whether plaintiff is viewed as an employee or a self-employed

individual. (Def.’s MSJ (Dkt. No. 16) at 11.) 

As noted above, at step one of the sequential evaluation, the ALJ must determine if

plaintiff is engaging in substantial gainful activity. “The concept of substantial gainful activity 

involves the amount of compensation and the substantiality and gainfulness of the activity itself.” 

Keyes v. Sullivan, 894 F.2d 1053, 1056 (9th Cir. 1990). See also Lynch v. Colvin, 2:13-cv-1855 

CKD, 2014 WL 4370676, at *6 (E.D. Cal. Sept. 2, 2014). In this regard, substantial gainful 

activity is work activity that is both substantial and gainful:

(a) Substantial work activity. Substantial work activity is work

activity that involves doing significant physical or mental activities. 

Your work may be substantial even if it is done on a part-time basis 

or if you do less, get paid less, or have less responsibility than when 

you worked before.7

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6

 Plaintiff is the Chairman of the Board and sole common shareholder of a family owned 

corporation. (Tr. at 500.) “If you are an officer of a corporation, you are an employee of the 

corporation if you are paid or you are entitled to be paid for holding office or performing services. 

However, if you are a director of a corporation, we consider you to be self-employed when you 

work as a director.” 20 C.F.R. § 404.1006.

7

 “Generally, we do not consider activities like taking care of yourself, household tasks, hobbies, 

therapy, school attendance, club activities, or social programs to be substantial gainful activity.” 

20 C.F.R. § 404.1572(c).

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(b) Gainful work activity. Gainful work activity is work activity 

that you do for pay or profit. Work activity is gainful if it is the kind 

of work usually done for pay or profit, whether or not a profit is 

realized.

20 C.F.R. § 404.1572(a)-(b). “If your duties require use of your experience, skills, supervision 

and responsibilities, or contribute substantially to the operation of a business, this tends to show 

that you have the ability to work at the substantial gainful activity level.” 20 C.F.R. § 

404.1573(a). 

If a claimant is self-employed, the Commissioner will consider the 

work activities he or she has performed and their value to the 

business to determine whether the individual engaged in SGA. 20 

C.F.R. §§ 404.1575(a)(2) & 416.975(a)(2). The Social Security 

Regulations provide three tests for determining whether selfemployment qualifies as SGA . . . . Test Three: You have engaged 

in substantial gainful activity if your work activity, although not 

comparable to that of unimpaired individuals, is clearly worth the 

amount shown in [the Commissioner’s Earnings Guidelines] when 

considered in terms of its value to the business, or when compared 

to the salary that an owner would pay to an employee to do the 

work you are doing.

Le v. Astrue, 540 F.Supp.2d 1144, 1149-50 (C.D. Cal. 2008) (emphasis added).

Moreover, “there is a presumption of substantial gainful employment if the applicant earns 

over the amount specified in the guidelines.” Keyes, 894 F.2d at 1056. However, “[t]he claimant 

may rebut a presumption based on earnings with evidence of his inability to be self-employed or 

to perform the job well, without special assistance, or for only brief periods of time.” Id. (citing 

Anderson v. Heckler, 726 F.2d 455, 456 (8th Cir. 1984)). “In considering whether the 

presumption is rebutted, the factors to be considered include the responsibilities and skills 

required to perform the work, the amount of time the individual spends working, the quality of 

the individual’s work, special working conditions, and for individuals who are self-employed, the 

value of their work to the business.” Corrao v. Shalala, 20 F.3d 943, 948 (9th Cir. 1994). See

also Katz v. Secretary of Health & Human Services, 972 F.2d 290, 293 (9th Cir. 1992) (“The 

earnings presumption can be rebutted. Factors to be considered in addition to the amount earned 

include the time spent working, quality of a person’s performance, special working conditions, 

and the possibility of self-employment.”).

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Here, Ms. Farmer’s testimony directly concerns the value of plaintiff’s work activity to 

the business, the quality of his work and his working conditions. Moreover, were Ms. Farmer’s 

testimony to be credited as true, plaintiff’s work activity may be of such little value to the 

business that an owner would not pay an employee a salary to do that work.

8

 In fact, Ms. Farmer 

testified that she did “some hiring” for the business and she “would not pay [plaintiff] to do what 

he does . . . .” (Tr. at 659.) 

Obviously, whether to fully credit Ms. Farmer’s testimony as true and the determination 

of the exact value of plaintiff’s work activity to the business at issue are matters for the ALJ to 

resolve. See Allen v. Heckler, 749 F.2d 577, 580 n. 1 (9th Cir. 1985) (“questions of credibility 

and resolutions of conflicts in the testimony are functions solely for the Secretary”). However, as 

the court in plaintiff’s prior civil action noted, “[t]he issue of substantial gainful activity cannot be 

determined until the ALJ has considered” Ms. Farmer’s testimony because, accepting Ms. 

Farmer’s testimony as true, a “reasonable ALJ could have come to a different disability 

determination.” (Tr. at 605.) See also Jones v. Shalala, 21 F.3d 191, 192 (7th Cir. 1994) (“There 

are cases in which although the claimant is currently earning a decent wage, he really is 

permanently disabled from engaging in gainful activity. Maybe his boss feels desperately sorry 

for him and is retaining him on the payroll even though he is incapable of working. That act of 

charity ought not be punished by denying the employee benefits and thus placing pressure on the 

employer to retain an unproductive employee indefinitely.”); Corrao, 20 F.3d at 948 (“While it is 

clear that Corrao’s ‘income’ establishes a presumption that he is engaged in SGA, these 

guidelines are only a presumption and do not relieve an ALJ of the duty to develop the record 

fully and fairly.”); SSR 83-34, 1983–1991 SOC. SEC. REP. SERV. 106, 1983 WL 31256, at *1 

(1983) (“In determining whether a self-employed individual is engaging in SGA, consideration 

must be given to the individual’s activities and their value to his or her business. Self-

 

8

See Patane v. Harris, 507 F. Supp. 115, 117 (E.D. Pa. 1981) (“Here, the record supports only 

the inference that Mr. Patane was capable of discharging his responsibilities as an outside director 

of five small closely-held corporations directorships that together apparently required a single 

meeting of one hour’s duration each month, a few words, and no action at all. This brief, 

intermittent activity is not ‘substantial gainful activity.’”)(citations omitted).

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employment income alone is not a reliable factor in determining SGA, since it is influenced not 

only by the individual’s services but also by such things as market conditions, capital 

investments, the services of other people, and agreements on distribution of profits. An 

individual’s services may help build up capital assets during a period of development when no 

profits are evident, or they may reduce losses during temporary periods of poor business 

conditions. On the other hand, a person who is incapable of rendering valuable services may 

receive a large income solely because of his or her capital investment in the business. Hence, it is 

necessary to consider the economic value of the individual’s services, regardless of whether an 

immediate income results from such services.”).

SCOPE OF REMAND

With error established, the court has the discretion to remand or reverse and award 

benefits. McAllister v. Sullivan, 888 F.2d 599, 603 (9th Cir. 1989). A case may be remanded 

under the “credit-as-true” rule for an award of benefits where: 

(1) the record has been fully developed and further administrative 

proceedings would serve no useful purpose; (2) the ALJ has failed 

to provide legally sufficient reasons for rejecting evidence, whether 

claimant testimony or medical opinion; and (3) if the improperly 

discredited evidence were credited as true, the ALJ would be 

required to find the claimant disabled on remand.

Garrison, 759 F.3d at 1020. Even where all the conditions for the “credit-as-true” rule are met, 

the court retains “flexibility to remand for further proceedings when the record as a whole creates 

serious doubt as to whether the claimant is, in fact, disabled within the meaning of the Social 

Security Act.” Id. at 1021. See also Treichler v. Commissioner of Social Sec. Admin.,, 775 F.3d

1090, 1105 (9th Cir. 2014) (“Where . . . an ALJ makes a legal error, but the record is uncertain 

and ambiguous, the proper approach is to remand the case to the agency.”).

Here, because of the error caused by the ALJ’s repeated failure to properly consider lay 

witness testimony and because the ALJ ceased the sequential evaluation at step one, the record in 

this action is unclear and ambiguous and this matter must be remanded for further proceedings. 

On remand, the ALJ shall consider and evaluate the testimony of Shanna Farmer. The ALJ shall 

also specifically address whether Ms. Farmer’s testimony is being fully credited and, if not fully 

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credited in any respect, the ALJ shall provide a germane reason or reasons for not fully crediting 

that testimony. The ALJ shall then proceed with the sequential evaluation, if appropriate. 

CONCLUSION

Accordingly, IT IS HEREBY ORDERED that:

1. Plaintiff’s motion for summary judgment (Dkt. No. 15) is granted;

2. Defendant’s cross-motion for summary judgment (Dkt. No. 16) is denied;

3. The Commissioner’s decision is reversed; and

4. This matter is remanded for further proceedings consistent with this order.

Dated: September 21, 2015

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DAD:6

Ddad1\orders.soc sec\hendricks0647.ord.docx

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