William H. Rehnquist: We will hear arguments next in No. 85-1358, Lukhard against Reed. Mr. Czelusta, you may proceed whenever you are ready.
Thomas J. Czelusta: Mr. Chief Justice, and may it please the Court, the question before the Court this morning is whether a state can require a recipient of AFDC benefits who receives a personal injury award to use at least a portion of that award for future living expenses in lieu of receiving AFDC benefits. The question arises out of the enactment of an amendment to the Social Security Act by Congress in 1981 as a result of the Omnibus Reconciliation Act, and that statute is now commonly referred to as the lump sum rule. Essentially what that statute provides is that when a recipient of AFDC receives an amount of income in a month which when added together with all the other income available to that family in that month exceeds the state's standard of need, then the family must be disqualified from AFDC benefits for a period of time. That period is determined by adding all that income together, dividing by the state's standard of need, and the resulting quotient is the number of months of disqualification. Congress in the statute uses the word "income" but does not define it. The Secretary, in enacting regulations in 1981 and '82 did not define the term but rather continued the long-standing federal policy of allowing states to treat personal injury rewards as income but did not require them to do so. On March 18th of 1986 the Secretary enacted a rule which now defines lump sum income and requires states to include personal injury awards as income subject to the rule save to the extent that the funds are earmarked and used for a purpose for which they are intended, such as medical expenses or legal fees.
Sandra Day O'Connor: With regard to those items, medical expenses and legal fees, they are deducted before the application of this requirement?
Thomas J. Czelusta: Under current policy the medical expenses and any other directly related expense is deducted at the front end when determining the disqualification period.
Sandra Day O'Connor: How about future medical expenses, if it is an ongoing medical problem?
Thomas J. Czelusta: In 1984 Congress amended the statute to allow states greater flexibility to shorten the period of ineligibility, and we have done that. Future medical expenses and a number of other situations, if somebody steals the money, or a family member absconds with the money, or if the--
Sandra Day O'Connor: Yes, how about that situation? There was one of those examples given in this case of a family member who left the family and took the money along. Now what happens?
Thomas J. Czelusta: --If that case had occurred after the 1984 amendment to the Act that person would not have been disqualified at all.
Sandra Day O'Connor: But this particular family is disqualified because it occurred before the adoption of the rule?
Thomas J. Czelusta: Yes.
Sandra Day O'Connor: Is that it?
Thomas J. Czelusta: Yes. Virginia believes that the Secretary's determination that personal injury awards could be income subject to the lump sum rule and now must be is entitled to the deference of this Court. Whether or not this Court gives deference to the Secretary's determination, however, the petitioner believes that Virginia's inclusion of personal injury awards as income subject to the lump sum rule is a reasonable interpretation of the statute and is consistent with the intent of Congress. In Heckler v. Turner, this Court had before it a case involving a statute enacted by the OBRA Congress involving AFDC and the meaning of the word "income". This Court looked at the language of the statute, its legislative history, the administrative background against which the OBRA Congress worked, and the goals and objectives sought to be achieved. In that case this Court determined that Congress did embark upon a new course which in that case was emphasizing work requirements over financial incentives. We believe that if this Court examines the language of the lump sum statute, its legislative history, the goals and objectives sought to be achieved, and the administrative background against which the Congress worked, it will lead the Court to the conclusion that Congress indeed intended to embark upon a new course with the lump sum rule, and that Virginia has correctly identified that course. Both Congress and the administration articulated a number of goals and objectives sought to be achieved by enactment of the rule. They sought to restrain the growth of government spending. They sought to redirect benefits to those who are without income or resources with which to support themselves, and to reduce or eliminate benefits for those who had money with which to support themselves. Congress and the administration sought to promote responsible budgeting and encourage personal responsibility, but of particular concern to both Congress and the administration was that the prior treatment of large sums of money had, in the words of the Senate Finance Committee, "the perverse effect of encouraging recipients to spend money quickly in order to regain or retain eligibility. " Prior to OBRA, a recipient who received a large sum of money could have been disqualified for the month that the money was received, but thereafter to the extent that any was left it was treated as a resource, and as soon as it was spent down to the state's allowable resource limit, then the person could immediately regain eligibility. Inclusion of personal injury awards as income subject to the lump sum rule achieves every one of these goals and objectives. The funds remaining in the hands of a recipient after deduction for the directly related expenses by and large represents pain and suffering, loss of earnings, loss of earning capacity, and in some cases future medical expenses, but it is money. It is available to be spent. It can be spent over a period of time, carefully, on essential needs such as food, clothing, and shelter, or it can be spent very quickly on consumer goods.
Antonin Scalia: What kind of receipts wouldn't be treated as income? What continues to be treated as resources?
Thomas J. Czelusta: If someone owns the house and they sell the house, we would treat the funds that came from the sale of that house as a resource.
Antonin Scalia: So that there would be an incentive in order to bring the resources down to the level at which the person can requalify to spend that money as quickly as possible.
Thomas J. Czelusta: Yes. But in those instances we feel that a person does have to have a place to live, so that if they sell their home they are going to in all likelihood replace it.
Antonin Scalia: Now, that would only be a problem if you sell a home. I mean, if you are selling, let's say, a vacation home that would already be counted as a resource anyway.
Thomas J. Czelusta: Yes.
Antonin Scalia: So converting it to cash instead of the real estate wouldn't make any difference.
Thomas J. Czelusta: No, it would be disqualified in either event.
Harry A. Blackmun: What about a bequest of $1,500?
Thomas J. Czelusta: That would be counted as income subject to the lump sum rule. And the individual would be disqualified for the period of time that the calculation worked out to be.
Harry A. Blackmun: What if it were a piece of land somewhere?
Thomas J. Czelusta: Land itself is a resource. And if the land is sold, we would consider it to be a resource.
Harry A. Blackmun: So that you would treat the bequest differently from the devise.
Thomas J. Czelusta: Yes. We believe that Congress did not intend to obliterate the distinction between income and resources. They still did use the word "income", and in other parts of the statute they still use the word "resources". I would point out one thing, Justice Blackmun, that our resource level at the time this suit was brought was $600. Now it has been raised to $1,000. So when we are talking about a piece of land it has got to be either a very, very small interest in a piece of land or a very poor piece of land to begin with.
Byron R. White: Was this, this is the state's construction of this provision?
Thomas J. Czelusta: Yes.
Byron R. White: It is not compelled by any view of the United States?
Thomas J. Czelusta: It is now. As of March 18th, 1986, the Secretary has now required every state in the country to--
Byron R. White: What about before that?
Thomas J. Czelusta: --Before that the Secretary in accordance with a long-standing policy that the Secretary had would require certain things to be treated as income, such as a retroactive Social Security award.
Byron R. White: Well, what about this particular--
Thomas J. Czelusta: For this kind of a payment the states had the option--
Byron R. White: --I see.
Thomas J. Czelusta: --of treating it as a resource or as income.
Byron R. White: Well, they--
Thomas J. Czelusta: And after 1981 to 1986 the Secretary continued that and said, you may do it, but you do not have to. Now the Secretary has said you may... you must.
Byron R. White: --Do you understand the Secretary to say the Act requires it or that he is just free to interpret the statute that way?
Thomas J. Czelusta: The Secretary's position, I believe, is that the statute does not require him to do it.
Byron R. White: Yes, all right.
Thomas J. Czelusta: But it certainly gives him the discretion to do it.
Byron R. White: Well, I guess he is going to speak for himself.
Thomas J. Czelusta: Yes. We believe that requiring a personal injury award to be treated as a resource would defeat every goal that Congress intended to achieve in enacting the rule.
Antonin Scalia: When you answered Justice White in the affirmative when he asked, is this required by the federal government now, did that answer apply not just to the treatment of this income, but also to the treatment that we have been discussing earlier of resources such as a home and so forth? Is it all standardized now?
Thomas J. Czelusta: Yes.
Antonin Scalia: So all of the answers you have given are now not just Virginia's view but everybody's view by reason of federal law.
Thomas J. Czelusta: 0 xxx.
John Paul Stevens: But the rule is a little different on some of the resources, isn't it, such as... some exchanges of assets now produce income even though they would have produced a resource before. Isn't that correct? Say you sell a car. That would be income now, wouldn't it?
Thomas J. Czelusta: No.
John Paul Stevens: Under the new federal interpretation? I misunderstood it.
Thomas J. Czelusta: Well, one of the things that the federal rule does that we have been doing differently up until now is the issue of casualty loss awards.
John Paul Stevens: Right. That's what it was, yes.
Thomas J. Czelusta: That right now, although we have moved to change our rule, if a car is destroyed, we treat the insurance payment as a resource, assuming that the person is going to replace the car.
John Paul Stevens: But they require you to treat it as income now.
Thomas J. Czelusta: But the Secretary says not to the extent that it is earmarked and used for the purposes for which it was intended, so if it comes in intended to replace the car and they go out and replace the car, then the only difference between our rule now and the Secretary's new rule is that we are going to have to ask for receipts and actually go out and see the car.
John Paul Stevens: Oh, I see.
Thomas J. Czelusta: That is the only difference between the two rules.
John Paul Stevens: Is there any change in the treatment of the medical expenses and the... that you up to now have treated as resource rather than income? You deduct... as I understand it, in a personal injury award you deduct medical expenses and things of that... attorneys' fees, and treat them as... or just take them out of the calculation entirely?
Thomas J. Czelusta: Well, the money will have been spent by that point in time in paying those medical bills, and--
John Paul Stevens: And that still will be the same under the new--
Thomas J. Czelusta: --Yes, that remains the same.
Sandra Day O'Connor: --Well, but future medical bills will not have been expended.
Thomas J. Czelusta: Correct.
Sandra Day O'Connor: And is it the federal policy that governs on treatment of future medical bills?
Thomas J. Czelusta: It is in the statute now.
Thurgood Marshall: How about drugs?
Thomas J. Czelusta: As I said before, Justice O'Connor, that would shorten the period, so we would disqualify them initially for a period, and then they have the right to come back in and reapply and produce these bills and say, I have incurred these medical expenses, or my husband has absconded with the money, or I had to avoid an eviction, and then we would recalculate the period and shorten it. To be sure that Congress used the word "income" and did not define it, respondents maintain that the word "income" should be interpreted according to its plain and ordinary meaning. The word, however, just simply does not have a singular plain and ordinary meaning. It is rather a concept within which there are different definitions depending upon the context in which the word is used and the result intended to be achieved. Indeed, if a plain and ordinary definition exists at all, it is a broad one which includes all that comes in, and represents an increase in an individual's economic power, and in fact this is the judgment of the Seventh Circuit Court of Appeals in Watkins versus Blenzinger. We believe if the Court examines the purposes and goals to be achieved through the rule and its legislative history the Court will conclude that Congress intended the word "income" to be a broad one. The administration in proposing the rule to Congress repeatedly described the rule in terms of a large sum of money and gave us such examples, inheritances, insurance settlements, and retroactive Social Security benefits. Congressional documents, both staff and committee, repeatedly describe it in similar terms. The statute that was enacted by Congress was enacted virtually identically to that proposed to it by the administration. It expressed no disagreement with it and made no exceptions to it. We believe that if Congress intended to restrict the definition of income it could have very easily done so.
Byron R. White: Well, it could have used some other word than "income", too.
Thomas J. Czelusta: Certainly.
Byron R. White: Ordinarily you wouldn't think that tort recoveries are income, would you?
Thomas J. Czelusta: Again, I think--
Byron R. White: I mean, just in a--
Thomas J. Czelusta: --It depends, I think, on who you are--
Byron R. White: --if you just weren't reading the Social Security Act you wouldn't think that was income.
Thomas J. Czelusta: --It depends on who you talk to. I think if you talk to a lawyer or an accountant they are going to respond from that background. If you talk to the person next door who has seen their neighbor all of a sudden have money to spend and say, did they receive income, I think they would acknowledge, yes, they did receive income.
Byron R. White: Well, I know, but the people who wrote the law weren't just ordinary neighbors. They were... they were writing... the people who wrote it, I suppose, knew what they were talking about when they used the word income.
Thomas J. Czelusta: But even within a technical legal context the word does have different meanings, depending upon that context and the resultant end to be achieved. I would wish to reserve the balance of my time for rebuttal. Thank you.
William H. Rehnquist: Thank you, Mr. Czelusta. We will hear now from you, Mr. Nager.
Glen D. Nager: Mr. Chief Justice, and may it please the Court, as counsel for petitioners noted, this case presents a question concerning the meaning of the term AFDC part of the Social Security Act. Specifically, the question is whether the Secretary is reasonably determined that states may treat and how should treat personal injury or workers' compensation awards as income--
Sandra Day O'Connor: Mr. Nager, it has already been discussed this morning that for a good many years the Department left it up to the states to decide whether to treat it as income or a resource.
Glen D. Nager: --Yes, Justice O'Connor. That's correct.
Sandra Day O'Connor: Now, why the change?
Glen D. Nager: The change arises out of the Secretary's examination of the purposes Congress was trying to promote in amending the statute in 1981. If I might back up a little, prior to 1981, when there was no lump sum rule, whether a nonrecurring receipt in the form of a personal injury award or a worker's compensation award was characterized as a resource or as income did not have a significant effect because however it was characterized in the second month it would be characterized as a resource, and if the assistance unit still had the money from the award they would be ineligible for benefits under the resource--
Sandra Day O'Connor: Yes, but if they had spent it that was all right, and the government, the Secretary left it up to the states--
Glen D. Nager: --Right, and the--
Sandra Day O'Connor: --and then all of a sudden there was a change.
Glen D. Nager: --Yes. Justice O'Connor, the rationale for leaving it up to the states prior to 1981 arises out of two elements. The first element is, the practical effect was, these are not recurring events, they are single time events, and so we were only talking about one month's worth of benefits, and secondly, the Court... we would ask the Court to keep in mind that the AFDC statute is one that this Court has termed based on cooperative federalism. It is a statute that states participate in at their option, and when they choose to participate they in fact provide part of the money. They administer the program on a day to day basis, and the statute is replete with options given to the states in making decisions about how the program should be run, most importantly setting the level of need and the level of benefits--
Sandra Day O'Connor: Well, the point is, they have no option any more, and I am wondering if the statute requires that interpretation.
Glen D. Nager: --No, Justice O'Connor, the Secretary's position is not that the statute mandates the personal injury awards and workers' compensation awards be treated as income. Rather, the purposes behind the lump sum rule specifically that Congress was concerned with cutting the cost of the program, encouraging large payments of money to be budgeted, are furthered by treating workers' compensation awards and personal injury awards as income and thus that facilitates what Congress was trying to achieve in amending the statute in--
Sandra Day O'Connor: So you rely or the Secretary relies on some power to enact regulations to further the overall purposes of the statute?
Glen D. Nager: --Yes, Justice O'Connor, Congress--
Sandra Day O'Connor: It isn't just an interpretation of the statute that we are considering?
Glen D. Nager: --It is a exercise of the Secretary's delegated authority under the statute to interpret the statute. Congress in 42 USC 1302 delegated rulemaking power to the Secretary and throughout the AFDC part of the statute instructs that the Secretary will interpret the provisions of the statute and be responsible for administering them. In that capacity the Secretary prior to 1981 determined that the purposes of the statute would be furthered by leaving this particular type of monetary receipt to the option of the states as to whether or not it should be treated as income or as resources, and after 1981 examined the pattern of the states' response to the 1981 amendment and the purposes that Congress was trying to further in the 1981 amendments and thus in 1984 issued the notice of rulemaking proposing that personal injury and workers' compensation awards and other similar types of nonrecurring lump sum receipts would be treated as income.
Antonin Scalia: Is it a policy judgment, or is it an interpretive judgment?
Glen D. Nager: Well, it is an interpretation of the statute, Justice Scalia.
Antonin Scalia: I would think so, and all you are saying is, it was no big deal before '81. It wasn't necessary to interpret it one way or another. It didn't make a whole lot of difference, and the Secretary had other things to do. It became very important later to know just what the interpretation of this was, and then he came up with this... that's what I thought had happened, anyway.
Glen D. Nager: I couldn't have put it more succinctly. The Secretary believes that his interpretation is reasonable. By looking at the language and the legislative history of the statute the states get no guidance as to whether or not these items should be treated as income or as resources. It is common ground among the parties that the statute does not define the term "income" and does not state either in specific terms or in general terms whether or not personal injury and worker's compensation awards should be treated as resources or income. Respondents have not been able to point to anything in the legislative history which shows that Congress intended to exclude these types of payments from the income calculation, and so what we have is a classic case of where Congress has created the general framework, mandated that the states shall take into account any income and resources, and then not define the term, left the interstices of the statute to be filled in by those who administer the statute, in this case the Secretary and the states. In doing that, the Secretary, guided by what is left available to him, which is the purposes Congress was trying to promote, has on a case by case basis looked at the receipts that a family can receive and determined in his judgment whether or not those were the types of receipts that Congress intended to have included in the income calculation as to whether or not they would further the purposes of the statute.
Sandra Day O'Connor: Mr. Nager, now, under the food stamp program, which also is designed to help these same people, these things aren't treated as income, these personal injury awards.
Glen D. Nager: Justice O'Connor, I quibble with your premise that these programs are designed to help the same people. In fact, the food stamp program is available to a broader group of people. The AFDC statute is really designed as a statute of last resort, and I can give two reasons for that, at least two examples of why that is true. First of all, food stamps are in kind benefits. The only thing the recipient can do with them is get food with them, whereas the AFDC program is a cash grant statute, and Congress has defined the group of people eligible in the AFDC program more narrowly than the group of individuals eligible for food stamps in the food stamp program. In addition, as we pointed out in our brief, the food stamp program has a rather all-inclusive definition of income and then has an express exclusion for personal injury and worker's compensation awards, and that express exclusion is absent in the AFDC part of the statute. The Court of Appeals gave three reasons for refusing to defer to the Secretary in this case. Its first reason was that it equated the concept of income with profit or gain. It said that profit or gain is the plain and ordinary meaning of the term "income", and thus the Secretary has adopted an unreasonable interpretation of the statute. We pointed out in our brief one can look at a variety of dictionary and sources, and we looked at the ones the respondents pointed out, and the term "income" is defined in various ways, profit or gain, gross receipts. In fact, in this Court's decision in Heckler versus Turner there are several references to the term "income" as being a broader concept than the narrower term "earned income", and in fact in several places refer to income as meaning gross receipts. The second reason the Court of Appeals gave for treating personal injury... for refusing to defer to the Secretary was that the Court of Appeals looked to other statutes. The food stamp statute that Justice O'Connor has pointed out and the Internal Revenue Code, and in those statutes Congress has excluded by express provision personal injury or worker's compensation awards. The Court might have looked at the SSI program where Congress has defined the term SSI program to include personal injury awards. We just don't think that the interpretation of the AFDC program can be controlled by the decisions Congress has made in other statutes. Rather, we have to look at the purposes and provisions of the AFDC statute, and as counsel for petitioner has noted and which I would briefly summarize, the purposes of the AFDC statute are promoted by treating worker's compensation and personal injury awards as income. Now, the final reason that the Court of Appeals gave for refusing to defer to the Secretary was, it found inequitable that the Secretary allowed the state to treat personal injury awards as income, and yet casualty losses as resources, and said that that violated the Secretary's own equitable treatment regulation. The Secretary has resisted that throughout the litigation, because since the Secretary gave the option to the states to treat personal injury awards or worker's compensation awards as either income or resources, the state was merely acting pursuant to an option that the Secretary gave the states, and the Secretary does not believe that when a state acts pursuant to an option given by the Secretary that the state can be violating the Secretary's own equitable treatment regulation at the same time. Thus we would ask that the judgment of the court below be reversed. Unless the Court has further questions.
William H. Rehnquist: Thank you, Mr. Nager. We will hear now from you, Ms. Hanken.
Jill A. Hanken: Mr. Chief Justice, and may it please the Court, Virginia and the Secretary of HHS reject the fundamental concept in our common law that a personal injury award only makes the victim whole. It does not enrich. There is no gain. But Virginia treats a personal injury award as income, and as a result parents and children who are the victims of accidents are disqualified from the AFDC program. Because Virginia's standard of need is so low, even modest awards result in disqualifications of months or years. For example, a $2,000 award paid to a mother with two children in Richmond will disqualify the family for more than six months.
Antonin Scalia: The family has money to buy their necessities during that six months, right? Why is that unusual? If you regard this as a statute to help people who don't have money, not a statute to replace a person's arm if he is unfortunate enough to lose it, the fact is that the person has the money, regardless of how the money was come by, right?
Jill A. Hanken: It is true that the person has money, but the purpose of that money is to compensate the individual for the injuries that have been suffered, and the problem is that the regulations make no provisions for the family to use the money for the purpose that it is intended.
Antonin Scalia: Let's assume an individual gets a multi-million dollar personal injury award, multi-million dollar. The person is a millionaire now. Your contention here is that it is somehow contrary to the purpose of AFDC if the state did not continue to pay this millionaire AFDC every month because of the manner in which that money was acquired? That doesn't strike me as obvious.
Jill A. Hanken: Congress did not intend for multi-million dollar personal injury award that is compensatory to be treated under the lump sum rule. As a resource that money would disqualify the family for many months... would disqualify the family for as long as they still had the money, and they would have to spend the money, and the agency would look to see how the money was expended to make sure that there was fair value received in return for the expenditures. And only when the family had $1,000 left could they return to the program and receive AFDC benefits. In reality, our clients have not received multi-million dollar payments. They have received personal injury awards of $1,000. A disabled father received $10,000 after being struck by a car. And the rule is not intended to apply as broadly as you say. The lump sum rule was a very small part of the OBRA amendments. Of $1 billion that was to be cut from the AFDC program, the lump sum rule was expected to save just $5 millions, and only 5,000 families of the three and a half million families receiving AFDC were to be disqualified from the program. The fact that Virginia is applying this rule too broadly can be seen in these numbers because Virginia only has 1.6 percent of the ADC case load nationwide. Thus under Congressional estimates only 80 families would have been disqualified under this rule if implemented as Congress intended. Instead, the District Court found that 400 families a year have been disqualified under Virginia's rules, five times the amount... the number of people who are expected to be disqualified under the provision, and the reason that so many people have been disqualified under this--
Antonin Scalia: Expected according to whom? According to the statute?
Jill A. Hanken: --The Congressional estimates at Page 76 of the Joint Appendix. The estimate is that 5,000 families would be terminated from the program--
Antonin Scalia: That is not in the statute, though.
Jill A. Hanken: --No.
Antonin Scalia: That is an estimate of whom? Of whom? An estimate of whom? Who made the estimate?
Jill A. Hanken: That is in a Congressional... one of the reports prepared by HHS to Congress estimating the--
Antonin Scalia: Is it in a committee report? Does it appear in a Congressional committee report? Or is this just what HHS told a committee? Do we know that Congress was relying on that when they passed the statute, is what I am asking.
Jill A. Hanken: --Well, that was the amount of savings expected from this particular rule change, and it appears in the OBRA amendments and the final calculations of fiscal savings to be achieved under the various rules. In Virginia alone, 400 families a year are terminated under this lump sum rule because they are applying the rule to far more receipts than ever intended by Congress.
Antonin Scalia: Where is this, Ms. Hanken? You are looking at it there.
Jill A. Hanken: In the Joint Appendix, 76.
Antonin Scalia: Thank you.
Jill A. Hanken: And this is a Committee on Ways and Means report estimating the number of families removed from the rolls and the expected impact on the budget. These committee reports also indicate that Congress knew that the new rule was not going to be applied to all payments of money. Throughout the committee reports Congress said that the new rule was to apply to payments that meet the definition of income, and throughout the reports the single example of income was retroactive Social Security benefits, which is--
Lewis F. Powell, Jr.: May I interrupt you just for a minute?
Jill A. Hanken: --Yes.
Lewis F. Powell, Jr.: How would you classify punitive damages?
Jill A. Hanken: I would classify punitive damages as a gain, as this Court did in the Glentrell Glass case, and since there is a gain it would be more properly classified as income.
Lewis F. Powell, Jr.: Although they are not compensatory.
Jill A. Hanken: They are not compensatory at all, and therefore could be properly used by the family for future subsistence living expenses.
Lewis F. Powell, Jr.: But you would call them, such damages income?
Jill A. Hanken: Yes. Yes, Your Honor. But as Justice White mentioned earlier, there is an obvious definition of income. As this Court has found when looking for a common sense definition of income, there is a requirement of gain or profit, and that is the definition that has been consistently followed by this Court and has been referred to as the obvious or the natural meaning of income. The definition of income that is used in common speech, and of course in looking at 602(a)(17) we must look at the natural and common sense definitions of the words used by Congress. Congress did not intend to apply the rule to all payments of money. Even the Secretary still says that if a house is sold, and certainly a large amount of money is received in return for that, the money is a resource, and the money can be spent in any way the family needs to, and spend it down, and requalify for benefits under the program. The system here creates an inequity between persons who receive personal injury awards and people who receive property damage payments. To this day Virginia still treats as a resource money paid for property damage. So if a car or refrigerator is either sold or damaged, the money paid in return is a resource.
Antonin Scalia: They are not allowed to do that, though, are they? I thought that the federal rule now would not permit that, but Virginia just hasn't gotten around to revising its rules to conform to the federal rule.
Jill A. Hanken: That is true if the new federal regulation is valid.
Antonin Scalia: Well, okay, but your argument assumes that the federal regulation is valid. So that inequity does not exist under what the Secretary is arguing for here.
Jill A. Hanken: Even under the new regulation there still is an inequity because if the car refrigerator is damaged and money is paid in return, the family can replace the car or refrigerator and return to the program. But the person who receives a personal injury award has no opportunity to use that award for the purpose it is intended. Let's look at a pain and suffering award. The family cannot make any expenditure to ease pain and suffering. The parent can't buy toys for the sick child. The family cannot buy a television for the bedridden person. You couldn't weatherize your house to make it warmer. Mr. Long couldn't buy a used car to help him travel after his injury. The family can't set aside any funds for future burial expenses, which is allowed by Congress in the statute as a way to prepare for the future.
Sandra Day O'Connor: How about prosthetic devices or prescribed drugs or anything of that sort?
Jill A. Hanken: Your Honor, any medical expenses paid with the award would be deducted from the lump sum amount and the length of disqualification could be shortened. The problem, though, with that is, when the family receives the award they are told that you are ineligible for this program for months or years into the future. And the family may not even get the medical care they need because they know they have to let the money last. And the other problem is, some future medical expenses may be needed beyond the disqualification period after the money is already gone, so the family doesn't have the ability to even get the kind of medical attention that they require as a result of the injuries, and in that respect they can't use the award for the purposes that it was intended, and have no ability to ease their pain and suffering to make their lives more comfortable or better. Some of the injured persons may want to go to additional educational courses or training.
Antonin Scalia: There may also be a lot of people who can't get on the AFDC rolls right now because the level to quality is too low. And more of those people might be allowed on if the kind of benefits that are paid to those who are on are reduced to some extent. I mean, there are hardships on both sides. We are talking about an absolute amount of money that has to be distributed somehow, and the Secretary has said, these people have money. We can't replace the arm or the leg or whatever is lost. This is a program to give people money who don't have it. These people have money. Now, there are others in the program who don't have money. I would rather spend the money there. Why isn't that a reasonable determination? I mean, it could have gone the other way.
Jill A. Hanken: It is not--
Antonin Scalia: There is hardship on all sides.
Jill A. Hanken: --Well, it is not reasonable because when Congress enacted this statute in 1981 it did not change the definition of income in the AFDC program. There has been a long standing distinction between income and resources, and Congress was aware of that distinction in 1981. In fact, in the same year--
Antonin Scalia: It was aware that Virginia was using this definition in 1981, wasn't it?
Jill A. Hanken: --Your Honor, in 1981, at Page 23 of the joint appendix. Virginia's pre-OBRA regulation treated all lump sums except for Social Security retroactive benefits as a resource. The money was compared to resources, as it should be.
Antonin Scalia: What about other states? Was there no state that was taking advantage of the discretion given them by the Secretary to treat this?
Jill A. Hanken: There is no evidence in our record that any state was using an option, and in fact the documents referred to by the Secretary and Virginia are all post-OBRA documents discussing an option, and even if there was an option just by the pure definition when your house burns down or is sold, the money is a replacement. The money... the nature of the resource does not change. The money is a resource. And the same is true when a body is injured. Our bodies are priceless commodities, and money that is paid in substitution for our bodies is compensatory. It is an exchange. It is a conversion of one resource for cash money. It is a fundamental concept in our common law that--
John Paul Stevens: Well, Ms. Hanken, isn't it... it also is true that in many personal injury cases you have a very significant element based on loss of earnings that you project the earning capacity in the future, and so forth and so on. Isn't that perhaps subject to a different analysis than the pain and suffering part of your argument?
Jill A. Hanken: --Yes, it is true that personal injury awards may include an aspect of lost earnings or lost earning capacity, but most of these situations are settled, and the settlements won't delineate between that portion of the award that is for lost earnings capacity and the portion that is for pain and suffering.
John Paul Stevens: No, but it is certainly true, though, that a person who has a substantial salary gets a bigger settlement than a person who has a lower salary, even though the injury is precisely the same, so that it certainly must be part of the settlement figures as well as the awards made by juries and judges.
Jill A. Hanken: That is true. Many of our victims are children, where lost earnings or earning capacity won't even be an issue, and in any case, just like the Internal Revenue Code exempts personal injury awards without trying to figure out what part of it is to replace lost earnings or earnings capacity, the money--
John Paul Stevens: See, that kind of cuts against you a little bit, because Congress did it expressly there, didn't they?
Jill A. Hanken: --There is an express exemption in the Internal Revenue Code that exempts personal injury awards. However, that exemption was based on a long history of departmental rulings by the Internal Revenue Service that took the position that personal injury was not income in the first place, and that is consistent with the opinions of this Court which find consistently that in order for income to be received there must be a gain or a profit, and in the Glenshaw Glass case, this Court said a personal injury award is compensatory only. There is no gain. It is not income in the first place.
Antonin Scalia: There is also an explicit exception in the food stamp program, isn't there?
Jill A. Hanken: That's true.
Antonin Scalia: It is set forth explicitly that these things are not covered.
Jill A. Hanken: Yes. The Secretary has consistently been shifting its position, keeps changing his mind what the scope of the lump sum rule is. His latest interpretation, which is found in Footnote 4 of his reply brief, demonstrates the extreme to which the Secretary has gone in interpreting this rule. Now the Secretary says that a house or a car is sold, that the money received in return is a resource, but if the home is burned in a fire or the car is wrecked in an accident, that money is income, and the rationale given by the Secretary even though in his proposed new regulations and his final regulations adopted in March in the preamble he said that there could not be any rationale for distinguishing between large payments of money, he is still distinguishing between large payments of money, and now the house which is sold is a resource, but if it is damaged it is income. This makes no sense. It is illogical and it is irrational. It doesn't have anything to do with the definitions of income and resources in the Social Security Act, and it doesn't have anything to do with what Congress intended in adopting the new income rule in 1981. To put a greater value on homes or cars than on our own health and well-being is illogical. The children and the parents in this case--
Antonin Scalia: Excuse me. What about a gift? Is that... what is the ordinary meaning of income? What would somebody think of a gift? Would somebody regard a gift as being--
Jill A. Hanken: --A gift would be like a gain, and would therefore fall under the common definition of income.
Antonin Scalia: --You think an average person would consider a gift to be income? I don't know that that is so. My point is, don't you acknowledge that the Secretary has to have some authority to give some meaning to income? It isn't self-evident what... even if you say this particular item you think is self-evident, is it your contention that the word "income" is a word that the Secretary has no authority to interpret because it is self-evident what it means?
Jill A. Hanken: No, but the Secretary does not have the ability or the authority to interpret the word "income" in a way that is contrary to what Congress intended.
Antonin Scalia: You are saying its entire meaning is not self-evident, but at least it is self-evident that it includes recoveries for personal injuries.
Jill A. Hanken: It does not include recoveries--
Antonin Scalia: I'm sorry, right.
Jill A. Hanken: --It does not include recoveries for personal injuries.
Antonin Scalia: I wasn't trying to trick you. 0 [Generallaughter.]
Jill A. Hanken: And by using the historical definition of income, accumulated benefits, retroactive Social Security payments, which has always been treated as income... throughout all of the documents of HHS that has always been viewed as income... that would alone have been enough to take care of the $5 million savings and the 5,000 families across the country. It is very common for families on AFDC to receive a retroactive Social Security benefit when a child's parent becomes disabled or dies and survivors' benefits or disability benefits are paid, and this as the core concern of Congress in 1981, and by sweeping more and more items into the definition of income and interpreting the rules in the illogical ways that the Secretary is, they are just going too far. The parents and children in this case have already suffered the indignity of an injury caused by another. The policies add insult to their injuries by terminating their sole source of support for months into the future, long after the money is gone. The policies urged by Virginia and the Secretary make it impossible for the family to use the personal injury award for the purposes intended. They can't use the money to ease their pain and suffering nor to set aside funds for future needs. The policy amounts to a disincentive for the victims of wrongdoing to seek redress. Here only the tort fees are benefits, because the families, knowing that the money is going to have to be used for subsistence income support, will simply not file these cases. The rule is very harsh. As I have said, our standards of need are so low that disqualifications of months and years are not uncommon when a lump sum payment of money is received. Our standards are sadly out of date, and they recognize only half of what a family needs to live. So this makes it essential that the rule is limited to the scope envisioned by Congress. They use the word 602(a)(7)(b) of the Social Security Act. This means that Congress affirmed that a family does not have to relinquish all of its goods of value in order to receive AFDC benefits. Throughout this litigation, for the five years since OBRA was enacted, both the Secretary and Virginia have not treated all payments of money as lump sum income. They have recognized that when money represents a resource it should be treated as a resource, and the Secretary still says that as far as selling a resource goes, that the money is a resource and could be spent as the family chooses, as the family needs to. The family does not have to purchase another house. Instead, the family could purchase... put a down payment on a house and buy a car, or put aside money in a savings account, purchase burial contracts, and reallocate resources in the way that they see fit for their family.
Antonin Scalia: Ms. Hanken, you surprised me earlier because it was not my understanding when you said that the practice among the states as far as you know when OBRA was enacted was uniformly to treat these things as resources rather than income. The reason I had the opposite impression was a passage which I found in the Secretary's brief which says that the practice among the states was varied in 1981, and he gives a citation for that. Now, I didn't go back and look up the citation. Did you? And is it wrong?
Jill A. Hanken: There isn't evidence in our record that the practices of states was varied. The Secretary--
Antonin Scalia: You don't need testimony on that, do you. I mean, couldn't you give us a citation to the Federal Register? It was a Federal Register cite. I didn't look it up. Did you?
Jill A. Hanken: --The Federal Register cite at that point in the Federal Government's brief is one of the post-OBRA cites, a preamble used to explain its shifting of interpretation.
Antonin Scalia: But does that... that preamble at least does say that the practice among the states at the time of OBRA was varied +/?
Jill A. Hanken: That's true. That is what the preamble says.
John Paul Stevens: --May I ask you another question? Your argument earlier about the projection in the hearings of 5,000 families and in fact the 1.6 percent that Virginia represents turned out to be much larger, did you make that argument in your brief? I missed it.
Jill A. Hanken: No, I did not, Your Honor.
John Paul Stevens: You did not, so they haven't responded to it yet.
Jill A. Hanken: No, they haven't. But the expected cost savings and the number of families affected is part of the record.
John Paul Stevens: It is in the record.
Jill A. Hanken: And in public documents Virginia's share of the national case load can easily be found.
John Paul Stevens: I see.
Jill A. Hanken: It is essential that the rule here is limited to the scope envisioned by Congress. It hasn't been applied by Virginia or Secretary to all payments of money because Congress didn't intend them to.
Antonin Scalia: Excuse me. You also didn't set forth in your brief the argument that the practice amount the states was uniform at the time OBRA was enacted, did you?
Jill A. Hanken: Your Honor, I don't take the position that all states' practices were uniform. I am saying that I don't know, that in Virginia in a lump sum payment was compared to the resource level except for a lump sum that represented accumulated gain. And that was Virginia's pre-OBRA policy.
Antonin Scalia: Did you contest the Solicitor General's statement in your reply brief that practice among the states was varied? I mean, the reason I ask is, that is an important point to me, and it seems to me that you should make your argument at a point were the SG has an opportunity to respond to it, not in oral argument after he has made his presentation and has no opportunity. It leaves me unable to decide the issue on the basis of what is in front of us.
Jill A. Hanken: Well, even if the practices of states was varied, and it is true that prior to 1981 the distinction between income and resources, while separate and different, it was not nearly as important as the distinction today in terms of how the two are treated. In 1981--
John Paul Stevens: No, but you make a point that the Congress presumptively knew what the practices were, and if they were different the presumption cuts one way and if they are the same it cuts the other way.
Jill A. Hanken: --Well, the one thing that Congress knew is that the only consistent definition of income was accumulated benefits, the retroactive Social Security awards, and that has been the definition of income for many years by HHS, and that was the concern of Congress in adopting this new income rule. But it was not supposed to apply to all payments of money. It never has, according to Virginia and the Secretary's policies, and it still doesn't, even under the Secretary's new rule, which was promulgated, adopted in its final form after Virginia's petition for certiorari was filed in a form that was much different than the proposed regulation. They are trying to assist themselves in this litigation through their regulatory powers, and are virtually eliminating the distinction between income and resources in the AFDC program which has been in place for decades and which Congress did not change in 1981. Congress did change the treatment of income and did lower the allowable resource level, but it did not change the definitions of those terms, so the Court should give those terms their common sense definitions, and when you do so, personal injury awards will not fall into the income category. Instead, personal injury awards will be what they are, compensatory for injuries suffered. Every penny of the award represents an actual loss. There is no gain. We urge you to affirm the judgment of the Fourth Circuit.
William H. Rehnquist: Thank you, Ms. Hanken. Mr. Czelusta, you have one minute remaining.
Thomas J. Czelusta: Mr. Chief Justice, and may it please the Court, if the Court has any questions, I will answer them.
John Paul Stevens: Yes, do you have an answer to the 5,000 argument?
Thomas J. Czelusta: Ms. Hanken is wrong on the figures. If you look at the District Court's decision the figures that we came up with, it was only 231 cases a year, not 500.
John Paul Stevens: I see. Thank you.
Thomas J. Czelusta: If the Court has no further questions, I have no further rebuttal.
William H. Rehnquist: Thank you. The case is submitted we'll stand in recess until one o'clock.


Earl Warren: Number 645, United States, Petitioner versus the Equitable Life Assurance Society of the United States. Mr. Rifkind.
Robert S. Rifkind: Mr. Chief Justice, may it please the Court. This case is here on writ of certiorari to the Supreme Court of the State of New Jersey. It brings once again to this Court an aspect of the recurring problem of the relationship of the federal tax lien to conflicting state created liens. The question here arises from the application of a state court rule, which you may find in page 19 of our brief, which provides that in mortgage foreclosure actions, an allowance for an attorney's fee determined as a stated percentage of all sums adjudged to be paid the plaintiff, mortgagee, shall be included in the tax costs of the action and paid to the mortgagee out of the proceeds of the foreclosure sale. The question presented is whether the court below was correct as a matter of federal law in holding that the mortgagee is entitled to recover, not only his principle in interest, but also the attorney's fee ahead of a federal tax lien which had attached after the mortgage but subsequent to the default which led to the foreclosure -- but before the default which led to the foreclosure, I'm sorry. The facts from which the controversy arise are not complex. In December 1960, respondent Equitable Life Assurance Society loaned one Albert Bagin and his wife $30,000 to be repaid at 6% interest over a period of 28 years. To secure repayment, Equitable received a mortgage covering real estate owned by the Bagins. The mortgage was properly record in the next few days. Second and third mortgagees were subsequently conveyed to other mortgagees but are not directly involved here. More than a year later, in March 1962, the United States filed notice of the federal tax lien against Bagin. The lien secured a liability for $7700 in unpaid taxes. The lien arose under provisions of the Internal Revenue Code upon the assessment of the tax liability under Section 6321, which is at page 17 of our brief. It was a lien in favor of the United States upon all property and rights to property belonging to the taxpayer. And under Section 6323, the lien was not valid as against any mortgagee, pledgee, purchaser or judgment creditor until notice was prompt -- properly filed. Such notice was filed on March 21, 1962. A year later, on March 1, 1963 the Bagins for the first time defaulted on their monthly payments to Equitable. After that default, it continued for more than 30 days, Equitable exercised its rights under the mortgage to declare the principal sum and unpaid interest immediately due. And on June 4, 1963 Equitable filed a complaint in the Superior Court of Bergen County seeking foreclosure of the mortgage. The United States was named as a defendant in that action and summoned to answer the complaint. In its answer, the United States conceded that the principle and interest on Equitable's mortgage was prior to the federal lien, but denied that the federal lien was subordinate to any claim Equitable might acquire to counsel fees. On motion for summary judgment, the Superior Court held that the federal tax lien was junior to the claim for principal and interest under the mortgage but senior to Equitable's claim for counsel fees and that any counsel fee awarded should be allowed in a surplus money proceeding. The court thought that this conclusion was required by this Court's decision recently in United States v.Pioneer American Insurance Company. Equitable appealed the appellate division and while the case was pending there the appeal was certified to the New Jersey Supreme Court on that court's own motion. The Supreme Court reversed. It held that the Equit -- that Equitable was entitled to priority over the federal lien not only for its principal and interest and costs but also for its counsel fee under the rules of the New Jersey courts. That fee had in the meantime been determined to be 425 odd dollars. Because the total claims exceeded the net proceeds of the foreclosure sale, the practical immediate consequence of the decision was to reduce the Government's recovery on its $7700 tax lien from $491 to $66. This Court has long recognized that the uniform application of the federal tax law and the protection of federal revenues requires that state determinations of the relative priority of federal tax liens must meet federal standards. It implies no disrespect to the states to recognize as this Court has that in the absence of federal standards, the inevitable and natural tendency of the states would be to give precedence to state created liens running in favor of local real estate taxes, various municipal assessments as was the case in New Britain and Buffalo Savings Bank, or local commercial interests, all of which hit closer to home. Accordingly to avoid the unequal application of the federal tax laws and to protect federal revenues from being whittled away, the court has evolved the general rule that whatever may be the priorities among state created liens, a recorded federal tax lien is subordinate to all previously perfected liens and superior to all subsequent and inchoate liens. A corollary of that rule is that subsequently perfected liens do not relate back to the time of their creation to defeat federal liens perfected in the interval. This doctrine represents an elaboration of a principle dating back to Chief Justice Marshall that first in time, is first in right. Now the Court had occasioned to apply this general principle to facts quite similar to those presented here in the Pioneer American Insurance Company case three years ago. Pioneer involved a mortgage that provided in terms that a reasonable attorney's fee shall be added to the principle sum and shall be secured by the instrument in the event of foreclosure. The Court held that where federal tax liens were accorded after the mortgage, after default, after the commencement of the foreclosure proceedings but before the entry of judgment fixing the amount of the attorney's fees such tax liens were entitled to priority over the lien for counsel fees. The Court likened the mortgagee's lien for counsel fees to a lien to secure future indebtedness, which had been held inchoate in United States v. Ball Construction Company. The Court concluded that likewise when a mortgagee has a lien for an attorney's fee which is uncertain in amount and yet to be incurred and paid, such a lien is inchoate and is subordinate to the intervening federal tax lien filed before the mortgagee's lien for the attorney's fee matures. Now, it is unquestionably true that there are points of difference between the present case and Pioneer. Several of them, I think, show that this is a much stronger case. Nevertheless as the court below stressed, the precise percentages set forth in the New Jersey rule given apparent definiteness to Equitable's claim for counsel fees which was not supplied by the relatively and definite provision for a reasonable attorney's fee --
William J. Brennan, Jr.: Mr. Rifkind (Voice Overlap) --
Robert S. Rifkind: -- in Pioneer's mortgage. Sir --
William J. Brennan, Jr.: Were there other allowances of tax costs in addition to the attorney's fee under this rule?
Robert S. Rifkind: Yes, there were some 200 odd dollars of normal tax cost, court fees and so on.
William J. Brennan, Jr.: And what's the Government's position as to that?
Robert S. Rifkind: The Government has never disputed that normal tax costs which are definite amount which are paid generally speaking to court officials as a toll for using the court have precedence over everything.
William J. Brennan, Jr.: Are these -- are all this whole 200 and 80 odd dollars, are they definite?
Robert S. Rifkind: They are certainly as definite as things can be in the -- in life. There's a $10 fee for that and a $50 fee for that. In addition, and I don't mean to mislead you, there are expenses of the sale. The Sheriff who conducts the sale gets a percentage of the proceeds, but we're talking here about the net proceeds of the sale rather than the gross proceeds. You have to hire a hall perhaps to accommodate the people who want to bid.
William J. Brennan, Jr.: And what is the distinction between the tax cost which the Government concedes as priority and this tax cost from the way of -- a fixed percentage for counsel fees?
Robert S. Rifkind: Well, there is -- there's first of all the historical difference that we have always recognized or generally recognized in the United States, in this Court, throughout the states that there is a difference between counsel fees as cost which may or may not be allowable, generally are not, and the fees paid into court to clerks and so on for services provided by the court. And that distinction is not foreign to the New Jersey courts. Only shortly before this case was decided, the Supreme Court wrote in United States-Pipe & Foundry -- the Supreme Court of New Jersey wrote in United States-Pipe & Foundry, which is cited on page 14 of our brief that cost generally comprise principally certain statutory allowances, amounts paid the clerk in fees and various other specified disbursements of counsel, including sheriff's fees, witness fees, deposition expenses and printing costs. Counsel fees, although if allowable, are included in the tax costs are an entirely different matter. So this isn't a noble notion to the -- even to the New Jersey courts.
Hugo L. Black: Well, entirely (Voice Overlap) --
Abe Fortas: Mr. Rifkind.
William J. Brennan, Jr.: -- matter in what way?
Robert S. Rifkind: I'm sorry?
William J. Brennan, Jr.: Entirely different but I know that they set an entirely --
Robert S. Rifkind: Yes.
William J. Brennan, Jr.: -- different matter, but in what way are they an entirely different matter?
Robert S. Rifkind: That -- they took a much more restrictive view of the circumstances under which those might possibly be allowed.
William J. Brennan, Jr.: As tax costs?
Robert S. Rifkind: As tax costs.
William J. Brennan, Jr.: As I understand it this rule specifies so that everyone knows in advance only as to those apply X percentage to some figure, doesn't he? He knows what the counsel fee is?
Robert S. Rifkind: That's right, if you know the amount of the judgment to be allowed.
William J. Brennan, Jr.: Well, you can't know that until the sales end.
Robert S. Rifkind: You can't know that until judgment.
William J. Brennan, Jr.: But you do know that it's going to be an X percent.
Robert S. Rifkind: That's right.
William J. Brennan, Jr.: Fixed percentage of that -- right.
Robert S. Rifkind: But certainly when the federal lien arose you didn't know what it was going to pay you. There is also the fact --
Byron R. White: (Inaudible) it is really is rather hard on the principle to distinguish here, this cost from attorney's fees, isn't it Mr. Rifkind?
Robert S. Rifkind: Except I think on the theory which in a way the Court adopted in Pioneer that there is a difference between something reimbursement for an amount paid into court or state court officers as a toll for judicial process, and something paid to your adversary for his lawyer who is representing him in an adverse relationship.
Byron R. White: And as a matter of fact it's probably kind of harder to distinguish between this attorney's fees, isn't it, be in interest, isn't it?
Robert S. Rifkind: No, I think not. There is no --
Byron R. White: Well, how do you know how much or even the principal? How do you know what principal is going to be ahead of your lien?
Robert S. Rifkind: You certainly don't know at any time the dollar figure, but the crucial --
Byron R. White: You mean, you don't (Voice Overlap) --
Robert S. Rifkind: That is when the federal lien arises, you don't get (Voice Overlap) --
Byron R. White: Do you think you know what the outside figure, is that it?
Robert S. Rifkind: No, but the point is that the counsel fee problem is contingent and inchoate in a much more fundamental sense. You know that principal and interest are going to be returned that the principal is going to be -- is to be returned. The liability has arisen. With respect to counsel fees the liability which the lien is designed to secure has not occurred until default.
Byron R. White: And do you take the same position on the other amounts that have -- under a mortgage that aren't either principal or interest but nevertheless is secured from the mortgage taxes, do you -- is that your position?
Robert S. Rifkind: With respect to taxes that the mortgagee might pay?
Byron R. White: Yes, if the mortgagee pays.
Robert S. Rifkind: Well, we've certainly taken the position consistently and the court has supported us in that view that if the mortgagee pays taxes after a federal lien arises and those taxes themselves, state taxes, would be junior to the federal lien that the recompense for the amounts paid out are not senior to the federal lien.
Byron R. White: How about insurance?
Robert S. Rifkind: Insurance presents a more difficult question. If -- it depends upon what the insurance is to cover. If the insurance is merely to cover --
Byron R. White: (Inaudible) insurance?
Robert S. Rifkind: Yes, if it's -- but the question is how much. If it's merely designed to secure the mortgagee's interest then it's of no value or interest to the United States to help them (Voice Overlap) --
Byron R. White: And so, (Voice Overlap) -- so you say the federal lien is a -- once it's filed is prior to any subsequent insurance payment.
Robert S. Rifkind: Any subsequent advances, that's right. I would --
Byron R. White: And life insurance the same way?
Robert S. Rifkind: I'm not sure I think of how life insurance would come into play, but I -- but the general rule is that --
Byron R. White: Private insurance, its (Inaudible), are you?
Robert S. Rifkind: That all advances made subsequent to the falling in the -- or of the attachment of the federal lien have to be subordinate under the general rule, first in time is first in right.
Byron R. White: Well, how about the open-ended mortgage on -- for future advances with an outside limit placed on in the mortgage?
Robert S. Rifkind: The Court has taken the view in a long series of cases that a security for future advances does not give priority when those advances occur after the federal lien arises. The --
Byron R. White: This is because it's of inchoateness?
Robert S. Rifkind: Because of inchoateness, because -- well, in a sense there's a very practical problem here. We live in a society that the local expression is in hot. People are borrowing credit all the time. If you didn't in some way say these types of security arrangements we're going to recognize, but security arrangements for everything in the future we're not going to recognize, it's simply be no way for a federal lien to attach to anything in most cases. You could suppose an assignment, indeed it's not unheard of, as -- of all future wages for all future credit to be extended that embraces everything.
Byron R. White: Oh, but take the same position in this case that the attorney's fees was in a dollar amount, $150 for each attorney's fees.
Robert S. Rifkind: Specified in the mortgage or in the lien or in the rules?
Byron R. White: Or right in the mortgage, yes, $150 of attorney's fee.
Robert S. Rifkind: It still remains the fact that at the time the federal lien attached there was no reason to believe at all that foreclosure would take place, the default would take place.
Byron R. White: That's (Voice Overlap) --
Robert S. Rifkind: That was a remote contingency.
Byron R. White: That's the same with regard to the principal.
Robert S. Rifkind: But until default -- until the Equitable has to go into court, it doesn't incur a liability. It has incurred the liability for the principal and it's entitled to the price of its money which is interest.
William J. Brennan, Jr.: Well, I would say --
Robert S. Rifkind: It's that --
William J. Brennan, Jr.: -- liability for cost apart from counsel fee.
Robert S. Rifkind: I'm sorry, I didn't --
William J. Brennan, Jr.: The liability for costs which you concede --
Robert S. Rifkind: That's right.
William J. Brennan, Jr.: -- are prior to the Government lien are not incurred either until Equitable went into court
Robert S. Rifkind: Perhaps --
William J. Brennan, Jr.: And at the time of the lien, I gather on the facts of this case, there wasn't any suggestion of a default. That all happened later.
Robert S. Rifkind: That's certainly true, and --
William J. Brennan, Jr.: So, that -- is that -- that all these -- that's why I have trouble understanding what on principal how you distinguish those costs that you concede superior to the Government lien under this case.
Robert S. Rifkind: Well, perhaps there is an inconsistency.
William J. Brennan, Jr.: Perhaps what?
Robert S. Rifkind: Perhaps there is an inconsistency.
William J. Brennan, Jr.: Perhaps?
Abe Fortas: Mr. Rifkind --
Robert S. Rifkind: But there has been -- there is the feeling that these are small, they're de minimis.
Speaker: Sort of a comity to the state.
Robert S. Rifkind: And there's an element of comity to the states. It's going to state officers.
William J. Brennan, Jr.: Where do we find that in the statute?
Robert S. Rifkind: You don't.
Abe Fortas: As I read your brief Mr. Rifkind, I thought the brief said that the Government acquiesced in the special treatment given to the court cost and things like that. And I gathered from it, perhaps quite wrongly, that the Government's position is that you have a statutory and logical right to assert your priority even with respect to court costs, the cost of administration. But that the Government has acquiesced on the principle of de minimis or state committee or whatnot. Now from what you're saying now, and I think it perhaps I drew the wrong inference from your brief.
Robert S. Rifkind: Well, although I'm sure is that the problem hasn't arisen and therefore we've never been forced to an election or its determination that this is a matter of grace on the part of the Government --
Abe Fortas: -- if --
Robert S. Rifkind: -- or rise (Inaudible).
Abe Fortas: That's possible, but the other possibility it asserts, arisen right here.
Robert S. Rifkind: The counsel fee?
Abe Fortas: Yes, but the question of reconciliation of the law as a general matter, and that's why I'm asking you to put it another way. Is it your position that the Government could assert the priority of its lien as against court cost, as against cross of administration etcetera, but then it does not do so for whatever reason, comity or de minimis or whatnot? Or is it your position that there is logical and legal distinction between attorney's fees even where they're fixed in amount in the mortgage or by statute on the one hand and the other types of costs on the other hand? I really think, as far as I'm concerned that tentatively I think I have to know the answer to that question.
Robert S. Rifkind: Well, I think logically we -- under the decisions up to date and what little one can get out of the statute, we should be entitled to say no costs of any sort. I think a distinction can be drawn nonetheless between the two types of costs which perhaps eases the inevitable frictions between state and federal governments and which the Treasury has been willing to draw, and which I hope they will continue to draw because it makes life much simpler. But I think as a logical matter, we should be able to insist on cost in their entirety.
Abe Fortas: Although you --
Robert S. Rifkind: I'm -- I wish should be entitled to priority to cost -- over cost in their entirety.
Byron R. White: You might lose though, aren't you?
Robert S. Rifkind: That's possible. Returning briefly to the supposed precision of the percentages supplied by the court rules, I just want to emphasize that there are many circumstances in which the sums adjudged to be paid can be varied by factors other than the accrue interest and principal, which therefore would affect the sums adjudged to be paid and therefore protect --
William J. Brennan, Jr.: I've forgotten this rule Mr. Rifkind. Is this a -- is it graduated?
Robert S. Rifkind: Yes it is. Its --
William J. Brennan, Jr.: Yes.
Robert S. Rifkind: -- 1%, 1.5%, 3% over some amount, but there are -- they are taxes, there is insurance, there're all sorts of things which might or might not have priority over the federal claim which nevertheless expand or contract the attorney's fees. And I think the allu -- the impression of precision is really a little illusory.
Speaker: What did you say in answer to Justice White's question, (Inaudible) no attorney's fees, fixed amount that the Government (Inaudible) the Government's position?
Robert S. Rifkind: The Government's position would still be that at the time the federal lien attached, the --
Speaker: (Inaudible)
Robert S. Rifkind: The fee was contingent.
Hugo L. Black: But no more contingent than the cost?
Robert S. Rifkind: Than the costs, the court costs, that's true. Now there is an important distinction which -- between Pioneer and this case which I think also is worthy of some note and it bears on this problem of contingency, because after all in Pioneer by the time the federal lien was reported defaults had occurred, the mortgagee had elected to declare the note due and payable, an attorney had been engaged and a suit to foreclose the mortgage had been filed. There was no doubt in Pioneer that the attorney's fee was to be incurred. The -- some uncertainty as to the amount, it hadn't actually been incurred but there was really no contingency that it would be con -- incurred. In the present case, all of those events were in the unforeseeable, unpredictable future. A year was to go by after the federal lien was recorded before the default occurred which precipitated the foreclosure which led ultimately to the allowance of an attorney's fee. If Pioneer's lien was like a lien to secure future indebtedness even though the lawyer whose fee was involved was already hard at work, here, the degree of futurity, the element of contingency is much more marked. The fact is that Equitable's lien, if there was a lien at all, was entirely contingent because the events which would lead to the liability which the lien would secure had not occurred and might never have occurred.
Earl Warren: Mr. Hoak.
Frank W. Hoak: Your Honors. I would like to address first to the statements which Mr. Rifkind made concerning the ability of the Government to say that we should not be entitled to any cost. To his statement in answer to Chief -- Justice White's question about the $150 counsel fee and his statement that if there was a lien at all. These answers, I believe that he has presented, indicate a misconception of the -- what a mortgagee's lien is. It is a different lien from the lien of the Government at the time that the Government's tax lien arises, there has been a demand for payment of taxes and a refusal of payment then the assessment is made, the Government's tax lien arises. The taxpayer has default. He's in default at the time the lien arises. A mortgagee's lien arises at the time that the mortgagor and the mortgagee enter into a contractual relationship whereby the mortgagor agrees to repay alone. We don't know at any time when or if the mortgagor will default. If he defaults, our courts or our legislatures or both, have said that the only recourse we have to realize anything out of our mortgage lien is to foreclose the mortgage in a judicial proceeding. The only way we get anything, principal, interest, costs, advancement, anything we want, the only way we get it is to commence the foreclosure action after default. Carry that foreclosure action through to a share of sale and have the actual purchase price paid to the sheriff, our lien is then extinguished. That's when we get paid. That's when our lien becomes meaningful. If our lien is taken away from us prior to that time we have known. I believe that the real question in this case concerns the 1913 Act of Congress which stated that a federal tax lien shall not be valid as to any mortgagee until notice is filed. In the light of the Pioneer case, I believe that that statute should now be read that a federal tax lien shall not be valid as to all choate rights of mortgagees until notice is filed. And the question that is presented to us today is how we are to determine the choate rights of a mortgagee. Commencing in 1950, this Court has decided almost a dozen cases involving competition or the choateness of state created liens on real property of taxpayers who are not insolvent. In all of these cases except Pioneer, the liens were for municipal taxes, attachment liens or mechanics liens. In all of these cases -- although some of these cases other than Pioneer started these mortgage foreclosure actions, the liens which this Court considered were not held by the foreclosing mortgagee, and that each of these cases other than Pioneer, the United States disputed the entire lien with the competing lien holders. In Pioneer however, and in this case, the competing lien was and is held by the foreclosing mortgagee and his mortgage had been recorded long prior to the Government's federal tax lien. In either of these cases however, has the Government chosen to dispute our entire lien, is probably because if it had chosen to do so it would have had to justify its position in the light of this 1913 Act of Congress. And that Act did not apply to these other cases in which the United States had disputed the entire lien. In order to avoid this position, this unfavorable position, we believe that the Government made the lists of all rights of mortgagees. And some of Your Honors have discussed some of these items. I would like to mention a few of them very briefly. Although the Government concedes that principal is choate, it is not difficult to describe a mortgage in which the principal would not be choate. There would be no objective standard by which to measure the amount it would be due to the mortgagee that the mortgagor should default. In such a case, the principal of the mortgage would be every bit as inchoate until judgment is entered as the counsel fee is in -- was in Pioneer. The interest is even more inchoate. Interest and counsel fee in New Jersey are computed in exactly the same manner. For that matter, the sheriff's commissions are also computed in the same manner. But the am -- the actual dollar amount of our counsel fee is fixed at the time the judgment is entered in the foreclosure action. The actual dollar amount of both the interest and the sheriff's commissions are only determined at the end of the foreclosure proceeding, after judgment, execution and levy, after sheriff's sale and payment of the purchase price to the sheriff. Regarding to the item of cost, the Government has not chosen to dispute sheriff's cost, sheriff's commission and tax costs other than counsel fees on the grounds that these items are usually de minimis, fixed in amount and constitute reimbursement for some state over to state officials. However, we have reviewed a number of our foreclosure actions in which the principal balances exceeded $10,000. We have found that the overall cost of foreclosure ranged from 5% to 9%. The counsel fees which they have chosen to dispute have accounted for only 1 1/2 to 2 1/4%, and they have ranged in amount from $250 to $550. The other costs exclusive of counsel fees have ranged from $750 to (Inaudible) -- $1800.
Abe Fortas: Well, those counsel fees are less than the statute provides, isn't that right? You say there had been a study that you made, counsel fees were less than 1%.
Frank W. Hoak: They were --
Abe Fortas: In your state (Voice Overlap) --
Frank W. Hoak: -- 1 1/2 to 2 1/4% of the principal balance. The percentages 3%, 1 1/2%, 1% are applied to the amount that is adjudged to be due the plaintiff. That would also include an amount of principal that was due up to the time we field her affidavit of the amount due on the defaulted loan.
Abe Fortas: I'm sorry, just to clear this up for me, you are saying that your study did not disclose its fee, counsel less than the statutory --
Frank W. Hoak: No sir. They were the exact amounts computed by the standing (Inaudible).
Earl Warren: Mr. Hoak, does your case depend on the distinction that we might make between statutes that provide reasonable attorney's fees on the one hand and a statute on the other hand that provides for a percentage of the amount due?
Frank W. Hoak: Yes sir, I think that the --
Earl Warren: That you'll -- it depends upon that issue that (Voice Overlap) --
Frank W. Hoak: Yes sir.
Earl Warren: Yes.
Frank W. Hoak: There must be a -- an objective standard by which to measure a competing lien. If there is an objective standard by which it can be measured at the time that the notice of the federal tax lien arises, then the lien is choate. If at least -- if we are a lien holder who is protected by the 1913 Congressional Act, in order to give any meaning to this Act, we must look at the lien that we are dealing with. And as I've stated, a mortgagee's lien, default is insignificant. We never know when that will happen. So that if we -- if at the time the Government files its notice we can take any of our rights and just assume a date to which the interest will be computed and determine what the facts might -- the relevant facts might be. But make only that one assumption. If we can compute a fictitious but definite sum then I would say that that item is choate. That we can do with the New Jersey counsel fee. That we can not do with the Arkansas' counsel fee in Pioneer. Pioneer was correctly held to be inchoate. I think New Jersey's counsel fee should definitely be held to be choate otherwise we can not give substantial meaning to this 1913 Congressional Act.
Byron R. White: I take it you are somewhat dissatisfied with the whole choateness concept however as applied to mortgages.
Frank W. Hoak: As applied to mortgages, yes sir Your Honor. I do believe that choateness if it is defined is a very helpful tool. I think in New Britain, you defined it in the general sense that under the property, that under the lien or -- and fixed in amount. But this item of fixed in amount has not been defined certainly as to a mortgagee. If we had a definition of this choateness in relation to a mortgagee, the general definition that could be applied to each right as it arises then I think we could avoid a lot of our problems with the United States Government.
Byron R. White: What do you do in New Jersey with regard to a second mortgagee? There are some states, I know from experience, in which the first mortgagee may not collect attorney's fees as against the second mortgagee from foreclosure when there is a -- not enough to pay both liens. And the question is how much the second mortgagee gets? The first mortgagee may not have out of the property as attorney's fee, even though it's reserved in the mortgage even in a specific amount.
Frank W. Hoak: That is not the rule in New Jersey. In fact in this case, we had a priority adjustment fund equal to the amounts exclusive of counsel fees due to the first and second mortgagees. The first mortgagee obtained the amount of the counsel fee at the expense of the second mortgagee. So that the second mortgagee is actually the person who is out $425 (Voice Overlap) --
Byron R. White: The rule is otherwise some other places, you know (Inaudible) -- but how about the -- how about future advances as against the second mortgagee?
Frank W. Hoak: We are entitled to -- well, when we get into the question of future advances that --
Byron R. White: I don't want to take all your time on it.
Frank W. Hoak: There is a distinction I think sometimes made between whether there's a legal liability to make the advance or not. We can get them under certain circumstances and others we could not. The only other thing that I think I would like to say Your Honor, is this, that I do believe that we can get a much more satisfactory relationship in this field and settle a lot of the questions before coming up to this Court if we have a general definition to be applied.
Earl Warren: Mr. Rifkind.
Robert S. Rifkind: Mr. Chief Justice, I just like to make one or two very short points. As counsel for Equitable pointed out, the question of fixed in amount as spelled out in New Britain has not been spelled out in great detail. But one thing ought to be very clear, if you can't tell whether the amount is something or another, as was the case here, it certainly not fixed in amount. In this case, we're not talking about whether it was $10 or $12 or $100. At the time the federal lien attached we didn't know where there was any dollars and in fact it might well and in the normal course of things would've been nothing. The respondent also faces great reliance on the 1912 or 1913 Act of Congress, which it says Cong -- in which it says Congress impended to protect a wide variety of interests pertaining to the mortgagee. Now the 1912 Act, which is now Section 6323, simply provides that until recorded the federal tax lien should be invalid as against mortgagees as well as against a variety of other people. And it seems quite clear that it was designed simply to protect against the secret lien. And as a matter of fact, the committee reports deal largely with the problem of the purchaser who doesn't know that a lien is attached to his property. But there is reason to suppose that it intended to protect every device for augmenting a mortgagee's security against prospective risks whenever they might ripen into liabilities that mortgagee's lawyers could device. Indeed as this Court pointed out in Pioneer, Congress did not intend to purport or did not purport to affect the time at which local liens were deemed to arise or to become choate or to subordinate the tax lien to tentative, conditional or imperfect state liens. Clearly when the federal lien arose here, Equitable's lien if there was one at that point was at best tentative conditional and imperfect. Finally, I'd like to point out one other attribute of the New Jersey rule and of similar rules in a few other states that provide court counsel fees. It seems to me, although I have not investigated the legislative history of many of these rules, that they were designed principally not to augment the mortgagee's reach, but rather to restrict it. They were designed to prevent overbearing. They were designed to prevent overreaching and they did it by saying, as New Jersey says, no counsel fee shall be allowed no matter what the mortgage says except as provided. And that's -- the theme runs through the several states that have such arrangements. They were not designed to make integral to the mortgages property right as the Equitable would suggest. Some new claim but were designed to restrict overreaching on the part of creditors. I don't think that gives a right that the Congress intended to protect at least until the time the liability arises. Thank you.
Earl Warren: Very well. We'll --