GILLES v. CALIFORNIA DEPARTMENT OF HUMAN RESOURCES DEVELOPMENT

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Court of Appeal, Third District, California.

Hubert GILLES et al., Plaintiffs and Appellants, v. CALIFORNIA DEPARTMENT OF HUMAN RESOURCES DEVELOPMENT et al., Defendants and Respondents.

Civ. 13768.

Decided: April 27, 1973

S. M. Rosenzweig, Stephen B. Berzon, Legal Aid Society of Alameda County, Oakland, Daniel S. Brunner, Legal Aid Foundation of Long Beach, San Pedro, Jeffrey L. Kastner, Southeast Legal Aid Center, Compton, for plaintiffs-appellants. Evelle J. Younger, Atty. Gen., by Raymond Momboisse, Deputy Atty. Gen., Sacramento, for defendants-respondents. J. Richard Glade, Sacramento, for Unemployment Ins. Assn. Charles P. Scully, Donald C. Carroll, San Francisco, amicus curiae Cal. Labor Federation, AFL-CIO in support of appellants.

In this class action plaintiffs brought suit for an injunction to prohibit defendants from attempting to collect unemployment insurance overpayments. The trial court sustained defendants' demurrer and denied the request for an injunction. Plaintiffs appeal from the judgment of dismissal, contending:

1. Unemployment Insurance Code section 1375 prohibits the collection of plaintiffs' overpayments.

a. Collection plaintiffs' overpayments violates equity and good conscience.

b. Collecting plaintiffs' overpayments by the offset method of recovery violates equity and good conscience.

c. The state's justification for recouping plaintiffs' overpayments does not make recovery consistent with equity and good conscience.

2. The Social Security Act prohibits the collection of plaintiffs' overpayments.

In general, this class action challenges the defendants' attempt to recoup unemployment compensation benefits from unemployed workers who have been found to be without fault in the receipt of benefits. The benefits were paid following favorable eligibility determinations which subsequently were proved upon employer appeals to have been made in error.

After an initial eligibility investigation by the department or a hearing by a referee of the board, plaintiffs were found eligible for unemployment benefits.1 Plaintiffs' former employers appealed these eligibility decisions. In accordance with the Supreme Court's ruling in California Dept. of Human Resources v. Java (1971) 402 U.S. 121, 91 S.Ct. 1247, 28 L.Ed.2d 666, unemployment benefits were continuously paid pending such appeals.

Prior to Java, unemployed workers in California eligible for benefits did not receive payment if an employer filed an appeal except in certain circumstances. (See Unemp.Ins.Code, § 1335 [prior to Oct. 1971 amendment].) Mainly, benefits were paid pending an appeal only where a referee sustained a departmental determination of eligibility.2 The Court in Java held this statute to be in violation of the Social Security Act. (See 42 U.S.C., §§ 501–503.)

In particular, the court found that ‘the interview for the determination of eligibility is the critical point in the California procedure.’ (402 U.S. at p. 127, 91 S.Ct. at p. 1352, 28 L.Ed.2d at p. 671.) It then held that ‘the California procedure, which suspends payments for a median period of seven weeks pending appeal, after an initial determination of eligibility has been made, is not ‘reasonably calculated to insure full payment of unemployment compensation when due.’ [42 U.S.C., § 503(a)(1)].' (Id. at p. 133, 91 S.Ct. at p. 1355, 28 L.Ed.2d at p. 675.)

After the decision in Java, the Legislature amended section 1335 of the Unemployment Insurance Code to read as follows: ‘If an appeal is filed, benefits with respect to the period prior to the final decision on the appeal shall be paid only after such decision, except that:

‘(a) If benefits for any week are payable in accordance with a determination by the department irrespective of any decision on the issues set forth in the appeal, such benefits shall be promptly paid regardless of such appeal.

‘(b) If a referee affirms a determination allowing benefits, such benefits shall be promptly paid regardless of any appeal which may thereafter be taken, and regardless of any action taken under Section 1336 or otherwise by the director, Appeals Board, or other administrative body or by any court.

‘If such determination is finally reversed, no employer's account shall be charged with benefits paid because of that determination.

‘(c) If benefits for any week are payable in accordance with a determination by the department, or a referee issues a decision allowing benefits, such benefits shall be promptly paid regardless of any appeal. If the determination of the department or the decision of the referee is finally reversed, no employer's reserve account shall be charged with benefits paid pursuant to this subdivision.’ (Matter italicized added by Stats.1971, ch. 1107, § 64.)

After the enactment of this amendment, plaintiffs were paid benefits pending their employers' appeals. At the same time, however, plaintiffs were notified that if their eligibility decisions were found to be erroneous on appeal, they would be required to repay the benefits.

After delays of weeks or months, the determinations of eligibility were found to be in error, and plaintiffs were assessed overpayments for the amounts paid pending appeal. Plaintiffs appealed the department's attempt to recoup these payments. In some instances referees held that plaintiffs were not at ‘fault’ in the receipt of benefits (see Unemp.Ins.Code, § 1375), and thus the payments could not be recouped.

However, on July 27, 1971, the board issued a ‘Precedent Benefit Decision’ in the matter of Herbert Gilles.3 In Gilles, the board reversed a referee's decision which waived an overpayment of benefits, holding that the payments were subject to recoupment under section 1375 of the Unemployment Insurance Code, which reads: ‘Any person who is overpaid any amount as benefits under this part is liable for the amount overpaid unless:

(a) The overpayment was not due to fraud, misrepresentation or wilful nondisclosure on the part of the recipient, and

‘(b) The overpayment was received without fault on the part of the recipient, and its recovery would be against equity and good conscience.’

The board, in so ruling, held that the claimant Gilles satisfied the first two tests of the statute but not the third (i. e., the ‘equity and good conscience’ test). In its decision, the board states:

‘The definitions of ‘equity’ and ‘good conscience’ seem to intertwine and lead us to believe that the terms are substantially synonymous and pertain to some moral right or obligation, rather than any legal concept.

‘In the instant case the claimant is not entitled to the benefits he received and he was put on notice that the money would have to be repaid if the case was reversed on appeal. It does not appear that he has any legal or moral right to the money.

‘Accordingly, we find that it is not against equity and good conscience to require the claimant to repay the benefits. In fact, we have previously held in Appeals Board Decision No. P–B–47 that to charge the fund, by waiving repayment of benefits that a claimant is not entitled to, would be unjust and a detriment to the public at large.

‘We conclude that the referee erred in waiving the overpayment.’

As a result of the Gilles decision, plaintiffs are now liable for overpayments. The department has two methods of recoupment: (1) filing a civil action for the recovery of the amount of the overpayment; or (2) offsetting the amount of the overpayment against any amount of unemployment benefits or disability benefits to which the recipient subsequently becomes entitled. (Unemp.Ins.Code, § 1379.)

Plaintiffs contends that collecting their overpayments violates ‘equity and good conscience’ as that phrase is used in section 1375 of the Unemployment Insurance Code.

Plaintiffs argue the decisional law establishes that plaintiff unemployed workers may not be held liable for the state's administrative errors4 without violating equity and good conscience. (See Claim of Sapp (Idaho—1954) 75 Idaho 65, 266 P.2d 1027, 1031; cf. Austin v. Campbell (Ariz.—1962) 91 Ariz. 195, 370 P.2d 769, 776.)

Plaintiffs mainly rely upon Western Etc. Lbr. Co. v. Cal. Emp. Com. (1943) 58 Cal.App.2d 403, 137 P.2d 76.5 In Western unemployed workers were found eligible for benefits by a referee on their appeals from initial departmental findings of ineligibility. The commission (now the board) affirmed the decisions of the referee and benefits were paid. The recipients' employers then brought an action in mandamus to compel the commission to set aside its ruling of eligibility and take such steps as may be proper to make the unemployment fund whole. The commission apparently conceded that its eligibility decisions were in error, but refused to take action to recover benefits previously paid. (Id. at pp. 406–407, 137 P.2d 76.) The lower court ruled in favor of the employers and ordered the commission to recoup the benefits. On appeal, the court reversed and held that the benefits could not be recouped by the state.

There is some language in Western which tends to support plaintiffs' position. For example, the court states (at pp. 413–414, 137 P.2d at p. 81): ‘Ordinarily it certainly must be conceded that when money is collected upon an erroneous judgment, which subsequent to the payment of the money is reversed, both equity and good conscience irresistibly dictate the legal conclusion that the money belongs to the person from whom it was collected. But in the instant case we are confronted with a situation wherein the legislature concluded, as stated by the supreme court in the case of Abelleira v. District Court of Appeal [17 Cal.2d 280, 100 P.2d 942], supra, at page 299, 100 P.2d 942 ‘on the basis of normal experience that the large majority of the administrative orders will be proper, and that to permit this justifiable and necessary payments to be postponed for long periods would defeat the objectives of the act.’ . . . [I]f as stated by the Supreme Court in Abelleira v. District Court of Appeal, supra, such mandatory and authorized payments cannot be stayed pending judicial review because to do so would in effect practically nullify one of the prime objects and purposes of the law, then surely it must be said that if such payments are coupled with the obligation on the part of the beneficiary to make restitution in the event of a later reversal of the commission's decision by the courts, an equally great or greater hardship would be visited upon the claimant than would ensue from a long postponement of benefits under a stay order pending ultimate decision on appeal. Again, as stated by the Supreme Court in Abelleira v. District Court of Appeal, supra, at page 298, 100 P.2d 942, ‘The very essence of the act is its provision for the prompt payment of benefits to those unemployed.’ We can find no warrant in the act for the assumption that the legislative purpose and intent was to do anything except what would alleviate the suffering occasioned by involuntary unemployment by making payments during the existence of such condition even though the validity of such payments might be in the process of debate in the courts, and that it was not intended to visit upon the unemployed beneficiary of the fund the burden and responsibility of refunding such payments if it was later determined that the commission, although acting in good faith, has misinterpreted the law.'6

However, the Western case is somewhat of an enigma. Previous to the language just set forth, the court had apparently decided the case on the basis that the code provisions for recoupment had been repealed. (Id. 58 Cal.App. at pp. 410–411, 137 P.2d 76.) But near the end of the opinion, the court states (at p. 414, 137 P.2d at p. 82): ‘The repeal of the sections which conferred power of recoupment and to which we have heretofore alluded gives strength to the conclusion just announced . . ..’ Since the pertinent sections have been repealed, we question whether Western is authority for plaintiffs' position.

Plaintiffs contend the legislative intent indicates recoupment is unwarranted in the situations present here. They argue that section 1380 of the Unemployment Insurance Code,7 in effect, codifies the decision in Western, and indicates a legislative intent to waive overpayments that arise from the payment of benefits pending an employer's appeal. However, Java created a new class of unemployed workers, a class which the Legislature could not foresee. They contend all of the reasons for protecting section 1380 beneficiaries apply equally to plaintiffs, the only difference being that plaintiffs received benefits upon a single rather than a double determination. They conclude that since the recoupment of plaintiffs' overpayments frustrates the legislative purposes of the unemployment compensation program (see California Dept. of Human Resources v. Java, supra, 402 U.S. at p. 135, 91 S.Ct. 1347, 28 L.Ed.2d at p. 676; Abelleira v. District Court of Appeal (1941) 17 Cal.2d 280, 298, 100 P.2d 942), it violates ‘equity and good conscience.’ (Unemp.Code, § 1375.)

Plaintiffs also note that In re Gilles marked a change in defendants' interpretation of ‘equity and good conscience’ and constitutes an unwarranted return to a position specifically rejected a decade earlier. They contend that Java in no way changes the legislative intent to waive overpayments. This does not necessarily follow, however, for Java did change a long-standing administrative practice.8 Further, the legislative intent goes to ‘double affirmance,’ and not the single type of affirmance we are dealing with here.

Plaintiffs contend that collecting over-payments by the offset method of recovery also violates equity and good conscience. They ague by depriving unemployed workers of new benefits or which they unquestionably have been found eligible, offsets deny recipients the sustaining funds that are necessary both to keep them off the welfare rolls and to stabilize the economy. (Cal. Dept. of Human Resources v. Java, supra, 402 U.S. at pp. 131–132, 91 S.Ct. 1347, 28 L.Ed.2d at p. 442.)

Plaintiffs next contend that the state's justification for recouping plaintiffs' overpayments does not make recovery consistent with equity and good conscience. They first argue that the mere provision of notice cannot make recoupment that would otherwise be against ‘equity and good conscience’ consistent therewith. To hold to the contrary would allow defendants to recoup overpayments in every situation and thereby circumvent section 1375. Moreover, plaintiffs argue that the use of a notice form to obtain a waiver from recipients is contrary to Unemployment Insurance Code section 1342, which provides, inter alia, that ‘Any waiver by any person of any benefit or right under this code is invalid.’

Secondly, plaintiffs aver the sole interest of the state in shifting the cost of its errors is to protect the integrity of the unemployment fund. They then state: ‘However, the cost of waiving plaintiffs' overpayments is de minimis when compared with the surplus of the Fund, a mere .1%.’

Plaintiffs also argue that no significant employer interests are affected by permitting plaintiffs to retain their benefits. They acknowledge that the amount of taxes assessed against an employer under the code does vary with the number of his former employees who are properly paid unemployment benefits. Nevertheless, they contend that should an employer prevail on appeal, either at the referee level or before the board, his reserve account is relieved of all charges for benefits paid his former employee pending appeal. (Unemp.Ins.Code, §§ 1335, 1380.) Plaintiffs conclude from this that ‘equity and good conscience’ dictate that the unemployment fund, rather than unemployed workers, absorb responsibility for defendant's errors.

Finally, plaintiffs contend the Social Security Act prohibits the collection of plaintiffs' overpayments. State unemployment compensation programs must ‘be reasonably calculated to insure full payment of unemployment compensation when due . . ..’ (42 U.S.C. § 403(a)(1).) Plaintiffs contend that the wording of the federal statute as interpreted by the court in Java, compels the aforesaid conclusion.

With this background and the contentions raised by plaintiffs in mind, we turn to the principal issue raised by this case: Does collecting plaintiffs' overpayments violate equity and good conscience when there has been but a single affirmance as to the entitlement to benefits and plaintiffs were put on notice that in the event of a reversal on appeal plaintiffs were liable to repay such overpayments?

At the outset, it must be kept in mind that we are here dealing with the single affirmance situation. Under our existing state laws, there is no finality in such a situation. (Cf. Unemp.Ins.Code, § 1380 [no recipient liable for overpayment where double affirmance].) Thus, cases such as Western and Abelleira are of no help in determining the precise question presented.

Nor does Java (as contended by plaintiffs) provide the key. Java did interpret the ‘when due’ provision of the federal law and thereby overturned a long-standing administrative practice. The court there, however, was not concerned with recoupment. In accordance with the dictates of Java, defendants changed their administrative procedure to pay claims promptly. They also instigate a form to give recipients notice of possible liability in accepting benefits. This form of notice states the applicable law in situations of single affirmance and, in our opinion, is not coercive or against ‘equity and good conscience.’

Also, and apparently in line with the Java decision, the Legislature amended section 1335 of the Unemployment Insurance Code, to allow for prompt payment of benefits after a single affirmance (i. e., a favorable determination by either the department or a referee). It is significant, however, that the Legislature did not also expand section 1380 to provide for waiver in single affirmance situations. Nor did the Legislature modify or alter the hearing procedure with regard to questioned claims. The question thus arises—why have a hearing procedure in cases of this type if a claimant can collect benefits regardless of the outcome? We think the foregoing negates any legislative intent to waive overpayment in single affirmance situations such as presented here.

The critical question thus appears to concern the true meaning of ‘Equity and good conscience’ as used in section 1375. As noted by the trial court, the search for the legislative history of this section has been unrewarding.9 The term is an elusive one.10 Surely, however, the term does not mean that only the retention of benefits under the facts of this case satisfies ‘equity and good conscience.’ (Cf. Burrow v. Finch (8th Cir. 1970) 431 F.2d 486, 491, fn. 5.)

Placed in context of the entire statutory scheme, the term is more readily understood. Plaintiffs herein fall into the single affirmance category. There is no provision in the state law for waiver under those circumstances. Although Java stated that payments must be promptly paid ‘when due,’ the court did not address itself to recoupment of benefits erroneously made. Under new departmental directives, claimants were notified of their possible liability if it were determined they were not eligible for benefits. The burden of proving that recovery of overpayments would be against equity and good conscience is generally upon the overpaid beneficiary. (Burrow v. Finch, supra.) As noted by the trial court, ‘once paid, always paid’ is not the rule in this state and, in fact, is contrary to the statute. (Unemp.Ins.Code, § 1380.) Under these circumstances, we hold that the collection of overpayments does not violate equity and good conscience. By the same token, we do not find that the offset method violates such standard. (See Dorozinski v. Review Board of Indiana Emp. Sec. Div. (Ind. 1951) 121 Ind.App. 367, 98 N.E. 911, 912.)

The judgment is affirmed.

FOOTNOTES

1.  Plaintiffs' employment was terminated by their employers for alleged misconduct.

2.  In this ‘double affirmance’ situation, unemployed workers did not have to repay benefits in the event a favorable eligibility decision subsequently was reversed on a further employer's appeal. (Unemp.Ins.Code, § 1380.)

3.  No. P–B–113. Section 409 of the Unemployment Insurance Code specifically authorizes the board to ‘designate certain of its decisions as precedents.’

4.  In this connection, the trial court in its memorandum and order comments: ‘the petitioners argue that the respondent was at fault for making the overpayments. But the respondent was no more at fault in making the overpayment than the petitioners were for asking for them.’

5.  See discussion in 5 A.L.R.2d 860, 862.

6.  Abelleira involved ‘double affirmance’ and therefore is distinguishable from the instant case. (See Unemp.Code, § 1380.)

7.  Section 1380 reads:‘No person shall be liable for the amount of benefits received where the benefits were paid pursuant to a referee's decision which affirmed an initial determination or in accordance with a final decision of the Appeals Board, regardless of any further appeal. An employer's experience rating account shall not be charged with any benefits erroneously or unlawfully paid.’

8.  The trial court, in its memorandum and order, commented, on this argument as follows:‘The petitioners' argument based on respondents' chance in the administrative construction of § 1375 is not persuasive. Following Calif. Dept. of Human Resources v. Java, 402 U.S. 121 [91 S.Ct. 1347, 28 L.Ed.2d 666] (1971), which changed more than thirty years of administrative practice, the other administrative practices also had to be changed. If they were not changed, there might have been no recovery in any case of payments later determined on administrative appeals to have been overpayments. Indeed, it seems that this is the result petitioners are attempting to reach—once paid, always paid. This is plainly contrary to the statute. Un.Ins.C. § 1380.‘Since the petitioners have not met the burden of showing that recovery would not violate equity and good conscience, since the fault, if it be that, of the respondent in making the overpayment does not prevent recovery, and since the administrative practice seems reasonable in the light of the changed conditions brought about by Java, the petitioners cannot prevail.

9.  In its memorandum and order the court states:‘My own search for legislative history of Un.Ins.C. § 1375 has been as fruitless as that of counsel. It is only possible to conjecture that it was derived from the Social Security Amendments of 1939, now 42 U.S.C. § 404(b). The latter, in turn, seems to have been derived from § 28 of the World War Veterans Act, 43 Stats. 615 (1924), now 38 U.S.C. § 3102, relating to overpayments by the Veterans Administration.’Title 42, U.S.C., § 404, subdivision (b), provides:‘In any case in which more than the correct amount of payment has been made, there shall be no adjustment of payments to, or recovery by the United States from, any person who is without fault if such adjustment or recovery would defeat the purpose of this subchapter or would be against equity and good conscience.’

10.  In 20 C.F.R., § 404.509, relating to employers' benefits ‘against equity and good conscience’ is defined. Under that section, recovery is considered inequitable if an individual because of a notice that such payments would be made or by reason of the incorrect payment, relinquished a valuable right or changed his position for the worse.There is nothing in this case to show that plaintiffs could have qualified under this definition.

REGAN, Associate Justice.

RICHARDSON, P. J., and GOLDSTEIN, J.,* concur.