Low-Income Tenant Victorious in Lawsuit Preventing Housing Authority From Counting Distributions From Special Needs Trust As Income

An aged, low-income tenant with disabilities recently prevailed in a lawsuit filed against the Santa Monica Housing Authority, which had incorrectly increased her monthly rent by counting as income money received in a settlement and deposited into a Special Needs Trust. Sheila Finley v. City of Santa Monica, Case No. BS – 127077 (Superior Court of California, May 25, 2011).

Petitioner Sheila Finley is a 64-year-old, disabled resident of the City of Santa Monica with low income and resources who is a participant in the Section 8 voucher program funded by the U.S. Department of Housing and Urban Development (HUD) and administered by the Santa Monica Housing Authority (SMHA). Under HUD’s Section 8 voucher program, a tenant’s share of rent is limited to 30 percent of the tenant’s total income. In 2008, Finley settled personal injury and workers’ compensation lawsuits she filed against a former employer. In 2009, Finley received the proceeds from settlement of the lawsuits in the amount of $47,800 which were deposited in a special needs trust (SNT) created by the court to protect Finley’s eligibility for needs-based public benefits. During the next 6 months, the trustee of the SNT made distributions to third parties from the funds in the SNT in the amount of $3,886. The distributions were made by check to a variety of recipients, including Texaco, Exxon Mobil, Rocket Smog, A+ Auto Repair, Time Warner Cable and the like. After Finley informed the SMHA of the trust fund and distributions, the agency retroactively increased Finley’s rent, finding that “any amount distributed … in the form of periodic payments from a trust is counted as income, even though the trust is not accessible to the [trust beneficiary].” The SMHA’s decision to increase Finley’s rent was upheld on administrative appeal. The hearing officer agreed that the payments to third parties from Finley’s SNT were income under 24 C.F.R. §5.609 (defining “annual income” as including “all amounts, monetary or not, which … go to or on behalf of, the family … or are anticipated to be received ….”) and were not excluded as “temporary, nonrecurring or sporadic” payments under 24 C.F.R. §5.609(c)(9).

Finley asked for court review of the administrative ruling. On May 25, 2011, California Superior Court Judge James C. Chalfant issued a written decision in favor of Finley. Judge Chalfant found that, although under 24 C.F.R. §5.609(b)(2) “any income distributed from a trust fund shall be counted when determining annual income…,”  “annual income” as defined under the federal regulations exempts from treatment as income “lump sums” such as personal injury settlements, even when, as in this case, the settlement proceeds are held in trust. 24 C.F.R. §5.609(c)(3). However, the interest earned on the settlement proceeds, though excluded from income when held in trust, was held by the court to be countable once distributed.

The decision was hailed by public interest attorneys, and is a long-awaited interpretation of complex federal regulations, which will likely have a national impact.

“We are pleased with the outcome of this case. It is our hope that all Section 8 participants who receive lump- sum income will be treated equally regardless of whether that money is placed in a checking account, an irrevocable trust, or under the person’s mattress,” said Attorney Denise McGranahan of the Legal Aid Foundation of Los Angeles.

The case is annexed here – Sheila Finley v. City of Santa Monica