Scholl v. Mnuchin

Background

Colin Scholl and Lisa Strawn, who were incarcerated or formerly incarcerated, filed a class action against Steven Mnuchin, Charles Rettig, the U.S. Department of the Treasury, the U.S. Internal Revenue Service, and the United States. They challenged the government’s policy of denying economic impact payments to people who were or had been incarcerated. The payments were advance refunds connected to a tax credit created by the Coronavirus Aid, Relief, and Economic Security Act.

The plaintiffs brought three causes of action. They sought relief under two provisions of the Administrative Procedure Act: one addressing agency action unlawfully withheld or unreasonably delayed, and another addressing agency action that is contrary to law, exceeds statutory authority, or is arbitrary and capricious. They also asserted a claim under the CARES Act and the Little Tucker Act. The court’s summary-judgment ruling addressed the two Administrative Procedure Act claims.

In an earlier order, the court provisionally certified a class and entered a preliminary injunction barring the defendants from withholding payments solely because a person was incarcerated. The defendants appealed that order and asked the district court to stay, or pause, the preliminary injunction while the appeal was pending. The plaintiffs moved for summary judgment on their two Administrative Procedure Act claims.

Jurisdictional Issues

The defendants argued that the plaintiffs lacked standing, that their claims were not ripe for review, and that sovereign immunity prevented the lawsuit. The court rejected those arguments. It found that the plaintiffs had suffered an economic injury because the government had denied or intercepted payments, and that the claims were sufficiently concrete for judicial review.

The court also found that the Internal Revenue Code’s tax-refund procedure was not an adequate alternative remedy. The plaintiffs were challenging the government’s policy and decision-making process, rather than seeking a conventional tax refund. The court therefore concluded that the Administrative Procedure Act waived sovereign immunity for these claims and that the court had subject-matter jurisdiction.

Motion for Stay

The court denied the defendants’ motion for a stay pending appeal. The defendants had not provided evidence showing that they were likely to suffer irreparable harm without a stay. Their concerns about recovering payments and the administrative burden of complying with the injunction were described as assumptions, projections, or unsupported arguments. Because the defendants failed to satisfy the most critical stay factors, the court did not reach the remaining factors.

First Administrative Procedure Act Claim

The first claim alleged that the defendants unlawfully withheld or unreasonably delayed economic impact payments under 5 U.S.C. § 706(1). The court denied summary judgment on this claim. Section 706(1) applies when an agency fails to take a discrete action that the law specifically commands it to take.

The court concluded that the government had taken action: it issued payments to millions of people, initially issued some payments to incarcerated individuals, then changed its policy and stopped issuing payments to that group. The plaintiffs were challenging the way the agency acted and the legality of its exclusion policy, not a complete failure to act. The court therefore found that the claim was better analyzed under the Administrative Procedure Act’s provision addressing unlawful agency action, rather than under § 706(1).

Second Administrative Procedure Act Claim

The second claim alleged that the policy was contrary to law, exceeded statutory authority, and was arbitrary and capricious. The court granted summary judgment on this claim.

The court interpreted the CARES Act as requiring the Treasury Secretary to refund or credit qualifying overpayments as rapidly as possible. It held that the Act required advance refund payments for eligible individuals who met the statutory criteria. The court also reaffirmed that incarcerated individuals were not excluded from the Act’s definition of “eligible individual.”

The court held that the government’s policy of treating incarcerated individuals as ineligible was therefore not in accordance with law and exceeded the government’s statutory authority. The court separately held that the policy was arbitrary and capricious because the agency had not provided an adequate contemporaneous explanation for excluding all incarcerated individuals. The government’s concern about possible fraud was not publicly advanced when the agency made its decision, so the court treated that explanation as an impermissible post hoc rationalization.

The court did not decide whether every plaintiff or class member was actually entitled to a payment or the amount of any payment. Individual eligibility determinations remained the responsibility of the Internal Revenue Service under the CARES Act’s criteria.

Class Certification and Relief

The court vacated the provisional class certification and certified a litigation class for all purposes. It declared that the CARES Act did not authorize the defendants to withhold advance refunds or credits from class members solely because they were or had been incarcerated. It also declared that the challenged policy was arbitrary and capricious and not in accordance with law.

The court vacated the policy and converted the preliminary injunction into a permanent injunction. The defendants were enjoined from withholding CARES Act benefits from the plaintiffs or any class member solely because of incarcerated status. Within 30 days of the court’s September 24, 2020 order, the defendants were required to reconsider advance payments for people who appeared entitled to them based on information in IRS records, including 2018 or 2019 tax returns, but whose payments had been withheld, intercepted, or returned solely because of incarcerated status. The defendants also had to take steps to implement those reconsiderations and file a declaration within 45 days confirming implementation and providing data about payments disbursed.

Disposition

The defendants’ motion for a stay pending appeal was DENIED. The plaintiffs’ motion for summary judgment on the first claim was DENIED, and their motion for summary judgment on the second claim was GRANTED. The challenged policy was declared unlawful and VACATED, the class was certified for all purposes, and a permanent injunction was entered.