The state welfare agency cannot penalize welfare recipients with mental illnesses for missing appointments or paperwork deadlines, according to a recent court decision.

In February, a New York State Appellate Court ruled in favor of Juana Diaz, a Manhattan resident who lost her public assistance in January 2001 after she failed to respond to a request for information about her income from the state Office of Temporary and Disability Assistance (OTDA).

Diaz argued that she forgot about the form and missed the deadline because she is clinically depressed. A medical report she presented to the state explained that she is “easily overwhelmed” and “acutely depressed and dysfunctional.” Still, the state would not reinstate her benefits, arguing that depression is not a medical condition. That decision was upheld at her fair hearing.

The state appeals court saw it differently, however. If a welfare client can show “good cause” for failing to comply with certain requirements, state law says, that client is exempt from those mandates. Good cause, the panel of judges pointed out, includes physical or mental conditions such as clinical depression.

This ruling sets a precedent for people with mental disabilities, and could affect thousands of New Yorkers on welfare. A study published in February 2000 by the Center on Budget and Policy Priorities estimated that “roughly one-fourth to one-third of current [Temporary Assistance for Needy Families] recipients have a serious mental health problem.”

In New York City, that would mean between 44,000 and 59,000 clients. (The Human Resources Administrations reports that 176,311 adults received benefits this February.)

The Appellate Division also offered a surprisingly stinging rebuke of OTDA. “Regrettably, this is not the first time we have found that an administrative agency…has used a person’s incapacity against her.”

A spokesperson for OTDA declined to comment.