                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


2-6-2004

Johnson v. Guhl
Precedential or Non-Precedential: Precedential

Docket No. 01-3774




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Recommended Citation
"Johnson v. Guhl" (2004). 2004 Decisions. Paper 964.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/964


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                   PRECEDENTIAL            names);ROBERT GROSS;
                                       GEORGE ALLEN; Social Services;
        UNITED STATES                 THOMAS KOELHOFFER; FRANCES
       COURT OF APPEALS                        KOELHOFFER;
     FOR THE THIRD CIRCUIT              WILLIAM KELLY; KATHRYN
                                                   KELLY;
                                      MARCELLA FINKEL; JACK FINKEL;
           No. 01-3774                         EDNA ALLEN;
                                        WILLARD NICKERSON; ETHEL
                                                NICKERSON;
DONALD H. JOHNSON; JUANITA L.         GERALDINE ANN SAHL; GEORGE J.
              JOHNSON;                             SAHL;
 EUGENE V. MARIANI; DOROTHY            MARGARET BAKERIAN; VASGEN
              MARIANI;                          BAKERIAN;
MARY LOU FLEMING; WILLIAM R.             CHARLES DERROT; LOUISE
              FLEMING;                            DERROT;
WILLIAM C. SCHAIBLE; PHYLLIS R.          MIGUEL OBREGON; ONELIA
              SCHAIBLE,                          OBREGON;
   by her Court Appointed Guardian;     ROY W. MCDOWELL; JUNE M.
    LOIS BENEDETTO; GERALD                      MCDOW ELL;
            BENEDETTO;                   JOSEPH MEZZO; CARMELLA
  DONNA R. BANKS; CHARLES V.                       MEZZO;
          BANKS, Estate of;                  MATHILDA GROSS
    RAYM OND O. DENM AN, JR.;
       FRANCES C. DENMAN;                                  v.
   CHARLES N. HICKS; MARIE L.
                 HICKS;                MICHELLE K. GUHL, Commissioner;
ANN B. SILBERNAGEL; NORMAN V.                          STATE OF
           SILBERNAGEL;                  NEW JERSEY, DEPARTMENT OF
  ANNA PRYSTASCH; STANLEY                        HUMAN SERVICES,
            PRYSTASCH;                  MARGARET A. MURRAY, Director,
   MARY MACKRON; ANTHONY                               Division of
        MACKRON, Estate of;            Medical Assistance and Health Service;
   JANET WHALON; HAROLD B.             JOHN ROE, (1-5 fictitious names) their
            WHALON, JR.;                  agents, servants, employees, and/or
BERNADINE WEISER; RICHARD C.               assigns, jointly, severally or in the
                WEISER;               alternative; EDWARD TESTA, Director,
     GRACE LAFORGE; BLACE             Bergen County Board of Social Services;
    LAFORGE; JOHN FILLMORE;              ELIZABETH LEHMANN, Director,
 MARY FILLMORE; JOHN DOE, (1-5                            Morris
           fictitious names);              County Board of Social Services;
       JANE DOE, (1-5 fictitious        JAMES WILLIAM S, Director, Essex
                 County                         (Opinion filed: February 6, 2004)
 Board of Social Services; JANE ROE,
 Director, ABC County Board of Social
    Services, (1-5 fictitious names);           Donald M. McHugh, Esquire (Argued)
    ESSEX COUNTY BOARD OF                       McHugh & Macri
      CHOSEN FREEHOLDERS                        49 Ridgedale Avenue
ESSEX COUNTY BOARD OF SOCIAL                    East Hanover, NJ 07936
              SERVICES;
                                                National Academy of Elder Law
                                                Attorneys
Donald H. Johnson, Juanita L. Johnson,          New Jersey Chapter
William C. Schaible, Phyllis R. Schaible,       Eugene Rosner, Esquire
Charles N. Hicks, Marie L. Hicks,               1093 Raritan Road
Ann B. Silbernagel, Norman V.                   Clark, NJ 07066
Silbernagel,
Anna Prystasch, Stanley Prystasch,                     Attorneys for Appellants

      Appellants
                                                David Samson
                                                Attorney General of New Jersey
         On Appeal from the                     Michael J. Haas
  United States District Court for the          Assistant Attorney General
        District of New Jersey                  M. Elizabeth Doyle (Argued)
  D.C. Civil Action No. 99-cv-05403             Deputy Attorney General
  (Honorable Dennis M. Cavanaugh)               Office of Attorney General of New
                                                Jersey
                                                Division of Law, P.O. Box 112
         Argued April 22, 2003                  R. J. Hughes Justice Complex
                                                25 Market Street
   Before: SCIRICA*, Chief Judge,               Trenton, NJ 08625
  AM BRO and W EIS, Circuit Judges
                                                       Attorneys for Appellees
                                                       Commissioner and State Divisions
       *Judge Scirica began his term as
Chief Judge on May 4, 2003.                     Edwin C. Eastwood, Jr., Esquire
                                                Law Offices of Edwin C. Eastwood, Jr.
                                                723 Kennedy Boulevard
                                                North Bergen, NJ 07047

                                                       Attorney for Appellee

                                            2
       Edward Testa                              spouse”) and the other resides in the
                                                 community (the “community spouse”).
Daniel W. O’Mullan, Esquire                      Plaintiffs, New Jersey residents, sought
O’Mullan & Brady                                 and were denied M edicaid benefits
57 Whippany Road                                 because their assets exceed a level
Whippany, NJ 07981                               qualifying them for Medicaid eligibility.
                                                 They challenge their benefits denials
       Attorney for Appellee                     under 42 U.S.C. § 1983, and seek both
       Elizabeth Lehmann                         injunctive relief and a declaratory
                                                 judgment. The District Court held, inter
                                                 alia, that New Jersey did not violate
                                                 federal law in denying plaintiffs benefits
       OPINION OF THE COURT                      and thus dismissed their complaint.

                                                         Whether plaintiffs are entitled to
AM BRO, Circuit Judge                            Medicaid benefits depends on how we
                                                 view certain private trusts they
       Medicaid is a federal assistance          established for the community spouse’s
program, administered by the states, that        benefit. Those trusts, known as
helps individuals with below a certain           Community Spouse Annuity Trusts
level of assets pay for medical expenses.1       (“CSATs”), are designed to provide a
Because Medicaid is available only to the        stream of annuity payments to the
needy, creative lawyers and financial            community spouse for the duration of his
planners have devised various ways to            or her life. From 1994 to 1999, New
“shield” wealthier claimants’ assets in          Jersey did not consider the corpus of
determining M edicaid eligibility. In this       these CSATs as “countable” assets – that
context, we decide, among other issues,          is, among plaintiffs’ available resources
whether New Jersey has correctly                 for Medicaid eligibility purposes – so
interpreted federal law to preclude use of       long as, on the community spouse’s
a private annuity trust to shield assets.        death, New Jersey would be the first
                                                 beneficiary of the CSAT to the extent
             I. Background                       that the State paid benefits on behalf of
                                                 the institutionalized spouse (“state
       Plaintiffs in this case are elderly       payback” or “state-payback
couples in which one spouse resides in a         requirement”). Thus, New Jersey
nursing home (the “institutionalized             effectively permitted Medicaid claimants
                                                 to use CSATs to shield a couple’s assets
                                                 from Medicaid eligibility determinations
   1                                             during the community spouse’s lifetime.
   The Medicaid Act is codified at 42
                                                 New Jersey would then be reimbursed
U.S.C. § 1396 et seq.

                                             3
for benefits paid if any funds remained in                Plaintiffs applied for Medicaid
the CSAT after the community spouse’s             benefits during the period that New
death. If no funds remained, New Jersey           Jersey was implementing its CSAT
would recover nothing.                            policy change. They claim that, during
                                                  this period, New Jersey delayed in
        In 1999 New Jersey changed its            processing their pending Medicaid
position on the countability of CSATs,            applications for anywhere between eight
largely in response to an earlier                 and eighteen months. When New Jersey
interpretive letter from an employee of           finally determined plaintiffs’ eligibility,
the Department of Health and Human                applying its “new” policy, it deemed
Services (“HHS”) stating that trusts such         their asset levels too high to qualify for
as CSATs should be considered                     Medicaid benefits because it included
countable assets. With this change New            their CSATs as available assets.
Jersey considers CSATs among                      Plaintiffs dispute that the corpus of their
Medicaid claimants’ assets when                   CSATs should be counted among their
determining their total resources for             assets.
eligibility purposes. Thus, CSATs can
no longer be used to shelter assets.2 New                 Recognizing the difficulties its
Jersey has taken a similar position with          policy change caused plaintiffs (who had
respect to commercial annuities.3                 established CSATs expecting pre-1999
                                                  policy to apply), New Jersey advised that
                                                  it would allow them to replace their
   2                                              CSATs with commercial annuities. As a
    In this context, state paybacks no
                                                  compromise to plaintiffs, the State would
longer were exacted.
                                                  treat these annuities as non-countable
   3
    Like CSATs, commercial annuities              (whereas for other Medicaid claimants
provide a stream of payments (in this             the State treats commercial annuities as
context, to the community spouse) for a           countable), so long as plaintiffs included
fixed term of years. However, they are            a state-payback provision in the
administered differently from CSATs.              annuities. Plaintiffs, however, did not
Whereas the corpus of a CSAT is                   accept this settlement.4
administered by a trustee, who is often
related to the elderly couple, the “corpus”
                                                     4
of a commercial annuity is paid to an                 Plaintiffs argue that they notified
unrelated third party (typically an               New Jersey that they wished to exchange
insurance company) to purchase the                their CSATs for commercial annuities.
annuity. The annuity company then                 New Jersey responds that they instructed
makes payments to the community                   plaintiffs how to do so, but they declined
spouse from a combination of principal            to follow these instructions and therefore
and income from that corpus.                      waived this offer of compromise.

                                              4
        After New Jersey held their                imposes no such requirement), the Court
CSATs countable (thereby making them               saw no risk of irreparable harm because
ineligible for Medicaid), plaintiffs sought        New Jersey ceased to require state
to prove that New Jersey’s denial of               paybacks for CSATs post-1999 when it
benefits would cause them “undue                   began to deem CSATs countable assets.
hardship.” Under federal law, if denial            Finally, the Court confirmed that
of Medicaid benefits to a claimant causes          plaintiffs must be afforded an
undue hardship, the state must provide             opportunity for an undue hardship
benefits, even though the claimant would           hearing (and that New Jersey had failed
otherwise not be so entitled. Federal law          to promulgate procedures for such a
requires states to establish hearing               hearing). However, because New Jersey
procedures by which individuals can                conceded its obligation and had
present their undue hardship claims. But           committed to promulgating regulations
at that time New Jersey had not                    for hearings, the Court held that its
promulgated these procedures, leaving              failure to do so thus far posed no risk of
plaintiffs without any administrative              irreparable harm. Judge Bassler left
avenue for undue hardship relief.                  open the possibility that plaintiffs could
                                                   return to federal court if New Jersey
         As a result of these circumstances,       failed to implement its promised
plaintiffs filed suit in the District Court.       procedures.
They challenged, inter alia, New Jersey’s
determination that their CSATs are                        In the meantime, despite the
countable resources, the state-payback             absence of officially promulgated
requirement for CSATs deemed not                   procedures, New Jersey offered plaintiffs
countable, and New Jersey’s failure to             the opportunity to plead undue hardship
promulgate procedures for undue                    in conformity with federally mandated
hardship hearings required by federal              standards. The State sent “amended”
law. The District Court (per Judge                 denial letters to plaintiffs in December
Bassler) denied relief and dismissed               1999 notifying them of their right to
certain of their claims (though both               apply for an undue hardship exception.
actions were without prejudice in part).           Plaintiffs declined to do so, however.5
First, it held plaintiffs’ CSATs countable
under federal law. Second, although the
Court believed that New Jersey’s state-               5
                                                       Plaintiffs’ counsel asked New Jersey
payback requirement violates federal law           by letter on January 11, 2000 to “send . . .
by imposing M edicaid eligibility criteria         the undue hardship policy provision
more stringent than those imposed by the           contained in the New Jersey State
Medicaid Act (i.e., that Medicaid                  Medicaid Plan” that implements the
claimants with CSATs name New Jersey               federal mandate to afford undue hardship
first beneficiary, when federal law                hearings. He said that, “[u]pon receipt of

                                               5
       In 2001, New Jersey’s undue-              determining their eligibility, it should be
hardship regulations became effective.           equitably estopped from applying its new
Plaintiffs believe those regulations are         CSAT countability policy to plaintiffs.
inadequate, however, because they fail to        The Court reasoned that equitable
specify a time in which the State must           estoppel will rarely lie against
hold a hearing, thereby violating a              governmental entities. Moreover, Judge
federal Medicaid regulation requiring a          Cavanaugh rejected plaintiffs’ state-
“timely process for determining whether          payback argument, though for different
an undue hardship waiver will be                 reasons than did Judge Bassler. Judge
granted.” Health Care Financing                  Cavanaugh found no evidence that New
Administration (now Centers for                  Jersey any longer requires state paybacks
Medicare & Medicaid                              for CSATs. However, in disagreement
Services)(“HCFA”) Transmittal No. 64 §           with Judge Bassler, Judge Cavanaugh
3259.8C.                                         held that state paybacks are consistent
                                                 with federal policy disfavoring Medicaid
       Plaintiffs returned to the District       claimants’ attempts to shelter assets and
Court. This time the Court (with Judge           thus do not violate federal law. Finally,
Cavanaugh now presiding) denied their            the Court disagreed with plaintiffs that
motion for, inter alia, injunctive relief        New Jersey’s newly promulgated undue
and dismissed their complaint. It again          hardship hearing provisions were
held plaintiffs’ CSATs countable in              deficient for their failure explicitly to
determining Medicaid eligibility. It also        provide a time frame in which a hearing
rejected their argument that, because            must be conducted. Rather, it held that
New Jersey unduly delayed in                     the State had “substantially complied”
                                                 with federal law’s mandate to provide for
                                                 undue hardship hearing procedures.
that information, my clients will file the
undue hardship request.” As noted, New                  Plaintiffs appeal Judge
Jersey had no formal procedures in place         Cavanaugh’s dismissal of their
at that time, but rather was attempting to       complaint. 6 They raise essentially five
accommodate plaintiffs’ complaint by             issues for our review 7 : (1) whether
providing ad hoc procedures that would
comply with federal law. Thus New
Jersey had nothing to send plaintiffs.              6
                                                     The District Court had jurisdiction
Plaintiffs – presumably because they did         under 28 U.S.C. § 1331. We have
not receive the then-nonexistent                 jurisdiction pursuant to 28 U.S.C. §
provisions – never provided New Jersey           1291.
with the information necessary to
                                                    7
determine whether they were entitled to              These are questions of statutory
an undue hardship exception.                     interpretation, over which we exercise

                                             6
CSATs are countable assets for M edicaid                  As this is a question of statutory
eligibility purposes; (2) whether in any          interpretation,8 we begin (and end) our
event New Jersey should be estopped               inquiry with the relevant statute, 42
from treating plaintiffs’ CSATs as                U.S.C. § 1396p(d)(3)(B). That provision
countable assets because they delayed             provides, in subsection (i), that “[i]n the
unduly in determining plaintiffs’                 case of an irrevocable trust -- if there are
Medicaid eligibility (or alternatively            any circumstances under which payment
whether the District Court should hold a          from the trust could be made to or for the
hearing on plaintiffs’ estoppel claim); (3)       benefit of the individual [the
whether New Jersey’s state-payback                institutionalized spouse whose assets are
requirement pre-1999 for CSATs violates           used to establish the trust], the portion of
federal law; (4) whether New Jersey’s             the corpus from which, or the income on
state-payback requirement for the                 the corpus from which, payment to the
commercial annuity option offered to              individual could be made shall be
plaintiffs violates federal law; and (5)          considered resources available to the
whether the undue hardship regulations            individual . . . .” Both parties agree that
of New Jersey violate federal law by              CSATs are irrevocable trusts. They are
failing explicitly to provide a time by           generally funded with marital assets
which it must hold a hearing. Plaintiffs          (assets that belong to both spouses).
also seek attorneys’ fees.                        Moreover, CSATs are designed so that
                                                  the corpus and the income on the corpus
             II. Discussion                       will provide the community spouse a
                                                  stream of payments. Once the
                                                  community spouse receives these
A. Countability of CSATs                          payments, there is nothing preventing her
                                                  or him from sharing them with the
       New Jersey deemed plaintiffs               institutionalized spouse as well. Section
ineligible for Medicaid benefits because,         1396p(d)(3)(B)(i) thus squarely covers
when the capital in their CSATs was
taken into account, they had assets
exceeding a level qualifying them for                8
                                                      We note that there is some question
Medicaid. Plaintiffs argue that New               “whether third parties may sue to enforce
Jersey should not have considered their           Spending Clause legislation [such as
CSATs as countable assets.                        provisions of the Medicaid Act].”
                                                  Pharmaceutical Research & Mfrs. of Am.
                                                  v. Walsh, 123 S. Ct. 1855, 1878 (2003)
                                                  (Thomas, J., concurring) (citations
plenary review. Moody v. Sec. Pac. Bus.           omitted). However, as neither party
Credit, Inc., 971 F.2d 1056, 1063 (3d             raises this issue on appeal, we have no
Cir. 1992).                                       occasion to decide it.

                                              7
CSATs – as “circumstances [exist] under              we affirm the District Court ruling that
which payment from the trust could be                plaintiffs’ CSAT assets are countable
made to or for the benefit of” the                   resources.
institutionalized spouse – and deems
them countable resources.9 Accordingly,              B. Equitable Estoppel

                                                             Plaintiffs argue that New Jersey
   9
     Indeed, an interpretive letter from an          “stalled” their Medicaid applications for
HHS employee supports our analysis.                  eight to eighteen months to allow the
On April 16, 1998, Robert A. Streimer,               State to make a “policy change”
with the Disabled and Elderly Health                 regarding CSATs’ countability. As a
Programs Group of HHS’s Center for                   result, plaintiffs assert that we should
Medicaid and State Operations, wrote to              equitably estop New Jersey from
an attorney in Virginia who inquired                 attempting to apply its new CSAT
about the treatment of her client’s trust.           countability rule to plaintiffs or at least
According to the letter, the Virginia                order the District Court to hold a hearing
Department of Social Services denied her             and allow discovery on this claim.
client Medicaid benefits because, when
the trust’s corpus was counted as an                          We decline to do either.
eligible resource, the client had assets in          “[E]quitable estoppel will not lie against
excess of a M edicaid-qualifying level.              the Government as it lies against private
Streimer opined that Virginia’s                      litigants.” Office of Personnel Mgmt. v.
determination was correct. He reasoned               Richmond, 496 U.S. 414, 419 (1990). In
that the trust “falls under the jurisdiction         Richmond, even though a federal
of [§ 1396p(d)] if the trust was                     employee provided misinformation to the
established by either member of the                  plaintiff (on which he relied to his
couple, using at least some of the                   detriment), the Supreme Court declined
Medicaid applicant’s assets.” Second,                equitably to estop the Government. Id. at
because “the trust . . . is an irrevocable
trust, the corpus of which can be paid at
some point in time to the community                  commercial annuities would not be
spouse[,] . . . the corpus . . . is considered       countable resources. Because, as will be
as an available resource to the                      discussed below, the countability of
beneficiary, and thus must be included as            commercial annuities is not a question
a countable resource in determining                  raised in plaintiffs’ complaint, we need
Medicaid eligibility for the                         not decide whether the Streimer letter’s
institutionalized spouse.” The Streimer              position on the countability of
letter went on to draw a distinction                 commercial annuities – a position
between irrevocable (private) trusts and             conflicting with New Jersey’s – is
commercial annuities, suggesting that                correct.

                                                 8
433-34. In a case more than a century              trusts, see § 1396p(d)(4)(A)-(C), 11
before, The Floyd Acceptances, the Court           Congress knew how to specify state
similarly held that the Government could           payback when it wanted; that it did not
not be compelled to honor bills of                 do so for spousal trusts indicates that it
exchange issued by a government official           did not intend to permit states to seek
where there was no statutory authority             payback for CSATs. New Jersey
for the issuance of the bills. 74 U.S. 666,        counters that this issue is now moot
682-83 (1868). An analogous principle              because it considers CSATs countable
applies here: because, as discussed, there         and therefore no longer imposes this
is no statutory authority (federal or state)       condition. W e agree with New Jersey.
for treating CSAT assets as not
countable, New Jersey should not be                        As background, § 1396p(d)(3)
estopped from treating them as                     instructs states how to treat trusts for
countable. While the Richmond Court                Medicaid eligibility purposes.
left open the possibility that some kind of        Previously, when New Jersey considered
“‘affirmative misconduct’ might give rise          CSATs noncountable, it presumably
to estoppel against the Government,”               believed them to be governed by §
plaintiffs allege no affirmative                   1396p(d)(3)(B)(ii), which addresses
misconduct here. Richmond, 496 U.S. at             irrevocable trusts when no income or
421 (citations omitted). In this context,          principal from the trust “could under any
the District Court was correct in                  circumstances be made to the individual
eschewing the estoppel of New Jersey’s             [establishing the trust].” That section
countability rule.10                               provides that these trusts “shall be
                                                   considered . . . to be assets disposed by
C. State-payback requirement for                   the individual for purposes of subsection
CSATs                                              (c) of this section [imposing a penalty on
                                                   transfers of assets].” The creation of a
       Plaintiffs challenge New Jersey’s           CSAT results in a transfer of marital
state-payback requirement for CSATs.               assets to the community spouse. See §
They argue that no provision of the                1396p(c)(3). Thus, absent some
Medicaid Act allows a state to seek                exception, even though a CSAT is
payback from a community spouse’s                  noncountable it still is subject to §
estate. Moreover, because § 1396p
requires state payback for other types of


   10                                                 11
     As there is no need in this case for               The trusts provided for in this
any hearing (including discovery), the             section are known as special-needs,
District Court’s refusal to conduct a              “Miller,” and pooled trusts, and are not
hearing is also affirmed.                          implicated in this case.

                                               9
1396p(c)’s transfer penalty.12 Section              payback issue plaintiffs assert is moot
1396p(c)(2)(B)(i), however, exempts                 with respect to CSATs.
transfers from penalty when made “for
the sole benefit of the individual’s                D. Commercial annuity option offered
spouse.” In M edicaid parlance, this is             to plaintiffs
known as an “SBO transfer.” New
Jersey conditioned application of the                       Plaintiffs argue that the
SBO exception to the § 1396p(c) transfer            commercial annuity option New Jersey
penalty by defining an SBO transfer to              offered them – whereby New Jersey
include when the State is named first               would deem commercial annuities
beneficiary of the trust to the extent of           noncountable assets so long as they
benefits paid on behalf of the                      provided for state payback – violates
institutionalized spouse. N.J. Admin.               federal law for the same reasons
Code tit. 10, § 71-4.10(f). In layman’s             discussed above. New Jersey responds
language, transfers of assets by the                that because plaintiffs did not raise this
institutionalized spouse for the sole               issue in their complaint (i.e., plaintiffs
benefit of the community spouse are not             only raised the issue with respect to
penalized for Medicaid eligibility,                 CSATs), it is not properly before us.
according to New Jersey, if it has first
call on those trust assets equal to the                     We agree that plaintiffs take issue
Medicaid benefits it pays to the                    too late. Moreover, at oral argument
institutionalized spouse.                           New Jersey made clear that its offer to
                                                    treat any commercial annuities plaintiffs
       Because New Jersey no longer                 might purchase as noncountable (so long
requires state paybacks for CSATs, we
have no occasion to decide whether it
had the authority to define an SBO                  of a commercial annuity) contrary to
transfer in this manner. 13 Thus the state-         New Jersey’s view that SBO transfers
                                                    can include it as a beneficiary. See letter
                                                    dated September 26, 2002, from Thomas
   12
     The “transfer penalty” is a period of          E. Hamilton, Director of the Disabled
ineligibility for Medicaid benefits.                and Elderly Health Programs Group of
                                                    HHS’s Centers for Medicare and
   13
     Although § 71-4.10(f) is no longer             Medicaid Services, to Donald M.
applied by New Jersey with respect to               McHugh, Esq. (one of plaintiffs’ counsel
CSATs, it apparently is still in effect, and        in this case). Interestingly, the Hamilton
thus presumably contemplates state                  letter, notwithstanding § 71-4.10(f),
paybacks in non-CSAT contexts.                      refers to New Jersey’s interpretation as a
       We also note in this regard that             “policy, rather than state statute or
HHS has taken a position (in the context            regulation.”

                                               10
as they named New Jersey as first                  hardship” determinations. Section
beneficiary) was intended to be a                  3259.8A provides that “[u]ndue hardship
settlement available to the plaintiffs, not        exists when application of the trust
a policy generally applicable to all               provisions would deprive the individual
Medicaid claimants. New Jersey need                of medical care such that his/her health
not have offered this compromise to                or his/her life would be endangered [or]
plaintiffs, and instead could have chosen          when application of the trust provisions
to treat countable assets in any annuities         would deprive the individual of food,
(whether private or commercial)                    clothing, shelter, or other necessities of
plaintiffs purchased. Regardless,                  life.” While states have “considerable
plaintiffs rejected this settlement, and           flexibility in deciding the circumstances
New Jersey tells us it is no longer on the         under which [they] will not count funds
table. Thus, not only was this issue not           in trusts . . . because of undue hardship,”
properly pled, it is moot as well.                 the regulation requires that states, “at a
                                                   minimum, provide for: [1] [n]otice to
E. Undue Hardship Hearing                          recipients that an undue hardship
                                                   exception exists; [2] [a] timely process
        Section 1396p(d)(5) requires               for determining whether an undue
states to afford otherwise ineligible              hardship waiver will be granted; [and]
claimants Medicaid benefits if “undue              [3] [a] process under which an adverse
hardship” would result from the failure            determination can be appealed.” §
to provide benefits.14 The relevant                3259.8C. Moreover, a state’s “undue
Medicaid regulation, § 3259.8 of HCFA              hardship provision must discuss how [the
Transmittal No. 64, sets standards for             state] will meet these requirements.” Id.
states to apply in making “undue
                                                           Plaintiffs’ arguments have
                                                   necessarily shifted through the course of
   14
     42 U.S.C. § 1396p(d)(5) provides              this case because, before seeking relief
that “[t]he State agency [responsible for          initially in the District Court, New Jersey
administering Medicaid] shall establish            had not promulgated procedures under
procedures (in accordance with standards           which Medicaid claimants could seek
specified by the Secretary) under which            undue hardship hearings in accordance
the agency waives the application of this          with § 1396p(d)(5) of the Medicaid Act
subsection [relating to “[t]reatment of            and § 3259.8 of Transmittal No. 64.
trust amounts”] with respect to an                 However, after the hearing before Judge
individual if the individual establishes           Bassler, New Jersey implemented the
that such application would work an                long-promised undue hardship
undue hardship on the individual as                regulations. See N.J. Admin. Code tit.
determined on the basis of criteria                10, § 71:4.11(i). According to plaintiffs,
established by the Secretary.”                     however, New Jersey’s regulations do

                                              11
not fully comply with federal law. They            2001, this chronology is irrelevant. 15
argued before Judge Cavanaugh – and                What is important is that (the lack of
now before us – that New Jersey’s                  formal regulations notwithstanding) New
regulations do not specify within what             Jersey offered plaintiffs the opportunity
time period the State will afford an               to apply for an undue hardship hearing,
undue hardship hearing and thus do not             as federal law requires. For whatever
“discuss how [New Jersey] will meet”               reason, plaintiffs chose not to seek a
Transmittal No. 64's “timely process”              hearing for undue hardship at that time.
requirement. This failure, plaintiffs              Thus they have suffered no injury (and
argue, violates federal law.                       indeed have no basis to believe that New
                                                   Jersey would not have timely processed
        New Jersey responds that                   their request). 16 As a consequence,
plaintiffs are without standing to                 plaintiffs are without standing.
complain about the lack of an explicit
timeliness clause in its regulation                F. Attorneys’ fees
because plaintiffs have not availed
themselves of the offered undue hardship                   Because plaintiffs have not
remedy and thus have suffered no injury            received a favorable judgment on any of
as a result of the lack of an explicit             their claims – either in the District Court
timeliness provision in § 71:4.11(i). On
the merits, New Jersey also argues that
neither § 1396p(d)(5) nor § 3259.8 of                 15
                                                        We recognize that plaintiffs could
Transmittal No. 64 requires states to
                                                   not receive an undue hardship hearing
include an express timeliness provision.
                                                   under § 71-4.11(i) today. This provision
                                                   requires claimants to apply for an undue
        We agree with New Jersey that
                                                   hardship waiver “within 20 days of
plaintiffs lack standing because they
                                                   notification of the denial of eligibility or
have suffered no injury related to §
                                                   termination of benefits,” a period long-
71:4.11(i)’s lack of an explicit timeliness
                                                   passed. But as discussed, New Jersey
provision. Plaintiffs conceded both in
                                                   offered plaintiffs the opportunity to seek
their brief and at oral argument that New
                                                   an undue hardship hearing in December
Jersey notified them of their right to an
                                                   1999. Having done so, it followed
undue hardship hearing in December
                                                   federal law.
1999 and required them to submit “the
reasons and all documentation that you                16
                                                        Had plaintiffs sought a hearing, and
believe gives rise to an undue hardship . .        had New Jersey delayed unduly in
. to the county welfare agency within 20           providing them a hearing or otherwise
day[s] of this letter.” While these notices        not complied with federal standards for
were sent out before New Jersey’s undue            such a hearing, they would have had
hardship regulations became effective in           standing.

                                              12
or here – they are not entitled to
attorneys’ fees. Cf. Buckhannon Bd. and
Care Home, Inc. v. West Virginia Dep’t
of Health & Human Resources, 532 U.S.
598, 600 (2001) (party that failed to win
on the merits by judgment or consent
decree, yet obtained result it sought by
defendant’s voluntary change, is not a
prevailing party entitled to attorney’s
fees and costs).

         *************

        We hold that CSATs are
countable resources for Medicaid
eligibility purposes and decline (a) to
estop New Jersey from treating
plaintiffs’ CSAT assets as countable or
(b) to require the District Court to hold a
hearing on the issue. Moreover, we hold
that plaintiffs’ claims with respect to
state paybacks are moot both as to
CSATs and commercial annuities, and
they are without standing to attack New
Jersey’s undue hardship regulations.
Finally, because plaintiffs do not prevail
on the merits, they have no claim for
attorneys’ fees.




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