Federal Court In New Jersey Affirms Denial Of Medicaid, Finding Promissory Notes Owned By Applicants To Be Countable Resources

John Landy and Margaret Sauchelli are elderly persons who purchased promissory notes and subsequently applied fur Medicaid benefits. New Jersey’s Department of Human Services (DHS) declared Landy arid Sauchelli to be ineligible and denied their applications. In doing so, the agency ruled that the promissory notes were countable resources that made both Landy and Sauchelli above the $2,000 maximum resource level for Medicaid eligibility. To challenge that decision, Landy and Sauchelii filed a lawsuit in federal district court.

John Landy.

John Landy, 86 years old, made two gift transfers to his daughters in 2009. $80,000 was gifted in February and $100,000 was gifted in October. The gifts subjected him to a penalty period, or period of ineligibility for Medicaid, of 24.71 months.

In April 2010, Landy purchased from Deldor Realty Corp. (“Deidor Realty”) his former employer, a demand promissory note in the amount of $100,000, bearing an annual interest rate of 4.00%. In October 2010, Landy and his wife, who is now deceased, entered into another promissory note with Deldor Realty for an additional $100,000.

In November 2010, Landy applied for Medicaid benefits. By excluding the two Landv promissory notes, Landy was able to declare available and countable resources of just $1 ,000, He also declared approximately $2,200 in monthly income.

Upon review of the application, DHS found that Landv was not eligible for Medicaid because the agency considered the amounts under the Landy promissory notes to be available, countable resources.

Margaret Sauchelli.

Margaret Saucheili, 97 years old, jointly owned a home with her son John. In 2008, Margaret and her son sold the home. John received Margaret’s half of the sale proceeds, as well as firs own This was a gift transfer that delayed Medicaid eligibility.

In December 2011 Sauchelli purchased a $78 000 promissorv note from her granddaughter, Jill Connelly. On February 15, 2012, Sauchelli applied for Medicaid benefits. By excluding the promissory note, she was able to declare resources of just $1,900, She also declared monthly income oi $ 7,400: $1,300 from Social Security and $6,100 from the promissory note.

DHS found that Sauchelli was not eligible for Medicaid. The agency considered the note to be a countable and available resource, which placed her assets above the $2,000 resource maximum.

In October 2011, Sauchelli and Landy filed a lawsuit in federal district court pursuant to 42 U.S.C. §1983, alleging that DHS acted contrary to law when it treated each of their promissory notes not as bona fide, but as an available and countable resource. Landy and Sauchelli moved for a preliminary injunction, while DHS opposed the preliminary injunction motion and cross-moved for summary judgment.

The Court’s Ruling.

To decide the motion and cross-motion, the court analyzed each note to determine if it was bona fide, or in actually a trust-like devise designed to protect the plaintiffs’ assets from Medicaid’s requirement that all applicant’s assets above the $2,000 resource maximum be spent on each Medicaid applicant’s cost of care. As to the Landy note purchased in April 2010, the Court found it to be “unquestionably a countable, available resource” because it was a demand note, the entire principal of which was due and payable whenever Landy decided to ask for it. In addition, the Court found the note lacked a feasible repayment plan, or, in actuality, lacked any repayment plan at all. Also, the note was not bona fide because Landy did not consider Deldor Realty’s resources, income, expenses or liquidity in assessing the borrower’s ability to repay.

The note purchased by Landy in October 2010 was also found to be similarly flawed. The Court found the repayment plan in the October note was not feasible because there was no indication that the lender took into account Deldor Realty’s income, expenses, or assets before he loaned money to Deldor Realty.

The Court also found that the Landy notes were not made in good faith because the loans were not arm’s length transactions in the marketplace. The April note was between an employee and his former employer. Landy is not in the business of lending money. The note was not backed by collateral of any kind. Also, Landy did not timely obtain any objective assurance that Deldor Realty could repay the loan. Further, the October note, dated just three weeks before Landy submitted his Medicaid application, reduced Landy’s resources from approximately $101,000 to $1,000, just under the $2,000 Medicaid resource limit.

Likewise, the Court found that the Sancheili Note was not bona fide because its repayment plan was not feasible and the loan was not made in good faith.

The Court also concluded that the notes were invalid as trust-like devises. The Court concluded that Deldor Realty received Landy’s money, and Connolly received Sauchelli’s money, with the understanding that they were to hold the money in trust for the giver’s benefit.

As a result, the federal court denied Landy and Sauchelli’s motion for a preliminary injunction, and granted DHS’ motion for summary judgment.

The Case is annexed here – Landy v Velez