Federal Court Rules That Promissory Notes May Be Countable Resources

Sable v. Velez, Civ. No. 09-2813 (D.N.J., October 16, 2009), involved five applicants for nursing home Medicaid benefits. The applications filed by four of the five applicants were denied and one application was pending at the time of the court decision. Each denial was premised upon excess resources based upon the State’s decision to include certain promissory notes owned by each applicant as part of that applicant’s available resources in calculating financial eligibility. The applicants challenged the State’s decision. The issue in the case was whether the State acted properly in including the promissory notes as part of each applicant’s available resources.

In each case, the promissory notes were created by the applicants just before they filed for Medicaid benefits. At that time, each applicant was ineligible for Medicaid benefits because they each owned assets in excess of the financial limits established in the Medicaid program. Each applicant then loaned all of their excess resources to his or her child or other close relative in return for a promissory note. Each promissory note was properly signed by the borrower, and contained a specified interest rate and repayment schedule. After loaning the excess resources to the borrower, each applicant was financially eligible for Medicaid benefits unless the promissory notes were counted by the Medicaid agency as an available resource. New Jersey Medicaid found the promissory notes to be countable, and denied the applications for excess resources. The State determined that each promissory note qualified as a “legal instrument or devise that is similar to a trust,”qualifying the note as a countable resource.

The applicants for Medicaid filed a complaint in federal district court, suing under 42 U.S.C. §1983. The applicants alleged that the promissory notes had no value because they could not be sold, and that the State violated federal law by counting the promissory notes as trust-like instruments. They also asked the court to enjoin the State from denying their Medicaid applications because of the promissory notes. The applicants filed a motion for a preliminary injunction, and the State filed a cross-motion to dismiss the applicants’ federal complaint.

The parties’ motion were considered by United States District Judge Anne E. Thompson. Judge Thompson first denied the State’s motion to dismiss, holding that the federal Medicaid law created rights which are enforceable under 42 U.S.C. §1983 in federal court. Judge Thompson then also denied the applicants’ motion for a preliminary injunction. The Court ruled that the promissory notes may have been created with an understanding that the children would hold the money for the benefit of their parents and, if so, the State would have correctly found them to be countable. The Court ruled as follows:

Whether or not [the State of New Jersey] acted appropriately in counting the promissory notes as trust-like devices thus turns on whether or not the facts surrounding the creation of those notes show that Plaintiffs’ children took possession of Plaintiffs’ money with the understanding that they were to hold it in trust as a fund to be gradually repaid for the Plaintiffs’ benefit. If the facts show that there was such an understanding, then the notes are trust-like devices, and the state acted properly. If the facts do not show that the Plaintiffs’ children were expected to exercise any special care in safekeeping the money, then the notes were not trust-like devices.

The Court entered an Order and filed an written opinion denying the applicants’ motion for a preliminary injunction as well as the State’s motion to dismiss the applicants’ complaint. Judge Thompson’s decision is annexed here – Sable v. Velez – Order and Opinion. The applicants are considering the filing of a motion for reconsideration.

UPDATED ON DECEMBER 28, 2009: The Medicaid applicants filed a motion for reconsideration that was denied by the district court without oral argument on December 18, 2009. Judge Thompson’s Order denying reconsideration is annexed here – Order and Opinion on Reconsideration

UPDATED ON JULY 28, 2010: Two of the Medicaid applicants in the case, Mary Sable and Michael Lanza, filed an appeal of the denial of their motion for a preliminary injunction by the federal district court.  On appeal, the U.S. Court of Appeals for the Third Circuit vacated the district court’s order.  The Third Circuit held  that the district court committed legal error because it did not undertake the proper analysis of the promissory notes held by the Medicaid applicants.  As a result, the appellate court remanded the case to the lower court for further proceedings.

The Third Circuit decision is annexed here – Sable v. Velez – Order and Opinion of 3d Circuit

UPDATED ON SEPTEMBER 20, 2011: On remand, the federal district court again denied the plaintiffs’ motion for the preliminary injunction, finding that the plaintiffs were unlikely to succeed on the merits because they had failed to show that the agencies acted improperly by counting the promissory notes as trust-like devices. Plaintiffs again appealed, and this time the Third Circuit affirmed the district court’s decisions. I blogged about the appellate court’s decision here.