2004 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit

2-6-2004 

# J ohnson v . G uhl

P r e c e de n t i al or N on-P r e c e de n t i al : P r e c e de n t i al

D ocke t N o . 01-3774

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Thi s de c i sion i s br ou gh t t o you for f r e e a nd ope n a c c e s s b y the O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit at V i l l a no va U nive r sit y S choo l of L a

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. It h as be e n a c c e pt e d for inclusion in 2004 D e c i sion s b y a n author i z e d a dmini s tr at or of V i l l a no va U nive r sit y S choo l of L a

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UNITED STA TES COURT OF APPEALS FO R T HE TH IRD CIR CU IT



### No. 01-3774

DONALD H . J OHNSON; JUANITA L.

JOHNS ON; EUGENE V. MARIANI ; DO ROTHY

MA RIA NI; MARY LOU FLEMING; WILLI AM R.

FLEMI NG; WILLI AM C. SCHAI BLE; PHYLLI S R.

SCHAIBLE, by her Court Appointed Guardi an; LOIS BENEDETTO; GERALD BENEDE TTO; DONNA R. BANKS; CHARLES V. BAN KS, Estate of; RA YM ON D O . DE NM AN , JR .; FRANCE S C. DENMAN; CHARLES N. HICKS; MARIE L.

HICKS; ANN B. SI LBERNAG EL; NORMAN V.

SILBERNAGEL; ANNA PRYSTASCH ; STANLEY

PRYST ASCH; MARY MACKRON; ANTHONY MA CKR ON, Estate of; JANET WHALON; HAROLD B. W HA LO N, J R.; BERNADINE WEI SER; RICHARD C.

WEISER ; GRACE LAFORGE; BLACE LAFORGE; JOHN FILLMORE; MA RY FILL MO RE ; JOH N D OE , (1-5

fictitious names); JANE D OE, (1-5 fic titious names) ;ROBERT GR OSS; GEO RGE ALL EN; Social Services; THOMA S KOELHOFFER; FRANCES

KOELHOFFER; WILL IAM KEL LY; KATHRYN

KELLY; MARCELLA FINKEL; JACK FINKEL;

EDNA ALLE N; WILLARD NICKERSON; ETHEL

NIC KERSON; GER ALD INE A NN SAH L; GEO RGE J.

SAHL; MARGA RET BAKERIAN; VASGEN

BAKERI AN; CHAR LES DERRO T; LOUISE

DERROT; MIG UE L O BR EG ON ; ON ELIA

OBREGON; ROY W. MCD OWE LL ; J UNE M.

MCDOW ELL; JOSEPH MEZZO; CARMELLA

MEZZO; MAT HILDA GR OSS

v.

MIC HE LLE K. G UH L, Co mm issioner;

STATE OF NEW JE RSEY, DEPART MENT OF HUM AN SERV ICES, MA RG AR ET A . MU RR AY , Director,

Divisi on of Medical Assis tance and Heal th Servi ce; JOH N R OE , (1-5 fic titious na mes ) their agents, servant s, employ ees, and/or assigns , joi ntly , sever ally or in t he alternative; ED WA RD TES TA , Director, Bergen Co unty Board of Social Services; ELIZ AB ETH LEH MA NN , Director,

M orris County Board of Social Services; JAME S WILLIAM S, Director, Ess ex2 Co unty Boar d of So ci al Ser vic es; JANE ROE, Director , ABC County Board of Social Services, (1-5 f ictitious names); ESS EX COUNTY B OARD OF CHOSEN FREEHOLDERS ESS EX COUNTY B OARD OF S OCI AL

SERVICES;

Donald H. Johnson, Juanit a L. Johnson, Willi am C. Schaible , Phy lli s R. Schaibl e, Charles N. Hicks, Ma rie L. Hicks, Ann B. Si lb er na ge l, Nor man V. Silbern agel, Anna Pryst asch, St anleyPrys tasch,

Ap pellan ts

On Appeal from the United States District Court for the Distri ct of New Jersey D.C. CivilAction No. 99-cv- 05403 (Honorable Dennis M. Cavanaugh)

Argued April 22, 2003

Be for e: S CIR ICA *, Chief Judge
, AM BR O a nd W EIS
, Circuit Judges

*Judge Scirica began hi s term as Chief Judge on May 4, 2003. (Opinion filed: Februa ry 6, 2004)

Donald M. McH ugh, Esquire (Argued) Mc Hug h & Ma cri 49 Ridgedale Avenue East Hanover, NJ 07936

National Academy of Elder Law A tto rn eys New Jersey Chapter Euge ne Ro sner, Esqu ire 1093 Raritan Road Clark, NJ 07066

Attorn eys for App ellants

David Samson AttorneyGeneral of New Jersey Michael J. Haas Assist ant Attorney General M. Elizabeth Doyle ( Argued) Deputy Att orney General Office of Attorney Generalof New Jersey Divisi on of Law, P.O. Box 112 R. J. Hughes Jus tice Complex 25 Market Stree t Trenton, NJ 08625

Attorney s for Appel lees Comm issi oner and State Divisi ons

Edw in C. Eastw ood, Jr., Esquire Law Off ices of Ed win C . Eastwo od, Jr. 723 K enned y Boulevard North Bergen, NJ 07047

Attorneyfor Appellee3

Edw ard T esta

Dan iel W. O ’Mu llan, Esquire O’Mullan & Brady 57 Whippany Road Whippany, NJ 07981

Attorneyfor Appellee Elizabet h Lehmann

OPINI ON OF THE COURT

AM BR O, Circuit

Judge

Medicaid is a federalassis tance program, a dministered bythe st ates, that helps individ uals w ith belo w a certain level of assets payfor medical expenses. 1 Because Medicaid i s avail able onl y t o the needy, creative la wyers a nd financi al plann ers ha ve de vised variou s wa ys to “shield ” w ealthier c laima nts’ ass ets in determ ining M edica id eligib ility. In this context, we decide, among other issues, wh ether N ew Jersey ha s corre ctly inter preted f ederal law to prec lude use of a pr ivate ann uity tru st to s hield asse ts.

I. Bac kground

Plaintif fs in th is case are eld erly couples i n which one spouse r esides in a nursing home ( the “i nsti tuti onaliz ed spouse”) and the othe r resi des in t he

com mu nity (th e “c om mu nity sp ous e”). Plaintiffs, New Jersey resident s, sought and w ere de nied M edica id ben efits because their as sets e xceed a leve l qua lifying them for M edic aid e ligib ility. The y challen ge the ir bene fits den ials und er 42 U.S .C. § 1 983 , and s eek b oth injunctive relief and a declaratory jud gm ent. T he D istrict Co urt h eld, inter alia , that N ew Jersey did not v iolate fede ral law in den ying plain tiffs be nefits and th us dism issed th eir com plaint.

Wh ether p laintiffs are en titled to Medi ca idbe ne fi ts de pe nds on h ow we view cert ain pri vate trusts they established fo r the com mun ity spouse’s benefit . Those trusts , known as Co mm unity Sp ouse An nuity Tru sts (“CSATs”), are de signed t o provide a
stre am of annuitypayment s to the

com mu nity spou se fo r the du ration o f his or her l ife. From 1994 to 1999, New Jersey did not cons ider t

he corpus of these CSATs as “countable” ass ets – t hat is, among plaintiffs’ avail able re sources for Medicaid eligibili ty purposes – so long as, on the comm unity spouse’s death, New Jersey would be the first benefici ary of the CSAT to the ext ent that t he State paid benefi ts on behal f of the institu tionalize d spo use (“ state paybac k” or “st ate-payback requir ement”). Thus, New Jersey effe ctively perm itted M edica id claim ants to use CS AT s to shie ld a co uple’s assets from Medicaid el igibi lit y determinations dur ing the c om mu nity sp ous e’s lif etim e. New Jersey would t

hen be rei mbursed 1 The Medicaid Act is codifi ed at 42 U.S.C. § 1396 et seq

.4

for b enef its paid if any fun ds rem ained in the CS AT after the com mun ity spouse’s death. If no funds re mained, New Jersey would recover not

hing.

In 19 99 N ew Jersey ch ange d its position on the countabili ty of CSATs, largel y i n response to an earl ier inter preti ve letter fr om an employee of the Department of Health a nd Human Services (“HHS”) stating that trust s such as CSATs should be conside red countabl e asset s. With t his change New Jersey consider s CSATs among Medicaid cla imants’ asset s when determi ning their tot al res ources for eligibili ty purposes. Thus, CSATs can no longer be used to shelter assets

. 2 New Jersey ha s taken a simila r positio n w ith respect to commercial annuities

. 3 Plaintif fs ap plied f or M edica id benefit s during t

he period t

hat New Je rs eywas im pl eme nt in g i ts CSAT policy change. Theyclai m that, during this per iod, N ew Jersey de layed in proc essing their pe ndin g M edica id applic ations for any where between eight and eight een months. When New Jersey fin all y de ter m in ed pl ain tif fs ’ e lig ib ilit y, apply ing it s “new” polic y, it dee med their asset level s too hi gh to quali fy for Medicaid benefi ts becaus e it i ncluded their CS AT s as a vaila ble a ssets

. Plaintif fs disp ute tha t the co rpus o f their CS AT s sho uld b e cou nted a mo ng th eir

asse ts.

Rec ogn izing th e diff iculties its policy change caused pl ainti ffs (who had establ ished CSATs expecti ng pre-1999 policy to apply ), New Jersey

advised t

hat it wo uld allo w th em to replac e their CSA Ts with comm ercial annuiti es. As a

com prom ise to pla intiffs, th e State wo uld treat thes e ann uities as n on-c oun table (wh ereas f or oth er M edica id claim ants the State treats commerci al annui ties as countabl e), s o long as pl ainti ffs incl uded
a state-pay back provis ion in t he annuiti es. Pl ainti ffs, however, did not

acce pt this se ttlemen t. 4 2 In thi s context , st ate paybacks no longer were e xacted.

3 Like CSATs, commercial a nnuiti es prov ide a stre am o f paym ents (in this context, to the co mm unity spouse) for a fixed term of years. How ever, they are adm iniste red diff eren tly from CS AT s. Wh ereas th e corp us of a CS AT is administered bya trus tee, who is often related to t

he elderlycouple, the “corpus” of a commercialannuity is pai d to an unrelated third party(typical ly an insurance company) to purchas e the annuity . The annuit

y companythen mak es pa yments to the co mm unity spouse from a combination of principa l and income from that corpus. 4 Plaintiffs ar gue that theynotifi ed New Jersey t

hat the y wishe d to exchange their CS AT s fo r co mm ercia l ann uitie s. New Jersey responds that they inst ructed plaint iffs how to do s o, but t

hey dec lined to follow th ese instructions an d therefore waived thi s offer of compromi se.5

Af ter N ew Jersey he ld their CSAT s countabl e (thereby maki ng them ineli gible f

or Medicaid) , pla inti ffs sought to prove t

hat New Jersey ’s deni al of benefit s would cause them “undue hardshi p.” Under feder al la w, if deni al of Medicaid benefi ts t o a clai mant causes undue hardshi p, the stat e must provi de bene fits, eve n tho ugh the cla iman t wo uld otherwis e not be so ent

itl ed. Federa l law requir es states t o establ ish hearing procedures by which i ndividual s can present their undue hardshi p clai ms. But at that ti me New Jersey had not promulgate d these pr ocedures, leavi ng plaint iffs wit hout anyadminist

rati ve
ave nue for und ue h ard ship relie f.

As a result of these circumstances, plain tiffs filed suit in the D istrict Co urt. Th ey ch allen ged
, inter alia
, New Jersey’s determination that their CSA Ts are countabl e resour ces, t

he state-pay back requir ement for CSATs deemed not

coun table, an d N ew Jersey’s fa ilure to promulgate procedures for undue hardshi p hearings requir ed by fede ral law. The Dist

rict Court (per

Judge Bassler ) denied relie f and dismis sed certain of the ir claim s (thou gh b oth actio ns w ere w itho ut p reju dice in p art). First, it held plaintiff s’ CS AT s cou ntable under federa l law. Second, al though the Court beli eved that

New Jersey’ s statepaybac k requir ement viol ates fe deral l aw by impo sing M edica id eligib ility criteria
more stringent t

han those i mposed by t

he M edica id A ct ( i.e

. , that M edica id clai mants with CSATs name New Jersey firs t benefi ciary , when federallaw imposes no such requireme nt), the Court saw no risk of irreparable harm because Ne w Je rsey ceas ed to re quire s tate paybac ks fo r CS AT s pos t-199 9 w hen it beg an to dee m C SA Ts c oun table asse ts. Finall y, the Court c onfirmed that plaint iffs must be afforded an opp ortun ity for an u ndu e hard ship hearing ( and that

New Jersey had f

aile d to promulgate procedure s for such a hearing) . However, becaus e New Jersey conceded it s obli gation and had committed to promulgati ng regulat ions for h earing s, the C ourt h eld tha t its fail ure to do s o thus far posed no ri sk of irr eparabl e harm. Judge Bassler left open the po ssibility that plain tiffs co uld
return to feder al court

if New Jersey fail ed to impl ement it s promised procedures.

In the meantime, des pite t he absence of offi cial ly promulgate d procedures , New Jerseyoffered pl ainti ffs the op portu nity to plead und ue ha rdship in conformi ty with feder ally mandated standar ds. The State sent “amended” denial letters t o plaint

iffs i n December 199 9 no tifying them of the ir right to app ly for a n un due har dsh ip ex cep tion

. Plaintiffs declined to do so, ho wev er. 5

5 Plaintiffs’ counsel as ked New Jersey by lette r on Jan uar y 11, 2 000 to “s end

. . . the undue har dship pol icyprovisi on conta ined in the N ew Jersey Sta te Medicaid Plan” t

hat impl ements the fede ral ma ndate to aff ord u ndu e hard ship hearings . He said t

hat, “[u]pon rece ipt of6

In 2001, New Jersey ’s unduehar dsh ip re gul ation s be cam e ef fec tive. Plaintiffs believe tho se regulations are inade quate , how ever, b ecau se they fa il to specify a time in which the State must hold a hearing, t

herebyviolat

ing a federal Medicaid regul ation requiri ng a “timel y pr ocess for

determi ning whether an undue hardshi p waiver willbe granted. ” Health Care Fi nancing Administr ation ( now Centers for M edica re & M edica id Services )(“HCFA”) Transmitt al No. 64 § 325 9.8C

.

Plaintiffs r eturned to the Dist rict Court. Thi s ti me the Court ( with Judge Cav anau gh n ow presid ing) d enied their

mo tion for
, inter alia , inj unctive reli ef and d ismisse d their c om plaint. It ag ain held p laintiffs ’ CS AT s cou ntable in determining Medicaid eligibili ty. It also rejected thei r argument that, because Ne w Je rsey und uly delayed in determi ning their eli gibil ity , it should be equitably estopped fr om applyi ng its new CS AT cou ntab ility poli cy to p laint iffs

. The Co urt reas oned that eq uitable estoppel will rarely l ie against governmentalentit

ies. Moreover, Judge Cavanaugh rejec ted plainti ffs’ st atepaybac k argument, though for di fferent
reasons t han did Judge Bass ler. Judge Cavanaugh found no evidence t hat New Jersey any l onger requi res st ate paybacks for CSATs. However, in di sagreement with Judge Bassl er, J udge Cavanaugh held that st ate paybacks are c onsistent with fede ral polic y disfavo ring M edica id clai mants’ at

tempts to shelt er asse ts and th us do no t v io lat e f ed er al l aw . F in all y, the Court di sagreed wit h plaint iffs t hat New Jersey’ s newly promulgate d undue hardship h earing prov isions were defic ient fo r their fa ilure ex plicitly to provide a t

ime frame in whic h a heari ng must be conduct ed. Rather , it held that the State had “subst antia lly complied” with feder al la w’s mandate to provide for undue hardship hearing procedures.

Plaintiffs appea l Judge Cav anau gh’s d ismissa l of the ir

com plaint. 6 They ra ise es senti ally five issues for our r eview 7 : (1) whether that i nformati on, my c lient s will file the undue hardshi p request .” As noted, New Jersey had no formal pr ocedures i n place at that tim e, but ra ther w as attem pting to accommodate plai ntiff

s’ complai nt by providi ng ad hoc proc edur es that w ould comply wit

h federal law. Thus New Jers ey ha d no thin g to sen d pl ainti ffs

. Plaintif fs – p resum ably bec ause they did
not rece ive the then-nonexi stent provisi ons – never pr ovided New Jersey with the inf orm ation n ecess ary to determ ine w hethe r they w ere en titled to

an u ndu e ha rdsh ip ex cep tion

. 6 The Distri ct Court ha d juri sdiction under 28 U.S.C. § 1331. We have juris dicti on p ursu ant to 28 U .S.C . § 129 1.

7 These are questions o f statutory interpret ation, over which we exercise7

CS AT s are co untab le asse ts for M edica id eligibili ty purposes; (2) whether in any event New Jerseyshould be es topped from treating pl ainti ffs’ CSATs as countabl e asset s because t hey del ayed unduly in determini ng plaintiffs’ M edica id eligib ility (or alternativ ely whether the Distri ct Court s hould hold a hearing on pl ainti ffs’ estoppel cl aim); ( 3) whether New Jersey ’s st ate-payback requir ement pre- 1999 for CSATs violate s federal law ; (4) wheth er New Jersey’s
stat e-pay back requi rement for the

com merc ial ann uity option offe red to plaint iffs vi olate s federallaw; and (5) whether the undue hardshi p regulat ions of New Jersey vi olatefederal law by fail ing expli citl y t o provide a t ime by which it must

hold a hearing. Pl ainti ffs also seek attorney s’ fees.

II. Dis cussion

A. Co unt abi li ty o f CSATs

New Jersey dee med plaintiffs ineli gible f

or Medicaid benefi ts becaus e, when the capit al in t

heir CSATs was taken into ac coun t, they had a ssets exceeding a l evel qual ify ing them for Medicaid. Pl ainti ffs argue t hat New Jersey sh ould not h ave c onsid ered th eir CSA Ts as countable assets. As this is a qu estion of statutory inter pretat ion, 8 we begin (and end) our inquiry with the rel evant st atute , 42 U.S.C. § 1396p(d) (3)(B). That provi sion provides , in s ubsecti on (i) , that “[i ]n the case of a n irrevocab le trust -- if there are any circumstance s under which pay ment from the trust c ould be made to or for the benefit of the i ndividual[the institutionalized spouse who se assets are used to es tabli sh the t

rust] , the porti on of the corpus from which, or t he income on the corpus from which, pay ment to the indivi dual coul d be made shallbe consider ed resour ces avai lable to the indivi dual .

. . . ” Both parties agr ee that CSA Ts are irrevoc able trusts. They are gene rally fund ed w ith ma rital assets (ass ets th at be lon g to bot h sp ous es). Moreover, CSATs are designe d so that the corpus and the i ncome on the corpus will pr ovide the community spouse a stre am of payments . Once the

commu nityspouse receives these payment s, there is nothing preventi ng her or him from sharing them with the institutionali zed spouse as well. Section 1396p (d)(3)(B)(i) thus squ arely covers

plen ary rev iew

. Moo dy v. Sec. Pac. Bus. Credit, Inc. , 971 F.2d 1056, 1063 (3d Cir. 1992 ). 8 We note that t here is some questi on “whether third parties may sue t o enforce Spending Clause l egisl ation [ such as provisi ons of the Medicai d Act].” Pha rma ce ut ic alRes ea rc h & Mfr s. of Am. v. Walsh , 123 S. Ct. 1855, 1878 (2003) (Thomas, J. , concurr

ing) ( citations

om itted). H ow ever, a s neithe r party rais es thi s iss ue on appeal, we have no

occ asio n to dec ide it

.8

CSAT s – as “ci rcumstance s [exis t] under which payment

from the t

rust c ould be made to or for

the benefi t of” the in stit ut io nal iz ed s pou se – an d de ems them countable resources. 9 A cc or di ng ly, we affirm the Dis tri ct Court r uling t hat plaintiff s’ CS AT assets a re cou ntable

resources.
B. Equitable Est oppel

Plaintiffs ar gue that

New Jersey “stal led” their Medicai d applic ations for eight to eighte en months to al low the State to make a “polic y change ” regarding CSA Ts’ countability . As a result, pla intiffs a ssert tha t we s hou ld equitably estop New Jersey from
atte mptin g t o a ppl y it s n ew CS AT countability rule to plaintiffs or at least order the District Court to hold a he aring and al lo w di sc ove ryon thi s c la im.

W e de cline to d o eith er. “[E]quitable estoppel willnot lie against the G over nm ent as it lies again st priva te litigants .” Office of Personnel Mgm t. v

. Richmond , 496 U .S. 414, 419 (1990). In Richmond , even though a federal employe e provided mi sinformation t o the plaintiff (on w hich h e relied to his detri ment), the Supreme Court decli ned equ itabl y to esto p th e G ove rnm ent. Id . at 9 Indeed, an inter

preti ve letter fr om an HH S em plo yee su ppo rts ou r an alysis. On A pril 16, 1998, R obert A . Streimer, with the D isabled and E lderly He alth Programs Group of HHS’s Center for M edica id and State O peratio ns, w rote to an att orney in Virgi nia who inquired abo ut th e trea tme nt o f he r clie nt’s t rust. Ac cord ing to th e letter, the Virg inia Department of Soci al Servi ces denie d her clie nt Medicaid bene fits because, when the tr ust’s corpus was count ed as an eligible r esou rce, the client h ad as sets in

exc ess o f a M edic aid- qua lifying leve l. Streimer op ined that V irginia’s determi nation was cor

rect. He reasoned that t he trus t “fal ls under

the jurisdi ction of [§ 1396p(d)] if the trust was establ ished byeithe r member of the couple, using at

least some of the Medicaid appli cant’s asset s.” Second, beca use “ the trus t . . . is an irrevo cable
trust , the corpus of which can bepaid at

som e poin t in time to the co mm unity spouse[, ] . . . the corpus . . . i s conside red as an avai lable resourc e to the benefici ary , and thus must be i ncluded as a countabl e resour ce in det ermining Medicaid eli gibil ity

for the institutionali zed spouse. ” The Strei mer letter went on to dr aw a disti nction between irrevocabl e (pri vate) t rusts and commercial annuiti es, s uggesti ng that commercial annuiti es would notbe countabl e resour ces. Becaus e, as wil l be discuss ed below, the countabi lit y of commercial annuiti es is not a questi on rais ed in plainti ffs’ compla int, we need not decide whe ther the Streime r letter’s position on the c ountabil ity of commercial annuiti es – a posi tion conf licting w ith N ew Jersey’s – is

correc t.9

433-34 . In a case m ore than a c entury bef ore , The Floyd Acceptance s , the Court similarly he ld that th e G over nm ent co uld not be compell ed to honor bi lls of exchange is sued by a government offi cial wh ere the re w as no statutory au thority for the i ssuance of t

he bill s. 74 U.S. 666, 682 -83 (1 868 ). An analo gou s princ iple applies here: be cause, as discu ssed, there is no st atutor

y aut hority ( federal or state) for tr eati ng CSAT asset s as not countabl e, New Jerseyshould not be estopped fr om treating them as countabl e. While t

he Richmond Cou rt left open the poss ibil ity

that s ome kind of “‘affirmative misconduct’ might give ri se to es top pel a gain st the Go ver nm ent,” plaint iffs al lege no affi rmative mis con duc t her e. Richmond , 496 U.S. at 421 (citation s om itted). In th is con text, the D istrict Co urt w as co rrect in eschew ing the estopp el of N ew Jerse y’s countabi lit

y rule. 10

C. State-payback requir ement for CSATs

Plaintiffs challeng e New Jersey’s
state -pa ybac k re qui rem ent f or C SA Ts. They ar gue that

no provisi on of the Medicaid Act al lows a state to s eek payback fro m a co mm unity spouse’s
estate. Moreover, because § 1396p requir es state payback for other types of trust s, see § 1396 p(d)(4)(A )-(C), 11 Co ngre ss kn ew how to spe cify state paybac k when it wanted; that i t did not do so for sp ousa l trusts ind icates th at it did not i ntend to pe rmit s tate s to see k paybac k for CSATs. New Jersey
counters that t

his i ssue is now moot beca use it co nside rs CS AT s cou ntable and th erefo re no long er imp oses th is

co nd itio n. W e a gr ee w ith N ew Je rse y.
As background, § 1396p( d)(3) inst ructs states how to tr eat trusts for M edic aid e ligib ility pur pos es. Previousl y, when New Jersey considered CS AT s non coun table, it pre sum ably be lie ve d t he m to be go ve rn ed by § 1396p(d)(3) (B)(i i), which address es irr evocable t

rusts when no income or princi pal from the trus t “coul d under any circumst ances be made to t he indivi dual [establ ishi ng the tr

ust]. ” That section provides that t

hese tr usts “s hall be consider ed . . . to be asset s dispos ed by the indi vidual f

or purposes of subsection (c) of t his sec tion [i mposing a penal ty on trans fers of as sets] .” The creation of a CSAT resul ts i n a trans fer of mari tal

asse ts to th e co mm uni ty spo use

. See § 139 6p( c) (3 ). Thus , abse ntsom e
exce ption, e ven th oug h a C SA T is noncountabl e it s til l is subject to §

10 As there i s no need in t his cas e for any hearing ( includi ng discovery) , the Distric t Cou rt’s refu sal to co ndu ct a hearing i s also a ffirmed. 11 The trusts pro vided for in th is section are known as special-needs, “Miller ,” and pool ed trus ts, and are not impli cated i n this case.10

13 96 p( c) ’s t ra ns fe r p en alt y. 12 Section 139 6p(c )(2)(B )(i), how ever, e xem pts trans fers fr om penaltywhen made “for the sole ben efit of the individu al’s spou se.” In M edica id parla nce, th is is known as an “SBO transfer. ” New Jersey conditi oned appli cati on of the SBO exception to t

he § 1396p(c) t

ransfer pena lty by defining an S BO transf er to include when the State is named first benefici ary of the trust to the ext ent of benefit s paid on behal f of the institutionali zed spouse. N.J. Admin. Cod e tit. 10, § 71-4.10(f). In layman ’s language, trans fers of as sets by the institution alized spou se fo r the so le benefit of the community

spouse are not pe na liz ed fo r M ed ica id eli gi bi lity, according to New Jersey, if it has first call on those t

rust a ssets equal t o the Medicaid benefi ts i t pay s to the institu tion alize d sp ous e.
Because New Jersey no longer

re quire s s tate pa y ba ck s f orCSATs , w e have no o ccasio n to d ecide wh ether it had th e au th or ity to def in e anSBO transfer in this man ner. 13 Thus the st atepaybac k issue pl ainti ffs asser t is moot wit h re spe ct to C SA Ts.

D. Comm ercial annuity option of fered to plaintiffs

Plaintiffs ar gue that

the commercial annuity

option New Jerse y offered them – whereby New Jersey would deem commercial annui ties noncountabl e asset s so long as they provided for

stat e payba ck – violates federal law for the same reasons discuss ed above. New Jersey responds that be caus e plain tiffs did not rais e this issue in their co mp laint ( i.e

. , pla inti ffs only raised the issu e w ith resp ect to CS AT s), it is n ot p rop erly be for e us

. We agree that

plaint iffs t ake iss ue too late. Moreover, at oralargument Ne w Je rsey ma de cle ar that its o ffer to
treat any commerci al annui ties plaint iffs might purcha se as noncount able (s o long

12 The “trans fer penal ty ” is a period of ineli gib ility for M edic aid b ene fits.

13 Although § 71-4. 10(f) i s no longer applie d by N ew Jersey w ith resp ect to CSAT s, i t appare ntly

is stillin effect , and thus p resum ably con temp lates state payb ack s in n on- CS AT con texts

. We also note i n this regard t hat HHS has taken a position (i n the cont ext of a c om merc ial ann uity) contra ry to New Jersey’s view that SB O transfe rs can incl ude it a s a benefi ciary . See l ette r dated Sept ember 26, 2002, from Thomas E. Hamilton, Director

of the Disabl ed and Elderl y Healt

h Programs Group of HHS’s Centers for Medicar e and Medicaid Servi ces, to Donald M. McH ugh, Esq. ( one of plai ntiff s’ counsel in thi s case) . Interestingly , the Hamilton letter, notwithstanding § 71-4.10(f), refers to New Jersey’s interpretati on as a “polic y, rather

than st ate st atute or reg ulati on.”11

as they named New Jersey as first benefici ary ) was int ended to be a
settlement avai lable to the pl ainti ffs, not a polic y genera lly applicab le to all Medicaid cla imants. New Jersey nee d not h ave o ffere d this co mp rom ise to plaint iffs, and inst ead could have c hosen
to treat count able ass ets i n any annui ties (wh ether p rivate o r com merc ial) plaintiffs purchased. Regardless, plaint iffs r eject ed this settlement, and New Jersey tells us it

is no l onger on the table . Thus, not

only was this i ssue not prop erly pled, it is m oot as we ll.

E. Undue Hardshi p Hearing

Section 1396p( d)(5) requires
states to a fford otherw ise inelig ible clai mants Medicaid bene fits if “undue hardship” wou ld result from the failure to provide benefits. 14 The relevant Medicai d regu lation, § 3259. 8 of HCFA Transmitt al No. 64, sets s tandards for
stat es to appl y i n making “undue hardshi p” determinati ons. Section 325 9.8A prov ides tha t “[u]n due h ardsh ip exists when application of the tr ust provisi ons would depri ve the i ndividual of m edica l care su ch tha t his/her h ealth or his/her life wo uld be en dange red [or] when application of the trust provisi ons would deprive t

he indivi dual of food, clothi ng, shel ter, or other necessi ties of life.” W hile state s hav e “co nside rable flexi bili ty in deci ding the c ircumst ances under which [they] will not count funds in tru sts . . . b eca use of u ndu e ha rdsh ip,” the reg ulation requ ires that s tates, “at a minim um , prov ide fo r: [1] [n ]otice to recipie nts that a n un due h ardsh ip exception exists; [2] [a] timelyprocess for dete rmining whethe r an undue hardship w aiver will be gra nted; [and ] [3] [a] process under which an adverse determi nation c an be appeale d.” § 3259.8C. Moreover, a state’s “undue hardshi p provisi on must dis cuss how [the
stat e] willmeet thes e requirements. ” Id.

Plaintiffs’ arguments have

necessarily

shift ed through t

he course of this case becaus e, befor e seeking relie f initiall y i n the Dist

rict Court, New Jerse y had not promulgated proce dures under which Medicaid cl aimants c ould seek undue hardshi p hearings in accor dance with § 1396p(d) (5) of the Medicaid Act and § 32 59.8 of T ran sm ittal N o. 64

. However, after

the hearing before Judge Bassler , New Jerseyimplemente d the long -prom ised u ndu e hard ship reg ulati ons

. See N.J. A dm in. Co de tit. 10, § 71:4.11(i). According to plaintiffs, however, New Jersey ’s regul ations do 14 42 U.S.C. § 1396p(d) (5) provi des that “ [t]he St ate agency [responsible for administering Medicaid] shall est ablish procedures (in acc ordance with standar ds specifi ed by t

he Secret ary ) under which the ag ency w aives th e app lication o f this subsection [rel ating to “[t]reatment of
trust amounts”] wit

h respect to an indivi dual if

the indi vidual e stabl ishes that s uch appli cati on would work an undue hardshi p on the indi vidual a s determ ined o n the b asis of criteria
esta blish ed b y the S ecre tary.”12

not full y comply

with feder al la w. They argued before Judge Cavanaugh – and

now before u s – that Ne w Jersey’s regulat ions do not

specify within what time period the St ate wil l afford an undue hardshi p hearing a nd thus do not “discu ss ho w [ Ne w Je rsey] will m eet” Transmittal No. 64's “timely process” requir ement. Thi s fail ure, pl ainti ffs

ar gue , v io late s f

ed er al la w.
New Jersey responds that plaintiff s are w ithout s tandin g to

com plain a bou t the lack of an explic it timel iness c lause i n its regulat ion because pl ainti ffs have not a vaile d them selves of the offe red u ndu e hard ship remedy and thus have suffered no injury

as a res ult of th e lack of an explic it ti mel in es s p ro vi si on i n § 7 1: 4. 11( i) . O n the meri ts, New Jersey al so argues t hat neithe r § 1396p(d)( 5) nor § 3259. 8 of Tran smittal N o. 64 r equire s states to inclu de a n ex pre ss tim eline ss p rov ision

. We agree with New Jerseythat plaint iffs l ack standi ng because they have suffere d no injury r elat ed to § 71:4.11(i)’s lack of an explicit timeliness prov ision. P laintiffs conc eded both in their brief a nd at oralargument that New Jersey notifi ed them of their ri ght to an undue hardshi p hearing i n December 1999 and required them to submi t “the

reasons a nd all doc umentati on that y ou belie ve g ives rise to an u ndu e ha rdsh ip . .
. to t he countywelfare agency within 20 day[s ] of thi s letter. ” While thes e notic es were sent out

before New Jersey ’s undue hard ship re gulatio ns be cam e eff ective in 200 1, this ch rono logy is irrelev ant. 15 Wh at is important

is that (t he lack of formal re gulati ons notwithstandi ng) New Jersey of fered plaintiff s the o ppo rtunity to apply for an undue hards hip heari ng, as federallaw requires. For whatever
reason, plaint

iffs chos e not to s eek a hea ring for und ue h ard ship at tha t time

. Thus theyhave suffere d no injury ( and indeed have no bas is t o belie ve that New Jersey would not have timelyprocesse d their request). 16 As a consequence, plaint iffs are without s tanding.

F. Attorneys’ f

ees
Because plai ntiff

s have not recei ved a favorabl e judgment on any of their claims – either in the D istrict Court

15 We recog nize th at plain tiffs co uld
not rece ive an undue har dship hearing under § 71-4. 11(i) today . This pr ovisi on requir es clai mants to appl y for an undue hardshi p waiver “within 20 day s of notifi cati on of the deni al of el igibi lit y or termination of be nefit s,” a period longpassed. But as dis cussed, New Jersey offered pl ainti ffs the opportunit y t o seek an undue hardshi p hearing i n December 1999. Having done so, it fol lowed fed eral l aw

.

16 Had plaintiffs s ought a hearing, a nd had N ew Jersey de layed un duly in providing them a hearing or otherwise not compli ed with feder al st andards for such a heari ng, the y would have ha d
stan din g.13

or he re – the y are not e ntitled to
attor neys’ fee s. Cf. Buckhannon Bd. and Care H ome , Inc. v. West Virginia D ep’t of Health & Human R esources , 532 U. S. 598 , 600 ( 200 1) (pa rty that failed to w in on the meri ts byjudgment or c onsent decree, yet

obtaine d resul t it

sought by defe ndan t’s volu ntary cha nge, is n ot a prevailing party entitled to attorney’s fees and costs).

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

We hold that C SA Ts are

coun table re sourc es fo r M edica id eligibility purp oses a nd d ecline (a) to estop New Jersey

from treating plaint iffs’ CSAT asset s as count able or (b) t o requir e the Dist

rict Court to hol d a hearin g on the issu e. M oreo ver, w e hold that pla intiffs’ c laims w ith resp ect to state pa ybacks are m oot b oth as to CSAT s and commercialannuiti es, and theyare without

standi ng to att ack New Jers ey’s u ndu e ha rdsh ip re gul ation s. Fina lly, becaus e plain tiffs do not p revail on the meri ts, theyhave no clai m for attorney s’ fees.