2004 Decisions

Opinions of the United

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Precedential or Non-Precedential: Precedential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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"Johnson v. Guhl" (2004). 2004 Decisions. Paper 964.

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PRECEDENTIAL

UNITED STATES 

COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 01-3774

 

DONALD H. JOHNSON; JUANITA L.

JOHNSON;

EUGENE V. MARIANI; DOROTHY

MARIANI;

MARY LOU FLEMING; WILLIAM R.

FLEMING;

WILLIAM C. SCHAIBLE; PHYLLIS R.

SCHAIBLE,

by her Court Appointed Guardian;

LOIS BENEDETTO; GERALD

BENEDETTO;

DONNA R. BANKS; CHARLES V.

BANKS, Estate of;

RAYMOND O. DENMAN, JR.;

FRANCES C. DENMAN;

CHARLES N. HICKS; MARIE L.

HICKS;

ANN B. SILBERNAGEL; NORMAN V.

SILBERNAGEL;

ANNA PRYSTASCH; STANLEY

PRYSTASCH;

MARY MACKRON; ANTHONY

MACKRON, Estate of;

JANET WHALON; HAROLD B.

WHALON, JR.;

BERNADINE WEISER; RICHARD C.

WEISER;

GRACE LAFORGE; BLACE

LAFORGE; JOHN FILLMORE;

MARY FILLMORE; JOHN DOE, (1-5

fictitious names);

JANE DOE, (1-5 fictitious

names);ROBERT GROSS;

GEORGE ALLEN; Social Services;

THOMAS KOELHOFFER; FRANCES

KOELHOFFER;

WILLIAM KELLY; KATHRYN

KELLY;

MARCELLA FINKEL; JACK FINKEL;

EDNA ALLEN;

WILLARD NICKERSON; ETHEL

NICKERSON;

GERALDINE ANN SAHL; GEORGE J.

SAHL;

MARGARET BAKERIAN; VASGEN

BAKERIAN;

CHARLES DERROT; LOUISE

DERROT;

MIGUEL OBREGON; ONELIA

OBREGON;

ROY W. MCDOWELL; JUNE M.

MCDOWELL;

JOSEPH MEZZO; CARMELLA

MEZZO;

MATHILDA GROSS

 v.

MICHELLE K. GUHL, Commissioner;

STATE OF

NEW JERSEY, DEPARTMENT OF

HUMAN SERVICES,

MARGARET A. MURRAY, Director,

Division of

Medical Assistance and Health Service;

JOHN ROE, (1-5 fictitious names) their

agents, servants, employees, and/or

assigns, jointly, severally or in the

alternative; EDWARD TESTA, Director,

Bergen County Board of Social Services;

ELIZABETH LEHMANN, Director,

Morris

County Board of Social Services;

JAMES WILLIAMS, Director, Essex
2

County

Board of Social Services; JANE ROE,

Director, ABC County Board of Social

Services, (1-5 fictitious names);

ESSEX COUNTY BOARD OF

CHOSEN FREEHOLDERS

ESSEX COUNTY BOARD OF SOCIAL

SERVICES;

Donald H. Johnson, Juanita L. Johnson,

William C. Schaible, Phyllis R. Schaible,

Charles N. Hicks, Marie L. Hicks,

Ann B. Silbernagel, Norman V.

Silbernagel,

Anna Prystasch, Stanley Prystasch,

Appellants

 

On Appeal from the 

United States District Court for the 

District of New Jersey

D.C. Civil Action No. 99-cv-05403

 (Honorable Dennis M. Cavanaugh)

 

Argued April 22, 2003

Before: SCIRICA*, Chief Judge,

AMBRO and WEIS, Circuit Judges

 

*Judge Scirica began his term as

Chief Judge on May 4, 2003.

(Opinion filed: February 6, 2004) 

Donald M. McHugh, Esquire (Argued)

McHugh & Macri

49 Ridgedale Avenue

East Hanover, NJ 07936

National Academy of Elder Law

Attorneys

New Jersey Chapter 

Eugene Rosner, Esquire

1093 Raritan Road

Clark, NJ 07066

Attorneys for Appellants

David Samson

Attorney General of New Jersey

Michael J. Haas

Assistant Attorney General

M. Elizabeth Doyle (Argued)

Deputy Attorney General

Office of Attorney General of New

Jersey

Division of Law, P.O. Box 112

R. J. Hughes Justice Complex

25 Market Street

Trenton, NJ 08625

Attorneys for Appellees

Commissioner and State Divisions

Edwin C. Eastwood, Jr., Esquire

Law Offices of Edwin C. Eastwood, Jr.

723 Kennedy Boulevard

North Bergen, NJ 07047

Attorney for Appellee
3

Edward Testa

Daniel W. O’Mullan, Esquire

O’Mullan & Brady

57 Whippany Road

Whippany, NJ 07981

Attorney for Appellee

Elizabeth Lehmann

 

OPINION OF THE COURT

 

AMBRO, Circuit Judge

Medicaid is a federal assistance

program, administered by the states, that

helps individuals with below a certain

level of assets pay for medical expenses.1

Because Medicaid is available only to the

needy, creative lawyers and financial

planners have devised various ways to

“shield” wealthier claimants’ assets in

determining Medicaid eligibility. In this

context, we decide, among other issues,

whether New Jersey has correctly

interpreted federal law to preclude use of

a private annuity trust to shield assets. 

I. Background

Plaintiffs in this case are elderly

couples in which one spouse resides in a

nursing home (the “institutionalized

spouse”) and the other resides in the

community (the “community spouse”). 

Plaintiffs, New Jersey residents, sought

and were denied Medicaid benefits

because their assets exceed a level

qualifying them for Medicaid eligibility. 

They challenge their benefits denials

under 42 U.S.C. § 1983, and seek both

injunctive relief and a declaratory

judgment. The District Court held, inter

alia, that New Jersey did not violate

federal law in denying plaintiffs benefits

and thus dismissed their complaint.

Whether plaintiffs are entitled to

Medicaid benefits depends on how we

view certain private trusts they

established for the community spouse’s

benefit. Those trusts, known as

Community Spouse Annuity Trusts

(“CSATs”), are designed to provide a

stream of annuity payments to the

community spouse for the duration of his

or her life. From 1994 to 1999, New

Jersey did not consider the corpus of

these CSATs as “countable” assets – that

is, among plaintiffs’ available resources

for Medicaid eligibility purposes – so

long as, on the community spouse’s

death, New Jersey would be the first

beneficiary of the CSAT to the extent

that the State paid benefits on behalf of

the institutionalized spouse (“state

payback” or “state-payback

requirement”). Thus, New Jersey

effectively permitted Medicaid claimants

to use CSATs to shield a couple’s assets

from Medicaid eligibility determinations

during the community spouse’s lifetime. 

New Jersey would then be reimbursed 

1The Medicaid Act is codified at 42

U.S.C. § 1396 et seq.
4

for benefits paid if any funds remained in

the CSAT after the community spouse’s

death. If no funds remained, New Jersey

would recover nothing.

In 1999 New Jersey changed its

position on the countability of CSATs,

largely in response to an earlier

interpretive letter from an employee of

the Department of Health and Human

Services (“HHS”) stating that trusts such

as CSATs should be considered

countable assets. With this change New

Jersey considers CSATs among

Medicaid claimants’ assets when

determining their total resources for

eligibility purposes. Thus, CSATs can

no longer be used to shelter assets.

2

 New

Jersey has taken a similar position with

respect to commercial annuities.

3

Plaintiffs applied for Medicaid

benefits during the period that New

Jersey was implementing its CSAT

policy change. They claim that, during

this period, New Jersey delayed in

processing their pending Medicaid

applications for anywhere between eight

and eighteen months. When New Jersey

finally determined plaintiffs’ eligibility,

applying its “new” policy, it deemed

their asset levels too high to qualify for

Medicaid benefits because it included

their CSATs as available assets. 

Plaintiffs dispute that the corpus of their

CSATs should be counted among their

assets. 

Recognizing the difficulties its

policy change caused plaintiffs (who had

established CSATs expecting pre-1999

policy to apply), New Jersey advised that

it would allow them to replace their

CSATs with commercial annuities. As a

compromise to plaintiffs, the State would

treat these annuities as non-countable

(whereas for other Medicaid claimants

the State treats commercial annuities as

countable), so long as plaintiffs included

a state-payback provision in the

annuities. Plaintiffs, however, did not

accept this settlement.4

 

2

In this context, state paybacks no

longer were exacted.

 

3Like CSATs, commercial annuities

provide a stream of payments (in this

context, to the community spouse) for a

fixed term of years. However, they are

administered differently from CSATs. 

Whereas the corpus of a CSAT is

administered by a trustee, who is often

related to the elderly couple, the “corpus”

of a commercial annuity is paid to an

unrelated third party (typically an

insurance company) to purchase the

annuity. The annuity company then

makes payments to the community

spouse from a combination of principal

and income from that corpus.

 

4

Plaintiffs argue that they notified

New Jersey that they wished to exchange

their CSATs for commercial annuities. 

New Jersey responds that they instructed

plaintiffs how to do so, but they declined

to follow these instructions and therefore

waived this offer of compromise.
5

After New Jersey held their

CSATs countable (thereby making them

ineligible for Medicaid), plaintiffs sought

to prove that New Jersey’s denial of

benefits would cause them “undue

hardship.” Under federal law, if denial

of Medicaid benefits to a claimant causes

undue hardship, the state must provide

benefits, even though the claimant would

otherwise not be so entitled. Federal law

requires states to establish hearing

procedures by which individuals can

present their undue hardship claims. But

at that time New Jersey had not

promulgated these procedures, leaving

plaintiffs without any administrative

avenue for undue hardship relief. 

As a result of these circumstances,

plaintiffs filed suit in the District Court. 

They challenged, inter alia, New Jersey’s

determination that their CSATs are

countable resources, the state-payback

requirement for CSATs deemed not

countable, and New Jersey’s failure to

promulgate procedures for undue

hardship hearings required by federal

law. The District Court (per Judge

Bassler) denied relief and dismissed

certain of their claims (though both

actions were without prejudice in part). 

First, it held plaintiffs’ CSATs countable

under federal law. Second, although the

Court believed that New Jersey’s statepayback requirement violates federal law

by imposing Medicaid eligibility criteria

more stringent than those imposed by the

Medicaid Act (i.e., that Medicaid

claimants with CSATs name New Jersey

first beneficiary, when federal law

imposes no such requirement), the Court

saw no risk of irreparable harm because

New Jersey ceased to require state

paybacks for CSATs post-1999 when it

began to deem CSATs countable assets. 

Finally, the Court confirmed that

plaintiffs must be afforded an

opportunity for an undue hardship

hearing (and that New Jersey had failed

to promulgate procedures for such a

hearing). However, because New Jersey

conceded its obligation and had

committed to promulgating regulations

for hearings, the Court held that its

failure to do so thus far posed no risk of

irreparable harm. Judge Bassler left

open the possibility that plaintiffs could

return to federal court if New Jersey

failed to implement its promised

procedures.

In the meantime, despite the

absence of officially promulgated

procedures, New Jersey offered plaintiffs

the opportunity to plead undue hardship

in conformity with federally mandated

standards. The State sent “amended”

denial letters to plaintiffs in December

1999 notifying them of their right to

apply for an undue hardship exception. 

Plaintiffs declined to do so, however.5 

 

5

Plaintiffs’ counsel asked New Jersey

by letter on January 11, 2000 to “send . . .

the undue hardship policy provision

contained in the New Jersey State

Medicaid Plan” that implements the

federal mandate to afford undue hardship

hearings. He said that, “[u]pon receipt of
6

In 2001, New Jersey’s unduehardship regulations became effective. 

Plaintiffs believe those regulations are

inadequate, however, because they fail to

specify a time in which the State must

hold a hearing, thereby violating a

federal Medicaid regulation requiring a

“timely process for determining whether

an undue hardship waiver will be

granted.” Health Care Financing

Administration (now Centers for

Medicare & Medicaid

Services)(“HCFA”) Transmittal No. 64 §

3259.8C. 

Plaintiffs returned to the District

Court. This time the Court (with Judge

Cavanaugh now presiding) denied their

motion for, inter alia, injunctive relief

and dismissed their complaint. It again

held plaintiffs’ CSATs countable in

determining Medicaid eligibility. It also

rejected their argument that, because

New Jersey unduly delayed in

determining their eligibility, it should be

equitably estopped from applying its new

CSAT countability policy to plaintiffs. 

The Court reasoned that equitable

estoppel will rarely lie against

governmental entities. Moreover, Judge

Cavanaugh rejected plaintiffs’ statepayback argument, though for different

reasons than did Judge Bassler. Judge

Cavanaugh found no evidence that New

Jersey any longer requires state paybacks

for CSATs. However, in disagreement

with Judge Bassler, Judge Cavanaugh

held that state paybacks are consistent

with federal policy disfavoring Medicaid

claimants’ attempts to shelter assets and

thus do not violate federal law. Finally,

the Court disagreed with plaintiffs that

New Jersey’s newly promulgated undue

hardship hearing provisions were

deficient for their failure explicitly to

provide a time frame in which a hearing

must be conducted. Rather, it held that

the State had “substantially complied”

with federal law’s mandate to provide for

undue hardship hearing procedures.

Plaintiffs appeal Judge

Cavanaugh’s dismissal of their

complaint.6 They raise essentially five

issues for our review7: (1) whether

that information, my clients will file the

undue hardship request.” As noted, New

Jersey had no formal procedures in place

at that time, but rather was attempting to

accommodate plaintiffs’ complaint by

providing ad hoc procedures that would

comply with federal law. Thus New

Jersey had nothing to send plaintiffs. 

Plaintiffs – presumably because they did

not receive the then-nonexistent

provisions – never provided New Jersey

with the information necessary to

determine whether they were entitled to

an undue hardship exception. 

 

6The District Court had jurisdiction

under 28 U.S.C. § 1331. We have

jurisdiction pursuant to 28 U.S.C. §

1291. 

 

7These are questions of statutory

interpretation, over which we exercise
7

CSATs are countable assets for Medicaid

eligibility purposes; (2) whether in any

event New Jersey should be estopped

from treating plaintiffs’ CSATs as

countable assets because they delayed

unduly in determining plaintiffs’

Medicaid eligibility (or alternatively

whether the District Court should hold a

hearing on plaintiffs’ estoppel claim); (3)

whether New Jersey’s state-payback

requirement pre-1999 for CSATs violates

federal law; (4) whether New Jersey’s

state-payback requirement for the

commercial annuity option offered to

plaintiffs violates federal law; and (5)

whether the undue hardship regulations

of New Jersey violate federal law by

failing explicitly to provide a time by

which it must hold a hearing. Plaintiffs

also seek attorneys’ fees.

II. Discussion

A. Countability of CSATs

New Jersey deemed plaintiffs

ineligible for Medicaid benefits because,

when the capital in their CSATs was

taken into account, they had assets

exceeding a level qualifying them for

Medicaid. Plaintiffs argue that New

Jersey should not have considered their

CSATs as countable assets.

As this is a question of statutory

interpretation,8 we begin (and end) our

inquiry with the relevant statute, 42

U.S.C. § 1396p(d)(3)(B). That provision

provides, in subsection (i), that “[i]n the

case of an irrevocable trust -- if there are

any circumstances under which payment

from the trust could be made to or for the

benefit of the individual [the

institutionalized spouse whose assets are

used to establish the trust], the portion of

the corpus from which, or the income on

the corpus from which, payment to the

individual could be made shall be

considered resources available to the

individual . . . .” Both parties agree that

CSATs are irrevocable trusts. They are

generally funded with marital assets

(assets that belong to both spouses). 

Moreover, CSATs are designed so that

the corpus and the income on the corpus

will provide the community spouse a

stream of payments. Once the

community spouse receives these

payments, there is nothing preventing her

or him from sharing them with the

institutionalized spouse as well. Section

1396p(d)(3)(B)(i) thus squarely covers

plenary review. Moody v. Sec. Pac. Bus.

Credit, Inc., 971 F.2d 1056, 1063 (3d

Cir. 1992).

 

8We note that there is some question

“whether third parties may sue to enforce

Spending Clause legislation [such as

provisions of the Medicaid Act].” 

Pharmaceutical Research & Mfrs. of Am.

v. Walsh, 123 S. Ct. 1855, 1878 (2003)

(Thomas, J., concurring) (citations

omitted). However, as neither party

raises this issue on appeal, we have no

occasion to decide it. 
8

CSATs – as “circumstances [exist] under

which payment from the trust could be

made to or for the benefit of” the

institutionalized spouse – and deems

them countable resources.9 Accordingly,

we affirm the District Court ruling that

plaintiffs’ CSAT assets are countable

resources.

B. Equitable Estoppel

Plaintiffs argue that New Jersey

“stalled” their Medicaid applications for

eight to eighteen months to allow the

State to make a “policy change”

regarding CSATs’ countability. As a

result, plaintiffs assert that we should

equitably estop New Jersey from

attempting to apply its new CSAT

countability rule to plaintiffs or at least

order the District Court to hold a hearing

and allow discovery on this claim.

 We decline to do either. 

“[E]quitable estoppel will not lie against

the Government as it lies against private

litigants.” Office of Personnel Mgmt. v.

Richmond, 496 U.S. 414, 419 (1990). In

Richmond, even though a federal

employee provided misinformation to the

plaintiff (on which he relied to his

detriment), the Supreme Court declined

equitably to estop the Government. Id. at

 

9

Indeed, an interpretive letter from an

HHS employee supports our analysis. 

On April 16, 1998, Robert A. Streimer,

with the Disabled and Elderly Health

Programs Group of HHS’s Center for

Medicaid and State Operations, wrote to

an attorney in Virginia who inquired

about the treatment of her client’s trust. 

According to the letter, the Virginia

Department of Social Services denied her

client Medicaid benefits because, when

the trust’s corpus was counted as an

eligible resource, the client had assets in

excess of a Medicaid-qualifying level. 

Streimer opined that Virginia’s

determination was correct. He reasoned

that the trust “falls under the jurisdiction

of [§ 1396p(d)] if the trust was

established by either member of the

couple, using at least some of the

Medicaid applicant’s assets.” Second,

because “the trust . . . is an irrevocable

trust, the corpus of which can be paid at

some point in time to the community

spouse[,] . . . the corpus . . . is considered

as an available resource to the

beneficiary, and thus must be included as

a countable resource in determining

Medicaid eligibility for the

institutionalized spouse.” The Streimer

letter went on to draw a distinction

between irrevocable (private) trusts and

commercial annuities, suggesting that

commercial annuities would not be

countable resources. Because, as will be

discussed below, the countability of

commercial annuities is not a question

raised in plaintiffs’ complaint, we need

not decide whether the Streimer letter’s

position on the countability of

commercial annuities – a position

conflicting with New Jersey’s – is

correct.
9

433-34. In a case more than a century

before, The Floyd Acceptances, the Court

similarly held that the Government could

not be compelled to honor bills of

exchange issued by a government official

where there was no statutory authority

for the issuance of the bills. 74 U.S. 666,

682-83 (1868). An analogous principle

applies here: because, as discussed, there

is no statutory authority (federal or state)

for treating CSAT assets as not

countable, New Jersey should not be

estopped from treating them as

countable. While the Richmond Court

left open the possibility that some kind of

“‘affirmative misconduct’ might give rise

to estoppel against the Government,”

plaintiffs allege no affirmative

misconduct here. Richmond, 496 U.S. at

421 (citations omitted). In this context,

the District Court was correct in

eschewing the estoppel of New Jersey’s

countability rule.10 

C. State-payback requirement for

CSATs

Plaintiffs challenge New Jersey’s

state-payback requirement for CSATs. 

They argue that no provision of the

Medicaid Act allows a state to seek

payback from a community spouse’s

estate. Moreover, because § 1396p

requires state payback for other types of

trusts, see § 1396p(d)(4)(A)-(C),11

Congress knew how to specify state

payback when it wanted; that it did not

do so for spousal trusts indicates that it

did not intend to permit states to seek

payback for CSATs. New Jersey

counters that this issue is now moot

because it considers CSATs countable

and therefore no longer imposes this

condition. We agree with New Jersey.

As background, § 1396p(d)(3)

instructs states how to treat trusts for

Medicaid eligibility purposes. 

Previously, when New Jersey considered

CSATs noncountable, it presumably

believed them to be governed by §

1396p(d)(3)(B)(ii), which addresses

irrevocable trusts when no income or

principal from the trust “could under any

circumstances be made to the individual

[establishing the trust].” That section

provides that these trusts “shall be

considered . . . to be assets disposed by

the individual for purposes of subsection

(c) of this section [imposing a penalty on

transfers of assets].” The creation of a

CSAT results in a transfer of marital

assets to the community spouse. See §

1396p(c)(3). Thus, absent some

exception, even though a CSAT is

noncountable it still is subject to §

 

10As there is no need in this case for

any hearing (including discovery), the

District Court’s refusal to conduct a

hearing is also affirmed.

 

11The trusts provided for in this

section are known as special-needs,

“Miller,” and pooled trusts, and are not

implicated in this case.
10

1396p(c)’s transfer penalty.12 Section

1396p(c)(2)(B)(i), however, exempts

transfers from penalty when made “for

the sole benefit of the individual’s

spouse.” In Medicaid parlance, this is

known as an “SBO transfer.” New

Jersey conditioned application of the

SBO exception to the § 1396p(c) transfer

penalty by defining an SBO transfer to

include when the State is named first

beneficiary of the trust to the extent of

benefits paid on behalf of the

institutionalized spouse. N.J. Admin.

Code tit. 10, § 71-4.10(f). In layman’s

language, transfers of assets by the

institutionalized spouse for the sole

benefit of the community spouse are not

penalized for Medicaid eligibility,

according to New Jersey, if it has first

call on those trust assets equal to the

Medicaid benefits it pays to the

institutionalized spouse. 

Because New Jersey no longer

requires state paybacks for CSATs, we

have no occasion to decide whether it

had the authority to define an SBO

transfer in this manner.13 Thus the statepayback issue plaintiffs assert is moot

with respect to CSATs. 

D. Commercial annuity option offered

to plaintiffs

Plaintiffs argue that the

commercial annuity option New Jersey

offered them – whereby New Jersey

would deem commercial annuities

noncountable assets so long as they

provided for state payback – violates

federal law for the same reasons

discussed above. New Jersey responds

that because plaintiffs did not raise this

issue in their complaint (i.e., plaintiffs

only raised the issue with respect to

CSATs), it is not properly before us. 

We agree that plaintiffs take issue

too late. Moreover, at oral argument

New Jersey made clear that its offer to

treat any commercial annuities plaintiffs

might purchase as noncountable (so long

 

12The “transfer penalty” is a period of

ineligibility for Medicaid benefits. 

 

13Although § 71-4.10(f) is no longer

applied by New Jersey with respect to

CSATs, it apparently is still in effect, and

thus presumably contemplates state

paybacks in non-CSAT contexts. 

We also note in this regard that

HHS has taken a position (in the context

of a commercial annuity) contrary to

New Jersey’s view that SBO transfers

can include it as a beneficiary. See letter

dated September 26, 2002, from Thomas

E. Hamilton, Director of the Disabled

and Elderly Health Programs Group of

HHS’s Centers for Medicare and

Medicaid Services, to Donald M.

McHugh, Esq. (one of plaintiffs’ counsel

in this case). Interestingly, the Hamilton

letter, notwithstanding § 71-4.10(f),

refers to New Jersey’s interpretation as a

“policy, rather than state statute or

regulation.”
11

as they named New Jersey as first

beneficiary) was intended to be a

settlement available to the plaintiffs, not

a policy generally applicable to all

Medicaid claimants. New Jersey need

not have offered this compromise to

plaintiffs, and instead could have chosen

to treat countable assets in any annuities

(whether private or commercial)

plaintiffs purchased. Regardless,

plaintiffs rejected this settlement, and

New Jersey tells us it is no longer on the

table. Thus, not only was this issue not

properly pled, it is moot as well.

E. Undue Hardship Hearing

Section 1396p(d)(5) requires

states to afford otherwise ineligible

claimants Medicaid benefits if “undue

hardship” would result from the failure

to provide benefits.14 The relevant

Medicaid regulation, § 3259.8 of HCFA

Transmittal No. 64, sets standards for

states to apply in making “undue

hardship” determinations. Section

3259.8A provides that “[u]ndue hardship

exists when application of the trust

provisions would deprive the individual

of medical care such that his/her health

or his/her life would be endangered [or]

when application of the trust provisions

would deprive the individual of food,

clothing, shelter, or other necessities of

life.” While states have “considerable

flexibility in deciding the circumstances

under which [they] will not count funds

in trusts . . . because of undue hardship,”

the regulation requires that states, “at a

minimum, provide for: [1] [n]otice to

recipients that an undue hardship

exception exists; [2] [a] timely process

for determining whether an undue

hardship waiver will be granted; [and] 

[3] [a] process under which an adverse

determination can be appealed.” §

3259.8C. Moreover, a state’s “undue

hardship provision must discuss how [the

state] will meet these requirements.” Id.

Plaintiffs’ arguments have

necessarily shifted through the course of

this case because, before seeking relief

initially in the District Court, New Jersey

had not promulgated procedures under

which Medicaid claimants could seek

undue hardship hearings in accordance

with § 1396p(d)(5) of the Medicaid Act

and § 3259.8 of Transmittal No. 64. 

However, after the hearing before Judge

Bassler, New Jersey implemented the

long-promised undue hardship

regulations. See N.J. Admin. Code tit.

10, § 71:4.11(i). According to plaintiffs,

however, New Jersey’s regulations do

 

1442 U.S.C. § 1396p(d)(5) provides

that “[t]he State agency [responsible for

administering Medicaid] shall establish

procedures (in accordance with standards

specified by the Secretary) under which

the agency waives the application of this

subsection [relating to “[t]reatment of

trust amounts”] with respect to an

individual if the individual establishes

that such application would work an

undue hardship on the individual as

determined on the basis of criteria

established by the Secretary.”
12

not fully comply with federal law. They

argued before Judge Cavanaugh – and

now before us – that New Jersey’s

regulations do not specify within what

time period the State will afford an

undue hardship hearing and thus do not

“discuss how [New Jersey] will meet”

Transmittal No. 64's “timely process”

requirement. This failure, plaintiffs

argue, violates federal law.

New Jersey responds that

plaintiffs are without standing to

complain about the lack of an explicit

timeliness clause in its regulation

because plaintiffs have not availed

themselves of the offered undue hardship

remedy and thus have suffered no injury

as a result of the lack of an explicit

timeliness provision in § 71:4.11(i). On

the merits, New Jersey also argues that

neither § 1396p(d)(5) nor § 3259.8 of

Transmittal No. 64 requires states to

include an express timeliness provision. 

We agree with New Jersey that

plaintiffs lack standing because they

have suffered no injury related to §

71:4.11(i)’s lack of an explicit timeliness

provision. Plaintiffs conceded both in

their brief and at oral argument that New

Jersey notified them of their right to an

undue hardship hearing in December

1999 and required them to submit “the

reasons and all documentation that you

believe gives rise to an undue hardship . .

. to the county welfare agency within 20

day[s] of this letter.” While these notices

were sent out before New Jersey’s undue

hardship regulations became effective in

2001, this chronology is irrelevant.15

What is important is that (the lack of

formal regulations notwithstanding) New

Jersey offered plaintiffs the opportunity

to apply for an undue hardship hearing,

as federal law requires. For whatever

reason, plaintiffs chose not to seek a

hearing for undue hardship at that time. 

Thus they have suffered no injury (and

indeed have no basis to believe that New

Jersey would not have timely processed

their request).16 As a consequence,

plaintiffs are without standing.

F. Attorneys’ fees

Because plaintiffs have not

received a favorable judgment on any of

their claims – either in the District Court

 

15We recognize that plaintiffs could

not receive an undue hardship hearing

under § 71-4.11(i) today. This provision

requires claimants to apply for an undue

hardship waiver “within 20 days of

notification of the denial of eligibility or

termination of benefits,” a period longpassed. But as discussed, New Jersey

offered plaintiffs the opportunity to seek

an undue hardship hearing in December

1999. Having done so, it followed

federal law. 

 

16Had plaintiffs sought a hearing, and

had New Jersey delayed unduly in

providing them a hearing or otherwise

not complied with federal standards for

such a hearing, they would have had

standing. 
13

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.