NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

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No. 10-1148

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MARY SABLE; MICHAEL LANZA; WILLIAM GERWECK

v.

JENNIFER VELEZ, Commissioner, New Jersey Department of Human Services; 

JOHN R. GUHL, Director, New Jersey Department of Human Services, Division of 

Medical Assistance and Health Services

Mary Sable,

Michael Lanza,

 Appellants

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On Appeal from the United States District Court

for the District of New Jersey

(D.C. No. 09-cv-02813)

District Judge: Honorable Anne E. Thompson

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Argued June 29, 2010

Before: SLOVITER, BARRY and HARDIMAN, Circuit Judges.

(Filed: July 28, 2010)

John W. Callinan [Argued]

Suite 103 

2052 Highway 35 

Wall, NJ 07719-0000 

Rene H. Reixach

Woods Oviatt Gilman 

2 State Street 

700 Crossroads Building 
2

Rochester, NY 14614 

Attorneys for Appellants 

Dianna M. Rosenheim [Argued]

Office of Attorney General of New Jersey 

Department of Law and Public Safety 

25 Market Street 

Richard J. Hughes Complex 

Trenton, NJ 08625-0000 

Attorney for Appellees

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OPINION OF THE COURT

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HARDIMAN, Circuit Judge.

Mary Sable and Michael Lanza appeal the District Court’s denial of their motion

for a preliminary injunction. Because we hold that the District Court’s decision was

based on legal error, we will vacate and remand.

I.

Appellants are elderly individuals who, along with their spouses, had too many

resources to qualify for assistance under the federal Medicaid program 42 U.S.C. § 1396,

et seq. Around the time Appellants applied for Medicaid, their spouses purchased

promissory notes from their children that appeared to bring the couples’ resources within

the Medicaid eligibility limits. Both applications were denied, however, because the New

Jersey Department of Human Services (the Department) counted the promissory notes as

resources, which caused Appellants to exceed the Medicaid resource threshold. The
3

Department reached that conclusion because it analyzed the promissory notes as trust-like

devices.

Appellants brought this suit against the Department’s Commissioner, Jennifer

Velez, and the Director of the New Jersey Division of Medical Assistance and Health

Services, John R. Guhl. Appellants sought to enjoin the Department from treating their

notes as trust-like devices and asked the District Court to remand the matter so the

Department could reconsider their applications under the proper analytical framework. 

The District Court denied Appellants’ motion for preliminary injunction, holding they had

not established a likelihood of success on the merits because federal law does not prohibit

treating the notes at issue as trust-like devices.

When reviewing a preliminary injunction, “we review the court’s legal conclusions

de novo, its findings of fact for clear error, and its ultimate decision to grant or deny the

preliminary injunction for an abuse of discretion.” Maldonado v. Houstoun, 157 F.3d

179, 183 (3d Cir. 1998).

II.

Appellants claim the District Court committed legal error when it held the

promissory notes can be treated as trust-like devices under Medicaid. They argue such

treatment violates the Medicaid statute’s comparability provisions, which require a state’s

methodology for calculating income and resource eligibility to be “no more restrictive”

than the methodology used for Supplemental Security Income (SSI). 42 U.S.C.
 The phrase, “no more restrictive” was added in a 1988 amendment to 1

§1396(a)(10)(C)(I), Pub. L. 100-360 § 303(e)(1), which used to require that the state’s

“methodology . . . shall be the same methodology which would be employed under” the

SSI. See Atkins v. Rivera, 477 U.S. 154, 159 (1986).

4

§§ 1396a(a)(1)(C)(i)(III), 1396a(r)(2). A methodology is “considered to be ‘no more

restrictive’ if, using the methodology, additional individuals may be eligible for medical

assistance and no individuals who are otherwise eligible are made ineligible for such

assistance.” § 1396a(r)(2)(B). The Department may employ a different methodology, as

long as it is no more restrictive.1

There are essentially two tracks of analysis for calculating resources under SSI: the

regular rules and the trust rules. Under the regular rules, a resource is defined as “cash or

other liquid assets . . . that an individual (or spouse, if any) owns and could convert to

cash to be used for his or her support and maintenance.” 20 C.F.R. § 416.1201(a); see

also § 416.120(c)(3) (using substantially similar language). To be a resource, the cash or

property must be capable of being “converted to cash within 20 days,” § 416.1201(b), and

the person must have the “right, authority, or power to liquidate the property or his or her

share of the property,” § 416.1201(a)(1). In its Program Operations Manual System

(POMS), the Social Security Administration has established tests for analyzing different
 The POMS is the publicly available internal operating instructions for processing 2

SSI claims. Washington State Dept. of Social Health Servs. v. Keffler, 537 U.S. 371, 385

(2003). “While these administrative interpretations are not products of formal

rulemaking, they nevertheless warrant respect.” Id.; see also James v. Richman, 547 F.3d

214, 218 n.2 (3d Cir. 2008).

 We also note that the regulations list “promissory notes” as “resources that are 3

ordinarily liquid,” 20 C.F.R. § 416.1201(b), whereas “loan agreements” are “resources

that are ordinarily nonliquid,” § 416.1201(c).

5

instruments. The relevant POMS provisions contain tests for promissory notes, POMS

2

SI § 1140.300, and cash loans, § 1120.220.3

Prior to 1999, some applicants evaded the resource requirements by placing their

money in trusts, which frequently do not qualify as resources under § 416.1201. Kelley v.

Comm’r of Social Security, 566 F.3d 347, 352-53 (3d Cir. 2009). To close that loophole,

Congress amended the SSI statute to count trusts and trust-like devices separately. 42

U.S.C. § 1382b(e); Kelley, 566 F.3d at 352-53; see also 42 U.S.C. § 1396p(d) (the

Medicaid statute on trusts and trust-like devices). Now, all trusts and trust-like devices

are considered resources unless explicitly excluded by statute. §§ 1382b(e)(3), and (e)(6). 

The POMS also contains a section on how to analyze trusts or trust-like devices, POMS

SI § 1120.201.

Critical to this appeal, the trust-like device analysis is secondary to the regular

analysis, even for instruments that meet the trust-like device requirements: “we will not

consider these arrangements under trust rules if they would be counted as resources under

regular SSI resource-counting rules.” § 1120.201(G)(1); see also § 1120.202(A)(5)(a)
 Appellants claim a promissory note can never be treated as a trust-like device 4

under 42 U.S.C. § 1396(d) because such treatment would render § 1396p(c) meaningless. 

But the two subsections do not affect each other. Subsection (d) addresses counting

resources for eligibility, whereas subsection (c) addresses punishing sham transactions in

which assets are transferred for less than fair market value. Because the two are different,

instruments can be relevant under both subsections. For example, annuities are

punishable under §§ 1396p(c)(1)(F) and (G) and can be analyzed as trust-like devices for

eligibility. See POMS SI § 1120.201(G)(2) (listing examples of trust-like devices,

including “annuities”).

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(directing application reviewers to first determine whether the instrument is a countable

resource “under regular SSI resource-counting rules”). Although the POMS does not

define “regular SSI resource-counting rules,” it refers to the regular rules discussed

above.

The District Court held that “there is nothing in the Medicaid Act or the POMS

that forbids a state from instead analyzing a promissory note as a trust-like device if the

facts of the situation warrant such analysis.” Sable v. Velez, 2009 WL 5174452, at *1

(D.N.J. 2009). Despite the veracity of that statement, we hold that the District Court did

not undertake the proper analysis to determine whether the facts of this case warrant trustlike device analysis. The SSI analysis requires inquiry into whether the notes at issue in

this appeal are resources under the regular resource-counting rules. If they are resources,

the SSI analysis would never reach the trust-like device provision. Because the District

Court proceeded to the trust-like device analysis without first applying the regular rules, it

committed legal error.4
 Contrary to the Department’s argument, the District Court will not need to 5

determine whether the transactions had a “loan purpose” because that requirement is not

contained in the statute, regulations, or POMS.

 On remand, the District Court will also need to determine whether Appellants 6

have shown a likelihood of success on the merits. Success on the merits requires showing

they would have been eligible under SSI, not that they would have been entitled to some

hypothetical defenses. See, e.g., Roach v. Morse, 440 F.3d 53, 59 (2d Cir. 2006) (“[T]o

succeed in their claim, plaintiffs must show that Vermont’s Medicaid methodology

renders them ineligible for benefits for which they would be eligible under the SSI

methodology.”).

7

To be clear, we do not hold that the promissory notes at issue in this appeal would

necessarily be counted as resources under the regular SSI resource-counting rules; that

determination depends on whether they satisfy those rules. For example, under the cash

loan provision, the notes need to be “bona fide,” “negotiable,” POMS SI

§ 1120.220(B)(2), and “enforceable under state law,” § 1120.220(A)(1); see also 5

§ 1120.220NY(B)(1) (SSI policy explaining when an informal loan is legally binding in

New Jersey). It remains for the District Court to make those determinations in the first

instance.

6

We hold only that the District Court committed legal error when it analyzed the

notes as trust-like devices without first determining whether they would be counted as

resources under the regular resource-counting rules. Accordingly we will vacate the

District Court’s order and remand for further proceedings not inconsistent with this

opinion.