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Zackery D. Lewis, By His Next Friends; Richard v. Gary Alexander

June 20, 2012

ZACKERY D. LEWIS, BY HIS NEXT FRIENDS; RICHARD YOUNG; LYNN G. HAINER, ADMINISTRATRIX OF THE ESTATE OF ADDIE SMITH; SUSAN W. COLEMAN; KATHY A. BURGER; TRACY PALMER; KENNY ATKINSON, BY HIS NEXT FRIEND; BERNICE TATE, BY HER NEXT FRIEND; MARY WAGNER; MICHAEL BIDZILYA, BY HIS NEXT FRIEND; WILLIAM ALGAR, BY HIS NEXT FRIEND; ANTHONY GALE, BY HIS NEXT FRIENDS; THE ARC COMMUNITY TRUST OF PENNSYLVANIA; THE FAMILY TRUST, ON THEIR OWN BEHALF AND ON BEHALF OF ALL OTHER PERSONS SIMILARLY SITUATED
v.
GARY ALEXANDER, IN OFFICIAL CAPACITY AS SECRETARY OF DEPARTMENT OF PUBLIC WELFARE OF THE COMMONWEALTH OF PENNSYLVANIA; ERIC ROLLINS, IN OFFICIAL CAPACITY AS EXECUTIVE DIRECTOR OF THE ERIE COUNTY ASSISTANCE OFFICE, APPELLANTS



On Appeal from the United States District Court for the Eastern District of Pennsylvania District Court No. 2-06-cv-03963 District Judge: The Honorable Jan E. Dubois

The opinion of the court was delivered by: Smith, Circuit Judge,

PRECEDENTIAL

Argued March 26, 2012

Before: FUENTES, SMITH, and JORDAN, Circuit Judges

OPINION

I

This case involves the interaction between state and federal law under the Medicaid system, a cooperative program between the state and federal governments to provide medical assistance to those with limited financial resources. Seeking to stamp out abusive manipulation of trusts to hide assets and thereby manufacture Medicaid eligibility, Congress created a comprehensive system of rules mandating that trusts be counted as assets. But Congress also exempted from these rules certain trusts intended to provide disabled individuals with necessities and comforts not covered by Medicaid. Seeking to ensure that these trusts were not abused, Pennsylvania enacted Section 9 of Pennsylvania Act 42 of 2005, codified at 62 Pa. Stat. Ann. § 1414 (Section 1414), to regulate these special needs trusts.

Plaintiffs brought a putative class action in the Eastern District of Pennsylvania challenging Section 1414‟s validity. Plaintiffs allege Section 1414 is preempted by the federal statute governing Medicaid eligibility, 42 U.S.C. § 1396p(d)(4). They seek injunctive and declaratory relief barring its enforcement. The District Court granted that relief, holding all but one of the challenged provisions of Section 1414 preempted. In reaching that holding, the District Court concluded that Plaintiffs‟ case was justiciable and that Plaintiffs had a private right of action under both Section 1983 and the Supremacy Clause. The District Court also held that Section 1414 was severable, certified a class of plaintiffs, and appointed class counsel.

This appeal followed. The parties do not challenge the District Court‟s decision to uphold the remaining provision of Section 1414 or the District Court‟s decisions on severability, certification, and appointment of class counsel. We conclude that Plaintiffs‟ case is justiciable and that they have a private right of action under both Section 1983 and the Supremacy Clause of the Constitution. On the merits of Plaintiffs‟ challenge, we conclude that the District Court was correct in its determination that Section 1414‟s 50% repayment provision, "special needs" provision, expenditure provision, and age restriction are all preempted by federal law. However, we conclude that the enforcement provision of Section 1414 - when used to enforce provisions not otherwise preempted by federal law - is a reasonable exercise of the Commonwealth‟s retained authority to regulate trusts. We will affirm in part and reverse in part.

II

Medicaid is a joint federal-state program providing medical assistance to the needy.*fn1 Enacted under Congress‟ Spending Clause authority, Medicaid is voluntary. No State is obligated to join Medicaid, but if they do join, they are subject to federal regulations governing its administration. See Roloff v. Sullivan, 975 F.2d 333, 335 (7th Cir. 1992). Pennsylvania has elected to participate in Medicaid.

Generally, Medicaid provides assistance for two types of individuals: the categorically needy and the medically needy. The categorically needy are those who qualify for public assistance under the Supplemental Security Income (SSI) program or other federal programs. See Roach v. Morse, 440 F.3d 53, 59 (2d Cir. 2006) (Sotomayor, J.);

Roloff, 975 F.2d at 335. The medically needy are those who would qualify as categorically needy (because they are disabled, etc.) but whose income and/or assets are substantial enough to disqualify them. Roloff, 975 F.2d at 335.*fn2 Every State participating in Medicaid must provide assistance to the categorically needy. States need not provide assistance to the medically needy. See id. If States choose to make medical assistance available to the medically needy, they are subject to various statutory restrictions in determining to whom medical assistance should be extended.

Congress has created a comprehensive system of assetcounting rules for determining who qualifies for Medicaid. Under Medicaid‟s original asset-counting rules, individuals could put large sums of money in trust, thereby vesting legal title to those assets in the trust and reducing (on paper) the amount of assets owned by the individual.

A trust is a legal instrument in which assets are held in the name of the trust and managed by a trustee for the benefit of a beneficiary. Black's Law Dictionary 1546 (8th ed. 2004) (definition of "trust"). This structure means that the beneficiary does not actually own the assets of the trust, but instead has an equitable right to derive benefits from them. (The benefits vary according to the terms of the trust.) The trust has long been a tool for evading the rigid strictures of the law, which has generally been a positive development. For example, in feudal England - the trust‟s birthplace - the trust allowed younger sons and daughters to inherit land despite strict rules at law against devising land by will. See Joseph A. Rosenberg, Supplemental Needs Trusts for People with Disabilities: The Development of a Private Trust in the Public Interest, 10 B.U. Pub. Int. L.J. 91, 101 (2000) (citing Austin Wakeman Scott, Abridgment of the Law of Trusts 11 (1960)). And the trust‟s unique structure makes it useful for countless salutary purposes in modern society.

But this same bifurcated ownership structure has been used to manufacture eligibility for government welfare programs like Medicaid. As with many government programs, eligibility for Medicaid is partially dependent on the claimant‟s income and assets. Wealthy individuals are expected to exhaust their own resources before turning to the public for assistance. But trusts can enable these same individuals to technically "own" nothing at all, even though they may have access to substantial wealth. Such claimants may then qualify for Medicaid. See Johnson v. Guhl, 357 F.3d 403, 405 (3d. Cir. 2004) ("Because Medicaid is available to the needy, creative lawyers and financial planners have devised various ways to shield‟ wealthier claimants‟ assets in determining Medicaid eligibility."). Individuals have gained access to taxpayer-funded healthcare while retaining the benefit of their wealth and the ability to pass that wealth to their heirs.

Congress understandably viewed this as an abuse and began addressing the problem with statutory standards enacted in 1986. See Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272, § 9506(a), 100 Stat. 82 (Apr. 7, 1986). These standards were repealed and replaced in 1993 by the current trust-counting rules. See Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, Title XIII § 13611(d)(1)(c), 107 Stat. 312 (Aug. 10, 1993) (OBRA 1993). Those rules are at issue in this case.

In the 1993 OBRA amendments, Congress established a general rule that trusts would be counted as assets for the purpose of determining Medicaid eligibility. But Congress also excepted from that rule three types of trusts meeting certain specific requirements. Taken together, these are generally called "special needs trusts" or "supplemental needs trusts." "A supplemental needs trust is a discretionary trust established for the benefit of a person with a severe and chronic or persistent disability and is intended to provide for expenses that assistance programs such as Medicaid do not cover." Sullivan v. Cnty. of Suffolk, 174 F.3d 282, 284 (2d Cir. 1999) (internal quotation marks omitted). These expenses - books, television, Internet, travel, and even such necessities as clothing and toiletries - would rarely be considered extravagant.

One type of special needs trust - the one at issue in this case - is the pooled special needs trust. "A pooled trust‟ is a special arrangement with a non-profit organization that serves as trustee to manage assets belonging to many disabled individuals, with investments being pooled, but with separate trust accounts‟ being maintained for each disabled individual." Jan P. Myskowski, Special Needs Trusts in the Era of the Uniform Trust Code, 46 N.H. Bar J., Spring 2005, at 16. The pooled special needs trust was intended for individuals with a relatively small amount of money. By pooling these small accounts for investment and management purposes, overhead and expenses are reduced and more money is available to the beneficiary.

The Medicaid statute says the following regarding pooled trusts:

(4) This subsection [the rules counting trusts as available assets for purposes of Medicaid eligibility] shall not apply to any of the following trusts:

(C) A trust containing the assets of an individual who is disabled (as defined in section 1382c(a)(3) of this title) that meets the following conditions:

(i) The trust is established and managed by a non-profit association.

(ii) A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts.

(iii) Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1382c(a)(3) of this title) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court.

(iv) To the extent that amounts remaining in the beneficiary‟s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.

42 U.S.C. § 1396p(d)(4).

In 2005, Pennsylvania sought to regulate pooled trusts (and special needs trusts more generally) by passing Section 1414, which states:

Section 1414. Special Needs Trusts. -

(a) A special needs trust must be approved by a court of competent jurisdiction if required by rules of court.

(b) A special needs trust shall comply with all of the following:

(1) The beneficiary shall be an individual under the age of sixty-five who is disabled, as that term is defined in Title XVI of the Social Security Act (49 Stat. 620, 42 U.S.C. § 1381 et seq.)

(2) The beneficiary shall have special needs that will not be met without the trust.

(3) The trust shall provide:

(i) That all distributions from the trust must be for the sole benefit of the beneficiary.

(ii) That any expenditure from the trust must have a reasonable relationship to the needs of the beneficiary.

(iii) That, upon the death of the beneficiary or upon the earlier termination of the trust, the department and any other state that provided medical assistance to the beneficiary must be reimbursed from the funds remaining in the trust up to an amount equal to the total medical assistance paid on behalf of the beneficiary before any other claimant is paid: Provided, however, That in the case of an account in a pooled trust, the trust shall provide that no more than fifty percent of the amount remaining in the beneficiary‟s pooled trust account may be retained by the trust without any obligation to reimburse the department.

(c) If at any time it appears that any of the requirements of subsection (b) are not satisfied or the trustee refuses without good cause to make payments from the trust for the special needs of the beneficiary and, provided that the department or any other public agency in this Commonwealth has a claim against trust property, the department or other public agency may petition the court for an order terminating the trust.

(f) As used in this section, the following words and phrases shall have the following meanings:

"Special needs" means those items, products or services not covered by the medical assistance program, insurance or other third-party liability source for which a beneficiary of a special needs trust or his parents are personally liable and that can be provided to the beneficiary to increase the beneficiary‟s quality of life and to assist in and are related to the treatment of the beneficiary‟s disability. The term may include medical expenses, dental expenses, recreational therapy, occupational therapy, physical therapy, vocational therapy, durable medical needs, prosthetic devices, special rehabilitative services or equipment, disability-related training, education, transportation and travel expenses, dietary needs and supplements, related insurance and other goods and services specified by the department.

62 Pa. Stat. Ann. § 1414.

Plaintiffs challenge Section 1414 as preempted by the Medicaid statute. Stripped down to its essentials, their argument is that the requirements for a pooled special needs trust are set forth at 42 U.S.C. § 1396p(d)(4), that those are the only requirements, and that Section 1414‟s attempt to graft additional requirements onto pooled special needs trusts is not permissible. The District Court agreed. For the most part, we agree as well. We part company with the District ...


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