Lemmons v. Doerflinger et al

Filing 38

ORDER granting 32 Plaintiff's Motion for Summary Judgment; granting in part and denying in part 33 Defendant's Motion for Summary Judgment. Signed by Honorable Robin J. Cauthron on 3/21/13. (lg)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
JUANITA LEMMONS, by and through
Gary Lemmons, next friend and
attorney-in-fact,
Plaintiff,
vs.
ED LAKE, Director of Oklahoma
Department of Human Services, and
MIKE FOGARTY, Director of Oklahoma
Health Care Authority,
Defendants.

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Case No. CIV-12-1075-C

MEMORANDUM OPINION AND ORDER
This case involves the legality of Medicaid planning. On April 18, 2012, Plaintiff
Juanita Lemmons sold her farm and her Edwards Jones account to her son, Gary Lemmons,
in exchange for a promissory note for $84,600 (the “Note”). The parties agree that the Note
satisfies the elements of 42 U.S.C. § 1396p(c)(1)(I) because it has a repayment term that is
actuarially sound, provides for equal payment terms without deferral or balloon payments,
and prohibits cancellation upon the death of Plaintiff. Plaintiff filed an application for
Medicaid assistance with the Oklahoma Department of Human Services (“OKDHS”) twelve
days after the execution of the Note, on April 30, 2012. OKDHS issued Plaintiff a “Notice
of Denial” on August 17, 2012, denying Plaintiff’s application for Medicaid assistance
because it deemed the April 18th sale a transfer of resources without receipt of fair market
value or, alternatively, a trust-like device. Plaintiff filed this lawsuit on September 27, 2012,

to challenge OKDHS’s decision to deny her Medicaid benefits. Now before the Court are
the parties’ cross motions for summary judgment (Dkt. Nos. 32 & 33).
I. LEGAL STANDARD
Summary judgment is proper if the moving party “shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(a). A fact is material if it affects the disposition of the substantive claim.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). The party seeking summary
judgment bears the initial burden of demonstrating the basis for its motion, and identifying
those portions of “‘the pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any,’” that demonstrate the absence of a genuine issue of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (citation omitted). If the
movant satisfactorily demonstrates an absence of genuine issue of material fact with respect
to a dispositive issue for which the non-moving party will bear the burden of proof at trial,
the non-movant must then “go beyond the pleadings and by her own affidavits, or by the
‘depositions, answers to interrogatories, and admissions on file,’ designate ‘specific facts
showing that there is a genuine issue for trial.’” Id. at 324. A court considering a summary
judgment motion must view the evidence and draw all reasonable inferences therefrom in the
light most favorable to the nonmoving party. Kendrick v. Penske Transp. Servs., Inc., 220
F.3d 1220, 1225 (10th Cir. 2000).

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II. DISCUSSION
A. Procedural Arguments1
1. Sovereign Immunity
Defendants first move for summary judgment on Eleventh Amendment grounds, a
challenge that goes to the Court’s subject matter jurisdiction. Kirby v. Dallas Cnty. Adult
Prob. Dep’t, 359 F.App’x 27, 32 (10th Cir. 2009). Generally, the Eleventh Amendment
prohibits citizens from suing states in federal court. Lewis v. N.M. Dep’t of Health, 261 F.3d
970, 975 (10th Cir. 2001). However, the Supreme Court carved out an exception in Ex parte
Young, 209 U.S. 123 (1908), which “permit[s] citizens to seek prospective equitable relief
for violations of federal law committed by state officials in their official capacities.” Lewis,
261 F.3d at 975. To proceed under the Ex parte Young doctrine, Plaintiff’s suit must: (1) be
against state officials, not the state itself; (2) allege a non-frivolous violation of federal law;
(3) seek only prospective equitable relief, not retroactive monetary compensation; and (4) not
implicate “‘special sovereignty interests.’” Id.
Only Lewis’s third requirement is presently at issue. First, Defendants contend that
Plaintiff’s request for a declaratory judgment violates the Eleventh Amendment. Tenth
Circuit precedent holds that “[t]he Eleventh Amendment ‘does not permit judgments against
state officers declaring that they violated federal law in the past.’” Johns v. Stewart, 57 F.3d

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Although Plaintiff indicated in her Complaint that this case might involve preemption,
the parties have now agreed that there is no question of preemption, and therefore the Court does
not address this issue.
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1544, 1554-55 (10th Cir. 1995) (quoting P.R. Aqueduct & Sewer Auth. v. Metcalf & Eddy,
Inc., 506 U.S. 139, 146 (1993)). Thus, Plaintiff’s request for a declaratory judgment must
be dismissed for lack of jurisdiction. Next, Defendants attack Plaintiff’s request for
injunction certifying Plaintiff as eligible for Medicaid from the date of the requested
eligibility. Although the Eleventh Amendment does not bar the Court from issuing an
injunction requiring OKDHS to certify Plaintiff eligible for Medicaid going forward, it does
prevent the Court from back-dating its certification order. In Lewis, the Tenth Circuit
distinguished permissible prospective relief—“ask[ing] that state officials be compelled to
comply with federal statutes that allegedly entitle them to . . . services”—from retroactive
monetary compensation barred by the Ex parte Young doctrine—“reimburse[ment] for past
. . . services.” 261 F.3d at 977-78. Certifying Plaintiff eligible as of April 18, 2012, would
“require[] payment of state funds . . . as a form of compensation,” Edelman v. Jordan, 415
U.S. 651, 668 (1974), and thus constitutes improper relief.
2. Enforceable Rights Under § 1983
Plaintiff’s Complaint alleges that Defendants violated three sections of the federal
Medicaid Act by using an improper methodology in assessing her eligibility. Defendants
argue that Plaintiff lacks standing to assert this claim because the methodology statutes do
not provide for private enforcement. Individuals can use 42 U.S.C. § 1983 to bring suits
against state actors to enforce rights created by either federal statutes or the Constitution.
Gonzaga Univ. v. Doe, 536 U.S. 273, 279 (2002). However, the availability of § 1983’s
enforcement authority depends on “whether ‘Congress intended to confer individual rights
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upon a class of beneficiaries.’” Hobbs ex rel. Hobbs v. Zenderman, 579 F.3d 1171, 1179
(10th Cir. 2009) (quoting Gonzaga Univ., 536 U.S. at 285). Three factors govern the
applicability of § 1983:
First, Congress must have intended that the provision in question benefit the
plaintiff. Second, the plaintiff must demonstrate that the right assertedly
protected by the statute is not so “vague and amorphous” that its enforcement
would strain judicial competence. Third, the statute must unambiguously
impose a binding obligation on the States. In other words, the provision giving
rise to the asserted right must be couched in mandatory, rather than precatory,
terms.
Blessing v. Freestone, 520 U.S. 329, 340-41 (1997) (internal citations omitted). Under the
first Blessing factor, “[a] statute embodies congressional intent to benefit the plaintiff only
if it is ‘phrased in terms of the persons benefitted.’” Hobbs, 579 F.3d at 1179 (quoting
Gonzaga Univ., 536 U.S. at 284). This inquiry into congressional intent requires the Court
to “analyze separately each statutory provision in order to determine if any unambiguously
confers rights on the plaintiff.”

Bernard v. Kan. Health Policy Auth., Case No.

09-1247-JTM, 2011 WL 768145, at *7 (D. Kan. Feb. 28, 2011).
None of the three statutes relied on by Plaintiff in her Complaint—42 U.S.C.
§§ 1396a(a)(10)(C)(i)(III) and 1396a(r)(2)(A), 1396p(c)(1)—can support a claim under
§ 1983. In Hobbs, the Tenth Circuit expressly rejected claims brought under the Medicaid
Act’s “methodology provisions,” a holding that would apply to §§ 1396a(a)(10)(C)(i)(III)
and 1396a(r)(2)(A). Plaintiff’s claim under § 1396p(c)(1) likewise fails because neither
§ 1396p(c)(1)(A) nor § 1396p(c)(1)(I) includes the “rights-creating” language indicating

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congressional intent to invoke an individual entitlement for a certain benefitted class.2 See
Bernard, 2011 WL 768145 at *8 (noting § 1396p(c)(1)(A) “imposes a binding obligation on
the state” “[r]ather than conferring a benefit on the plaintiff”).
However, although § 1396p(c)(1) fails the first prong of the Blessing test,
§ 1396p(c)(2)3 does speak in terms of individual rights, as required. See Bernard, 2011 WL
768145 at *9 (“Unlike § 1396p(c)(1)(A), [§ 1396p(c)(2)(B)(i)] satisfies all prongs of the
Blessing test.”). Relevant to Plaintiff’s action, § 1396p(c)(2)(C) provides: “An individual
shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that
. . . (C) a satisfactory showing is made to the State . . . that . . . the individual intended to
dispose of the assets either at fair market value, or for other valuable consideration.”
(emphasis added). Section 1396p(c)(2)(C) not only speaks contains the necessary “rightscreating” language, it also couches its obligation in mandatory terms and is not impermissibly
vague or amorphous. Thus, § 1396p(c)(2)(C) provides an adequate statutory foundation for
a lawsuit brought pursuant to § 1983.
B. Merits Arguments
Pursuant to Title XIX of the Social Security Act of 1965, Congress created the
Medicaid program “to provide ‘health care to persons who cannot afford such care.’”

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For example, § 1396p(c)(1)(A)’s only mention of “individuals” relates to the state’s
obligation and § 1396p(c)(1)(I)’s definition of “assets” does not reference individuals at all.
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The Court acknowledges that Plaintiff did not cite § 1396p(c)(2) in her Complaint.
However, the Court will deem Plaintiff to have pleaded a claim under § 1396p(c)(2), rather than
giving Plaintiff leave to amend, to aid judicial efficiency and prevent further delays.
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(Morris v. Okla. Dep’t of Human Servs., 685 F.3d 925, 928 (10th Cir. 2012) (quoting Brown
v. Day, 555 F.3d 882, 885 (10th Cir. 2009)). Medicaid is a cooperative program, jointly
financed by the federal and state governments, but administered by the states. To opt into
the Medicaid program and receive federal financial assistance, a state must agree to
“operate[] its Medicaid program in compliance with federal statutory and regulatory
requirements.” Brown, 555 F.3d at 885. Oklahoma has opted to participate in the Medicaid
program.
Congress included income and resource eligibility thresholds in the Medicaid Act
“[t]o ensure the Medicaid program serves needy persons.” Id. For example, for an “aged”4
individual to qualify for long-term care assistance, that individual may not have more than
$2,000 of resources and must not have disposed of any assets for less than fair market value
during the last five years. 42 U.S.C. §§ 1396a(a)(17), 1382(a)(1)(B), 1396p(c)(1)(A),
1396p(c)(1)(B)(i). At issue in this case is whether OKDHS complied with federal statutes
and regulatory requirements pertaining to eligibility when it denied Plaintiff benefits based
on her receipt of the Note in exchange for her farm and Edwards Jones account.
1. Promissory Notes as “Resources”
Under the federal regulations, promissory notes generally constitute “resources” for
the purpose of determining Medicaid eligibility. “Resources” is a term of art used to
described assets available to a Medicaid applicant “mean[ing] cash or other liquid assets or

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An “aged” individual is an individual who is at least 65 years old.
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any real or personal property that an individual owns and could convert to cash to be used
for support and maintenance.” 20 C.F.R. § 416.120(c)(3). “Liquid assets” or “liquid
resources” “are cash or other property which can be converted to cash within 20 days.” 20
C.F.R. § 416.1201(b). One specified example of a liquid resource is a promissory note. Id.
Thus, because promissory notes are generally liquid assets, they are normally resources of
a Medicaid applicant.
However, Plaintiffs argue that the Note in this case is different because of its terms,
which prevent either party from “grant[ing], bargain[ing], sell[ing], assign[ing], convey[ing]
or transfer[ing] this note or any payments hereunder” made as a result of the Note. (Pl.’s
Mot. for Summ. J., Dkt. No. 24, Ex. 3.) The sole exception to the anti-assignment clause is
an allowance made for Plaintiff, the Lender, to transfer the note to a revocable trust for estate
planning purposes. An expert hired to review the Note stated he did “not believe the Note
can be sold on any secondary market,” making it “of no value in the hands of a third party”
because of the anti-assignment clause and the nature of the secondary market or promissory
notes. (Id., Ex. 6.) Therefore, the Note cannot be converted into cash within twenty days,

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meaning it is not a liquid asset.5 And, as the Tenth Circuit noted in Morris,6 “‘[i]f a property
right cannot be liquidated, the property will not be considered a resource of the individual.’”
685 F.3d at 930 (quoting 20 C.F.R. § 416.1201).
Additional support for this conclusion is found in the Program Operations Manual
System (“POMS”), a Social Security Administration publication to which both parties accord
deference. See Ramey v. Reinertson, 268 F.3d 955, 964 n.2 (10th Cir. 2001) (noting
deference to the POMS provisions unless a court finds them ‘arbitrary, capricious, or
contrary to law’) (citation omitted). Pursuant to POMS SI 01120.220, a promissory note is
a resource to the lender if it is “negotiable,” meaning assignable on its face. Since the Note
in this case is not transferable on its face, given the anti-assignment clause, it is not
negotiable, and thus not a resource under the POMS. See Harper v. Okla. ex rel. Okla. Dep’t
of Human Servs., Case No. CIV-10-514-R (W.D. Okla. Mar. 22, 2011) (unpublished).

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Defendants argue that Plaintiff can convert the Note into cash, notwithstanding the
Note’s anti-assignment provision. According to Defendants, although Plaintiff may not sell,
assign, or transfer the Note or any payments, Plaintiff could use the potential payments to secure
a second promissory note. However, this contention is too speculative to support a denial of
Medicaid benefits, particularly given the unlikely scenario of a lender agreeing to loan Plaintiff,
a 95-year-old woman with dementia, a significant sum of money with nothing more than an
unsecured note from a family member as collateral.
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The Court acknowledges that this conclusion differs from the one reached in Gragert v.
Hendrick, Case No. CIV-11-984-C, 2012 WL 1893635, at *2 (W.D. Okla. May 24, 2012).
However, this Court decided Gragert several months before the Tenth Circuit issued its opinion
in Morris. This Court’s current opinion reflects the Tenth Circuit’s holding in Morris that the
Medicaid statutes and regulations should be read as technically written, even when that creates
loopholes. 685 F.3d at 938 (reversing the district court and interpreting the Medicaid statutes to
give effect to an annuities provision despite recognizing “the district court’s concerns about the
annuity provisions in the Medicaid statutes” and acknowledging “the fiscal strain Medicaid can
exert on state budgets”).
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2. Trust-Like Device
Alternatively, Defendants contend that even if the Note is not a resource under the
“regular rules,” it is a resource under the secondary “trust rules.” Sable v. Velez, 388 F.
App’x 235, 237 (3d Cir. 2010). Congress amended the Medicaid Act to create the “trust
rules” in order to close a loophole exploited by some applicants: Because trusts frequently
do not qualify as resources under the regular rules, some applicants placed their assets and
money in trusts in order to evade the Medicaid Act’s resource limitation. Id. Now, 42
U.S.C. § 1382b(e) deems trusts and trust-like devices resources unless explicitly excluded.
The POMS define a trust-like device as “a legal instrument, device, or arrangement, which
may not be called a trust under State law, but is similar to a trust.”

POMS SI

1120.201(B)(5). A trust-like device must include: (1) a grantor (2) who transfers property
(3) to an individual or entity with fiduciary obligations (a trustee) (4) “with the intention that
it be held, managed or administered by the individual or entity for the benefit of the grantor
or others.” Id. Under this definition, Defendants argue that the Note transaction created a
trust-like device. Plaintiff does not dispute that she transferred money and property to her
son and could be considered a grantor under the first POMS requirement. However, Plaintiff
asserts that she did not transfer property to a trustee and that there was no intention that her
son use or hold the property for her benefit.
The Court agrees with Plaintiff that the transaction did not constitute a trust-like
device. Although Defendants make much of Gary Lemmons’ service as his mother’s
attorney-in-fact—a position creating fiduciary obligations—the fact that Mr. Lemmons owes
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fiduciary duties to his mother in a certain context does not make him her trustee in all
circumstances. Additionally, the Court rejects Defendants’ reliance on a statement made by
Gary Lemmons at his deposition and taken out of context. Gary Lemmons testified that the
property transaction was to benefit his mother because he thought she needed the money.
(Defs.’ Mot. for Summ. J., Dkt. No. 33, Ex. 1 at 55.) However, this testimony does not
indicate that Mr. Lemmons intended to hold the property for his mother’s benefit as trustee;
rather, it demonstrates that the transaction was to benefit his mother by providing her income
from the promissory note. Likewise, the Court rejects Defendants’ insinuation that the use
of a law firm practicing in the field of Medicaid planning is dispositive of whether the
transaction created a trust-like device. Because Gary Lemmons holds the farm and account
for his own benefit, not as his mother’s trustee, the Note does not qualify as a resource.
3. Transfer Penalty
Regardless of whether the Note is a resource, Defendants argue Plaintiff is ineligible
for medical assistance because of the “transfer penalty” found in 42 U.S.C. § 1396p(c)(1)(A).
Essentially, Defendants contend that Plaintiff received a “worthless” Note in exchange for
property valued at $84,600, meaning she sold her resources for less than fair market value.
In contrast, Plaintiff insists the transfer penalty does not apply to the exchange because the
Note received qualifies for the exception in § 1396p(c)(1)(I). Subsection 1396p(c)(1)(I)
specifically addresses the transfer of assets in exchange for a promissory note and provides
that an individual’s countable “assets” will include funds used to purchase a promissory note
unless that note: (1) has an actuarially sound repayment term; (2) provides for equal
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payments, with no deferral or balloon payments; and (3) prohibits cancellation of the note
upon the death of the lender-applicant. Although Defendants concede that the Note meets
all three requirements, they argue that the transaction should nonetheless be penalized
because the Note was “worthless,” a situation Congress did not contemplate in enacting
§ 1396p(c)(1)(I).
The Court disagrees both with Defendants’ characterization of the Note as “worthless”
and their misunderstanding of § 1396p(c)(1)(I). First, although an expert hired to review the
Note did testify that the Note was “of no value,” the full context of that statement is
necessary: “I do not believe the Note can be sold on any secondary market. Consequently,
the Note is of no value in the hands of a third party or in the secondary market.” (Pl.’s Mot.
for Summ. J., Ex. 6.) The expert did not opine that the Note was totally worthless, contrary
to what Defendants would have this Court believe. Rather, he indicated that the Note has no
value for anyone but Plaintiff because of the Note’s anti-assignment provision. Moreover,
regardless of the Note’s value, the Tenth Circuit’s decision in Morris precludes the
imposition of the transfer penalty. Although Morris did not address the intersection of
§§ 1396p(c)(1)(A) and 1396p(c)(1)(I), Morris did discuss the interaction between
§ 1396p(c)(1)(A) and two analogous provisions, §§ 1396p(c)(1)(F) and 1396p(c)(1)(G). In
Morris, the Court recognized that individuals could use the annuity provisions at issue in that
case to “act strategically” and avoid the transfer penalty. 685 F.3d at 937. Under this
rationale, using the exception to the transfer penalty in § 1396p(c)(1)(I) is a valid form of
Medicaid planning. Defendants may not use § 1396p(c)(1)(A) to penalize Plaintiff for taking
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advantage of a lawful loophole that Congress has not foreclosed. Id. at 934 (noting “despite
its presumed awareness . . . , Congress has not revised the Medicaid statute to foreclose this
option”).
4. Sham Transaction
Finally, Defendants argue that the property-for-Note transaction is a “sham
transaction,” not worthy of recognition. To the extent that Defendants contend that strategic
but lawful Medicaid planning always results in a sham transaction, the Court rejects that
argument. See id. at 928 (holding that only Congress can address the exploitation of
loopholes). Likewise, the Court rejects Defendants’ remaining “sham” contentions. First,
the Court disagrees that in facilitating the transaction Gary Lemmons “failed to exercise his
fiduciary duties toward his mother as her attorney-in-fact, and frankly, failed to exercise his
moral duties toward her as her son.” (Defs.’ Mot. for Summ. J. at 26.) Plaintiff’s expert
opined that “the ‘Note’ is a reasonable promissory note based on the circumstances under
which it was executed,” with a reasonable rate of interest, repayment structure, and default
provision. (Pl.’s Mot. for Summ. J., Ex. 6.) Next, Defendants’ arguments about Gary
Lemmons as trustee of Plaintiff’s estate planning trust are irrelevant, as the terms of the trust
provided a successor trustee would not be named until specific events had transpired, none
of which occurred here. Finally, despite evidence to the contrary, Defendants argued that the
Edwards Jones account transferred to Gary Lemmons with the farm was part of Plaintiff’s
estate planning trust, thereby accusing Mr. Lemmons of “unlawfully raid[ing] his mother’s
trust.” (Defs.’ Mot. for Summ. J. at 29.) However, records from Edward Jones prove that
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Plaintiff and Gary Lemmons owned the account together, as joint tenants with rights of
survivorship; the account was not part of Plaintiff’s estate planning trust. (See Pl.’s Resp.
to Defs.’ Mot. for Summ. J., Ex. 1.)
III. CONCLUSION
Accordingly, the Court hereby GRANTS Plaintiff’s Motion for Summary Judgment
(Dkt. No. 32). The Court hereby GRANTS IN PART and DENIES IN PART Defendants’
Motion for Summary Judgment (Dkt. No. 33). Judgment will be entered for Plaintiff.
IT IS SO ORDERED this 21st day of March, 2013.

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