Review of the Third Circuits view on promissory notes purchased from family members:
George and Mary Sable are married. Mary Sable suffers from severe rheumatoid arthritis and depends on others for her ADLs. On Oct. 23, 2008, George purchased a promissory note in the amount of $80,903 from his son, payable for seven years at six percent interest. There was no security or collateral form the promissory note; the son’s creditworthiness was not evaluated as part of the transaction. Mary applied for a Medicaid waiver, but was told she was over resourced. At that time, George purchased an additional promissory note from his son in the amount of $42,500, payable at three percent over seven years. On June 23, 2009, the Medicaid agency denied Mary’s application for Medicaid, finding that the promissory notes were countable resources because they were trust-like devices. Another plaintiff, Michael Lanza, was similarly situated. After they were denied, these plaintiffs brought suit in federal district court seeking an injunction preventing the Medicaid agency from treating promissory notes as trust-like devices. The district court denied the plaintiffs’ motion for a preliminary injunction, finding they failed to make an adequate showing of success on the merits. On Dec. 18, 2009, the district court denied a motion for reconsideration after finding that the SSI provisions of the Act did not prohibit promissory notes from being counted as trust-like devices. The Third Circuit initially reviewed this case on July 28, 2010, when it found the district court committed legal error by not first determining whether the notes would be counted as resources under the regular resource rule before reaching its trust-like device analysis. On Dec. 8, 2010, the district court again found that under the SSI resource counting rules, the notes failed to qualify as cash loans or promissory notes because the plaintiffs failed to meet their burden of showing that the notes were not the product of a bad-faith arrangement. The previous finding that plaintiffs were unlikely to succeed on the merits was reaffirmed and the district court again denied a motion for preliminary injunction. With this background, the case made its way back to the Third Circuit. The Court of Appeals began by analyzing the POMS to determine whether the notes qualified as cash loans or promissory notes since the trust-like device analysis is not reached unless they fail to qualify under either provision.
The POMS, at SI 1120.220(B)(2)(a) describe a “cash loan” as a “negotiable, bona fide loan agreement.” To be bona fide, the loan must be (1) enforceable under state law, (2) in effect at the time the cash proceeds were provided, (3) include an acknowledgment of an obligation to repay, (4) a plan for repayment, and (5) the repayment plan must be feasible. The district court found, and the court of appeals agreed, that the notes failed to qualify as cash loans; the lack of any evidence of feasibility of repayment was sufficient to find that the notes failed the POMS test. The district court also found that the notes failed the POMS test because it was not an arms-length transaction, it was between family members, the children had power of attorney over the parents, there was no collateral and because the timing and amount of the transaction appeared to be designed to achieve Medicaid eligibility. Similarly, a “promissory note” must be “bona fide” and “negotiable.” SI 1140.300(D)(1) and (B)(3). Here, the notes appeared to be for the purpose of gaining Medicaid eligibility instead of for the purpose of making an actual loan.
Having agreed with the district court that the promissory notes failed to meet the POMS resource test, the court went on to determine whether they were trust-like devices. The POMS define a trust-like device as an instrument involving a grantor who transfers property to a person or entity with fiduciary obligations with the intention that it be held or managed by that person for the benefit of the grantor or others. In this procedural context, the court did not find that the promissory notes were trust-like devices; however, it did find that the district court properly denied the motion for a preliminary injunction because the plaintiffs failed to establish a likelihood of success on the merits (which likely amounts to the same conclusion). The plaintiffs failed to show that absence of a fiduciary relationship between the parents and children and the loans were made in an environment of trust and confidence. The plaintiffs failed to show that the notes were created for any purpose other than simply holding the money for the benefit of the parents. Accordingly, the decision was affirmed.
Sable v. Velez, 2011 U.S. App. LEXIS 14414 (July 12, 2011)
Source: NAELA e-bulliten
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