Scheduled Promissory Notes

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					A tale about a promissory note journey
How the Florida Elder Law Bar successfully
resolved a DRA implementation issue
by Howard S. Krooks

                      We’ve all been        of a promissory note, loan or mort-        market for the notes and, therefore,
                    there. Waiting to       gage will have no effect on the asset’s    the note should be countable as a
                    see how our state       countability.” The use of promissory       resource for Medicaid purposes. This
                    would implement         notes came to a screeching halt in         argument was struck down in the
                    the DRA. In some        Florida long-term care planning on         various published decisions, so DRA
                    cases, implemen-        Mar. 1, 2005.                              compliant notes could be used in New
                    tation was accom-          Then along came the federal DRA         York, and the value of the note would
                    plished quickly. In     statute on Feb. 8, 2006. Among many        not constitute an available resource
                    others, this was not    other things (some not so clearly stat-    for Medicaid purposes. This was of
   H. krookS        the case until very     ed), the DRA delineated clear param-       particular importance in New York,
                    recently. Still other   eters setting forth the requirements       where a partial return of funds was
states await implementation, even to        for how a promissory note was to be        not allowed per the administrative
this day. In my case, the journey was       structured in order for the note not       directive (06 OMM/ADM-5) issued
even more interesting since I practice      to be considered an uncompensated          by the Department of Social Services
in two states, New York and Florida.        transfer of assets resulting in a penal-   implementing the DRA.1
The similarities and differences be-        ty period (i.e., level payments, actuar-      About a year ago, I was asked to
tween New York and Florida mark             ially sound, no deferred payments, no      chair the DRA Task Force for NAELA
a poignant contrast in how different        self-canceling notes, etc.). The Florida   to address some of the implementa-
states can approach the very same           Elder Law Bar thought at the time          tion issues being experienced around
issue, with a federal statute pur-          that these new parameters would            the country and to work with CMS
portedly providing uniformity and a         supersede the prior transmittal treat-     in securing a clarifying pronounce-
federal agency, CMS, purportedly do-        ing all notes as countable resources.      ment regarding certain issues that
ing the same. This article details the      Much to our surprise (or maybe it          remained unclear post DRA. This
journey the Florida Elder Law Bar           should have come as no surprise), the      work is ongoing, and I am sure you
traveled in relation to the treatment       Medicaid agency stated in informal         will hear more about the work of
of promissory notes in a post-DRA           discussions that even a so-called DRA      the task force since a meeting with
world. The story of Florida’s treat-        compliant note would be considered         CMS is being planned as I write this
ment of promissory notes is compel-         a countable resource for Medicaid          piece. As part of the work of the DRA
ling, not only because it has a happy       eligibility purposes. Thus, we were        Task Force, we looked at the ques-
ending from an advocacy standpoint,         left with the possibility of having a      tion of how promissory notes should
but because it could serve as a useful      DRA compliant note, so no transfer         be treated post DRA and the varying
model that we hope will be replicated       of assets penalty would apply, but         experiences of the states on this is-
in other states.                            the entire value of the note would         sue.2 I was convinced that Florida’s
   The story begins in December             be considered an available resource.       treatment of notes was not correct in
2004, when the Florida Department           Thus, the use of notes in long-term        light of the New York experience, the
of Children and Families (our Med-          care planning remained nonexistent         SSI POMS and the James v. Richman
icaid agency) issued a transmittal          in Florida.                                line of cases from the Third Circuit.
(Transmittal No. P-04-10-0017), as             While this was going on in Florida,        So, with this backdrop, let’s return
amended by Transmittal No. 04-12-           New York had implemented the DRA           to Florida and see what happened to
0020, rendering all promissory notes        effective Aug. 1, 2006, and the use of     cause a change in Medicaid’s treat-
countable resources, the effective          notes was subsequently challenged          ment of notes. The Florida Elder
date of which was delayed from Dec.         in numerous fair hearing decisions.        Law Bar comprises primarily the
22, 2004, through Feb. 28, 2005. A          A similar issue was raised in at least     Academy of Florida Elder Law At-
statement made in the transmittal           some of these cases regarding the          torneys (AFELA)3 and The Florida
made it clear that this was intended        question of whether a note was a           Bar Elder Law Section.4 These two
to constitute a total prohibition on the    countable resource. The appellants         groups have worked side by side for
use of promissory notes in Florida:         argued that it was not, while the          about six years through their Joint
“They will be countable assets to the       New York State Department of So-           Public Policy Task Force, a collec-
individual (lender) in the amount           cial Services argued, among other          tion of elder law attorneys from both
of their equity value. The liquidity        things, that there was a secondary                           continued, next page

                                        The Elder Law Advocate • Vol. XVIII, No. 1 • Spring 2010 • Page 
Promissory note journey                   countability of DRA compliant notes        the state’s Administrative Procedure
from preceding page                       continued to weigh on the minds of         Act. The task force is waiting to hear
                                          the task force members since it did        back from Medicaid as to whether it
                                          not seem consistent with federal SSI       will publish such changes as a rule,
groups that work toward achieving         law, which provides for a rebuttable       allowing a comment period and con-
positive change regarding a broad         presumption that the note could be         ducting a hearing, or if we will need
range of policy issues throughout the     sold.                                      to proceed with litigation over these
state.5 The task force also works with       There were other issues as well that    issues.
a lobbyist, an administrative law at-     required our attention. For example,           Meanwhile, I was asked to join
torney, a governmental consultant         we were working on a variety of chal-      some informal discussions with Med-
and a public relations specialist, all    lenges to Medicaid’s implementation        icaid policymakers that were initially
of whom are paid individuals through      of the DRA outside of the promissory       designed to address customer service
funding that is contributed by AFE-       note issue. In particular, Florida’s at-   issues for the consumer in dealing
LA and Elder Law Section members.         tempted retroactive implementation         with Medicaid.6 This began about nine
Needless to say, DRA implementation       of a 60-month lookback period was          months ago. Once all of the customer
is one of many issues the task force      the cause of great concern. Through        service issues were addressed, I sug-
has been working on since Feb. 8,         discussions with the assistant gen-        gested that we tackle some of the more
2006. There is a phone call of task       eral counsel at the Department of          substantive issues that remained post
force members every Thursday to           Children and Families and others, the      DRA, and the Medicaid policymakers
discuss progress and strategy. Flor-      task force was successful in having        were receptive to this. All they asked
ida implemented the DRA through           the 60-month lookback period applied       was that I outline in memo format the
formal adoption of two rules (Nov.        prospectively only, and this was one       nature of the issue, the law and our
1, 2007, and Dec. 24, 2009), the pub-     of the major changes contained in          interpretation of the law. There were
lication of one transmittal (Oct. 31,     the recently adopted Dec. 24, 2009,        a number of sub-issues that the task
2007) and through various changes         rule. We are also challenging Medic-       force identified as being appropriate
to its Medicaid Manual (April 2009,       aid’s casual approach to effectuating      for discussion in this forum, and one
July 2009, October 2009 and January       change through Medicaid Manual re-         of them was the promissory note issue.
2010). Many issues were addressed in      visions, none of which followed basic      The task force appointed a sub-com-
these various rules, transmittals, etc.   principles of administrative law (i.e.,    mittee consisting of Lauchlin Waldoch,
But one issue remained unresolved,        publication, public comment, hearing,      Esq., Ellen Morris, Esq., and me to
and that is the way Florida Medicaid      etc.) before being implemented. In         work on various memoranda outlin-
treated DRA compliant promissory          fact, our administrative law attorney      ing our position on promissory notes
notes. Although Florida allows for a      has submitted to Medicaid a draft of       and certain other issues. The promis-
partial return of funds to reduce a       a petition challenging the Medicaid        sory note memo outlined federal law
penalty period, the question about the    Manual revisions as a violation of         and Florida law on the treatment of
                                                                                     promissory notes, and I had previ-
                                                                                     ously forwarded James v. Richman,
                                                                                     the Third Circuit case holding that
                                                                                     no secondary market existed for a
                                                                                     non-assignable, non-transferable an-
                                                                                     nuity income stream. I submitted the
                                                                                     promissory note memo in August 2009
                                                                                     and was told that Medicaid would
                                                                                     review our position and let us know
                                                                                     what action, if any, would be taken
                                                                                     in response. Several months passed,
                                                                                     and in October 2009, I was told that
                                                                                     Medicaid had considered our position
                                                                                     and that a policy statement would be
                                                                                     forthcoming in the near future. I was
                                                                                     told that a final decision had not yet
                                                                                     been made as to whether this change
                                                                                     would occur in the form of a rule, a
                                                                                     transmittal or a Medicaid Manual
                                                                                     change. From September through De-
                                                                                     cember 2009, no action was taken, and
                                                                                     I began to wonder if this would end
                                                                                     up in the agency black hole where so
                                                                                     many things land, never to be heard
                                                                                     from again.

  Page 10 • The Elder Law Advocate • Vol. XVIII, No. 1 • Spring 2010
    The Florida Bar Certification Re-       at least in our experience, it is worth-   he serves as secretary. Mr. Krooks is a
view Course was scheduled for Jan.          while to pursue an ongoing relation-       founding principal of ElderCounsel
14-15, 2010 (a course designed to pre-      ship with Medicaid, one that spans         LLP, the premier document drafting
pare Elder Law Section members to           the test of time and not just an oc-       solution for elder law and special
become board certified in elder law),       casional contact. It may not resolve       needs planning attorneys.
and I was scheduled to cover the topic      every issue, and litigation will remain
of Planning After the DRA. I thought        an option for some issues that cannot      Endnotes:
it prudent to check to see if there were    be resolved in this way. Having said       1. Partial return of funds has been allowed in
any revisions to the Medicaid Manual        that, ongoing communication could          various counties throughout the state due to
                                                                                       an ambiguity in the directive.
before giving the presentation since        provide an extremely useful and pow-
                                                                                       2. New Jersey has vacillated between allow-
these changes are never announced           erful way to effectuate change in Med-     ing them and then not allowing them several
to us, and if anything had changed I        icaid policy and, at a minimum, will       times. New York allows the use of DRA compli-
should know about it so that I could        reveal to the Elder Law Bar (and vice      ant notes, and they will neither be considered
pass it along to the attendees. Up                                                     an uncompensated transfer of assets nor be
                                            versa) the thinking of the Medicaid        counted as an available resource. Ohio con-
until this point in time, the Medicaid      agency on important policy issues.         siders notes to be a transfer of assets, even
Manual had a provision stating:                                                        so-called DRA compliant notes. NAELA Past
  If the note, loan or mortgage is not      Howard S. Krooks, JD, CELA,                President Bill Browning is presently arguing
                                            CAP, is a partner with Elder Law           a case in the Sixth Circuit challenging Ohio’s
  bona fide or not negotiable, the in-                                                 treatment of notes, but this case is presently
  strument cannot be converted to           Associates PA, with offices located in     hung up on some procedural issues, so it may
  cash (sold) and is not an asset but       Boca Raton, Aventura (N. Miami),           be some time before the Ohio position is re-
  is a potential transfer.                  Weston (Fort Lauderdale) and West          solved. The use of notes has been upheld in
                                            Palm Beach, Fla. Mr. Krooks is of          Massachusetts as well.
   This is confusing language to deal       counsel to Amoruso & Amoruso LLP,          3. Randy Bryan, Esq., of Oviedo, Fla., is the
with because Medicaid’s position in         located in Westchester, N.Y. He serves
                                                                                       current president of AFELA.
our discussions was always that a           on the Executive Council of The Flor-      4. Babette Bach, Esq., of Sarasota, Fla., is the
DRA compliant note would not result                                                    current chair of the Elder Law Section.
                                            ida Bar Elder Law Section and the          5. Task force members include: Randy Bryan
in a penalty, but would be consid-          Joint Public Policy Task Force of The      and Steve Kotler, co-chairs; Mark Mazzeo,
ered an available resource, yet the         Florida Bar Elder Law Section and          AFELA president-elect; Steve Quinnell, AFE-
language of the manual suggests it          the Academy of Florida Elder Law At-       LA treasurer; Babette Bach, ELS chair; Len
would be considered a potential trans-                                                 Mondschein, ELS chair-elect; Twyla Sketchly,
                                            torneys, and he is a former chair of the   ELS substantive chair; Enrique Zamora, ELS
fer. One could only imagine that the        New York State Bar Association Elder       administrative chair; Ellen S. Morris, legisla-
manual should have read “… is not an        Law Section, where he continues to         tive chair; Lauchlin Waldoch, at large member;
asset but is a countable resource.”         serve on its Executive Committee. He       Howard S. Krooks, at large member; Beth
   In any event, when I looked at the                                                  Prather, at large member; and Jack Rosen-
                                            is a member of the board of directors      kranz, at large member.
January 2010 changes to the Medicaid        and is an officer of the National Acad-    6. Many thanks to Elder Law Section member
Manual, the table of contents referred      emy of Elder Law Attorneys, where          Scott Selis for arranging these informal calls.
to a change in the treatment of prom-
issory notes. So, I looked at the new
provision, which read as follows:
  If the note, loan or mortgage is not
  bona fide or not negotiable, the in-
  strument cannot be converted to
  cash (sold) and is not an asset.
   Could it be? The elimination of five
words in the Medicaid Manual seemed
to reflect our understanding that a
DRA compliant note would neither
be a transfer nor a countable asset.
I spoke the next day with my contact
at Medicaid, and he confirmed that
indeed the department was satisfied
that our reading of federal law on this
issue was correct! Thus, effective with
the January 2010 Medicaid Manual
change referenced above, DRA com-
pliant promissory notes can now be
used in Florida as part of long-term
care planning, and such notes will not
be considered countable assets.
   The moral of the story is, of course,

                                         The Elder Law Advocate • Vol. XVIII, No. 1 • Spring 2010 • Page 11

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