Federal Court Approves use of Promissory Note in Crisis Medicaid Planning

The Federal District Court for the Western District of Oklahoma recently struck down Oklahoma's assertion that a Medicaid applicant's sale of assets in exchange for a non-negotiable promissory note rendered the applicant ineligible for Medicaid benefits.

In Lemmons v. Lake (U.S. Dist. Ct., W.D. Okla., No. CIV-12-1075-C, March 21, 2013), Juanita Lemmons sold a farm and investment assets to her son, Gary Lemmons, in exchange for a promissory note.  The note included an anti-assignment clause, which prohibited Mrs. Lemmons from selling the note to a third party.  Soon thereafter, Mrs. Lemmons applied for Medicaid benefits.

Notwithstanding that the note met the requirements set forth by Congress as part of the 2006 Deficit Reduction Act, Oklahoma's Department of Human Services denied Mrs. Lemmons' Medicaid application on two bases:  (1) the transaction constituted a transfer of assets without receipt of adequate value, or (2) the note constituted an impermissible "trust like" device.

Mrs. Lemmons sued in Federal Court, claiming that the promissory note was not a resource. The District Court sided with Mrs. Lemmons, granting her summary judgment. The court held that the note was not a resource, as the anti-assignment clause rendered the note non-negotiable and thus it could not be sold to a third party.  The court further refuted the state's claim that the note was a trust-like device, holding that Gary Lemmons held the farm for his rather than his mother's benefit.

In reaching its decision in favor of Mrs. Lemmons, the court specifically recognized that use of a promissory note "is a valid form of Medicaid planning," and that the State of Oklahoma "may not use [the statute] to penalize Plaintiff for taking advantage of a loophole that Congress has not foreclosed."

Although this decision does not constitute legal precedent in New York, the court's reasoning in Lemmon provides comfort that the common use of promissory notes in "crisis" Medicaid planning cases should withstand any similar challenge that might be brought by any Department of Social Services in New York State.