Donald H. Johnson; Juanita L. Johnson; Eugene v. Mariani

PRECEDENTIAL
UNITED STATES
COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-3774
DONALD H. JOHNSON; JUANITA L.
JOHNSON;
EUGENE V. MARIANI; DOROTHY
MARIANI;
MARY LOU FLEMING; WILLIAM R.
FLEMING;
WILLIAM C. SCHAIBLE; PHYLLIS R.
SCHAIBLE,
by her Court Appointed Guardian;
LOIS BENEDETTO; GERALD
BENEDETTO;
DONNA R. BANKS; CHARLES V.
BANKS, Estate of;
RAYM OND O. DENM AN, JR.;
FRANCES C. DENMAN;
CHARLES N. HICKS; MARIE L.
HICKS;
ANN B. SILBERNAGEL; NORMAN V.
SILBERNAGEL;
ANNA PRYSTASCH; STANLEY
PRYSTASCH;
MARY MACKRON; ANTHONY
MACKRON, Estate of;
JANET WHALON; HAROLD B.
WHALON, JR.;
BERNADINE WEISER; RICHARD C.
WEISER;
GRACE LAFORGE; BLACE
LAFORGE; JOHN FILLMORE;
MARY FILLMORE; JOHN DOE, (1-5
fictitious names);
JANE DOE, (1-5 fictitious
names);ROBERT GROSS;
GEORGE ALLEN; Social Services;
THOMAS KOELHOFFER; FRANCES
KOELHOFFER;
WILLIAM KELLY; KATHRYN
KELLY;
MARCELLA FINKEL; JACK FINKEL;
EDNA ALLEN;
WILLARD NICKERSON; ETHEL
NICKERSON;
GERALDINE ANN SAHL; GEORGE J.
SAHL;
MARGARET BAKERIAN; VASGEN
BAKERIAN;
CHARLES DERROT; LOUISE
DERROT;
MIGUEL OBREGON; ONELIA
OBREGON;
ROY W. MCDOWELL; JUNE M.
MCDOW ELL;
JOSEPH MEZZO; CARMELLA
MEZZO;
MATHILDA GROSS
v.
MICHELLE K. GUHL, Commissioner;
STATE OF
NEW JERSEY, DEPARTMENT OF
HUMAN SERVICES,
MARGARET A. MURRAY, Director,
Division of
Medical Assistance and Health Service;
JOHN ROE, (1-5 fictitious names) their
agents, servants, employees, and/or
assigns, jointly, severally or in the
alternative; EDWARD TESTA, Director,
Bergen County Board of Social Services;
ELIZABETH LEHMANN, Director,
Morris
County Board of Social Services;
JAMES WILLIAM S, Director, Essex

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2
County
Board of Social Services; JANE ROE,
Director, ABC County Board of Social
Services, (1-5 fictitious names);
ESSEX COUNTY BOARD OF
CHOSEN FREEHOLDERS
ESSEX COUNTY BOARD OF SOCIAL
SERVICES;
Donald H. Johnson, Juanita L. Johnson,
William C. Schaible, Phyllis R. Schaible,
Charles N. Hicks, Marie L. Hicks,
Ann B. Silbernagel, Norman V.
Silbernagel,
Anna Prystasch, Stanley Prystasch,
Appellants
On Appeal from the
United States District Court for the
District of New Jersey
D.C. Civil Action No. 99-cv-05403
(Honorable Dennis M. Cavanaugh)
Argued April 22, 2003
Before: SCIRICA*, Chief Judge,
AM BRO and W EIS, Circuit Judges
*Judge Scirica began his term as
Chief Judge on May 4, 2003.
(Opinion filed: February 6, 2004)
Donald M. McHugh, Esquire (Argued)
McHugh & Macri
49 Ridgedale Avenue
East Hanover, NJ 07936
National Academy of Elder Law
Attorneys
New Jersey Chapter
Eugene Rosner, Esquire
1093 Raritan Road
Clark, NJ 07066
Attorneys for Appellants
David Samson
Attorney General of New Jersey
Michael J. Haas
Assistant Attorney General
M. Elizabeth Doyle (Argued)
Deputy Attorney General
Office of Attorney General of New
Jersey
Division of Law, P.O. Box 112
R. J. Hughes Justice Complex
25 Market Street
Trenton, NJ 08625
Attorneys for Appellees
Commissioner and State Divisions
Edwin C. Eastwood, Jr., Esquire
Law Offices of Edwin C. Eastwood, Jr.
723 Kennedy Boulevard
North Bergen, NJ 07047
Attorney for Appellee

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Edward Testa
Daniel W. O’Mullan, Esquire
O’Mullan & Brady
57 Whippany Road
Whippany, NJ 07981
Attorney for Appellee
Elizabeth Lehmann
OPINION OF THE COURT
AM BRO, Circuit Judge
Medicaid is a federal assistance
program, administered by the states, that
helps individuals with below a certain
level of assets pay for medical expenses.1
Because Medicaid is available only to the
needy, creative lawyers and financial
planners have devised various ways to
“shield” wealthier claimants’ assets in
determining M edicaid eligibility. In this
context, we decide, among other issues,
whether New Jersey has correctly
interpreted federal law to preclude use of
a private annuity trust to shield assets.
I. Background
Plaintiffs in this case are elderly
couples in which one spouse resides in a
nursing home (the “institutionalized
spouse”) and the other resides in the
community (the “community spouse”).
Plaintiffs, New Jersey residents, sought
and were denied M edicaid benefits
because their assets exceed a level
qualifying them for Medicaid eligibility.
They challenge their benefits denials
under 42 U.S.C. § 1983, and seek both
injunctive relief and a declaratory
judgment. The District Court held, inter
alia, that New Jersey did not violate
federal law in denying plaintiffs benefits
and thus dismissed their complaint.
Whether plaintiffs are entitled to
Medicaid benefits depends on how we
view certain private trusts they
established for the community spouse’s
benefit. Those trusts, known as
Community Spouse Annuity Trusts
(“CSATs”), are designed to provide a
stream of annuity payments to the
community spouse for the duration of his
or her life. From 1994 to 1999, New
Jersey did not consider the corpus of
these CSATs as “countable” assets – that
is, among plaintiffs’ available resources
for Medicaid eligibility purposes – so
long as, on the community spouse’s
death, New Jersey would be the first
beneficiary of the CSAT to the extent
that the State paid benefits on behalf of
the institutionalized spouse (“state
payback” or “state-payback
requirement”). Thus, New Jersey
effectively permitted Medicaid claimants
to use CSATs to shield a couple’s assets
from Medicaid eligibility determinations
during the community spouse’s lifetime.
New Jersey would then be reimbursed
1The Medicaid Act is codified at 42
U.S.C. § 1396 et seq.

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4
for benefits paid if any funds remained in
the CSAT after the community spouse’s
death. If no funds remained, New Jersey
would recover nothing.
In 1999 New Jersey changed its
position on the countability of CSATs,
largely in response to an earlier
interpretive letter from an employee of
the Department of Health and Human
Services (“HHS”) stating that trusts such
as CSATs should be considered
countable assets. With this change New
Jersey considers CSATs among
Medicaid claimants’ assets when
determining their total resources for
eligibility purposes. Thus, CSATs can
no longer be used to shelter assets.2 New
Jersey has taken a similar position with
respect to commercial annuities.3
Plaintiffs applied for Medicaid
benefits during the period that New
Jersey was implementing its CSAT
policy change. They claim that, during
this period, New Jersey delayed in
processing their pending Medicaid
applications for anywhere between eight
and eighteen months. When New Jersey
finally determined plaintiffs’ eligibility,
applying its “new” policy, it deemed
their asset levels too high to qualify for
Medicaid benefits because it included
their CSATs as available assets.
Plaintiffs dispute that the corpus of their
CSATs should be counted among their
assets.
Recognizing the difficulties its
policy change caused plaintiffs (who had
established CSATs expecting pre-1999
policy to apply), New Jersey advised that
it would allow them to replace their
CSATs with commercial annuities. As a
compromise to plaintiffs, the State would
treat these annuities as non-countable
(whereas for other Medicaid claimants
the State treats commercial annuities as
countable), so long as plaintiffs included
a state-payback provision in the
annuities. Plaintiffs, however, did not
accept this settlement.4
2In this context, state paybacks no
longer were exacted.
3Like CSATs, commercial annuities
provide a stream of payments (in this
context, to the community spouse) for a
fixed term of years. However, they are
administered differently from CSATs.
Whereas the corpus of a CSAT is
administered by a trustee, who is often
related to the elderly couple, the “corpus”
of a commercial annuity is paid to an
unrelated third party (typically an
insurance company) to purchase the
annuity. The annuity company then
makes payments to the community
spouse from a combination of principal
and income from that corpus.
4Plaintiffs argue that they notified
New Jersey that they wished to exchange
their CSATs for commercial annuities.
New Jersey responds that they instructed
plaintiffs how to do so, but they declined
to follow these instructions and therefore
waived this offer of compromise.

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After New Jersey held their
CSATs countable (thereby making them
ineligible for Medicaid), plaintiffs sought
to prove that New Jersey’s denial of
benefits would cause them “undue
hardship.” Under federal law, if denial
of Medicaid benefits to a claimant causes
undue hardship, the state must provide
benefits, even though the claimant would
otherwise not be so entitled. Federal law
requires states to establish hearing
procedures by which individuals can
present their undue hardship claims. But
at that time New Jersey had not
promulgated these procedures, leaving
plaintiffs without any administrative
avenue for undue hardship relief.
As a result of these circumstances,
plaintiffs filed suit in the District Court.
They challenged, inter alia, New Jersey’s
determination that their CSATs are
countable resources, the state-payback
requirement for CSATs deemed not
countable, and New Jersey’s failure to
promulgate procedures for undue
hardship hearings required by federal
law. The District Court (per Judge
Bassler) denied relief and dismissed
certain of their claims (though both
actions were without prejudice in part).
First, it held plaintiffs’ CSATs countable
under federal law. Second, although the
Court believed that New Jersey’s state-
payback requirement violates federal law
by imposing M edicaid eligibility criteria
more stringent than those imposed by the
Medicaid Act (i.e., that Medicaid
claimants with CSATs name New Jersey
first beneficiary, when federal law
imposes no such requirement), the Court
saw no risk of irreparable harm because
New Jersey ceased to require state
paybacks for CSATs post-1999 when it
began to deem CSATs countable assets.
Finally, the Court confirmed that
plaintiffs must be afforded an
opportunity for an undue hardship
hearing (and that New Jersey had failed
to promulgate procedures for such a
hearing). However, because New Jersey
conceded its obligation and had
committed to promulgating regulations
for hearings, the Court held that its
failure to do so thus far posed no risk of
irreparable harm. Judge Bassler left
open the possibility that plaintiffs could
return to federal court if New Jersey
failed to implement its promised
procedures.
In the meantime, despite the
absence of officially promulgated
procedures, New Jersey offered plaintiffs
the opportunity to plead undue hardship
in conformity with federally mandated
standards. The State sent “amended”
denial letters to plaintiffs in December
1999 notifying them of their right to
apply for an undue hardship exception.
Plaintiffs declined to do so, however.5
5Plaintiffs’ counsel asked New Jersey
by letter on January 11, 2000 to “send . . .
the undue hardship policy provision
contained in the New Jersey State
Medicaid Plan” that implements the
federal mandate to afford undue hardship
hearings. He said that, “[u]pon receipt of

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In 2001, New Jersey’s undue-
hardship regulations became effective.
Plaintiffs believe those regulations are
inadequate, however, because they fail to
specify a time in which the State must
hold a hearing, thereby violating a
federal Medicaid regulation requiring a
“timely process for determining whether
an undue hardship waiver will be
granted.” Health Care Financing
Administration (now Centers for
Medicare & Medicaid
Services)(“HCFA”) Transmittal No. 64 §
3259.8C.
Plaintiffs returned to the District
Court. This time the Court (with Judge
Cavanaugh now presiding) denied their
motion for, inter alia, injunctive relief
and dismissed their complaint. It again
held plaintiffs’ CSATs countable in
determining Medicaid eligibility. It also
rejected their argument that, because
New Jersey unduly delayed in
determining their eligibility, it should be
equitably estopped from applying its new
CSAT countability policy to plaintiffs.
The Court reasoned that equitable
estoppel will rarely lie against
governmental entities. Moreover, Judge
Cavanaugh rejected plaintiffs’ state-
payback argument, though for different
reasons than did Judge Bassler. Judge
Cavanaugh found no evidence that New
Jersey any longer requires state paybacks
for CSATs. However, in disagreement
with Judge Bassler, Judge Cavanaugh
held that state paybacks are consistent
with federal policy disfavoring Medicaid
claimants’ attempts to shelter assets and
thus do not violate federal law. Finally,
the Court disagreed with plaintiffs that
New Jersey’s newly promulgated undue
hardship hearing provisions were
deficient for their failure explicitly to
provide a time frame in which a hearing
must be conducted. Rather, it held that
the State had “substantially complied”
with federal law’s mandate to provide for
undue hardship hearing procedures.
Plaintiffs appeal Judge
Cavanaugh’s dismissal of their
complaint.6 They raise essentially five
issues for our review7: (1) whether
that information, my clients will file the
undue hardship request.” As noted, New
Jersey had no formal procedures in place
at that time, but rather was attempting to
accommodate plaintiffs’ complaint by
providing ad hoc procedures that would
comply with federal law. Thus New
Jersey had nothing to send plaintiffs.
Plaintiffs – presumably because they did
not receive the then-nonexistent
provisions – never provided New Jersey
with the information necessary to
determine whether they were entitled to
an undue hardship exception.
6The District Court had jurisdiction
under 28 U.S.C. § 1331. We have
jurisdiction pursuant to 28 U.S.C. §
1291.
7These are questions of statutory
interpretation, over which we exercise

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CSATs are countable assets for M edicaid
eligibility purposes; (2) whether in any
event New Jersey should be estopped
from treating plaintiffs’ CSATs as
countable assets because they delayed
unduly in determining plaintiffs’
Medicaid eligibility (or alternatively
whether the District Court should hold a
hearing on plaintiffs’ estoppel claim); (3)
whether New Jersey’s state-payback
requirement pre-1999 for CSATs violates
federal law; (4) whether New Jersey’s
state-payback requirement for the
commercial annuity option offered to
plaintiffs violates federal law; and (5)
whether the undue hardship regulations
of New Jersey violate federal law by
failing explicitly to provide a time by
which it must hold a hearing. Plaintiffs
also seek attorneys’ fees.
II. Discussion
A. Countability of CSATs
New Jersey deemed plaintiffs
ineligible for Medicaid benefits because,
when the capital in their CSATs was
taken into account, they had assets
exceeding a level qualifying them for
Medicaid. Plaintiffs argue that New
Jersey should not have considered their
CSATs as countable assets.
As this is a question of statutory
interpretation,8 we begin (and end) our
inquiry with the relevant statute, 42
U.S.C. § 1396p(d)(3)(B). That provision
provides, in subsection (i), that “[i]n the
case of an irrevocable trust -- if there are
any circumstances under which payment
from the trust could be made to or for the
benefit of the individual [the
institutionalized spouse whose assets are
used to establish the trust], the portion of
the corpus from which, or the income on
the corpus from which, payment to the
individual could be made shall be
considered resources available to the
individual . . . .” Both parties agree that
CSATs are irrevocable trusts. They are
generally funded with marital assets
(assets that belong to both spouses).
Moreover, CSATs are designed so that
the corpus and the income on the corpus
will provide the community spouse a
stream of payments. Once the
community spouse receives these
payments, there is nothing preventing her
or him from sharing them with the
institutionalized spouse as well. Section
1396p(d)(3)(B)(i) thus squarely covers
plenary review. Moody v. Sec. Pac. Bus.
Credit, Inc., 971 F.2d 1056, 1063 (3d
Cir. 1992).
8We note that there is some question
“whether third parties may sue to enforce
Spending Clause legislation [such as
provisions of the Medicaid Act].”
Pharmaceutical Research & Mfrs. of Am.
v. Walsh, 123 S. Ct. 1855, 1878 (2003)
(Thomas, J., concurring) (citations
omitted). However, as neither party
raises this issue on appeal, we have no
occasion to decide it.

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CSATs – as “circumstances [exist] under
which payment from the trust could be
made to or for the benefit of” the
institutionalized spouse – and deems
them countable resources.9 Accordingly,
we affirm the District Court ruling that
plaintiffs’ CSAT assets are countable
resources.
B. Equitable Estoppel
Plaintiffs argue that New Jersey
“stalled” their Medicaid applications for
eight to eighteen months to allow the
State to make a “policy change”
regarding CSATs’ countability. As a
result, plaintiffs assert that we should
equitably estop New Jersey from
attempting to apply its new CSAT
countability rule to plaintiffs or at least
order the District Court to hold a hearing
and allow discovery on this claim.
We decline to do either.
“[E]quitable estoppel will not lie against
the Government as it lies against private
litigants.” Office of Personnel Mgmt. v.
Richmond, 496 U.S. 414, 419 (1990). In
Richmond, even though a federal
employee provided misinformation to the
plaintiff (on which he relied to his
detriment), the Supreme Court declined
equitably to estop the Government. Id. at
9Indeed, an interpretive letter from an
HHS employee supports our analysis.
On April 16, 1998, Robert A. Streimer,
with the Disabled and Elderly Health
Programs Group of HHS’s Center for
Medicaid and State Operations, wrote to
an attorney in Virginia who inquired
about the treatment of her client’s trust.
According to the letter, the Virginia
Department of Social Services denied her
client Medicaid benefits because, when
the trust’s corpus was counted as an
eligible resource, the client had assets in
excess of a M edicaid-qualifying level.
Streimer opined that Virginia’s
determination was correct. He reasoned
that the trust “falls under the jurisdiction
of [§ 1396p(d)] if the trust was
established by either member of the
couple, using at least some of the
Medicaid applicant’s assets.” Second,
because “the trust . . . is an irrevocable
trust, the corpus of which can be paid at
some point in time to the community
spouse[,] . . . the corpus . . . is considered
as an available resource to the
beneficiary, and thus must be included as
a countable resource in determining
Medicaid eligibility for the
institutionalized spouse.” The Streimer
letter went on to draw a distinction
between irrevocable (private) trusts and
commercial annuities, suggesting that
commercial annuities would not be
countable resources. Because, as will be
discussed below, the countability of
commercial annuities is not a question
raised in plaintiffs’ complaint, we need
not decide whether the Streimer letter’s
position on the countability of
commercial annuities – a position
conflicting with New Jersey’s – is
correct.

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9
433-34. In a case more than a century
before, The Floyd Acceptances, the Court
similarly held that the Government could
not be compelled to honor bills of
exchange issued by a government official
where there was no statutory authority
for the issuance of the bills. 74 U.S. 666,
682-83 (1868). An analogous principle
applies here: because, as discussed, there
is no statutory authority (federal or state)
for treating CSAT assets as not
countable, New Jersey should not be
estopped from treating them as
countable. While the Richmond Court
left open the possibility that some kind of
“‘affirmative misconduct’ might give rise
to estoppel against the Government,”
plaintiffs allege no affirmative
misconduct here. Richmond, 496 U.S. at
421 (citations omitted). In this context,
the District Court was correct in
eschewing the estoppel of New Jersey’s
countability rule.10
C. State-payback requirement for
CSATs
Plaintiffs challenge New Jersey’s
state-payback requirement for CSATs.
They argue that no provision of the
Medicaid Act allows a state to seek
payback from a community spouse’s
estate. Moreover, because § 1396p
requires state payback for other types of
trusts, see § 1396p(d)(4)(A)-(C),11
Congress knew how to specify state
payback when it wanted; that it did not
do so for spousal trusts indicates that it
did not intend to permit states to seek
payback for CSATs. New Jersey
counters that this issue is now moot
because it considers CSATs countable
and therefore no longer imposes this
condition. W e agree with New Jersey.
As background, § 1396p(d)(3)
instructs states how to treat trusts for
Medicaid eligibility purposes.
Previously, when New Jersey considered
CSATs noncountable, it presumably
believed them to be governed by §
1396p(d)(3)(B)(ii), which addresses
irrevocable trusts when no income or
principal from the trust “could under any
circumstances be made to the individual
[establishing the trust].” That section
provides that these trusts “shall be
considered . . . to be assets disposed by
the individual for purposes of subsection
(c) of this section [imposing a penalty on
transfers of assets].” The creation of a
CSAT results in a transfer of marital
assets to the community spouse. See §
1396p(c)(3). Thus, absent some
exception, even though a CSAT is
noncountable it still is subject to §
10As there is no need in this case for
any hearing (including discovery), the
District Court’s refusal to conduct a
hearing is also affirmed.
11The trusts provided for in this
section are known as special-needs,
“Miller,” and pooled trusts, and are not
implicated in this case.

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1396p(c)’s transfer penalty.12 Section
1396p(c)(2)(B)(i), however, exempts
transfers from penalty when made “for
the sole benefit of the individual’s
spouse.” In M edicaid parlance, this is
known as an “SBO transfer.” New
Jersey conditioned application of the
SBO exception to the § 1396p(c) transfer
penalty by defining an SBO transfer to
include when the State is named first
beneficiary of the trust to the extent of
benefits paid on behalf of the
institutionalized spouse. N.J. Admin.
Code tit. 10, § 71-4.10(f). In layman’s
language, transfers of assets by the
institutionalized spouse for the sole
benefit of the community spouse are not
penalized for Medicaid eligibility,
according to New Jersey, if it has first
call on those trust assets equal to the
Medicaid benefits it pays to the
institutionalized spouse.
Because New Jersey no longer
requires state paybacks for CSATs, we
have no occasion to decide whether it
had the authority to define an SBO
transfer in this manner.13 Thus the state-
payback issue plaintiffs assert is moot
with respect to CSATs.
D. Commercial annuity option offered
to plaintiffs
Plaintiffs argue that the
commercial annuity option New Jersey
offered them – whereby New Jersey
would deem commercial annuities
noncountable assets so long as they
provided for state payback – violates
federal law for the same reasons
discussed above. New Jersey responds
that because plaintiffs did not raise this
issue in their complaint (i.e., plaintiffs
only raised the issue with respect to
CSATs), it is not properly before us.
We agree that plaintiffs take issue
too late. Moreover, at oral argument
New Jersey made clear that its offer to
treat any commercial annuities plaintiffs
might purchase as noncountable (so long
12The “transfer penalty” is a period of
ineligibility for Medicaid benefits.
13Although § 71-4.10(f) is no longer
applied by New Jersey with respect to
CSATs, it apparently is still in effect, and
thus presumably contemplates state
paybacks in non-CSAT contexts.
We also note in this regard that
HHS has taken a position (in the context
of a commercial annuity) contrary to
New Jersey’s view that SBO transfers
can include it as a beneficiary. See letter
dated September 26, 2002, from Thomas
E. Hamilton, Director of the Disabled
and Elderly Health Programs Group of
HHS’s Centers for Medicare and
Medicaid Services, to Donald M.
McHugh, Esq. (one of plaintiffs’ counsel
in this case). Interestingly, the Hamilton
letter, notwithstanding § 71-4.10(f),
refers to New Jersey’s interpretation as a
“policy, rather than state statute or
regulation.”

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as they named New Jersey as first
beneficiary) was intended to be a
settlement available to the plaintiffs, not
a policy generally applicable to all
Medicaid claimants. New Jersey need
not have offered this compromise to
plaintiffs, and instead could have chosen
to treat countable assets in any annuities
(whether private or commercial)
plaintiffs purchased. Regardless,
plaintiffs rejected this settlement, and
New Jersey tells us it is no longer on the
table. Thus, not only was this issue not
properly pled, it is moot as well.
E. Undue Hardship Hearing
Section 1396p(d)(5) requires
states to afford otherwise ineligible
claimants Medicaid benefits if “undue
hardship” would result from the failure
to provide benefits.14 The relevant
Medicaid regulation, § 3259.8 of HCFA
Transmittal No. 64, sets standards for
states to apply in making “undue
hardship” determinations. Section
3259.8A provides that “[u]ndue hardship
exists when application of the trust
provisions would deprive the individual
of medical care such that his/her health
or his/her life would be endangered [or]
when application of the trust provisions
would deprive the individual of food,
clothing, shelter, or other necessities of
life.” While states have “considerable
flexibility in deciding the circumstances
under which [they] will not count funds
in trusts . . . because of undue hardship,”
the regulation requires that states, “at a
minimum, provide for: [1] [n]otice to
recipients that an undue hardship
exception exists; [2] [a] timely process
for determining whether an undue
hardship waiver will be granted; [and]
[3] [a] process under which an adverse
determination can be appealed.” §
3259.8C. Moreover, a state’s “undue
hardship provision must discuss how [the
state] will meet these requirements.” Id.
Plaintiffs’ arguments have
necessarily shifted through the course of
this case because, before seeking relief
initially in the District Court, New Jersey
had not promulgated procedures under
which Medicaid claimants could seek
undue hardship hearings in accordance
with § 1396p(d)(5) of the Medicaid Act
and § 3259.8 of Transmittal No. 64.
However, after the hearing before Judge
Bassler, New Jersey implemented the
long-promised undue hardship
regulations. See N.J. Admin. Code tit.
10, § 71:4.11(i). According to plaintiffs,
however, New Jersey’s regulations do
1442 U.S.C. § 1396p(d)(5) provides
that “[t]he State agency [responsible for
administering Medicaid] shall establish
procedures (in accordance with standards
specified by the Secretary) under which
the agency waives the application of this
subsection [relating to “[t]reatment of
trust amounts”] with respect to an
individual if the individual establishes
that such application would work an
undue hardship on the individual as
determined on the basis of criteria
established by the Secretary.”

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not fully comply with federal law. They
argued before Judge Cavanaugh – and
now before us – that New Jersey’s
regulations do not specify within what
time period the State will afford an
undue hardship hearing and thus do not
“discuss how [New Jersey] will meet”
Transmittal No. 64's “timely process”
requirement. This failure, plaintiffs
argue, violates federal law.
New Jersey responds that
plaintiffs are without standing to
complain about the lack of an explicit
timeliness clause in its regulation
because plaintiffs have not availed
themselves of the offered undue hardship
remedy and thus have suffered no injury
as a result of the lack of an explicit
timeliness provision in § 71:4.11(i). On
the merits, New Jersey also argues that
neither § 1396p(d)(5) nor § 3259.8 of
Transmittal No. 64 requires states to
include an express timeliness provision.
We agree with New Jersey that
plaintiffs lack standing because they
have suffered no injury related to §
71:4.11(i)’s lack of an explicit timeliness
provision. Plaintiffs conceded both in
their brief and at oral argument that New
Jersey notified them of their right to an
undue hardship hearing in December
1999 and required them to submit “the
reasons and all documentation that you
believe gives rise to an undue hardship . .
. to the county welfare agency within 20
day[s] of this letter.” While these notices
were sent out before New Jersey’s undue
hardship regulations became effective in
2001, this chronology is irrelevant.15
What is important is that (the lack of
formal regulations notwithstanding) New
Jersey offered plaintiffs the opportunity
to apply for an undue hardship hearing,
as federal law requires. For whatever
reason, plaintiffs chose not to seek a
hearing for undue hardship at that time.
Thus they have suffered no injury (and
indeed have no basis to believe that New
Jersey would not have timely processed
their request).16 As a consequence,
plaintiffs are without standing.
F. Attorneys’ fees
Because plaintiffs have not
received a favorable judgment on any of
their claims – either in the District Court
15We recognize that plaintiffs could
not receive an undue hardship hearing
under § 71-4.11(i) today. This provision
requires claimants to apply for an undue
hardship waiver “within 20 days of
notification of the denial of eligibility or
termination of benefits,” a period long-
passed. But as discussed, New Jersey
offered plaintiffs the opportunity to seek
an undue hardship hearing in December
1999. Having done so, it followed
federal law.
16Had plaintiffs sought a hearing, and
had New Jersey delayed unduly in
providing them a hearing or otherwise
not complied with federal standards for
such a hearing, they would have had
standing.

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or here – they are not entitled to
attorneys’ fees. Cf. Buckhannon Bd. and
Care Home, Inc. v. West Virginia Dep’t
of Health & Human Resources, 532 U.S.
598, 600 (2001) (party that failed to win
on the merits by judgment or consent
decree, yet obtained result it sought by
defendant’s voluntary change, is not a
prevailing party entitled to attorney’s
fees and costs).
* * * * * * * * * * * * *
We hold that CSATs are
countable resources for Medicaid
eligibility purposes and decline (a) to
estop New Jersey from treating
plaintiffs’ CSAT assets as countable or
(b) to require the District Court to hold a
hearing on the issue. Moreover, we hold
that plaintiffs’ claims with respect to
state paybacks are moot both as to
CSATs and commercial annuities, and
they are without standing to attack New
Jersey’s undue hardship regulations.
Finally, because plaintiffs do not prevail
on the merits, they have no claim for
attorneys’ fees.

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