Smalley v. Nebraska Dept. of Health & Human Servs.

In this case, excluding the evidence serves the deterrence
aim of the exclusionary rule by forbidding the use of evidence
obtained through an obvious Fourth Amendment violation.
Conversely, to ignore such a blatant lack of probable cause
would set a low bar for future police conduct.29
We conclude that the deputies’ reliance on the warrant was
not reasonable and thus did not bring it within the Leon good
faith exception to the exclusionary rule. The court erred in
overruling Sprunger’s second motion to suppress.
CONCLUSION
We conclude that probable cause did not support the warrant
to search Sprunger’s computers for child pornography. We also
conclude that it was lacking probable cause to such a degree
that reliance on the warrant was not objectively reasonable.
Accordingly, the court should have suppressed fruits of the
search. We reverse, and remand for proceedings consistent with
this opinion.
R eveRsed and Remanded foR
fuRtheR pRoceedings.
WRight, J., not participating.
29 See State v. Gorup, 279 Neb. 841, 782 N.W.2d 16 (2010).
edWaRd m. smalley, appellee and cRoss -appellant, v.
nebRaska depaRtment of health and human
seRvices , appellant and cRoss -appellee .
811 N.W.2d 246
Filed March 23, 2012. 	No. S-11-151.
1. Judgments: Appeal and Error. The trial court’s factual findings in a bench
trial of an action at law have the effect of a jury verdict and will not be set aside
unless clearly erroneous.
2. Administrative Law: Statutes: Appeal and Error. To the extent that the mean-
ing and interpretation of statutes and regulations are involved, questions of law
are presented, in connection with which an appellate court has an obligation
to reach an independent conclusion irrespective of the decision made by the
court below.
544 	283 NebrASkA repOrTS
Nebraska Supreme Court Online Library
www.nebraska.gov/apps-courts-epub/
11/01/2026 04:42 AM CST

3. Medical Assistance: Federal Acts: States. The Medicaid program provides joint
federal and state funding of medical care for individuals whose resources are
insufficient to meet the cost of necessary medical care.
4. ____: ____: ____. The Medicaid program provides federal financial assist-
ance to states that choose to reimburse certain costs of medical treatment for
needy persons.
5. ____: ____: ____. A state is not obligated to participate in the Medicaid program;
however, once a state has voluntarily elected to participate, it must comply with
standards and requirements imposed by federal statutes and regulations.
6. Medical Assistance: Federal Acts. based in part on its third-party liability provi-
sions, Medicaid has been characterized as a “payer of last resort.” Therefore, all
other available resources must be used before Medicaid pays for the medical care
of an individual enrolled in a Medicaid program.
7. Ordinances: Presumptions: Proof. In considering the validity of regulations,
courts generally presume that legislative or rulemaking bodies, in enacting ordi-
nances or rules, acted within their authority, and the burden rests on those who
challenge their validity.
8. Administrative Law. Agency regulations that are properly adopted and filed with
the Secretary of State of Nebraska have the effect of statutory law.
Appeal from the District Court for Cass County: R andall l.
R ehmeieR, Judge. reversed and remanded with directions.
Jon bruning, Attorney General, and Michael J. rumbaugh
for appellant.
William r. Settles, of Lamson, Dugan & Murray, L.L.p.,
Dean T. Jennings, of Jennings Law Firm, and G. Michael
Fenner, of Creighton University School of Law, for appellee.
heavican, c.J., connolly, geRRaRd, stephan, mccoRmack ,
and milleR-leRman, JJ.
stephan, J.
This case arises from the settlement of a personal injury
lawsuit filed by edward M. Smalley, who was seriously injured
in a motor vehicle accident in December 2007. Although
Smalley qualified for Medicaid as a result of the accident,
the Nebraska Department of Health and Human Services
(DHHS), Nebraska’s Medicaid administrator, took the posi-
tion that it would not pay Smalley’s outstanding medical bills
prior to the disposition of his third-party liability claims. In
order to facilitate a settlement of those claims, Smalley’s
attorney agreed that if DHHS paid the medical bills at the
SMALLey v. NebrASkA DepT. OF HeALTH & HUMAN ServS. 	545
Cite as 283 Neb. 544

discounted Medicaid rate, Smalley would reimburse DHHS
dollar-for-dollar out of the settlement proceeds. After DHHS
paid the bills as agreed, Smalley objected to full reimburse-
ment as contrary to federal law. The disputed funds were held
in escrow, and the dispute was tried to the district court for
Cass County. The court determined that under federal law,
DHHS was entitled to reimbursement of only a portion of the
Medicaid payments it had made. The court denied Smalley’s
requested relief under 42 U.S.C. §§ 1983 and 1988 (2006).
DHHS appeals, and Smalley cross-appeals. We conclude that
DHHS is entitled to full reimbursement and therefore reverse
the judgment of the district court.
bACkGrOUND
accident
Shortly before 10 p.m. on December 20, 2007, Smalley was
standing outside a vehicle parked on a snow- and ice-packed
road in Cass County. Smalley was talking with the owner of the
vehicle, who was giving him a ride home from a bar. both were
struck by a vehicle operated by Jerome G. Speck and owned by
Mark Morehead Construction, Inc. (Morehead). Smalley was
treated at a hospital in Omaha, Nebraska. He sustained serious
injuries, including amputation of his legs. The other party also
suffered injuries in the accident.
submission and denial
of medicaid claim
Smalley was determined eligible for Medicaid during his
hospital stay. In February 2008, he filed a personal injury
lawsuit 	against 	Speck 	and 	Morehead, 	alleging 	they 	were
responsible for his injuries. In March, the hospital submitted
medical bills in excess of $400,000 to DHHS for payment
under Medicaid. DHHS sets maximum reimbursement rates for
Medicaid services, and pursuant to statutory regulations and
its provider agreement with the hospital, DHHS could fully
resolve Smalley’s medical bills with a payment of approxi-
mately $131,000.1 emil Spicka, a medical claims investigator
1 See 471 Neb. Admin. Code, ch. 2, § 001.03(4) and ch. 3, § 002.02A
(2005).
546 	283 NebrASkA repOrTS

for DHHS, refused to pay the hospital bill on the ground that
“third party resources” might be available, such as the liability
insurance of Speck and Morehead. The total liability coverage
available to satisfy the claim of Smalley and the other person
injured in the accident was $1,025,000. At the time DHHS
denied payment of Smalley’s medical bills, Smalley’s claims
against Speck and Morehead had not been resolved.
agReement betWeen smalley’s
attoRney and dhhs
Speck and Morehead agreed to mediate the personal injury
lawsuit. prior to the mediation session, Spicka told Smalley’s
attorney that DHHS would pay Smalley’s outstanding medical
bills at the discounted Medicaid rate if Smalley would agree to
reimburse DHHS for the full amount of its payments out of the
settlement proceeds. After receiving a proffered settlement of
$800,000, Smalley’s attorney agreed to this proposal because
it disposed of the medical bills at a substantially reduced
rate, thereby maximizing Smalley’s net settlement proceeds.
However, the attorney testified that he had reservations about
whether DHHS could legally insist upon full reimbursement
and that he intended to seek a legal resolution of this issue
before consummating the settlement. Smalley’s attorney did
not mention this portion of his strategy to Spicka when the
agreement was reached. Sometime after May 15, 2008, DHHS
paid approximately $131,000 to resolve Smalley’s outstanding
medical bills. DHHS anticipated it would be fully reimbursed
out of the settlement proceeds pursuant to its agreement.
disposition of medicaid
subRogation claim
On May 27, 2008, Smalley added DHHS as a defendant in
his pending personal injury action against Speck and Morehead.
Smalley asserted that fully reimbursing DHHS out of the pro-
ceeds of the settlement would be contrary to federal law as
applied by the U.S. Supreme Court in Arkansas Dept. of Health
and Human Servs. v. Ahlborn2 and that he could not accept the
2 Arkansas Dept. of Health and Human Servs. v. Ahlborn, 547 U.S. 268, 126
S. Ct. 1752, 164 L. ed. 2d 459 (2006).
SMALLey v. NebrASkA DepT. OF HeALTH & HUMAN ServS. 	547
Cite as 283 Neb. 544

pending offer to settle his personal injury claim until this issue
had been resolved. He sought both declaratory and injunctive
relief against DHHS and asserted that DHHS was liable under
42 U.S.C. §§ 1983 and 1988. A few days after Smalley added
DHHS as a defendant, the parties entered into a stipulation
which permitted Smalley to settle his claims against Speck and
Morehead for $805,000. A portion of the settlement amount
was placed into a special needs trust for Smalley’s benefit, and
Smalley’s attorney fees and expenses were paid. An amount
just over $130,000, representing the reimbursement claimed
by DHHS and disputed by Smalley, was deposited in escrow
pending disposition of the issue by the district court. DHHS
filed an answer and a counterclaim asserting it was entitled to
$130,000, representing partial reimbursement of the Medicaid
payments it made to Smalley’s health care providers.
The district court conducted a bench trial at which Smalley
was represented by new counsel. Smalley’s original attorney
testified, as did Spicka and another representative of DHHS.
Over a foundational objection, Smalley’s original attorney tes-
tified that in his professional opinion, Smalley’s personal injury
claim was worth at least $6 million. He admitted that he never
intended to honor his agreement to fully reimburse DHHS and
that he entered into the agreement in order to induce DHHS
to pay Smalley’s medical expenses at the discounted Medicaid
rate. Spicka testified that based upon the representations of
Smalley’s counsel, he expected DHHS to be fully reimbursed
for the Medicaid payments it made on Smalley’s behalf. He
further testified that in the absence of the agreement, DHHS
would have continued its “cost avoidance approach,” leaving
Smalley to negotiate with the hospital regarding the outstand-
ing bill.
The district court held that DHHS’ right to reimbursement
was limited by Ahlborn,3 in which the U.S. Supreme Court
held that a state Medicaid program is entitled to reimbursement
from only that part of a personal injury settlement that repre-
sents payment for medical care expenses. Applying a formula
used in Ahlborn, the district court concluded that Smalley’s
3 Id.
548 	283 NebrASkA repOrTS

claim had a value of $6 million and that the settlement amount
of $805,000 represented approximately 13.4 percent of the
total value of Smalley’s claim. Applying this percentage to the
Medicaid payments made by DHHS, the court determined that
DHHS was entitled to reimbursement in the amount of $17,420.
The court determined that enforcement of DHHS’ claim for any
greater portion of the settlement proceeds would be inconsist-
ent with Ahlborn and enjoined DHHS from pursuing such
enforcement efforts. The district court denied Smalley’s § 1983
claim and held that he was not entitled to attorney fees pursu-
ant to § 1988.
Smalley filed a motion for a new trial with respect to the
denial of his § 1983 claim and his request for attorney fees.
The court overruled the motion. DHHS then perfected this
timely appeal, which we moved to our docket on our own
motion pursuant to our statutory authority to regulate the dock-
ets of the appellate courts of this state.4
ASSIGNMeNTS OF errOr
DHHS assigns that the district court abused its discretion
in (1) denying full dollar-for-dollar recovery pursuant to the
agreement, (2) applying Ahlborn to this case, and (3) overrul-
ing its objection to the testimony of Smalley’s original counsel
regarding the value of Smalley’s personal injury claim.
On cross-appeal, Smalley assigns that the district court erred
in (1) denying his § 1983 claim, (2) denying his request for
attorney fees under § 1988, (3) finding unique circumstances
existed that made an award of attorney fees unjust, and (4)
denying his motion for a new trial on the issue of attor-
ney fees.
STANDArD OF revIeW
[1,2] The trial court’s factual findings in a bench trial of
an action at law have the effect of a jury verdict and will not
be set aside unless clearly erroneous.5 To the extent that the
4 See Neb. rev. Stat. § 24-1106(3) (reissue 2008).
5 Hooper v. Freedom Fin. Group, 280 Neb. 111, 784 N.W.2d 437 (2010);
Eicher v. Mid America Fin. Invest. Corp., 275 Neb. 462, 748 N.W.2d 1
(2008).
SMALLey v. NebrASkA DepT. OF HeALTH & HUMAN ServS. 	549
Cite as 283 Neb. 544

meaning and interpretation of statutes and regulations are
involved, questions of law are presented, in connection with
which an appellate court has an obligation to reach an inde-
pendent conclusion irrespective of the decision made by the
court below.6
ANALySIS
The parties’ dispute arises from an agreement, the existence
and terms of which are not disputed. The record reflects that
(1) Smalley, through his attorney, promised DHHS that if it
paid Smalley’s medical expenses at the discounted Medicaid
rate, it would be reimbursed in full from the proceeds of the
personal injury settlement; (2) in reliance on this promise,
DHHS made the requested payments; and (3) the promised
reimbursement was not made. DHHS contends that it relied
to its detriment upon Smalley’s agreement and that it was
defrauded into making the payments by a promise which
Smalley and his attorney did not intend to keep. but Smalley
contends that DHHS was legally obligated to pay his medical
expenses and therefore could not have been induced to do so
by a promise of full reimbursement. Smalley also argues that
full reimbursement would violate federal law as interpreted and
applied in Ahlborn. In resolving these issues, we do not com-
ment on the tactic employed by Smalley’s counsel in securing
payment of Smalley’s medical expenses. We are concerned here
only with its legal consequence, which must be determined in
the context of state and federal statutes and regulations which
govern Medicaid. We begin by summarizing those provisions
applicable to this case.
medicaid and thiRd -paRty liability
[3-5] The Medicaid program provides joint federal and
state funding of medical care for individuals whose resources
are insufficient to meet the cost of necessary medical care.7
The program provides “federal financial assistance to States
6 Children’s Hospital v. State, 278 Neb. 187, 768 N.W.2d 442 (2009).
7 Ahlborn, supra note 2; Pohlmann v. Nebraska Dept. of Health & Human
Servs., 271 Neb. 272, 710 N.W.2d 639 (2006).
550 	283 NebrASkA repOrTS

that choose to reimburse certain costs of medical treatment
for needy persons.”8 A state is not obligated to participate
in the Medicaid program; however, once a state has volun-
tarily elected to participate, it must comply with standards
and requirements imposed by federal statutes and regulations.9
Nebraska elected to participate in the Medicaid program when
it enacted the Medical Assistance Act.10 DHHS is responsible
for administering the program in this state.11
Among the federal statutes and regulations which govern
that administration are those relating to third-party liability for
medical expenses that would otherwise be paid by Medicaid.
States participating in Medicaid are required by federal law
to have a plan providing that the state agency administering
the program “will take all reasonable measures to ascertain
the legal liability of third parties . . . to pay for care and serv-
ices available under [Medicaid].”12 The state plan must pro-
vide that
in any case where such a legal liability is found to exist
after medical assistance has been made available on behalf
of the individual and where the amount of reimbursement
the State can reasonably expect to recover exceeds the
costs of such recovery, the State or local agency will seek
reimbursement for such assistance to the extent of such
legal liability.13
And, to the extent that a third party is legally liable for a pay-
ment which has been made under Medicaid, states are required
to have laws through which the state acquires “the rights of
such [Medicaid recipient] to payment by any other party for
8 Harris v. McRae, 448 U.S. 297, 301, 100 S. Ct. 2671, 65 L. ed. 2d 784
(1980). See, also, Ahlborn, supra note 2.
9 See, Ahlborn, supra note 2; Thorson v. Nebraska Dept. of Health &
Human Servs., 274 Neb. 322, 740 N.W.2d 27 (2007); Pohlmann, supra
note 7.
10 See Neb. rev. Stat. §§ 68-901 to 68-971 (reissue 2009, Cum. Supp. 2010
& Supp. 2011). See, also, Thorson, supra note 9.
11 Thorson, supra note 9. See Pohlmann, supra note 7.
12 42 U.S.C. § 1396a(a)(25)(A) (2006).
13 § 1396a(a)(25)(b).
SMALLey v. NebrASkA DepT. OF HeALTH & HUMAN ServS. 	551
Cite as 283 Neb. 544

such health care items or services.”14 Federal law further man-
dates that states require individuals seeking Medicaid benefits
“to assign the State any rights . . . to payment for medical care
from any third party.”15 Any amount collected by a state under
such an assignment must “be retained by the State as is nec-
essary to reimburse it for medical assistance payments made
on behalf of an individual with respect to whom such assign-
ment was executed.”16 Any remaining amount is to be paid to
the individual.17
pursuant to these federal mandates, Nebraska’s Medical
Assistance Act provides that an application for Medicaid ben-
efits must include an assignment to DHHS of
any rights to pursue or receive payments from any third
party liable to pay for the cost of medical care and serv-
ices arising out of injury, disease, or disability of the
applicant or recipient or other members of the assistance
group which otherwise would be covered by medical
assistance [Medicaid].18
Further, Neb. rev. Stat. § 68-716 (reissue 2009) provides:
An application for medical assistance shall give a right
of subrogation to [DHHS] or its assigns. Subject to sec-
tions 68-921 to 68-925, subrogation shall include every
claim or right which the applicant may have against a
third party when such right or claim involves money for
medical care. The third party shall be liable to make pay-
ments directly to [DHHS] or its assigns as soon as he or
she is notified in writing of the valid claim for subroga-
tion under this section.
[6] based in part on its third-party liability provisions,
Medicaid has been characterized as a “‘payer of last resort.’”19
14 § 1396a(a)(25)(H).
15 42 U.S.C. § 1396k(a)(1)(A) (2006).
16 § 1396k(b).
17 Id.
18 § 68-916.
19 Ahlborn, supra note 2, 547 U.S. at 291, quoting S. rep. No. 99-146
(1985), reprinted in 1986 U.S.C.C.A.N. 42, 280.
552 	283 NebrASkA repOrTS

Therefore, “‘all other available resources must be used before
Medicaid pays for the medical care of an individual enrolled
in a Medicaid program.’”20 but, as the U.S. Supreme Court
noted in Ahlborn, it “does not mean . . . that Congress meant to
authorize States to seek reimbursement from Medicaid recipi-
ents themselves.”21 The federal Medicaid statutes include an
“anti-lien provision” which provides that “[n]o lien may be
imposed against the property of any individual prior to his
death on account of medical assistance paid or to be paid”
under Medicaid, except in certain limited circumstances.22
Also, federal law provides that “[n]o adjustment or recovery
of any medical assistance correctly paid on behalf of an indi-
vidual under the State plan may be made, except” in certain
specific circumstances.23
In Ahlborn, the U.S. Supreme Court considered federal
Medicaid statutes in the context of an attempt by the State
of Arkansas to recover Medicaid payments from a personal
injury settlement. The client sustained a disabling brain injury
in a motor vehicle accident. Arkansas paid Medicaid benefits
of approximately $215,000 on her behalf. The client filed suit
against the parties she claimed to have caused the accident
and received a settlement of $550,000. Arkansas sought reim-
bursement from the settlement of all Medicaid benefits it had
paid, based on a state statute. In affirming the holding of a
lower appellate court, the Supreme Court held that Arkansas’
claim against the settlement for all the Medicaid benefits it
paid “squarely conflict[ed] with the anti-lien provision of the
federal Medicaid laws.”24 The Court reasoned that the federal
anti-lien provision allowed Arkansas to assert a lien on only
that portion of the settlement proceeds representing medi-
cal expenses.
20 Miller v. Gorski Wladyslaw Estate, 547 F.3d 273, 278 (5th Cir. 2008),
quoting Caremark, Inc. v. Goetz, 480 F.3d 779 (6th Cir. 2007).
21 Ahlborn, supra note 2, 547 U.S. at 291.
22 42 U.S.C. § 1396p(a)(1) (2006).
23 § 1396p(b)(1) (Supp. Iv 2010).
24 Ahlborn, supra note 2, 547 U.S. at 280.
SMALLey v. NebrASkA DepT. OF HeALTH & HUMAN ServS. 	553
Cite as 283 Neb. 544

accRual of obligation to
pay medicaid benefits
As noted, although Smalley admits to the terms of the
reimbursement agreement and further admits that he never
intended to hold to its terms, he contends that DHHS has no
claim for detrimental reliance or fraudulent misrepresentation
because DHHS had an independent legal obligation, existing
at the time the reimbursement agreement was entered into,
to pay Smalley’s outstanding medical bills. His theory is that
“‘[o]ne suffers no damage where he is fraudulently induced to
do something which he is under legal obligation to do . . . .’”25
Our initial task, therefore, is to determine whether DHHS was
legally obligated to pay Smalley’s medical expenses at the time
it entered into the reimbursement agreement.
Federal Medicaid regulations require state Medicaid agen-
cies to follow certain procedures with respect to the payment
of claims involving third-party liability.26 For purposes of these
regulations, “[t]hird party means any individual, entity or pro-
gram that is or may be liable to pay all or part of the expend-
itures for medical assistance furnished under a State plan.”27
The regulations specify two procedures for paying Medicaid
claims. Under 42 C.F.r. § 433.139(b)(1),
[i]f the agency has established the probable existence
of third party liability at the time the claim is filed, the
agency must reject the claim and return it to the pro-
vider for a determination of the amount of liability. The
establishment of third party liability takes place when
the agency receives confirmation from the provider or a
third party resource indicating the extent of third party
liability. When the amount of liability is determined, the
agency must then pay the claim to the extent that payment
allowed under the agency’s payment schedule exceeds the
amount of the third party’s payment.
25 Beltner v. Carlson, 153 Neb. 797, 800, 46 N.W.2d 153, 155 (1951), quot-
ing 23 Am. Jur. Fraud and Deceit § 177 (1939).
26 42 C.F.r. § 433.139(a) (2011).
27 42 C.F.r. § 433.136 (2011).
554 	283 NebrASkA repOrTS

This procedure is known as cost avoidance.28 The second
procedure is derived from 42 C.F.r. § 433.139(c), which pro-
vides, “If the probable existence of third party liability can-
not be established or third party benefits are not available to
pay the recipient’s medical expenses at the time the claim is
filed, the agency must pay the full amount allowed under the
agency’s payment schedule.” This procedure, known as pay
and chase, seeks reimbursement from liable third parties after
the claim is paid and therefore can only occur after Medicaid
pays for services.29 It is clear from the record that DHHS was
aware of Smalley’s pending third-party liability claims when it
initially denied his request that it pay his outstanding medical
bills. but Smalley argues that because there was no “‘confir-
mation from the provider or a third party resource indicating
the extent of third party liability’”30 when his Medicaid claim
was filed, DHHS was obligated under 42 C.F.r. § 433.139(c)
to pay the claim and “chase” the third parties alleged to
be liable.
Smalley does not cite any authority for his interpretation of
the federal regulations. And it conflicts with regulations duly
promulgated by DHHS which provide that DHHS does not pay
a Medicaid claim if there is any possibility that a third party
could be liable for the amounts due. According to 471 Neb.
Admin. Code, ch. 3, § 004 (2005):
All third party resources available to a Medicaid client
must be utilized for all or part of their medical costs
before Medicaid. Third party resources (Tpr) are any
individual, entity, or program that is, or may be, con-
tractually or legally liable to pay all or part of the cost
of any medical services furnished to a client. Third party
resources include, but are not limited to —
1. private health insurance;
2. 	Casualty 	insurance, 	including 	medical 	payment
provisions;
28 Miller, supra note 20.
29 Id.
30 brief for appellee at 19, quoting 42 C.F.r. § 433.139(b)(1).
SMALLey v. NebrASkA DepT. OF HeALTH & HUMAN ServS. 	555
Cite as 283 Neb. 544

. . . .
12. Liable third parties who are not insurance carriers;
. . . .
14. Any other party contractually or legally liable to
pay medical expenses.
. . . Medicaid payment is made only after all third party
resources have been exhausted or met their legal contrac-
tual or legal obligations to pay. Medicaid is the payor of
last resort.
(emphasis supplied.) Further, 471 Neb. Admin. Code, ch. 3,
§ 004.03 (2005), provides in part:
Medicaid clients who have third party resources must
exhaust these resources before Medicaid considers pay-
ment for any services. Medicaid shall not pay for medical
services as a primary payor if a third party resource is
contractually or legally obligated to pay for the service.
providers shall bill all third party resources and/or
the client . . . for services provided to the client . . . .
Medicaid is the payor of last resort.
particularly instructive is 471 Neb. Admin. Code, ch. 3,
§ 004.06C (2003), which is captioned “Timely Filing of Claims
with Casualty Insurance,” and specifies in part:
providers must submit claims within 24 months of the
date of service. In some casualty third party situations,
[DHHS] recognizes that it may take longer than 24
months to resolve the third party obligation. In these situ-
ations, [DHHS] can make payment beyond the 24 months
if the provider can document that action was taken to
obtain payment from the third party. If a provider has
received a denial from [DHHS] due to the existence of
casualty insurance coverage and the provider has sought
payment from the third party, then the provider can
request [DHHS] to reconsider payment if the provider
has waited 24 months and the third party has not paid
the provider.
And 471 Neb. Admin. Code, ch. 3, § 004.06D (2003), states
that “[p]roviders shall bill [DHHS] only when all third party
resources have failed to cover the service or when a portion of
the cost of the service has been paid.” Further, § 004.06D1c
556 	283 NebrASkA repOrTS

provides that DHHS “will recognize and consider payment
on claims involving casualty coverage denial,” but expressly
states that “[t]he insurer’s statement that payment cannot be
made at this time due to a pending liability determination or
litigation is not a valid denial.” (emphasis supplied.) And 471
Neb. Admin. Code, ch. 3, §§ 004.06F and 004.06G (2003),
state, respectively, “[t]he provider shall resolve all third party
resources before Medicaid can consider paying a claim even
when Medicaid prior authorization has been given” and “[t]he
provider shall resolve all third party resources before Medicaid
can consider paying a claim even though the client is eligible
for Medicaid.”
[7,8] In considering the validity of regulations, courts
generally presume that legislative or rulemaking bodies, in
enacting ordinances or rules, acted within their authority,
and the burden rests on those who challenge their validity.31
There is no such challenge in this case, and we are not free
to disregard the regulations upon which DHHS bases its posi-
tion. Agency regulations that are properly adopted and filed
with the Secretary of State of Nebraska have the effect of
statutory law.32 Thus, Nebraska’s Medicaid regulations sum-
marized above are controlling law on the question of whether
DHHS was obligated to pay Smalley’s medical expenses at
the time it entered into the agreement with Smalley’s attor-
ney. based upon those regulations, we find that it was not.
Instead, DHHS was legally entitled to refrain from paying
Smalley’s medical bills until the third-party liability claims
were resolved.
effect of A hlborn
Smalley’s alternative argument is that even if he fraudu-
lently induced DHHS to enter into the reimbursement agree-
ment, DHHS cannot premise recovery on his promise of full
reimbursement, because full reimbursement violates the federal
anti-lien provision as discussed in Ahlborn. He argues that
31 Scofield v. State, 276 Neb. 215, 753 N.W.2d 345 (2008); Jacobson v. Solid
Waste Agency of Northwest Neb., 264 Neb. 961, 653 N.W.2d 482 (2002).
32 Holmes v. State, 275 Neb. 211, 745 N.W.2d 578 (2008).
SMALLey v. NebrASkA DepT. OF HeALTH & HUMAN ServS. 	557
Cite as 283 Neb. 544

“[a] party cannot, by contractual agreement with another party,
obtain the power to do something the law forbids.”33
Ahlborn held that the federal Medicaid statutes forbid state
Medicaid programs from imposing a lien on any portion of a
personal injury judgment or settlement which does not repre-
sent payments for medical care. It did not, however, hold that a
state Medicaid administrator is never entitled to full reimburse-
ment, and thus the facial terms of the reimbursement agree-
ment do not violate federal law.
And the facts in this case are substantially different than
Ahlborn. In Ahlborn, the state Medicaid provider, presum-
ably pursuant to state regulations, adopted a “pay and chase”
strategy and paid the client’s medical bills while the client’s
third-party claims were pending. After the client settled those
claims for $550,000, the Medicaid provider asserted a lien for
approximately $215,000, which represented the full amount of
medical expenses it had paid on behalf of the client. The parties
stipulated that the client’s entire claim was reasonably valued
at approximately $3 million and that the settlement reached
amounted to approximately one-sixth of that sum. They fur-
ther stipulated that, based upon this percentage allocation,
approximately $35,000 of the settlement amount constituted
reimbursement for medical payments made. On these stipulated
facts, the Court was asked to determine whether the Medicaid
provider could recover $215,000 or $35,000. based on its find-
ing that the state could not assert an interest in a portion of the
settlement that was not reimbursement for medical payments,
it awarded the latter.
Here, DHHS, pursuant to its regulations, adopted a “cost
avoidance” strategy and did not pay Smalley’s outstanding
medical bills while the third-party liability claims were pend-
ing. At the time DHHS entered into the reimbursement agree-
ment and ultimately paid Smalley’s outstanding medical bills,
it had no legal obligation to do so. The record conclusively
shows that DHHS—knowing Smalley had been offered a
settlement of $800,000—paid the medical bills, based on
33 brief for appellee at 21, citing Rath v. City of Sutton, 267 Neb. 265, 673
N.W.2d 869 (2004).
558 	283 NebrASkA repOrTS

Smalley’s promise that he would reimburse DHHS the full
amount of its payment. All parties agree that DHHS’ payment
of the medical bills at the reduced Medicaid rate resulted in a
benefit to Smalley, in that it increased his net recovery of the
settlement proceeds.
The district court found that Ahlborn limited DHHS’ reim-
bursement “to the pro rata share of the past medical expenses
paid by [DHHS] as the same relates to the total value of
[Smalley’s] claim.” In doing so, the court erred as a matter
of law. Courts in other jurisdictions have recognized that
the pro rata formula applied in Ahlborn was simply a result
of the factual stipulation entered into by the parties.34 These
jurisdictions consider the pro rata formula as one means
of determining the portion of a settlement related to medi-
cal expenses, and do not consider the formula itself law.35
Instead, states are generally free to employ any reasonable
means to determine what portion of a settlement relates to
medical expenses and is therefore recoverable by a state
Medicaid administrator.36
based on the unique facts of this case, the district court
should have looked no further than the agreement between
the parties. by promising that the $130,000 would be reim-
bursed in full if DHHS paid his outstanding medical bills at
the reduced rate, Smalley agreed that $130,000 of the prof-
fered $800,000 settlement related to medical expenses. This
agreement is both consistent with Ahlborn and reasonable
under the undisputed facts. The district court erred in further
reducing the amount DHHS could recover from the settle-
ment proceeds. DHHS is entitled to the full $130,000 held
in escrow.
34 See, I.P. ex rel. Cardenas v. Henneberry, 795 F. Supp. 2d 1189 (D. Colo.
2011); Armstrong v. Cansler, 722 F. Supp. 2d 653 (W.D.N.C. 2010);
Morales v. HHC, 34 Misc. 3d 835, 935 N.y.S.2d 850 (2011); Russell v.
Agency for Health Care Admin., 23 So. 3d 1266 (Fla. App. 2010); Edwards
v. Ardent Health Services, L.L.C., 243 p.3d 25 (Okla. Civ. App. 2010);
McMillian v. Stroud, 166 Cal. App. 4th 692, 83 Cal. rptr. 3d 261 (2008).
35 Id.
36 Id.
SMALLey v. NebrASkA DepT. OF HeALTH & HUMAN ServS. 	559
Cite as 283 Neb. 544

CONCLUSION
The district court erred in not permitting DHHS to recover
the full amount of its counterclaim, to be satisfied from the
funds withheld from the settlement proceeds pursuant to the
stipulation of the parties. The judgment of the district court is
reversed, and the cause is remanded with directions to enter
judgment in accordance with this opinion. because DHHS
is entitled to the full amount of its counterclaim, Smalley’s
assignments of error on cross-appeal need not be addressed.
R eveRsed and Remanded With diRections.
geRRaRd, J., not participating in the decision.
WRight, J., not participating.
state of nebRaska , appellee , v.
William d. kinseR, JR., appellant.
811 N.W.2d 227
Filed March 23, 2012. 	No. S-11-558.
1. Statutes: Appeal and Error. Statutory interpretation presents a question of law,
for which an appellate court has an obligation to reach an independent conclusion
irrespective of the determination made by the court below.
2. Sentences: Appeal and Error. A sentence imposed within statutory limits will
not be disturbed on appeal absent an abuse of discretion by the trial court.
3. Sentences: Prior Convictions: Habitual Criminals: Proof. In a habitual crimi-
nal proceeding, the State’s evidence must establish with requisite trustworthiness,
based upon a preponderance of the evidence, that (1) the defendant has been
twice convicted of a crime, for which he or she was sentenced and committed to
prison for not less than 1 year; (2) the trial court rendered a judgment of convic-
tion for each crime; and (3) at the time of the prior conviction and sentencing, the
defendant was represented by counsel or had knowingly and voluntarily waived
representation for those proceedings.
Appeal from the District Court for Scotts bluff County:
R andall l. lippstReu, Judge. Affirmed.
brian J. Lockwood and richard L. DeForge, Deputy Scotts
bluff County public Defenders, for appellant.
Jon bruning, Attorney General, and kimberly A. klein for
appellee.
560 	283 NebrASkA repOrTS