STATE OF MICHIGAN
COURT OF APPEALS
BETSY MACKEY, Personal Representative for
the Estate of ELIZABETH A. MARDEN,
September 7, 2010
Grand Traverse Circuit Court
LC No. 08-026616-AA
DEPARTMENT OF HUMAN SERVICES,
Before: MURRAY, P.J., and SAAD and M.J. KELLY, JJ.
Respondent, the Department of Human Services (DHS), appeals on leave granted the
circuit court order reversing the hearing referee’s decision that the DHS properly imposed a
Medicaid benefit divestment penalty on petitioner.1 We conclude that the circuit court’s ruling
was in error where the circumstances of petitioner’s investment in a closely-held L.L.C. rendered
the transaction a transfer for less than fair market value. Accordingly, the circuit court’s order is
I. FACTS AND PROCEEDINGS
The underlying facts are not in dispute. On November 29, 2005, petitioner and her
husband applied for Medicaid, but they failed to disclose certain annuity contracts they held,
which, had they been disclosed, would have rendered them ineligible for Medicaid benefits. On
November 9, 2006, Mr. Marden died. Shortly thereafter, petitioner’s case was due for
redetermination, but was closed when she failed to return the required form.
On January 11, 2007, petitioner again applied for Medicaid, but was denied eligibility the
following June because she had too much money in her bank account. After her second
application had been denied, petitioner received close to $100,000 in payouts as a result of her
Elizabeth Marden died September 28, 2009, and Betsy Mackey was substituted as the personal
representative of Marden’s estate. For clarity, Marden will be referenced as petitioner
throughout this opinion.
husband’s death. In preparation for submitting a third request for Medicaid benefits, petitioner’s
daughter and attorney-in-fact, Betsy Mackey, formed the Marden Family L.L.C. Mackey was
assigned, in her own name, 100 investment (non-voting) units of the L.L.C, and all 100 voting
units. Petitioner was assigned 111,460 investment units, for which she (through Mackey’s power
of attorney) paid the L.L.C. $111,460. The same day, Mackey, as sole voting member of the
L.L.C., acted to disallow any transfer of investment units during a two-year holding period.
Thus, under the L.L.C.’s operating agreement, petitioner could not sell, transfer, or liquidate her
units for two years from the date of investment without a super majority of the voting members.
After two years, the agreement permitted sale of the units and guaranteed compounding two
percent interest on the amount paid for the units from the date of purchase to the date of sale.
During the two years, petitioner would not receive any payments from the L.L.C.
That September, petitioner again applied for Medicaid, including a retroactive application
for the month of August (the month the L.L.C. was created). The DHS found that petitioner was
eligible for Medicaid, but applied a divestment penalty2, refusing to pay for long-term care
services for 18 months and 23 days. Petitioner appealed the DHS determination, and the hearing
referee found that petitioner had not received fair market value for her money, and affirmed the
decision of the DHS to apply the divestment penalty. Specifically, the hearing referee found that
because petitioner’s investment within the five-year “look-back” period rendered an otherwise
available cash asset unavailable for two years, the investment was for less than fair market value
and a divestment penalty was appropriate. Additionally, the hearing referee rejected petitioner’s
argument that the investment was a permissible conversion of the annuity proceeds3 since the
annuity was actually cashed out—and was thus available as a cash asset—before it was invested
in the L.L.C.
Petitioner then appealed to the circuit court, which reversed the hearing referee, holding
that petitioner’s purchase of the L.L.C shares was not a divestment because she received fair
market value for her money. In reaching this conclusion, the court initially observed that federal
law permits certain annuity purchases and asset transfers for a spouse’s benefit in order to
circumvent countable asset provisions and qualify for Medicaid long-term care benefits,4 and
noted that this was the third case wherein the DHS ruled that an applicant’s investment in a
A divestment penalty is computed by dividing the uncompensated value of the resource
divested ($111,432.47) by the average monthly long-term care costs in Michigan for the
applicant’s baseline date ($5,938 in 2007). DHS Program Eligibility Manual (PEM) 405, pp 8-9.
The penalty would preclude petitioner from receiving benefits for just over 18 months.
“Converting an asset from one form to another of equal value is not divestment even if the new
asset is exempt. Most purchases are conversions.” PEM 405, p 7.
The court cited § 6012(a) of the Deficit Reduction Act of 2005, Public Law 109-171; 42 USC
1396p(c)(2)(B)(1); 42 USC 1396p(d)(2)(a)(ii); Mertz v Houstoun, 155 F Supp 2d 415, 426-427
(ED Pa, 2001); and James v Richman, No. 3:05-CV-2647 (MD Pa, unpublished opinion issued
November 21, 2006), aff’d 547 F3d 214 (CA 3, 2008).
closely-held L.L.C. guaranteeing compound interest after a set period of time was a divestment.5
As in the prior case it had decided, the court ruled that
the purchase of stock in the family limited liability company in this case was not,
by definition, a divestment since the transfer was not for less than fair market
value. In fact, the value of the asset did not change–the asset merely took another
form–a form that legally made it unavailable and uncountable. Based on the
authority cited herein, not only is the value of the stock not countable, but the
income stream from that investment is also not countable.
Accordingly, the court reversed the hearing referee’s decision and determined that petitioner was
entitled to long-term care benefits without a divestment penalty.
We granted the DHS’s application for leave to appeal, Marden v Dep’t of Human Servs,
unpublished order of the Court of Appeals, entered March 18, 2009 (Docket No. 288966), and
A. GENERAL MEDICAID BACKGROUND
In 1965, Congress enacted Title XIX of the Social Security Act, commonly known as the
Medicaid Act. See 42 USC 1396 et seq. This statute created a cooperative program in which the
federal government reimburses state governments for a portion of the costs to provide medical
assistance to low income individuals. Cook v Dep’t of Social Servs, 225 Mich App 318, 320;
570 NW2d 684 (1997). Participation in Medicaid is essentially need-based, with states setting
specific eligibility requirements in compliance with broad mandates imposed by federal statutes
and regulations.6 Id., see also Atkins v Rivera, 477 US 154, 156-157; 106 S Ct 2456; 91 L Ed 2d
131 (1986), Nat’l Bank of Detroit v Dep’t of Social Servs, 240 Mich App 348, 354-355; 614
NW2d 655 (2000), and Gillmore v Ill Dep’t of Human Servs, 218 Ill 2d 302, 305; 843 NE2d 336
Like many federal programs, since its inception the cost of providing Medicaid benefits
has continued to skyrocket. The Act, with all of its complicated rules and regulations, has also
become a legal quagmire that has resulted in the use of several “loopholes” taken advantage of
by wealthier individuals to obtain government paid long-term care they otherwise could afford.
The Florida Court of Appeals accurately described this situation, and Congress’s attempt to curb
See In re Gault, Grand Traverse Circuit Court File No. 06-25485-AA and In re Olsen,
Manistee Circuit Court File No. 06-12519-AA. The DHS appealed neither case to this Court.
In Michigan, the Department of Community Health oversees the Medicaid program, which the
DHS administers pursuant to the Social Welfare Act, MCL 400.1 et seq.
After the Medicaid program was enacted, a field of legal counseling arose
involving asset protection for future disability. The practice of “Medicaid Estate
Planning,” whereby “individuals shelter or divest their assets to qualify for
Medicaid without first depleting their life savings,” is a legal practice that
involves utilization of the complex rules of Medicaid eligibility, arguably
comparable to the way one uses the Internal Revenue Code to his or her
advantage in preparing taxes. See generally Kristin A. Reich, Note, Long-Term
Care Financing Crisis-Recent Federal and State Efforts to Deter Asset Transfers
as a Means to Gain Medicaid Eligibility, 74 N.D. L.Rev. 383 (1998). Serious
concern then arose over the widespread divestiture of assets by mostly wealthy
individuals so that those persons could become eligible for Medicaid benefits.
Id.; see also Rainey v. Guardianship of Mackey, 773 So. 2d 118 (Fla. 4th DCA
2000). As a result, Congress enacted several laws to discourage the transfer of
assets for Medicaid qualification purposes. See generally Laura Herpers Zeman,
Estate Planning: Ethical Considerations of Using Medicaid to Plan for LongTerm Medical Care for the Elderly, 13 Quinnipiac Prob. L.J. 187 (1988). Recent
attempts by Congress imposed periods of ineligibility for certain Medicaid
benefits where the applicant divested himself or herself of assets for less than fair
market value. 42 U.S.C. § 1396p(c)(1)(A); 42 U.S.C. § 1396p(c)(1)(B)(i); Fla.
Admin. Code R. 65A-1.712(3). More specifically, if a transfer of assets for less
than fair market value is found within 36 months of an individual’s application for
Medicaid, the state must withhold payment for various long-term care services,
i.e., payment for nursing home room and board, for a period of time referred to as
the penalty period. Fla. Admin. Code R. 65A-1.712(3). Medicaid does not,
however, prohibit eligibility altogether. It merely penalizes the asset transfer for a
certain period of time. See generally Omar N. Ahmad, Medicaid Eligibility Rules
for the Elderly Long-Term Care Applicant, 20 J. Legal Med. 251 (1999).
[Thompson v Dep’t of Children & Families, 835 So 2d 357, 359-360 (Fla App,
In Gillmore the Illinois Supreme Court recognized this same history, noting that over the
years (and particularly in 1993), Congress enacted certain measures to prevent persons who were
not actually “needy” from making themselves eligible for Medicaid:
In 1993, Congress sought to combat the rapidly increasing costs of Medicaid by
enacting statutory provisions to ensure that persons who could pay for their own
care did not receive assistance. Congress mandated that, in determining Medicaid
eligibility, a state must “look-back” into a three- or five-year period, depending on
the asset, before a person applied for assistance to determine if the person made
any transfers solely to become eligible for Medicaid. See 42 U.S.C. §
1396p(c)(1)(B) (2000). If the person disposed of assets for less than fair market
value during the look-back period, the person is ineligible for medical assistance
for a statutory penalty period based on the value of the assets transferred. See 42
U.S.C. § 1396p(c)(1)(A) (2000). [Gillmore, 218 Ill 2d at 306 (emphasis added).]
See, also, ES v Div of Med Assistance and Health Servs, 412 NJ Super 340, 344; 990 A2d 701
(2010) (Noting that the purpose of this close scrutiny while “looking back” is “to determine if
[the asset transfers] were made for the sole purpose of Medicaid qualification.”).7
This statutory “look-back” period, noted in Gillmore and Thompson and contained within
42 USC 1396p(c)(1), requires a state to “look-back” a number of years (in this case five) from
the date of an asset transfer to determine if the applicant made the transfer solely to become
eligible for Medicaid, which can be established if the transfer was made for less than fair market
value. See 42 USC 1396p(c)(1); DHS Program Eligibility Manual (PEM)8 405, pp 1, 4; see also
Gillmore, 218 Ill 2d at 306. “Less than fair market value means the compensation received in
return for a resource was worth less than the fair market value of the resource.” PEM 405, p 5.
A transfer for less than fair market value during the “look-back” period is referred to as a
“divestment,” and unless falling under one of several exclusions, subjects the applicant to a
penalty period during which payment of long-term care benefits is suspended. See, generally
PEM 405, pp 1, 5-9. “Congress’s imposition of a penalty for the disposal of assets or income for
less than fair market value during the look-back period is intended to maximize the resources for
Medicaid for those truly in need.” ES, 412 NJ Super at 344.
Turning to the case before us, then, the issue presented is this: whether the 93-year-old
petitioner’s investment of $111,460.47 in an L.L.C. formed by her daughter for the sole purpose
of qualifying petitioner for Medicaid benefits constituted a divestment, and if so, is it otherwise
excluded as a divestment.
B. IS THIS A DIVESTMENT?
“This Court reviews a decision of an administrative agency in the same limited manner as
does the circuit court.” Barker Bros Constr v Bureau of Safety & Regulation, 212 Mich App
132, 141; 536 NW2d 845 (1995). Thus, our review
is limited to determining whether the decision was contrary to law, was supported
by competent, material, and substantial evidence on the whole record, was
arbitrary or capricious, was clearly an abuse of discretion, or was otherwise
affected by a substantial and material error of law. “Substantial” means evidence
that a reasoning mind would accept as sufficient to support a conclusion. [Dignan
Both the executive and legislative branches have supported elimination of any loopholes that
allow individuals with resources to transfer assets as a way of qualifying for Medicaid benefits.
For example, in signing into law the Deficit Reduction Act of 2005, 120 Stat 4 (2006), President
George W. Bush stated that the act “tightens the loopholes that allowed people to game the
system by transferring assets to their children so they can qualify for Medicaid benefits.” See
Reif, A Penny Saved Can Be A Penalty Earned: Nursing Homes, Medicaid Planning, The Deficit
Reduction Act of 2005, And The Problem of Transferring Assets, 34 NYU Review of Law &
Social Change 339, 347 (2010).
This manual was renamed the Bridges Eligibility Manual on October 1, 2009.
v Michigan Pub Sch Employees Retirement Bd, 253 Mich App 571, 576; 659
NW2d 629 (2002) (citations omitted); see also MCL 24.306.]
The substantial evidence standard is indistinguishable from the clearly erroneous standard of
review. Boyd v Civil Serv Comm, 220 Mich App 226, 234; 559 NW2d 342 (1996). A finding is
clearly erroneous when, “on review of the whole record, this Court is left with the definite and
firm conviction that a mistake has been made.” Id. at 235.
At the outset we recognize that in creating the L.L.C., petitioner makes no pretense that
the corporation’s purpose was for any reason other than circumventing Medicaid rules that
would otherwise render her ineligible for long-term care benefits for a certain period. Such a
purpose flies in the face of the general Congressional intent in creating the Medicaid program,
i.e., to provide benefits to the truly needy, and of the 1993 amendments, i.e., to preclude asset
transfers by those with wealth who would rather pass on their accumulated wealth and at the
same time qualify for Medicaid without penalty. See ES, 412 NJ Super at 352; Estate of Gonwa
v Dep’t of Health & Family Servs, 265 Wis 2d 913, 934-935; 668 NW2d 122 (2003), citing
Cohen v Mass Comm’r of Div of Med Assistance, 423 Mass 399, 402-403; 668 NE2d 769 (1996);
Gillmore, 218 Ill 2d at 306. Petitioner admitted at oral argument before the trial court that the
purpose in establishing the L.L.C. was to allow her to qualify for Medicaid without suffering a
divestment penalty.9 That admission, coupled with the timing of the share purchase and the
particulars of the transaction, make it crystal clear that the only purpose of this asset transfer was
to create eligibility for Medicaid.
As one court has noted, however, Medicaid contains loopholes permitting transfers that
are inconsistent with the goals of that legislation, Mertz v Houstoun, 155 F Supp 2d 415, 427-428
(ED Pa, 2001), and our judicial duty is to enforce the purposes of the law as expressed in the
applicable statutory provisions, James v Richman, 547 F3d 214, 219 (CA 3, 2008) (in
interpreting 42 USC 1396, the court noted that “we do not create rules based on our own sense of
the ultimate purpose of the law . . . but rather seek to implement the purpose of Congress as
expressed in the text of the statutes it passed”), not to just enforce a generalized purpose or
intent. We therefore turn to the actual statutory language and the PEM rules to determine the
fate of plaintiff’s cause.
To be eligible for Medicaid long-term care benefits in Michigan, an individual must meet
a number of criteria, including having $2,000 or less in countable assets. PEM 400, pp 4-5;
Ronney v Dep’t of Social Servs, 210 Mich App 312, 315; 532 NW2d 910 (1995). As previously
set forth, a Medicaid applicant eligible for long-term care benefits is subject to a divestment
penalty if she transfers a resource during the five-year “look-back” period for less than fair
market value and that resource is not otherwise excluded as a divestment. 42 USC 1396p(c)(1);
PEM 405, p 1.
At oral argument before the trial court petitioner admitted that the intent in creating the L.L.C.
was to qualify her for Medicaid long-term benefits, but that her intent was not relevant.
With respect to fair market value, PEM 405, p 5 instructs that the phrase, “[l]ess than fair
market value[,] means the compensation received in return for a resource was worth less than the
fair market value of the resource” and elaborates that compensation must have “tangible form”
and “instrinsic value.” Neither the Medicaid Act nor the PEM offers a definition of “fair market
value.” However, this Court has explained that the common understanding of “fair market
value” refers to “the amount of money that a ready, willing, and able buyer would pay for the
asset on the open market . . . .” Wolfe-Haddad Estate v Oakland Co, 272 Mich App 323, 325326; 725 NW2d 80 (2006) (emphasis added). Black’s Law Dictionary similarly defines “fair
market value” as “[t]he price that a seller is willing to accept and a buyer is willing to pay on the
open market and in an arm’s-length transaction; the point at which supply and demand
intersect.” Black’s Law Dictionary (7th ed), p 1549 (emphasis added). An “arm’s-length”
transaction, in turn, is defined as “relating to dealings between two parties who are not related . .
. and who are presumed to have roughly equal bargaining power; not involving a confidential
relationship.” Id. at 103.
Although no Michigan court has attempted to define the parameters of an arm’s-length
transaction, several courts in our sister states have indicated “that an arm[’]s-length transaction is
characterized by three elements: it is voluntary, i.e., without compulsion or duress; it generally
takes place in an open market; and the parties act in their own self interest.” Bison Twp v
Perkins County, 607 NW2d 589, 593 (SD, 2000), citing Walters v Knox Co Bd of Revision, 47
Ohio St 3d 23, 25; 546 NE2d 932 (1989) and Beach Properties Inc v Town of Ferrisburg, 161 Vt
368, 375-376; 640 A2d 50 (1994). And, we have recognized that family members deal with each
other in financial matters differently than they do “with strangers in arm[’]s-length transactions.”
Morrison v Secura Ins, 286 Mich App 569, 574; 781 NW2d 151 (2009). Hence, to determine
what the fair market value of a resource is, we must be able to discern what the value of that
resource was on the open market.
While no Michigan case specifically addresses the issue before us today, other courts’
treatments of asset transfers to circumvent countable asset requirements in similar contexts are
instructive. For example, the Wisconsin Court of Appeals held that the purchase of a balloon
annuity (an annuity where a substantial portion of the benefit is paid toward the end of the
benefit term) from close relatives constituted a divestment because the transfer was for less than
fair market value. Buettner v Dep’t of Health & Family Servs, 2003 WI App 90; 264 Wis 2d
700, 705-706, 716-717; 663 NW2d 282 (2003). In Buettner, the applicant and her spouse
purchased two irrevocable balloon annuities from their children that “were nonassignable and
unsecured, and were private financial instruments that paid a rate of return of less than one
percent, with exceptionally low monthly income payments of fifty dollars per annuity.” Id. at
717. The court found that under those circumstances, an “arm’s-length transaction” had not
occurred because “no person of sound mind would give $200,000 to an unrelated third party in
exchange for the unsecured, low yield, and non-alienable promises in the instant document,” and
therefore the exchange constituted a transfer for less than fair market value. Id. at 717-718.
The Commonwealth Court of Pennsylvania decided two cases on the same day, Pyle v
Dep’t of Public Welfare, 730 A2d 1046 (Pa Comm, 1999), and Ptashkin v Dep’t of Public
Welfare, 731 A2d 238 (Pa Comm, 1999), that addressed Medicaid eligibility. In both of those
cases, the court decided appeals from Pennsylvania Department of Public Welfare denials of
applications for medical assistance benefits on the basis that available assets had been transferred
for less than fair market value. In Pyle, the applicant transferred two large sums of money to a
trust, the trustee of which was her daughter. In return for the lump sum payments, the applicant
received from the trust a nonnegotiable promissory note that provided for a return of eight
percent, plus an additional two percent premium in consideration of the fact that if Pyle died
before the maturation date, the trust would have no further payment obligation. Both promissory
notes required a minimal monthly payment followed by a balloon payment on the last month of
the note’s term. Pyle, 730 A2d at 1047-1048. In Ptashkin, the applicant’s husband passed away,
so the family home was sold. The applicant’s two sons each executed a nonnegotiable
promissory note payable to the applicant in exchange for the proceeds of the home sale.
Ptashkin, 731 A2d at 239. These nonnegotiable promissory notes had the same eight percent and
two percent interest rate provisions, with the payments being $17.18 per month with a balloon
payment plus any accrued interest being payable at the maturity date of the note. Id.
In addressing these similar fact scenarios, the court utilized Pennsylvania’s definition of
fair market value, which is “the price which property could be expected to sell for on the open
market or would have been expected to sell on the open market in the geographic area in which
the property is located.” Ptashkin, 731 A2d at 245, quoting 55 Pa Code 178.2. Focusing on the
“open market” part of the definition similar to what we have in Michigan, in both cases the court
concluded that the transactions involving the loan of large sums of money in exchange for low
monthly payments followed by balloon payments were not fair market value transactions.
Critical to the court’s conclusion that both deals were “absurd” were the facts that the applicants
were surrendering the principal without any security while receiving a monthly payment lower
than what was required by the prescribed interest rates. Ptashkin, 731 A2d at 245; Pyle, 730 A2d
at 1050. Indeed, the court noted that neither applicant was receiving any real benefit from the
transaction other than to transfer large sums of money to relatives while avoiding paying for long
term care. Ptashkin, 731 A2d at 245; Pyle, 730 A2d at 1050.
Also analogous is the situation presented to the United States District Court in Wesner v
Velez, unpublished opinion of the United States District Court for the District of New Jersey,
issued April 19, 2010 (Docket No. 10-308). In that case Wesner gave an $80,000 gift to her
close friend and power of attorney, Aamland. That same month (December 2008) Wesner
purchased a promissory note from Aamland for $60,000, with the payments going to Wesner to
cover her nursing care for the 13 months before her request for Medicaid funds. The promissory
note was not disclosed in her January 2009 application for benefits, but once the note was
disclosed to the state, Wesner filed suit seeking to enjoin the state from treating the note as a
prohibited trust-like device. In deciding Wesner’s motion for a preliminary injunction, the court
noted that the close relationship of the parties, coupled with the fiduciary duties to Wesner
placed on Aamland through the power of attorney, and the admission that the note was part of a
“Medicaid planning device,” showed that the transaction was likely a “sham”:
Wesner asserts that 42 U.S.C. § 1396p(c)(1)(I)(i)-(iii) was enacted by Congress to
avoid “sham transactions.” The transaction entered into by Wesner and Aamland
appears to be a “sham transaction” designed to avoid application of the rules
governing Medicaid eligibility. The loan between Wesner and Aamland has all
the characteristics of a trust-like device under the POMS.10 This was not an
arm[’]s-length transaction between two unrelated parties. Aamland and Wesner
apparently enjoy a close friendship; Wesner gave Aamland an $80,000.00
uncompensated gift and has made Aamland her [power of attorney]. As such,
Aamland owes Wesner a fiduciary duty. Further, Wesner admits that the gift/loan
transaction entered into with Aamland was part of a “Medicaid planning
technique.” Based a review of the evidence before the Court at this time, the
Court concludes that Wesner has failed to establish that she is likely to succeed on
the merits of her claim; therefore, Wesner’s motion for a preliminary injunction is
denied. [Wesner, slip op at 6-7 (footnote supplied).]
Turning to the case before us, we recognize that the potential return upon the sale of
petitioner’s interest would exceed the amount of her original investment after two years.11
Additionally, not only does the DHS make no claim impugning the formation or legitimacy of
the L.L.C. as an entity under Michigan law, see MCL 450.4201, but also, as petitioner makes
clear, the L.L.C.’s terms of investment are consistent with relevant IRS and SEC regulations.12
While the DHS contests the transfer on the grounds that the two-year waiting period,
alone, rendered the transaction for less than fair market value, we are hard pressed to reach that
conclusion where the investment would increase in value over the two-year restriction period.
However, that petitioner would not realize this value for two years is a relevant factor to
consider, it is just not alone dispositive of this issue. In so concluding, and for the reasons
detailed below, we agree with the DHS that the circuit court erred in reversing the hearing
referee, as under these unique facts the purchase of the L.L.C. shares was for less than fair
Utilizing the foregoing dictionary definitions and case law, we hold that petitioner’s
purchase of shares in an L.L.C. (1) that is unsecured, (2) operated exclusively by her daughter
(and her attorney-in-fact), (3) that is not an approved investment vehicle under PEM 405, (4)
whose shares are unavailable in the open market and are nonassignable, (5) where there is no
evidence of actuarial soundness, (6) where no monthly distributions are made to petitioner during
the two-year period, and (7) was purchased to make petitioner eligible for Medicaid, was not the
result of an “arm’s-length” transaction made on the open market. Consequently, it was a
“The Social Security Administration has published a Program Operating Manual System
(POMS) representing the publicly available operating instructions for processing Social Security
claims. While not the product of formal rulemaking, the POMS provide guidance to the courts
and warrant respect.” Wesner, unpublished op at 4 (quotation marks and citations omitted).
Petitioner calculated the return upon sale of her investment to be $113,922.98, or a profit of
Specifically, petitioner points to 17 CFR 230.144(d) and IRS Revenue Ruling 59-60, § 8.
purchase for less than fair market value, and therefore the assets are subject to the divestment
Indeed, these circumstances reveal that this transaction was an impermissibly abusive
attempt to shelter assets. Gillmore, 218 Ill 2d at 324-325; Thompson, 835 So 2d at 359-360. The
evidence reveals an unsecured private transaction between relatives, one of whom is the other’s
fiduciary, wherein a purchase of shares is made without any ability to sell or otherwise exchange
the shares for a two-year period. The L.L.C. is operated exclusively by an individual who is both
a close relative and fiduciary, and the L.L.C. has no real business other than to return petitioner’s
investment, plus two percent compounded interest, at the end of two years.14 Additionally, and
unlike the balloon annuity found deficient in Gillmore, the purchase of shares in the L.L.C. did
not result in any monthly payments to petitioner. See Pyle, 730 A2d at 1050. And, we must also
consider the admitted purpose in creating the L.L.C. (to make petitioner eligible for Medicaid
payments without divestment) in conjunction with the fact that petitioner’s daughter (who was
also an attorney-in-fact for petitioner) created the L.L.C. and controlled 100 percent of the voting
shares, including having unfettered discretion on expenditures of reserve funds.
In sum, taken together these facts point to the inescapable conclusion that this was not an
asset that was purchased on the open market, but instead an arrangement between relatives, not
strangers in an arm’s-length transaction. Thus, the compensation petitioner was ultimately to
receive “was worth less than the fair market value of the resource” because nothing about this
transaction revealed a fair market value, i.e., it was not made through an arm’s length transaction
on the open market. Accordingly, the DHS properly concluded that this particular transaction
was for less than fair market value, and was subject to the divestment penalty.15
In making her arguments, petitioner fails to recognize, or at least appreciate, the private,
non-arm’s length relationship involved in the transaction. The definitions and case law recited
clearly indicate that “shell transactions” between relatives that have little or no economic benefit
to the applicant, are not for fair market value. This point was made by the court in Mertz, a case
relied upon by the trial court. There, the applicant’s spouse had purchased two commercial
annuities with $106,000 of joint assets, receiving in return just under $2,000 a month, or a two-
Petitioner’s reliance on the ruling of the United States Court of Appeals for the Third Circuit
in James is unavailing as the central issue in that case was “whether a non-revocable, nontransferable annuity may be treated as an available resource by the Department for the purposes
of calculating Medicaid eligibility.” James, 547 F3d at 218. In contrast, the DHS in this case
found petitioner eligible despite the transaction, but instead sought to delay the payment of
benefits pending the divestment penalty period.
Interestingly, the records for the Marden Family L.L.C. bank account reveal that a four percent
interest rate is applied to deposited monies, highlighting the fact that the two percent rate
awarded by the L.L.C. is lower than what was available on the open market.
This is not to say, however, that investment in an L.L.C. or even a closely-held corporation
would be a per se divestment, but only that the scheme at issue in this case constitutes a transfer
for less than fair market value.
and-a half percent return. In recognizing that the purchases at issue were inconsistent with the
purposes of Medicaid, but not the language of the Act, the court noted that private, unsecured,
nonassignable transactions between relatives—like those involved in Pyle and Ptashkin—were
on much different footing. Mertz, 166 F Supp 2d at 427 n 16. Likewise, petitioner’s analogy to
United States savings bonds misses the point, because purchasing unsecured shares in a private
L.L.C. operated by a relative, bears little, if any, resemblance, to a purchase of savings bonds on
the open market from the United States government.
Nor is the asset transfer in this case otherwise excluded as a divestment under the PEM.
See PEM 405, pp 7-9. While PEM 405 certainly provides numerous categories of transfers that
are excluded from consideration as a divestment, PEM 405 provides no exclusion category for an
asset transfer for an interest in a closely-held limited liability corporation, as is the case here.
Consequently, the trial court’s ruling that the investment was essentially a conversion of the asset
into a form rendering the asset unavailable and uncountable was incorrect.16 Key to the
definition of an asset conversion on this point is that the conversion must be “from one form to
another of equal value.” See PEM 405, p 7 (emphasis supplied). The examples provided in
PEM 405 are purchases of automobiles or boats, where the applicant buys an asset on the open
market and obtains the asset, presumably at market price. As previously concluded, however,
given the circumstances of this transaction it was not established that what petitioner received for
her assets was for fair market value, and so by definition could not be considered a conversion to
a form of equal value. Indeed, to hold to the contrary would enable the exception to swallow the
Petitioner invested a sizeable sum in the Marden Family L.L.C., which was created solely
for the purpose of circumventing Medicaid eligibility requirements and which ceded total control
to petitioner’s daughter (and fiduciary) for a fraction of the cost of petitioner’s investment.
Under the terms of the agreement, petitioner would only receive a marginal return on her
unsecured investment after two years. A willing buyer could not acquire such an asset on the
open market, in an arm’s-length transaction. Therefore, the transaction was for less than fair
market value and constituted a divestment of assets not subject to an exclusion. The hearing
referee’s conclusion affirming the imposition of a divestment penalty by the DHS was
appropriate, albeit for the wrong reason. Thorin v Bloomfield Hills Sch Dist, 179 Mich App 1, 6;
445 NW2d 448 (1989) (“The familiar rule that appellate courts affirm the right result reached for
the wrong reason is appropriate in the administrative context.”). The circuit court erred in ruling
Whether petitioner’s investment was unavailable and uncountable on account of the transfer
does not impact whether the transfer is a divestment, but rather goes to the initial determination
of whether an applicant is eligible for Medicaid benefits. ES, 412 NJ Super at 348 (“If any of the
applicant’s resources are transferred for less than fair market value during the look-back period,
they are included in the eligibility analysis as funds available to the applicant,” and result in
delayed eligibility and imposition of a transfer penalty); see also 42 USC 1396p(c)(1)(A).
No costs, a public question being involved.
/s/ Christopher M. Murray
/s/ Henry William Saad
/s/ Michael J. Kelly