The opinion
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APPROVAL OF THE APPELLATE DIVISION
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SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-3307-19
L.C.,
Petitioner-Appellant,
v.
DIVISION OF MEDICAL
ASSISTANCE AND HEALTH
SERVICES and MONMOUTH
COUNTY BOARD OF SOCIAL
SERVICES,
Respondents-Respondents.
____________________________
Argued October 6, 2021 – Decided October 26, 2021
Before Judges Hoffman, Whipple, and Susswein.
On appeal from New Jersey Department of Human
Services, Division of Medical Assistance and Health
Services.
Richard I. Miller agued the cause for appellant
(Mandelbaum Salsburg, PC, attorneys; Richard I.
Miller, of counsel and on the briefs; Shawna A.
Brown, on the briefs).
Jacqueline R. D'Alessandro, Deputy Attorney General,
argued the cause for respondent Division of Medial
Assistance and Health Services (Andrew J. Bruck,
Acting Attorney General, attorney; Melissa H. Raksa,
Assistant Attorney General, of counsel; Jacqueline R.
D'Alessandro, on the brief).
PER CURIAM
Petitioner L.C. appeals from a February 19, 2020 final agency decision
(FAD) of the Department of Human Services, Division of Medical Assistance
and Health Services (Division), imposing a 1,029-day transfer penalty in L.C.'s
Medicaid application based on a transfer of $436,272.67. We reverse.
On April 29, 2015, L.C. and his spouse R.S. sold their marital residence
in Cedar Knolls for $330,833.23, resulting in net proceeds of $277,438.23.
L.C. and R.S. gave some or all proceeds of the home sale and other cash gifts
to their daughter V.R. and her husband I.R. On May 13, 2015, V.R. and I.R.
purchased a residence in Manalapan for $396,000. L.C. and R.S. lived at this
home with V.R. and I.R. until L.C. moved to a nursing facility on October 27,
2017. The following day, I.R. and V.R. transferred by deed the Manalapan
property to only R.S. for one dollar. R.S. continued to live in the home, the
value of which was $425,000 in 2017. In addition, I.R. returned $10,000 in
cash to R.S. Accordingly, L.C. asserts the total amount returned was
$435,000.
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2
On January 30, 2018, R.S. filed a Medicaid application with the
Monmouth County Division of Social Services (County) on behalf of L.C.
Medicaid is a federally funded and state-administered-and-funded program that
provides health care coverage and services to New Jersey residents who meet
specified income thresholds. 42 U.S.C. § 1396 to 1396w-5; N.J.S.A. 30:4D-
3(i). The Department of Human Services administers the Medicaid program in
New Jersey. N.J.S.A. 30:4D-4. To be eligible for the Medicaid Only program,
individual applicants' resources cannot exceed $2,000. N.J.A.C. 10:71-4.5(c).
Applicants are subject to a "transfer penalty" when they transfer or dispose of
resources for less than fair market value during or after the start of the sixty-
month look-back period before the individual becomes institutionalized or
applies for Medicaid as an institutionalized individual. 42 U.S.C. §
1396p(c)(1); N.J.A.C. 10:71-4.10(a), (m)(1). The transfer penalty does not
apply if the applicant can prove that all assets transferred for less than fair
market value have been returned to the individual. N.J.A.C. 10:71-
4.10(e)(6)(iii).
On May 14, 2018, the Division approved L.C.'s application and issued a
determination that L.C. transferred $463,672.67 in assets to become eligible
for Medicaid benefits. As a result, the Division assessed a 1,093-day penalty,
A-3307-19
3
making L.C. ineligible for Medicaid from December 1, 2017 through
November 28, 2020. After receiving additional documentation from L.C., the
Division issued on June 6, 2018, an amended determination that L.C.
transferred $436,272.67 to become eligible for Medicaid benefits. Thus, the
Division reduced the transfer penalty to 1,029 days, making L.C. ineligible for
Medicaid from December 1, 2017 through September 25, 2020. Both parties
stipulated that $436,272.67 is the transferred amount at issue.
L.C. filed a timely appeal to the Division, which transmitted the matter
to the Office of Administrative Law where it was filed on June 26, 2018. On
March 7, 2019, L.C. filed a motion for summary decision. On June 7, 2019,
the administrative law judge (ALJ) denied L.C.'s motion for summary decision
to rescind the transfer penalty. The fair hearing pursuant to N.J.A.C. 10:71-8.4
was conducted on August 28, 2019. On November 21, 2019, the ALJ filed an
Initial Decision denying the petitioner's motion for summary decision. On
February 19, 2020, the Division issued an FAD adopting the Initial Decision.
This appeal followed.
Our review of an agency decision is limited. In re Anthony Stallworth,
208 N.J. 182, 194 (2011). "[A] 'strong presumption of reasonableness attaches
to [an agency decision].'" In re Carroll, 339 N.J. Super. 429, 437 (App. Div.
A-3307-19
4
2001), certif. denied, 170 N.J. 85 (2001) (quoting In re Vey, 272 N.J. Super.
199, 205 (App. Div. 1993), aff'd, 135 N.J. 306 (1994)).
An agency's interpretation of its own regulation warrants substantial
deference unless it is plainly unreasonable or inconsistent with the governing
legislation. See In re Freshwater Wetlands Prot. Act Rules, 180 N.J. 478, 488-
89 (2004). "This deference comes from the understanding that a state agency
brings experience and specialized knowledge to its task of administering and
regulating a legislative enactment within its field of expertise." In re Election
Law Enf't Comm'n Advisory Op. No. 01-2008, 201 N.J. 254, 262 (2010). It is
not our province "to assess the wisdom of the agency's decision . . . only its
legality." N.J. Ass'n of Nurse Anesthetists, Inc. v. N.J. State Bd. of Med.
Exam'rs, 183 N.J. 605, 610 (2005). "Nevertheless, 'we are not bound by the
agency's legal opinions.'" A.B. v. Div. of Med. Assistance & Health Servs.,
407 N.J. Super. 330, 340 (App. Div. 2009), certif. denied, 200 N.J. 210 (2009)
(quoting Levine v. State Dep't of Transp., 338 N.J. Super. 28, 32 (App. Div.
2001)). "Statutory and regulatory construction is a purely legal issue subject
to [our] de novo review." Ibid. (citation omitted).
Ordinarily, we will reverse the decision of the administrative agency
only if it is arbitrary, capricious, or unreasonable or it is not supported by
A-3307-19
5
substantial credible evidence in the whole record. See Campbell v. Dep't of
Civ. Serv., 39 N.J. 556, 562 (1963). In determining whether an agency action
is arbitrary, capricious, or unreasonable, our role is restricted to three
inquiries:
(1) whether the agency's action violates express or
implied legislative policies, that is, did the agency
follow the law; (2) whether the record contains
substantial evidence to support the findings on which
the agency based its action; and (3) whether in
applying the legislative policies to the facts, the
agency clearly erred in reaching a conclusion that
could not reasonably have been made on a showing of
the relevant factors.
[In re Herrmann, 192 N.J. 19, 28 (2007) (quoting
Mazza v. Bd. of Trs., 143 N.J. 22, 25 (1995)).]
"However, when an agency's decision is manifestly mistaken, the
interests of justice authorize a reviewing court to shed its traditional deference
to agency decisions." P.F. v. N.J. Div. of Developmental Disabilities, 139 N.J.
522, 530 (1995).
On appeal, L.C. argues that a transfer penalty should not apply because
the full fair market value of the Cedar Knolls transfer was returned in
compliance with N.J.A.C. 10:71-4.10(e) and 42 U.S.C. § 1396p(c)(2)(c). L.C.
further argues that the Division's imposition of the transfer penalty was
arbitrary, capricious, and unreasonable. We agree.
A-3307-19
6
The Medicaid regulations treat a married couple as a single financial unit
for the purpose of determining Medicaid eligibility. When a married Medicaid
applicant requires long-term care, the Department of Human Services imposes
a resource limit on both the assets of the applicant (the institutionalized
spouse) and the non-institutionalized spouse (the community spouse).
N.J.A.C. 10:71-4.8(a). "The total countable resources of the couple shall
include all resources owned by either member of the couple individually or
together." Ibid. Resources are:
[A]ny real or personal property which is owned by the
applicant (or by those persons whose resources are
deemed available to him or her, as described in
N.J.A.C. 10:71-4.6) and which could be converted to
cash to be used for his or her support and
maintenance. Both liquid and nonliquid resources
shall be considered in the determination of eligibility,
unless such resources are specifically excluded under
the provisions of N.J.A.C. 10:71-4.4(b).
[N.J.A.C. 10:71-4.1(b).]
"A resource which is classified as excludable shall not be considered
either in the deeming of resources or in the determination of eligibility for
participation in the Medicaid Only Program." N.J.A.C. 10:71-4.4(a). For
example, a home that was the applicant's former principal residence and
continues to be used by a spouse is excludable. N.J.A.C. 10:71-4.4(b)(1)(i).
A-3307-19
7
(b) The following resources shall be classified as
excludable:
1. A house occupied by the individual as
his or her place of principal residence, and
the land appertaining thereto, shall be
excluded:
....
i. An absence of more than six
months is assumed to indicate that
the home no longer serves as a
principal residence. However, if the
home is used by a spouse or there is
evidence that the absence from the
house is temporary, the home may
continue to be excluded. With that
exception, the [county welfare
agency] shall extend the period only
with approval from the Division of
Medical Assistance and Health
Services.
[Ibid.]
Applicants are subject to a transfer penalty when they transfer or dispose
of resources for less than fair market value during or after the start of the sixty-
month look-back period before the individual becomes institutionalized or
applies for Medicaid as an institutionalized individual. 42 U.S.C. §
1396p(c)(1); N.J.A.C. 10:71-4.10(a), (m)(1). As to transfers of assets,
"individual" means "[t]he individual him or herself who is applying for
A-3307-19
8
benefits" and "[t]he individual's spouse." N.J.A.C. 10:71-4.10(b)(1). Assets
"include all income and resources of the individual and of the individual's
spouse." N.J.A.C. 10:71-4.10(b)(3). Thus, the Medicaid regulations
contemplate that either spouse may liquidate their individual or collective
assets to support the institutionalized spouse. Moreover, the transfer penalty
does not apply when "assets were transferred to the individual's spouse."
N.J.A.C. 10:71-4.10(e)(2).
Transfers within the look-back period are presumed to be an attempt by
applicants to obtain earlier Medicaid eligibility than to which they were
entitled. N.J.A.C. 10:71-4.10(j). An applicant may overcome this
presumption if the applicant can prove that all assets transferred for less than
fair market value have been returned to the individual. N.J.A.C. 10:71-
4.10(e)(6)(iii). The State Medicaid Manual explains that "the full market value
of the asset must be returned to the transferor, either in cash or another form
acceptable to the State." CTRS. FOR MEDICARE & MEDICAID SERVS.,
TRANSMITTAL 64, STATE MEDICAID MANUAL 3258.10(3) (2010). Additionally,
the State's Medicaid Communication issued to explain and clarify Medicaid
regulations states:
"(2) An individual shall not be ineligible for medical
assistance by reason of paragraph (1) to the extent that
A-3307-19
9
....
(C) A satisfactory showing is made to the
state (in accordance with regulations
promulgated by the Secretary) that . . .
(iii) all assets transferred for less than fair
market value have been returned to the
individual."
No adjustments to the penalty period can be made
absent such a showing.
[N.J. Dep't of Human Servs., Div. of Med. Assistance
and Health Servs., Medicaid Communication No. 10-
02 (May 26, 2010),
https://www.state.nj.us/humanservices/dmahs/info/res
ources/medicaid/2010/10-
02_Resource_Assessments_and_Calculation_of_Reso
urce_Transfer_Penalty_Periods.pdf (quoting U.S.C. §
1396p(c)(2)(C)).]
The Division's witness, M.D. Islam, Human Services Specialist from the
County's Division of Social Services, conceded that the full market value of
the asset may be returned in the form of a house if the house could be
liquidated into cash accessible to the Medicaid applicant:
Q: Let me focus on that for a little bit then. First
going back to your original point that it had to be an
equal like kind exchange, money for money, that was
it, that was all that worked, you're aware of the
Medicaid manual?
A: Just for clarification, when I say money for
money, it has to be money for money or as I said, as
A-3307-19
10
you have mentioned, something that could be
liquidated into cash.
Q: So car would work, stock would work, even a
house would work?
A: If that could be liquidated into cash and accessible
to the client.
Here, under a plain reading of the State's Medicaid regulations, L.C.
overcame the N.J.A.C. 10:71-4.10(j) presumption by effectuating a return of
real property to himself via his spouse, R.S. The parties do not dispute that the
fair market value of the Manalapan property was $425,000 on October 27,
2017, and that V.R. returned to R.S. both the home and $10,000 in cash.
Therefore, because the fair market equivalent of the Cedar Knolls home was
returned to L.C. via R.S. in the form of the Manalapan house and cash, the
Division improperly imposed the transfer penalty.
The Division advances two alternative arguments to rebut the sufficiency
of the inter-spousal transfer to cure the transfer penalty. The Division first
argues that the Manalapan house was not excludable from L.C.'s resources
because the house was returned to only R.S. rather than to L.C. or to L.C. and
R.S. together. The Division explains that "because L.C. did not receive any
interest in the Manalapan house, it could not be considered an excludable
A-3307-19
11
resource. And, because the house cannot be considered an excludable
resource, the transfer penalty was properly imposed."
The Division's argument fails for two reasons. First, the Division
suggests that the institutionalized spouse individually, or jointly with his or her
spouse, must receive an interest in excludable property to avoid the transfer
penalty. No statutory or regulatory authority, however, supports this assertion.
The Medicaid regulations do not differentiate between property owned by
either spouse individually or by both spouses together. N.J.A.C. 10:71-4.8(a);
N.J.A.C. 10:71-4.10(b). Thus, the return of property to R.S. constitutes a
return to L.C. regardless of the property's excludability.
Next, the regulations do not attach significance to the ownership of the
principal residence in determining whether the home is excludable. The
regulations clearly and unambiguously provide that "[a] house [formerly]
occupied by the individual as his or her place of principal residence" is
excluded, and continues to be occupied by the individual's spouse, is
excludable. N.J.A.C. 10:71-4.4(b)(1)(i).
Here, the Manalapan home is excludable. The parties do not dispute that
L.C. and R.S. resided at the Manalapan home together until L.C. moved to a
nursing home on October 27, 2017, and that R.S. continues to reside there.
A-3307-19
12
Thus, the Division's refusal to accept L.C. and R.S.'s inter-spousal transfer of
real property to cure the transfer penalty is arbitrary, capricious, and
unreasonable.
Moreover, the Division's earlier position was that the house was
excludable, disqualifying it from satisfying the transfer penalty exemption.
But the Division offered no statutory or regulatory authority to support its
view that the return of excludable property may not cure the transfer penalty.
The regulations plainly state that the Division may not impose the transfer
penalty when the applicant can prove that "[a]ll assets transferred for less than
fair market value have been returned to the individual." N.J.A.C. 10:71-
4.10(e)(6)(iii). The regulations do not require that the assets be non-
excludable. Therefore, imposing the transfer penalty is arbitrary, capricious,
and unreasonable.
A plain reading of the State's Medicaid regulations supports the
argument that the transfer of the Manalapan home constituted a return to L.C.
via his spouse R.S. pursuant to N.J.A.C. 10:71-4.8 and -4.10(b)(1). And,
because the home was L.C.'s former principal residence and is R.S.'s continued
principal residence, the home is excludable pursuant to N.J.A.C. 10:71-4.4.
A-3307-19
13
L.C. also argues that the Division's FAD was against public policy
because "[i]f a transfer penalty is imposed, [R.S.] will be forced to sell the
Manalapan [p]roperty" where she resides to pay for L.C.'s care. Such an
outcome contravenes the goal of the Medicare Catastrophic Coverage Act
(MCCA), 42 U.S.C. § 1396r-5. Congress enacted the MCCA to "end the
pauperization of the community spouse by allowing that spouse to protect a
sufficient, but not excessive, amount of income and resources to meet his or
her own needs while the institutionalized spouse was in a nursing home at
Medicaid expense." Mistrick v. Div. of Med. Assistance & Health Servs., 154
N.J. 158, 170 (1998).
The Division ultimately relied upon the fact that the house was an
excludable asset and justifies its decision to prevent applicants from
circumventing the system.
Because Medicaid serves the purpose of providing
necessary medical services for both the indigent and
the elderly, a related goal of the MCCA is to preclude
couples who possessed substantial resources from
qualifying for Medicaid. By sheltering a portion of
their shared resources in trusts or in the community
spouse's name, a couple might appear to have fewer
resources, making them eligible for Medicaid.
[Ex rel. Cleary v. Waldman, 167 F.3d 801, 805 (3d
Cir. 1999), cert. denied, 528 U.S. 870 (1999).]
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Although the Division's public policy rationale has merit, we decline to
decide the resolution of these two public policies that are in tension with one
another. That issue may be ripe for the agency to address and clarify through
rulemaking. See generally Metromedia, Inc. v. Dir., Div. of Tax'n, 97 N.J.
313, 328-35 (1984).
As the ALJ explained, "[b]ecause the return of assets provision could
easily be exploited as a loophole, the Division determined that it needed to
draw a line and chose to do so with respect to the facts in this case." The ALJ
also observed, however, the Division's position is not supported by legal
authority.
Q: So it could be anything, it doesn't have to be cash
is now what you're saying.
A: It could be anything that could be liquidable and
accessible to the client in the same amount.
[Division's attorney]: I am going to object. I think we
did establish in the beginning of this hearing that
there's no legal authority that addresses on point either
way, that has to be the same form or non-form, there's
no legal authority that we can all find that says you
can or cannot do that, so I think trying to force him to
come up with a citation which we all know doesn't
address it on point, there's no legal authority that
addresses it on point.
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Therefore, because the agency may undertake rulemaking to address this
novel issue, we decline to resolve the public policy issues arising in this case.
Therefore, because the Division's imposition of the transfer penalty does not
comport with a plain reading of the regulations and is arbitrary, capricious, and
unreasonable, we reverse.
Reversed.
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