Lewis Ex Rel. Young v. Alexander

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________

No. 11-3439

_____________

ZACKERY D. LEWIS, by his next friends; RICHARD

YOUNG; LYNN G. HAINER, Administratrix of the Estate of

ADDIE SMITH;

SUSAN W. COLEMAN; KATHY A. BURGER; TRACY

PALMER; KENNY ATKINSON, by his next friend;

BERNICE TATE, by her next friend;

MARY WAGNER; MICHAEL BIDZILYA, by his next

friend; WILLIAM ALGAR, by his next friend; ANTHONY

GALE, by his next friends;

THE ARC COMMUNITY TRUST OF PENNSYLVANIA;

THE FAMILY TRUST, on their own behalf and on behalf of

all other persons similarly situated

v.

GARY ALEXANDER, in official capacity as Secretary of

Department of Public Welfare of the Commonwealth of

Pennsylvania;

ERIC ROLLINS, in official capacity as Executive Director of

the Erie County Assistance Office,

Appellants

_____________

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

District Court No. 2-06-cv-03963

District Judge: The Honorable Jan E. Dubois

Argued March 26, 2012

Before: FUENTES, SMITH, and JORDAN, Circuit Judges

(Filed: June 20, 2012)

Stephen A. Feldman, Esq. (Argued)

Feldman & Feldman

820 Homestead Road

Jenkintown, PA 19046

Counsel for Appellee

Jason W. Manne, Esq. (Argued)

Office of General Counsel

Department of Public Welfare

301 Fifth Avenue

Suite 430

Pittsburgh, PA 15222

Counsel for Appellant

2

Shirley B. Whitenack, Esq.

Schenck, Price, Smith & King

220 Park Avenue

P.O. Box 991

Florham Park, NJ 07932

Counsel for Amicus Appellees

________________

OPINION

________________

SMITH, Circuit Judge,

I

This case involves the interaction between state and

federal law under the Medicaid system, a cooperative

program between the state and federal governments to

provide medical assistance to those with limited financial

resources. Seeking to stamp out abusive manipulation of

trusts to hide assets and thereby manufacture Medicaid

eligibility, Congress created a comprehensive system of rules

mandating that trusts be counted as assets. But Congress also

exempted from these rules certain trusts intended to provide

disabled individuals with necessities and comforts not

covered by Medicaid. Seeking to ensure that these trusts

were not abused, Pennsylvania enacted Section 9 of

Pennsylvania Act 42 of 2005, codified at 62 Pa. Stat. Ann. §

1414 (Section 1414), to regulate these special needs trusts.

3

Plaintiffs brought a putative class action in the Eastern

District of Pennsylvania challenging Section 1414‟s validity.

Plaintiffs allege Section 1414 is preempted by the federal

statute governing Medicaid eligibility, 42 U.S.C.

§ 1396p(d)(4). They seek injunctive and declaratory relief

barring its enforcement. The District Court granted that

relief, holding all but one of the challenged provisions of

Section 1414 preempted. In reaching that holding, the

District Court concluded that Plaintiffs‟ case was justiciable

and that Plaintiffs had a private right of action under both

Section 1983 and the Supremacy Clause. The District Court

also held that Section 1414 was severable, certified a class of

plaintiffs, and appointed class counsel.

This appeal followed. The parties do not challenge the

District Court‟s decision to uphold the remaining provision of

Section 1414 or the District Court‟s decisions on severability,

certification, and appointment of class counsel. We conclude

that Plaintiffs‟ case is justiciable and that they have a private

right of action under both Section 1983 and the Supremacy

Clause of the Constitution. On the merits of Plaintiffs‟

challenge, we conclude that the District Court was correct in

its determination that Section 1414‟s 50% repayment

provision, “special needs” provision, expenditure provision,

and age restriction are all preempted by federal law.

However, we conclude that the enforcement provision of

Section 1414 – when used to enforce provisions not otherwise

preempted by federal law – is a reasonable exercise of the

Commonwealth‟s retained authority to regulate trusts. We

will affirm in part and reverse in part.

II

4

Medicaid is a joint federal-state program providing

medical assistance to the needy.1 Enacted under Congress‟

Spending Clause authority, Medicaid is voluntary. No State

is obligated to join Medicaid, but if they do join, they are

subject to federal regulations governing its administration.

See Roloff v. Sullivan, 975 F.2d 333, 335 (7th Cir. 1992).

Pennsylvania has elected to participate in Medicaid.

Generally, Medicaid provides assistance for two types

of individuals: the categorically needy and the medically

needy. The categorically needy are those who qualify for

public assistance under the Supplemental Security Income

(SSI) program or other federal programs. See Roach v.

Morse, 440 F.3d 53, 59 (2d Cir. 2006) (Sotomayor, J.);

Roloff, 975 F.2d at 335. The medically needy are those who

would qualify as categorically needy (because they are

disabled, etc.) but whose income and/or assets are substantial

1

The Supreme Court has noted, echoing Judge Friendly,

that Medicaid‟s “Byzantine construction . . . makes the

Act „almost unintelligible to the uninitiated.‟” Schweiker

v. Gray Panthers, 453 U.S. 34, 43 (1981) (quoting

Friedman v. Berger, 547 F.2d 724, 727 n.7 (2d Cir.

1976)). The District Court in Friedman, which the

Supreme Court quoted, was even more direct: “The

Medicaid statute . . . is an aggravated assault on the

English language, resistant to attempts to understand it.”

Friedman v. Berger, 409 F. Supp. 1225, 1225-26

(S.D.N.Y. 1976), quoted by Schweiker, 453 U.S. at 43

n.14.

5

enough to disqualify them. Roloff, 975 F.2d at 335.2 Every

State participating in Medicaid must provide assistance to the

categorically needy. States need not provide assistance to the

medically needy. See id. If States choose to make medical

assistance available to the medically needy, they are subject

to various statutory restrictions in determining to whom

medical assistance should be extended.

Congress has created a comprehensive system of asset-

counting rules for determining who qualifies for Medicaid.

Under Medicaid‟s original asset-counting rules, individuals

could put large sums of money in trust, thereby vesting legal

title to those assets in the trust and reducing (on paper) the

amount of assets owned by the individual.

A trust is a legal instrument in which assets are held in

the name of the trust and managed by a trustee for the benefit

of a beneficiary. Black’s Law Dictionary 1546 (8th ed. 2004)

(definition of “trust”). This structure means that the

beneficiary does not actually own the assets of the trust, but

2

“[T]he medically needy may qualify for financial

assistance for medical expenses if they incur such

expenses in an amount that effectively reduces their

income to the eligibility level. Only when they „spend

down‟ the amount by which their income exceeds that

level, are they in roughly the same position as [the

categorically needy]: any further expenditures for

medical expenses then would have to come from funds

required for basic necessities.” Atkins v. Rivera, 477

U.S. 154, 158 (1986) (footnote and citation omitted).

6

instead has an equitable right to derive benefits from them.

(The benefits vary according to the terms of the trust.) The

trust has long been a tool for evading the rigid strictures of

the law, which has generally been a positive development.

For example, in feudal England – the trust‟s birthplace – the

trust allowed younger sons and daughters to inherit land

despite strict rules at law against devising land by will. See

Joseph A. Rosenberg, Supplemental Needs Trusts for People

with Disabilities: The Development of a Private Trust in the

Public Interest, 10 B.U. Pub. Int. L.J. 91, 101 (2000) (citing

Austin Wakeman Scott, Abridgment of the Law of Trusts 11

(1960)). And the trust‟s unique structure makes it useful for

countless salutary purposes in modern society.

But this same bifurcated ownership structure has been

used to manufacture eligibility for government welfare

programs like Medicaid. As with many government

programs, eligibility for Medicaid is partially dependent on

the claimant‟s income and assets. Wealthy individuals are

expected to exhaust their own resources before turning to the

public for assistance. But trusts can enable these same

individuals to technically “own” nothing at all, even though

they may have access to substantial wealth. Such claimants

may then qualify for Medicaid. See Johnson v. Guhl, 357

F.3d 403, 405 (3d. Cir. 2004) (“Because Medicaid is available

to the needy, creative lawyers and financial planners have

devised various ways to „shield‟ wealthier claimants‟ assets in

determining Medicaid eligibility.”). Individuals have gained

access to taxpayer-funded healthcare while retaining the

benefit of their wealth and the ability to pass that wealth to

their heirs.

7

Congress understandably viewed this as an abuse and

began addressing the problem with statutory standards

enacted in 1986. See Consolidated Omnibus Budget

Reconciliation Act of 1985, Pub. L. No. 99-272, § 9506(a),

100 Stat. 82 (Apr. 7, 1986). These standards were repealed

and replaced in 1993 by the current trust-counting rules. See

Omnibus Budget Reconciliation Act of 1993, Pub. L. No.

103-66, Title XIII § 13611(d)(1)(c), 107 Stat. 312 (Aug. 10,

1993) (OBRA 1993). Those rules are at issue in this case.

In the 1993 OBRA amendments, Congress established

a general rule that trusts would be counted as assets for the

purpose of determining Medicaid eligibility. But Congress

also excepted from that rule three types of trusts meeting

certain specific requirements. Taken together, these are

generally called “special needs trusts” or “supplemental needs

trusts.” “A supplemental needs trust is a discretionary trust

established for the benefit of a person with a severe and

chronic or persistent disability and is intended to provide for

expenses that assistance programs such as Medicaid do not

cover.” Sullivan v. Cnty. of Suffolk, 174 F.3d 282, 284 (2d

Cir. 1999) (internal quotation marks omitted). These

expenses – books, television, Internet, travel, and even such

necessities as clothing and toiletries – would rarely be

considered extravagant.

One type of special needs trust – the one at issue in

this case – is the pooled special needs trust. “A „pooled trust‟

is a special arrangement with a non-profit organization that

serves as trustee to manage assets belonging to many disabled

individuals, with investments being pooled, but with separate

trust „accounts‟ being maintained for each disabled

8

individual.” Jan P. Myskowski, Special Needs Trusts in the

Era of the Uniform Trust Code, 46 N.H. Bar J., Spring 2005,

at 16. The pooled special needs trust was intended for

individuals with a relatively small amount of money. By

pooling these small accounts for investment and management

purposes, overhead and expenses are reduced and more

money is available to the beneficiary.

The Medicaid statute says the following regarding

pooled trusts:

(4) This subsection [the rules counting trusts as

available assets for purposes of Medicaid

eligibility] shall not apply to any of the

following trusts:

....

(C) A trust containing the assets of an

individual who is disabled (as defined in

section 1382c(a)(3) of this title) that

meets the following conditions:

(i) The trust is established and

managed by a non-profit

association.

(ii) A separate account is

maintained for each beneficiary of

the trust, but, for purposes of

investment and management of

9

funds, the trust pools these

accounts.

(iii) Accounts in the trust are

established solely for the benefit

of individuals who are disabled

(as defined in section 1382c(a)(3)

of this title) by the parent,

grandparent, or legal guardian of

such individuals, by such

individuals, or by a court.

(iv) To the extent that amounts

remaining in the beneficiary‟s

account upon the death of the

beneficiary are not retained by the

trust, the trust pays to the State

from such remaining amounts in

the account an amount equal to

the total amount of medical

assistance paid on behalf of the

beneficiary under the State plan

under this subchapter.

42 U.S.C. § 1396p(d)(4).

In 2005, Pennsylvania sought to regulate pooled trusts

(and special needs trusts more generally) by passing Section

1414, which states:

Section 1414. Special Needs Trusts. –

10

(a) A special needs trust must be approved by a

court of competent jurisdiction if required by

rules of court.

(b) A special needs trust shall comply with all

of the following:

(1) The beneficiary shall be an individual

under the age of sixty-five who is

disabled, as that term is defined in Title

XVI of the Social Security Act (49 Stat.

620, 42 U.S.C. § 1381 et seq.)

(2) The beneficiary shall have special

needs that will not be met without the

trust.

(3) The trust shall provide:

(i) That all distributions from the

trust must be for the sole benefit

of the beneficiary.

(ii) That any expenditure from the

trust must have a reasonable

relationship to the needs of the

beneficiary.

(iii) That, upon the death of the

beneficiary or upon the earlier

termination of the trust, the

department and any other state

that provided medical assistance

11

to the beneficiary must be

reimbursed from the funds

remaining in the trust up to an

amount equal to the total medical

assistance paid on behalf of the

beneficiary before any other

claimant is paid: Provided,

however, That in the case of an

account in a pooled trust, the trust

shall provide that no more than

fifty percent of the amount

remaining in the beneficiary‟s

pooled trust account may be

retained by the trust without any

obligation to reimburse the

department.

....

(c) If at any time it appears that any of the

requirements of subsection (b) are not satisfied

or the trustee refuses without good cause to

make payments from the trust for the special

needs of the beneficiary and, provided that the

department or any other public agency in this

Commonwealth has a claim against trust

property, the department or other public agency

may petition the court for an order terminating

the trust.

....

12

(f) As used in this section, the following words

and phrases shall have the following meanings:

....

“Special needs” means those items, products or

services not covered by the medical assistance

program, insurance or other third-party liability

source for which a beneficiary of a special

needs trust or his parents are personally liable

and that can be provided to the beneficiary to

increase the beneficiary‟s quality of life and to

assist in and are related to the treatment of the

beneficiary‟s disability. The term may include

medical expenses, dental expenses, recreational

therapy, occupational therapy, physical therapy,

vocational therapy, durable medical needs,

prosthetic devices, special rehabilitative

services or equipment, disability-related

training, education, transportation and travel

expenses, dietary needs and supplements,

related insurance and other goods and services

specified by the department.

62 Pa. Stat. Ann. § 1414.

Plaintiffs challenge Section 1414 as preempted by the

Medicaid statute. Stripped down to its essentials, their

argument is that the requirements for a pooled special needs

trust are set forth at 42 U.S.C. § 1396p(d)(4), that those are

the only requirements, and that Section 1414‟s attempt to

graft additional requirements onto pooled special needs trusts

13

is not permissible. The District Court agreed. For the most

part, we agree as well. We part company with the District

Court only insofar as we believe it gave insufficient weight to

Pennsylvania‟s retained authority to regulate trusts.

III

There are two types of named plaintiffs in this

proposed class action: the Individual Plaintiffs and the Trust

Plaintiffs.3 The Individual Plaintiffs are Zackery Lewis,

Richard Young, Lynn Hainer, Susan Coleman, Kathy Burger,

Tracy Palmer, Kenny Atkinson, Bernice Tate, Mary Wagner,

Michael Bidzilya, William Algar, and Anthony Gale. With

the exception of Lynn Hainer, all the Individual Plaintiffs are

domiciled in the State of Pennsylvania, are disabled, and have

received medical assistance under Medicaid.4 Lynn Hainer

brings suit as administratix for the estate of her deceased

niece Addie Smith. At the time of her death, Addie was

domiciled in Pennsylvania, disabled, and receiving medical

3

The parties have stipulated to the facts. The stipulation

was filed with the District Court in advance of the motion

for summary judgment. We have seen nothing in the

record to suggest that we lack jurisdiction or that the

stipulation is obviously inaccurate in any other respect.

We accept it as true for the purposes of this appeal and

have included relevant facts below.

4

Kenny Atkinson and Bernice Tate passed away during

the pendency of this suit.

14

assistance through Medicaid. The Individual Plaintiffs all

have accounts in pooled trusts, with balances ranging from $0

(Richard Young)5 to $1.26 million (Zackery Lewis).6 In

general, the Individual Plaintiffs‟ balances are quite low,

usually a few hundred to a few thousand dollars. The

Individual Plaintiffs use or intend to use the balances in their

accounts for a variety of purposes, including personal items,

furnishings, therapy sessions, cell phone and cable service,

and travel expenses. With the exception of Michael Bidzilya

and William Algar, who at the time of filing were 80 years

old and 69 years old respectively, all the individual plaintiffs

are under the age of 65. (At the time of her death, Addie

Smith was 72 years old.)

The Trust Plaintiffs are ARC-CT (ARC) and The

Family Trust. ARC is a charitable organization managing

trust accounts, with approximately $23 million in funds under

management. It currently manages approximately 117 pooled

trust accounts. It has managed approximately 130 pooled

trust accounts since its inception. All its trust beneficiaries

5

Richard Young exhausted his account, but continues to

be paid benefits from account funds retained by the trust

after the deaths of the respective account beneficiaries.

He appears to be the only Plaintiff with such an

arrangement.

6

The current balance in Lewis‟ account is not provided

in the stipulation, but it is being funded with annuities

purchased from the $1.26 million net proceeds of a

settlement reached in a medical malpractice lawsuit.

15

are disabled, Medicaid-eligible individuals. It does not open

pooled trust accounts for beneficiaries over the age of 65.

Disabled individuals seeking to establish an account in

ARC‟s pooled trust sign an agreement providing that the

trustee has sole discretion in disbursing funds and will do so

for the beneficiary‟s “supplemental and life enhancing needs

and care.” The agreement further provides that the trustee

“may interpret liberally the term „supplemental needs‟ but all

distributions shall be made solely for the benefit of the

disabled beneficiary.” ARC has not approved the use of trust

funds for luxury items and Pennsylvania has never informed

ARC that any of its expenditures are unallowable.

Prior to enactment of Section 1414, ARC‟s agreements

provided that all funds in trust would be retained by ARC

upon the death of the beneficiary and would be used for the

benefit of other beneficiaries. In 2002, the Social Security

Administration and the Pennsylvania Department of Public

Welfare (DPW) informed ARC that its trust documents met

the requirements of 42 U.S.C. § 1396p(d)(4)(C). Following

the enactment of Section 1414, DPW informed ARC that its

trust agreements did not comply with the new Pennsylvania

statute. In response, ARC amended its trust agreements to

provide that funds would be retained “to the maximum extent

allowed by law.” Since enactment of Section 1414, ARC has

retained the funds in the accounts of several deceased

beneficiaries and paid some of those funds out for the benefit

of other beneficiaries. In 2006, Pennsylvania sought a portion

of the funds retained by ARC following the death of Thomas

Johnstone, but it has since withdrawn that request.

16

The Family Trust is a charitable organization

managing trust accounts, with approximately $20 million in

funds under management. It currently manages

approximately 1,122 pooled trust accounts. It has managed

approximately 1,248 pooled trust accounts since its inception.

Unlike ARC, the Family Trust does open pooled trust

accounts for beneficiaries over the age of 65, with fourteen

individuals permitted to do so since the enactment of Section

1414. All of The Family Trust‟s beneficiaries are disabled,

Medicaid-eligible individuals.

Disabled individuals seeking to establish an account in

the pooled trust sign an agreement providing that the trustee

has sole discretion in disbursing funds and will do so for the

beneficiary‟s “extra and supplemental care.” When the

Family Trust inquired whether it was permitted to use funds

in a beneficiary‟s account to pay for her funeral expenses, it

was informed that it was not permitted to do so.

The Family Trust‟s agreements provide that all funds

in trust are retained by The Family Trust upon the death of

the beneficiary and used to provide “support for individuals

with disabilities to live safe, meaningful and productive

lives.” The Family Trust has used retained funds for general

charitable purposes, not solely for other beneficiaries of its

trust accounts. In 2000, DPW informed The Family Trust

that its trust documents met the requirements of 42 U.S.C.

§ 1396p(d)(4)(C).7

7

While we intend to cast no aspersions on The Family

Trust, its stewardship of funds has been questioned. For

17

Gary Alexander is the Secretary of the Pennsylvania

Department of Public Welfare. The DPW is charged with

administration of the State‟s Medicaid program. It is also

responsible for reviewing special needs trusts and for

promulgating “regulations or statements of policy . . . to

implement” Section 1414. 62 Pa. Stat. Ann. § 1414(b)(4).

The DPW operates county assistance offices throughout the

Commonwealth to serve the citizens of Pennsylvania. Eric

Rollins is the Executive Director of the Erie County

Assistance Office. Both Mr. Alexander and Mr. Rollins are

defendants in this suit, having been sued in their official

capacities.

Following the enactment of Section 1414, DPW

sought to terminate the medical assistance of Mary Wagner

by asserting that assets she had transferred to the trust could

not be exempted because The Family Trust‟s trust agreements

did not comply with Section 1414. In addition, DPW has

objected to Kenny Atkinson and Bernice Tate‟s participation

in The Family Trust based upon The Family Trust‟s failure to

conform its agreements to Section 1414. DPW has not

example, the Family Trust approved the use of trust

funds for the purchase of a new home by the family of

Zachery Lewis. Though the disbursement was in the

amount calculated by the trust to provide for necessary

safety features for the home, neither Zachery Lewis nor

The Family Trust retained a security interest in the home.

On the other hand, in a different case, The Family Trust

refused to approve the use of funds to purchase a Jaguar

automobile.

18

otherwise challenged the medical assistance eligibility of any

individuals, terminated the medical assistance of any

beneficiary, or attempted to block disbursements for failure to

conform to Section 1414. But DPW stipulates that should it

“prevail in this litigation, it will enforce all provisions of

section 1414[.]” Also, DPW has “directed all pooled trusts in

Pennsylvania to amend their master trust[] agreements and

joinder agreements to conform to the requirements of section

1414.”

DPW has not promulgated official regulations or

issued formal guidance regarding its interpretation of Section

1414. But it did create and circulate a document on Special

Needs Trusts to DPW attorneys and County Assistance

Offices.

IV

Plaintiffs brought a putative class action in the Eastern

District of Pennsylvania before Judge Jan E. Dubois,

challenging the validity of Section 1414 and seeking

injunctive and declaratory relief barring its enforcement. The

original defendants included a host of state officials

(including the Governor of Pennsylvania, Attorney General of

Pennsylvania, and others) purportedly charged with enforcing

Section 1414. By opinion dated August 3, 2007, the District

Court dismissed the claims against all individuals except the

Secretary of the Pennsylvania Department of Public Welfare

and the Executive Director of the Erie County Assistance

Office. It concluded that the Complaint adequately alleged

that these two individuals had actually attempted to enforce

Section 1414. In the same opinion, the District Court

19

dismissed substantive and procedural due process claims

made by the plaintiffs.8 None of these decisions appears to be

challenged, except insofar as Defendants continue to

challenge the justiciability of Plaintiffs‟ claims.

After discovery and submission of stipulated facts,

cross-motions for summary judgment were filed by the

parties. In a thorough and carefully-considered opinion, the

District Court granted Plaintiffs‟ motion for summary

judgment almost in its entirety, holding that all but one of the

challenged provisions of Section 1414 are preempted by

federal law.9 However, the District Court concluded that the

offending provisions could be severed from the remainder of

the law, and thus did not strike down Section 1414 in its

8

The District Court deferred consideration of one portion

of the procedural due process claim until the summary

judgment stage, at which point it concluded the claim

was moot due to its determination that the challenged

portions of Section 1414 were preempted. Given our

reversal of the District Court‟s judgment with regard to

the enforcement clause, the District Court is free to

revisit this ruling on remand. We express no opinion on

the merits of the claim.

9

The District Court concluded that the requirement of

Section 1414(b)(3)(i) that “all distributions from the trust

must be for the sole benefit of the beneficiary” mirrored

federal law and was not preempted.

20

entirety. The District Court also certified a (b)(2) class action

and appointed class counsel.

On appeal, Defendants challenge the justiciability of

Plaintiffs‟ claims, their ability to bring a private right of

action, and the District Court‟s judgment that Section 1414 is

preempted by federal law.

V.A.1

Constitutional standing “is an essential and

unchanging part of the case-or-controversy requirement of

Article III.” Lujan v. Defenders of Wildlife, 504 U.S. 555,

560 (1992). Reduced to its constitutional minimum, standing

requires three elements: (1) an injury in fact consisting of an

actual or imminent invasion of a legally protected interest; (2)

a causal connection between the injury in fact and the

Defendants‟ conduct; and (3) a likelihood that the injury will

be redressed by a favorable decision. See id. at 560-61. “The

party invoking federal jurisdiction bears the burden of

establishing these elements.” Id. at 561.

Defendants‟ only challenge is to whether Plaintiffs

have an injury in fact.10 Defendants note several provisions

10

Because constitutional standing is a jurisdictional

requirement, “[w]e are obliged to examine standing sua

sponte where standing has erroneously been assumed

below.” Adarand Constructors, Inc. v. Mineta, 534 U.S.

103, 110 (2001). Thus, our examination is not confined

to those arguments raised by the Defendants. But the

21

of the law that they have allegedly never attempted to

enforce. They particularly rely on arguments that: (1) they

have never challenged trust disbursements under the

expenditure provision of Section 1414(b)(3)(ii) (“any

expenditure from the trust must have a reasonable

relationship to the needs of the beneficiary”); and (2) they

have never denied eligibility to form or maintain a trust based

on the special needs provision of Section 1414(b)(2) (“The

beneficiary shall have special needs that will not be met

without the trust.”) (Appellants‟ Principal Br. at 14)

Because the provisions of Section 1414 are

severable,11 we must analyze each provision independently

for the purposes of determining whether the Plaintiffs have

standing to challenge that particular provision. See

Contractors Ass’n of E. Pa., Inc. v. City of Phila., 6 F.3d 990,

District Court concluded – and we agree – that the causal

connection and redressability prongs are satisfied

because “[t]he injuries alleged by plaintiffs are a direct

result of Section 1414 and its impending enforcement by

defendants, and declaratory and injunctive relief would

eliminate the risk of such injury.”

11

The District Court did a comprehensive severability

analysis and concluded that the statute is severable. The

parties have not contested severability before us. We

adopt the analysis of the District Court and conclude that

the statute is severable.

22

996 (3d Cir. 1993). But should we conclude that even one of

the Plaintiffs has an injury regarding a specific provision of

Section 1414, we need not examine the effect of that

provision on the other Plaintiffs. See Montalvo-Huertas v.

Rivera-Cruz, 885 F.2d 971, 976 (1st Cir. 1989) (“Where

coplaintiffs have a shared stake in the litigation – close

identity of interests and a joint objective – the finding that one

has standing to sue renders it superfluous to adjudicate the

other plaintiffs‟ standing.”).

Defendants deny Plaintiffs have an injury in fact as

regards the expenditure and special needs provisions.12 So

we must determine whether any of the Plaintiffs have been

subject to actual enforcement of the expenditure or special

needs provisions or are likely to have these provisions

12

Though injury in fact is not disputed as to the other

provisions, we note that it appears from the record that

there are Plaintiffs with standing to challenge those

provisions. Michael Bidzilya and William Algar can

challenge the under-65 provision because they are over

65 years old. Mary Wagner can challenge the 50%

repayment provision because the State sought repayment

from her and has only suspended its collection attempt

pending the outcome of this suit. All plaintiffs can

challenge the termination provision, as that is an

enforcement clause applicable to any potential violations

of Section 1414. We therefore confirm our jurisdiction

to consider challenges to those provisions.

23

enforced against them in the near future. We conclude that

Plaintiffs are indeed likely to have these provisions

imminently enforced against them. First, all Plaintiffs fall

within the scope of these statutory provisions, such that

Plaintiffs would be burdened by these provisions if they were

enforced. Second, DPW has stated that it intends to enforce

all the requirements of the statute should it prevail. This

establishes an imminent injury in fact.

Defendants believe that Plaintiffs lack an injury in fact

as to the special needs provision because they “have not

produced a single class member who can plausibly claim to

be at risk of being denied access to a pooled trust under” that

provision. (Appellants‟ Principal Br. at 14) Defendants point

to cases where they have approved exceptionally large

trusts,13 implicitly arguing that they will not enforce the

“special needs” requirement except in egregious cases. They

believe Plaintiffs lack an injury in fact unless one of the

Plaintiffs presents such an egregious case. Similarly, because

Plaintiffs have failed to point to a specific expenditure that

Defendants have disapproved or threatened to disapprove,

Plaintiffs supposedly lack an injury in fact as to the

expenditure provision.

But Defendants‟ position ignores the nature of these

provisions. Instead of being imposed on particular classes of

13

We note, though, that the Defendants do not commit

themselves to continuing such a course. Faced with an

identical situation in the future, they could disallow such

trusts.

24

individuals, these requirements are burdens on the nature of

the trust itself, affecting all beneficiaries and trustees of

special needs trusts. With regard to the special needs

provision, the Pennsylvania statute requires that the trust‟s

existence be justified in relation to the “special needs” of the

beneficiary. It defines “special needs” as “items, products or

services . . . related to the treatment of the beneficiary‟s

disability.” 62 Pa. Stat. Ann. § 1414(f). This requires that the

trust be justified in relation to the treatment of the

beneficiary‟s disability. Similarly, the expenditure provision

requires “any expenditure from the trust” to “have a

reasonable relationship to the needs of the beneficiary.” 62

Pa. Stat. Ann. § 1414(b)(3)(ii). All special needs trusts are

subject to these requirements. Each of these provisions

requires careful scrutiny of the trust, the beneficiary, and the

beneficiary‟s ongoing needs, and therefore each provision

imposes an ongoing burden on beneficiaries and trustees.

Plaintiffs are within the scope of the statute and

therefore potentially affected by it. By itself, this is not

sufficient to demonstrate constitutional standing. Normally,

Plaintiffs would have the burden of demonstrating that there

is an imminent threat of enforcement against them. But here

DPW has relieved Plaintiffs of that burden by stipulating that

should it “prevail in this litigation, it will enforce all

provisions of section 1414[.]” Therefore, the threat of

enforcement is sufficiently imminent that Plaintiffs have an

injury in fact.

Defendants also argue that should they prevail, they

will not seek to terminate trusts, but rather seek to force their

compliance with Section 1414. (Appellants‟ Principal Br. at

25

15) But it is unclear why this would deny Plaintiffs an injury

in fact. While terminating non-compliant trusts would surely

be more draconian, forcing such trusts to comply with an

allegedly illegitimate statute is, from the perspective of

constitutional standing, no less an injury in fact.

We hold that Plaintiffs have constitutional standing to

challenge Section 1414.

V.A.2

Prudential standing requires: (1) that a litigant assert

his or her own legal interests rather than those of a third

party; (2) that the grievance not be so abstract as to amount to

a generalized grievance; (3) and that the Plaintiffs‟ interests

are arguably within the “zone of interests” protected by the

statute, rule, or constitutional provision on which the claim is

based. See Mariana v. Fisher, 338 F.3d 189, 205 (3d Cir.

2003).14 These requirements are clearly met in this case.

14

Defendants do not challenge Plaintiffs‟ prudential

standing. Constitutional standing is clearly jurisdictional

and must be considered even when the parties fail to raise

the issue. It is unclear whether prudential standing is

similar. There is significant disagreement among our

sister circuits on whether objections to prudential

standing can be waived. Compare Cmty. First Bank v.

Nat’l Credit Union Admin., 41 F.3d 1050, 1053 (6th Cir.

1994) (not waivable); Animal Legal Defense Fund, Inc. v.

Espy, 29 F.3d 720, 723 n.2 (D.C. Cir. 1994) (not

26

Plaintiffs are asserting their own interests as

beneficiaries and trustees of trusts the Commonwealth of

Pennsylvania is attempting to regulate. Their grievance is not

so abstract as to amount to a generalized grievance. Rather, it

is clear, distinct, and particular to their status as beneficiaries

and trustees. Finally, the “zone of interests” analysis parallels

our later consideration of whether Plaintiffs have a private

right of action. Under Gonzaga University v. Doe, 536 U.S.

273 (2002), to determine whether Congress intended to create

a private right of action, we must look for “rights-creating

language” clearly imparting an “individual entitlement,” with

“an unmistakable focus on the benefitted class.” Id. at 287.

This test is both narrower than the zone-of-interests test and

fully encompassed within its boundaries. Thus, should we

conclude that Plaintiffs have a private right of action, we must

waivable); and Thompson v. Cnty. of Franklin, 15 F.3d

245, 248 (2d Cir. 1994) (not waivable) with Bd. of Miss.

Levee Comm’rs v. EPA, 674 F.3d 409, 417-18 (5th Cir.

2012) (waivable); The Wilderness Soc. v. Kane Cnty.,

Utah, 632 F.3d 1162, 1168 n.1 (10th Cir. 2011)

(waivable); RK Co. v. See, 622 F.3d 846, 851-52 (7th Cir.

2010) (waivable); City of L.A. v. Cnty. of Kern, 581 F.3d

841, 845 (9th Cir. 2009) (waivable). We have previously

acknowledged the divide in our sister circuits, see UPS

Worldwide Forwarding, Inc. v. USPS, 66 F.3d 621, 626

n.6 (3d Cir. 1995), but we have thus far not decided the

issue. Because we hold that Plaintiffs have satisfied the

requirements for prudential standing, we similarly

decline to decide the issue now.

27

necessarily conclude that they satisfy the zone-of-interests

test. Since our later analysis does conclude that Plaintiffs

have a private right of action, Plaintiffs have satisfied the

zone-of-interests test. We therefore hold that Plaintiffs have

prudential standing to challenge Section 1414.

V.A.3

Ripeness requires “a substantial controversy, between

parties having adverse legal interests, of sufficient immediacy

and reality to warrant the issuance of a declaratory

judgment.” Md. Cas. Co. v. Pac. Coal & Oil Co., 312 U.S.

270, 273 (1941).

In Step-Saver Data Systems, Inc. v. Wyse Technology,

912 F.2d 643 (3d Cir. 1990), we concluded that the most

important factors in determining whether a case is ripe are

“the adversity of the interest of the parties, the conclusiveness

of the judicial judgment and the practical help, or utility, of

that judgment.” Id. at 647. Adversity requires opposing legal

interests. See id. at 648 (citing and quoting 10A C. Wright,

A. Miller & M. Kane, Federal Practice & Procedure § 2757,

at 582-83 (2d ed. 1983)). Such opposing interests are clearly

present here, as Defendants have an obligation to enforce

Section 1414, and Plaintiffs seek to evade its strictures.

Conclusivity depends on the ability of a decision to “define

and clarify the legal rights or relations of the parties.” Id. at

648. A decision here would establish whether the statute can

be enforced against the Plaintiffs, so it would define and

clarify Plaintiffs‟ legal rights. And declaratory judgments

have utility because the clarity they bring enables “plaintiffs

(and possibly defendants) [to] make responsible decisions

28

about the future.” Id. at 649. Here, a declaratory judgment

will enable the Plaintiffs to make informed decisions about

the administration of their trusts with a full understanding of

Section 1414‟s effects.

Defendants argue that Plaintiffs‟ claims are not ripe,

but do not clearly state which factors they believe are lacking.

They argue that because Section 1414 requires compliance

with authoritative interpretations of the statute, because DPW

is the agency charged with such interpretation, and because

DPW has not released any such interpretations, the case is not

ripe for decision. They are incorrect.

First, the statutory text has its own freestanding

meaning and imposes requirements on trusts even without

agency interpretation. Defendants point to no authority

requiring us to wait for an authoritative interpretation from a

state agency before determining whether a state statute

conflicts with federal law. And to the extent the agency is

pleading for a chance to interpret the statute more leniently

than the statute‟s text might suggest, we question whether we

can credit such an interpretation. As the Supreme Court said

in United States v. Stevens, 130 S. Ct. 1577, 1591 (2010):

“We would not uphold an unconstitutional statute merely

because the Government promised to use it responsibly.”

Second, the stipulated facts cite multiple attempts to

enforce provisions of the statute. In one enforcement attempt,

DPW denied Mary Wagner medical assistance because the

trust agreement for The Family Trust did not comply with

Section 1414. Defendants claim this “ineligibility decision

was withdrawn,” (Appellants‟ Reply Br. at 4) but that

29

explanation is at best incomplete, and at worst misleading,

particularly coming as it does in a reply brief. In fact, Mary

Wagner, the trustee, and DPW entered into what is essentially

a stay of the ineligibility determination pending resolution of

this suit. Should Plaintiffs‟ challenge fail, Mary Wagner and

the trustee have agreed that the Commonwealth will be paid

“up to fifty (50%) percent of remaining funds in Mary

Wagner‟s pooled account at her death[.]” Obviously, Mary

Wagner‟s interests remain adverse to those of the

Commonwealth.

Finally, the stipulated facts indicate that DPW has

created and internally circulated a document addressing

various provisions of the statute. Defendants argue that these

guidelines have not been used to disapprove any accounts or

expenditures, but that is beside the point. The document

undermines Defendants‟ argument that they have not reached

any conclusions on the scope and meaning of the statute. For

example, they have concluded that “luxury items” cannot be

bought with trust funds and that “[n]o assets can be added

after age 65.”

The issues raised by Defendants will often be present

in declaratory judgment cases. Such actions are often brought

specifically because legal rights and obligations are

ambiguous or undefined. Plaintiffs seek to clarify those legal

rights and obligations. We understand that DPW has been

entrusted by the Pennsylvania Legislature with the duty of

interpreting Section 1414 and we appreciate DPW‟s stated

intent to interpret the statute reasonably. But Plaintiffs have

satisfied Step-Saver‟s requirements. They are entitled to have

Section 1414 examined in light of federal law and to have

30

their legal rights and obligations clarified. We hold that

Plaintiffs‟ claims are ripe for adjudication.

V.B

Defendants‟ central argument, cutting across both the

private-right-of-action and the merits sections of their brief, is

that 42 U.S.C. § 1396p(d)(4) does not mandate that the States

exempt special needs trusts meeting its criteria. Defendants‟

argument has been embraced by both the Second and Tenth

Circuits. See Wong v. Doar, 571 F.3d 247 (2d Cir. 2009);

Keith v. Rizzuto, 212 F.3d 1190 (10th Cir. 2000).

Meanwhile, the Eighth Circuit suggests in a passing reference

that § 1396p(d)(4) is mandatory. See Norwest Bank of N.D.,

N.A. v. Doth, 159 F.3d 328, 330 (8th Cir. 1998). Having

given careful consideration to Defendants‟ arguments and to

the positions of our sister circuits, we conclude that 42 U.S.C.

§ 1396p(d)(4) imposes mandatory obligations upon the

States.

Defendants‟ key point is that the beginning of the

special needs exemption states: “This subsection shall not

apply to any of the following trusts[.]” 42 U.S.C.

§ 1396p(d)(4) (emphasis added). This language refers to the

portion of the Medicaid statute requiring States to count trusts

against eligibility. It abrogates that section insofar as it

applies to special needs trusts. Both parties agree that this

lifts the obligation levied upon the States by the trust-

counting provisions and says that the States do not have to

apply the trust-counting provisions to qualifying special needs

trusts. But the provision does not specifically say that “Any

31

trusts meeting these requirements shall not be counted as

available assets for determining Medicaid eligibility.”

Defendants argue that this creates a “gap” where the

States can legislate. This was the Second Circuit‟s position

in Wong v. Doar, 571 F.3d at 256-57 (“Congress‟s negative

command that (d)(3) „shall not apply‟ to the trusts referenced

in (d)(4) does not, however, provide any guidance as to what

rules shall apply to (d)(4) trusts.”). Similarly, in Keith v.

Rizzuto, the Tenth Circuit concluded that “Section

1396p(d)(4) . . . provides an exception to a requirement.

States accordingly need not count income trusts for eligibility

purposes, but nevertheless may . . . opt to do so.” 212 F.3d at

1193; see also Hobbs ex rel. Hobbs v. Zenderman, 579 F.3d

1171, 1179-80 (10th Cir. 2009) (applying Keith to conclude

that 42 U.S.C. § 1396p(d)(4)(A) does not confer a private

right of action).

“[T]he intent of Congress is the „ultimate touchstone‟

of preemption analysis.” Farina v. Nokia, Inc., 625 F.3d 97,

115 (3d Cir. 2010) (quoting Medtronic, Inc. v. Lohr, 518 U.S.

470, 485 (1996)). And because “the best evidence of

Congress‟s intent is what it says in the texts of the statutes,”

Fogleman v. Mercy Hosp., Inc., 283 F.3d 561, 569 (3d Cir.

2002), we give controlling weight to the statutory text. But

we believe that focusing solely on the words “[t]his

subsection” has caused Defendants and several courts to miss

the forest for the trees.

In enacting the trust provisions of OBRA 1993,

Congress provided a comprehensive system for dealing with

the relationship between trusts and Medicaid eligibility. After

32

limited success with the Medicaid Qualifying Trusts

provisions enacted in 1986, Congress made a deliberate

choice to expand the federal role in defining trusts and their

effect on Medicaid eligibility. Evidence of this can be found

throughout the Medicaid statute. For example, the current

text of 42 U.S.C. § 1396a(a)(18) requires States to comply

with “section 1396p of this title with respect to . . . treatment

of certain trusts[.]” Before OBRA 1993, the provision

instructed States to “comply with the provisions of section

1396p of this title with respect to liens, adjustments and

recoveries of medical assistance correctly paid, and transfers

of assets[.]” 42 U.S.C. § 1396a(a)(18) (1992). It did not

mention compliance with 1396p.

Congress made a specific choice to expand the types of

assets being treated as trusts and to unambiguously require

States to count trusts against Medicaid eligibility. Its primary

objective was unquestionably to prevent Medicaid recipients

from receiving taxpayer-funded health care while they

sheltered their own assets for their benefit and the benefit of

their heirs. But its secondary objective was to shield special

needs trusts from impacting Medicaid eligibility. And the

Supreme Court has emphasized the importance of giving full

effect to all of Congress‟ statutory objectives, as well as the

specific balance struck among them. See Rodriguez v. United

States, 480 U.S. 522, 525-26 (1987) (“Deciding what

competing values will or will not be sacrificed to the

achievement of a particular objective is the very essence of

legislative choice-and it frustrates rather than effectuates

legislative intent simplistically to assume that whatever

furthers the statute‟s primary objective must be the law.”).

33

Congress‟ intent was not merely to shelter special

needs trusts from the effect of 42 U.S.C. § 1396p(d)(3). It

was to shelter special needs trusts from having any impact on

Medicaid eligibility. This conclusion is rooted in the

statutory text. If Congress had intended to do as the

Defendants insist – provide an exception to the trust-counting

rules through which the States were free to do as they wish –

it seems unlikely that Congress would use the word “shall” in

its command that “[t]his subsection shall not apply.” Any

number of constructions would have been more amenable to

the Defendants‟ position. For example, Congress could have

said: “States are not required to apply this subsection to any

of the following trusts.” Congress is not required to use any

particular magic words, but its choice of an imperative like

“shall” does give evidence of its intent.

Even more important is the structure of the asset-

counting rules. While Defendants focus on the specific

mandate-and-exception structure of 42 U.S.C. §§ 1396p(d)(3)

and (4), both of these sit within a complex and comprehensive

system of asset-counting rules. Congress rigorously dictates

what assets shall count and what assets shall not count toward

Medicaid eligibility. State law obviously plays a role in

determining ownership, property rights, and similar matters.

Here Congress has not only provided a comprehensive system

of asset-counting rules, it has actually legislated on this

precise class of asset. Defendants argue that Congress left a

gap or an unprovided-for case with regard to these trusts. But

with such a rigorous system, it seems clear that Congress

intended to create a purely binary system of classification:

either a trust affects Medicaid eligibility or it does not.

34

Finally, while this shades into our preemption analysis,

it is important to note that 42 U.S.C. § 1396p(d)(4) basically

provides a federal definition for what constitutes a special

needs trust. Through this statutory provision, Congress has

set the boundaries for what will be considered a special needs

trust under federal law. Pennsylvania‟s Section 1414 adds

requirements to this definition. As our preemption analysis

will demonstrate, States are not free to rewrite congressional

statutes in this way.

For these reasons, rooted in the text and structure of

the Medicaid statute, we respectfully disagree with the

conclusion of the Second and Tenth Circuits. We hold that in

determining Medicaid eligibility, States are required to

exempt any trust meeting the provisions of 42 U.S.C. §

1396p(d)(4).15

V.C.1

To find a private right of action under Section 1983:

(1) the statutory provision must benefit the plaintiffs with a

right unambiguously conferred by Congress; (2) the right

cannot be so “vague and amorphous” that its enforcement

would strain judicial competence; and (3) the statute must

impose a binding obligation on the States. See Blessing v.

Freestone, 520 U.S. 329, 329 (1997); Gonzaga Univ. v. Doe,

536 U.S. 273, 282 (2002). Defendants challenge the first and

15

Trusts are, of course, required to abide by a State‟s

general law of trusts, the effects of which will be

discussed in greater detail in our preemption analysis.

35

third parts of this test. We conclude that Plaintiffs have a

private right of action under Section 1983.

Medicaid provides eligible individuals with the

statutory right to receive medical assistance and to receive it

with reasonable promptness. See 42 U.S.C. §§ 1396a(a)(8),

1396a(a)(10) & 1396d(a). Our Court has already concluded

that Medicaid provides a private right of action under Section

1983 for interference with this right. See Sabree ex rel.

Sabree v. Richman, 367 F.3d 180, 189 (3d Cir. 2004).

Plaintiffs have a right to receive reasonably prompt medical

assistance so long as they meet the eligibility requirements as

those requirements are defined by federal law. Plaintiffs

allege that Section 1414 changes the eligibility requirements

for medical assistance, contrary to federal law. Thus, it

interferes with Plaintiffs‟ right to receive medical assistance.

Plaintiffs therefore have a cause of action under Section 1983.

It is a closer question whether the Trust Plaintiffs have

a private right of action here. To be sure, they do not have a

right to receive medical assistance. We nonetheless conclude

that the Medicaid statute confers a private right of action

upon the Trust Plaintiffs.

Under Gonzaga University v. Doe, we must look for

“rights-creating language” clearly imparting an “individual

entitlement,” with “an unmistakable focus on the benefitted

class.” 536 U.S. at 287. In Gonzaga, the Supreme Court

contrasted the “individually focused terminology of Title VI

(„No person . . . shall . . . be subjected to discrimination‟)”

with FERPA‟s mandate that the Secretary of Education

36

withhold funds from institutions violating its provisions. Id.

at 287.

Based on Gonzaga, at least two provisions of the

Medicaid statute confer rights upon the trusts. First, 42

U.S.C. § 1396p(d)(4) says that the trust-counting rules “shall

not apply to” special needs trusts. This parallels the

language from Title VI and Title IX (“No person . . . shall . . .

be subjected to discrimination”) that the Court has held to

create individual rights. See Gonzaga, 536 U.S. at 284, 287.

Second, 42 U.S.C. § 1396a(a)(18) instructs that “[a] State

plan for medical assistance must . . . comply with the

provisions of section 1396p of this title with respect to . . .

treatment of certain trusts[.]” This parallels the language

from 42 U.S.C. § 1396a(a)(8)16 already held by Sabree to

confer an individual right. In fact, they are both part of a list

of requirements that Congress concluded “must” be met by a

“State plan for medical assistance[.]” While the instruction to

comply is directed at the State, the right to have the State

comply is directed at those affected by noncompliance. See

Sabree, 367 F.3d at 190. In the case of Section 1396a(a)(8),

individual rights were conferred upon those eligible for

Medicaid. In the case of Section 1396a(a)(18), individual

rights are conferred upon the trusts.

16

“A State plan for medical assistance must . . . provide

that all individuals wishing to make application for

medical assistance under the plan shall have opportunity

to do so, and that such assistance shall be furnished with

reasonable promptness to all eligible individuals[.]” 42

U.S.C. § 1396a(a)(8).

37

Defendants‟ counterargument is that the special needs

exemptions to the trust-counting rules (42 U.S.C.

§ 1396p(d)(4)) are not mandatory. In order to confer a

private right of action, the statute “must be couched in

mandatory, rather than precatory, terms.” Blessing, 520 U.S.

at 341. Otherwise it does not “unambiguously impose a

binding obligation on the States” such that plaintiffs can seek

its enforcement through Section 1983. Because we have

already concluded that the special needs exemptions are

mandatory, we must reject this argument.

We hold, consistent with our opinion in Sabree, that

the Individual Plaintiffs have a private right of action to

enforce the application of the special needs exemptions. We

further hold that 42 U.S.C. § 1396p(d)(4) and 42 U.S.C.

§ 1396a(a)(18) unmistakably confer a similar right on the

Trust Plaintiffs.

V.C.2

We also conclude that the Supremacy Clause provides

Plaintiffs with an independent basis for a private right of

action in this case.17 Supreme Court precedent establishes

17

The District Court concluded that this issue could not

be bypassed – despite finding a private cause of action

under Section 1983 – because Plaintiffs supposedly

challenge a specific use of the 50% payback provision

solely under the Supremacy Clause. While that may be

38

that the Supremacy Clause creates an independent right of

action where a party alleges preemption of state law by

federal law. See Shaw v. Delta Air Lines, 463 U.S. 85, 96

n.14 (1983) (“A plaintiff who seeks injunctive relief from

state regulation, on the ground that such regulation is pre-

empted by a federal statute which, by virtue of the Supremacy

Clause of the Constitution, must prevail, thus presents a

federal question which the federal courts have jurisdiction

under 28 U.S.C. § 1331 to resolve.”). We acknowledged as

much in St. Thomas-St. John Hotel & Tourism Ass’n v. Gov’t

of the U.S. V.I., 218 F.3d 232, 240 (3d Cir. 2000) (“[A] state

or territorial law can be unenforceable as preempted by

federal law even when the federal law secures no individual

substantive rights for the party arguing preemption. . . . The

Supreme Court has recognized that such a challenge presents

a federal question which the federal courts have jurisdiction

under 28 U.S.C. § 1331 to resolve.”).18

Our opinion in Gonzalez v. Young, 560 F.2d 160, 166

(3d Cir. 1977), is not to the contrary. There we concluded

that 28 U.S.C. § 1343 did not confer jurisdiction over a claim

an overly narrow construction of the Complaint, the

Supremacy Clause does provide a cause of action.

18

It is worth noting, though, that our statement in St.

Thomas-St. John is only dicta, because the Supremacy

Clause has no direct role in a conflict between federal

law and territorial law. Such a conflict presents no

competition between state and federal sovereignty.

39

that the federal welfare program preempted New Jersey law.

But here Section 1331 provides federal question jurisdiction

so long as there is a “civil action[] arising under the

Constitution, laws, or treaties of the United States.” 28

U.S.C. § 1331.19 In any event, Shaw post-dates Gonzalez and

commands that jurisdiction and a cause of action are present

here.

We are compelled to hold that the Supremacy Clause

provides a private right of action here.20

19

Section 1331 could not be used in Gonzalez as the

version in effect at the time had an amount-in-

controversy requirement of $10,000. See Gonzalez, 560

F.2d at 164. That requirement was removed in 1980.

Federal Question Jurisdictional Amendments Act of

1980, Pub. L. No. 96-486, 94 Stat. 2369 (Dec. 1, 1980).

20

When this case was briefed, the Supreme Court was

poised to revisit this issue in Douglas v. Independent

Living Center of Southern California, 565 U.S. __, No.

09-958, 2012 WL 555204 (Feb. 22, 2012). But though

the question on which the Court granted certiorari

squarely presented the issue, the Court expressly declined

to “address whether the Ninth Circuit properly

recognized a Supremacy Clause action to enforce this

federal statute[.]” Id. at *6. Instead, the Court remanded

for consideration of agency determinations issued during

the pendency of the appeal. See id. at *2. The Court

40

V.D

Our preemption analysis must necessarily examine

each individual component of the Pennsylvania statute to

determine whether it conflicts with the Medicaid statute. But

we begin by determining whether Congress had an

overarching intent in enacting the trust-counting provisions

and the special needs exemptions.

The basic principles of a preemption analysis are

familiar. First, “the intent of Congress is the „ultimate

touchstone‟ of preemption analysis.” Farina, 625 F.3d at 115

(quoting Medtronic, 518 U.S. at 485). Second, “we „start[]

with the basic assumption that Congress did not intend to

displace state law.‟” Id. at 116 (quoting Maryland v.

Louisiana, 451 U.S. 725, 746 (1981)). Third, when we are

dealing with Spending Clause legislation, we require

Congress to speak “unambiguously,” because such legislation

is in the nature of a contract between Congress and the States,

reached this decision over the strong dissent of the Chief

Justice, joined by Justices Scalia, Thomas, and Alito.

The dissenting justices would have concluded that

“[w]hen Congress did not intend to provide a private

right of action to enforce a statute enacted under the

Spending Clause, the Supremacy Clause does not supply

one of its own force.” Id. at *11 (Roberts, C.J.,

dissenting). Although the Supreme Court is free to

revisit Shaw if it so desires, we are not. Shaw is binding

precedent unless and until it is abrogated by the Supreme

Court.

41

and the States are entitled to know the conditions under which

they are accepting. Pennhurst State Sch. & Hosp. v.

Halderman, 451 U.S. 1, 17 (1981).

Bearing these principles in mind, we discern an

overarching intent behind the trust exemptions. First,

Congress intended to mandate the exemption of special needs

trusts from the trust-counting rules. We explained our

reasoning for this conclusion in Section V.B.

Second, Congress intended that special needs trusts be

defined by a specific set of criteria that it set forth and no

others. We base this upon Congress‟ choice to provide a list

of requirements to be met by special needs trusts. The

venerable canon of statutory construction – expressio unius

est exclusio alterius – essentially says that where a specific

list is set forth, it is presumed that items not on the list have

been excluded. See, e.g., U.S. Term Limits, Inc. v. Thornton,

514 U.S. 779, 793 n.9 (1995) (noting that application of

expressio unius leads to the conclusion that the qualifications

for office expressed in the Constitution are the sole

requirements and other requirements cannot be imposed);

Waggoner v. Gonzales, 488 F.3d 632, 636 (5th Cir. 2007)

(applying expressio unius to a list of requirements and

concluding that expression of the “extreme hardship”

requirement forecloses conclusion that additional

requirements exist beyond “extreme hardship”). Absent an

explicit statement or a clear implication that States are free to

expand the list, expressio unius leads us to conclude they are

not.

42

Third and finally, while Congress did not intend to

allow additional burdens targeted specifically at special needs

trusts, there is no reason to believe it abrogated States‟

general laws of trusts or their inherent powers under those

laws. There is necessarily some tension between this

conclusion and the bar on States adding requirements. For

example, even application of the trustee‟s traditional duty of

loyalty – to “administer the trust solely in the interests of the

beneficiaries[,]” 20 Pa. Cons. Stat. Ann. § 7772(a) – could be

considered an extra requirement. But we reject the

conclusion that application of these traditional powers is

contrary to the will of Congress. After all, Congress did not

pass a federal body of trust law, estate law, or property law

when enacting Medicaid. It relied and continues to rely on

state laws governing such issues.

These three conclusions – that the special needs

exemptions are mandatory, that Congress‟ stated

requirements for special needs trusts are exclusive, and that

States retain their traditional regulatory authority – guide our

preemption analysis here.21

21

We note briefly that we see no reason for application

of the “no more restrictive” rule (NMR rule) in this case.

The NMR rule bars States – in determining whether the

medically needy are eligible for Medicaid – from using a

methodology that is “more restrictive than the

methodology which would be employed under the

supplemental security income program.” 42 U.S.C.

§ 1396a(a)(10)(C)(i)(III). While the NMR rule was

43

V.D.1

Pennsylvania‟s 50% retention provision provides:

[U]pon the death of the beneficiary or upon the

earlier termination of the trust, the department

and any other state that provided medical

assistance to the beneficiary must be reimbursed

from the funds remaining in the trust up to an

heavily relied upon by the District Court and its

application has been extensively briefed, using the NMR

rule without consideration of Congress‟ underlying intent

is like using a yardstick without knowing where to start

measuring. Regardless, the more direct approach is to

apply Medicaid standards in resolving this case. As the

Supreme Court has recognized, the Medicaid statute

requires the States to base assessments of financial need

(for both categorically needy and medically needy

individuals) on resources “available” to the recipient.

Schweiker v. Gray Panthers, 453 U.S. 34, 37 (1981).

The trust provisions are deliberately worded to require

that States consider money held in trust “available”

unless the trust is protected by one of the exemptions. 42

U.S.C. § 1396p(d)(3). (Use of Medicaid standards

instead of SSI standards may be a distinction without a

difference. The SSI standards incorporate by reference

the Medicaid trust exemptions. See 42 U.S.C.

§ 1382b(e)(5). But given the complexity of Medicaid,

we seek to simplify the analysis in any way we can.)

44

amount equal to the total medical assistance

paid on behalf of the beneficiary before any

other claimant is paid: Provided, however, That

in the case of an account in a pooled trust, the

trust shall provide that no more than fifty

percent of the amount remaining in the

beneficiary‟s pooled trust account may be

retained by the trust without any obligation to

reimburse the department.

62 Pa. Stat. Ann. § 1414(b)(3)(iii). The Medicaid statute,

meanwhile, includes the following language:

To the extent that amounts remaining in the

beneficiary‟s account upon the death of the

beneficiary are not retained by the trust, the

trust pays to the State from such remaining

amounts in the account an amount equal to the

total amount of medical assistance paid on

behalf of the beneficiary under the State plan

under this subchapter.

42 U.S.C. § 1396p(d)(4)(C)(iv). These two provisions are

irreconcilable. We conclude that Congress intended to permit

special needs trusts – at the discretion of the trust – to retain

up to 100% of the residual after the death of the disabled

beneficiary. We therefore hold the repayment provision of

Section 1414 preempted by federal law. 22

22

Defendants argue that there is a particular justiciability

problem with the 50% repayment provision, as the

45

Plaintiffs argue that the Medicaid provision leaves it to

the trust to decide how much – if any – money should be

provided to the State to reimburse it for Medicaid expenses.

We agree. This construction accords with the statutory text

and Congress‟ evident solicitude for these pooled trusts

(evident by the fact that there is a special category of

exemption for them.) Retaining the residual enables the trust

to cover administrative fees and other overhead without

increasing charges on accounts of living beneficiaries At the

same time, should the trust attempt to pass the money to the

deceased‟s estate, this provision acts as a safeguard to ensure

Individual Plaintiffs supposedly have no interest in where

the remainder goes after they die (as they have forfeited

to the trust their right to the remainder) and Trust

Plaintiffs do not have a “personal right” in the pooled

trusts. (Appellants‟ Principal Br. at 26. n.7) We

disagree. The injury to the Individual Plaintiffs does not

arise from the disposition of property after their death.

Rather, it arises from imposing additional requirements

on their existing trust. If, for example, DPW reviews the

trust agreement of an Individual Plaintiff and determines

that the agreement is invalid for lack of a provision for

repaying the State, DPW calls into question the validity

of the Individual Plaintiff‟s trust and, by extension, their

eligibility for medical assistance. This is an injury in fact

sufficient to confer standing upon the Individual

Plaintiffs. And for the reasons discussed above, we

believe the relevant provisions of the Medicaid statute

grant a private right of action to the Trust Plaintiffs.

46

that the State gets repaid. See Joseph A. Rosenberg,

Supplemental Needs Trusts for People with Disabilities: The

Development of a Private Trust in the Public Interest, 10 B.U.

Pub. Int. L.J. 91, 132 (2000) (“To the extent the remaining

balance in an individual trust account is retained by the

pooled trust after the death of the beneficiary, the State is not

entitled to be paid back. However, any amounts that are not

retained by the pooled trust must be used to reimburse the

State for the cost of medical assistance provided to the

beneficiary during his or her lifetime.”).

Defendants have not offered any reasonable alternative

construction of the Medicaid provision. Their principal

argument is that the Medicaid statute makes no mention of

who gets to decide the percentage retained by the trust. But

Plaintiffs‟ construction of the statute – which we find

persuasive, particularly in the absence of a contrary

construction from the Defendants – is that this is a protective

provision, intended to shield the trust from repayment

obligations. Permitting the States to choose how much the

trust can retain would eviscerate that protection. While

Pennsylvania seeks “only” 50% of the trust residual, States

would be free to demand any amount they wished, with the

possible exception of 100%, and the courts would be

powerless to mediate these disputes. Absent some statutory

guidance, there is no reasonable way for us to say that

demanding 75%, 85%, or even 99.9% of the residual is any

less permissible than demanding 50%. We cannot believe

Congress would intentionally cripple its statute in that

manner.

47

It is particularly noteworthy that this provision differs

from the other three types of special needs trusts. In enacting

the trust-counting rules, Congress designated three types of

exempted trusts in successive statutory paragraphs at 42

U.S.C. §§ 1396p(d)(4)(A), (B), and (C). Both the first and

second exemptions, 42 U.S.C. § 1396p(d)(4)(A) and (B),

require repayment up to the total amount expended for

medical assistance. The pooled-trust provision, 42 U.S.C.

§ 1396p(d)(4)(C), is the only one of the three exemptions that

qualifies this repayment obligation and permits the trust to

retain some portion of the residual. This is strong evidence of

congressional intent. See Russello v. United States, 464 U.S.

16, 23 (1983) (“Where Congress includes particular language

in one section of a statute but omits it in another section of the

same Act, it is generally presumed that Congress acts

intentionally and purposely in the disparate inclusion or

exclusion.”).

There is no question that Congress could have chosen

to strike the balance differently, determining that the trust

could retain some portion of the residual while partially

repaying the State. But Congress chose to strike the balance

in favor of the trust. It is important to remember that the

residual here is not being passed to the deceased beneficiary‟s

estate. It is being retained by a charitable organization whose

purpose is to operate special needs trusts for the benefit of the

disabled. See 42 U.S.C. § 1396p(d)(4)(C)(I) (requiring that a

pooled trust be “established and managed by a non-profit

association”). To the extent any part of the residual is passed

to the estate, States are free to seek repayment from those

funds. But Congress has given the trust discretion to

48

determine whether to retain the residual. We hold the

repayment provision of Section 1414 preempted by federal

law.

V.D.2

The expenditure provision of Section 1414(b)(3)(ii)

provides that “any expenditure from the trust must have a

reasonable relationship to the needs of the beneficiary.” 62

Pa. Stat. Ann. § 1414(b)(3)(ii). The Medicaid statute sets no

restrictions on the purposes for which trust funds can be

expended. Thus, the reasonable relationship requirement of

Section 1414(b)(3)(ii) transgresses congressional intent. We

hold it preempted by federal law.

The Commonwealth is justifiably concerned with the

potential for fraud and abuse. While there is little if any

evidence to demonstrate that the Trust Plaintiffs here have

spent trust funds recklessly, it is always possible that trustees

could do so. But States are not without tools to prevent

abuse. The trust-counting rules are built atop the States‟ legal

framework for trusts. Special needs trusts are therefore

subject to supervision by the courts and legal actions to

enforce trustees‟ fiduciary duties. And because pooled

special needs trusts must be managed by non-profit

organizations, they are similarly subject to the States‟ legal

rules for non-profits. We trust that these statutory tools are

robust enough to curtail abuses. But should States find these

tools inadequate, they are free to petition Congress to change

the Medicaid statute. Should Congress be unresponsive,

States retain the option of withdrawing from Medicaid.

49

V.D.3

The special needs requirement of Section 1414(b)(2)

attempts to restrict pooled special needs trusts to beneficiaries

with “special needs that will not be met without the trust.” 62

Pa. Stat. Ann. § 1414(b)(2). The Pennsylvania statute defines

“special needs” as “those items, products or services not

covered by the medical assistance program, insurance or other

third-party liability source for which a beneficiary of a special

needs trust or his parents are personally liable and that can be

provided to the beneficiary to increase the beneficiary‟s

quality of life and to assist in and are related to the treatment

of the beneficiary‟s disability.”23 These limitations do not

appear in the Medicaid statute, which only requires that

individuals be “disabled.”24

23

The statute also provides examples: “The term may

include medical expenses, dental expenses, nursing and

custodial care, psychiatric / psychological services,

recreational therapy, occupational therapy, physical

therapy, vocational therapy, durable medical needs,

prosthetic devices, special rehabilitative services or

equipment, disability-related training, education,

transportation and travel expenses, dietary needs and

supplements, related insurance and other goods and

services specified by the department.” 62 Pa. Stat. Ann.

§ 1414(f).

24

The definition of “disabled” for this purpose is given at

42 U.S.C. § 1382c(a)(3)(A): “[A]n individual shall be

50

Defendants point to the flexibility of the term “quality

of life” as support for their contention that this provision is

not inconsistent with Medicaid‟s requirements. Plaintiffs

rightly note that the Pennsylvania statute requires both that

the items will enhance the beneficiary‟s quality of life and

that they be “related to the treatment of the beneficiary‟s

disability.” Congress did not include any requirement that

proceeds from a special needs trust be used solely for

treatment of the beneficiary‟s disability. Starting from the

assumption that Congress intended to exempt all legally

constituted trusts meeting the requirements of 42 U.S.C.

§ 1396p(d)(4) from counting against Medicaid eligibility, and

did not intend to permit additional restrictions beyond those it

specified, the special needs requirement of Section 1414(b)(2)

transgresses congressional intent. We hold it preempted by

federal law.

Defendants claim that this requirement, much like the

“reasonable relationship” requirement, is needed to prevent

abuse of the trusts and the purchase of luxury items. But

considered to be disabled for purposes of this subchapter

if he is unable to engage in any substantial gainful

activity by reason of any medically determinable physical

or mental impairment which can be expected to result in

death or which has lasted or can be expected to last for a

continuous period of not less than twelve months.”

Additional provisions provide that disability requires

consideration of all jobs for which an individual might be

eligible and relax the definition of “disabled” for minors.

42 U.S.C. § 1382c(a)(3)(B) & (C).

51

while preventing abuse is a laudable goal and one with which

Congress may agree, that requirement is not reflected in the

Medicaid statute. And of course States retain their full

complement of general trust and non-profit laws to combat

waste, fraud, and abuse. Should a State find these tools

inadequate, it may petition Congress for statutory changes, or

it may withdraw from Medicaid entirely.

V.D.4

The age provision of Section 1414(b)(1) attempts to

restrict pooled special needs trusts to beneficiaries “under the

age of sixty-five.” 62 Pa. Stat. Ann. § 1414(b)(1). Congress

did not include an age restriction for pooled special needs

trusts. On that basis alone, the age restriction in Section

1414(b)(1) transgresses congressional intent.

Our conclusion is bolstered by a close examination of

the other trust exemptions (for non-pooled trusts). In

enacting the trust-counting rules, Congress designated three

types of exempted trusts in successive statutory paragraphs at

42 U.S.C. §§ 1396p(d)(4)(A), (B), and (C). Only the first

exemption, 42 U.S.C. § 1396p(d)(4)(A), is restricted to “an

individual under age 65[.]” The other two exemptions –

including pooled special needs trusts at 42 U.S.C.

§ 1396p(d)(4)(C) – contain no similar language. This is

strong evidence of congressional intent not to impose an age

restriction on pooled special needs trusts. See Russello v.

United States, 464 U.S. 16, 23 (1983) (“Where Congress

includes particular language in one section of a statute but

omits it in another section of the same Act, it is generally

presumed that Congress acts intentionally and purposely in

52

the disparate inclusion or exclusion.”). And, indeed,

Defendants conceded at oral argument that if we held 42

U.S.C. § 1396p(d)(4) to be mandatory and binding, the age

restriction must fall. We agree, and hold the provision

preempted.

We note here that Defendants were attempting to

protect elderly beneficiaries of special needs trusts from

potentially invalidating (at least temporarily) their Medicaid

eligibility. Through a quirk of the Medicaid statute, elderly

individuals (65 and over) transferring assets into a pooled

trust are made ineligible for Medicaid for a period of time.

See Rosenberg, supra, 10 B.U. Pub. Int. L.J. at 134-35 &

n.234 (discussing operation of the penalty). Before the

District Court, Defendants argued that this was a “drafting

error” by Congress. They may well be correct.25 But this is

not a mere “scrivener‟s error” that we can correct judicially.

Congress could have rationally concluded that the benefits of

making special needs trusts available to elderly individuals

outweighed the burden of the penalty. As it stands,

congressional intent – as exemplified by the text of the statute

– is clear. The Commonwealth‟s goal may be laudable, but if

Congress perceives a problem, Congress will have to fix it.

25

Professor Rosenberg‟s article notes that advocates who

lobbied Congress for the trust exceptions have expressed

their belief that the lack of an age restriction was a

“technical drafting error, created when the provision was

divided into separate sections to accommodate the

retention of the remainder by the pooled trust.”

Rosenberg, supra, 10 B.U. Pub. Int. L.J. at 129.

53

V.D.5

The enforcement provision of Section 1414(c) states:

“If at any time it appears that any of the requirements of

subsection (b) are not satisfied or the trustee refuses without

good cause to make payments from the trust for the special

needs of the beneficiary and, provided that the department or

any other public agency in this Commonwealth has a claim

against trust property, the department or other public agency

may petition the court for an order terminating the trust.” 62

Pa. Stat. Ann. § 1414(c). The District Court held this

provision preempted, but we believe it is a reasonable

exercise of the Commonwealth‟s retained authority to

regulate trusts. We therefore hold that the enforcement

provision is not preempted by federal law.

The pooled special needs trust is a unique type of trust.

It is one legal entity, but with many separate beneficiaries,

each having a claim over a specific “account” within the trust.

It is entirely reasonable for the Commonwealth to seek a

method of enforcement tailored to this legal entity. Assume,

for example, that the non-profit trustee has a dozen accounts

within the trust. Eleven of those twelve accounts it manages

well. But for one of those accounts, it breaches the sole

benefit requirement and makes distributions of account funds

to relatives and friends of the disabled beneficiary, or – even

worse – to its own employees. It is the nonprofit that is at

fault, and the nonprofit that can no longer be trusted to

manage any of the accounts. It is entirely reasonable for the

Commonwealth to seek cancellation of the entire trust.

54

Pennsylvania‟s general trust law contains numerous

provisions for protecting the trust and the interests of its

beneficiaries. For example, Pennsylvania law imposes duties

of loyalty, impartiality, prudent administration, and prudent

investment. See 20 Pa. Cons. Stat. Ann. §§ 7772, 7773, 7774,

7203. These duties may be enforced by a court when the

court‟s jurisdiction is “invoked by an interested person or as

provided by law” and the proceeding may “relate to any

matter involving the trust‟s administration.” 20 Pa. Cons.

Stat. Ann. § 7711. The court‟s authority includes the power

to remedy breaches of trust, remove the trustee, or terminate

the trust. See 20 Pa. Cons. Stat. Ann. §§ 7781, 7766, 7740.2.

Should the beneficiary be incapable of protecting his or her

own interests, the Commonwealth may ask a court to appoint

a guardian capable of bringing actions on the beneficiary‟s

behalf. See 20 Pa. Cons. Stat. Ann. § 5511.

Because pooled trusts are required to be managed by

non-profit organizations, see 42 U.S.C. § 1396p(d)(4)(C)(i),

Pennsylvania is also free to employ its general laws regarding

nonprofits. Among other things, these laws regulate the

formation of non-profit corporations, see 15 Pa. Cons. Stat.

Ann. §§ 5301-5311; they set forth the powers and duties of

non-profit corporations, see 15 Pa. Cons. Stat. Ann. §§ 5501-

5589; and they hold directors to a duty of care, see 15 Pa.

Cons. Stat. Ann. § 5712.

Obviously, Pennsylvania cannot use the enforcement

provision of Section 1414 to terminate trusts for violating

other provisions we hold to be preempted. But we see no

reason why it cannot use this section to enforce its general

trust laws or provisions like the sole benefit requirement.

55

In briefing and at oral argument, Defendants have

expressed an intent not to cancel entire trusts because of a

single account‟s transgressions. We agree that innocent

beneficiaries should not be punished for the transgressions of

their trustee or their fellow account holders. We appreciate

Defendants‟ intent to apply this provision reasonably, and we

trust that they will do so. Should any individual enforcement

action infringe on the rights of a trust or a disabled

beneficiary, those individuals remain free to bring an as-

applied challenge to the statute. But we cannot hold the

enforcement provision categorically preempted, and we

therefore vacate that portion of the District Court‟s opinion.

V.D.6

The District Court addressed a number of other issues

in its opinion. It concluded that the surviving portions of

Section 1414 were severable and could stand on their own. It

granted Plaintiffs‟ request for class certification, but narrowed

the class on the basis of its conclusion that no Plaintiff

adequately represented individuals with trusts created prior to

2000, when the SSI and Medicaid standards for trust

treatment were different. It concluded that The Family Trust

could not adequately represent the class. Finally, it appointed

class counsel. None of these decisions are challenged by the

parties. We affirm them in all respects.

VI

We conclude that Plaintiffs‟ case is justiciable and

they have a private right of action under both Section 1983

and the Supremacy Clause of the Constitution. On the merits

56

of Plaintiffs‟ challenge, we conclude that the District Court

was correct in its determination that Section 1414‟s 50%

repayment provision, “special needs” provision, expenditure

provision, and age restriction are all preempted by federal

law. However, we conclude that the enforcement provision

of Section 1414 – when used to enforce provisions not

otherwise preempted by federal law – is a reasonable exercise

of the Commonwealth‟s retained authority to regulate trusts.

We will affirm in part, reverse in part, and remand for

proceedings consistent with this opinion.

57