Lewis Ex Rel. Young v. Alexander ( 2012 )

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