On March 7, 2008, the Board of Hearings for the Office of Medicaid determined that a $32,0000 promissory note to the Appellant's nephew, who was also the Appellant's Durable Power of Attorney (DPA), was a disqualifying transfer because of the nephews status as both borrower of the promissory note and DPA to the Appellant.
On February 15, 2007, property in which the Appellant owned a two-third interest was sold. When the Appellant received his share of the proceeds and upon MassHealth's learning this information, the Appellant's LTC payment benefits were ended because his assets now exceeded the $2,000 limit. Among other methods of spending down these recently acquired assets, the Appellant lent his nephew $32,000 in the form of a promissory note. The nephew was the Appellant's attorney-in-fact and signed the Promissory Note on the Appellant's behalf. Shortly after this spend down, the Appellant again filed an application for LTC payment benefits with MassHealth seeking an eligibility benefit start date beginning on the date that MassHealth terminated his benefits. MassHealth subsequently denied this application.
On appeal, MassHealth argued that the promissory note lacked fair market value for a variety of reasons, most notably the inherent conflict of interest in the Appellant's nephew assuming both roles in the creation and execution of the note. MassHealth cited the Gagnon (Gagnon v. Coombs, 39 Mass.App.Ct. 144 (1995)) case which stands for the proposition that for a valid transaction to occur, the person accepting the responsibility of a DPA for another cannot possibly fulfill that fiduciary responsibility if he is also acting in furtherance of his own personal interests. Therefore, here the nephew's personal interest in the note prevented him from negotiating the best possible agreement for the lender Appellant, as is required of a DPA. They also concluded that the mere inclusion of the elements contained in the MassHealth regulations does not transform the transaction into a valid one. In addition, they argued if the nephew fails to pay either before or after his uncle's death he will not seek to enforce the terms against himself.
Counsel for the Appellant asserted that because the note met the requirements of 130 CMR 520.007(J)(3), and in fact, mirrored the language of the regulation, it should be deemed to have fair market value. Appellant's counsel also advanced the argument that the promissory note does provide adequate consideration by virtue of the fact that the Appellant will be receiving interest as well as the amount loaned from his nephew over the three year life of the note. In addition, counsel argued that a promissory note is no different from the permitted practices of spending down assets such as community spousal purchase of actuarial sound annuities, investments in the personal residence of an applicant, and the prepayment of funeral expenses, all of which have been allowed for decades.
The Board of Hearings concluded that the note was "not a legally valid contract" and that "the Appellant's premise that copying or mirroring the regulation should result in a promissory note is erroneous. The document does not constitute a promissory note, or a contract, or much of anything because the person executing the instrument allegedly on the Appellant's behalf is the same person receiving a $32,000 personal benefit from his own execution of the note and subsequent payment of the Appellant's funds to himself....Execution of the instrument by the nephew personally, with the deliberate intention of making the Appellant eligible for MassHealth LTC payment benefits, while the nephew is the only person who has the power to enforce or collect the note, is exactly the type of disqualifying transfer which the Deficit Reduction Act of 2005 intended to end..."
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