Iowa Dep't of Human Servs. v. Lohman (In re Estate of Melby)

• Decision Date: 10 January 2014
• Docket Number: No. 12–1593.,12–1593.
• Parties: In the Matter of the ESTATE OF Arnold MELBY, Deceased. Iowa Department of Human Services, Appellant, v. James D. Lohman, Appellee.
• Court: Iowa Supreme Court

841 N.W.2d 867

In the Matter of the ESTATE OF Arnold MELBY, Deceased.

Iowa Department of Human Services, Appellant,

v.James D. Lohman, Appellee.

No. 12–1593.

Supreme Court of Iowa.

Jan. 10, 2014.

Thomas J. Miller, Attorney General, and Barbara E.B. Galloway and Timothy L. Vavricek, Assistant Attorneys General, for appellant.

Bradley J. Nelson of Norelius Nelson PC, Denison, for appellee.

HECHT, Justice.

The Iowa Department of Human Services appeals from a district court ruling on the department's claim in probate for recovery of Medicaid payments made for services provided to an elderly married couple. The recipients of the services were trustors of separate irrevocable trusts. The district court's ruling concluded the trustors' interests in the trusts were limited to their right to receive the net income from the trusts' assets, and the department's statutory right to recover the Medicaid payments could be enforced against such income, but not against the corpus of the trusts. We conclude the department's right to recover Medicaid payments under the facts of this case extends beyond the trustors' net income interests. We further conclude the district court erred in its determination of the scope of medical assistance for which recovery has been authorized by the general assembly. Accordingly, we reverse and remand for further proceedings.

I. Background Facts and Proceedings.

Arnold and Vesta Melby (the Melbys) owned a farm in Monona County. In 1991, Arnold and Vesta created substantially identical irrevocable trusts and funded the trusts with their respective one-half interests in the farm. The trusts named the Melbys' son Duane as trustee.

The trusts contained several terms addressing administration. The trusts were to pay net income to their respective trustors while the trustors were living. ¹ Upon the death of a trustor, in the event the trustor had no other resources available, each trust was to pay “all expenses of” its respective trustor's “last illness and funeral,” “any indebtedness owed by the Trustor,” and “any estate tax, gift tax, inheritance tax or income tax owed by the Trustor.” ² Each trust also provided the surviving spouse net income from the decedent spouse's trust upon the decedent's death. Then, following the deaths of both trustors, each trust directed any remaining assets be distributed in equal shares to the Melbys' three children.

In November 2000, Vesta was deemed eligible for and began receiving Medicaid benefits. She passed away in December 2002. The Iowa Department of Human Services (the department) later advanced evidence it had made Medicaid payments totaling $53,118.62 on Vesta's behalf. Vesta's assets at the time of her death, excluding any interest in the corpus of her trust, totaled $661.97, and her estate was probated without present administration.

After Vesta's death, Duane submitted a Medicaid Debt Response Claim Form and information about Vesta's trust for the department's review. The director of the department concluded there were no assets in Vesta's estate from which the department could recover the Medicaid payments it had made on her behalf. The department advised Duane to dispose of the trust assets as he deemed appropriate. Because Arnold was still living, Vesta's trust was administered to provide him with net income in accordance with the surviving spouse provision.

In January 2002, Arnold was deemed eligible for and began receiving Medicaid benefits. Arnold continued to receive Medicaid benefits for several years, until he passed away in November 2009. The department later advanced evidence it had made Medicaid payments totaling $251,254.14 on Arnold's behalf. Arnold's assets at the time of his death, excluding any interest in the corpus of his trust or Vesta's trust, totaled $2529.25.³

Following Arnold's death, Duane and the Melbys' daughter Sharon were appointed coexecutors of Arnold's estate (the estate). Duane submitted a new Medicaid Debt Response Claim Form to the department's Estate Recovery Program, detailing Arnold's assets and expenses and his trust information. Reviewing Arnold's trust documentation, the department concluded Arnold had an interest in his trust beyond the net income interest from which the department could recover the Medicaid payments it had made on his behalf.

The department's review of Arnold's file also prompted a new review of Vesta's file. After this second review, the department concluded it had mistakenly determined Vesta held no interest in her trust beyond her net income interest from which the department could recover the Medicaid payments made on her behalf. The department therefore notified the estate it would seek reimbursement for all Medicaid expenses it had paid on behalf of Arnold and Vesta, in the total amount of $321,263.96.

Duane and Sharon filed a petition for probate of Arnold's estate as a small estate. The department filed its Medicaid recovery claim, but the claim was denied. In December 2010, the farm was sold for $904,024 and proceeds were set aside in an amount sufficient for repayment of the Medicaid claim if required by an order of the court. In January 2011, Duane passed away, and Sharon was appointed as successor trustee of both trusts. Sharon transferred the sale proceeds from Iowa to Oregon, where she resides.⁴

The department filed an application in the estate seeking a judgment declaring the Melbys had interests in the corpus of their trusts—in addition to the income interests—that should be counted as assets available for repayment of the department's Medicaid claim. The estate filed its resistance again denying the department's claim. The trustee of the Melby trusts filed a general appearance and answer joining in the defenses asserted by the estate.

After a bench trial on the department's contested claim and application in September 2011, the district court concluded the Melbys' interests in the trusts at the time of their deaths were limited to net income from the trusts, and thus the department's right to recover was limited to $3191.22. Both the department and the estate then moved to enlarge and amend the district court's ruling. After considering these motions, the district court amended its order, ruling: (1) the Medicaid payments made on behalf of the Melbys did not constitute debts of the Melbys under Iowa's Medicaid recovery statute—instead, the payments constituted debts of the Melbys' estates; (2) the department was entitled to recover from the income interests available to the Melbys at the time of their deaths but was not entitled to recovery from the corpus of the trusts; (3) any right of recovery for Medicaid expenses established under the recovery statute was limited to “medical assistance” as defined in section 249A.2(7) of the statute; (4) the department had provided sufficient evidence to establish the amounts it paid on behalf of the Melbys; (5) the department had failed to demonstrate its Medicaid payments constituted “expenses of last illness” as contemplated by the language of the trusts given the structure of the probate debt classification provision in Iowa Code section 633.425; (6) the court had jurisdiction to decide the department's claims notwithstanding the location of the trust assets in Oregon.

On appeal, the department asserts the district court erred in limiting the department to recovery from the Melbys' income interests in the trusts. The department contends caselaw and the language and structure of the Medicaid recovery statute instead establish the department's right to recover from both the Melbys' income interests and the corpus of the trusts. The department also contends the district court erred in concluding the department was limited to recovery of expenses incurred for provision of the narrowly drawn categories of services listed within the definition of “medical assistance” in section 249A.2(7) of the recovery statute. The plain language of the recovery provision at issue, the department argues, allows for a broader recovery. The estate cross-appeals, contending the district court erred in determining the department produced substantial evidence it had paid medical assistance under Iowa Code section 249A.5(2), and therefore, the district court should have denied any recovery.

II. Scope of Review.

The department's claims in this case were tried in a probate proceeding. Contested claims in probate are tried and reviewed at law. Iowa Code § 633.33 (2011); see also In re Barkema Trust, 690 N.W.2d 50, 53 (Iowa 2004) (citing Iowa Code § 633.33). We review the district court's interpretation of statutory provisions for errors at law. In re Estate of Whalen, 827 N.W.2d 184, 187 (Iowa 2013).

III. Discussion.A. Recovery of Medicaid Payments Under Section 249A.5.

We have previously undertaken a three-part analysis in determining whether certain trust assets may be subject to Medicaid recovery under our Medicaid recovery statute's provisions. See Barkema, 690 N.W.2d at 53, 55–56;see also In re Estate of Gist, 763 N.W.2d 561, 565 (Iowa 2009). That analysis has typically required a classification of the trust at issue, a determination of whether the beneficiary's interest in the trust is a type included in the recovery statute's definition of the recipient's estate, and a determination of whether that interest existed at the time of the medical assistance recipient's death. See Gist, 763 N.W.2d at 565.⁵ 1. Trust classification. The Medicaid recovery statute defines a Medicaid assistance recipient's estate, for purposes of Medicaid recovery, as including any asset “in which the recipient ... had any legal title or interest ... including ... interests in trusts.” Iowa Code § 249A.5(2)( c ). In both Barkema and Gist, we were tasked with determining the nature of a decedent Medicaid recipient's interest in a trust. See Gist, 763 N.W.2d at 564–65;Barkema, 690 N.W.2d at 53–55. In each case, the decedent's estate disputed the extent of the recipient's...