Kadingo v. Johnson

Decision Date26 January 2017
Docket NumberCivil Action No. 15–cv–02835–NYW
Citation304 F.Supp.3d 1003
Parties Lilafern KADINGO, Plaintiff, v. Lynn A. JOHNSON, in her official capacity as director of the Jefferson County Department of Human Services, and Susan E. Birch, in her official capacity as Executive Director of the Colorado Department of Health Care Policy and Financing, Defendants.
CourtU.S. District Court — District of Colorado

Lance Eric McKinley, R. Eric Solem, Solem, Mack & Steinhoff, P.C., Englewood, CO, for Plaintiff.

Eric Thomas Butler, Joan S. Heller, Rachel Jane Marilyn Bender, Jefferson County Attorney's Office, Golden, CO, Jennifer Lee Weaver, Michael D. McMaster, Colorado Attorney General's Office, Denver, CO, for Defendants.


Magistrate Judge Nina Y. Wang

This matter comes before the court on Defendants Lynn A. Johnson and Susan E. Birch's (collectively, "Defendants") Joint Motion to Dismiss First Amended Complaint (the "Motion to Dismiss"). [# 42, filed July 13, 2016]. The Motion to Dismiss is before the undersigned Magistrate Judge pursuant to 28 U.S.C. § 636(c) and the Order Referring Case dated January 29, 2016 [# 16]. After carefully considering the Motion to Dismiss and associated briefing, the entire case file, the applicable case law, and the comments offered during the September 15, 2016 Motion Hearing, the Motion to Dismiss is GRANTED IN PART and DENIED IN PART.


On December 11, 2015, Plaintiff Lilafern Kadingo ("Plaintiff" or "Ms. Kadingo") commenced this action in the District Court of the City and County of Denver. See [# 1 at 1]. Defendants filed their Notice of Removal in the federal district court for the District of Colorado on December 30, 2015, pursuant to 28 U.S.C. § 1331, because Plaintiff's Complaint alleged violations of her constitutional rights and sought relief under 42 U.S.C. § 1983. [Id. at 2]. However, on January 29, 2016, the court granted the Parties a 60–day stay, eventually extended to 90 days, of the proceedings to pursue settlement negotiations. See [# 17; # 22].

Because settlement negotiations were unsuccessful, Defendants responded to Plaintiff's Complaint with their first Joint Motion to Dismiss Plaintiff's Complaint on May 10, 2016. [# 28]. The court denied as moot Defendants' first Joint Motion to Dismiss in light of Plaintiff's notice of filing the First Amended Complaint with Defendants' consent. [# 39]. On June 29, 2016, Plaintiff filed her First Amended Complaint [# 38], which remains the operative Complaint in this matter.

Plaintiff's First Amended Complaint alleges that she is a ninety-two (92) year old woman who "is incapacitated with dementia and physical disabilities." [# 38 at ¶ 1–2]. Plaintiff currently resides in a nursing home in Thornton, Colorado, and her son, John Kadingo, "holds a durable power of attorney for [her]." [Id. at ¶¶ 3–5]. Plaintiff's husband, Hubert Kadingo, passed away on May 16, 2011, and through his will he devised one-half of his estate via the Lilafern Kadingo Trust (the "Trust") to Plaintiff and one-half via a separate trust to his children. [Id. at ¶¶ 6–7].1 The Trust is a pure discretionary trust that granted sole and absolute discretion to the trustee regarding distributions to Plaintiff, the sole beneficiary of the Trust. [Id. at ¶ 11]. Further, Plaintiff alleges that the Trust did not constitute a property interest of Plaintiff's under Colorado law, that the Trust did not constitute a countable resource under state or federal Medicaid law, and that the Trust is a proper "third party trust" that is "not countable under Colorado law as a ‘third party trust’ because it had a sole and absolute discretionary standard." [Id. at ¶¶ 12–15].

In November 2011, Innovage2 prepared and filed a Medicaid application on behalf of Plaintiff as her authorized representative. [Id. at ¶¶ 16–21]. Plaintiff alleges that prior to receiving Medicaid benefits she spent all of her cash assets, with her only asset being a one-half interest in the residence—an exempt homestead under state and federal law. [Id. at ¶¶ 23–25]. Further, that she was not required to sell her residence under Medicaid laws or regulations, and that it was Innovage's responsibility to report her residence and the Trust on her Medicaid application. [Id. at ¶¶ 26–27].

Nevertheless, Plaintiff contends her residence and the Trust would not have affected her eligibility for Medicaid, even if properly reported in November 2011. [Id. at ¶ 28]. Ultimately, Plaintiff sold her residence and informed Jefferson County of the sale on multiple occasions. [Id. at ¶¶ 32–34].

On July 16, 2014, Leanne Gardner of the Colorado Department of Health Care Policy and Financing ("CDHCPF") informed John Kadingo that Plaintiff received an overpayment of $98,703.52 in Medicaid benefits, and that the CDHCPF sought only to recover that overpayment. [Id. at ¶ 35]. Plaintiff alleges that Ms. Gardner never mentioned a "transfer without fair consideration." [Id. ]. Then, on or about July 25, 2014, the Jefferson County Department of Human Services ("JCDHS") sent Plaintiff a notice (the "July 2014 notice") that she was "over resourced;" however, according to Plaintiff, the notice was deficient as it cited an incorrect regulation and was sent directly to Innovage who did not forward it to Ms. Kadingo. [Id. at ¶¶ 37–39]. The JCDHS informed Ms. Kadingo's attorney that they could not send an additional notice, as they can only send notices to one address. [Id. at ¶ 40].

An Administrative Law Judge ("ALJ") conducted a hearing on the July 2014 notice, on July 17, 2015 and again on August 10, 2015 via telephone. [Id. at ¶ 41; # 51–1 at 4]. Following the hearings, the ALJ concluded that the July 2014 notice was defective; however, the ALJ considered the merits of Plaintiff's case on the theory of transfer without fair consideration rather than over-resourced. [Id. at ¶ 42]. The ALJ concluded that there was a transfer without fair consideration in the amount of $87,000 based solely on his review of past, not future, expenditures from the Trust. [Id. at ¶ 46]. Ultimately, the ALJ issued Plaintiff a future disqualification of benefits penalty rather than a past disqualification that Plaintiff alleges is required by federal and state law. [Id. at ¶ 47; # 47–4 at 1 (the ALJ imposed a fourteen-month disqualification period to begin upon entry of the Final Agency Decision) ].

Plaintiff alleges that this hearing violated her due process rights. [Id. at ¶ 43]. First, the hearing was fundamentally unfair, as Plaintiff did not receive proper advance notice of the basis for the alleged overpayment. [Id. at ¶ 44]. Next, Plaintiff alleges that the ALJ applied the wrong standard of proof in the case and improperly shifted the burden of proof on Plaintiff rather than the JCDHS. [Id. at ¶ 45]. In addition, Plaintiff did not have the opportunity to contest the penalty methodology used by the ALJ, because "issues of state and federal law are beyond the jurisdictional authority of the [ALJs] in Colorado." [Id. at ¶ 47]. Plaintiff filed a motion for an extension of time to appeal the ALJ's decision on September 8, 2015, which the Office of Appeals of CDHCPF denied. [Id. at ¶ 48]. Thus, the CDHCPF issued a Final Agency Decision on October 30, 2015, affirming the ALJ's decision and imposing the fourteenth-month disqualification period as of the date of its order. See [# 47–4 at 3].

Then, on June 14, 2016, the JCDHS issued a new notice ("June 2016 notice") to Plaintiff, imposing the fourteen-month disqualification period set to run from July 1, 2016 to August 31, 2017. [# 38 at ¶ 50]. The reason for imposing the fourteen-month penalty was Plaintiff's transfers without fair consideration based on her failure "to elect against her spouse's estate and [her failure] to obtain a family allowance and exempt property allowance from her spouse's estate." [# 38 at ¶ 51]. Apparently, the June 2016 notice was an attempt to cure the deficiencies of the July 2014 notice, but was not a new notice that Plaintiff could appeal on the merits. See [# 51–1 at 4–5]. And, on October 25, 2016, the ALJ dismissed Plaintiff's appeal of the June 2016 notice, because the ALJ had already heard the case and the CDHCPF already issued a Final Agency Decision on the matter. [Id. at 5].

Though not entirely clear, Plaintiff's First Amended Complaint asserts five claims against Defendants and seeks declaratory relief under Rule 57 of the Federal Rules of Civil Procedure as well as reasonable attorney's fees under 42 U.S.C. § 1988. [# 38 at 27–30]. It appears that Plaintiff seeks a declaratory judgment that Defendants: (1) violated federal law, specifically 42 U.S.C. §§ 1396p(c)(2)(B)(i), 1396p(d)(2)(A), 1396a(a)(18), with their policy and practice of interpreting a spouse's failure to elect against the decedent spouse's will as a transfer without consideration, infringing her rights to a testamentary trust that would be exempt from consideration under Medicaid ("Claim I");3 (2) violated 42 U.S.C. § 1396p(c)(1)(E)(i)(I), by failing to treat Mr. Kadingo's testamentary trust as equivalent to an elective-share trust under Colorado law and assessing a transfer penalty ("Claim II"); (3) violated 42 U.S.C. § 1396p(c)(1)(D)(ii),4 because the ALJ ignored the state regulations and arbitrarily implemented the disqualification penalty in contravention of federal law by utilizing a start date that was not the first day of the month during or after the date in which assets were transferred ("Claim III"); (4) violated 42 U.S.C. § 1396a(a)(3) and the Fourteenth Amendment of the United States Constitution, because they provided Plaintiff deficient notice of the termination of her Medicaid benefits and failed to provide her a fair and impartial hearing, and seeking a declaration that 10 C.C.R. 2505.10, 8.057.8.D and 8.057.8.E are unconstitutional ("Claim IV"); and (5) violated 42 U.S.C. § 1396p(c)(2)(C) with their policy and practice of applying transfer penalties when an individual fails to elect...

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