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The nursing home where a Medicaid recipient died should be paid from the proceeds of the sale of her home before Medicaid is reimbursed, a divided state appeals panel has ruled, reversing a lower court judge.

Appellate Division, First Department Justice Rolando Acosta (See Profile) wrote the 3-1 majority opinion in Matter of Shannon, 92560/08, joined by Justices Peter Tom (See Profile) and Barbara Kapnick (See Profile). He wrote that the nursing home’s claims took precedence because they arose against the woman’s guardian while she was still alive, while Medicaid’s claims arose only against her estate after she died.

Justice Helen Freedman (See Profile) dissented.

The woman, Edna Shannon, died in December 2011 at Eastchester Rehabilitation & Health Care Center, where she had been living since 2005. Tuesday’s ruling means that Eastchester will be able to collect the balance of the home sale proceeds for care it provided, while the Westchester County Department of Social Services, which administered Shannon’s Medicaid benefits, will get nothing.

According to Nancy Levitin, a partner at Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara & Wolf who represents Eastchester, the decision marks a departure from previous court rulings, which have generally found that Medicaid’s claims on funds belonging to decedents take precedence. She said she was not aware of any First Department precedent on the issue.

Sarah Lichtenstein, another partner at the firm who worked on the case, said she was “gratified that the court understood and acknowledged the distinction between claims of creditors such as nursing homes that arise during the lifetime of an incapacitated person who has had a guardian appointed, and claims of the Department of Social Services for Medicaid reimbursement, which arise only against the estate of a deceased.”

Lichtenstein said the case was significant because similar situations, in which a nursing home and Medicaid have competing claims on a deceased incapacitated person’s assets, arise frequently.

Shannon, who was 87 when she died, came under the court-ordered guardianship of Family Service Society of Yonkers, a home care agency, in April 2009. The guardianship order gave Family Service Society the authority to pay Shannon’s nursing home expenses and to pay her bills after her death.

Also in 2009, the Westchester County Department of Social Services determined that Shannon was eligible for Medicaid benefits, effective September 2008, though these benefits did not cover the entire cost of her treatment. In June 2010, Eastchester filed a claim with Family Service Society stating that it was owed more than $164,000 for treatment not covered by Medicaid. By the time of her death, the total bill was over $222,000.

In November 2010, Family Service Society sold Shannon’s home for about $300,000 to help pay for her treatment. The Westchester DSS also told Family Service Society that it had a claim on Shannon’s estate for Medicaid reimbursement. Medicaid generally has the right to recover payments made for the care of people older than 55 from the assets of their estates.

After Shannon died, the DSS told Family Service Society that her estate owed more than $270,000, and claimed that it had a preferred claim on the state pursuant to Social Services Law §104(1), which states: “In all claims of the public welfare official made under this section the public welfare official shall be deemed a preferred creditor.” Eastchester, meanwhile, still claimed over $222,000.

Family Service Society petitioned the Bronx Supreme Court for a final accounting. Justice Howard Sherman ruled that, after paying administrative and legal fees, the balance of Shannon’s estate, about $188,000, would be turned over to the DSS, because it had the superior claim on the funds. Sherman found that Eastchester might have had an equal claim on the funds if it had reduced its claim to a judgment, but because it had not, it had only a general claim. Eastchester appealed.

Payment From Guardianship

Acosta, in his opinion reversing Sherman’s decision, ruled that Eastchester should be paid first because Eastchester was not being paid from the estate at all, but from Family Service Society’s guardianship. Only after Family Service Society paid Shannon’s bills did the money from the sale of Shannon’s home become part of her estate, and subject to DSS’s claim, he said.

“As Eastchester was to be paid out of the guardianship account before any funds passed to the estate, its claim had priority over DSS’ claim.”

“DSS, as a preferred creditor pursuant to SSL §104, had a priority claim only against the estate,” Acosta wrote. “Contrary to the court’s conclusion, it was irrelevant that Eastchester had not reduced its lien to a judgment, which would have given it priority over competing creditors, because DSS had no viable competing claim against Shannon’s guardianship account.”

Freedman, in her dissent, said Sherman should have been affirmed.

She said that Family Service Society, as guardian, had authority to retain funds only “equal in value to the claim for administrative costs, liens and debts,” citing Mental Hygiene Law §81.44.

The majority interpreted that language to mean that the guardian could retain funds for all kinds of “liens and debts” including Eastchester’s claim. Freedman, however, said that the law meant only that it could retain funds for costs, liens and debts directly related to the administration of the guardianship.

“Inasmuch as Eastchester’s claim for services was unrelated to the administration of the decedent’s guardianship, the guardian could not retain the funds to pay the claim under Mental Hygiene Law §81.44(d); rather, the guardian was required to turn the funds remaining after covering administrative expenses over to the personal representative of the decedent’s estate,” she wrote.

Freedman also agreed with Sherman that if Eastchester had reduced its claim to a judgment, it may have had a claim equal to DSS.

Eileen Campbell O’Brian and James Castro-Blanco of the Westchester County Attorney’s office represented the DSS. The county declined to comment.