Dun Dun Dun... More Trouble for Promissory Notes

DE PERE, Wis. - July 30, 2013 - PRLog -- In the matter of Landy v. Velez (U.S. Dist. Ct., D.N.J., No. 2:11-5862 (KM), July 17, 2013), a federal district court considered three promissory notes purchased by two Medicaid applicants to be available, countable resources that rendered the applicants ineligible for Medicaid.

John Landy entered into two promissory notes with his former employer in 2010.  Each note was for the amount of $100,000.  The April 2010 transaction was a demand note, held an annual interest rate of 4%, was not backed by any collateral, did not have a repayment term that was actuarially sound, and did not provide for equal payments.  It did, however, contain an acknowledgement of an obligation to repay the balance upon Mr. Landy's death.  The October 2010 transaction held an interest rate of 1%, contained a payment duration that was actuarially sound, prohibited balloon or deferral payments, and required repayment upon Mr. Landy's death.

Margaret Sauchelli entered into a promissory note with her granddaughter in 2011.  The note had an interest rate of 1%, contained payment duration that was actuarially sound, prohibited balloon or deferral payments, and required repayment upon Ms. Sauchelli's death.

The court considered Mr. Landy's April 2010 note countable and available in that it was a demand note.  Amounts outstanding on a demand note are unquestionably available to the lender, who has the right, authority, or power to liquidate the asset at will (N.J. Admin. Code § 10:71-4.1(c)).

The court further considered that Mr. Landy's October 2010 was not made in good faith, and neither was Ms. Sauchelli's promissory note.

As provided in Sable, 437 Fed. App'x at 77; Wesner, 2010 WL at *8, to determine whether a loan was entered into in good faith, a court should look at all of the facts and circumstances surrounding it, such as whether:

   The entities are related or are at arm's length;
   The lender is in the business of lending money;
   The borrower has power of attorney over the lender;
   The loan is backed by collateral;
   Documentation existed regarding the borrower's ability to repay the loan;
   The date of the loan is close to the date the lender applied for Medicaid;
   The amount of the loan brought the lender close to or under the maximum resource threshold for Medicaid eligibility;
   Payments on the loans were late; and
   The loan was disclosed on the lender's Medicaid application.

It was determined that all three notes were trust-like devices, in that the parties were in a relationship of atypical trust and confidence - in other words, a fiduciary relationship.