Business Law

Gonzalez v. City National Bank (June 24, 2019, B284521) __ Cal.App.5th __ [2019 WL 2576537]

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Residue of a special needs trust must reimburse DHCS for Medi-Cal payments to deceased beneficiary.

After Brenda Gonzalez suffered birth injuries, a medical malpractice suit brought on her behalf yielded a $2.4 million settlement. A court placed the settlement funds in a special needs trust, thereby preserving Brenda’s eligibility for Medi-Cal benefits while sheltering money to meet any special needs not covered by Medi-Cal. Brenda died while there was still about $1.6 million left in the trust. The Department of Health Care Services (DHCS) filed a nearly $4 million creditor’s claim with the probate court to recoup Brenda’s Medi-Cal expenses. Brenda’s parents (plaintiffs) then petitioned the probate court for an order denying DHCS’s claim and, instead, directing the trustee to distribute the funds to them. The probate court ruled that federal and state law required the trustee to reimburse DHCS for Brenda’s Medi-Cal expenses before disbursing funds to her heirs. Plaintiffs appealed.

The Court of Appeal affirmed. Plaintiffs had argued that—under Shewry v. Arnold (2004) 125 Cal.App.4th 186, as well as former Welfare and Institutions Code section 14009.5, and Probate Code section 3605, subdivision (b)—the trustee was prohibited from reimbursing DHCS’s Medi-Cal payments since Brenda was under age 55 at the time of her death. But the Court of Appeal followed Herting v. State Dept. of Health Care Services (2015) 235 Cal.App.4th 607, which had reached the opposite conclusion from Shewry. Under 42 U.S.C. § 1396p(d)(4)(A), states should not consider the assets in a special needs trust when determining Medicaid eligibility if the state will receive reimbursement for Medicaid payments upon the beneficiary’s death. Congress enacted section 1396 to prevent Medicaid recipients from receiving taxpayer-funded health care as they shelter their own assets for their own benefit. As Herting concluded, section 1396 does not limit DHCS reimbursements to services provided to beneficiaries older than 55, and construing Probate Code section 3605 to impose that limitation would render the statute preempted by section 1396. Further, public policy favors reimbursing DHCS to maximize the funds it can provide to others in need. Finally, requiring reimbursement was consistent with the language of the trust itself, which anticipated paying remaining assets to a state agency that had provided Brenda medical assistance.

The bulletin describing the Court of Appeal’s decision was originally prepared for the California Society for Healthcare Attorneys (CSHA) by H. Thomas Watson and Peder K. Batalden, Horvitz & Levy LLP, and is republished with permission.

For more information regarding this bulletin, please contact H. Thomas Watson, Horvitz & Levy LLP, at 818-995-0800 or

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