Introduction
It is well-known that long-term care can be extremely expensive. Medicare only covers up to one hundred days of long-term care expenses if certain qualifying criteria are first met. Once a resident uses up the majority of his or her assets for the cost of such care, the Medicaid program for the indigent may step in to cover the long-term care expenses of the resident. However, Medicaid will not permit certain asset transfers for a resident who is claiming an inability to pay based on lack of funds. A resident applying for Medicaid assistance for long-term care risks being rejected for coverage due to Medicaid’s “look-back” regulation concerning asset transfers made by the Medicaid applicant within a certain period of time. Alternatively, a cause of action for fraudulent transfer of assets may also give rise to resident liability as well as for those who accepted the assets as part of a scheme to defraud creditors in certain situations. This article will discuss different types of impermissible transfers that give rise to liability for residents in skilled nursing and long-term care facilities. Specifically, it will compare and contrast proving a fraudulent transfer by a debtor as to a creditor under the Illinois Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/1 et seq. and showing a disqualifying transfer under Medicaid’s look-back rule, most importantly as it relates to the requisite intent in both scenarios.
Medicaid Look-Back Provision
The Medicaid look-back provision imposes penalties on long-term care applicants who have made “disqualifying transfers” within the look-back period. The purpose of the Medicaid look-back provision is to ensure that Medicaid applicants who have sufficient funds to pay for their long-term care do not try to quickly “spend down” funds to meet the Medicaid asset limit. See https://www. medicaidplanningassistance.org/medicaid-look-back-period/.
There are state requirements for Medicaid look-back, but while different states may make their own rules, they need to stay within certain parameters, 42 U.S.C.A. § 1396p. Every state, with the exception of California, has a look back period of 60 months (California’s look back period is 30 months). See https://www. medicaidplanningassistance.org/medicaid-look-back-period/.
All disqualifying transfers made within the look-back period will be presumed to have been made with the intention of avoiding the Medicaid asset limit. Drogolewicz v. Quern, 74 Ill. App. 3d 862, 866 (1st Dist. 1979). This presumption is outlined in Drogolewicz where the court compared this presumption to one made when a debtor transfers funds in derogation of a creditor’s interest. Id. at 865. The court justified its reasoning by stating that before the State was to disburse its funds for personal medical costs, it was not unreasonable for the individual to prove that he had not created a false sense of need, and if such proof could not be given, the availability of assets is to be inferred. Id. at 865-66.
A disqualifying transfer is a transfer made for under the market value or a gift of assets given outside of any exceptions to the look-back rule. There are many exceptions to the look-back rule, such as a gift exception, which varies from state to state. However, the gift exception is always less than the IRS gift exemption for tax law. There is also an exception for gifts, such as trusts, made for the benefit of minor children, and many more, but that is beyond the scope of this article. See https:// www.medicaidplanningassistance.org/ medicaid-look-back-period/. If Medicaid finds that there is an inadequate transfer of assets under the look-back provision, a penalty will be applied. The penalty would be equivalent to the value of all countable assets that were given away or sold under fair market value divided by the average cost of long-term nursing care in the state, which calculates the numbers of days the individual could have paid for his or her own care had the assets not been divested.
Fraudulent Transfers
The Illinois Uniform Fraudulent Transfer Act allows for a cause of action where there is a transfer of property in order to evade a creditor. Illinois courts have divided these fraudulent conveyances into either actual fraud (fraud in fact) or constructive fraud (fraud in law). 740 ILCS 160/5. There are different methods of proving both causes of action; actual fraud requires proving intent, but constructive fraud does not.
Actual Fraud
In order to prove actual fraud, one must first prove actual intent to hinder, delay or defraud creditors. In re Martin, 145 B.R. 933, 946 (Bankr. N.D. Ill. 1992). The plaintiff or moving party has to prove specific intent. Id. To prove actual intent, courts will apply to the facts of the case the badges of fraud. UFTA delineates eleven badges of fraud in 740 ILCS 160/5(b) as follows: (1) the transfer was to an insider; (2) debtor retained possession or control of the property; (3) the transfer was disclosed or concealed; (4) before the transfer, the debtor had been sued or threatened with suit; (5) the transfer was substantially all of the debtor’s assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the value of consideration received for the transfer; (9) the debtor was insolvent or became insolvent after the transfer was made; (10) the transfer occurred shortly before or after a substantial debt was incurred; and (11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. The badges are not an exhaustive list and are strongly fact driven. When there are a sufficient number of these “badges,” an inference or presumption of fraud is made. In re Zeigler, 320 B.R. 362 (Bankr. N.D. Ill. 2005).
Constructive Fraud
Constructive fraud, or fraud in law, does not require a showing of fraudulent intent. In re Zeigler, 320 B.R. at 374. When the elements of constructive fraud are met, there is a presumption of intent to defraud. Id. There is a long line of precedent that has established that constructive fraud occurs when (1) a voluntary gift is made, (2) there is an existing or contemplated indebtedness against the debtor, and (3) the debtor has failed to retain sufficient property to pay the indebtedness. Apollo Real Estate Inv. Fund, IV, L.P. v. Gelber, 403 Ill. App. 3d 179, 193, (1st Dist. 2010). The UFTA allows for causes of action in both cases where the transfer takes place before and after the debt is incurred. 740 ILCS 160/5(a)(2); 740 ILCS 160/6(a). The main component of a constructive fraud claim is the showing of the reasonable value that was given in consideration for the transfer. Illinois courts define a voluntary gift as a transfer made in exchange for inadequate consideration. In re Zeigler at 374. In Anderson v. Ferris, 128 Ill. App. 3d 149, 153 (3d Dist. 1984) the court held that a pending lawsuit is sufficient to show a contemplated indebtedness, but one can assume that other factors—such as being dropped from Medicaid or insurance coverage ending during long term care—can show a contemplated indebtedness.
Fraud claims under UFTA, both actual and constructive, are extinguished four years after the transfer, or one year after the transfer was discovered or reasonably could have been discovered. 740 ILCS 160/10.
Medicaid Look-Back vs Fraudulent Transfers
The major similarity between the Medicaid look-back provisions and fraudulent transfers deal with constructive fraud. In both cases, there is a presumed requisite intent. Further, this presumption arises in both cases when a gift is given, or an asset is transferred for inadequate consideration. The determination is based mostly on the consideration given for such a transfer rather than the individual’s state of mind at the time.
However, that is where the similarities end. In a constructive fraud claim, the plaintiff must show a contemplated or actual indebtedness in order to state a cause of action. In contrast, Medicaid’s look-back provision assumes that any disqualifying transfer was made for the purpose of avoiding the Medicaid asset limit if that transfer was made within five years of the Medicaid application. In other words, Medicaid’s provision is an automatic penalty for such a transfer, and no other factors are taken into consideration. Fraudulent transfers, especially actual fraud, are extremely fact driven and take into consideration the actual circumstances of the transfer. Medicaid’s look-back provision also has a longer timeframe for when a transfer can affect a person. In most states, a transfer can impact a person’s ability to receive Medicaid for five years, but a fraudulent transfer cause of action must be made within four years of the transfer.
Conclusion
While some similarities exist between the Medicaid look-back provision and a cause of action under the UFTA, there is a much lower burden for a transfer to be deemed disqualifying under the Medicaid look-back provision. This provision does not rely so much on intent as it does whether such a transfer was made. Compared to a heavily fact-driven analysis under the fraudulent transfer causes of action, Medicaid presumes intent solely from the transfer of property.
The Illinois Human Rights Act was recently amended, effective March 23, 2021. Public Act 1010656. The Illinois Human Right Act generally covers unlawful discrimination. This amendment covers the use of criminal convictions in employment decisions.
A different Illinois Law already makes it unlawful to inquire about or consider or require disclosure of a criminal record or criminal activity of an applicant for employment until that applicant has been determined qualified for the position and has been notified that the applicant has been selected for an interview or a conditional offer of employment has been made to the applicant. See the Job Opportunities for Qualified Applicants Act, 820 ILCS 75 et.seq. (This law does not apply if employers are prohibited by law from hiring someone with certain criminal convictions or if an applicant must be eligible for fidelity bonding, and that criminal conviction would prohibit such bonding.)
In general terms this new amendment states it is a civil rights violation for any employer, employment agency, or labor organization to use a conviction record as a basis to refuse to hire, to segregate, or to act with respect to recruitment, hiring, promotion, renewal of employment, selection for training or apprenticeship, discharge, discipline, tenure, or terms, privileges or conditions of employment with limited exceptions. Those exceptions are:
1. If there is a substantial relationship between one or more of the previous criminal offenses and the employment sought or held;
2. The granting or continuation of employment would involve an unreasonable risk to property or to the safety, welfare of specific individuals or the general public; or
3. The employer’s actions are otherwise authorized by law.
The employer is required to consider a number of factors in making a decision.
1. The length of time since the conviction.
2. The number of convictions that appear on the record.
3. The nature and severity of the conviction and its relationship to the safety and security of others.
4. The facts or circumstances surrounding the conviction.
5. The age of the employee at the time of the conviction.
6. Evidence of rehabilitation efforts.
If, after considering these factors, an employer makes a preliminary decision that the employee’s criminal conviction disqualifies him or her, then the employer is required to notify the employee of this preliminary decision in writing. That written notice must contain all of the following:
1. Notice of the conviction(s) that form the basis of the disqualification.
2. A copy of the conviction history report, if any.
3. An explanation of the employee’s right to respond to the preliminary decision before it becomes final. That explanation must inform the employee that a response may include, but is not limited to, evidence challenging the accuracy of the information, or evidence of mitigation such as rehabilitation.
The employee must have a minimum of 5 business days to respond before the employer makes a final decision, and the employer must consider any such response in making that final decision.
If that final decision is to disqualify or take an adverse action solely or partly because of the conviction, the employer must then notify the employee in writing of the following:
1. Notice of the conviction that formed all or part of the basis for disqualification or adverse action and the employer’s reasoning.
2. Any procedures the employer may have in place for the employee to contest the decision or to request reconsideration.
3. The employee’s right to file a charge alleging discrimination with the Illinois Department of Human Rights.
This new law does not seem to require a procedure to allow an employee to contest a decision, but employers should carefully consider whether to adopt such a procedure and what it should look like. Employers such make sure those charged with making these decisions are up to date on these laws. They should amend whatever forms are used in these processes to take this new law into account. If a final decision is being made to disqualify, consult with a lawyer to ensure compliance.
Also, in Illinois, you cannot use criminal history records of arrests or convictions in your decision to hire if those records have been ordered expunged. See 775 ILCS 5/2-103.
A lot has been written about the use of criminal arrest and conviction records in employment decisions. Generally, do not use arrest records in your decision making unless you have independent proof the applicant engaged in the criminal conduct. Do not have a blanket policy of refusing to hire solely on any type of criminal arrest or conviction record. Develop a narrowly written policy for screening that should include how recent a conviction must be to affect your decision, the types of convictions considered in making employment decisions, i.e. those involving dishonesty, and of course keep these records confidential.
In addition to Illinois laws, federal law applies to employment practices. Both Cook County and the City of Chicago have also adopted ordinances specifically on the use of criminal convictions in employment decisions. This area of the law is extremely complicated and has harsh consequences for failure to comply. All employers should review their policies on finding new employees, hiring them, and on promotions and renewals of employment, to ensure compliance.
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