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GESTON v. OLSON

CASE NO. 1:11-CV-044.

857 F.Supp.2d 863 (2012)

John and Carolyn GESTON, Plaintiffs,

v.

Carol K. OLSON, in her official capacity as Executive Director of the North Dakota Department of Human Services, Defendant.

United States District Court, D. North Dakota, Southwestern Division.

April 24, 2012.

Order Denying Motion for Stay Pending Appeal August 1, 2012.

Gregory C. Larson

Jeanne M. Steiner, Attorney General’s Office, Bismarck, ND, for Defendant.

ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT

DANIEL L. HOVLAND, District Judge.

This is a Medicaid eligibility case. Before the Court are cross-motions for summary judgment filed on August 22, 2011, and October 3, 2011, respectively. See Docket Nos. 10 and 13. A number of responsive pleadings were filed by both parties thereafter. See Docket No’s. 16, 20, 27, 31, and 34. Oral argument was held in Bismarck, North Dakota, on April 12, 2012.

I. BACKGROUND.

Plaintiff John Geston is a 73-year-old resident of the Missouri Slope Lutheran Care Center (Missouri Slope), a skilled nursing home facility located in Bismarck, North Dakota. He is considered the “institutionalized spouse” for Medicaid purposes. John Geston resided at Edgewood Vista Memory Care facility (Edgewood Vista) prior to moving to Missouri Slope. The cost of his care is $219.25 per day. See Docket No. 21-1. Plaintiff Carolyn Geston is married to John Geston. She lives in her home in Bismarck and is considered the “community spouse” for Medicaid purposes.

The defendant, Carol K. Olson, is the Executive Director of the North Dakota Department of Human Services (DHS). North Dakota has elected to participate in the Medicaid program and has designated DHS to implement the program. N.D.C.C. § 50-24.1-01.1. As Executive Director of DHS, Olson is responsible for the administration of the Medicaid program for the State of North Dakota. The Burleigh County Social Services Board acts under the direction and supervision of theDHS to administer the Medicaid program in Burleigh County, North Dakota.

John Geston entered Missouri Slope on April 19, 2011. His application for Medicaid benefits was filed with the Burleigh County Social Service Board on April 29, 2011. See Docket No. 15-1. An asset assessment was included with the application. See Docket No. 15-6. Eligibility rules limit the amount of assets or resources1 a married couple may possess and still qualify for Medicaid. The asset limit for the “institutionalized spouse” is $3,000. The asset limit for the “community spouse” is $109,560. The asset assessment determined that the Geston’s total countable assets were $699,144.80. as of July 21, 2010, the date John Geston entered Edgewood Vista. See Docket No. 15-6. Subtracting the Geston’s combined asset allowance of $112,560 produced an excess asset calculation of $586,854.80.

Thus, it was necessary to spend down the assets if John Geston was to be eligible for Medicaid benefits. A new car and home were purchased along with prepaid burial services, all of which are considered to be exempt assets. Carolyn Geston also purchased an annuity. See Docket No. 11-1. The single premium annuity was purchased on November 24, 2010, from Employees Life Company (Mutual) for $400,000. The annuity had an effective date of December 6, 2010, and provides Carolyn Geston with monthly income of $2,734.65. The income of the “community spouse” is not taken into consideration in making a Medicaid eligibility determination for the “institutionalized spouse.” The annuity is irrevocable, unassignable, and nontransferable. The annuity has a benefit period of thirteen (13) years, which period is actuarially sound because it is less than Carolyn Geston’s life expectancy which is slightly more than thirteen years. The North Dakota Department of Human Services is named as the primary beneficiary in the first position for at least the total amount of Medicaid benefits paid on behalf of the Gestons.

The record reveals that John Geston applied for Medicaid benefits on April 29, 2011. See Docket No. 21-1. The Medicaid application was denied on June 8, 2011. See Docket No. 11-2. The basis for denial was that the Gestons’ countable assets, which were calculated at $454,691.33, exceeded the $112,560 maximum. The annuity was valued at $383,592.10 which represented the purchase price minus the annuity payments already made. Carolyn Geston’s annuity failed to meet the criteria set forth in N.D.C.C. § 50-24.1-02.8(7)(b) and the annuity was determined to be a countable asset. If the corpus of Carolyn Geston’s annuity was not treated as a countable asset, John Geston would be eligible for Medicaid benefits.

This action was commenced in federal court on May 13, 2011. See Docket No. 1. The action is brought pursuant to 42 U.S.C. § 1983 and the Supremacy Clause. U.S. Const. art. VI. para. 2. The Gestons seek injunctive and declaratory relief declaring N.D.C.C. § 50-24.1-02.8(7) invalid and preempted by federal law because it is more restrictive than federal law and impermissibly allows DHS to consider a community spouse’s income in determining an institutionalized spouse’s Medicaid eligibility. The Court has federal question jurisdiction as the primary issue is whether thefederal Medicaid Act has been violated. See 28 U.S.C. § 1331.

II. STANDARD OF REVIEW.

Summary judgment is appropriate when the evidence, viewed in a light most favorable to the non-moving party, indicates that no genuine issues of material fact exist and that the moving party is entitled to judgment as a matter of law. Davison v. City of Minneapolis, Minn., 490 F.3d 648, 654 (8th Cir.2007); seeFed.R.Civ.P. 56(c). Summary judgment is not appropriate if there are factual disputes that may affect the outcome of the case under the applicable substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). An issue of material fact is genuine if the evidence would allow a reasonable jury to return a verdict for the non-moving party. Id.

The Court must inquire whether the evidence presents a sufficient disagreement to require the submission of the case to a jury or whether the evidence is so one-sided that one party must prevail as a matter of law.Diesel Mach., Inc. v. B.R. Lee Indus., Inc., 418 F.3d 820, 832 (8th Cir.2005). The moving party bears the burden of demonstrating an absence of a genuine issue of material fact. Simpson v. Des Moines Water Works, 425 F.3d 538, 541 (8th Cir.2005). The non-moving party “may not rely merely on allegations or denials in its own pleading; rather, its response must … set out specific facts showing a genuine issue for trial.” Fed. R.Civ.P. 56(e)(2). The court must consider the substantive standard of proof when ruling on a motion for summary judgment. Anderson, 477 U.S. at 252, 106 S.Ct. 2505.

There are no material facts in dispute in this case and only questions of law remain. The parties agree summary judgment is appropriate.

III. LEGAL DISCUSSION.

A. PRIVATE CAUSE OF ACTION UNDER 42 U.S.C. § 1983.

Before proceeding to the merits of the action it is necessary to determine whether the statutory provisions at issue provide the Gestons a private cause of action under 42 U.S.C. § 1983. The Gestons contend the North Dakota rules and regulations for Medicaid eligibility are in direct conflict with federal Medicaid law. Specifically, they argue that N.D.C.C. § 50-24.1-02.8(7)(b) adds requirements not authorized by Congress which conflict with 42 U.S.C. § 1396a(a)(10)(C)(i), 1396a(a)(17), 1396a(r)(2)(B) and 1396r-5(b)(1). Section 50-24.1-02.8(7)(b) of the North Dakota Century Code uses a formula which treats some annuities as an asset which results in John Geston being ineligible for Medicaid benefits. DHS contends the Medicaid provisions cited by the Gestons do not provide a private cause of action under 42 U.S.C. § 1983.

42 U.S.C. § 1983 provides a private cause of action for the “deprivation of any rights, privileges, or immunities secured by the Constitution and laws” of the United States. 42 U.S.C. § 1983. Section 1983 actions may be brought against state actors to enforce rights created by federal statutes or the Constitution. Gonzaga Univ. v. Doe, 536 U.S. 273, 279, 122 S.Ct. 2268, 153 L.Ed.2d 309 (2002). A plaintiff seeking 42 U.S.C. § 1983 redress “must assert the violation of a federal right, not merely a violation of federal law.” Blessing v. Freestone, 520 U.S. 329, 340, 117 S.Ct. 1353, 137 L.Ed.2d 569 (1997) (citingGolden State Transit Corp. v. City of Los Angeles, 493 U.S. 103, 106, 110 S.Ct. 444, 107 L.Ed.2d 420 (1989)) (emphases in original). The United States Supreme Court looks at three factors in deciding whether a particular statutory provision, enacted pursuant to Congress’s spending power,creates a private right of action under 42 U.S.C. § 1983; (1) Congress intended the provision to benefit the plaintiff; (2) the right asserted is not so “vague and amorphous” that its enforcement would strain judicial competence; and (3) the provision clearly imposes a binding obligation on the States. Center for Special Needs Trust Admin., Inc. v. Olson, 676 F.3d 688, 698-99 (8th Cir.2012); Lankford v. Sherman, 451 F.3d 496, 508 (8th Cir.2006). “If the legislation meets this test, there is a presumption it is enforceable under section 1983.” Lankford, 451 F.3d at 508 (citing Blessing, 520 U.S. at 341, 117 S.Ct. 1353). If the legislation meets the three Blessing prongs, it is presumed enforceable under Section 1983. The presumption is rebutted if Congress explicitly or implicitly forecloses enforcement under Section 1983. However, the availability of administrative remedies alone cannot defeat the plaintiff’s ability to invoke Section 1983. Lankford, 451 F.3d at 508. Congress has created no such enforcement scheme for Medicaid disputes, and DHS does not contend that Congress has done so. See Ark. Med. Soc’y, Inc. v. Reynolds, 6 F.3d 519, 528 (8th Cir.1993) (citing Wilder v. Va. Hosp. Ass’n, 496 U.S. 498, 520-23, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990)).

1. 42 U.S.C. § 1396A(A)(17).

One of the statutory provisions relied upon by the Gestons is 42 U.S.C. § 1396a(a)(17). This provision states as follows:

A state Medicaid plan must “include reasonable standards … for determining eligibility for and the extent of medical assistance under this plan.”

42 U.S.C. § 1396a(a)(17). In Lankford, the Eighth Circuit Court of Appeals found the statutory language that required state plans to include reasonable standards for determining eligibility in 42 U.S.C. § 1396a(a)(17) “insufficient to evince a congressional intent to create individually-enforceable federal rights.” Id. at 509. The Ninth and Tenth Circuits have also found that 42 U.S.C. § 1396a(a)(17) does not create a private cause of action under 42 U.S.C. § 1983. Watson v. Weeks, 436 F.3d 1152, 1162-63 (9th Cir.2006) (finding 42 U.S.C. § 1396a(a)(17) fails the first prong of the Blessing test as it fails to even mention persons or individuals); Hobbs v. Zenderman, 579 F.3d 1171, 1182-83 (10th Cir.2009) (finding no individual entitlement). The Court finds that the Gestons do not have a private cause of action under 42 U.S.C. § 1396a(a)(17).

2. 42 U.S.C. § 1396A(A)(10)(C)(I) AND 1396A(R)(2)(B).

The Gestons also rely on 42 U.S.C. § 1396a(a)(10)(C)(i) and 1396a(r)(2)(B). These statutory provisions must be read together as 42 U.S.C. § 1396a(r)(2)(B) defines the controlling phrase “no more restrictive.” The statutes provide as follows:

[T]he plan must include a description of (I) the criteria for determining eligibility of individuals in the group for such medical assistance, (II) the amount, duration, and scope of medical assistance made available toindividuals in the group, and (III) the single standard to be employed in determining income and resource eligibility for all such groups, and the methodology to be employed in determining such eligibility, which shall be no more restrictive than the methodology which would be employed under the supplemental security income program in the case of groups consisting of aged, blind, or disabled individuals in a State in which such program is in effect, and which shall be no more restrictive than the methodology which would be employed under the appropriate State plan (described in subparagraph (A)(i)) to which such group is most closely categorically related in the case of other groups;

42 U.S.C. § 1396a(a)(10)(C)(i) (emphasis added).

For purposes of this subsection and subsection (a)(10) of this section, methodology is considered to be “no more restrictive” if, using the methodology, additional individuals may be eligible for medical assistance and no individuals who are otherwise eligible are made ineligible for such assistance.

42 U.S.C. § 1396a(r)(2)(B).

On their face these statutory provisions are phrased in terms of “individuals” and require state plans to adopt an eligibility methodology which is no more restrictive than that employed under the supplemental security income program. A statute must focus on an individual entitlement in order to satisfy the first prong of the Blessing test. Lankford, 451 F.3d at 508. The focus of these statutory provisions is eligibility criteria for “individuals.” 42 U.S.C. § 1396a(a)(10)(C)(i). Tellingly, the definition of “no more restrictive” twice speaks of individuals. 42 U.S.C. § 1396a(r)(2)(B). Section 1396a(r)(2)(B) permits adoption of an eligibility methodology which makes “additional individuals” eligible for medical assistance and forbids a methodology which results in otherwise eligible “individuals” being made ineligible. The failure to make any reference to individuals or persons was the fatal flaw that led to the conclusion that 42 U.S.C. § 1396a(a)(17) did not confer a private cause of action. Lankford, 451 F.3d at 509; Watson, 436 F.3d at 1162. However, the statutory provisions under consideration here clearly reveal an intent to benefit individuals such as the Gestons. See Markva v. Haveman, 168 F.Supp.2d 695, 711-12 (E.D.Mich.2001) (finding 42 U.S.C. § 1396a(a)(10)(C)(i) benefits individuals and provides a private right of action).

DHS relies on Hobbs v. Zenderman, 579 F.3d 1171, 1181-82 (10th Cir.2009) (concluding 42 U.S.C. § 1396a(a)(10)(C)(i) does not provide a private right of action). In Hobbs, the Tenth Circuit Court of Appeals construed 42 U.S.C. § 1396a(a)(10)(C)(i) in conjunction with 42 U.S.C. § 1396a(a)(17) and found the first prong of the Blessing test had not been met. Hobbs, 579 F.3d at 1181. The Court explained the references to individuals were tangential or passing references which did not provide the necessary rights-creating language.

The Court finds Hobbs unpersuasive. As the Court reads the statutory provisions in question, individuals are the focus. When a provision provides for the needs of a particular person, an individual right has been created. Gonzaga Univ., 536 U.S. at 288, 122 S.Ct. 2268. The statutory provisions in question speak to establishing “criteria for determining eligibility for individuals in the group” and assuring no individualsotherwise eligible are made ineligible. 42 U.S.C. § 1396a(a)(10)(C)(i) and 1396a(r)(2)(B) (emphasis added). Such references are not tangential. This Court’s interpretation is consistent with the Ninth Circuit’s finding inWatson that the operative phrase “`[a] State plan … must provide for making medical assistance available … to all individuals.'” “unmistakably focused on the specific individuals benefitted,” and thus satisfied the first prong of the Blessing test. Watson, 436 F.3d at 1160, (finding a private right of action under 42 U.S.C. § 1396a(a)(10)).

The second prong of the Blessing test asks whether the asserted right is “so vague and amorphous” as to be beyond the competence of the judiciary to enforce. Lankford, 451 F.3d at 508. The statutory provisions in question here are neither vague nor amorphous, and they provide an objective standard, no more restrictive, which is capable of judicial construction. See Watson, 436 F.3d at 1161. Statutory provisions which call for reasonable standards or substantial compliance have beenrejected while those that are expressed in terms of objective standards have been approved. Blessing, 520 U.S. at 343, 117 S.Ct. 1353 (rejecting substantial compliance); Lankford, 451 F.3d at 509 (rejecting reasonable standards); Watson, 436 F.3d at 1161 (approving objective standards). Whether a state plan applies eligibility criteria which results in individuals who are otherwise eligible being made ineligible will be readily apparent. Such an objective standard cannot be said to be vague or amorphous. As such, the second prong of the Blessing test is met.

Finally, the third prong under the Blessing test is whether the statutory provisions unambiguously impose a binding obligation on the states. Lankford, 451 F.3d at 508. “In other words, the provision giving rise to the asserted right must be couched in mandatory, rather than precatory, terms.” Blessing, 520 U.S. at 341, 117 S.Ct. 1353. 42 U.S.C. § 1396a(a)(10)(C)(i) begins by stating “the plan must” and then describing the eligibility requirements including the command that the methodology to be employed “shall be no morerestrictive.” 42 U.S.C. § 1396a(a)(10)(C)(i) (emphasis added). “42 U.S.C. § 1396a(r)(2)(B) requires that “no individuals” other wise eligible may be made ineligible”. This language is mandatory and the third prong of the Blessing test has been satisfied. In summary, the Gestons meet the three-part Blessing test for a private right of action under 42 U.S.C. § 1983.

3. 42 U.S.C. § 1396R-5(B)(1).

The final statutory provisions relied upon by the Gestons is 42 U.S.C. § 1396r-5(b)(1). This statute provides as follows:

(b) Rules for treatment of income(1) Separate treatment of incomeDuring any month in which an institutionalized spouse is in the institution, except as provided in paragraph (2), no income of the community spouse shall be deemed available to the institutionalized spouse.

42 U.S.C. § 1396r-5(b)(1).

The Court finds that 42 U.S.C. § 1396r-5(b)(1) also passes the threeprong Blessing test. This statutory provision is phrased in terms of the individual benefitted: the “community spouse.” The statute provides “no income of the community spouse shall be deemed available to the institutionalized spouse.” 42 U.S.C. § 1396r-5(b)(1). The focus on the individual is unmistakable. It is to be expected as Congress enacted 42 U.S.C. § 1396r as part of the Medicaid Catastrophic Care Act in an attempt to prevent the pauperization of the community spouse. Blumer, 534 U.S. at 477, 122 S.Ct. 962; Vieth v. Ohio Dept. of Job & Family Servs., No. 08AP-635, 2009 WL 2331870, at *3 (Ohio Ct.App. July 30, 2009). Second, the right not to have income deemed available to the “institutionalized spouse” provides a straightforward objective standard capable of judicial enforcement. Either the plan in question deems income available to the “institutionalized spouse” or it does not. Finally, the provision uses the mandatory language “no income” and “shall” and these terms provide no discretion to the states. The three-part Blessing test for a private right of action under 42 U.S.C. § 1983 has been met. Because the Blessing test is met and Congress has not foreclosed Section 1983 enforcement under the Medicaid Act, the Gestons have a private cause of action under 42 U.S.C. § 1983. The Court concludes that 42 U.S.C. § 1396r-5(b)(1) provides for a private cause of action.

B. SUPREMACY CLAUSE.

In the second claim the Gestons set forth the same argument as asserted intheir civil rights claim under 42 U.S.C. § 1983, but do so under the Supremacy Clause. U.S. Const. art. VI. para. 2. The Gestons contend that Section 50-24.1-02.8(7)(b) of the North Dakota Century Code is preempted by the Supremacy Clause because it is in direct conflict with the Medicaid Act.

The Supremacy Clause, while not the source of any federal rights, protects federal rights by giving them priority when they conflict with state laws. Lankford, 451 F.3d at 509; Weatherbee v. Richman, 595 F.Supp.2d 607, 617 (W.D.Pa. 2009). The Supremacy Clause prohibits states from establishing eligibility rules for federal assistance programs that conflict with federal statutes and rules. Jackson v. Rapps, 947 F.2d 332, 336 (8th Cir.1992). When a state receives Medicaid matching funds it must comply with all federal regulations and statutes. Lankford, 451 F.3d at 510.

Under the preemption doctrine, state laws that “interfere with, or are contrary to the laws of congress, made in pursuance of the constitution” are preempted. Wis. Pub. Intervenor v. Mortier, 501 U.S. 597, 604, 111 S.Ct. 2476, 115 L.Ed.2d 532 (1991), quoting Gibbons v. Ogden, 9 Wheat. 1, 22 U.S. 1, 9, 6 L.Ed. 23 (1824). Where Congress has not expressly preempted or entirely displaced state regulation in a specific field, as with the Medicaid Act, “state law is preempted to the extent that it actually conflicts with federal law.” Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm’n, 461 U.S. 190, 203-04, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983). An actual conflict arises where compliance with both state and federal law is a “physical impossibility,” or where the state law “`stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'” Id., quoting Fla. Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43, 83 S.Ct. 1210, 10 L.Ed.2d 248 (1963) and Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 85 L.Ed. 581 (1941). While Medicaid is a system of cooperative federalism, the same analysis applies; once the state voluntarily accepts the conditions imposed by Congress, the Supremacy Clause obliges it to comply with federal requirements. See Jackson v. Rapps, 947 F.2d 332, 336 (8th Cir.1991) (applying conflict preemption doctrine to state AFDC law, analogous to Medicaid’s system of cooperative federalism). See also King v. Smith, 392 U.S. 309, 316, 326-27, 88 S.Ct. 2128, 20 L.Ed.2d 1118 (1968); Planned Parenthood of Houston & Se. Tex. v. Sanchez, 403 F.3d 324, 337 (5th Cir.2005) (“once a state has accepted federal funds, it is bound by the strings that accompany them”).

Lankford, 451 F.3d at 509-10. The Court finds that the Gestons have stated a valid Supremacy Clause claim.

C. MEDICAID OVERVIEW.

The Medicaid program, enacted as Title XIX to the Social Security Act, was created by Congress in 1965 as a cooperative federal-state program designed to furnish medical assistance to persons “whose income and resources are insufficient to meet the costs of necessary medical services.” 42 U.S.C. § 1396. The Medicaid Act, 42 U.S.C. § 1396-1396v, “is a federal aid program designed to help the states provide medical assistance to financiallyneedy individuals, with the assistance of federal funding.” Lankford v. Sherman, 451 F.3d 496, 504 (8th Cir.2006). The administration of the Medicaid Act is entrusted to the Secretary of the United States Department of Health and Human Services who in turn exercises its authority through the Centers for Medicare and Medicaid Services (CMS), formerly knownas the Health Care Financing Administration (HCFA). Wisc. Dept. of Health and Family Servs. v. Blumer,534 U.S. 473, 479 n. 1, 122 S.Ct. 962, 151 L.Ed.2d 935 (2002). While states are not required to participate in Medicaid, all of them do. Ark. Dep’t of Health & Human Servs. v. Ahlborn, 547 U.S. 268, 275, 126 S.Ct. 1752, 164 L.Ed.2d 459 (2006). Once a state chooses to participate in the Medicaid program it must comply with the federal statutory and regulatory scheme. Harris v. McRae, 448 U.S. 297, 301, 100 S.Ct. 2671, 65 L.Ed.2d 784 (1980); Lankford, 451 F.3d at 504. Participating states must establish a plan to implement the program. 42 U.S.C. § 1396a. State plans must be approved by CMS. 42 U.S.C. § 1396a; 42 C.F.R. § 430.10. State Medicaid plans must comply with numerous prerequisites. 42 U.S.C. § 1396a(a)(1)-(65). In formulating a plan, states may consider only such income and assets as are determined by rules prescribed by the Department of Health and Human Services available to the applicant. Blumer, 534 U.S. at 473, 122 S.Ct. 962. Failure to conform with federal laws and regulations may result in a state’s loss of federal aid for its Medicaid program. 42 U.S.C. § 1396c.

Medicaid eligibility rules limit the amount of assets or resources a married couple may possess and still qualify for Medicaid. When both spouses live together in the community their income and assets are considered available to one another. When one spouse enters a nursing home the rules become more complex. See Johnson v. Guhl, 91 F.Supp.2d 754, 760 (D.N.J.2000). The allocation of income and resources between the “community spouse” and the “institutionalized spouse” are addressed in the Medicare Catastrophic Care Act of 1988. 42 U.S.C. § 1396r-5. The purpose of the Act was to protect the “community spouse” from pauperization while preventing financially-secure couples from obtaining Medicaid benefits. Blumer, 534 U.S. at 480, 122 S.Ct. 962. To accomplish this purpose, Congress and the Secretary have established a very complex set of laws and regulations which states must comply with in allocating a married couple’s income and assets. Id.

1. MEDICAID INCOME AND RESOURCE LIMITS FOR “COMMUNITY SPOUSES.”

42 U.S.C. § 1396r-5 (enacted in 1988) addresses the allocation of income and resources between spouses when one spouse applies for Medicaid because he requires long-term institutional care, while the other spouse continues to reside in the community. As described below, the assets of both spouses are considered in determining eligibility, regardless of who holds title; only the institutionalized spouse’s income is considered; the income of the “community spouse” is not considered; and the “community spouse” is allowed to keep the couple’s home, one automobile, personal items, and certain other forms of property. 42 U.S.C. § 1382b(a) and 1396r-5(c)(5).

The institutionalized spouse is expected to spend down his assets and income to defray the costs of his care. To prevent impoverishment of the community spouse, the Medicaid statute allows the community spouse to retain liquid assets or “resources,” up to a certain threshold, also known as the “Community Spouse Resource Allowance” (CSRA). 42 U.S.C. § 1396r-5(f)(2)(A). The law also allows the community spouse to receive an allowance from the income of the institutionalized spouse, known as the “minimum monthly maintenance needs allowance,” if the community spouse’s own income is below a certain threshold. Id. 42 U.S.C. § 1396r-5(d)(1), (2).

Liquid assets and other countable “resources” of the two spouses, measured at the time the institutionalized spouse is institutionalized, are divided equally betweenthe spouses. 42 U.S.C. § 1396r-5(c)(1)(A)(ii). This division is used to calculate the CSRA. Id. 42 U.S.C. § 1396r-5(f)(2). At the time of application for Medicaid, all of the couple’s resources are considered available to the institutionalized spouse, minus $1600 for the institutionalized spouse, and minus the CSRA for the community spouse as established by each state. Id. 42 U.S.C. § 1396r-5(c)(2)(B). Once the institutionalized spouse’s eligibility has been established, the resources of the community spouse are no longer considered available to the institutionalized spouse. Id. 42 U.S.C. § 1396r-5(c)(4).

The Medicaid statute treats the community spouse’s income differently from resources. If a community spouse receives income in her own name, it is not considered to be available to the institutionalized spouse and, therefore, is not considered for purposes of determining his eligibility. 42 U.S.C. § 1396r-5(b)(1), (2)(A)(I).

Asset allocation is governed by 42 U.S.C. § 1396r-5(c) and (f). Assets are valued as of the date of continuous institutionalization rather than the date of application. 42 U.S.C. § 1396r-5(c)(1)(B). Because of this, married couples are often advised to request a Medicaid valuation of their assets as soon as one of them enters a nursing home, even if they know they will not qualify until they spend down their assets. Frolick and Brown, Advising the Elderly or Disabled Client, ¶ 14.03[4] (2nd ed.2011). It is easier to value assets contemporaneously rather than to reconstruct values for a date several months or years in the past. One-half of the total assets is allocated to each spouse and is known as the spousal share. 42 U.S.C. § 1396r-5(c)(1)(A)(ii). An applicant may transfer assets to his or her spouse so long as the transfer is solely for the spouse’s benefit. 42 U.S.C. § 1396p(c)(2)(B)(I).

The institutionalized spouse is permitted a personal allowance of $3,000. 20 C.F.R. § 416.1205. The community spouse is permitted to retain assets up to a certain threshold set by the state. 42 U.S.C. § 1396r-5(f)(2)(A). In this case, the parties agree the CSRA is $109,560. The institutionalized spouse becomes eligible for Medicaid once the couple’s assets fall below the combined total of the personal allowance and the CSRA. It is undisputed in this case that this amount is $112,560 Another perspective is that all assets above the combined total of the CSRA and the institutionalized spouse’s personal allowance must be spent before eligibility is achieved. Blumer, 534 U.S. at 483, 122 S.Ct. 962.

One common strategy for dealing with excess assets is for the community spouse to purchase an annuity. Frolick and Brown, Advising the Elderly or Disabled Client, 1113.06 (2nd ed.2011). Congress made significant changes to the Medicaid rules relating to annuities and the transfer of assets when it passed the Deficit Reduction Act of 2005. 42 U.S.C. § 1396p. The transfer of assets for less than fair market value will result in a penalty. 42 U.S.C. § 1396p(c). However, the Deficit Reduction Act provides that an annuity is not to be treated as a transfer of assets for less than fair market value if the state is named as the first remainder beneficiary up to the amount paid on behalf of the institutionalized spouse. 42 U.S.C. § 1396p(c)(1)(F). In addition, an annuity will be treated as an asset unless the annuity is (1) irrevocable and nonassignable; (2) actuarially sound; and (3) provides for payments in equal amounts during its term with no deferral or balloon payments. 42 U.S.C. § 1396p(c)(1)(G)(ii). The Deficit Reduction Act of 2005 also requires the disclosure on the Medicaid application of any annuities held by the community or institutionalized spouse. 42 U.S.C. § 1396p(e)(1). Annuities which comply with these requirements are consideredqualifying annuities. See Lopes v. Starkowski, No. 3:10-CV-307, 2010 WL 3210793, at *5 (D.Conn. Aug. 12, 2010); see also Jackson v. Selig, No. 3:10-CV00276, 2010 WL 5346198, at *3 (E.D.Ark. Dec. 22, 2010).

2. ANNUITIES CAN BE INCOME OR RESOURCES.

An annuity is a contract by which the annuitant purchases the right to receive monthly payments for a specified period of time in exchange for the payment of an amount of principal. The Medicaid program does not specifically address whether an annuity is income or a resource. In 2005, Congress enacted restrictions on the use of annuities purchased by Medicaid recipients and their spouses to limit improper transfers of assets in anticipation of Medicaid eligibility. See Deficit Reduction Act of 2005(DRA), Pub.L. No. 109-171, § 6012 (2005), codified as amendments to 42 U.S.C. § 1396p. As previously noted, to avoid being considered a transfer of assets, an annuity purchased by a Medicaid applicant must be actuarially sound, irrevocable, and non-assignable, and must provide for payments in equal amounts during its term with no deferred or balloon payments. Id. 42 U.S.C. § 1396p(c)(1)(G). The annuity contract must name the State Medicaid agency as the remainder beneficiary for at least the total amount of medical assistance paid on behalf of the institutionalized individual under the Medicaid program. Id. 42 U.S.C. § 1396p(c)(1)(F)(I). The Deficit Reduction Act amendments also require the disclosure of any interest an individual or community spouse has in an annuity. Id. 42 U.S.C. § 1396p(3)(1), and provide for notice to the State by the annuity issuer of any changes in the interest or principal withdrawn. Id. 42 U.S.C. § 1396p(e)(2)(B). The Deficit Reduction Act amendments do not specifically address whether payments from an irrevocable and non-assignable annuity are to be treated as income or a resource.

However, Social Security Administration (SSA) regulations and policy guidance do address the issue. Those regulations and policies are relevant because a state may consider an individual eligible for Medicaid if he is eligible for certain cash assistance programs under the Social Security Act, including the SSI program established by Title XVI of the Social Security Act. 42 U.S.C. § 1396a(a)(10)(C)(i). In determining financial eligibility for persons aged 65 or older, a state, with a few exceptions not relevant here, may not use a more restrictive methodology for determining Medicaid eligibility than is used for SSI eligibility, though it is free to use a less restrictive methodology. See 42 U.S.C. § 1396a(r)(2)(A)(i). See also James v. Richman, 547 F.3d 214, 218 (3d Cir.2008) (“the Department [of Public Welfare] can not treat as available resources any assets that the SSI regulations would not treat as available resources”). Therefore, because no Medicaid provision specifically addresses the issue, SSI provisions govern.

While nothing in Title XVI of the Social Security Act is absolutely on point, Social Security Administration (SSA) regulations for Supplemental Security Income (SSI) generally treat annuities as income. See 20 C.F.R. § 416.1121(a). SSA’s program guidance, the Program Operations Manual System (POMS), also states as a “general rule” that annuities are income — albeit “unearned income.” POMS § SI 00830.160.B.1.

In addition, the SSA defines a resource as “cash or other liquid assets or any real or personal property that an individual (or spouse, if any) owns and could convert to cash to be used for his or her support and maintenance.” 20 C.F.R. § 416.1201(a). The regulation further provides that “[i]f the individual has the right, authority, orpower to liquidate the property or his or her share of the property, it is considered a resource.” Id. 20 C.F.R. § 416.1201(a)(1). On the other hand, “[i]f a property right cannot be liquidated, the property will not be considered a resource of the individual (or spouse).” Id. Thus, as a general rule, assets of any kind are not resources if an individual does not have “the legal right, authority, or power to liquidate them.”

D. TREATMENT OF ANNUITIES UNDER N.D.C.C. § 50-24.1-02.8(7).

The primary issue presented in this case is whether Section 50-24.1-02.8(7)(b) of the North Dakota Century Code is consistent with the Medicaid Act. The Gestons contend that Section 50-24.1-02.8(7)(b) adds additional Medicaid eligibility requirements not authorized by Congress. Specifically, they contend N.D.C.C. § 50-24.1-02.8(7)(b) treats the corpus of Carolyn Geston’s annuity as an available resource and is more restrictive than federal law allows under 42 U.S.C. § 1396a(a)(10)(C)(i) and 1396a(r)(2)(B). The Gestons also contend that Section 50-24.1-02.8(7)(b) is invalid because 42 U.S.C. § 1396r-5(b)(1) prohibits DHS from treating the income stream from a community spouse’s annuity as available to the institutionalized spouse. It is undisputed that the annuity Carolyn Geston purchased is a qualifying annuity under the federal rules and regulations. It is also undisputed that Carolyn Geston’s annuity does not comply with N.D.C.C. § 50-24.1-02.8(7)(b). DHS contends that Section 50-24.1-02.8(7)(b) complies with federal law.

North Dakota’s Medicaid eligibility rules mirror the federal rules in their treatment of annuities, at least in part. The analysis of any annuity begins with N.D.C.C. § 50-24.1-02.8(6). Section 50-24.1-02.8(6) provides that the purchase of an annuity is a disqualifying transfer of an asset unless the annuity complies with the following criteria:

a. The state is named as the remainder beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the annuitant or the state is named in the second position after the community spouse or minor or disabled child and is named in the first position if the community spouse or a representative of the minor or disabled child disposes of any remainder for less than fair market value;b. The annuity is purchased from an insurance company or other commercial company that sells annuities as part of the normal course of business;c. The annuity is irrevocable and neither the annuity nor payments due under the annuity may be assigned or transferred;d. The annuity provides substantially equal monthly payments of principal and interest and does not have a balloon or deferred payment of principal or interest. Payments will be considered substantially equal if the total annual payment in any year varies by five percent or less from the payment in the previous year; ande. The annuity will return the full principal and interest within the purchaser’s life expectancy as determined in accordance with actuarial publications of the office of the chief actuary of the social security administration.

N.D.C.C. § 50-24.1-02.8(6). Sections 50-24.1-02.8(6)(c)-(e) correspond with 42 U.S.C. § 1396p(c)(1)(G)(ii) which provides that an annuity will be treated as an asset unless:

(ii) the annuity –(I) is irrevocable and nonassignable;(II) is actuarially sound (as determined in accordance with actuarial publicationsof the Office of the Chief Actuary of the Social Security Administration); and(III) provides for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made.

42 U.S.C. § 1396p(c)(1)(G)(ii). Section 50-24.1-02.8(6)(a) corresponds with 42 U.S.C. § 1396p(c)(1)(F)(I) which provides as follows:

the purchase of an annuity shall be treated as the disposal of an asset for less than fair market value unless –(I) the State is named as the remainder beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the institutionalized individual under this subchapter.

42 U.S.C. § 1396p(c)(1)(F)(I).

It is undisputed that Carolyn Geston’s annuity meets all of the requirements of Section 50-24.1-02.8(6) andis not considered a disqualifying transfer. However, under North Dakota law, annuities must also comply with Section 50-24.1-02.8(7). If an annuity fails under Section 50-24.1-02.8(7) the annuity is considered a countable asset or resource. Section 50-24.1-02.8(7) provides as follows:

An annuity purchased on or after February 8, 2006, or a payment option selected or altered on or after February 8, 2006, with respect to an annuity purchased at any time is an asset for purposes of this chapter unless:a. The annuity meets all of the requirements of subsection 6;b. The monthly payments from all annuities owned by the purchaser that comply with this subsection do not exceed the minimum monthly maintenance needs allowance for a community spouse of the maximum amount allowed pursuant to 42 U.S.C. 1396r-5 and, at the time of application for benefits under this chapter, the total combined income from all sources of the purchaser and the purchaser’s spouse, or the annuitant and the annuitant’s spouse, does not exceed one hundred fifty percent of the minimum monthly maintenance needs allowance allowed for a community spouse of the maximum amount allowed pursuant to 42 U.S.C. 1396r-5; andc. The annuity will return the full principal and has a guaranteed period that is equal to at least eighty-five percent of the purchaser’s life expectancy as determined by the life expectancy tables used by the department of human services.

N.D.C.C. § 50-24.1-02.8(7).

The undisputed evidence reveals that Carolyn Geston’s annuity satisfies Sections 50-24.1-02.8(7)(a) and (c) but fails to satisfy Section 50-24.1-02.8(7)(b). The effect of Section 50-24.1-02.8(7)(b) is that the combined monthly payments from all annuities cannot exceed $2,739.00, and the total combined monthly income from all sources cannot exceed $4,108.50. Thus, Section 50-24.1-02.8(7) treats some annuities as countable assets and others as income, depending on how much income is derived from the annuity and how much income a couple receives from other sources.

The record reveals that Carolyn Geston’s income from her annuity is $2,734.65 per month. This is slightly less than the $2,739.00 permitted by the first part of the state statute. However, it is undisputed that the Gestons have a total combined monthly income, including Carolyn’s annuity, of $7,903.22. Because the Geston’s monthly income is in excess of $4,108.50, the annuity in question was treated as a countable asset. DHS assigned the annuity a market value of $383,592.10, which represented the purchase price minus the annuity payments already made. As a result, the Geston’s countable assets amounted to $454,691.33, which is in excess of the $112,560.00, “Community SpouseResource Allowance” or CRSA limit for Medicaid eligibility. Consequently, John Geston was found ineligible for Medicaid.

E. ANALYSIS OF CASE LAW.

Under the Medicaid and SSI provisions of the Social Security Act, an irrevocable annuity can be considered either income or a resource depending on its terms. See 42 U.S.C. § 1396p(e)(4) (discussing “income or resources” derived from an annuity). SSA regulations do not address whether the income from an irrevocable and nonassignable annuity can be treated as a resource just because it has a market value — because there is a willing buyer of the annuity’s income stream even though the annuity prohibits assignment of that stream. However, SSA policy is to look at the specific terms of the annuity to determine whether the annuity is income or a resource. Under 20 C.F.R. § 416.1201(a)(1), an asset is a resource only if “the individual has the right, authority, or power to liquidate the property or his or her share of the property.” POMS § SI 01110.115 clarifies that the individual’s right must be a legal right, authority, or power. Thus, a right or power to renegotiate the annuity contract would not suffice to make it a resource. The POMS provision uses an illustration to make this point: where joint owners of property have entered into a legally binding contract not to sell the property without the other’s consent, the property is not a resource if consent to a sale is withheld. At such time as consent is given, the property becomes a resource. A logical reading of 20 C.F.R. § 416.1201, as clarified in POMS § SI 01110.115, is that SSA will not require an applicant to renegotiate or breach a contract in order to recover the value of a resource, such as a non-assignable annuity, in order to qualify for Medicaid.

This position is consistent with the only other federal court of appeals to specifically address the income/resource question vis-a-vis an irrevocable annuity. See James v. Richman, 547 F.3d 214 (3d Cir. 2008). In that case, James had excess resources of $278,343, and Mrs. James purchased a $250,000 single premium irrevocable annuity with an immediate income stream that could not be transferred, amended, or assigned. The annuity term was eight years, and Mrs. James immediately began receiving monthly annuity payments of $2,937.71 for that period. The Pennsylvania Department of Public Welfare claimed that the James’ annuity had a resource value because a finance company in the secondary market for purchasing annuities advised that it would purchase her stream of monthly annuity payments for $185,000. That resource, the state said, disqualified James from Medicaid eligibility. However, the Third Circuit held otherwise. The Third Circuit Court of Appeals determined that “the Department cannot treat as available resources any assets that the SSI regulations would not treat as available resources,” Id. at 218 (citing 42 U.S.C. § 1396a(a)(10)(C)(i)(III) and 1396a(r)(2)(B)), and determined that SSI regulations would treat Mrs. James’ annuity as income, not a resource. Id. (citing 20 C.F.R. 416.1201(a)(1) and POMS SI § 01110.115). The Third Circuit said the “power to liquidate” referred to in “the regulation is not simply the de facto ability to accomplish a change in ownership of an asset, but must also include the power to do so without incurring legal liability,” and Mrs. James “lacks such power….” 547 F.3d at 218. The appellate court said to hold otherwise “would tend to undermine the rule that `no income of the community spouse shall be deemed available to the institutionalized spouse.’ 42 U.S.C. § 1396r-5(b)(1).” 547 F.3d at 219.

The underlying events in James predated the passage of the Deficit Reduction Act of 2005 but does not make Jamesdistinguishable from this case. The Deficit Reduction Act amendments did not affect the analysis of whether the payment stream from an annuity is income or a resource. See 42 U.S.C. § 1396p(e)(4). See also Weatherbee, ex rel. Vecchio v. Richman, 595 F.Supp.2d 607, 617 (W.D.Pa. 2009) (Congress did not “`ring the death knell’ for otherwise compliant annuities” when it enacted the Deficit Reduction Act of 2005),aff’d, 351 Fed.Appx. 786 (3d Cir. 2009).

DHS relies on Morris v. Oklahoma Department of Human Services, 758 F.Supp.2d 1212 (W.D.Okla.2010), which appears to reach the opposite result, but the case is distinguishable. In Morris, after two spouses’ shares had been determined, the institutionalized spouse attempted to transfer her remaining assets to her husband (the community spouse) to avoid spending down her share of assets. Morris distinguished Jamesas applying only to asset transfers between spouses prior to a determination of eligibility, 758 F.Supp.2d at 1216, and held that allowing a transfer to purchase an annuity for the community spouse after an initial determination of eligibility would render the statutory restrictions on spousal assets “toothless.” Id. at 1217.Morris did not specifically address the issue of whether an irrevocable annuity qualifies as a resource or income. Morris appears to stand for the proposition that the Deficit Reduction Act of 2005 did not affect the provisions of 42 U.S.C. § 1396r-5 that require that any resources of the couple in excess of the CSRA be considered as available to the institutionalized spouse. See 42 U.S.C. § 1396r-5(c)(2)(B); Jackson v. Selig,No. 3:10-CV-00276, 2010 WL 5346198 (E.D.Ark. Dec. 22, 2010) (holding annuity purchase was not an improper transfer of assets; declining to follow Morris because the Medicaid statute prohibits attributing income of the community spouse to the institutionalized spouse).

The treatment of annuities under the Medicaid Act, and various state implementing rules, has spawned numerous legal challenges since the passage of the Deficit Reduction Act of 2005. Some states have taken a dim view of annuities and have attempted to curtail their use in various ways. Most of the courts which have considered whether a federally-compliant annuity may be treated as an asset or resource have found that treating the annuity as a resource violates federal law. James v. Richman, 547 F.3d 214, 219 (3d Cir.2008) (finding annuity cannot be treated as an available resource); Weatherbee v. Richman, 595 F.Supp.2d 607 (W.D.Pa. 2009), aff’d 351 Fed.Appx. 786 (3d Cir. 2009) (finding state law which treated an annuity as a resource was preempted by federal law); Jackson v. Selig, No. 3:10-CV-00276, 2010 WL 5346198 (E.D.Ark. Dec. 22, 2010) (finding Congress could have prohibited using annuities for Medicaid planning but chose not to do so); Rorick v. Ohio Dep’t of Job and Family Servs., No. C-090627, 2010 WL 4683716 (Ohio Ct.App., Nov. 19, 2010) (finding the reasoning of James and Weatherbee persuasive); Lopes v. Starkowski, No. 3:10-CV-307, 2010 WL 3210793 (D.Conn. Aug. 12, 2010) (finding state law which treated a federally-compliant annuity as a resource rather than income was more restrictive than federal law); J.P. v. Mo. State Family Support Div., 318 S.W.3d 140, 147 (Mo. Ct.App.2010) (finding federal law defines payments received from an annuity as income); Vieth v. Ohio Dep’t of Job and Family Servs., No. 08AP-635, 2009 WL 2331870 (Ohio Ct.App., July 30, 2009) (finding federally-compliant annuities are not countable resources); contra Morris v. Okla. Dep’t of Human Servs., 758 F.Supp.2d 1212, 1216 (distinguishing James and other cases which involved annuities purchased prior to an application for Medicaid); N.M. v. Div. of Med. Assistanceand Health Servs., 405 N.J.Super. 353, 964 A.2d 822, 829 (N.J.Super.Ct.App.Div.2009) (finding the annuity income stream could be sold and thus was a countable resource).

1. THE “NO MORE RESTRICTIVE” REQUIREMENT.

The Gestons argue that Section 50-24.1-02.8(7)(b) of the North Dakota Century Code is more restrictive than federal law. A state’s Medicaid income and resource eligibility requirements are permitted to be more liberal than federal law but can be “no more restrictive” than the methodology which would be employed to determine eligibility under the supplemental security income (SSI) program. 42 U.S.C. § 1396a(a)(10)(C)(i). A methodology is “no more restrictive” if more individuals may be eligible and “no individuals who are otherwise eligible are made ineligible.” 42 U.S.C. § 1396a(r)(2)(B). DHS contends that this means the Gestons would have to show they would be otherwise eligible for SSI. The Court disagrees. The Court finds the reasoning of the Third Circuit Court of Appeals in James v. Richman, 547 F.3d 214 (3d Cir.2008) to be persuasive. The issue is not whether the Gestons are eligible for SSI, but whether the state’s treatment of annuities for Medicaid purposes would admit fewer applicants than the treatment of annuities under SSI rules and regulations. In simple terms, the treatment of annuities under state Medicaid eligibility rules must be the same or less restrictive than the treatment of annuities under SSI rules.

Thus, it is necessary to examine how annuities are treated under the SSI regulations. The applicable regulation provides that if the individual has the “right, authority or power to liquidate the property… it will be considered a resource” and “if a property right cannot be liquidated, the property will not be considered a resource.” 20 C.F.R. § 416.1201(a)(1). Resources are defined as cash or other liquid assets. 20 C.F.R. § 416.1201(a). Annuity payments are treated as unearned income for SSI purposes. 42 U.S.C. § 1382a(a)(2)(B). The SSI Program Operations Manual System (POMS) provides some guidance. The general POMS rule is that “assets of any kind are not resources if the individual does not have the legal right, authority, or power to liquidate them.” See POMS SI § 01110.115. Annuities, along with pensions, retirement benefits and disability benefits, are considered unearned income. See POMS SI § 00830.160.

In James, the community spouse lacked the power to change the ownership of her annuity because it was not assignable or transferable. 547 F.3d at 218. The argument that the annuitant had the de facto ability to sell the annuity was rejected because doing so would cause her to breach the contract and incur legal liability. The Third Circuit Court of Appeals court concluded that because of this restriction the annuity could not be treated as an asset or a resource.

In this case, the annuity specifically provides that it is irrevocable and “may not be transferred, assigned, surrendered or commuted.” See Docket No. 11-1. The annuity also provides that neither the annuitant nor the beneficiary may be changed and the payee is irrevocable. Thus, Carolyn Geston has no legal right to change ownership of the annuity. The Court finds that the annuity in question is considered income under federal law. 20 C.F.R. § 416.1201(a)(1). No change in ownership of the annuity could be accomplished without breaching the contract and incurring legal liability, and thus the annuity cannot be treated as an available resource. James, 547 F.3d at 218.

This Court rejects the suggestion that the annuity is somehow marketable or saleable,or that state law would treat the annuity as saleable. Federal law controls under the circumstances. The annuity in question clearly prohibits Carolyn Geston from liquidating it, and under federal law the annuity cannot be treated as an available resource. See Weatherbee, 351 Fed. Appx. at 787 (noting the community spouse had given up a resource for guaranteed income as defined by 42 U.S.C. § 1382a(2)(B));J.P., 318 S.W.3d at 146-47 (finding the reasoning of James, Weatherbee and Vieth to be persuasive and the conclusion that annuities must be treated as income mandated by 42 U.S.C. § 1382a(a)(2)(B)); 20 C.F.R. § 416.1201(a)(1). There is no federal provision in Title XIX of the Social Security Administration regulations and policy guidance which corresponds with Section 50-24.1-02.8(7)(b) of the North Dakota Century Code. Clearly, but for the existence of Section 50-24.1-02.8(7)(b), John Geston would qualify for Medicaid. The Court finds that Section 50-24.1-02.8(7)(b) of the North Dakota Century Code is more restrictive than federal law and thus violates 42 U.S.C. § 1396a(a)(10)(C)(i) and 1396a(r)(2)(B).

2. COMMUNITY SPOUSE INCOME.

The Gestons also argue that Section 50-24.1-02.8(7)(b) impermissibly considers community spouse income as part of the institutionalized spouse’s eligibility determination. The controlling statute provides that “no income of the community spouse shall be deemed available to the institutionalized spouse.” 42 U.S.C. § 1396r-5(b)(1). The well-established rule with regard to the income of the community spouse is that “the community spouse’s income is thus preserved for that spouse and does not affect the determination whether the institutionalized spouse qualifies for Medicaid.” Blumer, 534 U.S. at 480-81, 122 S.Ct. 962.

DHS contends that Section 50-24.1-02.8(7)(b) is not an eligibility determination but only an analyzation of the couple’s financial situation in order to determine what constitutes a resource. This is a distinction without difference. Section 50-24.1-02.8(7)(b) clearly considers income in the analysis. The purpose of Section 50-24.1-02.8(7)(b) is to consider the community spouse’s income in deciding whether to treat an annuity as income or an asset. Section 50-24.1-02.8(7)(b) takes income into consideration in the analysis of whether the community spouse’s “monthly payments from all annuities” is more than allowed, and secondly, in considering whether the “total combined income from all sources” of both spouses is more than allowed. Section 50-24.1-02.8(7)(b) considers the community spouse’s annuity income as well as allof the community spouse’s income from whatever source. The second calculation was the deciding factor in determining John Geston’s eligibility for Medicaid. Section 50-24.1-02.8(7)(b) is, without question, an integral part of Medicaid eligibility determination.

The Court finds that Section 50-24.1-02.8(7)(b) violates 42 U.S.C. § 1396r-5(b)(1) which prohibits consideration of the community spouse’s income in the institutionalized spouse’s Medicaid eligibility determination. See Jackson, 2010 WL 5846198 at *3 (noting it would be improper to count income of the community spouse to determine the institutionalized spouse’s Medicaid eligibility); Rorick, 2010 WL 4683716 at *6 (finding annuity income is not subject to countable asset classification if the annuity complies with the federal annuity rule set out in 42 U.S.C. § 1396p); Weatherbee, 595 F.Supp.2d at 611 (the community spouse’s income is completely protected and does not affect the institutionalized spouse’s eligibility determination); and Vieth, 2009 WL 2331870 at *8 (funds used to purchase a federally-compliantannuity are not countable resources for Medicaid eligibility purposes).

3. 42 U.S.C. § 1396P(E)(4).

DHS also contends that Section 50-24.1-02.8(7)(b) is saved by 42 U.S.C. § 1396p(e)(4) of the Deficit Reduction Act of 2005 which provides as follows:

(e) Disclosure and treatment of annuities(1) In order to meet the requirements of this section for purposes of section 1396a(a)(18) of this title, a State shall require, as a condition for the provision of medical assistance for services described in subsection (c)(1)(C)(i) of this section (relating to long-term care services) for an individual, the application of the individual for such assistance (including any recertification of eligibility for such assistance) shall disclose a description of any interest the individual or community spouse has in an annuity (or similar financial instrument, as may be specified by the Secretary), regardless of whether the annuity is irrevocable or is treated as an asset. Such application or recertification form shall include a statement that under paragraph (2) the State becomes a remainder beneficiary under such an annuity or similar financial instrument by virtue of the provision of such medical assistance.(2)(A) In the case of disclosure concerning an annuity under subsection (c)(1)(F) of this section, the State shall notify the issuer of the annuity of the right of the State under such subsection as a preferred remainder beneficiary in the annuity for medical assistance furnished to the individual. Nothing in this paragraph shall be construed as preventing such an issuer from notifying persons with any other remainder interest of the State’s remainder interest under such subsection.(B) In the case of such an issuer receiving notice under subparagraph (A), the State may require the issuer to notify the State when there is a change in the amount of income or principal being withdrawn from the amount that was being withdrawn at the time of the most recent disclosure described in paragraph (1). A State shall take such information into account in determining the amount of the State’s obligations for medical assistance or in the individual’s eligibility for such assistance.(3) The Secretary may provide guidance to States on categories of transactions that may be treated as a transfer of asset for less than fair market value.(4) Nothing in this subsection shall be construed as preventing a State from denying eligibility for medical assistance for an individual based on the income or resources derived from an annuity described in paragraph (1).

42 U.S.C. § 1396p(e) (emphasis added).

DHS argues that 42 U.S.C. § 1396p(e)(4) permits states to treat annuities as assets and the Deficit Reduction Act of 2005 was passed in order to close the annuity loophole in the federal scheme. DHS relies upon a New Jersey decision in support of this position. N.M. v. Div. of Med. Assistance and Health Servs.,405 N.J.Super. 353, 964 A.2d 822 (N.J.Super.Ct.App.Div.2009). The New Jersey court in N.M. rejectedWeatherbee and James and read 42 U.S.C. § 1396p(e)(4) expansively. However, the court in N.M. failed to recognize that the provision limits itself to “this subsection” and does not attempt to change the long-established rule that the community spouse’s income is protected. In addition, in N.M. the plaintiff had stipulated that the annuity in question was assignable. The Court finds N.M. unpersuasive.

A review of current case law on this subject matter reveals that most courts have rejected the N.M. court’s reading of42 U.S.C. § 1396p(e)(4) and found it to be self-limiting. Weatherbee, 595 F.Supp.2d at 615-16; Vieth, 2009 WL 2331870 at *10 (the Deficit Reduction Act does not undermine the rationale of James); J.P., 318 S.W.3d at 146-47 (finding Weatherbee, James, and Vieth persuasive); Lopes, 2010 WL 3210793 at *7. The court in Weatherbee held as follows:

[T]he language of 42 U.S.C. § 1396p(e)(4), when viewed in the context of the subsection as well as pertinent provisions of the Medicaid Act, is unambiguous and does not support the DPW’s reading of it. By its terms, 42 U.S.C. § 1396p(e)(4) expressly limits its effect to “this subsection.” It does not purport to alter the well-established rule under the Medicaid Act, contained in 42 U.S.C. § 1396r-5, that “no income of the community spouse shall be deemed available to the institutionalized spouse.” 42 U.S.C. § 1396r-5(b)(1). Indeed, 42 U.S.C. § 1396r-5(a)(1) provides that, “[i]n determining the eligibility for medical assistance of an institutionalized spouse …, the provisions of this section supersede any other provision of this subchapter … which is inconsistent with them.” In my view, 42 U.S.C. § 1396p(e)(4) simply makes clear that which would otherwise be implied. Namely, that disclosing the purchase of an annuity and naming the state as a remainder beneficiary will not, in and of itself, prevent a state from denying eligibility for income or resources derived from an annuity. A state could, for example, deny eligibility for a variety of reasons including, but not necessarily limited to, lack of an actuarially sound annuity or where the income from the annuity was not solely for the benefit of the community spouse. Consistent with the “holistic” approach espoused by the courts in the above cases, and having examined 42 U.S.C. § 1396p(e)(4) in context, I conclude that if Congress had intended to “ring the death knell” for otherwise compliant annuities, it would have said so. It did not.

Weatherbee, 595 F.Supp.2d at 616-17. It would make little sense for Congress to set up detailed rules and regulations establishing Medicaid compliant annuities and then allow the states, through 42 U.S.C. § 1396p(e)(4), to reject Congress’s plan.

F. COSTS AND ATTORNEY FEES.

The Gestons have requested an award of reasonable costs and attorney’s fees pursuant to 42 U.S.C. § 1988. “[T]he court, in its discretion, may allow the prevailing party, other than the United States, a reasonable attorney’s fee as part of the costs” in any action or proceeding to enforce a provision of 42 U.S.C. § 1983. 42 U.S.C. § 1988(b). “Though the Eleventh Amendment bars an award of damages against a State in a § 1983 action, a federal court may award attorneys’ fees and other costs against the State under § 1988 as part of the prospective injunctive relief authorized in the landmark decision Ex parte Young,209 U.S. 123, 28 S.Ct. 441, 52 L.Ed. 714 (1908).” El-Tabech v. Clarke, 616 F.3d 834, 837 (8th Cir.2010). The Court finds that the Gestons have prevailed on their civil rights claim under 42 U.S.C. § 1983. The Court, in the exercise of its broad discretion, grants the request for an award of reasonable costs and attorney’s fees.

IV. CONCLUSION.

The Medicaid eligibility provisions are not unlike the federal tax code in terms of complexity. If Carolyn Geston should find herself in need of nursing home care during the period of the annuity, the income received from the annuity she purchased would be taken into consideration in determining her eligibility for Medicaid. The North Dakota Department of Human Services is named as the first beneficiary upto the amount of all Medicaid benefits received by John Geston in the event Carolyn Geston would pass away. There is nothing unreasonable in the passage of Section 50-24.1-02.8(7)(b) of the North Dakota Century Code other than it is contrary to current federal law. If there is a “loophole” under federal law as to the treatment of irrevocable and non-assignable annuities under the Medicaid program, the closing of that “loophole” is best left for Congress to address.

The Plaintiffs’ Motion for Summary Judgment (Docket No. 10) is GRANTED, and the Defendant’s Motion for Summary Judgment (Docket No. 13) is DENIED.

The Court finds and orders as follows:

1) 42 U.S.C. § 1396a(a)(10)(C)(i), 1396a(r)(2)(B) and 1396r-5(b)(1) create federal rights enforceable under 42 U.S.C. § 1983. The Gestons have met the three-part Blessing test for a private right of action under Section 1983;2) Section 50-24.1-02.8(7)(b) of the North Dakota Century Code violates 42 U.S.C. § 1396a(a)(10)(C)(i), 1396a(r)(2)(B) and 42 U.S.C. § 1396r-5(b)(1) and is preempted thereby;3) The Defendant is enjoined from denying Medicaid benefits to John Geston based on Section 50-24.1-02.8(7)(b) of the North Dakota Century Code;4) The Plaintiffs are entitled to an award of reasonable costs and attorney’s fees and may submit a motion for such pursuant to D.N.D. Civ. L.R. 54.1.

IT IS SO ORDERED.

ORDER DENYING DEFENDANT’S MOTION FOR STAY PENDING APPEAL

Before the Court is the Defendant’s motion for a stay pending appeal. See Docket No. 47. The Defendant seeks a stay of the Court’s holding that Section 50-01.1-02.8(7)(b) of the North Dakota Century Code is preempted by federal law. The Court denies the motion.

A stay of a ruling pending an appeal is an extraordinary remedy. The Defendant has the burden to justify the stay based on the following factors: (1) likelihood of success on the merits; (2) likelihood of irreparable harm absent a stay; (3) potential for harm to other interested parties if the stay is granted; and (4) potential harm to the public interest if the stay is granted. Fargo Women’s Health Org. v. Schafer, 1993 WL 603600, *2 (8th Cir.1993) (citing Hilton v. Braunskill, 481 U.S. 770, 776, 107 S.Ct. 2113, 95 L.Ed.2d 724 (1987);James River Flood Control Assoc. v. Watt, 680 F.2d 543, 544 (8th Cir.1982)). After weighing these factors, the Court finds the Defendant has failed to sustain its burden.

The Court held that North Dakota law is preempted by federal law. The Court’s holding is in line with the only two federal circuit courts of appeals that have addressed the issue. See Geston v. Olson, 857 F.Supp.2d 863, 880, 883-85, 2012 WL 1409344, *14, 17-118 (D.N.D. April 24, 2012)(citing cases); James v. Richman, 547 F.3d 214 (3d Cir.2008); Morris v. Okla. Dept. of Human Servs., 685 F.3d 925 (10th Cir.2012). The Defendant has failed to sustain its burden of showing the likelihood of success on the merits.

Irreparable harm is typically shown where the injuries cannot be fully compensated through an award of damages. Gen. Motors Corp. v. Harry Brown’s, LLC, 563 F.3d 312 (8th Cir.2009); Wildmon v. Berwick Universal Pictures, 983 F.2d 21, 24 (5th Cir.1992). The movant should demonstrate the injury is “both certain and great.” Cuomo v. U.S. Nuclear Regulatory Comm’n., 772 F.2d 972, 976 (D.C.Cir.1985). The Defendant contends it will suffer irreparable harm because thestate will be required to pay Medicaid benefits to those similarly situated and will be unable to recover the monies paid if the Eighth Circuit Court of Appeals reverses on appeal. However, as the Plaintiffs point out, a state may recover medical benefits incorrectly paid under the Medicaid plan. See 42 U.S.C. § 1396p(a)(1)(A). The Defendant has failed to sustain its burden and demonstrate that, if the Eighth Circuit reverses, North Dakota could not recover incorrect payments pursuant to 42 U.S.C. § 1396p(a)(1)(A), or that this federal remedy at law is otherwise inadequate.

The Defendant addresses the potential for injury to other interested parties and the public. The Defendant requests the stay so it may deny Medicaid eligibility to those similarly situated as the Plaintiffs. If a stay is granted, the Defendant has pledged to reverse eligibility decisions and make corrective payments for those erroneously denied if the Eighth Circuit affirms this Court’s decision. This addresses the potential for injury to other interested parties if a stay is granted. However, this factor does not overcome the other factors to be considered in granting the extraordinary remedy of a stay pending on appeal.

The Court has carefully reviewed the parties’ briefs and the relevant case law. In the exercise of its discretion, the Court finds that the Defendant has failed to demonstrate that a stay pending appeal is warranted under the circumstances. Accordingly, the Court DENIES the Defendant’s motion for stay pending appeal (Docket No. 47).

IT IS SO ORDERED.

FOOTNOTES

1. The terms asset and resource are used interchangeably in the applicable statutes, rules and regulations.

The A/B Trust used to be one of the most popular estate planning products in a lawyer’s arsenal. Here’s how it previously worked: The first spouse dies and that spouse’s assets are placed into a trust using the first spouse’s estate tax exemption. The second spouse dies and their assets go to the children using the second spouse’s estate tax exemption. The assets in the first spouse’s trust then are passed to the children, thereby using both spouses estate tax exemption.

After years of this, the estate tax code was re-written combining the spouse’s exemptions making the A/B trust obsolete for this purpose. Some lawyers continue to use this method of estate planning even though it does some things poorly and others not at all. Although an A/B trust will pass the assets to the beneficiaries as good as other products, it has problems in the areas of privacy, asset protection, and Medicaid planning.

First, an A/B method of estate planning offers absolutely NO asset protection benefits while both spouses are alive and minimal protection after one spouse passes. In fact, if an attorney for a lawsuit checks a person who created an A/B trust for assets, they will see that they still own the assets in their name. While both spouses are alive, depending on how the lawyer drew up the estate plan, either each spouse has their assets in their own name with a will including a testamentary trust (a trust that doesn’t exist until death) or they each have their own revocable trust with half the marital assets.The A/B Trust used to be one of the most popular estate planning products in a lawyer’s arsenal. Here’s how it previously worked: The first spouse dies and that spouse’s assets are placed into a trust using the first spouse’s estate tax exemption. The second spouse dies and their assets go to the children using the second spouse’s estate tax exemption. The assets in the first spouse’s trust then are passed to the children, thereby using both spouses estate tax exemption.

Having assets in one’s own name or assets in a revocable trust doesn’t help for asset protection. In both scenarios, one has access to the assets, which means that one’s creditors can attach these assets as well as courts in the event of a lawsuit. After one spouse passes, the will creates an irrevocable trust or, alternatively, the revocable trust becomes irrevocable. The deceased spouse’s assets are now in an irrevocable trust and protected from creditors and the courts, but chances are that the prime years to get sued or go in debt happened a long time ago. Why not have an irrevocable trust in the first place?The A/B Trust used to be one of the most popular estate planning products in a lawyer’s arsenal. Here’s how it previously worked: The first spouse dies and that spouse’s assets are placed into a trust using the first spouse’s estate tax exemption. The second spouse dies and their assets go to the children using the second spouse’s estate tax exemption. The assets in the first spouse’s trust then are passed to the children, thereby using both spouses estate tax exemption.

An A/B trust also offers little protection from a Medicaid spend-down. Again, like above, while the spouses are alive, they will be subject to a Medicaid spend-down in order to qualify for long-term care benefits. The community spouse can keep a predetermined amount, but the rest will be spent down to a minimal amount ($1,500-2,000, depending on the state). Also, again, once one spouse dies, those assets are protected from the spend-down, but the other half of the assets are subject to the other spouses long-term care bills. An irrevocable trust would protect 100% of all of the assets.The A/B Trust used to be one of the most popular estate planning products in a lawyer’s arsenal. Here’s how it previously worked: The first spouse dies and that spouse’s assets are placed into a trust using the first spouse’s estate tax exemption. The second spouse dies and their assets go to the children using the second spouse’s estate tax exemption. The assets in the first spouse’s trust then are passed to the children, thereby using both spouses estate tax exemption.

An A/B trust doesn’t really do anything well. Instead of protecting half of the assets, a good irrevocable trust can protect all of the assets. The irrevocable trust takes all of the assets out of both spouse’s names so that they don’t own them anymore. If they don’t have title, the assets aren’t counted by Medicaid, aren’t included in the calculation for the estate tax, and cannot be found in a public record as being owned by you, thus they can’t be taken by creditors in the event of a lawsuit. In fact, if an attorney for a prospective lawsuit checks a person who created an irrevocable trust to hold assets, they won’t see any assets in your name and the lawyer probably won’t be interested in taking the case against you on a contingency basis. The lawsuit is stopped before it starts. There is a downside of an irrevocable trust; the persons creating it don’t have ownership of the assets past what they put in the trust documents. So, for the scared, there is the A/B trust and for the protected, the Ultra Trust irrevocable trust.The A/B Trust used to be one of the most popular estate planning products in a lawyer’s arsenal. Here’s how it previously worked: The first spouse dies and that spouse’s assets are placed into a trust using the first spouse’s estate tax exemption. The second spouse dies and their assets go to the children using the second spouse’s estate tax exemption. The assets in the first spouse’s trust then are passed to the children, thereby using both spouses estate tax exemption.

The Federal Trade Commission (FTC) has sued AmeriDebt, Inc., DebtWorks, Inc., and Andris Pukke for misrepresentations and deceptive omissions under the Federal Trade Commission Act (FTC Act), 15 U.S.C. § 41-58. It has also sued AmeriDebt for violations of the disclosure requirements under the Gramm-Leach-Bliley Act, 15 U.S.C. § 6801(a) et seq. The FTC alleges that Defendants, operating in common as a non-profit credit counseling service, defrauded consumers with debt problems by offering to fashion debt repayment plans for them, then deducting for their own benefit payments the consumers made under the plans without disclosing those deductions to the consumers. The FTC has also sued Pamela Pukke as Relief Defendant to recover such proceeds of these transactions as have been received by her husband, Andris Pukke, and transferred to her.

The FTC has filed a motion pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), requesting that the Court enter a preliminary injunction appointing a receiver, freezing the assets of Andris Pukke and DebtWorks, Inc. (collectively “Defendants”), *561 561requiring an accounting from them, and directing that Andris Pukke repatriate assets he has transferred offshore. 1The Court held oral argument on the motion and took it under advisement. On April 20, 2005 the Court entered an Order granting the Motion. This Opinion sets forth the reasons for the Court’s decision.

II.

The background of this litigation is set forth in FTC. v. AmeriDebt, 343 F.Supp.2d 451 (D.Md.2004). In brief, the FTC alleges that Defendants (except for Pamela Pukke) operated as a common enterprise to deceive consumers into paying for high-cost debt management plans in violation of Section 5 of the FTC Act, 15 U.S.C. § 45(a). After extensive discovery, the FTC filed a Motion for Summary Judgment Against DebtWorks and Andris Pukke, requesting that they be found liable, and that they be permanently enjoined and ordered to make restitution of some $172 million to injured consumers. That motion is currently pending. Meanwhile, the FTC alleges that since 2002, when Defendants became aware of the investigation that led to this lawsuit, Andris Pukke in particular has been actively dissipating Defendants’ assets by making transfers to close friends and relatives, to trusts (both domestic and offshore), and by living a lavish lifestyle. 2 For example, since 2003 Pukke and DebtWorks have transferred over $2.8 million to individuals who never worked for DebtWorks, including Pukke’s father in Latvia, his girlfriend Angela Chittenden, and his wife Pamela, as well as at least $1.6 million to a company controlled by Pukke, Infinity Resources Group. In addition, less than two months after the FTC served AmeriDebt and DebtWorks with Civil Investigative Demands in May and August 2002, Pukke attempted to establish domestic and offshore trusts which the FTC asserts were part of an effort to put his assets out of reach of the FTC and other creditors. 3 Pukke, however, appears to retain substantial control over three primary trusts: The Pukke 2002 Family Irrevocable Trust (located in Delaware with estimated assets *562 562of over $8.8 million), The P Family Trust (established under the laws of the Caribbean island of Nevis with estimated assets of $9 million), and The P II Family Trust (established under the laws of the Cook Islands with estimated assets of $1.3 million). Lastly, the FTC catalogs numerous expenditures Pukke has made out of DebtWorks’ funds to maintain personal residences, yachts and vacations unrelated to DebtWorks’ business. The FTC asserts that if this behavior is allowed to continue, there is a substantial risk that it will not be able to satisfy any final order granting equitable monetary relief that may be entered in this case.

III.

Defendants oppose the Motion for Preliminary Injunction on the grounds that: (a) the Court lacks jurisdiction to grant the requested relief; (b) the FTC has failed to meet its burden of demonstrating a likelihood of success on the merits; (c) the FTC has failed to show that the balance of equities favors the entry of a preliminary injunction; and (d) any order granting the requested relief would violate the Anti-Injunction Act, 28 U.S.C. § 2283, and improperly interfere with the priority of federal tax liens. 4

A. Jurisdiction

Pursuant to Section 13(b) of the FTC Act, “in proper cases the Commission may seek, and after proper proof, the court may issue a permanent injunction.” 15 U.S.C. § 53(b). The authority to grant such relief includes the power to grant any ancillary relief necessary to accomplish complete justice, including ordering equitable relief for consumer redress through the repayment of money, restitution, rescission, or disgorgement of unjust enrichment. FTC v. Febre, 128 F.3d 530, 534 (7th Cir.1997). To insure that any final relief is complete and meaningful, the court may also order any necessary temporary or preliminary relief, such as an asset freeze. FTC v. Gem Merch. Corp., 87 F.3d 466, 469 (11th Cir.1996). Exercise of this broad equitable authority, which is vested in the court’s sound discretion, is particularly appropriate where the public interest is at stake. Porter v. Warner Holding Co., 328 U.S. 395, 398, 66 S.Ct. 1086, 90 L.Ed. 1332 (1946) (citing Hecht Co. v. Bowles, 321 U.S. 321, 329, 64 S.Ct. 587, 88 L.Ed. 754(1944)).

Defendants contend that the Court’s jurisdiction to order the relief requested by the FTC is limited to “proper cases,” which they contend are only those in which the FTC seeks “to halt a straightforward violation of section 5 that require[s] no application of the FTC’s expertise to a novel regulatory issue,” citing FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020, 1028 (7th Cir.1988). Defendants argue that since the FTC admitted in a press conference in November 2003 that this case involves “novel and difficult legal issues” rather than those involved in a routine fraud case, jurisdiction does not lie.

The FTC responds that a “proper case” under Section 13(b) is simply one that involves a violation “of any provision of law enforced by the Commission.”Gem Merch., 87 F.3d at 468; FTC v. Evans Prods. Co., 775 F.2d 1084, 1086-87 (9th Cir.1985) (“In attempting to limit § 13(b) to cases involving `routine fraud’ or violations of previously established FTC rules, [Defendant] misreads both the case law … and the legislative history.”); FTC v. *563 563Va. Homes Mfg. Corp., 509 F.Supp. 51, 54 (D.Md.1981); FTC v. Mylan Labs., Inc., 62 F.Supp.2d 25, 36 (D.D.C.1999). Since, according to the FTC, Defendants Pukke and DebtWorks used deceptive claims to induce consumers to purchase their product in violation of Section 5, this is a “proper case” under Section 13(b) over which this Court should exercise jurisdiction. 5

The Court agrees with the FTC’s reading of “proper case” and that it has jurisdiction to order the requested relief under Section 13(b) of the Act.

B. Likelihood of Success on the Merits

Before a district court may enter a preliminary injunction under Section 13(b), it must (i) consider the FTC’s likelihood of success on the merits and (ii) weigh the equities. FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1343 (4th Cir.1976). This test is different from that used for private litigants, who must also prove irreparable injury, because in an FTC action harm to the public interest is presumed. FTC v. Affordable Media, 179 F.3d 1228, 1233 (9th Cir.1999); Va. Homes Mfg. Corp., 509 F.Supp. at 59.

For their part, Defendants contend that for the FTC to prove a violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), it must demonstrate that their actions involved a material misrepresentation or omission “likely to mislead the consumer acting reasonably in the circumstances to the consumer’s detriment,” Southwest Sunsites, Inc. v. FTC, 785 F.2d 1431, 1435 (9th Cir.1986), a burden the FTC cannot carry.

First, say Defendants, the FTC has failed to demonstrate that their statements were likely to mislead consumers. Instead the facts show that AmeriDebt was actually a non-profit entity whose customers were asked for an initial enrollment contribution which was understood to be voluntary, and that AmeriDebt in fact did educate and counsel its customers with respect to finances and credit. In addition, in contrast to the FTC’s claim that the allegedly misleading statements were likely to result in detriment to consumers, Defendants cite evidence tending to show that enrollment in their program actually benefitted consumers. Finally, Defendants argue that the FTC has not shown that it can succeed against DebtWorks and Pukke on theories of vicarious liability, since it has not established the various factors that courts require to determine the existence of a common enterprise.

The FTC submits that Defendants are arguing the merits of the case under a summary judgment standard. The burden for prevailing on a motion for a preliminary injunction under Section 13(b) is far more lenient. Specifically, the FTC “meets its burden on the `likelihood of success’ issue if it shows preliminarily, by affidavits or other proof, that it has a fair and tenable chance of ultimate success on the merits.” FTC v. Beatrice Foods Co., 587 F.2d 1225, 1229 (D.C.Cir.1978). This, the FTC submits, it has done through the exhibits entered in support of its Motion for Summary Judgment, viz. deposition testimony, declarations, and extensive documentary evidence. This evidence, according to the FTC, strongly suggests that AmeriDebt, DebtWorks, and Pukke operated as a common enterprise to *564 564deceive consumers into purchasing high-cost debt management plans, and then funneled the profits to Pukke and companies he owned. 6 Equally important, says the FTC, is the fact that on deposition, relying on the Fifth Amendment, Andris Pukke refused to respond to virtually every question asked of him with respect to issues relevant to whether the FTC is likely to prevail on the merits, and as a result of the Court may, in this civil proceeding, draw negative inferences about what he did or did not do. Baxter, 425 U.S. at 318-19, 96 S.Ct. 1551;ePlus Tech., Inc., 313 F.3d at 179.

The Court agrees that Pukke’s refusal to answer questions about his possible dissipation of assets, coupled with the exhaustive evidence marshaled by the FTC in support of its Motion for Summary Judgment, establish that the FTC has “a fair and tenable chance of ultimate success on the merits.”

C. Balancing the Equities

Although a district court must weigh the public and private equities in an FTC action for injunctive relief, courts have held that the public interest should receive greater weight in such proceedings. World Travel, 861 F.2d at 1030. The Fourth Circuit has gone so far as to say that private injuries “are not proper considerations for granting or withholding injunctive relief under Section 13(b).” Food Town Stores, 539 F.2d at 1346.

Even so, Defendants argue that the injunctive relief the FTC seeks is unwarranted because all the transfers of which it complains transpired prior to his “financial reverses,” and in any case there has been “no extravagance and no offshore transfers.”

Apart from urging that Pukke’s alleged personal hardship be given little weight, the FTC points out that under the injunction Pukke will still be allowed to earn income through gainful legitimate employment and at the same time will have a mechanism through which to seek reasonable living expenses and attorney’s fees. In contrast, the public interest in preserving the possibility of effective relief at the end of litigation requires the appointment of a receiver, an asset freeze, an accounting, and a repatriation of all transferred assets before they are completely dissipated.

The Court agrees with the FTC that in balancing the equities, the public interest predominates and will be best served by the appointment of a receiver, an asset *565 565freeze, an accounting, and a repatriation of Defendants’ assets.

D. Anti-Injunction Act and Tax Lien Considerations

Defendants’ final argument is that any court order granting the FTC’s request for relief would violate the Anti-Injunction Act (AIA), 28 U.S.C. § 2283, because it would in effect enjoin Pukke from making payments pursuant to the pendente lite support decree he and Pamela have entered into in state court. In addition, Defendants maintain that any injunction would prevent “Mr. Pukke from dealing with his obligations to the IRS, and would interfere with the IRS liens which have precedence over any interest that the FTC could attempt to assert.” The Court rejects both arguments.

The AIA instructs that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” 28 U.S.C. § 2283. The FTC submits that the AIA does not apply to the United States or its agencies. Leiter Minerals, Inc. v. United States, 352 U.S. 220, 225, 77 S.Ct. 287, 1 L.Ed.2d 267 (1957);Mitchum v. Foster, 407 U.S. 225, 235-36, 92 S.Ct. 2151, 32 L.Ed.2d 705(1972). Moreover, it says, a grant of relief in this case would not improperly affect the Pukkes’ divorce case since Maryland has long recognized the doctrine of constructive trust which requires that any proceeds of wrongdoing may be properly ordered held in trust for the victims of the wrongdoing.Bowie v. Ford, 269 Md. 111, 118-19, 304 A.2d 803, 808-09 (Md.1973). Freezing the assets in this case would do no more than effectuate Maryland law by preserving the Pukkes’ ill-gotten gains for eventual return to their victims. Finally, the FTC points out that the state court pendente lite decree is a consent decree, i.e., it is one in which Andris Pukke, Pamela Pukke, and presumably their counsel themselves fixed the amount of money he would pay to her each month. Thus, in addition to a base payment of $30,000 per month, Pukke has agreed to pay the mortgages on family residences, private schooling for the parties’ children, and a host of other add-ons. His total average payments certainly approach, may even exceed, six figures per month. The FTC argues that Defendants should not be permitted to use their divorce proceedings to redistribute, shield, and divert assets that may ultimately belong to consumer victims.

The FTC also disputes Defendants’ reference to unspecified “IRS liens” as a reason for the Court to deny relief in this case. Under the same doctrine of constructive trust previously referred to, even if the IRS has placed liens on Defendants’ assets, those liens would not attach to property that was wrongfully obtained from consumers, precisely what the FTC alleges in this case. See FTC v. Crittenden, 823 F.Supp. 699, 703 (C.D.Cal.1993), aff’d, 1994 WL 59803 (9th Cir.1994). Defendants leave this argument unanswered.

The Court agrees with the FTC’s arguments and concludes that neither the AIA nor any possible IRS liens bar the granting of preliminary injunctive relief in the present case.

IV.

Turning to the order proposed by the FTC, which Defendants objected to, the Court, with a few minor exceptions, has adopted the order submitted by the FTC. Specifically:

1) The Court has named Robb Evans & Associates, LLC, Sun Valley, California as Receiver, based on that entity’s extensive experience in locating and marshaling assets, including those located offshore. The Court *566 566notes that Robb Evans has worked on over 100 asset retrieval cases and has marshaled over a billion dollars in assets. Despite the fact that Robb Evans is located in California, the Court accepts the FTC’s representation that much of the discovery in the case has already been conducted which can be shared electronically, so that any need for Robb Evans personnel to travel back and forth to Maryland will be limited;

2) The Court finds no Fifth Amendment problem in requiring Andris Pukke to provide information under oath. The Court’s Order simply requires him to provide an accounting of assets, a standard provision in asset freeze orders. When ordered to provide an accounting, Pukke will be free to assert any Fifth Amendment privilege he might have, after which the FTC may seek an order of contempt. At that point, the issue will be ripe for the Court’s consideration.See FTC v. Phoenix Avatar, 2004 WL 1746698, *13-15 (N.D.Ill.2004);

3) The Court has revised slightly the proposed order and has required that information be turned over in ten (10) business days rather than five (5);

4) As for the provisions requiring Defendants to provide information to the AmeriDebt Trustee, the Court has rejected Defendants’ argument that because the Trustee may have claims against the Defendants, he is an adverse party who should not have access to asset information. As the FTC points out, the Bankruptcy Code (11 U.S.C. § 543) provides that, to the extent a Receiver holds property of the bankruptcy estate, he is a custodian of that property and is obliged to turn it over at the Trustee’s request. If there is any overlap between the property of the bankruptcy estate and that of the receivership, the notice provisions of the Court’s order will enable the Trustee and the parties to sort these issues out in due course;

5) The Court has also rejected Defendants’ suggestion that their attorneys fees should routinely be subject to court review and approval as opposed to approval by the Receiver, or that payment of the fees should be consistent with Defendants’ retainer agreement. To the extent Defendants feel aggrieved by any decision of the Receiver in this regard they may always file a petition for review with the Court;

6) As for living expenses, the Court does not agree that Andris Pukke should be allowed to continue servicing existing mortgage payments or make payments to his wife pursuant to a consent pendente lite order of the Circuit Court for Montgomery County. Pukke may spend freely any income earned from gainful employment and, if need be, he can obtain financial assistance from his friends and family. He may also seek expenses from any frozen funds after prior written approval by the Receiver or the Court. As for mortgage payments, since Pukke’s residences will become Receivership property, the Receiver may take whatever acts are necessary to conserve, hold and manage these properties;

7) The Court believes that the FTC proposal regarding the periodic accounts of the Receiver is sensible. The Receiver must provide a preliminary report to the Court ninety (90) days after being appointed and thereafter at regular intervals of three (3) months until discharged. Any more *567 567frequent accounting would unnecessarily increase expenses. The Receiver’s compensation is always subject to Court approval;

8) Defense Counsel will be provided with copies of any Receiver’s reports filed with the Court;

9) As for ex parte filings by the Receiver, the Court accepts that this is a standard provision. The Receiver may file an ex parte Affidavit of Non-Compliance whenever any person or entity fails to deliver or transfer any Receivership Property or otherwise fails to comply with that person or entity’s obligations under the Order. The Court may also authorize Writs of Possession or Sequestration or other equitable writs requested by the Receiver, and the Court may take other appropriate action including requiring notice to Defendants;

10) As far as the power of the Court to compel trustees to turn over trust assets to the Receiver, the Order requires Defendants, not the trustees, to turn over trust assets to the Receiver. If Andris Pukke, who appears to maintain substantial de facto control over the trusts, violates this Order and fails to repatriate assets in the trusts, the FTC may move for contempt, at which point Defendants will be free to argue the impossibility of performance, an argument the Court may or may not find persuasive.

V.

For all the foregoing reasons, the FTC’s Motion for Preliminary Injunction (Paper No. 103) was GRANTED by Order of the Court dated April 20, 2005.

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Notes:

1. Earlier in these proceedings, AmeriDebt filed a petition under Chapter 11 of the Bankruptcy Code and Mark D. Taylor was appointed as the Chapter 11 Trustee. On March 25, 2005 the FTC announced a settlement with the AmeriDebt Trustee, which will not be final until the Bankruptcy Court and District Court enter orders approving it. Since the settlement agreement is not final, the Trustee appeared on behalf of AmeriDebt in these proceedings and advised the Court that he agrees that the relief requested by the FTC is “necessary to prevent the further erosion of the Estate assets.”

2. When questioned about the dissipation of assets at his March 24, 2005 deposition, Pukke invoked his Fifth Amendment right against self-incrimination. As a result, the FTC asserts and the Court agrees that in this civil proceeding the Court may draw appropriate adverse inferences against him with respect to the allegations of dissipation. See, e.g., Baxter v. Palmigiano, 425 U.S. 308, 318-19, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976);ePlus Tech., Inc. v. Aboud, 313 F.3d 166, 179 (4th Cir.2002).

3. In support of this contention, the FTC cites a letter dated January 30, 2003 written by the attorney who created the trusts, Jonathan Gopman. In the letter Gopman explains that:

[O]ne of the benefits of [Pukke’s] foreign wealth protection structure is its ability to protect the underlying assets from the claims of future unforeseen creditors. The most effective method of protecting the underlying assets … is to hold [them] in an appropriate foreign jurisdiction and for each trust to have relatively few (if any) U.S. contacts. Therefore, should [Pukke’s] financial situation change or should he become (or potentially become) subject to litigation, I have informed him that it is important … to reevaluate the status of this structure and consider potential modifications that will help ensure the optimal protection of the underlying wealth.

4. Pamela Pukke joins Defendants in arguing that any order of this Court would violate the Anti-Injunction Act by interfering with a consent pendente lite order she and Andris Pukke entered into in divorce proceedings presently pending in the Circuit Court for Montgomery County, Maryland.

5. The FTC argues that Defendants misconstrue World Travel. There, they say, the Seventh Circuit held that Congress expected that the FTC could “at least” rely on Section 13(b) to halt a straightforward violation of Section 5. But rather than barring a reliance on Section 13(b) in more novel cases, as Defendants suggest, the World Travel court in fact observed that a “substantial argument can be made” that the FTC can rely on Section 13(b) “for any violation of a statute administered by the FTC.” 861 F.2d at 1028.

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6. The FTC also points out that it is not required to prove individual consumer reliance or injury in order to ultimately prevail and obtain consumer redress; it need only establish that a material misrepresentation or omission was made that was likely to mislead consumers acting reasonably under the circumstances. FTC v. Tashman, 318 F.3d 1273, 1277 (11th Cir.2003); FTC v. Pantron I Corp., 33 F.3d 1088, 1095 (9th Cir.1994); FTC v. Kuykendall, 371 F.3d 745, 764-66 (10th Cir.2004) (en banc). Moreover, the FTC disputes the relevance of the findings of Defendants’ two experts that few consumers complained to AmeriDebt about its practices or that some consumers actually benefitted from their debt management plans. The FTC argues that lack of consumer complaints is not a defense under the FTC Act, and that the measure of consumer injury is the amount paid by consumers for the product or service — regardless of the value gained. FTC v. Amy Travel Serv., 875 F.2d 564, 572 (7th Cir.1989); Detroit Auto. Purchasing Serv’s, Inc. v. Lee,463 F.Supp. 954, 968 (D.Md.1978); McGregor v. Chierico, 206 F.3d 1378, 1388-89 (11th Cir.2000); FTC v. Figgie Int’l, Inc., 994 F.2d 595, 605-06 (9th Cir.1993).

The Court need not resolve these issues at this juncture, which are more properly addressed at the summary judgment stage. For present purposes it will suffice if the FTC demonstrates that there is factual and legal authority for concluding that the FTC has a “fair and tenable chance of ultimate success on the merits.”

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The Federal Trade Commission (FTC) has sued AmeriDebt, Inc., DebtWorks, Inc., and Andris Pukke for misrepresentations and deceptive omissions under the Federal Trade Commission Act (FTC Act), 15 U.S.C. §§ 41-58. It has also sued AmeriDebt for violations of the disclosure requirements under the Gramm-Leach-Bliley Act, 15 U.S.C. § 6801(a) et seq. The FTC alleges that Defendants, operating in common as a non-profit credit counseling service, defrauded consumers with debt problems by offering to fashion debt repayment plans for them, then deducting for their own benefit payments the consumers made under the plans without disclosing those deductions to the consumers. The FTC has also sued Pamela Pukke as Relief Defendant to recover such proceeds of these transactions as have been received by her husband, Andris Pukke, and transferred to her.

The FTC has filed a motion pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), requesting that the Court enter a preliminary injunction appointing a receiver, freezing the assets of Andris Pukke and DebtWorks, Inc. (collectively “Defendants”), *561 561requiring an accounting from them, and directing that Andris Pukke repatriate assets he has transferred offshore. 1The Court held oral argument on the motion and took it under advisement. On April 20, 2005 the Court entered an Order granting the Motion. This Opinion sets forth the reasons for the Court’s decision.

II.

The background of this litigation is set forth in FTC. v. AmeriDebt, 343 F.Supp.2d 451 (D.Md.2004). In brief, the FTC alleges that Defendants (except for Pamela Pukke) operated as a common enterprise to deceive consumers into paying for high-cost debt management plans in violation of Section 5 of the FTC Act, 15 U.S.C. § 45(a). After extensive discovery, the FTC filed a Motion for Summary Judgment Against DebtWorks and Andris Pukke, requesting that they be found liable, and that they be permanently enjoined and ordered to make restitution of some $172 million to injured consumers. That motion is currently pending. Meanwhile, the FTC alleges that since 2002, when Defendants became aware of the investigation that led to this lawsuit, Andris Pukke in particular has been actively dissipating Defendants’ assets by making transfers to close friends and relatives, to trusts (both domestic and offshore), and by living a lavish lifestyle. 2 For example, since 2003 Pukke and DebtWorks have transferred over $2.8 million to individuals who never worked for DebtWorks, including Pukke’s father in Latvia, his girlfriend Angela Chittenden, and his wife Pamela, as well as at least $1.6 million to a company controlled by Pukke, Infinity Resources Group. In addition, less than two months after the FTC served AmeriDebt and DebtWorks with Civil Investigative Demands in May and August 2002, Pukke attempted to establish domestic and offshore trusts which the FTC asserts were part of an effort to put his assets out of reach of the FTC and other creditors. 3 Pukke, however, appears to retain substantial control over three primary trusts: The Pukke 2002 Family Irrevocable Trust (located in Delaware with estimated assets *562 562of over $8.8 million), The P Family Trust (established under the laws of the Caribbean island of Nevis with estimated assets of $9 million), and The P II Family Trust (established under the laws of the Cook Islands with estimated assets of $1.3 million). Lastly, the FTC catalogs numerous expenditures Pukke has made out of DebtWorks’ funds to maintain personal residences, yachts and vacations unrelated to DebtWorks’ business. The FTC asserts that if this behavior is allowed to continue, there is a substantial risk that it will not be able to satisfy any final order granting equitable monetary relief that may be entered in this case.

III.

Defendants oppose the Motion for Preliminary Injunction on the grounds that: (a) the Court lacks jurisdiction to grant the requested relief; (b) the FTC has failed to meet its burden of demonstrating a likelihood of success on the merits; (c) the FTC has failed to show that the balance of equities favors the entry of a preliminary injunction; and (d) any order granting the requested relief would violate the Anti-Injunction Act, 28 U.S.C. § 2283, and improperly interfere with the priority of federal tax liens. 4

A. Jurisdiction

Pursuant to Section 13(b) of the FTC Act, “in proper cases the Commission may seek, and after proper proof, the court may issue a permanent injunction.” 15 U.S.C. § 53(b). The authority to grant such relief includes the power to grant any ancillary relief necessary to accomplish complete justice, including ordering equitable relief for consumer redress through the repayment of money, restitution, rescission, or disgorgement of unjust enrichment. FTC v. Febre, 128 F.3d 530, 534 (7th Cir.1997). To insure that any final relief is complete and meaningful, the court may also order any necessary temporary or preliminary relief, such as an asset freeze. FTC v. Gem Merch. Corp., 87 F.3d 466, 469 (11th Cir.1996). Exercise of this broad equitable authority, which is vested in the court’s sound discretion, is particularly appropriate where the public interest is at stake. Porter v. Warner Holding Co., 328 U.S. 395, 398, 66 S.Ct. 1086, 90 L.Ed. 1332 (1946) (citing Hecht Co. v. Bowles, 321 U.S. 321, 329, 64 S.Ct. 587, 88 L.Ed. 754(1944)).

Defendants contend that the Court’s jurisdiction to order the relief requested by the FTC is limited to “proper cases,” which they contend are only those in which the FTC seeks “to halt a straightforward violation of section 5 that require[s] no application of the FTC’s expertise to a novel regulatory issue,” citing FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020, 1028 (7th Cir.1988). Defendants argue that since the FTC admitted in a press conference in November 2003 that this case involves “novel and difficult legal issues” rather than those involved in a routine fraud case, jurisdiction does not lie.

The FTC responds that a “proper case” under Section 13(b) is simply one that involves a violation “of any provision of law enforced by the Commission.”Gem Merch., 87 F.3d at 468; FTC v. Evans Prods. Co., 775 F.2d 1084, 1086-87 (9th Cir.1985) (“In attempting to limit § 13(b) to cases involving `routine fraud’ or violations of previously established FTC rules, [Defendant] misreads both the case law … and the legislative history.”); FTC v. *563 563Va. Homes Mfg. Corp., 509 F.Supp. 51, 54 (D.Md.1981); FTC v. Mylan Labs., Inc., 62 F.Supp.2d 25, 36 (D.D.C.1999). Since, according to the FTC, Defendants Pukke and DebtWorks used deceptive claims to induce consumers to purchase their product in violation of Section 5, this is a “proper case” under Section 13(b) over which this Court should exercise jurisdiction. 5

The Court agrees with the FTC’s reading of “proper case” and that it has jurisdiction to order the requested relief under Section 13(b) of the Act.

B. Likelihood of Success on the Merits

Before a district court may enter a preliminary injunction under Section 13(b), it must (i) consider the FTC’s likelihood of success on the merits and (ii) weigh the equities. FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1343 (4th Cir.1976). This test is different from that used for private litigants, who must also prove irreparable injury, because in an FTC action harm to the public interest is presumed. FTC v. Affordable Media, 179 F.3d 1228, 1233 (9th Cir.1999); Va. Homes Mfg. Corp., 509 F.Supp. at 59.

For their part, Defendants contend that for the FTC to prove a violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), it must demonstrate that their actions involved a material misrepresentation or omission “likely to mislead the consumer acting reasonably in the circumstances to the consumer’s detriment,” Southwest Sunsites, Inc. v. FTC, 785 F.2d 1431, 1435 (9th Cir.1986), a burden the FTC cannot carry.

First, say Defendants, the FTC has failed to demonstrate that their statements were likely to mislead consumers. Instead the facts show that AmeriDebt was actually a non-profit entity whose customers were asked for an initial enrollment contribution which was understood to be voluntary, and that AmeriDebt in fact did educate and counsel its customers with respect to finances and credit. In addition, in contrast to the FTC’s claim that the allegedly misleading statements were likely to result in detriment to consumers, Defendants cite evidence tending to show that enrollment in their program actually benefitted consumers. Finally, Defendants argue that the FTC has not shown that it can succeed against DebtWorks and Pukke on theories of vicarious liability, since it has not established the various factors that courts require to determine the existence of a common enterprise.

The FTC submits that Defendants are arguing the merits of the case under a summary judgment standard. The burden for prevailing on a motion for a preliminary injunction under Section 13(b) is far more lenient. Specifically, the FTC “meets its burden on the `likelihood of success’ issue if it shows preliminarily, by affidavits or other proof, that it has a fair and tenable chance of ultimate success on the merits.” FTC v. Beatrice Foods Co., 587 F.2d 1225, 1229 (D.C.Cir.1978). This, the FTC submits, it has done through the exhibits entered in support of its Motion for Summary Judgment, viz. deposition testimony, declarations, and extensive documentary evidence. This evidence, according to the FTC, strongly suggests that AmeriDebt, DebtWorks, and Pukke operated as a common enterprise to *564 564deceive consumers into purchasing high-cost debt management plans, and then funneled the profits to Pukke and companies he owned. 6 Equally important, says the FTC, is the fact that on deposition, relying on the Fifth Amendment, Andris Pukke refused to respond to virtually every question asked of him with respect to issues relevant to whether the FTC is likely to prevail on the merits, and as a result of the Court may, in this civil proceeding, draw negative inferences about what he did or did not do. Baxter, 425 U.S. at 318-19, 96 S.Ct. 1551;ePlus Tech., Inc., 313 F.3d at 179.

The Court agrees that Pukke’s refusal to answer questions about his possible dissipation of assets, coupled with the exhaustive evidence marshaled by the FTC in support of its Motion for Summary Judgment, establish that the FTC has “a fair and tenable chance of ultimate success on the merits.”

C. Balancing the Equities

Although a district court must weigh the public and private equities in an FTC action for injunctive relief, courts have held that the public interest should receive greater weight in such proceedings. World Travel, 861 F.2d at 1030. The Fourth Circuit has gone so far as to say that private injuries “are not proper considerations for granting or withholding injunctive relief under Section 13(b).” Food Town Stores, 539 F.2d at 1346.

Even so, Defendants argue that the injunctive relief the FTC seeks is unwarranted because all the transfers of which it complains transpired prior to his “financial reverses,” and in any case there has been “no extravagance and no offshore transfers.”

Apart from urging that Pukke’s alleged personal hardship be given little weight, the FTC points out that under the injunction Pukke will still be allowed to earn income through gainful legitimate employment and at the same time will have a mechanism through which to seek reasonable living expenses and attorney’s fees. In contrast, the public interest in preserving the possibility of effective relief at the end of litigation requires the appointment of a receiver, an asset freeze, an accounting, and a repatriation of all transferred assets before they are completely dissipated.

The Court agrees with the FTC that in balancing the equities, the public interest predominates and will be best served by the appointment of a receiver, an asset *565 565freeze, an accounting, and a repatriation of Defendants’ assets.

D. Anti-Injunction Act and Tax Lien Considerations

Defendants’ final argument is that any court order granting the FTC’s request for relief would violate the Anti-Injunction Act (AIA), 28 U.S.C. § 2283, because it would in effect enjoin Pukke from making payments pursuant to the pendente lite support decree he and Pamela have entered into in state court. In addition, Defendants maintain that any injunction would prevent “Mr. Pukke from dealing with his obligations to the IRS, and would interfere with the IRS liens which have precedence over any interest that the FTC could attempt to assert.” The Court rejects both arguments.

The AIA instructs that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” 28 U.S.C. § 2283. The FTC submits that the AIA does not apply to the United States or its agencies. Leiter Minerals, Inc. v. United States, 352 U.S. 220, 225, 77 S.Ct. 287, 1 L.Ed.2d 267 (1957);Mitchum v. Foster, 407 U.S. 225, 235-36, 92 S.Ct. 2151, 32 L.Ed.2d 705(1972). Moreover, it says, a grant of relief in this case would not improperly affect the Pukkes’ divorce case since Maryland has long recognized the doctrine of constructive trust which requires that any proceeds of wrongdoing may be properly ordered held in trust for the victims of the wrongdoing.Bowie v. Ford, 269 Md. 111, 118-19, 304 A.2d 803, 808-09 (Md.1973). Freezing the assets in this case would do no more than effectuate Maryland law by preserving the Pukkes’ ill-gotten gains for eventual return to their victims. Finally, the FTC points out that the state court pendente lite decree is a consent decree, i.e., it is one in which Andris Pukke, Pamela Pukke, and presumably their counsel themselves fixed the amount of money he would pay to her each month. Thus, in addition to a base payment of $30,000 per month, Pukke has agreed to pay the mortgages on family residences, private schooling for the parties’ children, and a host of other add-ons. His total average payments certainly approach, may even exceed, six figures per month. The FTC argues that Defendants should not be permitted to use their divorce proceedings to redistribute, shield, and divert assets that may ultimately belong to consumer victims.

The FTC also disputes Defendants’ reference to unspecified “IRS liens” as a reason for the Court to deny relief in this case. Under the same doctrine of constructive trust previously referred to, even if the IRS has placed liens on Defendants’ assets, those liens would not attach to property that was wrongfully obtained from consumers, precisely what the FTC alleges in this case. See FTC v. Crittenden, 823 F.Supp. 699, 703 (C.D.Cal.1993), aff’d, 1994 WL 59803 (9th Cir.1994). Defendants leave this argument unanswered.

The Court agrees with the FTC’s arguments and concludes that neither the AIA nor any possible IRS liens bar the granting of preliminary injunctive relief in the present case.

IV.

Turning to the order proposed by the FTC, which Defendants objected to, the Court, with a few minor exceptions, has adopted the order submitted by the FTC. Specifically:

1) The Court has named Robb Evans & Associates, LLC, Sun Valley, California as Receiver, based on that entity’s extensive experience in locating and marshaling assets, including those located offshore. The Court *566 566notes that Robb Evans has worked on over 100 asset retrieval cases and has marshaled over a billion dollars in assets. Despite the fact that Robb Evans is located in California, the Court accepts the FTC’s representation that much of the discovery in the case has already been conducted which can be shared electronically, so that any need for Robb Evans personnel to travel back and forth to Maryland will be limited;

2) The Court finds no Fifth Amendment problem in requiring Andris Pukke to provide information under oath. The Court’s Order simply requires him to provide an accounting of assets, a standard provision in asset freeze orders. When ordered to provide an accounting, Pukke will be free to assert any Fifth Amendment privilege he might have, after which the FTC may seek an order of contempt. At that point, the issue will be ripe for the Court’s consideration.See FTC v. Phoenix Avatar, 2004 WL 1746698, *13-15 (N.D.Ill.2004);

3) The Court has revised slightly the proposed order and has required that information be turned over in ten (10) business days rather than five (5);

4) As for the provisions requiring Defendants to provide information to the AmeriDebt Trustee, the Court has rejected Defendants’ argument that because the Trustee may have claims against the Defendants, he is an adverse party who should not have access to asset information. As the FTC points out, the Bankruptcy Code (11 U.S.C. § 543) provides that, to the extent a Receiver holds property of the bankruptcy estate, he is a custodian of that property and is obliged to turn it over at the Trustee’s request. If there is any overlap between the property of the bankruptcy estate and that of the receivership, the notice provisions of the Court’s order will enable the Trustee and the parties to sort these issues out in due course;

5) The Court has also rejected Defendants’ suggestion that their attorneys fees should routinely be subject to court review and approval as opposed to approval by the Receiver, or that payment of the fees should be consistent with Defendants’ retainer agreement. To the extent Defendants feel aggrieved by any decision of the Receiver in this regard they may always file a petition for review with the Court;

6) As for living expenses, the Court does not agree that Andris Pukke should be allowed to continue servicing existing mortgage payments or make payments to his wife pursuant to a consent pendente lite order of the Circuit Court for Montgomery County. Pukke may spend freely any income earned from gainful employment and, if need be, he can obtain financial assistance from his friends and family. He may also seek expenses from any frozen funds after prior written approval by the Receiver or the Court. As for mortgage payments, since Pukke’s residences will become Receivership property, the Receiver may take whatever acts are necessary to conserve, hold and manage these properties;

7) The Court believes that the FTC proposal regarding the periodic accounts of the Receiver is sensible. The Receiver must provide a preliminary report to the Court ninety (90) days after being appointed and thereafter at regular intervals of three (3) months until discharged. Any more *567 567frequent accounting would unnecessarily increase expenses. The Receiver’s compensation is always subject to Court approval;

8) Defense Counsel will be provided with copies of any Receiver’s reports filed with the Court;

9) As for ex parte filings by the Receiver, the Court accepts that this is a standard provision. The Receiver may file an ex parte Affidavit of Non-Compliance whenever any person or entity fails to deliver or transfer any Receivership Property or otherwise fails to comply with that person or entity’s obligations under the Order. The Court may also authorize Writs of Possession or Sequestration or other equitable writs requested by the Receiver, and the Court may take other appropriate action including requiring notice to Defendants;

10) As far as the power of the Court to compel trustees to turn over trust assets to the Receiver, the Order requires Defendants, not the trustees, to turn over trust assets to the Receiver. If Andris Pukke, who appears to maintain substantial de facto control over the trusts, violates this Order and fails to repatriate assets in the trusts, the FTC may move for contempt, at which point Defendants will be free to argue the impossibility of performance, an argument the Court may or may not find persuasive.

V.

For all the foregoing reasons, the FTC’s Motion for Preliminary Injunction (Paper No. 103) was GRANTED by Order of the Court dated April 20, 2005.

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Notes:

1. Earlier in these proceedings, AmeriDebt filed a petition under Chapter 11 of the Bankruptcy Code and Mark D. Taylor was appointed as the Chapter 11 Trustee. On March 25, 2005 the FTC announced a settlement with the AmeriDebt Trustee, which will not be final until the Bankruptcy Court and District Court enter orders approving it. Since the settlement agreement is not final, the Trustee appeared on behalf of AmeriDebt in these proceedings and advised the Court that he agrees that the relief requested by the FTC is “necessary to prevent the further erosion of the Estate assets.”

2. When questioned about the dissipation of assets at his March 24, 2005 deposition, Pukke invoked his Fifth Amendment right against self-incrimination. As a result, the FTC asserts and the Court agrees that in this civil proceeding the Court may draw appropriate adverse inferences against him with respect to the allegations of dissipation. See, e.g., Baxter v. Palmigiano, 425 U.S. 308, 318-19, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976);ePlus Tech., Inc. v. Aboud, 313 F.3d 166, 179 (4th Cir.2002).

3. In support of this contention, the FTC cites a letter dated January 30, 2003 written by the attorney who created the trusts, Jonathan Gopman. In the letter Gopman explains that:

[O]ne of the benefits of [Pukke’s] foreign wealth protection structure is its ability to protect the underlying assets from the claims of future unforeseen creditors. The most effective method of protecting the underlying assets … is to hold [them] in an appropriate foreign jurisdiction and for each trust to have relatively few (if any) U.S. contacts. Therefore, should [Pukke’s] financial situation change or should he become (or potentially become) subject to litigation, I have informed him that it is important … to reevaluate the status of this structure and consider potential modifications that will help ensure the optimal protection of the underlying wealth.

4. Pamela Pukke joins Defendants in arguing that any order of this Court would violate the Anti-Injunction Act by interfering with a consent pendente lite order she and Andris Pukke entered into in divorce proceedings presently pending in the Circuit Court for Montgomery County, Maryland.

5. The FTC argues that Defendants misconstrue World Travel. There, they say, the Seventh Circuit held that Congress expected that the FTC could “at least” rely on Section 13(b) to halt a straightforward violation of Section 5. But rather than barring a reliance on Section 13(b) in more novel cases, as Defendants suggest, the World Travel court in fact observed that a “substantial argument can be made” that the FTC can rely on Section 13(b) “for any violation of a statute administered by the FTC.” 861 F.2d at 1028.

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6. The FTC also points out that it is not required to prove individual consumer reliance or injury in order to ultimately prevail and obtain consumer redress; it need only establish that a material misrepresentation or omission was made that was likely to mislead consumers acting reasonably under the circumstances. FTC v. Tashman, 318 F.3d 1273, 1277 (11th Cir.2003); FTC v. Pantron I Corp., 33 F.3d 1088, 1095 (9th Cir.1994); FTC v. Kuykendall, 371 F.3d 745, 764-66 (10th Cir.2004) (en banc). Moreover, the FTC disputes the relevance of the findings of Defendants’ two experts that few consumers complained to AmeriDebt about its practices or that some consumers actually benefitted from their debt management plans. The FTC argues that lack of consumer complaints is not a defense under the FTC Act, and that the measure of consumer injury is the amount paid by consumers for the product or service — regardless of the value gained. FTC v. Amy Travel Serv., 875 F.2d 564, 572 (7th Cir.1989); Detroit Auto. Purchasing Serv’s, Inc. v. Lee,463 F.Supp. 954, 968 (D.Md.1978); McGregor v. Chierico, 206 F.3d 1378, 1388-89 (11th Cir.2000); FTC v. Figgie Int’l, Inc., 994 F.2d 595, 605-06 (9th Cir.1993).

The Court need not resolve these issues at this juncture, which are more properly addressed at the summary judgment stage. For present purposes it will suffice if the FTC demonstrates that there is factual and legal authority for concluding that the FTC has a “fair and tenable chance of ultimate success on the merits.”

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U.S. v. Rogan, 2012 WL 1107836 (N.D.Ill., Slip Copy, March 29, 2012).

United States District Court, N.D. Illinois, Eastern Division.

The UNITED STATES of America, Plaintiff,

v.

Peter ROGAN, Defendant.

and

410 Montgomery, LLC; Jerry Whitlow, individually and as registered agent of 410 Montgomery, LLC; McCorkle Pedigo & Johnson, LLP; and Darby Bank, Garnishees.

*1 Before the Court is Kelley Drye & Warren LLP’s (“KDW”) Claim and Request for Payment from Escrowed Funds of 410 Montgomery, LLC.

BACKGROUND

On September 29, 2006, the Court entered judgment against Peter Rogan in favor of the United States in the amount of approximately $64.2 million. The judgment was the result of a massive healthcare fraud scheme orchestrated and run by Rogan.FN1 See United States v. Rogan, 459 F.Supp.2d 692 (N.D.Ill.2006); United States v. Rogan, 517 F.3d 449 (7th Cir.2008); see also United States v. Rogan, et. al., 639 F.3d 1106 (7th Cir.2011) ( Rogan ). Rogan has fled the country. To collect the judgment, the United States traced Rogan’s assets and discovered that he invested in 410 Montgomery, LLC (“410 Montgomery”), a firm that built housing in Georgia. Rogan, 639 F.3d at 1106.

FN1. Rogan went through elaborate extremes to conceal his ownership of entities that received the proceeds from his activities. Rogan’s fraud scheme was perpetrated through Edgewater Medical Center (“Edgewater”).

In 1989, an entity that Rogan formed and controlled, Edgewater Operating Company (“EOC”), purchased Edgewater. In 1992, Rogan and his wife, Judith, had set up three trusts in Florida for the benefit of their children (the “Domestic Trusts”). In 1994, EOC was sold to Northside Operating Company (“Northside”), which was created by its parent company, a California-based company called Permian, for the exclusive purpose of purchasing EOC. Rogan and other shareholders of EOC received $31.1 million from the sale of Edgewater. Rogan received approximately $17.4 million, and the remaining shareholders were the Domestic Trusts, which received approximately $4.1 million.

Although Rogan had sold Edgewater to Northside, Rogan retained control of the hospital after the sale through a series of transactions, and he then caused Edgewater to enter into management contracts with two entities that he also controlled, Braddock Management, L.P. (“Braddock”) and Bainbridge Management, Inc. (“Bainbridge”). Rogan’s ownership interest was concealed through an elaborate scheme of inter-locking financial entities owned by Rogan, Rogan’s children, and other entities owned by Rogan. When Rogan operated Edgewater through these entities, the Domestic Trusts received millions of dollars in distributions from the entities.

The United States obtained a writ of garnishment against Rogan’s membership interests in 410 Montgomery. The company sold its holdings, paid its secured creditors, liquidated, and placed the money in escrow. After this Court approved distributions for closing costs, the remaining funds came to about $4 million, which is now being held in court-ordered escrow by the Darby Bank (the “Darby Escrow”). The instant dispute arises out of litigation relating to this writ of garnishment.

As will be further discussed below, on July 15, 2010, the Court entered an Agreed Final Disposition Order, ordering the $4 million in the Darby Escrow, with the exception of $173,289.71, to be turned over to the receiver appointed by Judge Kennelly in Dexia Credit Local v. Rogan, et al., No. 02 C 8288 (N.D.Ill.) ( Dexia ). The remaining $173,289.71 was withheld pending adjudication of claims by Diane Whitlow and the Estate of Jerry Whitlow (“the Whitlows”). The Whitlows claimed that they owned a one-third interest in Taylor Row, LLC (“Taylor Row”) and that 410 Montgomery owes Taylor Row $475,000. Accordingly, the Whitlows argued they were entitled to a total of $173,289.71 from 410 Montgomery and that this amount should be paid to them from the Darby Escrow. On September 21, 2010, the United States opposed the Whitlows’ claim, arguing that the United States had priority over the Whitlows’ claims. This Court entered an order holding that because the United States was a judgment creditor and the Whitlows were unsecured creditors, the United States was entitled to the disputed amount.

This judgment was vacated and remanded by the Court of Appeals on May 12, 2011, in Rogan. The Court of Appeals noted:

First, the writ [of garnishment] covers the property ‘in which the debtor has a substantial nonexempt interest’ which is to say, Rogan’s membership units in 410 Montgomery LLC, not the real estate that 410 Montgomery developed. Investors in corporations and LLCs own tradable shares or units; they do not own the company’s assets. The separation of investment interests from operating assets is a fundamental premise of business law. Equity investors are residual claimants; they get only what is left after debts have been paid. Second, if we were nonetheless to treat 410 Montgomery’s assets as property that Rogan ‘co-owned’ with other investors (including the banks and Taylor Row), then the law of the state in which the property is located determines how far the writ of garnishment reaches. That’s Georgia law-and the parties agree that a writ under Georgia law would not vault equity investor Rogan (and hence would not promote the United States) over creditors’ interests.

*2 * * *

[T]he Whitlows are not claiming any of Rogan’s assets. As we have emphasized, what Rogan owned was a membership interest in 410 Montgomery LLC. The Whitlows don’t want any part of that equity interest; their claim is against the LLC’s own assets, in which creditors have entitlements senior to those of equity investors.

Did 410 Montgomery LLC owe a debt to Taylor Row LLC? If so, how much? If it owed money to Taylor Row LLC, why are the Whitlows the right parties to receive that money?

* * *

Georgia does not appear to permit a suit of this nature; direct actions are proper only with respect to an investor’s own rights against the LLC or its other members. Southwest Health & Wellness, L.L.C. v. Work, 282 Ga.App. 619, 639 S.E.2d 570 (2006); see also Uniform Limited Liability Company Act sec. 901. Does some other provision of Georgia law permit the sort of direct claim that the Whitlows have presented? Has the United States forfeited any objection to the direct nature of this claim? These and any other material issues are open on remand.

Id. at 1109.

After remand to this Court, on September 22, 2011, KDW filed a claim and request for payment from the Darby Escrow for $106,667.37 in “unpaid fees and expenses incurred for 410 Montgomery’s benefit in conjunction with its representation of 410 Montgomery in the above-captioned matter.” (Dkt. No. 522 at 2.) The United States filed a response, opposing KDW’s claim. Dexia Credit Local (“Dexia”) also filed a response, opposing KDW’s claim.FN2

FN2. Dexia issued letters of credit securing some $56 million in bond obligations of Edgewater in May 1998. See Dexia Credit Local v. Rogan, 231 F.R.D. 268, 270 (N.D.Ill.2004). Dexia brought suit in November 2004, alleging that Rogan, Braddock, and Bainbridge engaged in a wide-ranging scheme to defraud Edgewater and that these defendants concealed this fraud from Dexia in order to induce Dexia to issue the letters of credit. Id. Dexia ultimately obtained a $124 million judgment against Rogan and, after instituting supplemental proceedings to locate Rogan’s assets, succeeded in obtaining a final judgment ordering the turnover to Dexia of nearly all the assets of the Domestic Trusts and terminating the Rogan children’s interests in those trusts. Dexia Credit Local v. Rogan, 629 F.3d 612, 616 (7th Cir.2010).

ANALYSIS

The Court of Appeals in Rogan determined the United States is a creditor of Rogan’s and therefore claims a garnishment interest in his ownership of membership units in 410 Montgomery. As to the assets of the LLC, the United States is a residual claimant of 410 Montgomery and will only collect on its judgment after 410 Montgomery’s debts have been paid. By contrast, the Whitlows are creditors of 410 Montgomery’s assets and have priority of their claim senior to the United States.

Accordingly, the issue presently before the Court is whether KDW has a claim against Rogan or 410 Montgomery. If the former, KDW is similarly situated as the United States; if the latter, KDW is in the same position of the Whitlows. However, it is not necessary to resolve this issue FN3—KDW has waived its right to assert a claim for attorneys’ fees against 410 Montgomery. KDW has failed to assert a claim for attorneys’ fees prior to this Court’s ruling that was the subject of the Whitlows’ appeal to the Seventh Circuit and that court’s ruling and remand. Moreover, KDW was not a party to that appeal, which held in favor of the Whitlows.

FN3. It appears that KDW is not similarly situated to the Whitlows. KDW has made no showing that it was representing 410 Montgomery other than as a creditor of the equity interest holders in defending this garnishment action. Actually, Rogan effectively owned all the interest in 410 Montgomery, as more fully set out in this Court’s February 5, 2010 Order, (Dkt. No. 468 at 2 (holding that the ownership of 410 Montgomery rested with three trusts that Rogan set up in Belize in 1994 in the name of his three children; however, his children had no knowledge of the existence of these trusts).) There is nothing to suggest that KDW is claiming payment for legal services performed in representing 410 Montgomery as an entity in the ordinary course of 410 Montgomery’s business regarding third parties. There is no claim by KDW that demonstrates that it is acting other than to protect the interests of the equity owners of 410 Montgomery, which have been determined to be effectively that of Rogan. And, KDW has not shown why its claim for fees in representing a garnishee in a collection action should be superior to those of a judgment creditor garnishor, such as the United States.

On March 27, 2008, Frank Cuppy, on behalf of 410 Montgomery, filed a motion to release funds from the Darby Escrow. (Dkt. No. 290.) Cuppy was Rogan’s personal friend, attorney, and advisor and assisted Rogan in setting up 410 Montgomery. KDW subsequently filed an appearance on behalf of Cuppy, as well as 410 Montgomery. sec. See Dkt. Nos. 289, 333.)

*3 On July 14, 2008, the United States moved for summary judgment and a garnishment order regarding the 410 Montgomery proceeds in the Darby Escrow. (Dkt. No. 326.) This motion was denied without prejudice and the Court required the United States to serve third parties who had a potential interest in the 410 Montgomery proceeds in the Darby Escrow, pursuant to 28 U.S.C. sec. 3202(c). (Dkt. No. 329 .)

In anticipation of a status conference to be held on March 24, 2009, the United States filed a certificate stating that it had complied with the Court’s Order regarding providing notice to interested parties. (Dkt. No. 412.) Importantly, KDW, which was representing Cuppy and 410 Montgomery, was served separately with the notice of garnishment by the United States. ( Id. at 6.)

At the status hearing on March 24, 2009, an attorney from KDW explained that 410 Montgomery had previously filed a motion to release funds from the Darby Escrow and asked, “Is there a date by which the Court would want me to file such a petition [for attorneys’ fees].” (Dkt. No. 424 at 5.) In response, the Court continued the matter to April 15, 2009, “for status and scheduling for the time for all parties to file pleadings.” (Dkt. No. 424 at 6 .) At the status hearing on April 15, 2009, the Court directed that “all claims be filed on or before 30 days hence.” (Dkt. No. 425 at 3.)

Although a number of parties made claims, KDW failed to make a claim for attorneys’ fees. At the next status hearing on May 21, 2009, 410 Montgomery withdrew its motion for release of funds from escrow without prejudice to re-file. A schedule for briefing on the United States’ motion for summary judgment on its garnishment petition was set. On June 22, 2009, the United States filed its motion for summary judgment. (Dkt. No. 429.) The Whitlows opposed the motion for summary judgment. KDW, however, opposed summary judgment only in its capacity as attorneys for 410 Montgomery.

KDW failed to timely file a claim by the required date set by the Court and specifically did not file a petition for attorneys’ fees. The only references to KDW’s attorneys’ fees appeared in 410 Montgomery’s initial Motion and Renewed Motion to Release Funds from Escrow. In the latter, KDW stated, “410 Montgomery has incurred approximately $145,000.00 in legal fees incurred in responding to discovery and litigating this garnishment proceeding.” (Dkt. No. 431 para. 19; Dkt. No. 421 at 3.)

The Court granted partial summary judgment in favor of the United States, holding that the United States was entitled to approximately $3.9 million of the funds in the Darby Escrow. (Dkt. No. 468.) As to the remaining funds, the Court denied the motion and scheduled the case for further proceedings. This ruling made no reference to 410 Montgomery’s motion to release funds. Subsequently, KDW, on behalf of 410 Montgomery, moved to clarify the order with respect to money allegedly owed to Cuppy’s company, Dynamic Alliance. (Dkt. No. 469.) However, the Court subsequently struck KDW’s motion because KDW no longer had authority to act on behalf of 410 Montgomery. (Dkt. No. 479.) FN4

FN4. On July 21, 2009, in Dexia v. Rogan, No. 02 C 8288, Judge Kennelly entered a order removing Cuppy and appointing Eugene Crane as Trustee of Rogan’s children’s domestic and Belizean trusts. On January 22, 2009, Judge Kennelly entered an order granting full control and title of the assets of the Rogan children’s domestic and Belizean trusts to the Trustee. Therefore, as a trust-owned entity, 410 Montgomery was under the control of the Trustee. Because the Trustee did not authorize KDW to file the motion, the motion was stricken.

*4 Subsequently, the Court entered two turnover orders. (Dkt. Nos. 489 and 503.) The first turnover order ordered that the $4 million (except for $173,289.71) of the Darby Escrow be turned over to the United States (the “First Turnover Order”). (Dkt. No. 489.) KDW did not appeal this Order. The First Turnover Order became final, pursuant to Federal Rule of Civil Procedure 54(b), on August 24, 2010. On September 21, 2010, the Court entered a second turnover order for $173,289.71, which resolved the issue of priority of the Whitlows’ claim in favor of the United States (the “Second Turnover Order”). (Dkt. No. 503.) As discussed above, the Whitlows appealed this Second Turnover Order; this Order was vacated and the case was remanded for further proceedings regarding the Whitlows’ claim. Subsequently, KDW filed the Motion presently before the Court, which is styled as a “claim and request for payment.”

Accordingly, to the extent KDW seeks attorneys’ fees from the funds that were subject to the First Turnover Order, it has waived its request for the following reasons: (1) KDW failed to make a claim in response to the required date set by the Court; (2) KDW did not contest the United States’ motion for summary judgment on its garnishment action against 410 Montgomery; (3) KDW failed to contest the First Turnover Order, which directed almost all of the Darby Escrow to the United States pursuant to Rule 54(b); and (4) KDW failed to appeal this First Turnover Order. The finality of the Court’s Rule 54(b) Order would be undermined by allowing KDW to pursue its claim.

Furthermore, that 410 Montgomery briefly mentioned legal fees it owed to KDW, as discussed above, does not support KDW’s claim: these references do not constitute a claim or petition for attorney’s fees by KDW. Moreover, the nature of the legal services which are the basis of KDW’s legal fees mentioned in 410 Montgomery’s Renewed Motion to Release Funds from Escrow are evidence that KDW represented the equity interest holders in 410 Montgomery in defending against the garnishment action by the United States rather than any third-party creditor of the LLC, as mentioned above.

KDW, as a non-appealing party, cannot benefit from the Whitlows’ successful appeal. Therefore, to the extent KDW seeks attorneys’ fees from the remaining funds—the funds at issue in the Second Turnover Order—it failed to appeal the Second Turnover Order and has thereby waived any claim to attorneys’ fees from these funds. Here, KDW’s claim is expressly based on the Seventh Circuit’s decision regarding only the competing interests in the funds between the Whitlows and the United States of the Second Turnover Order and in the amount of $173,289.71.

Even if KDW were a party in this case, it cannot claim rights based on the holding in the Whitlows’ successful appeal.FN5 Cf. Federated Dep’t Stores, Inc. v. Moitie, 452 U.S. 394, 400, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981) (observing the “generally accepted rule in civil cases that where less than all of the several co-parties appeal from an adverse judgment, a reversal as to the parties appealing does not necessitate or justify a reversal as to the parties not appealing.”) (citation and internal quotation marks omitted); Marin Piazza v. Aponte Rogue, 909 F.2d 35, 39 (1st Cir.1990) (holding that non-appealing plaintiffs could not benefit from reversal of judgment against the plaintiffs who did appeal, even though error had been found in judgments against all parties); see also 20 Moore’s Fed. Practice sec. 304.11[3][c] (“A distinct issue arises with respect to separate appeals where parties are aligned in interest, and one party appeals but the other does not. Can the non-appealing party benefit from the result on appeal? The Supreme Court has answered this question in the negative.”).

FN5. KDW is not a party to this case; as mentioned above, it was provided with notice of garnishment by the United States. It was not until September 22, 2011, after the Seventh Circuit’s decision, that KDW filed an appearance in this case on its own behalf. (Dkt. No. 521.)

CONCLUSION

*5 For the reasons set forth above, KDW’s Claim and Request for Payment from Escrowed Funds of 410 Montgomery [522] is denied.

OPINION AND ORDER ON MOTION TO ALLOW TRUSTEE TO TAKE ANY AND ALL NECESSARY ACTIONS TO LIQUIDATE PROPERTY OWNED BY WESTERN BLUE SKY LLC

BRUCE A. CAMPBELL, Bankruptcy Judge.

THIS MATTER is before the Court on the (1) Motion to Allow Trustee to Take Any and All Necessary Actions to Liquidate Property Owned by Western Blue Sky LLC (“Motion to Liquidate”); (2) Motion to Appoint and Compensate Bob Karls as Real Estate Broker to the Trustee; and (3) Debtor’s Response to Trustee’s Motion to Retain Realtor and Liquidate LLC Property. Following a hearing on February 4, 2003, the parties agreed to submit the matter on briefs.

Ashley Albright, the debtor in this Chapter 7 case (“Debtor”), is the sole member and manager of a Colorado limited liability company named Western Blue Sky LLC. [1] The LLC owns certain real property located in Saguache County, Colorado (the “Real Property”). The LLC is not a debtor in bankruptcy.

The Chapter 7 Trustee contends that because the Debtor was the sole member and manager of the LLC at the time she filed bankruptcy, he now controls the LLC and he may cause the LLC to sell the Real Property and distribute the net sales proceeds to his bankruptcy estate. [2] The Debtor maintains that, at best, the Trustee is entitled to a charging order [3] and cannot assume management of the LLC or cause the LLC to sell the Real Property.

Pursuant to the Colorado limited liability company statute, the Debtor’s membership interest constitutes the personal property of the member. Upon the Debtor’s bankruptcy filing, she effectively transferred her membership interest to the estate. See 11 U.S.C. § 541(a). [4] Because there are no other members in the LLC, the entire membership interest passed to the bankruptcy estate, and the Trustee has become a “substituted member.” [5]

Section 7-80-702 of the Limited Liability Company Act requires the unanimous consent of “other members” in order to allow a transferee to participate in the management of the LLC. [6] Because there are no other members in the LLC, no written unanimous approval of the transfer was necessary. Consequently, the Debtor’s bankruptcy filing effectively assigned her entire membership interest in the LLC to the bankruptcy estate, and the Trustee obtained all her rights, including the right to control the management of the LLC. [7]

The Debtor argues that the Trustee acts merely for her creditors and is only entitled to a charging order against distributions made on account of her LLC member interest. [8] However, the charging order, as set forth in Section 703 of the Colorado Limited Liability Company Act, exists to protect other members of an LLC from having involuntarily to share governance responsibilities with someone they did not choose, or from having to accept a creditor of another member as a co-manager. A charging order protects the autonomy of the original members, and their ability to manage their own enterprise. In a single-member entity, there are no non-debtor members to protect. The charging order limitation serves no purpose in a single member limited liability company, because there are no other parties’ interests affected. [9]

The Colorado limited liability company statute provides that the members, including the sole member of a single member limited liability company, have the power to elect and change managers. [10] Because the Trustee became the sole member of Western Blue Sky LLC upon the Debtor’s bankruptcy filing, the Trustee now controls, directly or indirectly, all governance of that entity, including decisions regarding liquidation of the entity’s assets.

Because of the Court’s ruling herein, the Debtor may be entitled to a claim for her contributions made to preserve an asset of this bankruptcy estate based on post-petition mortgage payments on the Real Property. The parties were asked to brief the issue, but the Debtor has not formally asserted such a claim. Therefore, the Court does not rule on the issue at this time.

Based on the foregoing, it is hereby:

ORDERED that the Trustee, as sole member, controls the Western Blue Sky LLC and may cause the LLC to sell its property and distribute net proceeds to his estate. Alternatively, the Trustee may elect to distribute the LLC’s property to the bankruptcy estate, and, in turn, liquidate that property himself; and it is

FURTHER ORDERED that the Trustee’s Motion to appoint Bob Karls as real estate broker for the Trustee is hereby granted; and it is

FURTHER ORDERED that the Debtor may file a claim, subject to objection in the regular course of this case, for her expenditures made to preserve an asset of this estate based on post-petition mortgage or other payments made by the Debtor.

———

Notes:

[1] The Debtor initiated this case on February 9, 2001, under Chapter 13. It was converted to Chapter 7 by the Debtor on July 19, 2001.

[2] If the Trustee is entitled to control of the LLC, he could, presumably, as an alternative, dissolve the LLC, distribute its property to his bankruptcy estate, and then sell the property himself. The Trustee has not asserted any alter ego theory and has not attempted to pierce the veil of the LLC.

[3] The Debtor further asserts that because the LLC is “non-profit” pursuant to its operating agreement, no distribution of “profit” will ever be made and thus the value of this interest is zero. This argument erroneously assumes that a member of a Colorado limited liability company’s distribution rights are limited only to “profits.” They are not. Colo.Rev.Stat. § 7-80-102(10)(“Membership interest means a member’s share of the profits and losses of a limited liability company and the right to receive distributions of such company’s assets.”) See also Colo.Rev.Stat. § 7-80-702(1).

[4] 11 U.S.C. § 541(a)(1) provides, in relevant part: “The commencement of a case … creates an estate. Such estate is comprised of … all legal or equitable interests of the debtor in property as of the commencement of the case.”

[5] Colo.Rev.Stat. § 7-80-702 provides (emphasis added):

(1) The interest of each member in a limited liability company constitutes the personal property of the member and may be transferred or assigned. However, if all of the other members of the limited liability company other than the member proposing to dispose of his or its interest do not approve of the proposed transfer or assignment by unanimous written consent, the transferee of the member’s interest shall have no right to participate in the management of the business and affairs of the limited liability company or to become a member. The transferee shall only be entitled to receive the share of profits or other compensation by way of income and the return of contributions to which that member would otherwise be entitled.

(2) A substituted member is a person admitted to all the rights of a member who has died or has assigned his interest in a limited liability company with the approval of all the members of the limited liability company by unanimous written consent. The substituted member has all the rights and powers and is subject to all the restrictions and liabilities of his assignor; except that the substitution of the assignee does not release the assignor from liability to the limited liability company under section 7-80-502.

[6] This reading of § 7-80-702 is reinforced in Colo.Rev.Stat.§ 7-80-108(3)(a). Section 108 sets forth the effect of an operating agreement and what provisions are non-waivable. Section 108(3) states that “[u]nless contained in a written operating agreement or other writing approved in accordance with a written operating agreement, no operating agreement may […] [v]ary the requirement under section 7-80-702(1) that, if all of the other members of the limited liability company other than the member proposing to dispose of the member’s interest do not approve of the proposed transfer or assignment by unanimous written consent, the transferee of the member’s interest shall have no right to participate in the management of the business and affairs of the limited liability company or to become a member.” Colo.Rev.Stat. § 7-80-108(3)(a). The clause “other than the member proposing to dispose of the member’s interest” confirms that the “other members” identified in § 7-80-702 does not include the transferee.

[7] Under Colo.Rev.Stat. § 7-80-702, supra, the result would be different if there were other non-debtor members in the LLC. Where a single member files bankruptcy while the other members of a multi-member LLC do not, and where the non-debtor members do not consent to a substitute member status for a member interest transferee, the bankruptcy estate is only entitled to receive the share of profits or other compensation by way of income and the return of the contributions to which that member would otherwise be entitled. Thus, Mountain States Bank v. Irvin, 809 P.2d 1113 (Colo.App.1991); Union Colony Bank v. United Bank of Greeley National Association, 832 P.2d 1112 (Colo.App.1992) and Prefer v. PharmNetRx LLC, 18 P.3d 844 (Colo.App.2000), cited by the parties, are distinguishable as they relate to multi-partner or member entities.

[8] Colo.Rev.Stat. § 7-80-703 provides:

Rights of creditor against a member. On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest thereon and may then or later appoint a receiver of the member’s share of the profits and of any other money due or to become due to the member in respect of the limited liability company and make all other orders, directions, accounts, and inquiries which the debtor member might have made, or which the circumstances of the case may require. To the extent so charged, except as provided in this section, the judgment creditor has only the rights of an assignee of the membership interest. The membership interest charged may be redeemed at any time before foreclosure. If the sale is directed by the court, the membership may be purchased without causing a dissolution with separate property by any one or more of the members. With the consent of all members whose membership interests are not being charged or sold, the membership may be purchased without causing a dissolution with property of the limited liability company. This article shall not deprive any member of the benefit of any exemption laws applicable to the member’s membership interest.

[9] The harder question would involve an LLC where one member effectively controls and dominates the membership and management of an LLC that also involves a passive member with a minimal interest. If the dominant member files bankruptcy, would a trustee obtain the right to govern the LLC? Pursuant to Colo.Rev.Stat. § 7-80-702, if the non-debtor member did not consent, even if she held only an infinitesimal interest, the answer would be no. The Trustee would only be entitled to a share of distributions, and would have no role in the voting or governance of the company. Notwithstanding this limitation, 7-80-702 does not create an asset shelter for clever debtors. To the extent a debtor intends to hinder, delay or defraud creditors through a multi-member LLC with “peppercorn” co-members, bankruptcy avoidance provisions and fraudulent transfer law would provide creditors or a bankruptcy trustee with recourse. 11 U.S.C. § 544(b)(1) and 548(a).

[10] See Colo.Rev.Stat. § 7-80-402 and § 7-80-405.

———

Plaintiff Goldin Auctions seeks a declaratory judgment that it has the legal right to sell at auction sports memorabilia of Kobe Bryant which was consigned to it by Pamela Bryant, Kobe Bryant’s mother.

Plaintiff:	GOLDIN AUCTIONS, LLC
Defendant:	KOBE BRYANT
Case Number:	1:2013cv02816
Filed:	May 2, 2013
Court:	New Jersey District Court
Office:	Camden Office
County:	Camden
Presiding Judge:	Renee Marie Bumb
Referring Judge:	Joel Schneider
Nature of Suit:	Contract – Other Contract
Cause:	28:1332 Diversity-Injunctive & Declaratory Relief
Jurisdiction:	Diversity
Jury Demanded By:	None

Docket Report

Date Filed	#	Document Text
May 2, 2013	5	ORDER TO SHOW CAUSE WITH TEMPORARY RESTRAINTS, Enjoining Deft. from interfering with the June, 2013 auction, etc.; Show Cause Hearing set for 5/14/2013 @11:00 AM before Judge Renee Marie Bumb. Show Cause Response due by 5/8/2013. Signed by Judge Renee Marie Bumb on 5/2/13. (js)
May 2, 2013	4	INDIVIDUAL RULES AND PROCEDURES JUDGE RENE MARIE BUMB (bdk, )
May 2, 2013	3	Corporate Disclosure Statement by GOLDIN AUCTIONS, LLC. (bdk, )
May 2, 2013	2	SUMMONS ISSUED as to KOBE BRYANT Attached is the official court Summons, please fill out Defendant and Plaintiffs attorney information and serve. Issued By *Brian D. Kemner* (bdk, )
May 2, 2013	1	COMPLAINT against KOBE BRYANT ( Filing and Admin fee $ 400 receipt number CAM002955), filed by GOLDIN AUCTIONS, LLC. (Attachments: # 1 Civil Cover Sheet, # 2 Cover letter, # 3 Order to Show Cause, # 4 Memorandum of Law, # 5 Declaration) (bdk, ).

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