Remedies Final Examination
Professor Martha Dragich Pearson
Winter Semester 2007
Instructions
This is a four-hour, closed book examination. The examination consists of two questions and includes 11 pages of materials.
The two questions may be answered in either order. They are not separately timed. Your answer for each question should state and explain your conclusion.
You are required to turn in the exam packet along with your answer at the end of the exam.
You may take this examination on computer to the extent and under the conditions permitted by the School of Law. If not taking the exam on computer, any material you do not wish me to read should be crossed through with an “X” and marked in the margin “omit.”
You may use any abbreviations you like as long as you clearly indicate what each abbreviation means. If any part of your answer would substantially repeat a previous part, you may incorporate the previous writing by clearly referring me back to that part.
Both questions are based loosely on cases or situations reported in the news. I have modified and embellished the facts, and you should assume that the facts as I have stated them are true for purposes of this examination. Any contradictory knowledge you may have about the actual case or situation is irrelevant for purposes of this examination. You may make assumptions in addition to the facts I have given, so long as your assumptions are not contradicted by the facts contained in the examination materials. You must clearly state these assumptions in your answer if you want me to rely on them.
Your grade will be based on your analysis of the remedies, not on the substantive law relating to the underlying causes of action. I have summarized the relevant substantive law to the extent I think necessary for you to analyze remedial options. If you are uncertain about the substantive law or the existence of liability, you may state your assumption about the substantive law or the likelihood that liability will be found.
Although both questions are situated in Missouri, I do not expect you to know Missouri law in particular. You may consider any case or other authority read or discussed this semester as relevant authority for purposes of this examination.
Your grade will be based on the quality of your analysis and on the clarity and conciseness of expression. Please answer the question asked. Information that is correct but irrelevant to the question will not add to your grade.
Question 1 (40 points)
The Columbia Daily Tribune recently reported on difficulties facing a local dealer of luxury automobiles. The newspaper reported that Otto Dealer, doing business as Otto’s Auto Gallery, is late on a loan and the bank wants its money. The report is based on a lawsuit filed by the bank last week in Boone County Circuit Court. Show-Me BankOne says Otto’s Auto Gallery has defaulted on a financing agreement and owes more than $1.7 million in principal and interest.
Mr. Dealer told the Tribune that the rumors that inventory had been seized and that his dealership was in trouble were false. "I’m still in business, still selling cars," he said. "I’m still open and taking care of my customers." Otto’s Auto Gallery, which opened in 1998, features Mercedes-Benz, BMW, Infiniti, Lexus, Porsche and sometimes Lamborghini, Maserati, Bentley, Ferrari and Jaguar models with prices that can reach $300,000. The Tribune reported that Dealer earned a profit on sales of $15 million in 2005 (and had earned a profit every other year since 1999), but lost $500,000 in 2006. In 2006, Otto’s Auto Gallery sold four new cars and 323 used cars, according to a report from the Missouri Department of Revenue.
Under the financing agreement at issue, the bank agreed in September 2006 to advance Dealer $1.5 million to purchase inventory. The bank has not advanced any additional funds since September. According to an affidavit by the bank’s chief executive officer, Dealer violated the agreement by not making payments to the bank after cars purchased by virtue of the agreement were sold. Since the financing agreement was made in September, the CEO said in his affidavit, Dealer has sold about 20 automobiles but kept proceeds totaling $585,900 for his own personal use rather than repay the bank. Dealer claims that he and the bank agreed on April 1, 2007 to a 45-day “forbearance agreement” extending the time for payment of his obligations under the financing agreement. Dealer asserts that any action by the bank to seize inventory or compel payment prior to the expiration of this extension on May 15, 2007 would be premature.
You represent Reggie Buyer, a long-time customer of Otto’s Auto Gallery. Mr. Buyer’s most recent transaction occurred on March 30, 2007, when he traded in a 2004 Maserati (also purchased from Dealer about 18 months ago) for a 2006 Mercedes-Benz S-class sedan. The Mercedes was one of the cars Dealer purchased with proceeds of the September 2006 BankOne loan. The details of Dealer’s purchase of this car are unknown at this time.
The Maserati had nearly 100,000 miles on it but was in pristine condition and had a remaining useful life of at least seven years. Dealer and Buyer agreed on a trade-in value of $100,000. Though Buyer loved the car, he traded it in at his wife’s insistence for something more “sensible,” now that the couple are the parents of infant twins. Frankly, Buyer considers the Mercedes more staid than sensible. The Mercedes is barely used, with just under 10,000 miles. Dealer and Buyer agreed on a price of $80,000. There is no defect that would void the transaction between Dealer and Buyer.
Buyer owed $20,000 on the Maserati. Dealer issued Buyer a check drawn on the Gallery’s account for the difference of $20,000 in the value of the two cars. Buyer then paid off the Maserati loan, leaving the new Mercedes unencumbered by any debt. Buyer finally got around to depositing Dealer’s check more than three weeks later, on April 25th. Buyer hadn’t worried about the delay in depositing the check because in his extensive dealings with Dealer over the years there had never been a problem, and because Buyer maintains a reserve in his own checking account sufficient to cover his expenditures in the meantime. But Dealer’s check bounced, forcing Buyer to scramble to cash in a CD prematurely to cover the Maserati loan payoff in addition to his house payment and other end-of-month bills. Buyer incurred an early withdrawal penalty of $500.
At about the same time that the check bounced, Buyer began to wonder why he had not received title to the Mercedes, because in the past all aspects of each transaction had been concluded promptly by Dealer. Just as he was beginning to worry about this transaction, Buyer saw the newspaper article indicating that Dealer might be in trouble. Upon investigating the title matter, he learned that the Department of Revenue has no record of an application from Dealer to transfer title in this automobile to Buyer. In fact, three separate, unrelated individuals all claim to hold title to an automobile identified with the Mercedes’ Vehicle Identification Number. Obviously, all but one of the titles must be fraudulent but there is no way of knowing right now which is which.
Assume that Buyer is a bona fide purchaser for value, but also that Dealer could not convey title to the automobile because he did not have title to it. Of course, the bank also claims the car as collateral securing the loan it made to Dealer for inventory.
Assume that Dealer is on the verge of filing for protection under Chapter 11 of the federal Bankruptcy Code. Dealer operates the Gallery as a sole proprietorship; you should assume that Dealer’s assets and liabilities are co-extensive with those of the dealership. Assume that Dealer has debts of about $2.3 million. Dealer’s home and all other real property he owns (including the building housing the Gallery) are mortgaged to the full extent of their value. Assume that the balance in Dealer’s checking account on March 29, 2007 was $15,000 and decreasing fast. On April 30, Dealer took out a mortgage on his mother’s home (with her consent) as an emergency measure to tide him over during this difficult period. This transaction yielded $150,000, which Dealer deposited that day in the checking account. The account balance today (May 3, 2007) is about $85,000.
Once a bankruptcy petition is filed, the court will issue a stay of any further transactions pending resolution of the case. Hoping to get a jump on any such stay, the bank posted a bond to seize inventory used as collateral for the loan agreement, according to documents filed in the case. You should assume that the bank will act expeditiously to accomplish such a seizure. Ultimately, any obligations under the bank’s secured loan to Dealer will have priority in the bankruptcy distribution over claims asserted by Dealer’s general (unsecured) creditors.
Meanwhile, the Maserati is still parked in Dealer’s showroom. Title to that car has been transferred to Otto’s Auto Gallery. Dealer is, of course, trying desperately to sell the car.
At the moment, Buyer has title to neither automobile and fears he might lose both if the Mercedes is seized by the bank and the Maserati sold to an innocent purchaser. If this happens, Buyer would be forced to purchase another car after already losing at least $100,500—making him the big loser in a fight for assets between Dealer and the bank. Buyer wants to know what, if anything, he can do to protect himself from incurring these losses, or at least to recover later if things turn out as badly as he fears. Mr. Buyer anticipates that the battle between Dealer and the bank may take a long time to resolve, and would prefer not to remain in limbo in terms of his car ownership, or to have his assets tied up unnecessarily, in the meantime.
Assume that the facts alleged will prove out and will lead to a finding of liability on the part of Dealer. Do not concern yourself with the merits of the underlying dispute between Dealer and the bank.
Please advise Mr. Buyer of any remedies he should consider. Your advice should include information about what Buyer must do to invoke each potential remedy, what defenses Dealer might be able to assert against the remedy, how the remedy would be enforced, and so on. Your advice should include a preliminary evaluation of the relative merits of the potential remedies in meeting Buyer’s objectives. Do not discuss remedies that are inapplicable to this situation.
Question 2 (60 points)
Plaintiffs in a recently-filed lawsuit are low income Missouri residents whose health care services are paid for through Missouri’s Medicaid program. You are General Counsel to the Missouri Department of Social Services (DSS); you represent the Department and its Director, Ms. Burr O’Crat. As Director of DSS, Ms. O’Crat is responsible for administering the Medicaid program in Missouri. Both DSS and Ms. O’Crat are named defendants in the lawsuit.
The lawsuit was filed in the United States District Court for the Western District of Missouri on behalf of about a dozen plaintiffs. You should assume that all jurisdiction and venue requirements have been met. The facts presented below, relating to one of the plaintiffs, are illustrative of those of the other plaintiffs not mentioned in this examination.
Plaintiff Sarah Livingston is a Missouri Medicaid recipient living in Sunny Acres, Missouri. Ms. Livingston suffers from a variety of medical conditions, including chronic obstructive pulmonary disease, bronchitis, asthma, and emphysema. As a result of these conditions, Ms. Livingston requires certain durable medical equipment (DME), including an oxygen machine for use as needed during the day, a “CPAP” machine to assist her breathing at night, and a nebulizer to treat her bronchitis and asthma. Because of her respiratory difficulties she generally must use an electric wheelchair. All the required equipment requires accessories such as filters for the respiratory equipment and batteries for the wheelchair. Until the program changes described below, Medicaid covered the costs of the oxygen machine, the CPAP machine and its accessories, the nebulizer, and the wheelchair, as well as all necessary accessories. Ms. Livingston’s physician has told her she will likely have a stroke or even die without the CPAP machine, and that her other conditions will go untreated (and will worsen) without the other equipment. Without the wheelchair, she will become bedridden, causing a further worsening of her conditions. Ms. Livingston’s sole income is Supplemental Security Income (SSI) benefits; this income supports Ms. Livingston and her two children. Her income places her below the federal poverty line. She lives in a mobile home owned by her brother, on her brother’s property. She has no assets of any value. She cannot afford to purchase or rent the necessary equipment.
Ms. Livingston seeks immediate restoration of coverage of the DME items she requires. If this does not occur, Ms. Livingston will be forced to enter a nursing home where her medical equipment costs will be covered. Ms. Livingston is the single parent of two teen-aged boys whose care and supervision she would not be able to provide from a nursing home. As for current costs for the needed respiratory equipment, friends have cooperated to lend Ms. Livingston the funds necessary to rent the CPAP machine, but their ability to do so is running out. Ms. Livingston cannot imagine how she will ever repay them unless she is able to obtain reimbursement from the state Medicaid program for the period when she was without Medicaid coverage for this equipment.
Background on the Medicaid Program
The federal Social Security Act, originally enacted in 1935 pursuant to Congress’s Article I Spending Power, establishes the Medicaid program. The objective of the program is to enable each state to furnish medical assistance to certain persons who need care and cannot afford it on their own. In addition, the program is intended to assist recipients in retaining the capability for independence and self-care rather than long-term hospitalization or nursing home care.
There is no question as to the validity of the Social Security Act or the Medicaid program. Federal statutory requirements of the program are binding on the states by virtue of the Supremacy Clause of the U. S. Constitution, but state participation in the program is voluntary. If a state chooses to participate in the Medicaid program, it receives significant federal funding for medical services provided under the Act, and in return it must comply with all relevant provisions of federal law. Missouri has participated in the program since its inception.
General Federal Requirements
The federal statutory scheme is a complex cooperative arrangement involving cost-sharing between the federal government and the states. The federal government contributes approximately three dollars for every dollar contributed by the state to the cost of providing health care services to covered individuals. Federal law establishes broad requirements on participating states, but the states retain considerable discretion to define eligibility, covered services, and other aspects of the state program within the broad federal limits.
The framework for federal-state cooperation requires the state to
• develop a plan for medical assistance;
• fund the plan at a level adequate to maintain the amount, duration, scope, or quality of care and services available under the plan;
• provide for the establishment or designation of a single state agency [in Missouri, the Department of Social Services] to administer or to supervise the administration of the plan;
• provide that all individuals wishing to make application for medical assistance under the plan shall have opportunity to do so, and that such assistance shall be furnished with reasonable promptness to all eligible individuals;
• provide for an opportunity for a fair hearing before the state agency to any individual whose claim for medical assistance under the plan is denied or is not acted upon with reasonable promptness.
Covered Persons and Services
Relevant provisions of the Social Security Act relating to Medicaid coverage include the following:
• The Social Security Act designates certain persons as belonging to the “mandatory” (as opposed to the “optional”) eligibility groups for coverage under the state Medicaid plan. Certain low-income children and pregnant women, persons meeting federal poverty standards, and blind persons are considered “categorically needy” persons for whom coverage under the state plan is mandatory. Plaintiffs meet the mandatory coverage criteria on grounds of poverty. As such, plaintiffs are entitled to have medical expenses covered by the state plan to the extent required by federal law for categorically needy persons.
• The Social Security Act further requires that the medical assistance made available to any categorically needy individual “shall not be less in amount, duration, or scope than the assistance made available to any other [categorically needy] individual.” This requirement is known as the “comparability requirement.”
• The Social Security Act also distinguishes between “mandatory” and “optional” services to be covered under the state plan. Mandatory services, which the state plan must cover, are limited to hospitalization, nursing home care, certain laboratory tests and X-rays, doctor visits, and certain pre-natal care. The state may (but need not) choose to cover optional medical services under its Medicaid plan. Durable medical equipment is an optional service. Durable medical equipment is defined to include medical supplies, equipment, and appliances suitable for use in the home. The equipment and supplies plaintiffs need are considered durable medical equipment, and all requested equipment was prescribed for their use by their treating physicians. Missouri has traditionally provided DME coverage under its plan, but now intends to cut back on that coverage.
Requirements Applicable to Optional Services
• Once the state decides to offer an optional service, it must comply with all applicable federal requirements. In this situation, federal law imposes the following requirements on states:
- The state is required to establish reasonable standards for determining the extent of coverage.
- The state must ensure that the coverage provided is sufficient in amount, duration, and scope to achieve the purpose of the service.
- With respect to the provision of services to categorically needy persons, the state must comply with the “comparability requirement” described above. The comparability requirement applies to both mandatory and optional services. In other words, if an optional service is provided to some categorically needy recipients, it must be provided to all categorically needy recipients.
• The U.S. Department of Health & Human Services (HHS) has issued an official policy statement to the states informing them that if they choose to cover DME, they may develop a list of pre-approved items of durable medical equipment. Such states must also provide a “reasonable and meaningful procedure” for covered individuals to request coverage of items not on the pre-approved list. The state must respond promptly and must employ “reasonable and specific criteria” for determining whether requested items will be provided. Neither the Social Security Act nor federal regulations governing the Medicaid program mention a pre-approved list of DME or require a procedure for considering requests for non-pre-approved items of DME. You should assume that HHS’s policy statement was properly issued and that it is entitled to some weight.
Missouri Program
You should assume that, prior to the changes described below, Missouri’s plan complied with all of the stated requirements of federal law. It did so largely by providing extremely broad coverage of both persons and services, such that the federal requirements never came into play.
As part of a comprehensive budget-cutting plan, Governor Blunt proposed significant cuts in the Missouri Medicaid program, saying that Missouri spent more per capita on this program than almost any other state. Last session, the Missouri General Assembly passed, and the Governor signed into law, a bill amending certain aspects of the Missouri Medicaid program. In brief, the statutory changes reduce or eliminate coverage of certain specific items of durable medical equipment, including wheelchairs, respiratory equipment, catheters, and nutrition tubes, as well as accessories and supplies for any of these items.
New Regulation
The statutory changes were implemented by an emergency state regulation which took effect about two months ago. The regulation is not vulnerable to any procedural challenge. The new regulation provides that:
• Pre-approved items of durable medical equipment for all categorically needy persons include wheelchairs, prosthetics, diabetic supplies and equipment, and certain respiratory equipment (ventilators, but not oxygen machines, CPAP machines, or nebulizers). Ms. Livingston is eligible under the new regulation for a wheelchair, but most of the equipment she and the other plaintiffs need is not listed here as pre-approved.
• Certain additional items of durable medical equipment are pre-approved only for persons classified as “categorically needy” because they are pregnant women or the blind. These items include hospital beds, nutrition supplies, and all respiratory equipment. Because plaintiffs qualify as “categorically needy” on the basis of poverty (rather than pregnancy or blindness), they are not eligible under the new regulation to receive the items listed in this paragraph.
• Other DME items and accessories for DME items are not on any pre-approved list under the new regulation. Plaintiffs require many items not listed as pre-approved for any recipient.
• The new regulation makes no mention of any procedure for requesting Medicaid coverage for items not on the pre-approved equipment list. Nor does it articulate any standards or criteria for determining coverage of any such equipment in a particular case. The new regulation’s approach (like that of the amended state statute) appears to base coverage decisions on budgetary requirements rather than on the objectives of the Medicaid program or the needs of persons the Act covers.
Federal Approval Process
The Social Security Act requires a state, when it amends its Medicaid plan, to seek approval of the amended plan by the Secretary of HHS. The Secretary’s task is to determine whether the amended plan complies with federal requirements. Immediately after promulgation of the emergency regulation, Director O’Crat submitted the required information to HHS for review.
Ms. O’Crat was aware of the federal comparability requirement. As the emergency regulation was being promulgated, she called this requirement to the attention of the Governor. The Governor then decided to fund non-comparable services to categorically needy recipients with state funds only. Blind persons and low-income pregnant women make up a small percentage of the state’s categorically needy population, so the state can afford to pay for additional optional services for this group out of state funds without resorting to the federal matching funds.
As a result, in the request for approval of the amended plan Ms. O’Crat argued that the amended plan complies with federal law. The crux of her argument is that because the state has decided to fund DME for pregnant women and the blind with state funds only, the comparability requirement does not affect the emergency regulation. The state’s theory is that the “comparability requirement” binds the state only when federal funds are used to help cover the affected services to categorically needy persons. Because the state has decided to fund non-comparable DME services to pregnant women and blind persons with state funds only, the state argues that its amended plan fully complies with the federal comparability requirement. As for the review procedure, the state contends that since DME is an optional service under federal law, the state has sole discretion as to coverage and administration of that service.
HHS has not yet taken any action on this request. You should assume that it will be several months before HHS responds with approval or disapproval of the amended plan. You should assume that there is no prior case addressing this issue.
Plaintiffs’ Allegations
According to the complaint, plaintiffs allege that the new regulation fails to comply with the Social Security Act’s Medicaid program requirements in that it
• violates the comparability requirement by providing specific items of DME for some categorically needy persons but not for others; and
• provides neither a reasonable procedure for requesting DME items not on the pre-approved list nor reasonable standards for determining coverage of such items.
Plaintiffs never applied for approval of the prescribed DME items under the new regulation. Instead, plaintiffs brought this action to determine the validity of the regulation and to block its enforcement in the meantime.
Plaintiffs’ Prayer for Relief
Plaintiffs’ complaint requests
• a declaratory judgment that the new state regulation is invalid;
• a preliminary injunction prohibiting Defendant O’Crat from enforcing the regulation; and
• reimbursement for expenditures plaintiffs have incurred to date (and will continue to incur during the pendency of this lawsuit, if the preliminary injunction is denied) for items of DME formerly covered by the Missouri Medicaid program.
In preparation for your initial meeting about this litigation with Ms. O’Crat and the Missouri Attorney General’s office, please analyze the availability and appropriate scope of each of the remedies sought in this case. Although plaintiffs hope their requested preliminary injunction would eventually be made permanent, you should confine your injunction analysis to the requirements for preliminary injunction.
At this early stage, you are not expected to analyze the enforcement mechanisms that might be necessary to enforce any available remedy. There is no statute of limitations problem, and plaintiffs’ lawsuit complies with all procedural rules.
You are aware that one defensive mechanism for the Department is likely to be an assertion of immunity. Accordingly, you have gathered up the following materials for review:
U.S. Constitution, Amendment XI
The judicial power of the US shall not extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another state, or by citizens or subjects of any foreign state.
R.S. Mo. §537.600. Sovereign immunity in effect--exceptions--waiver of
1. Such sovereign or governmental tort immunity as existed at common law in this state … shall remain in full force and effect; except that, the immunity of the public entity from liability and suit for compensatory damages for negligent acts or omissions is hereby expressly waived in the following instances:
(1) Injuries directly resulting from the negligent acts or omissions by public employees arising out of the operation of motor vehicles or motorized vehicles within the course of their employment;
(2) Injuries caused by the condition of a public entity's property if the plaintiff establishes that the property was in dangerous condition at the time of the injury, that the injury directly resulted from the dangerous condition, that the dangerous condition created a reasonably foreseeable risk of harm of the kind of injury which was incurred, and that either a negligent or wrongful act or omission of an employee of the public entity within the course of his employment created the dangerous condition or a public entity had actual or constructive notice of the dangerous condition in sufficient time prior to the injury to have taken measures to protect against the dangerous condition….
2. The express waiver of sovereign immunity in the instances specified in subdivisions (1) and (2) of subsection 1 of this section are absolute waivers of sovereign immunity in all cases within such situations whether or not the public entity was functioning in a governmental or proprietary capacity and whether or not the public entity is covered by a liability insurance for tort.
In addition, you researched the remedial provisions of the Social Security Act and found only the following section:
42 U.S.C. § 1396c. Operation of State [Medicaid] Plans
If the Secretary [of HHS], after reasonable notice and opportunity for hearing to the State agency administering or supervising the administration of the State plan approved under this subchapter, finds--
(1) that the plan has been so changed that it no longer complies with the provisions of this title; or
(2) that in the administration of the plan there is a failure to comply substantially with any such provision;
the Secretary shall notify such State agency that further payments will not be made to the State (or, in his discretion, that payments will be limited to categories under or parts of the State plan not affected by such failure), until the Secretary is satisfied that there will no longer be any such failure to comply. Until he is so satisfied he shall make no further payments to such State (or shall limit payments to categories under or parts of the State plan not affected by such failure).