State Medicaid agencies are required by federal law to seek reimbursement for long-term care benefits from the estates of recipients who die after age fifty-five. Of course, in order to qualify for the benefits in the first place the recipient must be impoverished. In practical terms that usually means that the state has a claim against the recipient’s home. A recent Arizona case reinforces, however, that even state agencies are required to follow the rules like everyone else.

Linda Stephenson was still living at home in Mesa, Arizona, when she borrowed $30,000 from American Savings Life Insurance Co. in 2001. The lender took a deed of trust against her home to secure the debt. When Ms. Stephenson died two years later, she had been receiving benefits from the Arizona Health Care Cost Containment System (AHCCCS), Arizona’s Medicaid agency.

It took the agency sixteen months to record notice of a “lien” against Ms. Stephenson’s property. A month after that, AHCCCS’s lawyer Wade R. Causey (who, incidentally, self-identifies as focusing his practice on construction and products liability, and professional malpractice) petitioned for appointment of the agency as personal representative of Ms. Stephenson’s estate, presumably so that the agency could arrange for the sale of her house and payment of the Medicaid reimbursement claim. AHCCCS was actually appointed five months later.

Unfortunately for the agency and its claim, American Savings had grown tired of waiting for payment. Three months after the probate proceedings had been initiated, and twenty months after Ms. Stephenson’s death, the lender scheduled a trustee’s sale on the property. Just after AHCCCS’s appointment in the probate proceeding, the trustee’s sale was held. The only bidder: American Savings itself, which bought the property for $34,828.

AHCCCS and its lawyer apparently didn’t notice that the foreclosure had been concluded. Its court inventory listed the residence as the only asset, and showed that there were no encumbrances. Seven months later, AHCCCS finally noticed and filed a probate court petition to secure return of the property.

The probate court agreed with AHCCCS and ordered American Savings to “return” the sale proceeds to the estate. American Savings appealed, arguing that it was not required to seek the personal representative’s approval before foreclosing its secured interest in the property.

The Arizona Court of Appeals agreed that AHCCCS’s interest had properly been cut off by the trustee’s sale. Just as in every other probate proceeding, the secured creditor had the option of foreclosing without seeking permission of the personal representative or the probate court. Estate of Stephenson, November 27, 2007.

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