Opinion
No. A06-1099.
Filed May 8, 2007.
Appeal from the Department of Human Services, Minnesota, OAH Docket No. 4-1800-15288-2.
Samuel D. Orbovich, Orbovich Gartner, Chartered, St. Paul, Minnesota 55102-1187 (for relator Foundation for Rural Health Care).
Lori Swanson, Attorney General, Barry R. Greller, Assistant Attorney General, St. Paul, Minnesota 55101-2127 (for respondent Minnesota Department of Human Services).
Considered and decided by Hudson, Presiding Judge; Randall, Judge; and Dietzen, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2006).
UNPUBLISHED OPINION
Relator Foundation for Rural Health Care, Inc. challenges the final decision of the commissioner of the Department of Human Services (commissioner) affirming the department's denial of relator's request for a property-rate increase. Because we conclude that relator purchased its nursing homes from a related organization, we affirm.
FACTS
The Parties and Key Players
The material facts of this case are not in dispute. Prior to 1983, Robert F. Odell owned three nursing homes in rural Minnesota. At some point, separate closely held corporations were created to own each of the three facilities (hereinafter the "Odell corporations"). By 1998, Odell was the sole shareholder of the Odell corporations. In September 1998, Odell met with his accountant to discuss the financial benefits of selling the nursing homes to a nonprofit corporation. Odell indicated that the sales would be seller-financed — that is, financed by promissory notes for the entire amounts of the purchase price issued by the purchasing nonprofit corporation to the three Odell corporations. Odell's attempts to sell the nursing homes were unsuccessful. Ultimately, Odell created the Foundation for Rural Health Care (relator) to purchase the nursing homes from him.
Odell appointed relator's original three board members. The board members most involved in the relevant transactions were two employees, Coral Blaze and Curt Jenson. The board authorized Blaze to negotiate on relator's behalf. Odell's lawyer, Thomas Dougherty, drafted all of the necessary legal documents for the sale/purchase of the nursing homes, including board resolutions and the purchase agreements. Odell's business consultant, Bruce Farrington, proffered the financial terms for the sale, basing them on an earlier valuation analysis he had performed for Odell prior to relator's existence.
The record also reflects that Blaze, Jenson, and Farrington each had a pecuniary interest in the transaction. Specifically, Blaze had a contract to manage the nursing homes on relator's behalf. Jenson, pursuant to a prior agreement with Odell, was contractually obligated to receive $30,000 once relator purchased the homes. Finally, Farrington and Odell had agreed that Farrington would receive one percent of the purchase price.
In or about December 1998, relator authorized the purchase of the nursing homes for $8.4 million. No formal board meeting was commenced before relator's directors authorized the purchase of the nursing homes. None of the board members made independent inquiries into whether the terms of the sale would be financially viable for relator. For example, none made independent appraisals of the nursing homes or independent financial analyses of the sales terms.
The Rate System — "rule 50"
Minnesota pays nursing homes a daily rate for the care of residents receiving Medicaid. During all times relevant to this appeal, the Department of Human Services (DHS) determined the payment rates for participating nursing homes in accordance with state statutes and rules collectively and commonly known as "rule 50." See Minn. Stat. §§ 256B.41 — .50 (2005); Minn. R. 9549.0010 — 0080 (2005). Under rule 50, DHS sets prospective reimbursement rates — also known as "property rates" — for nursing homes based on a facility's historical operating costs. DHS is authorized to pay a higher property rate after the acquisition of a nursing home, unless the seller and buyer are "related organizations." Minn. Stat. § 256B.431, subd. 14(a), (d)(7). Alternatively stated, if a facility changes ownership in a transaction with a related organization, the facility's reimbursement rate for its property costs cannot be increased based on costs associated with the transaction. Id.
In its brief to this court, DHS states that rule 50 will gradually be phased out beginning in October 2007.
Odell provided seller-financing for the nursing-home transactions on the assumption that DHS would recognize the sales and increase each nursing home's property rates. Absent rate increases, relator would be unable to service its debt to Odell. However, during a meeting with a DHS representative, the representative informed Blaze that DHS would not recognize any debt that exceeded the appraised value of the homes for the purpose of computing property rates. Relator's initial debt obligation to Odell exceeded the appraised value of the homes by approximately two million dollars. To ensure that relator could satisfy its debt obligations, and that Odell would continue to receive the same anticipated monthly cash flow, Blaze and Odell executed amended purchase agreements decreasing the purchase price and increasing the interest rate. Consequently, when the transaction was officially submitted to DHS for approval, the terms of the agreement were in compliance with DHS rules.
Initially, DHS granted relator's request for property-rate increases. But on March 14, 2001, DHS notified relator that it was rescinding its prior decision and retroactively readjusting relator's property rates because relator purchased the nursing homes from a related organization. See Minn. Stat. § 256B.431, subd. 14(d)(7) (excluding a "transfer of interest between related organizations" from the definition of "sale"). On September 13, 2001, DHS notified relator that, effective July 1, 2001, its prospective property rates would be decreased to a level indexed to the nursing homes' pre-sale property rates. Relator administratively appealed both decisions, and DHS affirmed.
Subsequently, relator requested a contested-case hearing seeking de novo review of DHS's disallowance of the rate increases. The sole issue at the contested-case hearing was whether the disallowance of the rate increases was correct. The administrative-law judge (ALJ) issued extensive findings and recommended that the commissioner affirm. The ALJ based his recommendation on the conclusion that the transactions were between related organizations because Odell exerted indirect influence over relator.
The commissioner issued its final decision accepting in part and rejecting in part the ALJ's findings, conclusions, and recommendations. However, the commissioner concluded that the transactions were between related organizations and affirmed the disallowance of the property-rate increases. This appeal follows.
DECISION
A presumption of correctness surrounds an agency's decision. In re Medical License of Friedenson, 574 N.W.2d 463, 465 (Minn.App. 1998), review denied (Minn. Apr. 30, 1998). We will reverse a final decision in a contested case if the agency's findings, inferences, conclusions, or decisions violate the constitution or lawful procedure, are affected by an error of law, exceed the agency's statutory authority or jurisdiction, are unsupported by substantial evidence, or are arbitrary and capricious. Minn. Stat. § 14.69 (2006). "The party seeking review has the burden of proving the decision violates one of these criteria." Sleepy Eye Care Ctr. v. Comm'r of Human Servs., 572 N.W.2d 766, 769 — 70 (Minn.App. 1998).
Generally, appellate courts defer to an agency's findings of fact. Saif Food Mkt. v. Comm'r, Dep't of Health, 664 N.W.2d 428, 430 (Minn.App. 2003). But, when reviewing legal questions, appellate courts "are not bound by the decision of the agency and need not defer to agency expertise." St. Otto's Home v. Minn. Dep't of Human Servs., 437 N.W.2d. 35, 39-40 (Minn. 1989) (citations omitted). Statutory construction is a question of law reviewed de novo. Id. at 39.
I
Relator argues that the commissioner erred in determining that the sale of the nursing homes from the Odell corporations to relator were between "related organizations" within the meaning of Minn. R. 9540.0020, subp. 38, thus denying relator a property-rate increase.
Rule 50 provides for a daily rate made up of several components, one of which is a "property rate" that essentially reimburses the nursing-home operator for the capital costs of the building. Currently, rule 50 states that "a nursing facility's property-related payment rate . . . shall be adjusted . . . for the sale of the nursing facility." Minn. Stat. § 256B.431, subd. 14(a) (2004). The term "sale" does not include "a sale, merger, reorganization, or any other transfer of interest between related organizations." Id., subd. 14(d)(7). The legislature adopted the definition of "related organization" stated in Minn. R. 9549.0020, subp. 38. See Minn. Stat. § 256B.431, subd. 13(a) (2004) ("Terms used in subdivisions 13 to 21 shall be as defined in Minnesota Rules, parts 9549.0010 to 9549.0080. . . ."). "Related organization" is defined as:
The parties have not designated which version of the relevant statutes and rules is applicable. It is uncertain from the record which version of the statutes and rules the ALJ applied, but it appears that he used the 2004 and 2005 editions. Although the relevant transactions occurred in 1998, use of these editions is appropriate because the relevant provisions are identical to the law in effect in 1998.
[A] person that furnishes goods or services to a nursing facility and that is . . . an affiliate of a nursing facility. . . .
A. An "affiliate" is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with another person.
B. A "person" is an individual, a corporation, a partnership, an association, a trust, an unincorporated organization, or a government or political subdivision.
Minn. R. 9540.0020, subp. 38.
Relator's primary challenge is to the commissioner's construction of the word "control" under Minn. R. 9549.0020, subp. 38D. The essence of relator's argument is that a sale creates a "related organization" situation only when the source of one party's power to direct the affairs of the other arises from a formal legal relationship or from an express agreement between both parties to the sale. We disagree.
"The object of all interpretation and construction . . . is to ascertain and effectuate the intention of the legislature. Every law shall be construed, if possible, to give effect to all its provisions." Minn. Stat. § 645.16 (2006). To determine whether a statute is being properly applied, appellate courts focus on the words of the statute. First Nat'l Bank of the N. v. Auto. Fin. Corp., 661 N.W.2d 668, 670 (Minn.App. 2003). "When the words of a law in their application to an existing situation are clear and free from all ambiguity, the letter of the law shall not be disregarded. . . ." Minn. Stat. § 645.16. But when statutory language is not explicit or is ambiguous, courts may look beyond the words in the statute to garner legislative intent. Id. Ambiguity arises when statutory language is subject to more than one reasonable interpretation. Amaral v. St. Cloud Hosp., 598 N.W.2d 379, 384 (Minn. 1999).
"Administrative interpretations are not entitled to deference when they contravene plain statutory language, or where there are compelling indications that the agency's interpretation is wrong." J.C. Penney Co. v. Comm'r of Econ. Sec., 353 N.W.2d 243, 246 (Minn.App. 1984) (citations omitted). However, we defer to an agency's interpretation if regulatory language is unclear or susceptible to different interpretations. St. Otto's Home, 437 N.W.2d at 40. Ambiguity requires a reasonable interpretation to be sustained. Id. But we need not show deference when the language is clear and capable of understanding. Id.
Here, the commissioner construed the word "control" to include indirect influence. Specifically, the commissioner concluded that a related organization can be established when one party to the sale of a nursing home has the power to control the affairs of the other through indirect influence. The commissioner further concluded that a "preponderance of the evidence established that before, during, and after the sale of the nursing homes . . . Mr. Odell was an affiliate of [relator]," and that Odell, through his relationships with Blaze, Jenson, Farrington, and Dougherty, possessed and exercised the power to direct relator's affairs through indirect influence.
But relator argues that the term "control" is limited to formal, legally recognized forms of control. Therefore, relator contends, the commissioner's construction is erroneous because it violates the canon of ejusdem generis, is an unpromulgated rule, and is unreasonable. We address each of realtor's arguments in turn.
Ejusdem Generis
Under the doctrine of ejusdem generis, the general wording of a statute must be interpreted to include only matters of the same kind or class as those specifically enumerated. Goplen v. Olmsted County Support Recovery Unit, 610 N.W.2d 686, 689 (Minn.App. 2000). The Minnesota legislature has codified this canon of construction by stating that "general words are construed to be restricted in their meaning by preceding particular words." Minn. Stat. § 645.08(3) (2006); see also Kastner v. Star Trails Ass'n, 658 N.W.2d 890, 895 (Minn.App. 2003) (stating that Minn. Stat. § 645.08(3) codifies ejusdem generis), review denied (Minn. Jun. 30, 2003). When construing a statute, this canon of construction governs, unless its "observance would involve a construction inconsistent with the manifest intent of the legislature, or repugnant to the context of the statute." Minn. Stat. § 645.08 (2006).
Our resolution of this issue focuses on the word "otherwise" as used in the statutory definition of "control." The relevant language is:
D. "Control" including the terms "controlling," "controlled by," and "under common control with" is the possession, direct or indirect, of the power to direct or cause the direction of the management, operations, or policies of a person, whether through the ownership of voting securities, by contract, or otherwise.
Minn. R. 9549.0020, subp. 38D.
Relator argues that because "otherwise" is preceded by "voting securities" and "by contract," the only other recognizable sources of the power to direct its affairs must be of the same kind or class. In other words, the power must be acquired by legal status. DHS, on the other hand, interprets the phrase "or otherwise" as referring to the many ways, other than legal status, that a person could acquire the "power to direct or cause the direction of" the business affairs of the other party to a sale. Like the commissioner, we conclude that relator's reliance on ejusdem generis is misplaced because it would frustrate legislative intent. See Minn. Stat. § 645.08. It is presumed that the legislature intended the entire statute "to be effective and certain." Minn. Stat. § 645.17(2) (2006). But relator's construction would render the word "indirect" superfluous. As the commissioner correctly stated, insertion of the phrase "direct or indirect" in the statute evidences an intent to broaden application of the rule to situations where a party has acquired the "power to direct" by indirect means.
Furthermore, relator's construction is repugnant to the statute because the statute's purpose is to prevent the state from reimbursing nursing homes for property-related expenses not negotiated at arm's length. Based on the facts of this case — in particular, the close personal and professional relationships Odell had with each of relator's board members, and the pecuniary interest each board member had in the sale of the facilities — it is clear that the nursing-home transactions were not negotiated at arm's length.
Unpromulgated Rule
Relator also argues that the commissioner's interpretation is, effectively, an unpromulgated rule. Rules must be adopted in accordance with the rulemaking requirements of the Minnesota Administrative Procedure Act (APA). Minn. Stat. § 14.05, subd. 1 (2006). An agency interpretation of the statute administered and enforced by the agency is an interpretive rule that is valid only if promulgated in accordance with the APA. Ebenezer Soc'y v. Minn. Dep't of Human Servs., 433 N.W.2d 436, 439 (Minn.App. 1988). But an interpretation does not constitute a new rule if it is consistent with the plain meaning of the statute, or if the rule is ambiguous and the interpretation is a long-standing one. Id.
Here, there is no evidence that the commissioner's interpretation is a long-standing one. Thus, to be valid it must be consistent with the definition's plain meaning. Words and phrases in a statute are "construed . . . according to their common and approved usage." Minn. Stat. § 645.08(1).
In our view, the word "power" must be read in conjunction with "the." The common usage of the phrase "the power" is "[t]he ability or official capacity to exercise control." The American Heritage Dictionary of the English Language 1420 (3d ed. 1992). "Control" in the context of defining "the power" means "[t]o exercise authoritative or dominating influence over." Id. at 410. The statutory definition of "control" includes the term "indirect." Minn. R. 9549.0020, subp. 38D. Thus, the construction of "otherwise" to include "indirect influence" is consistent with the statutory definition of "control." See id. In sum, we agree with respondent's contentions that rule 50 defines "control" broadly and that the definition clearly includes informal forms of control. As stated earlier, relator's argument to the contrary ignores the definition's use of the term "indirect" and the phrase "or otherwise" and fails to recognize the broad scope of the definition.
Unreasonable
Relator appears to argue that the commissioner's interpretation is unreasonable because: (1) it renders language in a subsequent amendment to chapter 256B superfluous, and (2) "control" is defined by statute so there is no need to construe the word "power."
But relator's first argument relies on a definition of "related organization" contained in section 256B.441, which was not in effect at times relevant to this appeal. Furthermore, when the legislature amended chapter 256B, it left unchanged the schematics of section 256B.431. Section 256B.431, subdivision 13, states that the terms used in subdivision 14(d)(7) are defined as in rule 9549.0020, subpart 38. Subdivision 14(d)(7) is the related-organization rule relevant to this appeal, and rule 9549.0020, subpart 38, defines "related organization" as used in that subdivision. Because relator does not argue that the commissioner's construction renders the language in subpart 38 superfluous, its argument has no merit.
Next, the phrase "the power" as used in the statutory definition of control, is not defined by rule or statute. But its common usage is essential to understanding the scope of the statutory definition of "control." To construe "the power" to include "influence," the ALJ relied on the following definition of "power": "A person . . . having great influence or control over others." As a direct means of construing "the power" to include "influence," the ALJ relied on an out-of-context definition. But as applied here, we conclude that this error is harmless.
As stated above, the common usage of "the power" is "[t]he ability or official capacity to exercise control." American Heritage Dictionary, supra, at 1420. The common usage of "control" is to exercise "authoritative or dominating influence." Id. at 410. Defining "the power" by resorting to the common usage of "control" is not equivalent to substituting the statutory definition of "control" with the dictionary definition. As such "the power" could reasonably be construed to include the ability to authoritatively or dominantly influence.
But the commissioner's construction refers to "indirect influence" not "indirect authoritative or dominating influence." In this respect, it appears that the commissioner's definition is unreasonable because it would permit the department to treat transactions negotiated at arm's length as being between related organizations. However, as applied to this case, the commissioner's construction is reasonable because the record shows that Odell possessed and exerted dominating influence over relator by virtue of the fact that the nursing-home sales were conceived and orchestrated by Odell and were executed without any meaningful negotiation.
II
Relator also challenges the constitutionality of Minn. Stat. § 256B.431, subd.14(d)(7) on equal-protection and due-process grounds. The constitutionality of a statute is a question of law, which we review de novo. Everything Etched, Inc. v. Shakopee Towing, Inc., 634 N.W.2d 450, 453 (Minn.App. 2001), review denied (Minn. Dec. 11, 2001).
Statutes enjoy a strong presumption of constitutionality. Id. "When a statute does not contain suspect classifications or impinge on fundamental rights, it only needs to be rationally related to a legitimate governmental purpose to withstand either an equal-protection or a substantive-due-process challenge." Id. "Under the rational basis test, legislation will not be set aside if any state of facts reasonably may be conceived to justify it." Doll v. Barnell, 693 N.W.2d 455, 463 (Minn.App. 2005).
Equal Protection
"The Equal Protection Clause of both the state and federal constitutions requires equal application of the laws such that all people in similar circumstances are treated similarly." Peterson v. Minn. Dep't of Labor Indus., 591 N.W.2d 76, 79 (Minn.App. 1999), review denied (Minn. May 18, 1999). An economic or social-welfare classification will not be set aside unless it is shown to have no reasonable basis. Id. The classification must make "distinctions that are rationally related to legitimate legislative goals." Id.
Here, relator argues that there is no rational basis for classifying acquisitions among related parties and acquisitions between unrelated parties differently, because the purchase negotiations among the parties, whether related or not, are irrelevant to rate setting under rule 50. But relator fails to make the threshold showing that related and unrelated organizations are similarly situated. In addition, treating related and unrelated organizations differently is rationally related to a legitimate state interest. The state has an interest in avoiding the payment of artificially inflated costs which may be generated by less-than-arm's-length bargaining, or that are not otherwise subject to the discipline of competitive market forces. Because related parties are more likely than unrelated parties to come to terms that deviate from market conditions, the statute's classification scheme is constitutional.
Due Process
Due-process doctrine provides that "[u]nless a fundamental right is limited . . . minimal judicial scrutiny of legislation is appropriate." Doll, 693 N.W.2d at 463 (alteration in original). Thus, legislation is constitutional if it "bears a rational relation to the public purpose it seeks to promote." Id. Legislation that does not violate equal protection does not violate substantive due process. Everything Etched, Inc., 634 N.W.2d at 453.
Here, relator has not established that Minn. Stat. § 256B.431, subd. 14(d)(7), infringes on its fundamental rights, requiring increased judicial scrutiny. Because under a rational-basis analysis this statute does not violate equal protection, it does not violate substantive due process.
III
Relator challenges the commissioner's decision on the ground that it is unsupported by substantial evidence or is arbitrary and capricious. Substantial evidence is "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Saif Food Mkt., 664 N.W.2d at 430 (quoting In re Excess Surplus Status of Blue Cross Blue Shield of Minn., 624 N.W.2d 264, 274 (Minn. 2001)). An agency's decision is arbitrary and capricious if it fails to articulate a rational connection between the facts found and the decision made. In re Excess Surplus Status of Blue Cross Blue Shield of Minn., 624 N.W.2d 264, 277 (Minn. 2001). Relator's argument has no merit.
Relator had the burden of proving by a preponderance of the evidence that the relevant transactions were not between related organizations. Minn. Stat. § 256B.50, subd. 1c(d) (2006). Relator argues that it met its burden because Blaze, Farrington, Dougherty, and Jenson testified that Odell did not control them, and that the commissioner's decision is based on impermissible inferences. But the record demonstrates that each of the above-named witnesses has a pecuniary interest in the transaction, which the commissioner could have believed weighed against their credibility. We defer to an agency's determination on the weight and credibility of testimony and the inference to be drawn from testimony. Blue Cross Blue Shield of Minn., 624 N.W.2d at 278. In addition, relator presented no evidence tending to prove that it engaged in any serious negotiation or due diligence before approving the transactions — prudent actions generally taken in an arm's-length transaction.
Relator's arbitrary-and-capricious argument focuses on the conduct of department personnel. However, "a contested case proceeding is a de novo review, and not a mere appeal from the agency's decision." Sleepy Eye Care Ctr., 572 N.W.2d at 770. The contested-case hearing nullified DHS's administrative-appeal determinations. Minn. Stat. § 256B.50, subd. 1c(c) (2006). As such, a certiorari appeal is from the commissioner's final decision. Minn. Stat. § 14.63 (2006). Thus, the proper focus of any argument is on the commissioner's conduct. But here, relator failed to present any facts establishing that the commissioner failed to articulate a rational connection between the facts found and the decision made. Accordingly, we conclude that the commissioner's decision was supported by substantial evidence and was neither arbitrary nor capricious.