Am. Ass'n of Bioanalysts v. N.Y. State Dept. of Health

• Decision Date: 22 July 2010
• Citation: 906 N.Y.S.2d 356,75 A.D.3d 939
• Parties: AMERICAN ASSOCIATION OF BIOANALYSTS et al., Respondents-Appellants, v. NEW YORK STATE DEPARTMENT OF HEALTH et al., Appellants-Respondents.
• Court: New York Supreme Court — Appellate Division

906 N.Y.S.2d 356

75 A.D.3d 939

AMERICAN ASSOCIATION OF BIOANALYSTS et al., Respondents-Appellants,

v.NEW YORK STATE DEPARTMENT OF HEALTH et al., Appellants-Respondents.

Supreme Court, Appellate Division, Third Department, New York.

July 22, 2010.

Andrew M. Cuomo, Attorney General, Albany (Frank K. Walsh of counsel), for appellants-respondents.

O'Connell & Aronowitz, P.C., Albany (Jeffrey J. Sherrin of counsel), for respondents-appellants.

Before: PETERS, J.P., ROSE, LAHTINEN, McCARTHY and EGAN JR., JJ.

ROSE, J.

Appeals (1) from a judgment of the Supreme Court (Sheridan, J.H.O.), entered September 30, 2008 in Albany County, which, among other things, declared the costs includable in certain annual inspection and reference fees assessed by defendant Department of Health, and (2) from an order of said court, entered June 22, 2009 in Albany County, which denied plaintiffs' motion to amend the judgment.

Plaintiffs are a trade association and a number of its clinical laboratory members that were required to pay inspection and reference fees to defendant Department of Health because they were located in or accepting specimens from New York State ( see Public Health Law art. 5, title V). The Department is authorized to impose these annual fees in an amount not exceeding the actual cost of operating and administering the clinical laboratory inspection and reference system program mandated by Public Health Law § 576 and further defined in Public Health Law § 571(3) (hereinafter the program). The program is operated and administered by the Department's Wadsworth Center, which also performs routine examinations and analyses, as well as original investigations and research in fulfillment of the Department's numerous other responsibilities regarding public health ( see Public Health Law § 500). Program work was dispersed throughout the Wadsworth Center's six divisions and more than 30 laboratories, with none of them exclusively dedicated to it. Plaintiffs commenced this action to obtain a declaration that the fees imposed for fiscal years 1998-1999 through 2005-2006 exceeded the Department's actual costs of operating the program in violation of Public Health Law § 576(4), and to annul and recover them.

When plaintiffs' action first came before us, it was revealed that the Department had not kept contemporaneous records of the actual costs of operating the program as required by Public Health Law § 576(4)(b) and (e), and defendants argued that itwould be unduly burdensome to require them to disclose the expenditures of the various divisions and laboratories of the Wadsworth Center that had been charged to plaintiffs. We required them to disclose these costs, however, and held that the burden of doing so was "solely due to defendants' failure to abide by statutory mandate for the years in question" and that "their laxity fueled the complexity of this litigation" (12 A.D.3d 868, 869, 784 N.Y.S.2d 717 [2004] ). Later, when the parties appealed the denial of their cross motions for summary judgment, we treated this matter as a hybrid action/special proceeding with the application to annul the fees being the CPLR article 78 portion. We then held that the words "actual costs" are used in Public Health Law § 576(4)(b) and (e) to distinguish them from estimated costs and to refer to the costs necessarily incurred by the Department in operating the program during a particular fiscal year (33 A.D.3d 1138, 823 N.Y.S.2d 552 [2006] ). Inasmuch as there was no dispute that the Department had failed to keep the records necessary to compute the actual costs of the program and had used program funds to pay non-program expenses of the Wadsworth Center, we determined that the fee assessments were arbitrary and capricious as a matter of law ( id. at 1140-1141, 823 N.Y.S.2d 552). Nonetheless, because the Department claimed to have reconstructed the costs of the program by surveying the Wadsworth Center's staff and compiling their estimates of the attributable personnel time, equipment and materials, we affirmed the finding of Supreme Court (Tomlinson, J.) that those surveys were sufficient to raise questions of fact as to the amount of any refund of overcharges.

Thus, we left it to Supreme Court to determine, as a matter of fact after trial, what costs were properly chargeable to the clinical laboratories for the years in question here ( id. at 1141, 823 N.Y.S.2d 552).

At trial, Supreme Court (Sheridan, J.H.O.) placed the burden upon defendants to present competent, legally sufficient evidence in support of their claimed actual costs, but maintained plaintiffs' ultimate burden of persuasion as to any overcharge. Defendants then presented the results of a second cost survey that was conducted after we rendered our decision and had not been previously disclosed to plaintiffs. Supreme Court discounted the results of that survey, however, because they were based on "bald estimates" having little probative value, and the court found that defendants had included costs that were not reliably established or proven to be reasonably necessary for the operation of the program. The court then remanded the matter to the Department for recalculation of the inspection and reference fees using only the costs found to be adequately proven as necessary for the program's operation. Defendants now appeal from that judgment, and plaintiffs appeal from a subsequent orderdenying their application to recover prejudgment interest upon the amount of any refunds owed to them.

Following our determination in the CPLR article 78 portion of this matter that defendants' assessment of fees was arbitrary and capricious for failure to comply with the statutory mandate, the remaining issue to be determined in the declaratory judgment portion was which costs are properly includable. That factual determination depended upon whether the costs claimed by defendants were shown to be for activities, equipment and materials reasonably necessary for the program's operation, and whether the amounts of the properly includable costs were sufficiently proven. Defendants now challenge Supreme Court's delineation of the program's components as well as its determination that the cost amounts of those components were largely unproven.

Defendants first argue that Supreme Court should have determined only whether or not the Department's recalculation of the program's costs was arbitrary and capricious, and that since their survey method for reconstructing those costs was rational despite its mathematical imprecision, Supreme Court could not reject it as unreliable. We disagree. The arbitrariness of the fees imposed by the Department was previously demonstrated and affirmed by this Court. What remained to be done thereafter was not a CPLR article 78 review of the rationality of the Department's methodology, but a declaration of what costs of the program were sufficiently proven as a setoff against the full refund of fees claimed by plaintiffs. Nor was the court required to merely defer to defendants' methodology because, in reconstructing the program costs, the Department was not "acting pursuant to its authority and within its area of expertise" ( Matter of Riverkeeper, Inc. v. Johnson, 52 A.D.3d 1072, 1074, 861 N.Y.S.2d 155 [2008], lv. denied 11 N.Y.3d 716, 874 N.Y.S.2d 5, 902 N.E.2d 439 [2009] ). The Department had statutory authority only to keep contemporaneous records of actual costs and none of its regulations contemplates or permits basing the program's fees upon retrospective reconstruction of its costs ( see 10 NYCRR 58-3.1-58-3.6). Unlike here, the governmental agencies in the cases cited by defendants in arguing for deference for their methodology were interpreting and implementing their own regulations in article 78 proceedings ( see e.g. Matter of New York Assn. of Homes & Servs. for Aging v. Commissioner of N.Y. State Dept. of Health, 87 N.Y.2d 978, 982, 642 N.Y.S.2d 854, 665 N.E.2d 655 [1996], revg. on dissenting ops. of Crew III and Casey, JJ., 212 A.D.2d 163, 170-172, 628 N.Y.S.2d 976 [1995] ). In addition to being unsupported by any regulation, reconstruction of the program's cost was not an exercise of the Department's expertise in public health mattersand was performed only for purposes of this litigation ( see Parker v. Office of Personnel Mgt., 974 F.2d 164, 166 [Fed.Cir.1992] ).

Accordingly, Supreme Court applied the appropriate standard here and properly assessed whether the costs alleged were necessary for the statutorily mandated program and whether reliable factual evidence supported their assessment ( see Jewish Reconstructionist Synagogue of N. Shore v. Incorporated Vil. of Roslyn Harbor, 40 N.Y.2d 158, 163, 386 N.Y.S.2d 198, 352 N.E.2d 115 [1976]; Matter of Phillips v. Town of Clifton Park Water Auth., 286 A.D.2d 834, 835 n., 730 N.Y.S.2d 565 [2001] ). Following such a nonjury trial and taking into account "that the trial judge had the advantage of seeing the witnesses" ( Northern Westchester Professional Park Assoc. v. Town of Bedford, 60 N.Y.2d 492, 499, 470 N.Y.S.2d 350, 458 N.E.2d 809 [1983] [internal quotation marks and citation omitted] ), "we independently review the weight of the evidence and may grant the judgment warranted by the record, while according due deference to the trial judge's factual findings" ( Charles T. Driscoll Masonry Restoration Co., Inc. v. County of Ulster, 40 A.D.3d 1289, 1291, 836 N.Y.S.2d 362 [2007] [internal quotation marks and citation omitted]; see Brown v. State of New York, 45 A.D.3d 15, 20-21, 841 N.Y.S.2d 698 [2007] ). Further, we will not disturb the trial court's decision "unless it is obvious that the court's conclusions could not be reached under any fair interpretation of the evidence" ( Thoreson v. Penthouse Intl., 80 N.Y.2d 490, 495, 591 N.Y.S.2d 978, 606 N.E.2d 1369 [1992] [internal quotation marks and citation omitted]; see Mazza v. Fleet Bank, 16 A.D.3d 761, 762, 790 N.Y.S.2d 730 [2005]; Federated Conservationists of...