Americana Healthcare Center v. North Dakota Dept. of Human Services

• Decision Date: 30 November 1995
• Docket Number: No. 950086,950086
• Citation: 540 N.W.2d 151
• Parties: AMERICANA HEALTHCARE CENTER, Appellee, v. NORTH DAKOTA DEPARTMENT OF HUMAN SERVICES, Appellant. Civ.
• Court: North Dakota Supreme Court

Page 151

540 N.W.2d 151

AMERICANA HEALTHCARE CENTER, Appellee, v. NORTH DAKOTA DEPARTMENT OF HUMAN SERVICES, Appellant.

Civ. No. 950086.

Supreme Court of North Dakota.

Nov. 30, 1995.

Carol Ronning Kapsner (argued), of Kapsner & Kapsner, Bismarck, for appellee.

Candace A. Prigge (argued), Assistant Attorney General, Attorney General's Office, Bismarck, for appellant.

NEUMANN, Justice.

The North Dakota Department of Human Services [Department] appeals from a district court judgment reversing the Department's order disallowing certain interest expenses in setting 1993 reimbursement rates for Americana Healthcare Center [Americana]. We reverse the judgment of the district court and affirm the Department's order.

Americana is a nursing home located in Fargo. At the time relevant to this case, Mid-States Nursing Home Corporation [Mid-States] owned the land and buildings where Americana was located. University Manor Corporation [University] operated the facility, and University had an option to purchase the property from Mid-States. Both Mid-States and University were wholly owned subsidiaries of Manor Healthcare Corporation [Manor].

Sunnycrest Nursing Facilities, Inc. [Sunnycrest], an unrelated corporation, held an option to purchase all of the shares of Mid-States. On September 25, 1983, Sunnycrest gave notice of its intention to exercise the option.

Concerned that Sunnycrest, as owner of Mid-States, might encumber the property occupied by Americana, University exercised its option to purchase the property from Mid-States on September 29, 1983. The property was transferred to University, and University issued to Mid-States a promissory note for $622,422.16, to be paid over 20 years at 10 percent interest. At the time of this transaction, Mid-States and University were still owned by Manor. However, no payment was made on the note while the parties were still related.

Sunnycrest exercised its option on October 14, 1983, acquiring Mid-States and, with it, University's note. Sunnycrest and Manor entered into negotiations which culminated in a refinancing in June 1984. To cancel University's note, Manor paid $157,532.68 to Sunnycrest and gave a new note for $562,000 at 12 percent interest. In 1986, Manor issued public debentures at 6 3/8 percent interest and paid off the 1984 note to Sunnycrest.

In its 1991-1992 cost report to the Department, Manor claimed an interest expense of $36,450 on the debentures related to the Mid-States refinancing. The Department audited Manor's expenses and disallowed the $36,450 interest expense because the original September 29, 1983 transaction had been between related parties. The Department adjusted Americana's 1993 reimbursement rate to reflect disallowance of the interest expense.

Americana's request for reconsideration was denied, and Americana appealed its final rates for 1993. Following an administrative hearing, the hearing officer issued his recommended findings and order concluding that, if interest on the debentures was paid to unrelated parties, the interest was an allowable expense for purposes of rate setting.

The Director rejected the hearing officer's findings and order. The Director interpreted the relevant regulations to allow the Department to look back to the original transaction and, if the parties to that transaction were related, to disallow the interest on the refinancing or transfer of the note to an unrelated party. The Director therefore concluded the interest expense was properly disallowed.

Americana appealed to the district court, which held the Department had misinterpreted its own regulations. The district court concluded that, because the interest on the debentures was actually paid to unrelated parties, it was an allowable expense. The Department has appealed.

When an order of the Department is appealed to the district court and then to this court, we review the Department's decision, not that of the district court. Bashus v. North Dakota Department of Human Services, 519 N.W.2d 296, 297 (N.D.1994); Hakanson v. North Dakota Department of Human Services, 479 N.W.2d 809, 811 (N.D.1992). Our review is limited to the record compiled before the Department. Bashus, supra, 519 N.W.2d at 297; Hakanson, supra, 479 N.W.2d at 811. Under Sections 28-32-21 and 28-32-19, we consider whether the Department's findings of fact are supported by a preponderance of the evidence, whether its conclusions of law are supported by the findings of fact, whether its decision is supported by the conclusions of law, and whether its decision is in accordance with the law. Bashus, supra, 519 N.W.2d at 297.

The determinative issue presented in this case is whether the Department correctly interpreted its own regulations regarding disallowance of interest between related parties. Although interpretation and application of administrative regulations generally presents a question of law, we will accord some deference to an administrative agency's reasonable interpretation of its own regulations. Hecker v. Stark County Social Service Board, 527 N.W.2d 226, 234 (N.D.1994); Hakanson, supra, 479 N.W.2d at 814. An agency has a reasonable range of informed discretion in the interpretation and application of its own regulations, and the agency's expertise is entitled to special deference when the subject matter is complex or technical. See, e.g., Cass County Electric Cooperative, Inc. v. Northern States Power Co., 518 N.W.2d 216, 220 (N.D.1994); Luithle v. Burleigh County Social Services, 474 N.W.2d 497, 500-501 (N.D.1991); In re Stone Creek Channel Improvements, 424 N.W.2d 894, 900 (N.D.1988). As the court noted in Hanson v. Industrial Commission, 466 N.W.2d 587, 590-591 (N.D.1991) (citations omitted):

"Ordinarily, determinations of administrative bodies are presumed to be correct.... If the subject matter of a question before an administrative agency is of a highly technical nature, the expertise of the agency is entitled to respect and appreciable deference."

This court has previously indicated that the rate setting procedures governed by Chapter 75-02-06, N.D.A.C., including the related-party rules, involve complex matters calling for agency expertise. See In re Dickinson Nursing Center, 353 N.W.2d 754, 758-759 (N.D.1984).

Section 75-02-06-04(7), N.D.A.C., provides that, to be an allowable expense, "[i]nterest must be paid to a lender that is not related to the borrower...." "Related organization" is defined in Section 75-02-06-01(44), N.D.A.C., and there is no dispute that Mid-States and University were "related organizations" for purposes of rate setting when the original transaction occurred on September 29, 1983. Americana asserts, however, that because no interest was actually paid when the two were related, and because the interest at issue here was paid to members of the public through debentures, the plain language of the regulation makes the interest an allowable expense.

The Department interprets the regulation to allow the Department to look back to the original transaction and disallow the interest if the parties to that original transaction were related. In reaching this conclusion, the Department relies upon two...