Bishop v. Evangelical Lutheran Soc.

• Decision Date: 10 January 2008
• Docket Number: No. 25,510.,25,510.
• Citation: 2008 NMCA 033,179 P.3d 1248
• Parties: Susan BISHOP and Mark Skofield, as Class Representatives in their capacities as Personal Representatives of the Estate of Richard H. Skofield, Individually and in his capacity as Class Representative, Plaintiffs-Appellants/Cross-Appellees, v. The EVANGELICAL LUTHERAN GOOD SAMARITAN SOCIETY, a foreign corporation d/b/a Manzano Del Sol Good Samaritan Village, Defendants-Appellees/Cross-Appellants.
• Court: Court of Appeals of New Mexico

179 P.3d 1248

2008 NMCA 033

Susan BISHOP and Mark Skofield, as Class Representatives in their capacities as Personal Representatives of the Estate of Richard H. Skofield, Individually and in his capacity as ClassRepresentative, Plaintiffs-Appellants/Cross-Appellees, v.The EVANGELICAL LUTHERAN GOOD SAMARITAN SOCIETY, a foreign corporation d/b/a Manzano Del Sol Good Samaritan Village, Defendants-Appellees/Cross-Appellants.

No. 25,510.

Court of Appeals of New Mexico.

January 10, 2008.

Certiorari Granted, No. 30,899, February 28, 2008.

Jeffries, Rugge, Rosales, PC, Eric Sedillo Jeffries, Brian A. Thomas, Albuquerque, NM, for Appellants.

Modrall, Sperling, Roehl, Harris & Sisk, P.A., Martha G. Brown, Albuquerque, NM, Quarles & Brady LLP, Dan Conley, Paul D. Bauer, Milwaukee, WI, for Appellees.

OPINION

ALARID, Judge.

{1}Plaintiffs' motion for rehearing having been granted, the Court's opinion of September 4, 2007, is withdrawn and this opinion substituted in its place.

{2} This appeal requires us to construe and apply the Continuing Care Act.The Legislature enacted the Continuing Care Act (CCA) in 1985. 1985 N.M. Laws, ch. 102(codified at NMSA 1978, §§ 24-17-1 to -13 (1985, as amended through 2005)).In enacting the CCA, the Legislature declared that "continuing care communities are an important and growing alternative for the provision of long-term residential, social and health maintenance needs for the elderly; however, the [L]egislature also finds that severe consequences to residents may result when a provider becomes insolvent or unable to provide responsible care."Section 24-17-2(A).The Legislature stated that "[t]he purpose of the [CCA] is to provide for disclosure and the inclusion of certain information in continuing care contracts in order that residents may make informed decisions concerning continuing care and to provide protection for residents and communities."Section 24-17-2(B)(citation omitted).¹

{3} The CCA contains the following provision, which is of particular importance in the present case.

A continuing care contract shall ... state when fees will be subject to periodic increases and what the policy for increases will be; provided, however, that ... increases shall be based upon economic necessity, the reasonable cost of operating the community, the cost of care and a reasonable return on investment[.]

Section 24-17-5(B)(11)(emphasis added).

{4}Defendant, Evangelical Lutheran Good Samaritan Society (Good Samaritan), is a non-profit corporation, incorporated under North Dakota law, with its home office in South Dakota.Nationwide, Good Samaritan operates more than two hundred independent living and nursing home facilities serving senior citizens.Good Samaritan operates nine facilities in New Mexico, including Manzano del Sol Good Samaritan Village(Manzano), an independent living facility located in Albuquerque.

{5}Plaintiff and Class Representative, Richard H. Skofield(Skofield), resided at Manzano.²The class consists of Skofield and approximately three hundred residents of Manzano who were subject to fee increases between July 30, 1993, and July 30, 1999.³Skofield and other class members were parties to Entrance Agreements with Manzano containing the following provision tracking the requirements of Section 24-17-5(B)(11).

The monthly service fee may be subject to increases provided, however, that MANZANO shall give advance notice of not less than thirty (30) days to the RESIDENT before any increase in monthly service fee becomes effective and increases shall be based upon economic necessity, the reasonable cost of operating MANZANO, the cost of care and reasonable return on investment.

There is no dispute that the Entrance Agreements are "continuing care contracts" governed by the CCA.

DISCUSSION

{6}The district court found that Good Samaritan raised the monthly service fee that Manzano charged residents 2.5% in 1994, 6% in 1995, 3% in 1996, 4% in 1997, and 2% in 1998; and that "[i]n raising the fees, [Good Samaritan] did not consider whether the increases complied with the CCA.Specifically, prior to each increase, [Good Samaritan] did not determine if the increase was based upon economic necessity or a reasonable return on investment."These findings are not challenged on appeal.The district court concluded that "[Good Samaritan] breached its contract with the class members by failing to conduct the required statutory analysis under the [CCA] and the continuing care contracts."Based on its determinations that Good Samaritan had violated the CCA and breached its contracts, the district court awarded substantial damages to the class.Good Samaritan challenges the judgment, arguing that its increases were lawful under any reasonable interpretation of the CCA.We agree with Good Samaritan that the damages awarded by the district court cannot be sustained under the legal theories reflected in the district court's findings of fact and conclusions of law.Accordingly, we reverse the judgment of the district court and remand for entry of a judgment in Good Samaritan's favor.

{7} The terms "economic necessity" and "reasonable return on investment" are not defined by the CCA and there were no regulations⁴ in place defining these terms at the times Good Samaritan imposed the fee increases that are the subject of this litigation.Our opinion in this case appears to be the first appellate opinion interpreting the CCA.

{8}We begin our analysis with the fourth factor, reasonable return on investment, as this factor was the focus of the parties' dispute in the district court.⁵Plaintiffs argue that for purposes of Section 24-17-5(B)(11), return on investment refers to a ratio commonly used by accountants and financial advisors in evaluating a business.See generallyDaniel Lipsky & David A. Lipton, A Student's Guide to Accounting for Lawyers 192-200 (Matthew Bender1985)(discussing "profitability ratios," including rate of return on investment).Plaintiffs asserted that a return on investment can be calculated for any business, including nonprofit entities; and, that by comparison with the returns historically achieved by for-profit business enterprises, Good Samaritan's return on its investment in Manzano, including the return on Manzano's reserves which Good Samaritan had invested in the stock market, were excessive.In contrast, Good Samaritan argues that we should interpret reasonable return on investment by analogy to public utility rate-making, an area of the law where the concept of a reasonable return is well established.Good Samaritan argued that reasonable return as used in rate-making has no application to non-profit entities such as Good Samaritan.The parties' dispute over the meaning of "reasonable return on investment" presents us with an issue of statutory construction, "a legal question which we review de novo."HSBC Bank USA v. Fenton,2005-NMCA-138, ¶ 5, 138 N.M. 665, 125 P.3d 644.

{9}We see an obvious analogy between rate-making and the analysis contemplated by Section 24-17-5(B)(11).SeeFed. Power Comm'n v. Hope Natural Gas Co.,320 U.S. 591, 601, 64 S.Ct. 281, 88 L.Ed. 333(1944)(observing that "[r]ate-making is indeed but one species of price-fixing").In each case, the Legislature has substituted a legislatively prescribed method for setting prices in place of the market forces that otherwise would determine the prices a business may charge consumers.In the ratemaking context, reasonable return has constitutional implications: due process of law requires that rates be set high enough to allow investors the opportunity to recover a return on their investment over and above the enterprise's costs of operation.In re Rates & Charges of Mountain States Tel. & Tel. Co.,99 N.M. 1, 8, 653 P.2d 501, 508(1982).An opportunity for investors to earn a reasonable return on investment is a mandatory requirement in a governmentally imposed rate-making or price-control regime.SeeCalfarm Ins. Co. v. Deukmejian,48 Cal.3d 805, 258 Cal.Rptr. 161, 771 P.2d 1247, 1252(1989)(In Bank).If the CCA did not allow investors in continuing care communities to recover a reasonable return on investment, we would be presented with a substantial question as to whether the limitations on fee increases imposed by Section 24-17-5(B)(11) are confiscatory.Cf.Mich. Bell Tel. Co. v. Engler,257 F.3d 587, 594-95, 600(6th Cir.2001)(enjoining the State of Michigan from enforcing provisions of the Michigan Telecommunications Act freezing rates and abolishing intrastate end user common line charge; emphasizing the legislature's failure to provide for a constitutionally adequate rate of return over and above the costs of providing services);Prop. Owners Ass'n of N. Bergen v. Twp. of N. Bergen,74 N.J. 327, 378 A.2d 25, 29(N.J.1977)(invalidating ordinance controlling rents charged to elderly tenants; citing the principle that rent regulation must allow landlords "a just and reasonable return"(internal quotation marks and citation omitted)).By expressly authorizing the owners and operators of continuing care communities to recover a reasonable return on investment, our Legislature anticipated and foreclosed concerns that the CCA would be construed as confiscatory."Although we rest our decision in this case on our interpretation of the statutory language, not constitutional doctrine, it is appropriate for a court interpreting a statute to consider whether a particular interpretation is likely to create [or avoid] problems arising from constitutional doctrine."Hughes v. Timberon Water & Sanitation Dist.,1999-NMCA-136, ¶ 10, 128 N.M. 186, 991 P.2d 16.We conclude that the Legislature intended "reasonable rate of return" to refer to a constitutionally adequate rate of return rather than to prescribe a particular accounting ratio.

{10} Price controls reflect the tension between the interests of investors in an enterprise subject to price controls and the interests...