Department of Health, State of Neb. v. Omaha Associates

• Decision Date: 16 June 1989
• Docket Number: No. 87-715,87-715
• Citation: 232 Neb. 516,441 N.W.2d 579
• Court: Nebraska Supreme Court
• Parties: DEPARTMENT OF HEALTH, STATE OF NEBRASKA, Appellant, v. OMAHA ASSOCIATES, a Limited Illinois Partnership, et al., Appellees.

Page 579

441 N.W.2d 579

232 Neb. 516

DEPARTMENT OF HEALTH, STATE OF NEBRASKA,

Appellant,

v. OMAHA ASSOCIATES, a Limited Illinois Partnership, et al., Appellees.

No. 87-715.

Supreme Court of Nebraska.

June 16, 1989.

Syllabus by the Court

1. Administrative Law: Appeal and Error. In an appeal to the Supreme Court from an administrative agency's decision, the Supreme Court tries factual questions de novo on the record and reaches a conclusion independent of the conclusion reached by the administrative agency, provided, where credible evidence is in conflict on a material issue of fact, the Supreme Court considers and may give weight to the fact that the administrative agency heard and observed the witnesses and accepted one version of the facts rather than another.

2. Administrative Law: Public Health and Welfare: Proof: Appeal and Error. In an appeal of a decision to grant a certificate of need, the person appealing the decision shall bear the burden of proof that the application does not meet the applicable criteria.

Robert M. Spire, Atty. Gen., and Marilyn B. Hutchinson, Lincoln, for appellant.

Joseph E. Casson and Beverly Petersen Jennison, of Casson, Harkins & LaPallo, Washington, D.C., and John R. Holdenried and Barbara E. Person, of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, Omaha, for appellees.

HASTINGS, C.J., SHANAHAN, and FAHRNBRUCH, JJ., NORTON, District Judge, and RONIN, District Judge, Retired.

SHANAHAN, Justice.

Omaha Associates, a limited partnership in the State of Illinois, and Aksarben Nursing Centers, Inc., a Minnesota corporation, appellees, seeking approval of the simultaneous purchase and lease of the 174-bed Omaha nursing home facility of The Hillhaven Corporation, filed an application with the Department of Health (department) requesting the issuance of a certificate of need (CON), which, by virtue of Neb.Rev.Stat. § 71-5830(1) (Reissue 1986), was required for the proposed transaction. Accepting the department's recommendations, the CON review committee denied the appellees' application for a CON. Appellees then appealed to the CON appeal panel. See Neb.Rev.Stat. § 71-5860 (Reissue 1986). The parties stipulated that the issues before the appeal panel were whether the appellees had met their burden to prove: (1) that the proposed project was the least costly or most effective alternative; (2) that the increase in costs, if any, was justified in part by improvements in the financing and delivery of health services which would foster competition and promote quality assurance for consumers; (3) that financing was available and the project was financially feasible; (4) that the proposed project was designed to provide or support high quality care; and (5) that the proposed project would foster competition and increase the range of choices available to consumers. Based on these issues, the CON appeal panel reversed the decision of the CON review committee and granted the requested CON. Pursuant to Neb.Rev.Stat. § 71-5866 (Reissue 1986), the department appealed to the district court for Lancaster County, which affirmed the decision of the CON appeal panel and issuance of a CON to the appellees. In its appeal to this court, the department claims that (1) the CON appeal panel exceeded its statutory authority and jurisdiction, (2) the appeal panel's decision is unsupported by appropriate evidence, (3) the decision of the appeal panel is contrary to law, and (4) the decision is arbitrary and capricious.

STANDARD OF REVIEW AND BURDEN OF PROOF

The department's appeal from a decision of the CON appeal panel, which has granted a CON, is governed by the Administrative Procedure Act. § 71-5866. In an appeal to the Supreme Court from an administrative agency's decision, the Supreme Court tries factual questions de novo on the record and reaches a conclusion independent of the conclusion reached by the administrative agency, provided, where credible evidence is in conflict on a material issue of fact, the Supreme Court considers and may give weight to the fact that the administrative agency heard and observed the witnesses and accepted one Because our review is de novo, we bear in mind the burden of proof when a CON has been issued. "In an appeal of a decision to grant a certificate of need, the person appealing that decision shall bear the burden of proof that the application does not meet the applicable criteria." Neb.Rev.Stat. § 71-5865 (Reissue 1986); Department of Health v. Grand Island Health Care, supra. Hence, the department has the burden of proof in the present case, namely, the burden of establishing that the applicants appellees have not satisfied the requirements for a CON.

version of the facts rather than another. See, Neb.Rev.Stat. § 84-918 (Reissue 1987); Department of Health v. Grand Island Health Care, 223 Neb. 587, 391 N.W.2d 582 (1986); Department of Health v. Columbia West Corp., 227 [232 Neb. 518] Neb. 836, 420 N.W.2d 314 (1988).

THE FACTS

Hillhaven, the current owner-operator of the 14-year-old nursing home facility which appellees seek to purchase and lease, acquired the facility in 1978 for a purchase price of $2.3 million. Dating back to November 1983, Hillhaven has had a somewhat strained relationship with the department. On February 14, 1985, the department's director issued a 10-page citation to Hillhaven, severely criticizing Hillhaven's care of its residents and the sanitary conditions within the nursing home facility. As a basis for the departmental citation, the department's director noted observations by the department's "surveyors," apparently a euphemism for inspectors, which included improper care of incontinent patients, haphazard and improper positioning of patients, presence of numerous cockroaches within the facility, improper food preparation, and inadequate staffing. As a result of the alleged violations, the department prohibited admission or readmission of patients to Hillhaven.

On February 25, 1985, the department, on account of the violations alleged against Hillhaven, filed a petition to place Hillhaven in the hands of a receiver. This action was unsuccessful. Hillhaven continued as the operator of the nursing home and took action to remedy the violations or deficiencies alleged by the department. On April 10, 1985, the department withdrew its allegations against Hillhaven and permitted admission of residents to the nursing home. On that same day, however, the department issued a new citation to Hillhaven documenting further deficiencies in the operation of the nursing home.

After the department lifted the ban on admissions, Hillhaven unilaterally restricted admissions to avoid further action by the department. Disputes with the department regarding the level of care provided by Hillhaven apparently had drastic effects on Hillhaven's profitability. In 1984-85, Hillhaven sustained "large financial losses."

In May 1986, Hillhaven contracted to sell its nursing home facility to Zev Karkomi, who in turn assigned his contractual interest to Omaha Associates, a partnership composed of Karkomi and Harvey Angell. Omaha Associates then leased the nursing home facility to Raymond Tutwiler, who assigned his leasehold interest to Aksarben Nursing Centers, a corporation formed by Tutwiler. Aksarben proposed to contract with RET & Associates, another entity operated by Tutwiler, for management services in the Hillhaven facility. Both Tutwiler and Karkomi have extensive experience with nursing home operations.

Karkomi proposed to pay Hillhaven $3.3 million for the land, building, and equipment, plus $50,000 for Hillhaven's inventory and an additional $150,000 in consideration of Hillhaven's promise not to compete. Omaha Associates gave Hillhaven a promissory note for $3.1 million, which was secured by a mortgage to Hillhaven. Omaha Associates' note bore a variable interest rate, ranging from 10.68 percent in the initial year to 13.12 percent in subsequent years for the note, which resulted in monthly payments ranging from $27,582.46 to $33,130.56. At the end of 15 years, Omaha Associates' note called for a balloon payment in the amount of $3,145,631. The note further provided that Omaha Associates had the option of prepayment without penalty at any time. Omaha Associates' lease to Tutwiler had a 10-year term with annual rent varying from $381,060 in the 1st year to $455,401 in the 10th year and obligated the lessee to pay "all taxes, assessments, licenses and permit fees, charges for public utilities, and all governmental charges." The Tutwiler lease also restricted the use of the premises to "skilled care and/or intermediate care nursing home" and required that the lessee maintain good standing with the department. Tutwiler subsequently assigned his leasehold interest to Aksarben Nursing Centers, which intended to hire RET & Associates, a nursing home management company, to handle the operation of the Hillhaven facility. All the transactions, however, were conditioned on appellees' success in acquiring a CON.

Meanwhile, the financial losses and problem care persisted at Hillhaven. In October of 1986, Hillhaven sustained a loss in excess of $47,000. Hillhaven's average nursing hours per resident per day were 3.9, when the average for nursing homes in the state was 2 to 2.5. Notwithstanding the greater than average nursing hours per resident, the general quality of nursing care for Hillhaven's residents was inferior by the standards of the department. Hillhaven's present management had difficulty in providing adequate care even though Hillhaven had a relatively low occupancy rate. In spite of Hillhaven's efforts, including $350,000 for capital improvement of its facility, the department remained dissatisfied with the management of the nursing home and issued a "Statement of Deficiencies" to be corrected by Hillhaven as a result of an October 1986 state inspection. At the time of the hearings on the requested CON, however, Hillhaven was...