Golden Day Schools, Inc. v. Department of Educ.

• Decision Date: 28 January 1999
• Docket Number: No. C026767,C026767
• Citation: 81 Cal.Rptr.2d 758,69 Cal.App.4th 681
• Court: California Court of Appeals Court of Appeals
• Parties: , 131 Ed. Law Rep. 808, 99 Cal. Daily Op. Serv. 826, 99 Daily Journal D.A.R. 984 GOLDEN DAY SCHOOLS, INC., Plaintiff and Appellant, v. CALIFORNIA DEPARTMENT OF EDUCATION, Defendant and Respondent.

Page 758

81 Cal.Rptr.2d 758

69 Cal.App.4th 681, 131 Ed. Law Rep. 808,

99 Cal. Daily Op. Serv. 826,

99 Daily Journal D.A.R. 984

GOLDEN DAY SCHOOLS, INC., Plaintiff and Appellant, v. CALIFORNIA DEPARTMENT OF EDUCATION, Defendant and Respondent.

No. C026767.

Court of Appeal, Third District, California.

Jan. 28, 1999.

Carlos M. Alcala, Alcala & Velez, Roseville, for Plaintiff and Appellant.

Michael E. Hersher, General Counsel, and Allan H. Keown, Deputy General Counsel, California Department of Education, for Defendant and Respondent.

PUGLIA ^*, J.

Education Code section 8448 requires an organization having a "direct service contract" with the State for the operation of child care and development programs and related support services annually to prepare a single, independent "financial and compliance audit" of its operations. If the audit meets generally accepted auditing standards, it shall be relied upon by the State Department of Education (the Department) and "any additional audit work shall build upon the work already done." (Educ.Code, § 8448, subd. (i)(1); further statutory references to sections of an undesignated code are to the Education Code.)

In this declaratory relief action, plaintiff Golden Day Schools, Inc. sought a determination of its right, following preparation and submission of an audit pursuant to section 8448, to prohibit the Department from inspecting plaintiff's business records. The trial court concluded section 8448 does not supersede powers granted to the Department elsewhere in the Education Code to audit and inspect the records of private entities contracting with the State. The court entered judgment declaring the Department's right to inspect plaintiff's records. We agree section 8448 is not a shield behind which an agency receiving Department funding may avoid Department scrutiny. We shall affirm.

I

This appeal is from a final judgment entered following an order granting the Department's motion for judgment on the pleadings without leave to amend. We therefore accept as true all allegations in the complaint as well as matters properly subject to judicial notice. (American Airlines, Inc. v. County of San Mateo (1996) 12 Cal.4th 1110, 1118, 51 Cal.Rptr.2d 251, 912 P.2d 1198.) ¹

Under the Child Care and Development Services Act (§ 8200 et seq.), the Department is the designated agency responsible for the "promotion, development, and provision of care of children in the absence of their parents during the workday or while engaged in other activities which require assistance of a third party or parties." (§ 8206.) In furtherance of this charge, the Department contracts with public or private agencies which provide "child care and development services" for children from infancy to age 14. (§§ 8203.5, 8208, subd. (h), 8262.) Such services include "direct care and supervision, instructional activities, resource and referral programs, and alternative payment arrangements." (§ 8208, subd. (i).)

Plaintiff is a California non-profit corporation which has operated "child development and pre-school programs, pre-school and school age nutrition programs and 'latch key' child care programs" for the past 31 years. Plaintiff has been funded by the Department to conduct these programs for the past 27 years. In 1996, plaintiff received $2,888,155 from the Department.

Pursuant to the "funding terms and conditions of [its] contract with [the Department]," plaintiff submits annual audit reports prepared in accordance with generally accepted auditing standards which cover plaintiff's use of both public and private funds for its programs. The Department has not yet approved the audits submitted by plaintiff for the fiscal years ending in 1993, 1994, and 1995. On August 30, 1996, the Department billed plaintiff for alleged overpayments made by the Department during each of those years in the amounts of $248,543, $349,372, and $356,651 respectively. When plaintiff requested administrative review, the Department withdrew its demand for repayment, explaining it needed more time to consider the audits.

On November 4, 1996, the Department notified plaintiff it intended to inspect plaintiff's financial and compliance records for plaintiff's "Child Development Program," "Child Care Food Program," "School Nutrition Program," United States Department of Agriculture "Donated Food Commodities [Program]," and "privately-funded General Programs" for the fiscal year ending in 1995. The notice described the scope of the records review to include plaintiff's "financial records, claiming methods, prepayments, cost allocations, administrative costs, and CPA's working papers for the program years ended June 30, 1993, 1994, and 1995."

Plaintiff, through its legal representative, wrote the Department disputing the Department's right to inspect plaintiff's records. Plaintiff explained it would not permit the proposed inspection because, under section 8448, the Department must either accept the audits provided by plaintiff or reject them, but may not perform its own audits. Plaintiff requested an explanation of the Department's legal authority for the proposed inspection.

The Department responded it could not determine the validity of plaintiff's audits without reviewing plaintiff's records. The Department cited as legal authority section 8448, federal regulations, and specific terms of the contracts between the Department and plaintiff. Plaintiff persisted in its refusal to permit access to its records, explaining that while plaintiff intends to honor its contractual obligations, the Department's request "is not merely to 'look' [sic ] or 'inspect' books and records[ ]" but "to be allowed to conduct a complete independent audit" of plaintiff.

The Department threatened that if plaintiff refused to permit access to its records, the Department may (1) reject the audits for 1993, 1994, and 1995, (2) charge plaintiff for the full amount of funds received from the Department during those three years, and (3) withhold payments for the current year. Plaintiff again explained the Department's only recourse is to accept the proferred audits, if performed according to generally accepted auditing standards, or reject them, giving plaintiff a right to administrative review. Plaintiff indicated a records inspection was unnecessary because the determination whether an audit is performed according to generally accepted auditing standards can be made by examining only the audit. Plaintiff accused the Department of asserting a need to examine its records as a pretext to circumvent section 8448.

Plaintiff commenced this declaratory relief action on December 6, 1996, seeking a declaration of the parties' rights as well as an injunction prohibiting the Department from conducting an independent audit of plaintiff's books and denying plaintiff continued funding. The Department moved for judgment on the pleadings, contending it has the right to inspect plaintiff's records pursuant to sections 33420 and 33421, section 8448, subdivision (i)(3), state and federal regulations, and the terms of the individual contracts between the Department and plaintiff. Plaintiff filed opposition and a motion for preliminary injunction contending, among other things, section 8448 supersedes sections 33420 and 33421 and does not permit a separate audit by the Department.

On February 20, 1997, the trial court issued a minute order granting the Department's motion. The court explained section 8448 "is not susceptible to the all-preclusive interpretation which plaintiff seeks to give it. The statute undoubtedly was intended to set forth auditing requirements deemed sufficient to satisfy federal requirements; but neither on its face nor in context does it preclude [the Department]'s authority to review plaintiff's records incidental to [the Department]'s determination as to how best to proceed regarding the pending audits." The court thereafter entered judgment declaring, among other things, the Department's right to inspect all of plaintiff's business records pursuant to sections 33420 and 33421, federal regulations, and the individual contracts between plaintiff and the Department. ²

II

Plaintiff contends the trial court erred in concluding section 8448 does not override all other legal and contractual authority for the Department's inspection of plaintiff's records. In particular, plaintiff argues section 8448 conflicts with sections 33420 and 33421 and, as the more specific provision, section 8448 controls. (See Lake v. Reed (1997) 16 Cal.4th 448, 464, 65 Cal.Rptr.2d 860, 940 P.2d 311.) Plaintiff further contends the federal regulations and contracts between itself and the Department do not permit the Department to perform multiple audits of plaintiff's operations. Finally, plaintiff claims principles of laches and estoppel preclude the Department from proceeding with its proposed course of action.

Section 33420 reads in relevant part:

"(a) The Superintendent of Public Instruction, in cooperation with the State Department of Finance and the Auditor General, shall, on or before July 1, 1980, provide for a plan for independent audits of state and federal funds allocated to private agencies that are under contract with the State Department of Education for the provision of educational services.

"For the purpose of this article, 'educational services' includes, but is not limited to, child nutrition and child development services.

"W27

"(b) Effective July 1, 1980, the State Department of Education, as a condition to any contract with a private agency for the provision of educational services, shall require a periodic audit of state and federal funds to be conducted by departmental staff auditors or a certified public accountant or public accountant who is licensed by the California State Board of Accountancy.... "

Section 33421 reads:

"Every private agency which receives state funds which may be audited pursuant to Section 33420 shall, at...