Gross v. Perales

• Decision Date: 06 July 1988
• Parties: , 527 N.E.2d 1205 In the Matter of George GROSS, as Commissioner of the New York City Human Resources Administration, et al., Respondents, v. Cesar PERALES, as Commissioner of the New York State Department of Social Services, et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

Page 68

532 N.Y.S.2d 68

72 N.Y.2d 231, 527 N.E.2d 1205

In the Matter of George GROSS, as Commissioner of the New

York City Human Resources Administration, et al Respondents, v. Cesar PERALES, as Commissioner of the New York State Department of Social Services, et al., Appellants.

Court of Appeals of New York.

July 6, 1988.

Robert Abrams, Atty. Gen. (Christopher Keith Hall, O. Peter Sherwood and Lawrence S. Kahn, Albany, of counsel), for appellants.

Peter L. Zimroth, Corp. Counsel (Kristin M. Helmers and Stephen J. McGrath, New York City, of counsel), for respondents.

OPINION OF THE COURT

TITONE, Judge.

The primary issue presented on this appeal is whether a municipality may challenge a determination by a State administrative agency, and at the same time recover wrongfully withheld money from the State, within the context of an article 78 proceeding in Supreme Court, or whether such a lawsuit must be commenced in whole or in part in the Court of Claims. We hold that where the thrust of the lawsuit is the review of an adverse State agency determination, with the monetary relief incidental, Supreme Court may entertain the entire case under CPLR article 78.

Petitioner, the New York City Human Resources Administration (HRA), provides public assistance benefits to some 860,000 New Yorkers under the Aid to Dependent Children (ADC) and Home Relief (HR) programs. Although the cost of these social services programs is initially borne by the City of New York (City), New York State reimburses the City for 50% of all ADC and HR benefits paid to eligible recipients, after deducting any applicable Federal funds received (see, Social Services Law § 153[1][d] ). Eligibility under these programs is subject to continual review, modification and termination. Generally, however, before the Department of Social Services may terminate or reduce benefits paid under these programs, it must provide the recipient with notice of the proposed eligibility determination (see, 18 NYCRR 358.8, 358.9).

From 1981 to 1983, respondent, the New York State Department of Social Services (NYSDSS), audited the City for compliance with the regulations governing the timely termination or reduction of benefits to recipients for the five-year period 1976 to 1980 (see, Social Services Law § 34[5][a] ). Under 18 NYCRR 358.8(d)(1) and 351.22(e), if the local welfare agency receives readily verifiable proof that a recipient's eligibility status has changed (such as a death certificate), no prior notice need be given to the recipient before taking action. In such cases, the HRA must "immediately initiate action" to terminate or reduce payments (see, 18 NYCRR 351.22[e] ). In all other cases, the HRA must provide the recipient with a minimum of 10 days' notice that payments will be reduced or terminated (see, 18 NYCRR 358.8, 358.9).

In conducting its audit, however, the NYSDSS also utilized unpromulgated internal audit guidelines, which provided that in cases requiring no notice to the recipient, benefits were to be reduced or terminated within four days. In all other cases, while the statute required only that the recipient be given 10 days' notice, the audit standard required that action be taken within 14 days. In effect, these audit standards imposed on the City the obligation to take appropriate action on a case within four days of the minimum required notice period. Using a statistical sampling of cases closed and grants reduced during the audit period, the State determined that the City failed to meet the audit criteria in some 62% of all cases. As a result, the State withheld $20 million in reimbursements as an administrative penalty.

The City then commenced this article 78 proceeding in Supreme Court, contending that the State's determination was arbitrary and capricious, since it was based solely on these unpromulgated auditing standards. The petition also alleged that the State wrongfully withheld $20 million in reimbursements based on this improper audit and sought to annul the administrative penalty. The State contended that Supreme Court lacked subject matter jurisdiction. Supreme Court rejected the State's argument, found that the NYSDSS acted arbitrarily and capriciously, and granted the petition in its entirety. The Appellate Division, 133 A.D.2d 37, 518 N.Y.S.2d 624, modified by vacating so much of the judgment as awarded interest on the $20 million in reimbursements. We granted leave to appeal and now affirm.

On this appeal, the State characterizes the City's claim as one for money damages and contends that redress must be sought in the Court of Claims. Alternatively, relying on CPLR 7806, the State takes the position that while an article 78 proceeding may be employed to review whether the audit was conducted in an arbitrary and capricious manner, in order for the City to recover the withheld reimbursements, it must commence a second lawsuit in the Court of Claims. Finally, on the merits, the State argues that its use of the internal audit standards was reasonable.

Under CPLR 7803(3), Supreme Court has subject matter jurisdiction over a proceeding challenging an administrative agency determination on the ground that it "was arbitrary and capricious" (see also, CPLR 7804[b] ). However, "[a]ny restitution or damages granted to the petitioner must be incidental to the primary relief sought by the petitioner, and must be such as he might otherwise recover on the same set of facts in a separate action or proceeding suable in the supreme court against the same body or officer in its or his official capacity" (CPLR 7806). On the other hand, where a party seeks only money damages against the State, the proper forum for such an action is the Court of Claims (N.Y. Const., art. VI, § 9; Court of Claims Act §§ 8, 9; see, Cass v. State of New York, 58 N.Y.2d 460, 463, 461 N.Y.S.2d 1001, 448 N.E.2d 786; Schaffer v. Evans, 57 N.Y.2d 992, 457 N.Y.S.2d 237, 443 N.E.2d 485, affg. 86 A.D.2d 708, 446 N.Y.S.2d 541; see also, Morell v. Balasubramanian, 70 N.Y.2d 297, 300-302, 520 N.Y.S.2d 530, 514 N.E.2d 1101; Sinhogar v. Parry, 53 N.Y.2d 424, 431, 442 N.Y.S.2d 438, 425 N.E.2d 826; Psaty v. Duryea, 306 N.Y. 413, 416-417, 118 N.E.2d 584).

We cannot agree with the State that the City's claim is essentially one for money damages. Whether the essential nature of the claim is to recover money, or whether the monetary relief is incidental to the primary claim, is dependent upon the facts and issues presented in a particular case ( see, Pauk v. Board of Trustees, 68 N.Y.2d 702, 705, 506 N.Y.S.2d 308, 497 N.E.2d 675; Schaffer v. Evans, supra; Matter of Schwab v. Bowen, 41 N.Y.2d 907, 394 N.Y.S.2d 616, 363 N.E.2d 341). Here, the threshold inquiry was whether the State acted arbitrarily and capriciously because its determination was premised solely on the City's failure to comply with the NYSDSS' internal audit criteria. Consequently, the City initially sought judicial review of a determination made by a State administrative agency, a customary type of article 78 proceeding over which the Supreme Court unquestionably has subject matter jurisdiction (see, Pauk v. Board of Trustees, supra; Health Care Plan v. Bahou, 61 N.Y.2d 814, 473 N.Y.S.2d 951, 462 N.E.2d 128; Solnick v. Whalen, 49 N.Y.2d 224, 230, 425 N.Y.S.2d 68, 401 N.E.2d 190; cf., Automated Ticket Sys. v. Quinn, 58 N.Y.2d 949, 460 N.Y.S.2d 533, 447 N.E.2d 82, affg. 90 A.D.2d 738, 455 N.Y.S.2d 799; Breen v. Mortgage Commn., 285 N.Y. 425, 35 N.E.2d 25). For this reason, the cases relied on by the State are not applicable, since they involve contract and tort actions seeking damages from the State, or eminent domain proceedings over which the Court of Claims clearly has jurisdiction (see, e.g., EDPL 304[E]; Morell v. Balasubramanian, supra; Sinhogar v. Parry, supra; Psaty v. Duryea, supra).

Only if it was found that the NYSDSS acted arbitrarily and capriciously could its determination, and the concomitant administrative penalty, be...