This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2006).
IN COURT OF APPEALS
In the Matter of the Rate Appeal
of Foundation for Rural Health Care,
d/b/a McIntosh Manor,
Filed May 8, 2007
Minnesota Department of Human Services
OAH Docket No. 4-1800-15288-2
Samuel D. Orbovich, Orbovich
& Gartner, Chartered,
Lori Swanson, Attorney General, Barry R. Greller, Assistant Attorney General, 900 Bremer Tower, 445 Minnesota Street, St. Paul, Minnesota 55101-2127 (for respondent Minnesota Department of Human Services)
Considered and decided by Hudson, Presiding Judge; Randall, Judge; and Dietzen, Judge.
U N P U B L I S H E D O P I N I O N
The Parties and Key Players
material facts of this case are not in dispute. Prior to 1983, Robert F. Odell owned three
nursing homes in rural
Odell appointed relator’s original three board members. The board members most involved in the relevant transactions were two employees, Coral Blaze and Curt Jenson. The board authorized Blaze to negotiate on relator’s behalf. Odell’s lawyer, Thomas Dougherty, drafted all of the necessary legal documents for the sale/purchase of the nursing homes, including board resolutions and the purchase agreements. Odell’s business consultant, Bruce Farrington, proffered the financial terms for the sale, basing them on an earlier valuation analysis he had performed for Odell prior to relator’s existence.
The record also reflects that Blaze, Jenson, and Farrington each had a pecuniary interest in the transaction. Specifically, Blaze had a contract to manage the nursing homes on relator’s behalf. Jenson, pursuant to a prior agreement with Odell, was contractually obligated to receive $30,000 once relator purchased the homes. Finally, Farrington and Odell had agreed that Farrington would receive one percent of the purchase price.
In or about December 1998, relator authorized the purchase of the nursing homes for $8.4 million. No formal board meeting was commenced before relator’s directors authorized the purchase of the nursing homes. None of the board members made independent inquiries into whether the terms of the sale would be financially viable for relator. For example, none made independent appraisals of the nursing homes or independent financial analyses of the sales terms.
The Rate System—“rule 50”
Odell provided seller-financing for the nursing-home transactions on the assumption that DHS would recognize the sales and increase each nursing home’s property rates. Absent rate increases, relator would be unable to service its debt to Odell. However, during a meeting with a DHS representative, the representative informed Blaze that DHS would not recognize any debt that exceeded the appraised value of the homes for the purpose of computing property rates. Relator’s initial debt obligation to Odell exceeded the appraised value of the homes by approximately two million dollars. To ensure that relator could satisfy its debt obligations, and that Odell would continue to receive the same anticipated monthly cash flow, Blaze and Odell executed amended purchase agreements decreasing the purchase price and increasing the interest rate. Consequently, when the transaction was officially submitted to DHS for approval, the terms of the agreement were in compliance with DHS rules.
D E C I S I O N
presumption of correctness surrounds an agency’s decision. In re Medical
License of Friedenson, 574 N.W.2d 463, 465 (Minn. App. 1998), review denied (Minn. Apr. 30,
1998). We will reverse a final decision
in a contested case if the agency’s findings, inferences, conclusions, or
decisions violate the constitution or lawful procedure, are affected by an
error of law, exceed the agency’s statutory authority or jurisdiction, are
unsupported by substantial evidence, or are arbitrary and capricious.
appellate courts defer to an agency’s findings of fact. Saif Food
Mkt. v. Comm’r, Dep’t of Health, 664 N.W.2d 428, 430 (
Relator argues that the commissioner erred in determining that the sale of the nursing homes from the Odell corporations to relator were between “related organizations” within the meaning of Minn. R. 9540.0020, subp. 38, thus denying relator a property-rate increase.
50 provides for a daily rate made up of several components, one of which is a
“property rate” that essentially reimburses the nursing-home operator for the
capital costs of the building.
Currently, rule 50 states that “a nursing facility’s property-related
payment rate . . . shall be adjusted . . . for the sale of
the nursing facility.” Minn. Stat. § 256B.431,
subd. 14(a) (2004). The term “sale” does not include “a sale,
merger, reorganization, or any other transfer of interest between related
[A] person that furnishes goods or services to a nursing facility and that is . . . an affiliate of a nursing facility . . . .
A. An “affiliate” is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with another person.
B. A “person” is an individual, a corporation, a partnership, an association, a trust, an unincorporated organization, or a government or political subdivision.
Minn. R. 9540.0020, subp. 38.
Relator’s primary challenge is to the commissioner’s construction of the word “control” under Minn. R. 9549.0020, subp. 38D. The essence of relator’s argument is that a sale creates a “related organization” situation only when the source of one party’s power to direct the affairs of the other arises from a formal legal relationship or from an express agreement between both parties to the sale. We disagree.
“The object of all interpretation and
construction . . . is to ascertain and effectuate the intention of
the legislature. Every law shall be
construed, if possible, to give effect to all its provisions.”
“Administrative interpretations are not entitled
to deference when they contravene plain statutory language, or where there are
compelling indications that the agency’s interpretation is wrong.” J.C.
Penney Co. v. Comm’r of Econ. Sec., 353 N.W.2d 243, 246 (
Here, the commissioner construed the word “control” to include indirect influence. Specifically, the commissioner concluded that a related organization can be established when one party to the sale of a nursing home has the power to control the affairs of the other through indirect influence. The commissioner further concluded that a “preponderance of the evidence established that before, during, and after the sale of the nursing homes . . . Mr. Odell was an affiliate of [relator],” and that Odell, through his relationships with Blaze, Jenson, Farrington, and Dougherty, possessed and exercised the power to direct relator’s affairs through indirect influence.
But relator argues that the term “control” is limited to formal, legally recognized forms of control. Therefore, relator contends, the commissioner’s construction is erroneous because it violates the canon of ejusdem generis, is an unpromulgated rule, and is unreasonable. We address each of realtor’s arguments in turn.
the doctrine of ejusdem generis, the
general wording of a statute must be interpreted to include only matters of the
same kind or class as those specifically enumerated. Goplen
Our resolution of this issue focuses on the word “otherwise” as used in the statutory definition of “control.” The relevant language is:
D. “Control” including the terms “controlling,” “controlled by,” and “under common control with” is the possession, direct or indirect, of the power to direct or cause the direction of the management, operations, or policies of a person, whether through the ownership of voting securities, by contract, or otherwise.
argues that because “otherwise” is preceded by “voting securities” and “by contract,”
the only other recognizable sources of the power to direct its affairs must be
of the same kind or class. In other
words, the power must be acquired by legal status. DHS, on the other hand, interprets the phrase
“or otherwise” as referring to the many ways, other than legal status, that a
person could acquire the “power to direct or cause the direction of” the
business affairs of the other party to a sale.
Like the commissioner, we conclude that relator’s reliance on ejusdem generis is misplaced because it
would frustrate legislative intent. See
Furthermore, relator’s construction is repugnant to the statute because the statute’s purpose is to prevent the state from reimbursing nursing homes for property-related expenses not negotiated at arm’s length. Based on the facts of this case—in particular, the close personal and professional relationships Odell had with each of relator’s board members, and the pecuniary interest each board member had in the sale of the facilities—it is clear that the nursing-home transactions were not negotiated at arm’s length.
Relator also argues that the
commissioner’s interpretation is, effectively, an unpromulgated rule. Rules must be adopted in accordance with the
rulemaking requirements of the Minnesota Administrative Procedure Act
(APA). Minn. Stat. § 14.05, subd. 1
(2006). An agency interpretation of the
statute administered and enforced by the agency is an interpretive rule that is
valid only if promulgated in accordance with the APA. Ebenezer
there is no evidence that the commissioner’s interpretation is a long-standing
one. Thus, to be valid it must be consistent
with the definition’s plain meaning.
Words and phrases in a statute are “construed . . . according
to their common and approved usage.”
our view, the word “power” must be read in conjunction with “the.” The common usage of the phrase “the power” is
“[t]he ability or official capacity to exercise control.” The
American Heritage Dictionary of the English Language 1420 (3d ed. 1992). “Control” in the context of defining “the
power” means “[t]o exercise authoritative or dominating influence over.”
Relator appears to argue that the commissioner’s interpretation is unreasonable because: (1) it renders language in a subsequent amendment to chapter 256B superfluous, and (2) “control” is defined by statute so there is no need to construe the word “power.”
But relator’s first argument relies on a definition of “related organization” contained in section 256B.441, which was not in effect at times relevant to this appeal. Furthermore, when the legislature amended chapter 256B, it left unchanged the schematics of section 256B.431. Section 256B.431, subdivision 13, states that the terms used in subdivision 14(d)(7) are defined as in rule 9549.0020, subpart 38. Subdivision 14(d)(7) is the related-organization rule relevant to this appeal, and rule 9549.0020, subpart 38, defines “related organization” as used in that subdivision. Because relator does not argue that the commissioner’s construction renders the language in subpart 38 superfluous, its argument has no merit.
Next, the phrase “the power” as used in the statutory definition of control, is not defined by rule or statute. But its common usage is essential to understanding the scope of the statutory definition of “control.” To construe “the power” to include “influence,” the ALJ relied on the following definition of “power”: “A person . . . having great influence or control over others.” As a direct means of construing “the power” to include “influence,” the ALJ relied on an out-of-context definition. But as applied here, we conclude that this error is harmless.
stated above, the common usage of “the power” is “[t]he ability or official
capacity to exercise control.” American Heritage Dictionary, supra, at
1420. The common usage of “control” is
to exercise “authoritative or dominating influence.”
But the commissioner’s construction refers to “indirect influence” not “indirect authoritative or dominating influence.” In this respect, it appears that the commissioner’s definition is unreasonable because it would permit the department to treat transactions negotiated at arm’s length as being between related organizations. However, as applied to this case, the commissioner’s construction is reasonable because the record shows that Odell possessed and exerted dominating influence over relator by virtue of the fact that the nursing-home sales were conceived and orchestrated by Odell and were executed without any meaningful negotiation.
also challenges the constitutionality of Minn. Stat. § 256B.431, subd.14(d)(7)
on equal-protection and due-process grounds.
The constitutionality of a statute is a question of law, which we review
de novo. Everything Etched, Inc. v. Shakopee Towing, Inc., 634 N.W.2d 450,
453 (Minn. App. 2001), review denied
enjoy a strong presumption of constitutionality.
Equal Protection Clause of both the state and federal constitutions requires
equal application of the laws such that all people in similar circumstances are
treated similarly.” Peterson v.
Here, relator argues that there is no rational basis for classifying acquisitions among related parties and acquisitions between unrelated parties differently, because the purchase negotiations among the parties, whether related or not, are irrelevant to rate setting under rule 50. But relator fails to make the threshold showing that related and unrelated organizations are similarly situated. In addition, treating related and unrelated organizations differently is rationally related to a legitimate state interest. The state has an interest in avoiding the payment of artificially inflated costs which may be generated by less-than-arm’s-length bargaining, or that are not otherwise subject to the discipline of competitive market forces. Because related parties are more likely than unrelated parties to come to terms that deviate from market conditions, the statute’s classification scheme is constitutional.
doctrine provides that “[u]nless a fundamental right is limited . . .
minimal judicial scrutiny of legislation is appropriate.” Doll,
693 N.W.2d at 463 (alteration in original).
Thus, legislation is constitutional if it “bears a rational relation to
the public purpose it seeks to promote.”
Here, relator has not established that Minn. Stat. § 256B.431, subd. 14(d)(7), infringes on its fundamental rights, requiring increased judicial scrutiny. Because under a rational-basis analysis this statute does not violate equal protection, it does not violate substantive due process.
challenges the commissioner’s decision on the ground that it is unsupported by
substantial evidence or is arbitrary and capricious. Substantial evidence is “such relevant evidence
as a reasonable mind might accept as adequate to support a conclusion.” Saif
Food Mkt., 664 N.W.2d at 430 (quoting In
re Excess Surplus Status of Blue Cross & Blue Shield of Minn., 624
N.W.2d 264, 274 (
arbitrary-and-capricious argument focuses on the conduct of department
personnel. However, “a contested case
proceeding is a de novo review, and not a mere appeal from the agency’s
decision.” Sleepy Eye Care Ctr., 572 N.W.2d at 770. The contested-case hearing nullified DHS’s
Minn. Stat. § 256B.50, subd. 1c(c) (2006). As such, a certiorari appeal is from the
commissioner’s final decision.
 In its brief to this court, DHS states that rule 50 will gradually be phased out beginning in October 2007.
 The parties have not designated which version of the relevant statutes and rules is applicable. It is uncertain from the record which version of the statutes and rules the ALJ applied, but it appears that he used the 2004 and 2005 editions. Although the relevant transactions occurred in 1998, use of these editions is appropriate because the relevant provisions are identical to the law in effect in 1998.