IN RE: PRELIMINARY CONTRACT FINANCIAL SETTLEMENTS ON THE CENTER FOR FAMILY SUPPORT'S CONTRACTS WITH THE DIVISION OF DEVELOPMENTAL DISABILITIES, CONTRACT NOS. 01ZX10N AND 01ZX11N (DEPARTMENT OF HUMAN SERVICES)

• Court: New Jersey Superior Court Appellate Division
• Decided: July 20, 2017
• Docket: A-3672-14T3
• Status: Unpublished

Opinion

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3.

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-3672-14T3

IN RE: PRELIMINARY CONTRACT FINANCIAL SETTLEMENTS ON THE CENTER FOR FAMILY SUPPORT'S CONTRACTS WITH THE DIVISION OF DEVELOPMENTAL DISABILITIES, CONTRACT NOS. 01ZX10N and 01ZX11N ___________________________________

Argued July 6, 2017 – Decided July 20, 2017

Before Judges Yannotti and Haas.

On appeal from the Department of Human Services, Division of Developmental Disabilities.

Dennis F. Driscoll argued the cause for appellant The Center for Family Support NJ, Inc. (Inglesino, Webster, Wyciskala & Taylor, LLC, attorneys; John P. Inglesino and Lisa D. Taylor, of counsel and on the brief; Owen T. Weaver, on the briefs).

Francesco Ferrantelli, Jr., Deputy Attorney General, argued the cause for respondent Department of Human Services, Division of Developmental Disabilities (Christopher S. Porrino, Attorney General, attorney; Beth Leigh Mitchell, Assistant Attorney General, of counsel; John Regina, Deputy Attorney General, on the brief).

PER CURIAM Appellant The Center For Family Support NJ, Inc. (the Center)

appeals from the March 6, 2015 decision of respondent Division of

Developmental Disabilities (the Division) requiring the Center to

repay the Division $883,631 in funds it allegedly misspent under

two contracts appellant entered into with the Division for the

two-year period between July 1, 2009 and June 30, 2011. On appeal,

the Center contends that the Division is prohibited from recovering

these funds because the Division should have promulgated the

contract terms that the Center violated as administrative

regulations under the Administrative Procedure Act (APA), N.J.S.A.

52:14B-1 to -15. Having reviewed the record in light of the

Center's arguments and the applicable law, we affirm.

We derive the following facts from the record presented on

appeal. The Division "[p]rovides services for eligible

developmentally disabled persons by identifying appropriate

programs to meet their needs" and by contracting with those

programs to provide services to these individuals. N.J.S.A. 30:6D-

27(a). Pursuant to this statutory authority, the Division has

contracted with the Center since 1997 to provide services to

Division clients.

During this period, the Center and the Division signed a

"Standard Language Document for Social Service and Training

Contracts" (SLD), developed by the Department of Human Services

2 A-3672-14T3 (the Department). The SLD incorporates the standard terms and

conditions of the contract, and a new SLD is executed each fiscal

year that a provider agrees to provide services to Division

clients.

The SLD defines a contract as "this document [the SLD], the

Annex(es), any additional appendices or attachments (including any

approved assignments, subcontracts or modifications) and all

supporting documents." The SLD further states that the "[c]ontract

constitutes the entire agreement between the parties."

With particular relevance to the present appeal, Section 3.11

of the SLD states:

In the administration of this [c]ontract, the Provider Agency shall comply with all applicable policies and procedures issued by the Department including, but not limited to, the policies and procedures contained in the Department's Contract Reimbursement Manual (as from time to time amended) and the Department's Contract Policy and Information Manual [(CPIM)] (as from time to time amended). Failure to comply with these policies and procedures shall be grounds to terminate the contract.

The CPIM is a compendium of policy circulars that are

incorporated by reference into each Division contract. Among

other things, these circulars cover such standard and decidedly

mundane contract terms and conditions as the documents a provider

must provide to the Division in connection with the contract

3 A-3672-14T3 negotiation (Policy Circular P1.01); what happens if the provider

merges with or acquires another company (Policy Circular P1.09);

terms applicable to the closeout of a contract (Policy Circular

P7.01); the procedures the provider and the Division will follow

in the event of an audit (Policy Circular P7.06); and the minimum

amount of insurance a provider must have in place (Policy Circular

P8.14).

In this appeal, the Center challenges the inclusion of Policy

Circular P1.10 in its contract with the Division. This circular

governs the procedures a provider must follow in order to modify

the contract during the fiscal year. The circular states that a

modification must be approved by the Division in advance of any

"[c]hange in any [b]udget [c]ategory which exceeds the [f]lexible

[l]imits" of the contract.1 The provider must also seek the

Division's prior written approval before it "[t]ransfer[s] [any]

budgeted cost across DHS [c]ontracts, or [c]lusters as identified

in the [c]ontract."2

1 The term "budget category" means "one of the major groupings of cost identified in the Contract Budget Annex B Form." The term "flexible limits" refers to the "upper dollar limit which is established for each [b]udget [c]ategory, and which may not be exceeded without an approved [c]ontract [m]odification." 2 The term "cluster" means "one or more service-related [p]rograms . . . identified in the [c]ontract."

4 A-3672-14T3 Thus, for example, if the provider has agreed in the contract

that it will spend a specified amount for a particular service

during the contract year, it may not exceed that amount without

first obtaining a written contract modification approved by the

Division. In addition, the provider may not transfer funds from

other budget categories to cover cost overruns in a different

budget category unless it has obtained prior Division approval.

These routine contract provisions as set forth in the circular

have been included, in one form or another, in each contract the

Center has entered into with the Division since at least 2002.

The circular specifically states that the provider's "[f]ailure

to complete a required [c]ontract [m]odification to the [Division]

may result[,]" among other things, in "[c]ontract [d]efault [and]

"[r]ecoupment of [f]unds" by the Division.

The Center entered into provider contracts with the Division

subject to the above terms for State fiscal years (FY) 2010 and

2011. Prior to the execution of these agreements, the Division

reminded the Center in writing that if it "request[ed] a contract

modification to shift funds between clusters, the modification

must be approved prior to implementation[,]" and that "[a]ny

expenditure incurred prior to approval will be disallowed" in

accordance with the terms of the CPIM.

5 A-3672-14T3 Subsequent audits of the Center's FY 2010 and FY 2011

contracts revealed that the Center exceeded its budget for

particular line items and "reallocated funds" from other budget

categories and clusters "to meet pressing needs" in connection

with those line items. The Center conceded that it did not obtain

prior Division approval for these expenditures.

In accordance with the express terms of the Center's contract,

the Division sent a letter to the Center on February 22, 2012

demanding the return of $507,961 in misspent funds for FY 2010,

and a second letter on October 31, 2014, seeking an additional

$375,670 covering the Center's improper expenditures for FY 2011.

The Center balked at repaying these funds and alleged, among other

things, that the Division should have promulgated the contract

terms as administrative regulations, the Division waived its right

to seek recoupment of the contract funds, and that the Division's

claims were barred by the doctrines of equitable estoppel and

laches.

After settlement attempts failed, the Division sent a letter

to the Center on March 6, 2015, again demanding the return of

$883,631 in contract funds. The Center responded by filing a

notice of appeal from the March 6, 2015 decision to this court.

In response, the Division filed a motion to dismiss the appeal and

transfer it to the Law Division. While that motion was pending,

6 A-3672-14T3 the Center sent written notice to the Division that it would be

filing a breach of contract claim against the agency under the

Contractual Liability Act, N.J.S.A. 59:13-1 to -10. On August 27,

2015, the Center filed its complaint against the Division in the

Law Division.3

Thereafter, the parties participated in a case management

conference conducted under the auspices of our Civil Appeals

Settlement Program. As a result of that conference, we ordered

that the Center's present appeal could "proceed, limited solely

to the issue of whether the implementation of [the Division's]

policy violates the" APA. We further ordered that the question

of whether the Division "properly applied" its policy as set forth

in the CPIM, "and all other issues and defenses," would be

adjudicated in the Law Division action, which we stayed pending

the resolution of this appeal.

On appeal, the Center contends that the Division's "adoption

of Policy Circular P1.10 violated the" APA; constituted an

"administrative rule"; and was "invalid because [the Division]

failed to adhere to the procedures of the" APA. Thus, the Center

contends that the requirements for contract modification set forth

3 Docket No. L-007739-15.

7 A-3672-14T3 in the circular, and made a part of its contract with the Division,

are invalid. We disagree.

Agencies are accorded "wide latitude in improvising

appropriate procedures to effectuate their regulatory

jurisdiction." Metromedia, Inc. v. Dir., Div. of Taxation, 97

N.J. 313, 333 (1984). "Administrative agencies possess the ability

to be flexible and responsive to changing conditions[,]" which

"includes the ability to select those procedures most appropriate

to enable the agency to implement legislative policy." In re

PSE&G Co. Rate Unbundling, 167 N.J. 377, 385 (2001) (internal

quotation marks and citation omitted).

Thus, in exercising its discretion when discharging its

statutory duties, an agency may choose between formal action, such

as rulemaking or adjudication, or informal action, provided the

choice complies with due process requirements and the APA. Nw.

Covenant Med. Ctr. v. Fishman, 167 N.J. 123, 135 (2001) (citing

In re Request for Solid Waste Util. Customer Lists, 106 N.J. 508,

518 (1987)). Informal agency action constitutes the bulk of the

activity of most administrative agencies, and it has been defined

as any determination that is taken without a trial-type hearing.

In re Solid Waste, supra, 106 N.J. at 519.

Significantly, the Supreme Court has further defined informal

agency action as "statutorily authorized agency action" such as

8 A-3672-14T3 "investigating, publicizing, planning, and supervising a regulated

industry." Ibid. The term also includes "negotiating, settling,

contracting, and advising" within the scope of its statutory

authority. Ibid. (emphasis added). Thus, when an agency

contracts with a private entity, it engages in "informal agency

action" and is not required to promulgate an administrative

regulation in order to do so.

Although administrative "agencies 'have wide latitude in

improvising appropriate procedures to effectuate their regulatory

jurisdiction[,]' . . . this discretion is not unbounded." Deborah

Heart & Lung Ctr. v. Howard, 404 N.J. Super. 491, 504 (App. Div.)

(quoting Metromedia, supra, 97 N.J. at 333-34), certif. denied,

199 N.J. 129 (2009). Thus, an agency's informal action may

constitute de facto rulemaking, despite the label the agency gives

to it. "In order to avoid abuse" by an agency of its "broad

administrative powers, our Supreme Court enumerated six factors

that are weighed to determine whether agency action must be

designated as an administrative rulemaking requiring

implementation through the APA." E.B. v. Div. of Med. Assistance

and Health Servs., 431 N.J. Super. 183, 207 (App. Div. 2013)

(citing Metromedia, supra, 97 N.J. at 331-32).

In Metromedia, the Court stated:

9 A-3672-14T3 [A]n agency determination must be considered an administrative rule . . . if it appears that agency determination, in many or most of the following circumstances, (1) is intended to have wide coverage encompassing a large segment of the regulated or general public, rather than an individual or a narrow select group; (2) is intended to be applied generally and uniformly to all similarly situated persons; (3) is designed to operate only in future cases, that is, prospectively; (4) prescribes a legal standard or directive that is not otherwise expressly provided by or clearly and obviously inferable from the enabling statutory authorization; (5) reflects an administrative policy that (i) was not previously expressed in any official and explicit agency determination, adjudication or rule, or (ii) constitutes a material and significant change from a clear, past agency position on the identical subject matter; and (6) reflects a decision on administrative regulatory policy in the nature of the interpretation of law or general policy.

[Metromedia, supra, 97 N.J. at 331-32.]

These factors, "either singly or in combination," determine

whether agency action amounts to the promulgation of an

administrative rule. Id. at 332. A de facto rule will be held

invalid unless the agency complied with the rulemaking

requirements of the APA. Id. at 328.

Viewed against this background and applying the Metromedia

standards, we are satisfied that the Division did not engage in

prohibited de facto rulemaking when it contracted with the Center

to provide services under the terms and conditions set forth in

10 A-3672-14T3 the CPIM. As noted above, the Division is statutorily authorized

to contract with private entities, such as the Center, in order

to provide services to its clients. N.J.S.A. 30:6D-27(a). The

contract modification terms that the Center now challenges were

specifically incorporated into the parties' written annual

contract, which expressly delineated each party's duties and

obligations. The fact that the Division included a requirement

that the Center obtain advance agency approval before spending

beyond the limits of its approved budget in any category or cluster

in the contract is exactly the type of "informal action" by an

agency that the Supreme Court has held does not require rulemaking.

In re Solid Waste, supra, 108 N.J. at 519; see also Nw. Covenant

Med. Ctr., supra, 167 N.J. at 135.

Moreover, the contract modification provisions set forth in

Policy Circular P1.10 and included in the CPIM and the SLD between

the Division and the Center also do not meet the Metromedia

criteria for a rule. The first two criteria are not met because

the Division is not "regulating" the Center or the general public

by making this circular part of the contract. Metromedia, 98 N.J.

at 331. Rather, it has simply included standard contract

modification requirements in the parties' agreement. The Center,

like any other private service provider, is not required to

contract with the Division for any purpose.

11 A-3672-14T3 The third Metromedia criterion is also not met because the

contract modification provisions in the circular are not designed

to operate in future cases. Ibid. Instead, they apply to the

particular contract entered into by the Division and a service

provider for a specific one-year period. Because the Division is

statutorily authorized to contract with service providers, which

necessarily includes the authority to set contract terms, the

circular does not "prescribe[] a legal standard or directive that

is not otherwise expressly provided by or clearly and obviously

inferable from the enabling statutory authorization." Ibid. Thus,

the fourth Metromedia criterion is also inapplicable.

The fifth and sixth criteria are also not present. The

contract modification provisions set forth in the circular have

been part of the Division's contracts since at least 2002 and,

therefore, do not reflect a "material and significant change" from

past contract provisions. Ibid. Finally, these provisions do not

constitute a "decision on administrative regulatory policy in the

nature of the interpretation of law or general policy." Id. at

331-32. As stated above, they are simply several of the dozens,

if not hundreds, of typical contract provisions included in any

well-drafted State agency contract.

In sum, we conclude that the Division was not required to

comply with the APA's rulemaking requirements when it decided to

12 A-3672-14T3 include the contract modification provisions set forth in Policy

Circular P1.10 in the contracts it entered into with the Center.

With the resolution of this issue, the parties may now proceed

with their pending Law Division action and, therefore, we vacate

our previously-ordered stay of that proceeding.

Affirmed, and remanded for further proceedings in the Law

Division. We do not retain jurisdiction.

13 A-3672-14T3