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) ( 2017 )

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APPROVAL OF THE APPELLATE DIVISION
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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
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(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
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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."
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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.
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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,
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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.
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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
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"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:
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[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
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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.
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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
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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.
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