Berlin Convalescent Center v. Stoneman

 NOTICE:  This opinion is subject to motions for reargument under V.R.A.P.
 40 as well as formal revision before publication in the Vermont Reports.
 Readers are requested to notify the Reporter of Decisions, Vermont Supreme
 Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
 order that corrections may be made before this opinion goes to press.


                            No. 91-127


 Berlin Convalescent Center, Inc.             Supreme Court
 and American Health Care, Inc.
                                              On Appeal from
      v.                                      Washington Superior Court

 Kent Stoneman, Director,                     March Term, 1992
 Division of Rate Setting, et al.


 Alan W. Cheever, J.

 Martin K. Miller and Patricia L. Rickard of Miller, Eggleston &
   Rosenberg, Ltd., Burlington, for plaintiffs-appellants

 Jeffrey L. Amestoy, Attorney General, Montpelier, and Marjorie
   Power, Special Assistant Attorney General, Waterbury, for
   defendants-appellees


 PRESENT:  Allen, C.J., Gibson, Dooley and Johnson, JJ.


      DOOLEY, J.   This case involves a dispute over nursing home rates.
 Plaintiffs, Berlin Convalescent Center, Inc., and American Health Care,
 Inc., both owners and operators of nursing homes, appealed to superior court
 a rate decision made by defendants, agencies and officials of the State of
 Vermont.  The court granted defendants' summary judgment motion because it
 concluded that earlier decisions in the ongoing rate dispute between
 plaintiffs and defendants constituted a res judicata bar to plaintiffs'
 claims.  On appeal, plaintiffs argue that res judicata does not apply and
 that summary judgment was improper.  We affirm.
      A history of the events in this proceeding is necessary.  In June of
 1987, defendants determined that daily rates payable to nursing homes for
 care of medicaid patients would increase by 2.6% for fiscal year 1988 (July
 1, 1987 through June 30, 1988) over those payable in the prior year.
 Alleging that the increase was insufficient to meet legal requirements,
 plaintiffs appealed the decision to the Washington Superior Court pursuant
 to 33 V.S.A. { 195(a)(2), now recodified as 33 V.S.A. { 909(a)(2).  They
 claimed that the rates were inadequate to cover the costs that had to be
 incurred by a nursing home operated in accordance with regulatory
 standards.
      After a hearing on the merits, the superior court issued a decision on
 May 5, 1989 agreeing with plaintiffs in part (the merits decision).  In
 reaching its decision, the court concluded that the appropriate standard of
 review required it to rely primarily on the record made in the
 administrative agency and that it would not overturn the administrative
 decision absent a finding of abuse of discretion.  Nevertheless, the court
 found that the rate increase was legally inadequate for five reasons:
         1.  The increase was based on national data about the
         cost of running an efficient and economical nursing
         home, and thus failed to accurately reflect Vermont's
         particular economic conditions.

         2.  After the prospective inflation rate was selected,
         it was reduced because rates selected in the past proved
         to be too high.  There was no economic basis for that
         decision.

         3.  The error itemized in 2. above was magnified by the
         use of a "half year inflation factor."

         4.  The rate was improperly reduced to offset a separate
         increase in medicaid rates for nursing homes voted by
         the Legislature to take effect January 1, 1988.

         5.  The base rate did not adequately account for
         increased staffing requirements resulting from new
         health and safety standards.

 Based on these deficiencies, the court found defendants' action to be
 unreasonable, clearly erroneous and an abuse of discretion.  It reversed and
 remanded the rate "for recalculation as to these petitioners."  Neither
 party appealed the merits decision. (FN1)
      In August of 1989, plaintiffs moved for enforcement of the superior
 court's merits decision and for contempt, alleging that defendants had
 failed to recalculate the rate increase.  On October 24, 1989, defendants
 filed a revised rate decision establishing a 3.9% increase for FY 1988.  On
 November 22, 1989, plaintiffs filed a separate appeal of those rates.  On
 January 10, 1990, they renewed their motion for enforcement and contempt
 alleging that the new rates failed to comply with the merits decision. On
 March 28, 1990, the superior court took up plaintiffs' motions for
 enforcement and contempt.  The record for that hearing consisted of
 communications between plaintiffs and defendants in the recalculation
 process and two affidavits submitted by defendants to describe how the
 recalculation was accomplished.  Based on that record, the court concluded
 that defendants had cured each of the five deficiencies found in the merits
 decision and that the new rate increase decision complied with the merits
 order, assuming that defendants did what the affidavits indicated they had
 done (the enforcement decision).  Because plaintiffs alleged that
 defendants did not use the methods they claimed, the court gave plaintiffs
 an opportunity to show evidence of this, emphasizing that, "they must
 substantiate their allegations with evidence of non-compliance in the method
 of recalculation and not just attempt to re-try the case because they are
 disappointed that the recalculated inflation factor does not equal 7.8
 percent [the amount they sought]."
      In response to the enforcement decision, plaintiffs filed an affidavit
 of the president of the plaintiff corporations, stating that the actual
 costs of operation of their nursing homes was about seven dollars per
 patient per day higher than the recalculated reimbursement rate.  Plaintiffs
 also filed an affidavit of their accountant, stating that the Director of
 the Vermont Division of Rate Setting had told him that the Director would be
 retired by the time the rates were finally set.  After evaluating these
 affidavits, the court denied the motion to enforce and for contempt,
 concluding that plaintiffs were again arguing only that they did not obtain
 the rates they wanted and were "attempting to retry the entire case on the
 merits" (the supplemental enforcement decision).  Neither party appealed the
 enforcement decisions.
      The action then shifted to the independent appeal of the rate decision
 filed by plaintiffs in November of 1989.  Defendants moved for summary
 judgment, claiming that all issues had been resolved in the earlier
 enforcement action.  The court agreed and dismissed the appeal (the summary
 judgment decision).  Plaintiffs appeal from this decision.
      The doctrine of res judicata, also known as claim preclusion, bars the
 litigation of a claim or defense if there exists a final judgment in former
 litigation in which the "parties, subject matter and causes of action are
 identical or substantially identical."  Berisha v. Hardy, 144 Vt. 136, 138,
 474 A.2d 90, 91 (1984).  It bars not only issues actually litigated but
 also those which "should have been raised in previous litigation."  American
 Trucking Ass'ns v. Conway, 152 Vt. 363, 370, 566 A.2d 1323, 1328 (1989).
 Similar in effect, although more narrow in scope, is the doctrine of
 collateral estoppel or issue preclusion.  It bars "the subsequent
 relitigation of an issue which was actually litigated and decided in a prior
 case between the parties resulting in a final judgment on the merits, where
 that issue was necessary to the resolution of the action."  Id. at 369, 566 A.2d  at 1327.  The elements of issue preclusion have recently been itemized
 in Trepanier v. Getting Organized, Inc., 155 Vt. 259, 265, 583 A.2d 583, 587
 (1990):
         (1) preclusion is asserted against one who was a party
         or in privity with a party in the earlier action; (2)
         the issue was resolved by a final judgment on the
         merits; (3) the issue is the same as the one raised in
         the later action; (4) there was a full and fair
         opportunity to litigate the issue in the earlier action;
         and (5) applying preclusion in the later action is fair.

 We also set forth a nonexclusive list of factors bearing on whether the last
 two elements are present.  Both claim and issue preclusion protect the
 courts and the parties against the burden of relitigation, encourage
 reliance on judicial decisions, prevent vexatious litigation and decrease
 the chances of inconsistent adjudication.  See id.; Fitzgerald v.
 Fitzgerald, 144 Vt. 549, 552, 481 A.2d 1044, 1046 (1984).
      Although the summary judgment decision of the trial court was phrased
 in terms of res judicata, it was actually an issue-preclusion decision,
 focusing on what was actually litigated in the prior proceeding.  The court
 held that plaintiffs are barred from relitigating the applicable standard of
 review and whether, under that standard of review, defendants acted in
 accordance with law in setting the fiscal year 1988 rates.  Having decided
 those issues in favor of defendants, the court concluded that plaintiffs
 could not prevail on the merits of the appeal and granted summary judgment.
 Plaintiffs argue that the issues in the earlier decision were different and
 narrower so that their resolution does not preclude plaintiffs from
 obtaining a de novo review of the new rate decision, and, in any event,
 there are disputed issues of fact that make summary judgment inappropriate.
 We start by examining the issues that the court found plaintiffs were
 precluded from relitigating.
      The first issue is the standard of review.  A party aggrieved by a
 final order of the Division of Rate Setting of the Vermont Agency of Human
 Services has a right "to appeal de novo to the superior court" where the
 nursing home facility is located.  33 V.S.A. { 909(a)(2).  In the merits
 decision, the superior court analyzed the wording of the statute in light of
 this Court's decision in Chioffi v. Winooski Zoning Board, 151 Vt. 9, 11
 n.2, 556 A.2d 103, 105 n.2 (1989), which noted a distinction between "de
 novo review" and "trial de novo," and concluded that, despite the use of the
 words "de novo," the statute did not call for "a retrial or . . . extensive
 judicial record making."  It went on to conclude that the Division's rate
 decision was discretionary and could be overturned only by a showing of
 abuse of discretion that resulted in prejudice to the appealing party.
 Necessarily, the standard of review determination meant that the court
 analyzed the rate decision solely on the record made in the Division.
 Because of the standard of review it adopted, when the court found the rate
 decision erroneous, it remanded to the Division rather than establishing the
 rate itself.
      While we do not have before us the full record of the earlier
 proceeding, it is clear that the court's standard of review decision
 differed from plaintiffs' position.  The most important effect of the
 decision was to make irrelevant plaintiffs' evidence about their costs of
 running nursing homes, as well as the evidence of the costs borne by other
 operators, to the extent that this evidence was not before the Division of
 Rate Setting.  One of plaintiffs' arguments to this Court is that the
 summary judgment decision they have appealed is flawed because it denies
 them a trial "de novo" of the recalculated rates in order to show that they
 will not cover plaintiffs' reasonable expenses.  That "flaw" is the result
 of the standard of review determined in the merits decision.  Although
 plaintiffs attack the standard of review determination, they offer no
 reason why they are not bound by that determination as a matter of issue
 preclusion.  The standard of review decision was "necessary to the
 resolution of the [earlier] action," American Trucking Ass'ns v. Conway, 152
 Vt. at 370, 566 A.2d  at 1327, and plaintiffs had a full and fair opportunity
 to litigate the standard of review in that action.  The issue is identical
 in this proceeding.  Thus, we agree with the trial court that the earlier
 standard of review decision controls. (FN2)
      The second issue is the review decision on the merits.  The superior
 court first "reversed and remanded" the rate decision "for recalculation as
 to these petitioners."  Plaintiffs brought the recalculated decision back to
 the superior court on a motion for enforcement of the earlier order and
 contempt.  The court found that defendants "made a good faith effort to
 comply with the mandates" of the earlier decision and their "interpretation
 of the directives in that order is correct."  It gave plaintiffs an
 opportunity "to prove that the Division did not comply with the specific
 requirements contained in the order."  The court reviewed plaintiffs' offer
 of proof, which again went to their operating costs, and concluded that
 plaintiffs were arguing noncompliance based solely on their position that
 they did not get the rate increase they desired and that they were "merely
 attempting to retry the entire case on the merits."  It made final its
 decision denying the motion to enforce and for contempt.
      The question of the preclusive effect of the merits and enforcement
 decisions is at the heart of plaintiffs' appeal to this Court.  They argue
 that these decisions have no preclusive effect because plaintiffs prevailed
 in the merits decision and the enforcement decisions went solely to whether
 defendants were in contempt.  In plaintiffs' view, none of these decisions
 involved the issue before the court in this proceeding, that is, whether the
 recalculated 3.9% rate increase complied with defendants' responsibilities
 under state and federal law.
      The question turns on what was actually litigated in the first
 proceeding.  When plaintiffs first moved for enforcement and contempt, their
 complaint was that defendants had failed to recalculate the rates.  They
 persisted in their motions after defendants recalculated the rates, however,
 and thus drew into question the lawfulness of the recalculation.  They
 continued to move not only for contempt but also for enforcement of the
 original order.
      Plaintiffs emphasize the wording of the enforcement decision to the
 effect that defendants "made a good faith effort to comply."  From this
 wording they argue that the court determined solely whether defendants' acts
 were contemptuous and not whether the rate recalculation complied with the
 law.  Taken out of context, that phrase supports plaintiffs' position.
 However, the court analyzed each of the deficiencies found in the earlier
 rate decision and found each had been corrected.  Thus, it analyzed in depth
 the merits of defendants' actions in recalculating the rates.  More
 important, it conducted this analysis according to a standard of review
 that was deferential and would uphold the recalculation absent an abuse of
 discretion.  We conclude that the language plaintiffs rely on is a
 restatement of the deference the court accorded defendants' actions rather
 than a narrowing of the inquiry to contemptuous behavior.  In effect, the
 court concluded that the Division acted within its discretion in setting the
 rate increase at 3.9%.  We can place no other interpretation on the
 enforcement and supplemental enforcement decisions.  Thus, the issue decided
 and the issue before the court in this case were identical.
      In deciding upon the application of issue preclusion, we balance our
 "desire not to deprive a litigant of an adequate day in court" against "a
 desire to prevent repetitious litigation of what is essentially the same
 dispute."  Restatement (Second) of Judgments { 27 comment c. (1982); see
 also Alpstetten v. Kelly, 137 Vt. 508, 513, 408 A.2d 644, 647 (1979)
 (purpose of collateral estoppel is to eliminate "repetitive or piecemeal
 litigation").  The comment to { 27 of the Restatement suggests we look at a
 number of questions in determining whether "essentially the same dispute" is
 involved: (1) Is there "a substantial overlap" in the evidence and argument
 between the two proceedings?; (2) Is the "same rule of law" involved in both
 proceedings?; (3) Does the "pretrial preparation and discovery" in the first
 proceeding cover the issues in the second proceeding"; and (4) "How closely
 related are the claims involved in the two proceedings?."  The answers to
 these questions make inescapable the conclusion that this litigation
 involves "essentially the same dispute" as the enforcement motion plaintiffs
 brought in the earlier litigation.  We need not determine whether the court
 applied an improper standard of review in the earlier litigation.
 Plaintiffs failed to timely appeal that issue when it was decided, instead
 resting on the court's favorable decisions with respect to the error it
 found had been made by the Board.
      Nor can we conclude that plaintiffs did not have a full and fair
 opportunity to litigate the issues they raise here or that applying issue
 preclusion would otherwise be unfair.  Plaintiffs opened the merits of the
 recalculation decision when they pressed forward with their enforcement
 motion after defendants recalculated the rate increase.  The court held the
 record open to allow plaintiffs to bring forward evidence that defendants
 had abused their discretion in the recalculation.  Although it was entirely
 foreseeable that the court and defendants would view the enforcement
 decisions as the end of the litigation over the FY 1988 rates, plaintiffs
 failed to appeal those decisions.  See Trepanier, 155 Vt. at 265, 583 A.2d
 at ___.
      Finally, we reach plaintiffs' argument that the issues precluded did
 not warrant entry of summary judgment for defendants.  Once we conclude that
 the earlier litigation determined that defendants' rate decision would be
 overturned only for abuse of discretion and it fell within their discretion,
 there are no issues left to litigate in this appeal from the rate decision.
 The matter was ripe for summary judgment because there are no disputed
 issues of material fact and defendants must prevail on the law.  See
 V.R.C.P. 56(c); State v. Delaney, 156 Vt. ___, ___, 598 A.2d 138, 141
 (1991).  As in the earlier case, the additional facts plaintiffs want to
 show were not before the Division in setting the rates and are therefore
 irrelevant in light of the standard of review utilized by the trial court.
      Affirmed.

                                         FOR THE COURT:




                                         Associate Justice



FN1.   Defendants attempted to appeal the merits decision, but their appeal
 was dismissed by this Court because notice of appeal was untimely.

FN2.    We expressly do not reach whether the standard of review decision
 correctly interpreted the statute.