
TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN





NO. 03-98-00245-CV





Texas Department of Human Services and Eric Bost, Commissioner, Appellants


v.


Kemp Health Services, Inc. d/b/a Kemp Care Center, and Ray Yonce, et al., Appellees






FROM THE DISTRICT COURT OF TRAVIS COUNTY, 53RD JUDICIAL DISTRICT

NO. 97-08716, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING






	The Texas Department of Human Services and its Commissioner Eric Bost appeal
from a final judgment recovered by Kemp Health Services, Inc. (Kemp), Ray Yonce, and others
following a trial without a jury. (1)  No findings of fact and conclusions of law were filed.  We will
affirm the judgment.

THE CONTROVERSY

	The Department entered into a Medicaid-provider contract with LTC Health
Management, Inc. (LTC), obligating LTC to provide long-term nursing care to patients in the
Kemp Health Care Center (the facility).  LTC leased the facility premises from Yonce and others
who owned the real property and improvements.  For providing such nursing care, LTC was
entitled under its contract with the Department to receive periodic payments from state and federal
Medicaid funds.  Operations at the facility were subject to regulation by the Department under
state and federal law.
	After LTC had operated the facility for a time, the Department found LTC in
violation of its contract and imposed against the company an administrative penalty in the amount
of $84,500.  The Department also cancelled LTC's Medicaid contract, based upon the "three
strike" rule, but abated the cancellation pending federal approval of this penalty. (2)  LTC
subsequently notified the Department that the company would not operate the facility after April
1, 1996.
	Yonce cancelled LTC's lease of the facility premises and entered into a new lease
with Kemp, a corporation having no connection to LTC.  Yonce agreed in the lease to indemnify
Kemp against any administrative penalties resulting from LTC's operation of the facility. (3)  Kemp,
a licensee under the Medicaid program, entered into a contract with the Department to provide
long-term nursing care to facility patients under the program.
	The Department attempted afterward to collect from Kemp the $84,500 penalty
imposed against LTC, contending Kemp had become liable under the Department's interpretation
of an agency rule.  See 40 Tex. Admin. Code Ann. § 19.2308 (1977) ("the Rule" hereafter). 
Kemp, Yonce, and others, sued in the present cause for declaratory and injunctive relief against
the Department's attempt to collect the penalty.
	Following a trial, the court below rendered judgment declaring the Rule, as
interpreted by the Department, invalid because it was inconsistent with the objectives of applicable
statutes and thus beyond the Department's authority to adopt.  See Gerst v. Oak Cliff Sav. &Loan
Ass'n, 432 S.W.2d 702, 706 (Tex. 1968).  The judgment denies other declaratory relief requested
in the cause and permanently enjoins the Commissioner, the Department, and its representatives
and employees from the following: "withholding funds from Kemp . . . by reason of 'strikes' and
penalties assessed against [LTC] . . . and any other actions against the facility or Kemp . . . by
reason of actions or violations [by LTC] at the facility in Kemp, Texas."

DISCUSSION AND HOLDINGS

	The Department appeals on two issues:  (1) whether the Rule is inconsistent with
a state statute or a federal statute as interpreted in a federal regulation; and (2) whether the Rule,
as applied to Kemp in the present circumstances, deprived Kemp of property without due process
of law contrary to article I, section nineteen of the Texas Constitution.  In the discussion that
follows, we will refer to the statutes and federal regulation upon which the Department bases its
contentions.  We will not discuss the constitutional issue because we believe the Rule, as
interpreted by the Department, is not in harmony with the objectives of applicable statutes as
implemented by a state rule and a federal regulation administered by the Department, both of
which the Department has misinterpreted.
	The Texas Health and Human Services Commission administers in Texas the state
and federal elements of the Medicaid program; and under an agreement with the Commission, the
Department administers the nursing-facility component of that program.  See Texas Home Mgt.
d/b/a Appleby Home v. Texas Dep't of Mental Health & Mental Retardation, 953 S.W.2d 1, 2
(Tex. App.--Austin 1997, pet. ref'd).  The Department possesses the statutory power to adopt
legislative rules for" the proper and efficient operation of the Medicaid program."  Tex. Hum.
Res. Code Ann. § 32.021(c) (West 1990).
	The legislative rule under which the Department seeks to impose liability upon
Kemp, in the present controversy, provides as follows:

§ 19.2308.  Change in Ownership

An ownership change is any change in the business organization that changes the
identity of the legal entity licensed to operate the facility. . . .  The [Department]
will recognize ownership changes effective as of the date of the legally effective
transfer of ownership subject to the following conditions:

* * *


(3)  When a change in ownership occurs, [the Department] assigns the agreement
to the new owner by issuing a new contract to the new owner. . . .  The new
owner's contract is subject to the prior owner's contract terms and conditions that
were in effect at the time of transfer of ownership, including, but not limited to, the
following:

* * *


	(E)  compliance with additional requirements imposed by [the Department]
and

	(F)  any sanctions as specified in this chapter relating to remedies for
violations of Title XIX nursing facility provider agreements, including . . .
monetary penalties . . . and history of deficiencies.
40 Tex. Admin. Code § 19.2308 (1977) ("the Rule" herein).
	The Department is also responsible for securing compliance with federal regulations
pertaining to nursing-home facilities.  See Tex. Hum. Res. Code Ann. § 32.021(b) (West  1990). 
One federal regulation provides as follows concerning Medicaid contracts:

§ 442.14.  Effect of change of ownership (4)

(a)  Assignment of agreement.  When there is a change of ownership, the Medicaid
agency [the Department] must automatically assign the agreement to the new
owner.

(b)  Conditions that apply to assigned agreements.  An assigned agreement is
subject to all applicable statutes and regulations and to the terms and conditions
under which it was originally issued, including but not limited to, the following:

* * *


	(6)  Compliance with any additional requirements imposed by the Medicaid
agency [the Department].


42 C.F.R. § 442.14 (1995) (the "federal regulation" hereafter).
	The Department argues, as it must, that the foregoing federal regulation and the
Rule are consistent in their terms, meaning, and objectives; and both authorized the Department
to condition its assignment of LTC's Medicaid contract to Kemp upon the "additional
requirement" that Kemp pay the $84,500 penalty imposed upon LTC.  See 42 C.F.R. §
442.14(b)(6) (1995); 40 Tex. Admin. Code § 19.2308(3)(E), (F).  The Department so construes
the federal regulation and the Rule; that interpretation becomes part of the regulation and the Rule
and the statutes they implement.  The Department argues in addition that Kemp was also obligated
to pay the penalty because Kemp, as assignee of the Medicaid contract, "stood in the shoes" of
LTC. (5)  We reject these contentions for the reasons that follow.
	The Department's interpretation of the federal regulation is contrary to its text,
meaning, and objective.  Subsection (a) of the federal regulation requires that the Department
"automatically assign the agreement to the new owner."  The objective of this provision is to
assure a continuity of care for patients in a facility affected by a change of ownership.  See
comments at 45 Fed. Reg. 22, 935 (1980).  The federal regulation was construed in Chezem v.
Texas Dep't of Human Res., 66 F.3d 741 (5th Cir. 1995).  In that litigation, the Department
argued that its rule, prohibiting the transfer of a Medicaid contract within three years of its
making, imposed a valid "additional requirement" under subsection (b)(6) of the federal
regulation.  The court rejected the argument because the three-year rule "contravenes the plain
language of the regulation, which requires automatic assignment without qualification."  Chezem,
66 F.3d at 743 (emphasis added).  We adhere to this interpretation of the federal regulation. 
Thus, the Department was not free in the present case, under the federal regulation, to qualify the
transfer to Kemp by conditioning it upon the "additional requirement" that Kemp pay the $84,500
penalty imposed against LTC.
	The same result is required by the very text of the federal regulation and the Rule. 
Subsection (b) of the federal regulation provides that any assignment of the Medicaid contract is
subject to "all applicable statutes and regulations" as well as "the terms and conditions under
which" the Medicaid contract "was originally issued."  42 C.F.R. § 442.14(b) (1995) (emphasis
added).  Item (6) of subsection (b)--"[c]ompliance with any additional requirements imposed by
the" Department--is expressly conditioned upon the initial proviso that any "additional
requirements imposed by the Department" must be a term or condition of the Medicaid contract
as "it was originally issued."  The sanctions imposed against LTC were not a part of LTC's
contract as "it was originally issued," although they arose from violations of LTC's contract
obligations.

	The Rule contains a similar proviso, as follows:

The new owner's contract is subject to the prior owner's contract terms and
conditions that were in effect at the time of transfer of ownership, including, but
not limited to, the following:

(E)  compliance with additional requirements imposed by (the Department) and

(F)  any sanctions . . . including . . . monetary penalties . . . and history of
deficiencies.


40 Tex. Admin. Code § 19.2308(3)(E), (F) (1977).  The federal regulation plainly forbids the
Department's imposing against a succeeding owner sanctions imposed against the former owner.
See Chezem, 66 F.3d at 743.  The Rule, however, appears to authorize the Department to do just
that.  May the Department therefore obstruct the force and effect of the federal regulation under
the authority given in the Department's own Rule?
	Subsection (3), (E) and (F) of the Rule mean exactly what the Department
contends--it may condition its assignment of a Medicaid contract by an additional requirement that
the assignee satisfy any sanctions, including monetary penalties and history of deficiencies
imposed against the previous licensee.  The Rule does not contradict the federal regulation,
however, because subsections (E) and (F) of the Rule become operative only upon a "change in
ownership," and that term has different meanings under the Rule and the federal regulation.
	The federal regulation takes effect on a simple "change of ownership."  42 C.F.R.
§ 442.14(a) (1995).  The Rule, in contrast, takes effect on a "[c]hange in [o]wnership" that is
particularly defined as follows:

An ownership change is any change in the business organization that changes the
identity of the legal entity licensed to operate the facility.


40 Tex. Admin. Code § 19.2308 (1977).  Striving for consistency in the Rule and the federal
regulation, the Department arbitrarily imputes the same meaning to both--each contemplates, in
the Department's view,  a simple change in ownership of facility premises.  While that is certainly
the meaning of the federal regulation, the text of the Rule will not reasonably sustain that meaning.
	The Department interpretation of the Rule would be reasonable if the rule defined
a change in ownership as "any change in the . . . identity of the legal entity licensed to operate the
facility." (6)  This is, however, only half of the definition laid down in the Rule.  The Department
interpretation becomes unreasonable under the entire definition set out in the Rule, which is "any
change in the business organization that changes the identity of the legal entity licensed to operate
the facility."  The Rule thus requires the simultaneous existence of two elements: (1) a change in
the business organization of a licensee that (2) results in a change in the identity of the legal entity
licensed to operate the facility.  While the identity of the legal entity licensed to operate the facility
changed in the present cause, from LTC to Kemp, the change was not the result of "any change
in the business organization" of LTC or any other entity.
	The definition of "change in ownership" contained in the Rule suggests that the
Rule has a different objective than does the federal regulation.  The Rule appears to be designed
to prevent a licensee's evading sanctions or any onerous provisions in its Medicaid contract by the
simple device of dissolving or revising the licensee's existing business organization in such a way
as to substitute a technically different "legal entity" as the new owner--a change from a
corporation to a partnership, for example.  To assure that such colorable changes do not succeed
in evasion, the Rule provides expressly that the Department may condition transfer of the
Medicaid contract to the new legal entity upon its compliance with the original contract terms and
any additional requirements imposed by the Department, including the payment of penalties or the
satisfaction of other sanctions imposed against the former entity.  The necessity and justice of
imposing the original contract terms and any sanctions against the new owner, in such
circumstances, is obvious.  No such circumstances exist in the present controversy.
	The Department is under a duty to enforce both the Rule and the federal regulation.
We believe our construction of the Rule allows some meaning to be given the expression "any
change in the business organization," while the Department interpretation renders that expression
meaningless.  Moreover, if the Rule was intended to have the same meaning as the federal
regulation, the language chosen for the Rule was singularly inapt for expressing that intention. 
Finally, our construction avoids the absolute contradiction between the federal regulation that
requires an automatic assignment without qualification and a state Rule that authorizes the
Department (under its strained interpretation of the Rule) to qualify the assignment by "additional
requirements" imposed as conditions.
	We hold the text of the Rule will not reasonably sustain the Department
interpretation.  That interpretation is therefore not binding on a court.  See Railroad Comm'n v.
Shell Oil Co., 161 S.W.2d 1022, 1027-28 (Tex. 1942).  Under our interpretation of the rule, it
has no application in the present litigation because Kemp did not become a licensee as the result
of a "change in the business organization" of a preceding licensee.
	Concerning the federal regulation, we hold it did not authorize imposing the
$84,500 penalty or LTC's history of deficiencies against Kemp because these were not "terms and
conditions under which" the Medicaid contract "was originally issued" to LTC, although they
undoubtedly arose from LTC's obligations under that contract.  Chezem, 66 F.3d at 743.
	We affirm the trial court judgment.


  
 John E. Powers, Justice
Before Justices Kidd, Patterson and Powers*
Affirmed
Filed:   February 25, 1999
Publish








* 	Before John E. Powers, Senior Justice (retired), Third Court of Appeals, sitting by
assignment.  See Tex. Gov't Code Ann. § 74.003(b) (West 1998).
1.        In the course of the litigation, Bost succeeded Terry Trimble who had been acting
Commissioner and an original defendant.
2.        The "three-strike" rule allows the Department to cancel a Medicaid contract for nursing-home care based upon three contract violations of a specified nature.  See Texas Health Care Ass'n
v. Health & Human Servs. Comm'n, 949 S.W.2d 544, 546 (Tex. App.--Austin 1997, no writ).
3.        Kemp stipulated at trial that it would not have leased the property from Yonce without the
indemnity provision and knew at the time of the Department's interpretation of the rule found at
40 Texas Administrative Code section 19.2308, a rule at the center of the present controversy. 
See 40 Tex. Admin. Code § 19.2308 (1977).
4.        The word "ownership" as used in section 442.14 refers to a licensee's fee or leasehold
interest in real property and improvements wherein the licensee operates a nursing-care facility. 
See Health Equity Res. Urbana, Inc. v. Sullivan, 927 F.2d 963, 964 (7th Cir. 1991); American
Prop. v. State Dep't of SRS, 738 P.2d 450, 451-54 (Kan. 1987).
5.        Under the state rule and the federal regulation, the Department is required to "assign" the
Medicaid contract to the new operator when there is a change in facility ownership.  From this use
of the word "assign," the Department argues that the rule and the regulation incorporate the
common-law rule that an assignee "steps in the shoes of his assignor."  Thus, when Kemp
received from the Department an "assignment" of the Medicaid contract previously held by LTC,
Kemp became liable instantly for the $84,500 penalty because Kemp "stood in the shoes of" LTC,
against whom the penalty had been imposed.  This course of reasoning is insupportable for several
reasons.

	In ordinary usage, the word "assignment" refers to an owner's transfer of his right or
interest to another existing person, pursuant to their mutual intention to transfer ownership.  All
assignments require a transfer, but not all transfers are assignments.  See 6A C.J.S. Assignments
§ 5, at 594-96 (1975).  This ordinary understanding of the word "assignment," in the common
law, is not the meaning of the word as it and its variations are used in the Rule and the federal
regulation.  The word has there a specialized or technical meaning.

	The previous owner (LTC) assigned, and could assign, nothing to Kemp; it was legally
impossible for Kemp to "stand in the shoes" of LTC.  Under the federal regulation, the
Department, not the former owner or licensee, "must automatically assign the" Medicaid contract
"to a new owner," Kemp in this instance.  Moreover, the Department must make the
"assignment" by cancelling the former contract and issuing a new and independent contract to the
successor licensee, which the Department did in this instance by entering into a new contract with
Kemp after cancelling the LTC contract.  The LTC contract having been cancelled, it was hardly
susceptible of "assignment" in the common-law meaning of that word.  The figure of speech
referring to "shoes" is meaningless in this context.
6.        If such was the meaning of the Rule, it would automatically result in a flagrant contradiction
between subsections (3) (E) and (F) of the Rule (authorizing the Department to condition its
contract with the new licensee on its satisfaction of sanctions imposed against the former licensee)
and the federal regulation (requiring a transfer of the Medicaid contract automatically and "without
qualification").
Before Justices Kidd, Patterson and Powers*
Affirmed
Filed:   February 25, 1999
Publish








* 	Before John E. Powers, Senior Justice (retired), Third Court of Appeals, sitting by
assignment.  See Tex. Gov't Code Ann. § 74.003(b) (West 1998).
1.        In the course of the litigation, Bost succeeded Terry Trimble who had been acting
Commissioner and an original defendant.
2.        The "three-strike" rule allows the Department to cancel a Medicaid contract for nursing-home care based upon three contract violations of a specified nature.  See Texas Health Care Ass'n
v. Health & Human Servs. Comm'n, 949 S.W.2d 544, 546 (Tex. App.--Austin 1997, no writ).
3.        Kemp stipulated at trial that it would not have leased the property from Yonce without the
indemnity provision and knew at the time of the Department's interpretation of the rule found at
40 Texas Administrative Code section 19.2308, a rule at the center of the present controversy. 
See 40 Tex. Admin. Code § 19.2308 (1977).
4.        The word "ownership" as used in section 442.14 refers to a licensee's fee or leasehold
interest in real property and improvements wherein the licensee operates a nursing-care facility. 
See Health Equity Res. Urbana, Inc. v. Sullivan, 927 F.2d 963, 964 (7th Cir. 1991); American
Prop. v. State Dep't of SRS, 738 P.2d 450, 451-54 (Kan. 1987).
5.        Under the state rule and the federal regulation, the Department is required to "assign" the
Medicaid contract to the new operator when there is a change in facility ownership.  From this use
of the word "assign," the Department argues that the rule and the regulation incorporate the
common-law rule that an assignee "steps in the shoes of his assignor."  Thus, when Kemp
received from the Department an "assignment" of the Medicaid contract previously held by LTC,
Kemp became liable instantly for the $84,500 penalty because Kemp "stood in the shoes of" LTC,
against whom the penalty had been imposed.  This course of reasoning is insupportable for several
reasons.

	In ordinary usage, the word "assignment" refers to an owner's transfer of his right or
interest to another existing person, pursuant to their mutual intention to transfer ownership.  All
assignments require a transfer, but not all transfers are assignments.  See 6A C.J.S. Assignments
§ 5, at 594-96 (1975).  This ordinary understanding of the word "assignme