HONG KONG SUPERMARKET INC v. COYE

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Court of Appeal, Second District, Division 7, California.

HONG KONG SUPERMARKET, INC., Plaintiff and Appellant, v. Molly J. COYE, as Director etc., Defendant and Respondent.

No. B067508.

Decided: June 24, 1993

John S. Chang and Cheryl D. Keily, for plaintiff and appellant. Daniel E. Lungren, Atty. Gen., Charlton G. Holland, III, Asst. Atty. Gen., John H. Sanders, Supervising Deputy Atty. Gen. and Jonathan R. Davis, Deputy Atty. Gen., for defendant and respondent.

Hong Kong Supermarket is a contract supplier (the Vendor hereafter) in the Supplemental Food Program for Women, Infants and Children (“WIC Program”).   The WIC Program is run by the Department of Health Services (the “Department”) in accordance with State and Federal law.   The WIC Program is designed to provide indigent women, infants and children with high-nutrition foods.   Pursuant to contract and applicable Federal regulations the State Controller inspected the Vendor's inventory in July 1983 and audited the Vendor's books and records.   Based upon this audit the Department concluded that in a period from 1982–1983 the Department had overpaid the Vendor $909,671.   This overpayment resulted from (1) the Vendor's overcharging the Department for the specific items provided, and (2) large volumes of inventory billed to the Department that were not supported by physical inspection or the Vendor's own records.   These findings were consistent with the Department's own compliance investigations, which discovered the Vendor was redeeming WIC coupons for items such as bubblegum and Ivory soap.

The Vendor resisted the conclusions of the audit and engaged in a lengthy series of unsuccessful administrative appeals.   Ultimately, the Vendor sought a writ of administrative mandate from the superior court claiming a plethora of procedural violations.   After trial the superior court determined that the Department and the director had conducted the administrative processes in conformance with law and upheld the Department's findings.   The trial court denied the petition for mandate.   The Vendor appealed seeking an order prohibiting Department from pursuing the overcharge claims against the Vendor.  (Code Civ.Proc., § 1094.5.)

I

THE WIC PROGRAM

The special supplemental food program for Women, Infants and Children (WIC) program is a Federal program authorized by section 17 of the Child Nutrition Act of 1966 (42 U.S.C., § 1771).   Any person electing to participate in the WIC Program must meet certain standards and comply with Federal mandates.   (7 C.F.R., § 246, et seq.)

The State of California through the Department elected to conduct a statewide program to provide additional food supplements to low income pregnant, post-partum, and lactating women and low income infants and children under five years of age who have been determined to be at nutritional risk by health professionals.  (Health & Saf.Code, § 311.)   The Department created a process to implement the WIC Program by contracting with retail food vendors to accept the WIC coupons or vouchers from the described beneficiaries of the food program.

The Vendor applied to the Department to participate in the WIC Program and signed the “Vendor Agreement” on October 16, 1981.   The application in part provides the applicant understood it was agreeing to adhere to the current guidelines for vendor participation in the WIC Program.   The Vendor Agreement provides as follows:

“Vendor Agreement:  The company or firm assigned in space 1 above (hereinafter called the ‘vendor’) hereby applied for authorization to participate in the SPECIAL SUPPLEMENTAL FOOD PROGRAM FOR WOMEN, INFANTS, AND CHILDREN (WIC PROGRAM).   The vendor has received, understands, and agrees to adhere to the current ‘guidelines for Vendor Participation in the WIC Program’ as issued by the State Department of Health Services and agrees to accept WIC vouchers only for the specific foods identified on the ‘WIC Acceptable Food List’.   If authorization to participate in the Program is granted, the vendor agrees that he and all employees will comply with these Rules and understands that a food market may be monitored periodically by State personnel to insure compliance.   The vendor also understands that any authorization to participate in the WIC Program to him may be revoked for any violation of these Rules by him or any of his employees and that further prosecution under applicable Federal and State statutes may be imposed.   The undersigned is either the sole proprietor of the food market or has the authority to contract for and in behalf of the food market.”

“DATE:  Oct. 16, 1981 NAME:  Ly–Kim–Fiang SIGNATURE:  Ly Kim Fiang

APPLICATION WILL NOT BE PROCESSED UNLESS ALL ITEMS ARE COMPLETED”

The Vendor's written agreement with the Department required, among other things that the Vendor:  (1) redeem vouchers for only the food items specified on the face of the voucher, (2) redeem vouchers at an amount which is the same or lesser than that charged other customers for identical foods, (3) redeem vouchers at an amount which represents the maximum price per quantity of times purchased by voucher, and (4) comply with the guidelines for vendor participation in the WIC Program as issued by the Department.  (Health & Saf.Code, §§ 317.5, 318.)

II

THE AUDIT

The state controller's office (pursuant to an inter-agency agreement with the Department) sent the Vendor notice that in July 1983 it intended to conduct an audit of the Vendor's store for the WIC Program for the period May 1, 1982 to April 30, 1983.   The letter notice to the Vendor stated:

“Our review will include but is not limited to an inventory of the food items for the WIC Program, records of purchases from the wholesalers, store inventory records, sales and use returns filed with the State Board of Equalization, invoices, books of accounting and other pertinent records ․” from the office of the controller.

A further letter sent on August 26, 1983, subsequent to the actual audit, said that, “the purposes of our review were to determine whether (1) food vouchers claimed were valid and in compliance with the conditions of the agreement with the WIC Supplemental Food Program, (2) the WIC food items were adequately stocked to support the volume of sales submitted to the WIC Supplemental Food Section for reimbursements, and (3) the prices charged the WIC Supplemental Food Section were reasonable.”

The auditors further stated (in the post-audit letter of August 26, 1983), “Our review indicated that there were exceptions to their pricing and inventory volume to support their food voucher claims submitted to the WIC Supplemental Food Section of their department.”   Finding No. 1 was that the prices charged to the WIC customer exceeded prices charged to non-WIC customers.

In support of Finding No. 1 was the table showing, for example, the average price charged the WIC Program was .95 cents for a quart of milk, whereas the store's retail price was .79 cents, thus an overcharge of .16 cents per quart.   That overcharge times the volume resulted in the $33,804 overcharge.   In this same fashion, findings were made with respect to eggs, infant juices, and beans.   The resultant was a total overcharge in the amount of $55,337.

Finding No. 2 demonstrated the inventory volume claimed for reimbursement (food items sold by Vendor) exceeded the inventory volume of the same item bought as substantiated by Vendor's purchase invoices.   The total amount of unsubstantiated inventory was $854,334.   These specific findings were set forth in the form letter to the Vendor.   This specific notification of the overpayment also gave written notice of the Vendor's opportunity to appeal the findings within 60 days.

The WIC item milk illustrates the unsubstantiated inventory finding.   The audit showed the Vendor was paid for a claimed WIC volume sales of milk of 217,277 units;  the inventory records showed a purchase of only 50,026 units.   Thus the price per unit paid to Vendor of $.79, the total amount of unsubstantiated milk inventory purchased was $127,388.

A more vivid example is found in the WIC authorized food item, peanut butter.   There the WIC printout of volume claimed sold by Vendor was 298,008 units;  the actual inventory documentation showing purchase of peanut butter was 1,296 units.   The total of the WIC items not supported by inventory purchases added up to the sum total of $854,334 (Finding No. 1).

III

The Vendor filed a timely appeal of the audit finding on January 23, 1984.   A hearing was conducted before an administrative law judge (ALJ) on June 12 and 13, 1985.   In September 1985 the appeal was bifurcated and the Vendor pursued time-consuming hearings of whether the ALJ had jurisdiction to hear the matter.   The Director of the Department (the Director) subsequently adopted a decision finding jurisdiction and substituted that decision for one proposed by the ALJ.  (Gov.Code, § 11517.)

The hearing before the ALJ continued in May 1988.   In September 1988 the ALJ proposed a second decision.   The Director indicated his intent to provide a substitute decision in December 1988.   Later, the matter was referred to the ALJ for further testimony.   From this hearing the ALJ issued a decision affirming the appeal as to the first audit finding ($55,337) and denying the appeal as to the second audit finding ($854,334).   The Director adopted the decision on August 3, 1991.  (Gov.Code, § 11517.)   The Vendor then sought a writ of mandate in the superior court to prevent Department from further pursuing the overcharge claim against the Vendor.

After a hearing, the trial court entered its statement of decision and judgment on March 23, 1992.   The trial court found:

“9. This matter is governed by the ‘substantial evidence test’.  (Code Civ.Proc., § 1094.5, subds. (b), (c);  Pacific Coast Medical Enterprises v. Department of Benefit Payments (1983) 140 Cal.App.3d 197, 207, 189 Cal.Rptr. 558.)

“10. The findings of the audit, as sustained within the Decision adopted by the Director were valid and within his lawful authority.

“11. The administrative procedures provided to the Vendor, including the notice of overpayment and subsequent administrative hearings, presented no fatal failure to meet the minimum requirements of due process.”

IV

DISCUSSION

The Vendor contends the hearing, which resulted in the finding of an $909,671 overpayment (Finding Nos. 1 & 2) was “without jurisdiction”.   The Vendor cites Armistead v. State Personnel Bd., 22 Cal.3d 198, 201–202, 149 Cal.Rptr. 1, 583 P.2d 744, for the proposition that the Department's failure to go through the administrative formal rule making process resulted in a lack of jurisdiction to audit or conduct a hearing and, therefore, the defendant had no power or authority to impose the pay-back order upon the Vendor.   The Vendor argues the “informal procedures” did not fulfill Federal regulatory requirements.   The Armistead case is not in point.  Section 246.18, of the 7 Code of Federal Regulations does not require a formal rule formulation process.   The relevant Code of Federal Regulations provides:

“§ 246.18.  Administrative appeal of State agency decisions.

“(a) Requirements.   The State agency shall provide a hearing procedure whereby a food vendor or local agency adversely affected by a State or local agency action may appeal the action.

“(1) The right of appeal shall be granted when a local agency's or a food vendor's application to participate is denied or, during the course of the contract or agreement, when a local agency or vendor is disqualified or any other adverse action which affects participation is taken.   Expiration of a contract or agreement with a food vendor or local agency shall not be subject to appeal.

“(2) The adverse action affecting a participating local agency shall be postponed until a hearing decision is reached.

“(3) The State agency may take adverse action against a vendor after the 15–day advance notification period mandated by paragraph (b)(1) of the section has elapsed.   In deciding whether or not to postpone adverse action until a hearing decision is rendered, the State agency shall consider whether participants would be unduly inconvenienced and may consider other relevant criteria, determined by the State agency.

“(b) Procedure.   The State agency hearing procedure shall at a minimum provide the local agency or vendor with the following:

“(1) Written notification of the adverse action, the cause(s) for and the effective date of the action.   Such notification shall be provided to participating food vendors not less than 15 days in advance of the effective date of the action.   In the case of the disqualification of local agencies, the State agency shall provide not less than 60 days advance notice of pending action.

“(2) The opportunity to appeal the adverse action within a time period specified by the State agency in its notification of adverse action.

“(3) Adequate advance notice of the time and place of the hearing to provide all parties involved sufficient time to prepare for the hearing.

“(4) The opportunity to present its case and at least one opportunity to reschedule the hearing date upon specific request.   The State agency may set standards on how many hearing dates can be scheduled, provided that a minimum of two hearing dates is allowed.

“(5) The opportunity to confront and cross-examine adverse witnesses.

“(6) The opportunity to be represented by counsel, if desired.

“(7) The opportunity to review the case record prior to the hearing.

“(8) An impartial decision maker, whose decision as to the validity of the State or local agency's action shall rest solely on the evidence presented at the hearing and the statutory and regulatory provisions governing the Program.   The basis for the decision shall be stated in writing, although it need not amount to a full opinion or contain formal findings of fact and conclusions of law.

“(9) Written notification of the decision concerning the appeal, within 60 days from the date of receipt of the request for a hearing by the State agency.

“(c) Continuing responsibilities.   Appealing an action does not relieve a local agency, or a food vendor permitted to continue in the Program while its appeal is in process, from the responsibility of continued compliance with the terms of any written agreement or contract with the State or local agency.

“(d) Judicial review.   If a State level decision is rendered against the local agency or food vendor and the appellant expresses an interest in pursuing a higher review of the decision, the State agency shall explain any further State level review of the decision and any available State level rehearing process.   If neither is available or both have been exhausted, the State agency shall explain the right to pursue judicial review of the decision.”   (Italics added.)

 These regulations were promulgated by the Secretary of Agriculture under authority of the Child Nutrition Act of 1966 (42 U.S.C., §§ 1786, 1787).   They have the force and effect of law to the same extent as though written into the statute.  (Maryland Casualty Co. v. United States, 251 U.S. 342, 40 S.Ct. 155, 64 L.Ed. 297;  Regents of New Mexico College of Agriculture & Mechanic Arts v. Albuquerque Broadcasting Co., (10 Cir.1947) 158 F.2d 900;  Wright v. Roanoke Redevelopment & Housing Authority, 479 U.S. 418, 107 S.Ct. 766, 93 L.Ed.2d 781.)

 The same rules of construction and interpretation which apply to statutes govern the construction and interpretation of rules and regulations of administrative agencies.  (Miller v. United States, 294 U.S. 435, 439, 55 S.Ct. 440, 441, 79 L.Ed. 977;  Cal Drive–In Rest., Inc. v. Clark, 22 Cal.2d 287, 292, 140 P.2d 657;  Robinson v. Fair Employment & Housing Comm., 2 Cal.4th 226, 224, 5 Cal.Rptr.2d 782, 825 P.2d 767.)   Any person dealing with a state agency is chargeable with the knowledge of all the powers possessed or which may be legally exercised by the officials in charge of the agency.   (Lertora v. Riley, 6 Cal.2d 171, 178, 57 P.2d 140.)

V

 The plain meaning of the regulations is:  The state agency (Department) shall provide a “hearing procedure”.   The word “provide” means to make ready for the future use;  to supply with what is needed;  to look out for something in advance.  (Webster's 3rd Internat. Dict., p. 1826.) 1

This interpretation of Code of Federal Regulations section 246.18 is bolstered by the language of subdivision (d) (Judicial Rev.) which provides:

“If ․ appellant expresses an interest in pursuing a higher review of the [adverse] decision the State agency [Department] shall explain any further State level review to the decision and any State level rehearing process.   If neither is available or both have been exhausted the State agency shall explain the right to pursue judicial review of the decision.”  (Italics added.)

 We conclude the Code of Federal Regulations does not require the promulgation of formal hearing rules or procedures under the Administrative Procedure Act of California in order for the Department to comply with the Code of Federal Regulations.

The due process required in any hearing is already provided for, and clearly specified in detail in the Code of Federal Regulations.   To require the Department to go through a lengthy complicated rule making procedure as contended by the Vendor would be an unnecessary duplicative, wasteful act.   The language of the Code of Federal Regulations does not impose a formal rule making procedure before hearings may be held or sanctions imposed.

VI

 The Vendor next contends the Department has no authority to conduct an audit of the specie here made.

The Department (pursuant to 7 C.F.R., § 246.12) entered into a written contract with the Vendor which provides in pertinent part:

“If authorization to participate in the Program is granted, the vendor agrees that he and all employees will comply with these Rules and understands that the food market may be monitored periodically by state personnel to insure compliance.”

Included in the same contract are the guidelines for the Vendor's participation in the WIC Program.   In addition to the “WIC Acceptable Food List” the following requirements were agreed to by the Vendor:

 “WIC ACCEPTABLE FOOD LIST

“To participate in the WIC Program as either a ‘Pharmacy/Drugstore’ or a ‘Retail Grocery/Dairy’ a vendor must stock at least one food item from each WIC Food group indicated for his category.   When brand names are specified, only these brands are acceptable.   He must also carry an adequate supply of WIC foods as dictated by the demand of WIC customers shopping at this store.   The State reserves the right to review the store's records of inventory if deemed necessary for confirmation or compliance.   While retail groceries/dairies are not required to stock infant formula, they are encourage to do so for the convenience of participants who purchase formula with their regular shopping.”

And the contract further provided:

“In addition, the State reserves the right to review prices of WIC foods to determine if such prices are excessive in relation to other stores in the community or in relation to similar foods in the store.   The State may, at its option, terminate this agreement based on pricing policies of the store and availability of WIC foods in the area.”

VII

We conclude the Department and the Vendor's relationship was not only one of contract but also governed by applicable Code of Federal Regulations binding upon the parties (the Vendor and the Department).

Specific authority to audit completely is found in Code of Federal Regulations section 246.12(i)(1) which authorizes the state agency to design and implement a system “to identify high risk vendors and ensure on-site monitoring, further investigation, and sanctioning of such vendors as appropriate.”   The regulations also provide “[t]he State agency shall design and implement a system to conduct on-site monitoring visits to at least 10 percent of authorized food vendors per year, selected on a representative basis, in order to survey the types and levels of abuse and errors among participating food vendors and to take corrective action, as appropriate.”  (§ 246.10(i)(4).)   The following methods of vendor monitoring are permitted, though not mandated, under the federal regulations:  “Compliance purchases, review of cashier checkout procedures, review of inventory records, and review of the availability and prices of Program supplemental foods.  (§ 246.12(i)(4).)

The Vendor's agreement and the Code of Federal Regulations authorize an audit of the species here made and a review of the store's “inventory records” to confirm compliance with the agreement to redeem coupons “only for foods specified therein”.   Such a requirement implies the obligation to maintain inventory records at least for a reasonable period of time.   The lack of duty to keep inventory records for at least a reasonable period would be an open invitation to defraud.

VIII

Did the Department “provide” a hearing procedure giving Vendor all the due process rights specified in Code of Federal Regulations section 246.18(b)?  The answer is a resounding yes.

All of the rights specified in 7 Code of Federal Regulations section 246.18 were provided.   Moreover, these rights were exercised, used, and taken advantage of by Vendor with the aid of skillful counsel.   It was given written notice of the prospective audit.   It was given a detailed written notice of the adverse determination.   The report of the auditors detailed the specific nature of the delicts found.   It was given the opportunity to appeal, adequate advance notice of the time and place of the appellate hearing, an opportunity to reschedule hearing dates, the opportunity to confront and cross-examine witnesses, an opportunity to be represented by counsel, an opportunity to review the case record, an impartial decision maker, and a written notification of the decision of the decision maker.   All of these rights were provided and exercised by Vendor.   Finally, the Vendor pursued its appellate remedy and has secured its rights at every step in the appellate process.   The Vendor's contentions are without merit.   They address only a theoretical case;  the arguments are not grounded on fact in this case.

We conclude the method of compliance inspection and audit is a necessary function and within the authority of the Department, if compliance methods are to be more than an empty noise.

IX

 The Vendor next argues the sole evidence offered was hearsay in support of overpayment charge.   This contention is without merit.   The Vendor's own inventory (business) records were examined and found deficient in amount of WIC foods purchased in the audit year.   These are admissible business records.   (See Witkin 1 Cal. Evidence, § 765, pp. 744–745;  Oakland California Towel Co. v. Zanes, 81 Cal.App.2d 343, 344, 184 P.2d 21.)   If the Vendor's records are not accurate, if they do not reflect the quantities of WIC food purchased, the Vendor has had more than ample opportunity to contradict such records.   It has not so attempted to do.

The computer printouts were not admitted in evidence, yet they are here challenged as inadmissible hearsay.   This contention is without merit inasmuch as they may be used as a basis for expert witness opinion.  (See People v. Lugashi, 205 Cal.App.3d 632, 640–641, 252 Cal.Rptr. 434, Aquimatang v. Cal. State Lottery, 234 Cal.App.3d 769, 797, 286 Cal.Rptr. 57.)

Evidence Code section 1500.5 provides, “[C]omputer information ․ stored in a computer ․ shall be admissible to prove the existence and contents of the computer information․”  Finally, the Vendor's records may be used to impeach its contention of no overpayment.   The summary of the examined Vendor's business records was admissible.

X

 Vendor next asserts the delay in rendering a final decision was a denial of “fair hearing”.   The causes of these delays were bilateral in nature.   This delay of the enforcement of the WIC rules favored the Vendor, not the Department.   Vendor remains in business.   It has not yet paid the overcharged amount.

The Vendor by a whole variety of defense efforts has prolonged the decisionmaking process.   It cannot now complain of the delay which has resulted of its own acts.   There were multiple administrative appeals and pre-trial hearing briefs.   There have been delays but no showing of prejudice to Vendor.

Moreover, time restrictions in this context and legal background are directory only, not mandatory.   In the statement here, no consequence or penalty for the failure to do any act within a prescribed time.  (See Edwards v. Steele, 25 Cal.3d 406, 410, 158 Cal.Rptr. 662, 599 P.2d 1365;  Outdoor Resorts etc. Owners' Assn. v. Alcoholic Beverage Control Appeals Bd., 224 Cal.App.3d 696, 703–704, 273 Cal.Rptr. 748.)

XI

 Finally, the Vendor asserts the award of overpayment found by the ALJ and approved by the Director and confirmed in the superior court decision is not supported by substantial evidence.   The Vendor's own inventory purchase records were viewed and testified to by the Department witness.   The government's own records of payments made to the Vendor were from the computer readout summarized by the Department's witness.   This evidence support the findings of violation of the terms of the contract and amount of overcharge by the Vendor.   There was an examination by the Department witness of the shelf prices and the quantities on the shelf/WIC authorized food.   The Department produced evidence of prior WIC violations found in on-site inspection and “test buys”.

We conclude there is clear and convincing evidence of the breach of the contract by the Vendor.   The Vendor received $906,671 from the Department for which it did not furnish WIC clients the authorized food or overcharged WIC customers.   This money was paid by the Department under a mistaken belief that the Vendor had complied with its contract.   The Department is entitled to a return of that quantity of money.   This sum will compensate the “party aggrieved” for “the detriment proximately caused”.  (Civ.Code, § 3300.)   These damages are certain both as to “origin and amount”.  (Civ.Code, § 3301.)

The judgment is therefore affirmed.

Costs on appeal awarded to Respondent.

FOOTNOTES

FOOTNOTE.  

1.   See also Solander v. Mun. Ct., 45 Cal.App.3d 664, 666, 119 Cal.Rptr. 609;  Matter of Gregory, 705 F.2d 1118, 1122.

STANIFORTH,* Associate Justice. FN* Assigned by the Chairperson of the Judicial Council.

LILLIE, P.J., and JOHNSON, J., concur.