CALI MARKET INC v. DEPARTMENT OF HEALTH SERVICES

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Court of Appeal, Fourth District, Division 3, California.

CALI MARKET, INC., Petitioner and Appellant, v. DEPARTMENT OF HEALTH SERVICES, Respondent.

No. G004114.

Decided: August 11, 1987

Carl W. Greifzu, Pasadena, for petitioner and appellant. John K. Van de Kamp, Atty. Gen., Charlton G. Holland, Asst. Atty. Gen., Anne S. Pressman, Supervising Deputy Atty. Gen., and G.R. Overton, Deputy Atty. Gen., for respondent.

OPINION

Cali Market, Inc. appeals the superior court's denial of its mandamus petition.   Cali sought reversal of the Department of Health Services' (DHS) decision ordering Cali to refund $150,119 to the WIC Program 1 and suspending Cali's participation in the program for three months.   Cali challenges the sufficiency of the evidence and asserts the administrative hearing did not meet minimum standards of due process.

In our view, the state hearing procedures mandated by the federal regulations which govern the WIC Program are those set forth in the Administrative Procedure Act (APA) and the hearing in this case concededly did not conform to the APA.   We also agree the evidence is insufficient.   Accordingly, we reverse the judgment.

I

In November 1982, Cali executed an agreement with the State of California (the administrator of the federal program) and commenced participating in the WIC Program as a vendor.   Cali is a small 2 ethnic market which purchases its stock in cash from local retail and wholesale markets.   Cali kept its receipts of its cash purchases at the store.   On January 15, 1984, the market was burglarized and a suitcase containing the receipts was taken.   A burglary report was made to the Garden Grove Police Department.3

In March, Cali was advised DHS was auditing the market for July 1, 1982 to June 30, 1983.   The audit took place March 30th.   Based on the records provided, the auditor concluded Cali could not have sold all the WIC approved food items allegedly represented by the vouchers it submitted for redemption.4  The auditor surmised Cali must have sold non-approved items because it had no receipts showing it purchased the food items represented by the vouchers.   Based on this alone, the auditor determined Cali overcharged the WIC Program $150,119.   The auditor also decided Cali overcharged WIC customers $5,891 for infant formula based upon the March 30 shelf price as compared to the prices reflected on the redeemed vouchers.

DHS advised Cali of the auditor's report by letter on June 20, and also stated Cali could “appeal” the finding at an informal hearing pursuant to article 1.5, division 3, title 22 of the California Administrative Code.5  Cali timely requested a hearing and, pursuant to Government Code section 11507.6, sought discovery of all documents to be presented and a list of witnesses to be called.6  On October 17, DHS replied to the requested discovery advising Cali it would be calling two witnesses 7 and enclosed a copy of the “entire file” including the auditor's paperwork.   DHS did not contend discovery under section 11507.6 was inapplicable to the scheduled hearing.8

The hearing was held on January 10, 1985.   Neither of the two previously listed witnesses was called.   Over objection, DHS presented three other witnesses.9  DHS also introduced, over objection, documents not previously presented to Cali.   The hearing officer was not an administrative law judge 10 nor an attorney.   Not surprisingly, he was unfamiliar with the rules of evidence.11

None of the persons who gave oral “testimony” were placed under oath.   It appears the procedure at the hearing was to allow both sides to present whatever they desired in whatever form they saw fit.12

The hearing officer concluded “the facts of the record do not support the WIC contentions that the audit findings indicate that Dakao Market 13 for infant formula charged the WIC Program a higher price than non-WIC customers.”   He concluded the assumptions in the audit were unreliable and the conclusions invalid.   He also recognized the WIC Program bore the burden of proof which was not met by the audit.   Cali was not to be charged $5,891 for overpricing.

But the hearing officer found Cali had not produced any evidence it had purchased the food items represented by the $150,119 redemption vouchers.   That money was still owing.

On May 29, DHS adopted the decision of the administrative hearing officer.   Cali's petition for writ of mandate was denied February 27, 1986;  and a statement of decision was filed April 7.   The trial court found Cali was not denied due process of law and had failed to establish its records were stolen.   The trial court concluded Cali failed to present evidence of the purchase of WIC approved foods represented by the redemption vouchers submitted.   The court also concluded the three-month suspension was supported by compliance buys 14 in April 1984 and August 1985 15 when Cali sold non-WIC approved food items in exchange for WIC vouchers.

II

The due process clause guarantees freedom from arbitrary government deprivation of rights in life, liberty and property.  (Fuentes v. Shevin (1972) 407 U.S. 67, 92 S.Ct. 1983, 32 L.Ed.2d 556 (conditional sales contracts);  Goldberg v. Kelly (1970) 397 U.S. 254, 90 S.Ct. 1011, 25 L.Ed.2d 287 (welfare benefits).)   Claims of entitlement are protected property rights.  (Board of Regents v. Roth (1972) 408 U.S. 564, 577, 92 S.Ct. 2701, 2709, 33 L.Ed.2d 548, 560-561.)   A WIC vendor is entitled to continue to participate in the program as long as it meets the standards set forth in the federal regulations.   The state can terminate a vendor only for cause.16  DHS concedes Cali's right to due process but argues the informal hearing satisfied that requirement.

Given Cali's right for a hearing, what minimal due process rights must it be afforded?   Cali argues the hearing procedure did not meet the minimum federal requirements 17 nor those of the more rigid APA.  (§ 11500 et seq.) 18  DHS now concedes Cali is covered by the federal regulations,19 but argues no prejudice resulted due to Cali obtaining judicial review via the mandate proceedings.   DHS also argues the APA is inapplicable to WIC proceedings.20

III

DHS argues the APA (§ 11500 et seq.) is inapt for two reasons.   First, the APA is applicable only in those instances where a statement of issues or accusation must be filed to commence the administrative hearing process.  (§§ 11500, subd. (c), 11503 and 11504.)   Second, there is no state statute which renders the APA applicable to the WIC Program.   We turn now to an examination of each assertion.

FILING ACCUSATION OR STATEMENT OF ISSUES

DHS is correct in its claim neither a formal accusation nor statement of issues was filed against Cali as required by section 11503 21 and 11504.22  But the failure to do so cannot be determinative of Cali's right to the procedural safeguards of the APA.   To accept DHS' position would allow state agencies to avoid application of the APA by simply failing to comply with the mandate of those sections.   We reject DHS' invitation to eviscerate the APA.

STATUTORY REFERENCE TO APA

We agree there is no state statute which specifies the WIC Program is to be administered pursuant to the APA.23  But we have been directed to and have found no state statutes concerning the WIC Program.   There is, however, as conceded by DHS, a federal statute, 7 Code of Federal Regulations, section 246, which covers the WIC Program.

The federal regulations require the state to provide a hearing procedure for both the individual participant and the food vendor.  (7 CFR, §§ 246.23;  246.24.)   Contrary to DHS' assertion, the federal regulations do not establish this procedure.   Rather, they set forth the minimal procedural guarantees which must be provided by the state.

 Government Code section 11501 enumerates the agencies to which the APA is applicable.   DHS is one of those agencies.   We have been directed to no state procedure other than the APA which could be applicable to WIC Program suspensions or terminations.   We conclude the state chose not to enact a separate procedure specifically for the WIC program.   The state already had an appeal procedure applicable to DHS, and that procedure, the APA, satisfied the directive of the federal regulations.

 The hearing provided Cali failed to comply with the APA procedural safeguards in several respects:  (1) none of the witnesses were placed under oath;  (2) Cali was not permitted to confront and cross-examine adverse witnesses;  and (3) the hearing officer was not an administrative law judge.

IV

 Cali's due process rights were also violated under the federal regulations.   It was not advised the hearing was being conducted pursuant to the federal regulations.   The notice Cali received indicated the hearing would be informal and conducted pursuant to title 22, division 3, article 1.5 of the California Administrative Code.   These provisions of the California Administrative Code deal with hearing procedures for Medi-Cal participants and are inapplicable to the WIC Program.  (See fn. 20, ante.)

Cali was given sufficient time to prepare for the hearing, the opportunity to prepare its case, be represented by counsel, and to be served with written findings.  (7 CFR, § 246.24, subds. (b)(1), (2), (4), (6);  see fn. 17, ante.)   But Cali was neither allowed to confront and cross-examine adverse witnesses nor given an opportunity to review the case record prior to the hearing.  (Id., at subds. (3) and (5).)   DHS refused to identify and produce the agents who made compliance buys.   And there was no determination made as to whether or not DHS had a privilege not to disclose the identity of the undercover agents.  (See Evid.Code, § 1040 et seq.)   Cali was also denied the right to cross-examine the auditor.24

The procedure utilized by DHS failed to meet both the standards of the federal regulations and the Administrative Procedure Act.   The informal hearing procedure did not afford Cali the minimum requirements of due process.   It is entitled to a new hearing.

V

 Cali also asserts the evidence presented at the hearing is insufficient as a matter of law to support the finding of either DHS or the trial court.   We agree.

The record reflects the hearing officer and the trial court imposed strict evidentiary rules upon Cali while imposing no restrictions in their evaluation of the evidence presented by DHS.   The trial court, in its statement of decision, found Cali's claim the inventory records were stolen was not credible “due to absence of admissible evidence․”  We have considerable difficulty with this conclusion in light of the hearing officer's assertion all evidence offered by either side was admissible.   The only “evidence” presented by DHS was pure speculation by an auditor 25 who based his conclusions upon the audit and hearsay evidence of postaudit compliance buys.26  DHS did not assert Cali's evidence was inadmissible at the hearing and it appears different standards of admissibility were applied to Cali's evidence than was applied to that offered by DHS.

Perhaps the most telling factor indicating the insufficiency of the evidence is the totally inconsistent reasoning utilized by the hearing officer and the trial court in reaching their conclusions on the two major issues.   The hearing officer held the WIC Program (DHS) had not met its burden of proof regarding the alleged overpricing.   This finding was based upon the lack of documentary evidence to support the auditor's conclusion Cali had overcharged WIC participants.   Here the hearing officer had to have concluded CALI had indeed purchased the WIC food items represented by the $5,891 worth of vouchers, notwithstanding Cali's inability to produce receipts showing it had purchased these items.   Nevertheless, the hearing officer concluded because Cali could not produce receipts for and failed to present alternative proof of purchase of the items represented by the $150,119 vouchers, it must have provided non-WIC approved items in exchange for the vouchers.   The hearing officer, based solely upon WIC-DHS “contention” shifted the burden of proof to Cali to establish it had made the purchases.   DHS had not made a prima facie showing of any violation of the WIC guidelines by Cali.

The documents submitted by DHS directly refute the conclusion reached by the hearing officer and the trial court.   Each one specifically evidences all WIC food categories are stocked.   One report even indicated there was an adequate selection within each category.   Furthermore, the audit itself does not indicate WIC food items were not stocked.   The audit merely reviewed the various items reflected on the vouchers Cali submitted for reimbursement.   The audit did reflect Cali's reported total gross sales for the audit period were $504,187.41.

Cali's evidence included the unrefuted testimony 27 of Mr. Tran that the receipts and invoices were kept in a suitcase which was one of the items taken in a reported burglary.   We note Tran was the reporting person indicated on the Garden Grove police report.   In that report it is indicated a “suitcase containing invoices for business” was stolen.   This report occurred two months prior to Cali being placed on notice it was to be audited.   In addition, Tran and an unidentified witness 28 testified Cali purchased WIC foods and other items in case lots and paid cash.   Cali had no standing accounts and it was therefore not possible to reconstruct its purchases made two years earlier.   On the other hand, presumably WIC-DHS were aware of the names of the participants whose vouchers had been submitted by Cali.   Yet none of these persons were called to testify that Cali provided non-WIC food items in exchange for WIC vouchers.29

The hearing officer's conclusions are supported only by the rankest hearsay.   “The general rule is that in the absence of a special statute an administrative agency cannot over objection make findings of fact supported solely by hearsay evidence.  [Citation.]”  (Steen v. Board of Civil Service Commrs. (1945) 26 Cal.2d 716, 726-727, 160 P.2d 816.)   Respondent has directed us to, and we have found, no such special statute.   The findings of the hearing officer are supported only by hearsay evidence which was duly objected to by Cali.

 The superior court applied the substantial evidence test 30 in reviewing and agreeing with the administrative ruling.   The evidence presented at the administrative hearing does not satisfy even the preponderance of evidence test, let alone the higher standard of clear and convincing proof to a reasonable certainty which must be applied when, as here, a fundamental interest is involved.  (Furman v. State Bar (1938) 12 Cal.2d 212, 229, 83 P.2d 12;  Small v. Smith (1971) 16 Cal.App.3d 450, 94 Cal.Rptr. 136.) 31

The judgment is reversed and the cause remanded to the trial court with instructions to issue the writ of mandate directing the Department of Health Services to set aside its decision adopting the Proposed Decision in Audit Appeal No. WIS-0683-03J and to conduct a new hearing consistent with this opinion.

SONENSHINE, Associate Justice.

TROTTER, P.J., and CROSBY, J., concur.