Terri Endress v. Iowa Department of Human Services

IN THE SUPREME COURT OF IOWA
No. 18–1329
Filed May 29, 2020
TERRI ENDRESS,
Appellee,
vs.
IOWA DEPARTMENT OF HUMAN SERVICES,
Appellant.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Polk County, Karen A.
Romano, Judge.
DHS seeks further review of a court of appeals decision. DECISION
OF COURT OF APPEALS VACATED; DISTRICT COURT JUDGMENT
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED WITH
DIRECTIONS.
Thomas J. Miller, Attorney General, Jeffrey S. Thompson, Solicitor
General, and Tabitha J. Gardner, Assistant Attorney General, for
appellant.
Trent W. Nelson of Sellers, Galenbeck & Nelson, Des Moines, for
appellee.
2
CHRISTENSEN, Chief Justice.
In this case, the Iowa Department of Human Services (DHS) waited
two years to attempt recoupment of $16,003.94 for child-care services
rendered by the provider during agency review of her cancelled provider
agreement. We must decide whether the provider was given
constitutionally sufficient notice of DHS’s intent to recoup payments. DHS
sent a notice cancelling the agreement. The notice advised the provider of
a right to appeal but cautioned, “Any benefits you get while your appeal is
being decided may have to be paid back if the Department’s action is
correct.” On appeal, DHS affirmed its decision to cancel the provider’s
agreement. Years later, DHS also found that the provider had to pay back
the $16,003.94. On judicial review, the district court reversed DHS’s
decision on recoupment. It reasoned DHS’s notice to the provider did not
afford her procedural due process. The district court, however, denied
attorney fees to the provider under Iowa Code section 625.29(1)(b) (2017).
On appeal, the court of appeals affirmed the decision of the district court
on the merits while reversing with respect to the award of attorney fees.
We granted further review. Upon our review, we conclude DHS’s
notice meets procedural due process requirements. However, we also
conclude that DHS erred in refusing to consider the provider’s unjust-
enrichment defense to the recoupment proceeding. On remand to the
agency, the provider should be allowed an opportunity to raise unjust
enrichment as an offset to DHS’s effort to recoup overpayments. With
respect to attorney fees, DHS’s role was primarily adjudicative, and it is
not liable for attorney fees. Therefore, we vacate the decision of the court
of appeals and affirm in part and reverse in part the judgment of the
district court. We remand the case to the district court to remand to DHS
for consideration of the provider’s equitable relief.
3
Three justices of this court have joined this entire opinion. The
concurrence in part and dissent in part filed by Justice McDonald on
behalf of three justices joins divisions III.A and III.C of this opinion, while
dissenting as to division III.B. The concurrence in part and dissent in part
filed by Justice Appel contingently joins division III.B of this opinion, while
dissenting as to divisions III.A and III.C. Accordingly, this opinion controls
all aspects of the resolution of this appeal.
I. Background Facts and Proceedings.
In 2012, Terri Endress received DHS registration as an approved
Category B DHS child-care provider. Endress entered into a Child Care
Assistance Provider (CCAP) agreement with DHS on March 6, 2013. This
agreement allowed Endress to receive state funds to provide child care for
eligible children, not to exceed twelve children at any one time. The
agreement had a two-year term and provided that if it was terminated,
termination “may prevent” Endress from reapplying to be a provider for six
months.
DHS received at least three reports against Endress, indicating more
children were present in her day care than allowed under her registration.1
The DHS investigator never found more than twelve children present
during his spot checks. Nor did DHS find any other health or safety
violations associated with the day care. However, on reviewing the billings,
DHS found Endress had submitted billings that would have indicated
thirteen to fifteen children were present at the same time.
On July 17, 2014, Endress received notice from DHS cancelling her
CCAP agreement because she had repeatedly submitted claims for
payment to which she was not entitled (based on the number of children
1Two of the reports predated the March 6, 2013 agreement.
4
shown under her care at specific times). The notice of cancellation
explained Endress may keep her benefits until an appeal is final. However,
the notice cautioned, “Any benefits you get while your appeal is being
decided may have to be paid back if the Department’s action is correct.”
Endress elected to receive funding while she appealed the decision
cancelling her CCAP agreement. As a result, Endress received a July 31,
2014 notice:
You have timely appealed the cancellation or denial of your
CCA provider agreement. You are therefore allowed to
continue to receive child care assistance funding pending the
outcome of your appeal. Any benefits you get while your
appeal is being decided may have to be paid back if the
Department’s action is correct.
(Emphasis added.) DHS issued a final decision on November 17, 2014,
sustaining the proposed decision to cancel Endress’s CCAP agreement
because she repeatedly made billings for children in excess of the numbers
allowed for her care at any one time.
On March 17, 2017, Endress was approved by DHS for another
CCAP agreement. On April 3, Endress received a “Notice of Child Care
Assistance Overpayment” in the amount of $16,003.94 2 for the months of
July 2014 to November 2014. DHS alleged the overpayment was due to
“[a] mistake by [Endress] that caused DHS to pay [her] incorrectly for child
care services” and that the “overpayment happened because of [her] choice
to continue benefits pending an appeal.” Endress appealed, and an
administrative law judge (ALJ) affirmed DHS’s computation of
overpayment for child-care assistance.
This proposed decision was adopted as DHS’s final decision, and
Endress petitioned for judicial review. She argued DHS violated her due
2The original notice stated the amount owed as $16,001.94. That was later
corrected to the present amount, $16,003.94.
5
process rights through insufficient notice of its intent to recoup payments
during her pending appeal. She also argued that she had not been
overpaid; she had provided appropriate child care at DHS rates for the
children entrusted to her. Endress pointed out that if there was any
overpayment, based on the DHS audit, it amounted only to $623.28 at
most and not the full amount (over $16,000) she was paid over four
months for child-care services rendered. The district court granted
Endress’s petition and reversed the decision of DHS. On judicial review,
it determined DHS exceeded its statutory authority in promulgating the
recoupment provisions of its administrative rules, the administrative rules
were unconstitutionally vague, and DHS’s implementation of the
administrative rules violated Endress’s procedural due process rights.
Endress also sought attorney fees, which the district court denied.
DHS appealed, and Endress cross-appealed the denial of attorney
fees. On appeal, the court of appeals agreed that Endress maintained a
protected property interest in payments made under the CCAP agreement
and that the notice of recoupment was constitutionally deficient. However,
it reversed the district court’s determination that Endress was not entitled
to attorney fees.
DHS applied for further review, and we granted its application.
II. Standard of Review.
Different standards of review apply to the claims raised by Endress.
First, the Iowa Administrative Procedure Act defines the standards we
apply in our judicial review of agency action to determine whether we reach
the same conclusion as the district court. See Iowa Code § 17A.19(10);
Brewer-Strong v. HNI Corp., 913 N.W.2d 235, 242 (Iowa 2018). “The
district court may properly grant relief if the agency action prejudiced the
substantial rights of the petitioner and if the agency action falls within one
6
of the criteria listed in section 17A.19(10)(a) through (n).” Brakke v. Iowa
Dep’t of Nat. Res., 897 N.W.2d 522, 530 (Iowa 2017).
Second, Endress’s constitutional claims in agency proceedings are
reviewed de novo. Ghost Player, L.L.C. v. State, 860 N.W.2d 323, 326 (Iowa
2015).
Finally, with respect to whether attorney fees are available, we apply
the standard of correction of errors at law. Colwell v. Iowa Dep’t of Human
Servs., 923 N.W.2d 225, 232 (Iowa 2019).
III. Analysis.
A. Procedural Due Process. Endress alleges a violation of her
procedural due process rights under the Fourteenth Amendment to the
United States Constitution and article I, section 9 of the Iowa Constitution.
We will apply the federal substantive standards because Endress does not
suggest we follow different substantive standards under the Iowa
Constitution. See Behm v. City of Cedar Rapids, 922 N.W.2d 524, 566
(Iowa 2019) (applying federal substantive standards to a party’s procedural
due process claim raised under the Iowa Constitution); State v. Russell,
897 N.W.2d 717, 732 & n.7 (Iowa 2017) (“Russell also did not present an
argument for why we should depart from established precedent in our
interpretation of the Iowa Constitution’s due process clause. We therefore
treat both [federal and state] claims as the same.”).
Endress is entitled to procedural due process if a state action
threatens to deprive her of a protected interest in life, liberty, or property.
Behm, 922 N.W.2d at 566; Russell, 897 N.W.2d at 732–33; Bowers v. Polk
Cty. Bd. of Supervisors, 638 N.W.2d 682, 690 (Iowa 2002). Accordingly, as
a first step, Endress must show a protected interest is involved. See Behm,
922 N.W.2d at 566; State v. Willard, 756 N.W.2d 207, 214 (Iowa 2008).
7
We have explained, “Protected property interests ‘ “are created and
their dimensions are defined” not by the Constitution but by an
independent source such as state law.’ ” Willard, 756 N.W.2d at 214
(quoting State v. Seering, 701 N.W.2d 655, 665 (Iowa 2005), superseded
by statute on other grounds, 2009 Iowa Acts ch. 119, § 3 (codified at Iowa
Code § 692A.103 (Supp. 2009)), as recognized in AFSCME Iowa Council 61
v. State, 928 N.W.2d 21, 31 (Iowa 2019)). This includes “rules or
understandings that secure certain benefits and that support claims of
entitlement to those benefits.” Bd. of Regents of State Colls. v. Roth, 408
U.S. 564, 577, 92 S. Ct. 2701, 2709 (1972); Orloff v. Cleland, 708 F.2d
372, 377 (9th Cir. 1983) (“Entitlements are created by ‘rules or
understandings’ from independent sources, such as statutes, regulations,
and ordinances, or express or implied contracts.” (quoting Roth, 408 U.S.
at 577, 92 S. Ct. at 2709)).
The district court concluded the relevant statute at issue—in
conjunction with its administrative rules—created DHS’s statutory
obligation to pay for the child-care services Endress provided during her
appeal. The statute relied on provides,
The department’s billing and payment provisions for the
program shall allow providers to elect either biweekly or
monthly billing and payment for child care provided under the
program. The department shall remit payment to a provider
within ten business days of receiving a bill or claim for services
provided. However, if the department determines that a bill
has an error or omission, the department shall notify the
provider of the error or omission and identify any correction
needed before issuance of payment to the provider. The
department shall provide the notice within five business days
of receiving the billing from the provider and shall remit
payment to the provider within ten business days of receiving
the corrected billing.
Iowa Code § 237A.13(4) (2017) (emphasis added). It reasoned the
legislature’s use of “shall” mandated a duty, see Iowa Code § 4.1(30)(a),
8
which was fulfilled by DHS’s accompanying rule, see Iowa Admin. Code
r. 441—7.9(1) (2017).
We assume, without deciding, that Endress did have a protected
property interest in payments under her CCAP agreement. Therefore, our
next step is to determine whether Endress was afforded procedural due
process. Procedural due process requires, at the very least, “notice and
opportunity to be heard in a proceeding that is ‘adequate to safeguard the
right for which the constitutional protection is invoked.’ ” Willard, 756
N.W.2d at 214 (quoting Seering, 701 N.W.2d at 665–66). Endress does not
challenge the district court’s finding that she was given an opportunity to
be heard. The contention lies with the notice DHS provided. Endress
asserts DHS’s notice is not a sufficient warning of the action taken against
her. We have said, “Notice must be reasonably calculated to apprise
interested parties of the pendency of the action and afford them an
opportunity to present their objections.” Meyer v. Jones, 696 N.W.2d 611,
614 (Iowa 2005) (quoting In re Estate of Borrego, 490 N.W.2d 833, 837
(Iowa 1992)). We conclude the notice DHS provided Endress meets this
requirement.
The first notice Endress received was DHS’s “Notice of Decision:
Child Care.” This notice explained DHS was cancelling Endress’s CCAP
agreement and specifically stated, “This action means you are no longer
eligible to receive CCA payments, it does not change your status as a child
development home or licensed center.” The notice also provided Endress
with a right-to-appeal document. As stated in the appeal document,
Endress could elect to keep her benefits until an appeal is final. However,
it cautioned, “Any benefits you get while your appeal is being decided may
have to be paid back if the Department’s action is correct.” Endress claims
the use of “benefits” connotes a broader gratuity or assistance not
9
applicable to her; she also argues that the cautionary language about
repayment of “benefits” does not mean that she may be required to pay
back her earned funds.
Iowa Code chapter 237A does not define “benefits.” Likewise, the
relevant administrative rules as well as the provider agreement are silent
on this definition. “In the absence of a legislative definition of a term or a
particular meaning in the law, we give words their ordinary meaning.”
State v. Kidd, 562 N.W.2d 764, 765 (Iowa 1997). The dictionary is a source
for the common and ordinary meaning of a word. Id. “Benefits” is defined
as “to be useful or profitable to : AID, ADVANCE, IMPROVE.” Benefits,
Webster’s Third New International Dictionary (unabr. ed. 2002). We
determine the plain and ordinary definition of “benefits” includes funds
provided to Endress by DHS for child-care services.
Our understanding of what “benefits” means is further supported by
the context of the second notice Endress received. Endress appealed
DHS’s decision to cancel her CCAP agreement. As part of the appeals
process, Endress selected “Yes” to whether she wanted her “Benefits [to]
Continue.” Her decision prompted DHS to send a second notice indicating
she appealed the cancellation of her agreement. Important to our decision
here, the second notice advised Endress that she was “allowed to continue
to receive child care assistance funding pending the outcome of [her]
appeal.” (Emphasis added.) The second notice again cautioned, “Any
benefits you get while your appeal is being decided may have to be paid
back if the Department’s action is correct.” It is clear the plain and
ordinary meaning of “benefits” includes any funds Endress received while
her appeal was pending. The notice from DHS need only “be reasonably
calculated to apprise interested parties of the pendency of the action.”
Meyer, 696 N.W.2d at 614 (quoting In re Estate of Borrego, 490 N.W.2d at
10
837). DHS’s notice meets this requirement and Endress was thus afforded
procedural due process.
B. Equitable Relief. We do not agree that this ends the matter,
though. While Endress’s appeal was pending, DHS was getting the benefit
of child-care services from her. As a DHS-approved Category B child-care
provider, Endress provided eligible families with child-care services. See
Iowa Code § 237A.13(1)(a)–(f); Iowa Admin. Code r. 441—170.4(3)(b). More
importantly, DHS-approved providers could also provide child-care
services for a child with protective needs in order to prevent or alleviate
abuse or neglect, see Iowa Code § 237A.13(1)(e), and child-care services
provided under a court order, see Iowa Admin. Code r. 441—170.3(2)(d).
Because of the exigent circumstances surrounding child abuse or neglect,
the benefits of protective child care and court-ordered child care are
provided irrespective of whether that child’s family is eligible for state
child-care assistance. See Iowa Admin. Code r. 441—170.3(2)(c), (d).
When the state exercises its removal power to prevent or alleviate harm to
a child, see Iowa Code §§ 232.78, .79, .79A, .102(1)(a)(3), the DHS-
approved child-care providers benefit the state by keeping the removed
child safe.
It is the state’s obligation, as parens patriae, to ensure every child
receives proper care and treatment. Hensler v. City of Davenport, 790
N.W.2d 569, 583 (Iowa 2010) (“The state has a legitimate interest to
promote the public welfare or the well-being of the child.”); In re K.N., 625
N.W.2d 731, 735 (Iowa 2001) (en banc) (“We have also observed that it is
the State’s duty, as parens patriae, to ensure that the aims of the juvenile
justice code are applied to each child in need of the code’s assistance.”); In
re Guardianship of Hedin, 528 N.W.2d 567, 571 (Iowa 1995) (en banc)
(stating it is the state’s obligation under the doctrine of parens patriae to
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care for vulnerable and less fortunate persons); In re M.M., 483 N.W.2d
812, 814 (Iowa 1992) (“The State, as parens patriae, has the duty to make
sure that every child within its borders receives appropriate care and
treatment. Our juvenile statutes are designed to effectuate that duty.”
(Citation omitted.)). The state may use a wide range of powers to ensure a
child’s safety, see Hensler, 790 N.W.2d at 583, which include financial
demands on the public fisc, see Iowa Code § 237A.12 (“Subject to the
provisions of chapter 17A, the department shall adopt rules setting
minimum standards to provide quality child care in the operation and
maintenance of child care centers and registered child development
homes . . . .”); id. § 237A.29(1) (allowing state and federal funds to pay for
child-care services); Galloway v. State, 790 N.W.2d 252, 257, 258 (Iowa
2010) (“If parents fail to provide for the needs of their injured children, and
the preinjury waiver in favor of the tortfeasor is enforced, financial
demands may be made on the public fisc to cover the cost of care.”); Clare
Huntington, Welfare Reform and Child Care: A Proposal for State
Legislation, 6 Cornell J.L. & Pub. Pol’y 95, 115 (1996) (“Importantly,
because child care subsidies funds were drawn directly from the public
fisc, the CCBDG [Child Care and Development Block Grant] succeeded in
shifting the cost of child care away from the working poor and onto society
at-large.”).
Endress contends it would be unreasonable, arbitrary, capricious,
or an abuse of discretion for DHS to receive free child-care services from
her during the four months in 2014 that her appeal was pending. The
rules allow for recovery of “overpayments . . . due to benefits or payments
issued pending an appeal decision . . . . Overpayments shall be computed
as if the information had been acted upon timely.” Iowa Admin. Code
r. 441—170.9(2). Endress argues that if this rule is interpreted as allowing
12
DHS to take back everything it paid her from July to November 2014
regardless of the benefit received, DHS would be unjustly enriched.
Endress asserted this unjust enrichment argument before the
agency. The ALJ rejected this argument on the ground that the doctrine
is a basis for recovering funds in a civil action, not a defense in an
administrative action. The DHS director adopted the ALJ’s decision and
did not separately address this issue at all.
We think this was error. Under the law of contracts, even when a
party is in breach, the party “has a claim in restitution against the
recipient of performance, as necessary to prevent unjust enrichment.”
Restatement (Third) of Restitution & Unjust Enrichment § 36(1), at 585–
86 (Am. Law Inst. 2011). It is true that such claims may be limited or
denied because of the breaching party’s inequitable conduct, see id. § 63,
at 487, but DHS never engaged in this analysis. Unjust enrichment could
have been considered as a defense or offset.
Also, the notice itself did not specify that any payments received
during the appeal period “shall” be returned to DHS if Endress lost her
appeal. It said that the benefits “may” have to be paid back. Inherent in
the word “may” is that the agency has discretion. See State ex rel. Lankford
v. Allbee, 544 N.W.2d 639, 641 (Iowa 1996). And that discretion is subject
to reversal if it is unreasonable, arbitrary, capricious, or an abuse of
discretion. See Iowa Code § 17A.19(10)(n). DHS’s rule states that
“overpayments” shall be recouped from child-care providers. See Iowa
Admin. Code r. 441—170.9(2). The word “overpayment” is pervasive. But
this begs the question of whether a child-care provider has been “overpaid”
during an appeal period when DHS receives child-care services and has
no complaint about their quality or the provider’s registration. Endress’s
very point—which DHS declined to consider—was she had only been
13
“overpaid” at most $623.28. Further, Endress testified that she had paid
her own employees out of the $16,000. Additionally, she testified that
between November 2014 and March 2017 she simply switched roles with
one of her employees who held the DHS contract; presumably, that same
arrangement could have been made during the appeal period.
Unjust enrichment is rooted in the principle that one party should
not be unjustly enriched at the expense of another party. State ex rel.
Palmer v. Unisys Corp., 637 N.W.2d 142, 154 (Iowa 2001). We have
previously recognized that “unjust enrichment is a broad principle with
few limitations.” Id. at 155. The remedies under this doctrine may be
legal, equitable, or both. Restatement (Third) of Restitution & Unjust
Enrichment § 4, at 27; id. § 4 cmt. b, at 28 (“The law of restitution is not
easily characterized as legal or equitable, because it acquired its modern
contours as the result of an explicit amalgamation of rights and remedies
drawn from both systems.”). Unjust enrichment has three basic elements:
“(1) enrichment of the defendant, (2) at the expense of the plaintiff,
(3) under circumstances that make it unjust for the defendant to retain
the benefit.” Behm, 922 N.W.2d at 577. In the past, we have considered
a plaintiff’s unjust-enrichment claim against DHS and the State of Iowa.
See Ahrendsen ex rel. Ahrendsen v. Iowa Dep’t of Human Servs., 613
N.W.2d 674, 679 (Iowa 2000) (en banc) (holding “neither DHS nor the State
of Iowa was unjustly enriched by denying an application for Medicaid
benefits on a ground that was consistent with federal statutory law and
the DHS regulations”); see also Krieger v. Iowa Dep’t of Human Servs., 439
N.W.2d 200, 203 (Iowa 1989) (“The DHS was not ‘enriched’ by the services
14
rendered for the Waterloo Pollution Control Plant.”); Dolezal v. City of
Cedar Rapids, 326 N.W.2d 355, 358 (Iowa 1982). 3
We do not think the law draws a distinction based on the procedural
status of the matter. Thus, the mere fact that DHS had paid for the July
2014 to November 2014 services and thus was initiating the claim, rather
than defending Endress’s claim, should not make a difference. Either way,
3The cases of Kreiger, 439 N.W.2d 200, Marshall v. State, 559 N.W.2d 612 (Iowa
1997), and Ahrendsen, 613 N.W.2d 674, are all distinguishable on their facts.
In Krieger, an individual who received welfare benefits while failing to disclose an
asset that rendered him ineligible became the subject of a DHS recoupment action. 439
N.W.2d at 201. He did not dispute that recoupment was appropriate but argued that he
should receive credit for services he had provided without compensation under a
community work experience program as a condition of receiving his benefits. Id. We held
unjust enrichment was not an appropriate offset under the facts of that case, reasoning,
“[W]e . . . reject Krieger’s unjust enrichment argument. The DHS was not ‘enriched’ by
the services rendered for the Waterloo Pollution Control Plant. Krieger worked for the
Waterloo plant, not for the DHS, and the DHS received no benefits from his services.” Id.
at 203. Of course, welfare benefits are different from contracted child-care services. See
id. at 201. The work requirement was intended to make Krieger more employable and to
provide a benefit to the Waterloo plant—not to provide a benefit to DHS. See id at 202–
03.
In Marshall, an individual who received welfare benefits when she was not eligible
due to having provided false information was required to pay all those benefits back. 559
N.W.2d at 615. We upheld the agency’s determination that lack of fraudulent intent was
not a defense to repayment. Id. But, again, welfare benefits are different from contracted
child-care services. The applicable state administrative rule was different. See id. at 614.
And federal law left no discretion as to whether those benefits had to be recovered. Id.
In Ahrendsen, an estate sought more than three months of retroactive Medicaid
benefits, even though federal law and state regulations limited retroactivity to only three
months. 613 N.W.2d at 677. The estate pointed out that the Medicaid application had
been delayed because DHS had provided incorrect information. Id. at 676. We upheld
DHS’s denial of more than three months of benefits and also denied recovery under unjust
enrichment. Id. at 678–79. We explained, “We are convinced that neither DHS nor the
State of Iowa was unjustly enriched by denying an application for Medicaid benefits on a
ground that was consistent with federal statutory law and the DHS regulations.” Id. at
679. But there the federal law and regulations gave no room for discretion. Id. at 677.
Furthermore, as in Marshall, these were benefits rather than payments for services
rendered. See id. at 675. So it would be unrealistic to say DHS had been “unjustly
enriched” when it received nothing in return. See id. at 679.
A key point is that none of these cases said that unjust enrichment could not
apply to DHS recoupment proceedings. In fact, Krieger and Ahrendsen implicitly
recognized it could apply under the appropriate facts.
15
it seems inequitable for DHS to get needed child-care services for nothing.
This is not to say that Endress is entitled to keep all of the $16,003.94.
She has the burden of showing the benefit she conferred on DHS during
the four months in question that should be offset against DHS’s requested
recoupment. For example, she must demonstrate that during the four
months, the day care was operating lawfully and did not have an excessive
number of children. To the extent DHS has suffered loss attributable to
Endress’s violations of the CCAP agreement, that should be taken into
account as well. See Restatement (Third) of Restitution & Unjust
Enrichment § 36, at 585–86; id. § 63, at 487. In short, the issue remaining
is whether DHS’s enrichment at Endress’s expense was “under
circumstances that make it unjust for [DHS] to retain the benefit.” Behm,
922 N.W.2d at 577. Therefore, we remand to the district court to remand
to the agency so that it may fully consider Endress’s unjust-enrichment
claim as an offset against DHS’s claim for recoupment.
C. Attorney Fees. Iowa law authorizes a court to award attorney
fees to a party that prevails in a judicial review action brought against the
state pursuant to chapter 17A. Iowa Code § 625.29(1). However, there is
an exception.
[T]he court shall not make an award under this section if it
finds one of the following:
....
b. The state’s role in the case was primarily
adjudicative.
Id. § 625.29(1)(b). The district court considered the exceptions under
section 625.29(1) and concluded DHS’s role in the case was primarily
adjudicative. Accordingly, it declined to award Endress attorney fees.
16
Endress now claims the agency did not adjudicate the rights and duties of
the parties but rather preserved the issues for judicial review.
Within the context of section 625.29(1), our court addressed the
meaning of “primarily adjudicative.” We have explained, “[I]t can be said
that if an agency’s function principally or fundamentally concerns settling
and deciding issues raised, its role is primarily adjudicative.” Remer v. Bd.
of Med. Exam’rs, 576 N.W.2d 598, 601 (Iowa 1998) (en banc). The role of
the agency is viewed “ ‘in the case’ at bar,” not the agency’s role generally.
Id. Therefore, we must determine whether the agency’s role in Endress’s
case principally or fundamentally concerned settling and deciding issues
raised.
We addressed whether the role of an agency was primarily
adjudicative in Branstad v. State ex rel. Natural Resource Commission, 871
N.W.2d 291 (Iowa 2015). Branstad concerned the Iowa Department of
Natural Resources (DNR) investigation and subsequent restitution
assessment following a fish kill. Id. at 292–93. A contested hearing was
held before an impartial ALJ to address the assessment of restitution,
including the amount. Id. at 293, 297. After the ALJ issued a proposed
decision affirming the DNR’s assessment, Branstad appealed to the Iowa
Natural Resource Commission. Id. at 298. The commission affirmed the
proposed decision, which became the final decision. Id. Branstad
petitioned for judicial review, and this court was asked to determine
whether the state’s role was primarily adjudicative. Id. at 294–95.
The Branstad court cited our previous understanding of “primarily
adjudicative” as expressed in Remer. See id. at 295–96. It also noted the
role of the commission was to “[hear] appeals in contested cases pursuant
to chapter 17A.” Id. at 296 (quoting Iowa Code § 455A.5(6)(b)). Ultimately,
the commission “weighed the evidence about the fish kill, applied the
17
rules, considered Branstad’s various defenses, and determined that the
amount in the restitution assessment was proper.” Id. Its actions fell
squarely within the meaning of adjudicate. Id. at 297.
The procedure in Branstad aligns with Endress’s case. Following
reports that Endress had more than twelve children present at certain
times, DHS conducted an investigation. It found Endress submitted
claims for payment to which she was not entitled. This led DHS to
terminate Endress’s CCAP agreement and later to recoup overpayments.
Endress appealed DHS’s decision to recoup overpayments in a contested
case before an impartial ALJ. The notice of hearing before the ALJ framed
the issue as “[w]hether the Department correctly computed and
established a claim for overpaid child care assistance.” In support of her
nonadjudicative position, Endress points out DHS’s own rules indicate the
recovery of overpayments “is not an appealable issue.” Iowa Admin. Code
r. 441—7.9(7). However, the proposed decision rejected this position and
specifically addressed whether DHS correctly computed and established
overpayment. The authority to address whether DHS correctly computed
overpayment is in fact provided by DHS’s rules: “[A]ppeals may be heard
on the computation of excess assistance paid pending a final decision.” Id.
Although the impartial ALJ made the initial proposed decision, DHS made
the final decision after it weighed evidence about recoupments, applied
rules, and determined the rights of the parties. See Branstad, 871 N.W.2d
at 297.
We are not persuaded the state’s role was to primarily preserve
arguments. DHS’s final decision adopted the proposed decision, which
affirmed “[DHS’s] decision establishing and computing a claim for
overpayment against [Endress] in the amount of $16,003.94.” It is true
DHS’s final decision preserved Endress’s constitutional arguments for
18
judicial review. This is because DHS lacked authority to decide her
constitutional issues. See Soo Line R.R. v. Iowa Dep’t of Transp., 521
N.W.2d 685, 688 (Iowa 1994). Moreover, Endress is required to raise
constitutional issues at the agency level, even though the agency lacks the
authority to decide the issues, in order to preserve the constitutional
issues for judicial review. See McCraken v. Iowa Dep’t of Human Servs.,
595 N.W.2d 779, 785 (Iowa 1999). Contrary to Endress’s position,
preserving an issue for judicial review because the agency lacks authority
to decide the issue does not automatically brand the agency action as
nonadjudicative. If DHS determines it lacks jurisdiction to hear a dispute
it could otherwise adjudicate, a prevailing party cannot ask for section
625.29(1) attorney fees against DHS as the adjudicator. See Colwell, 923
N.W.2d at 238. DHS has the authority to determine for itself if it has
subject matter jurisdiction over a matter. Id. As we explained in Colwell,
Every court has inherent power to determine whether it has
jurisdiction over the subject matter of the proceedings before
it. It makes no difference how the question comes to its
attention. Once raised, the question must be disposed of, no
matter in what manner of form or stage presented. The court
on its own motion will examine grounds of its jurisdiction
before proceeding further.
Id. (quoting Carmichael v. Iowa State Highway Comm’n, 156 N.W.2d 332,
340 (Iowa 1968)).
In this case, DHS preserved the constitutional issues it lacked
authority over, addressed whether it correctly computed and established
overpayments, and settled the issues raised. Endress is concerned the
use of the agency appeal system to preserve issues for judicial review gives
the false impression that adjudication occurred, thereby preventing
potential attorney fees under section 625.29(1)’s exceptions. We
previously addressed this concern in Branstad:
19
[A] commentator who has reviewed the legislative history
notes that, while there is no explanation provided in the
legislation, previous proposed bills would have eased the
ability to award attorney fees against the State. These bills
were rejected in favor of more limiting language contained in
the final legislation. Key among legislative concerns with prior
forms of the bill was the cost to the State if attorney fees were
awarded often.
Branstad, 871 N.W.2d at 297 (citations omitted). If the legislature
intended to ease the ability to award attorney fees, it would have done so.
The principal function of DHS in the case at bar was primarily
adjudicative. Therefore, DHS is not liable for Endress’s attorney fees
under Iowa Code section 625.29(1)(b).
IV. Conclusion.
For the aforementioned reasons, the decision of the court of appeals
is vacated. We affirm the judgment of the district court in part, reverse in
part, and remand to the district court with directions to remand the matter
to the agency to consider unjust enrichment as an offset (at least in part)
to DHS’s claim for recoupment.
DECISION OF COURT OF APPEALS VACATED; DISTRICT COURT
JUDGMENT AFFIRMED IN PART, REVERSED IN PART, AND
REMANDED WITH DIRECTIONS.
Waterman and Mansfield, JJ., join this opinion. Appel, J., files a
concurrence in part and dissent in part. McDonald, J., files a separate
concurrence in part and dissent in part joined by Oxley and McDermott,
JJ.
20
#18–1329, Endress v. Iowa Dep’t of Human Servs.
APPEL, Justice (concurring in part and dissenting in part).
In my view, this case presents a classic due process problem arising
from an extreme case of administrative overreach that cries out for a
judicial remedy. Further, because the Iowa Department of Human
Services (DHS) did not adjudicate the most important issues in the
administrative process, I conclude that Terri Endress is entitled to attorney
fees under Iowa Code section 625.29 (2017).
I. Factual and Procedural Background.
A. Introduction. Endress had a Child Care Assistance Provider
(CCAP) agreement with the DHS to provide child care for low income
persons. Under the agreement, she was to provide services to no more
than twelve children. The agreement contained a repayment provision,
which stated, “I understand that I may have to repay money received in
error or as a result of fraudulent billing.”
B. First and Second DHS Notices of Decision.
1. First notice. DHS sent Endress a “Notice of Decision: Child Care”
dated July 17, 2014. The notice declared that the CCAP agreement
between Endress and DHS was cancelled because “Endress submitted
claims for payment for which [she was] not entitled.”
The notice provided that if Endress did not agree with the decision,
she could discuss the decision with agency staff. Such informal
discussions, however, did not diminish her right to a hearing. The notice
further stated, “If your application has been denied or your assistance has
been canceled, you have the right to reapply.”
The notice provided that Endress had a right to appeal the decision.
The notice stated if she appealed within ten days of the decision,
21
You may keep your benefits until your appeal is final or
through the end of your certification period if you file an
appeal . . . .
....
Any benefits you get while your appeal is being decided may
have to be paid back if the Department’s action is correct.
Endress filed an appeal within ten days of the notice.
2. Second notice. DHS sent Endress a second “Notice of Decision:
Child Care.” The notice stated that Endress timely appealed the
cancellation or denial of her CCAP agreement. The second notice further
stated,
You are therefore allowed to continue to receive child
care assistance funding pending the outcome of your appeal.
Any benefits you get while your appeal is being decided may
have to be paid back if the Department’s action is correct.
The second notice repeated the statement of the original notice that
Endress “may keep [her] benefits until an appeal is final or through the
end of [her] certification period” if a timely appeal is filed. The second
notice further stated, again, “Any benefits you get while your appeal is
being decided may have to be paid back if the Department’s action is
correct.”
3. Administrative decision on notices. An administrative law judge
(ALJ) held a telephonic hearing on the matter. Endress appeared on her
own behalf; a representative from DHS appeared and called three
witnesses. DHS submitted documents into the record including the CCAP
agreement, complaint reports, attendance records, and the findings of a
program manager. The ALJ characterized the issue as “[w]hether the
Department correctly cancelled [Endress’s] child care provider agreement
for repeatedly submitting claims for payment to which Endress was not
entitled.” The ALJ noted that Endress certified that she would comply with
22
the minimum requirements for a child-care development home and that
three reports were filed against her indicating that more children were
present in her day care than were allowed under her registration. The ALJ
noted, however, that the DHS investigator never directly observed that
Endress had more children present in day care than allowed under her
provider agreement.
The ALJ determined that on several occasions, Endress submitted
bills indicating the presence of more than twelve children, and as a result,
the ALJ determined that Endress had submitted claims for payment for
which she was not entitled. While Endress suggested there were billing
mistakes by employees, the ALJ determined that Endress repeatedly billed
for children in excess of the number allowed for her care at any one time.
As a result, the ALJ ruled that DHS’s cancellation of her CCAP agreement
should be sustained.
C. Notice of Child-Care Assistance Overpayment.
1. Introduction. For several years, there was no further action taken
by either Endress or DHS. In 2017, however, Endress applied for a new
CCAP agreement and was accepted as a provider on about March 17.
2. Notice of child-care assistance overpayment. DHS sent Endress
a “Notice of Child Care Assistance Overpayment” on April 3, 2017. The
notice asserted that Endress owed DHS $16,001.94 for amounts paid
between July 29, 2014, and November 23, 2014. The reason for the
overpayment was said to be the result of “[a] mistake by a provider that
caused DHS to pay the provider incorrectly for child care services.” The
dates the amounts owed were paid demonstrate that DHS was not seeking
to recover for alleged overbillings but instead to recoup funds paid for
services provided by Endress during the period when her appeal was
pending before DHS. While DHS characterized the payments made for
23
services provided by Endress during the course of the appeals as a
“mistake made by a provider,” the funds DHS sought to recover were for
services actually performed. The notice further states, “This overpayment
happened because of your choice to continue benefits pending an appeal.”
3. Administrative decision on notice of child-care assistance
overpayment. Endress appealed the decision referenced in the notice of
child-care assistance overpayment. On August 8, 2017, a hearing was
held before an ALJ. DHS relied on Iowa Administrative Code rule 441—
7.9(3) (2017), which states, “[E]xcess assistance paid pending a hearing
decision shall be recovered to the date of the decision. This recovery is not
an appealable issue. However, appeals may be heard on the computation
of excess assistance paid pending a hearing decision.” DHS took the
position that the only issue that could be heard was the amount of money
paid to Endress during the 2014 appeal.
The ALJ entered a proposed decision that agreed with DHS. With
respect to Endress’s due process claims, the ALJ declared that such
constitutional arguments cannot be addressed on an administrative level
but were preserved for judicial review. The ALJ also declined to address
constitutional and statutory challenges to Iowa Administrative Code rule
441—170.9. In addition, the ALJ declined to consider contract law claims
on the basis the claims rehashed the constitutional arguments she had
already rejected. Finally, the ALJ declined to find unjust enrichment,
noting that she was aware of no authority holding unjust enrichment could
be used as a defense in an administrative action.
Endress appealed the proposed decision to the director, who
affirmed the decision. Endress then filed a petition for judicial review in
district court.
24
4. District court decision on review of agency action. Endress filed a
petition for judicial review. The district court reversed. The district court
found that Endress had a statutory property right in payments under Iowa
Code section 237A.13(4), which provided that “[t]he departments shall
remit payment to a provider within ten business days of receiving a bill or
claim for services provided.” Further, the district court cited Iowa
Administrative Code rule 441—7.9, which provides, in part, “Assistance
. . . shall not be suspended, reduced, restricted, or canceled, nor shall a
license, registration, certification, approval, or accreditation be revoked or
other proposed adverse action be taken pending a final decision on an
appeal.”
The district court also found a contractual interest in the payments.
The district court based its decision on the CCAP agreement which noted,
among other things, that the provider shall “have the status of an
independent contractor.” The contract, however, provided that DHS could
cancel the agreement with ten days’ notice for any violation of the
agreement. The district court reasoned, however, that the notice of
decision received by Endress terminated her rights under the contract (but
not under the statute).
Having found a statutory property interest and partial contractual
interest in the payments, the district court proceeded to consider whether
Endress received adequate notice that all the funds paid, including those
earned for new services, could be recouped by the state. The district court
focused primarily on the fact that the notice indicated “any benefits” you
get during the appeal may have to be paid back, but the CCAP agreement
talks not in terms of benefits but refers to “fees” and “payments” and
“money received.” According to the district court, the parent of a child
25
receives the benefits, not a provider. The poor terminology in the notice,
according to the district court, was “fatal.”
The district court proceeded to consider whether the rules provided
sufficient warning that payments for services earned during the pendency
of an appeal could be recouped. The district court determined that the
DHS rules were conflicting and did not provide reasonable notice to
Endress. The district court noted that Iowa Administrative Code rule
441—7.9(1) provides that “[a]ssistance . . . shall not be suspended,
reduced, restricted, or canceled, nor shall a license, registration,
certification, approval, or accreditation be revoked or other proposed
adverse action be taken pending a final decision on an appeal.” But rule
441—170.9(2) states that “[a]ll overpayments due to client, provider, or
agency error or due to benefits or payments issued pending an appeal
decision shall be recouped.” Id. r. 441—170.9(2). And, rule 441—7.9(7)
provides that “[c]ontinued assistance is subject to recovery by the
department if the department’s action is affirmed. . . . When the
department’s action is sustained, excess assistance paid pending a final
decision shall be recovered to the date of the decision.” Id. r. 441—7.9(7).
The district court next turned to Iowa Administrative Code rule
441—170.9. The district court found the rule conflicted with itself. Rule
441—170.1 defines “overpayment” as “any benefit or payment received in
an amount greater than the amount the client or provider is entitled to
receive.” Id. r. 441—170.1. But under rule 441—7.9(1), DHS is required
to pay petitioner during the period of appeal and prohibits DHS from
revoking her approval as a provider under the CCA program. Id. r. 441—
7.9(1). Because Endress is entitled to receive payments during the
pending of her appeal, the district court reasons that it is not an
overpayment as an amount greater than the provider is entitled to receive.
26
The district court further noted that Iowa Administrative Code rule
441—7.5(9) defines program overpayment to mean “child care assistance
was received by or on behalf of a person in excess of that allowed by law,
rules, or regulations for any given month.” But because Iowa
Administrative Code rule 441—7.9(1) requires payment during the
pendency of appeal, the district court reasoned that the provisions of Iowa
Administrative Code rule 441—7.5(9) were not applicable.
Because the rules are conflicting and cannot be harmonized in a
reasonable manner, the district court determined that the rules collectively
have such total ambiguity that they “clearly, palpably, and without doubt
infringe . . . the constitution.”
The district court next turned to consider the statutory authority of
DHS’s recoupment rules. The district court held that neither Iowa Code
chapter 237A nor chapter 17A contained any language that would
reasonably support recoupment as advocated by DHS. The district court
noted that Iowa Code section 237A.13(4) provided that “if the department
determines that a bill has an error or omission, the department shall notify
the provider of the error or omission and identify any correction needed
before issuance of payment to the provider.” But, according to the district
court, there is nothing in Iowa Code chapter 237A.13 that authorizes DHS
to recoup earned payments for services during the pendency of an appeal
of an administrative decision canceling a provider contract. Further, the
district court found nothing in Iowa Code chapter 17A to authorize the
recoupment of funds paid during the pendency of an appeal.
The district court finally turned to unjust enrichment. The district
court held that because the due process holdings of the court provided
Endress with the relief she sought, there was no reason to exercise equity
jurisdiction on an unjust enrichment theory.
27
The last issue considered by the district court was whether Endress
was entitled to recover her attorney fees under Iowa Code section 625.29.
The district court held that Endress was not entitled to fees. The district
court reasoned that the action of DHS was primarily adjudicative because
it determined the rights and duties of a party. Under the statute, attorney
fees are not available when an agency acts in a primarily adjudicative
capacity.
Endress filed a motion to reconsider under Iowa Rule of Civil
Procedure 1.904(2). Endress pointed out that in the administrative
proceeding, the only question considered was the value of the alleged
overpayment and that Endress did not contest its value. But Endress
argued that the administrative law judge did not consider her challenge to
the rules and notices on statutory and constitutional grounds and that, as
a result, the action was not “primarily adjudicative.”
5. Court of appeals. DHS appealed, and we transferred the case to
the court of appeals. The court of appeals found that Iowa Code section
237A.13(4) and Iowa Administrative Code rule 441—7.9 established a
statutory property right in payments for child-care services. The court of
appeals also agreed with the district court’s reasoning that the notices
were constitutionally deficient to support DHS’s recoupment claim. The
court of appeals, however, found that DHS’s action was not “primarily
adjudicative” and that, as a result, Endress was entitled to attorney fees
under Iowa Code section 625.29.
II. Discussion.
A. The Notices to Endress Were Insufficient and Any Resulting
Deprivation of Property Violated Due Process of Law.
28
1. Protected property interest. Iowa Code section 237A.13(4)
provides a statutory property interest in payments for services under the
program. This section provides,
The department’s billing and payment provisions for the
program shall allow providers to elect either biweekly or
monthly billing and payment for child care provided under the
program. The department shall remit payment to a provider
within ten business days of receiving a bill or claim for services
provided. However, if the department determines that a bill
has an error or omission, the department shall notify the
provider of the error or omission and identify any correction
needed before issuance of payment to the provider. The
department shall provide the notice within five business days
of receiving the billing from the provider and shall remit
payment to the provider within ten business days of receiving
the corrected billings.
This Code section mandates timely payments under the program and
establishes a remedy in the event the department determines that an error
or omission has occurred. I have no doubt that this statute, by directing
and restraining the scope of administrative action in connection with
payment for child care services, establishes a property interest in payment
for the services that triggers due process protections.
An argument could be made, perhaps, that the accompanying
regulations eviscerate any statutory property interest by providing for
recoupment of funds paid for services provided during the pendency of an
administrative appeal. As demonstrated by the district court ruling, the
DHS rules themselves are very hard to decipher and cannot be
harmonized.
But more importantly, in light of the statutory language in Iowa
Code section 237A.13(4), I conclude that any rule that authorized
recoupment as advocated by DHS would be ultra vires. To begin with,
where the legislature has established remedies, I am not inclined to pencil
into the statute additional remedies. That was the central teaching of
29
Brakke v. Iowa Department of Natural Resources, 897 N.W.2d 522, 530,
533–34, 540–41 (Iowa 2017). In Brakke, we refused to expand remedies
in a statute regulating sick deer even though the agency believed expanded
remedies would be administratively convenient or make the statute more
effective. Id. at 540–42.
Further, I note that the legislature knows how to enact recoupment
provisions. Iowa Code section 96.3(7) provides for recoupment of
unemployment benefits. Iowa Code section 96.3(11) provides for
recoupment of food stamps. As the district court observed, “The
possession of authority by one administrative body and the absence of a
grant of such authority in the statute relating to another administrative
body significantly shows that the latter body possesses no such authority.”
Branderhorst v. Iowa State Highway Comm’n, 202 N.W.2d 38, 40 (Iowa
1972). And, it makes sense for the legislature to expressly provide for
recoupment of benefits but not recoupment of earned payments for
services rendered.
2. Procedural due process: notice. Endress received notice from
DHS that “[a]ny benefits you get while your appeal is being decided may
have to be paid back if the Department’s action is correct.” This notice
does not provide fair warning that the clawback by the department of
payments made will exceed those that the department has shown were
improperly paid and would include payments fully earned by a provider.
First, the notice refers to “benefits”. The payments to providers,
however, are not benefits. Benefits are provided to families to utilize the
services. The CCAP agreement makes no reference at all to benefits. Thus,
a provider might well believe the notice did not apply to them but was
boilerplate in DHS documents.
30
There is no question that the notice states that “any” benefits paid
“may” have to be paid back. But may is not must. The term “may”
ordinarily implies the use of some kind of discretion. See, e.g.,
Kingdomware Techs., Inc. v. United States, 579 U.S. ___, ___, 136 S. Ct.
1969, 1977 (2016); Jama v. Immigration & Customs Enf’t, 543 U.S. 335,
346, 125 S. Ct. 694, 703 (2005); John Deere Waterloo Tractor Works of
Deere & Co. v. Derifield, 252 Iowa 1389, 1392, 110 N.W.2d 560, 562 (1961).
In other words, DHS “may” in its discretion clawback paid benefits. We
must, however, recognize and give effect to the choice of the word “may”
and not “must” or “shall” in the notice. Fairfield Sci. Corp. v. United States,
611 F.2d 854, 862 (Ct. Cl. 1979) (noting default clause in government
contract does not say “shall” or “must” but says “may,” demonstrating the
existence of discretion).
Such discretion vested in an agency has been held to give rise to an
implied condition of reasonableness in many settings. See, e.g., Darwin
Constr. Co. v. United States, 811 F.2d 593, 596 (Fed. Cir. 1987);
Schlesinger v. United States, 390 F.2d 702, 709 (Ct. Cl. 1968); Williamson
v. N.Y. State Liquor Auth., 200 N.E.2d 565, 567 (N.Y. 1964). Thus, by
analogy to the well-established principle that discretion must be
reasonably exercised, to the extent “benefits” paid are unearned, or should
not have been paid, the department may claw them back.
Assuming a provider would understand that he or she is receiving
“benefits,” even though the provider is, in fact, getting paid for services
rendered under the CCAP agreement, a reasonable provider reading the
notice would assume that DHS would act rationally and not impose a
disproportionate penalty for thousands of dollars for an accounting error
of much lower proportion. The language in the notice does not remotely
31
suggest, however, that the department may engage in grossly
disproportionate, irrational clawback.
The notice does not say, for instance, “If you are found to have
erroneously billed DHS by any amount, including 1 cent, we will claw back
the entire amount of payments made during the pendency of your appeal
as a forfeiture.” In the alternative, the notice does not say, “You will have
to pay back all payments earned for services rendered during the appeal if
DHS prevails on the smallest billing issue as a forfeiture for using the
administrative process.” The notice does not tell you that if you lose even
the smallest aspect of your appeal, you will suffer a forfeiture or penalty.
If the state wanted to assert such an extraordinary unqualified
power of forfeiture, it could have done so in simple, clear language. DHS’s
position does not describe a reasonable discretionary clawback. It
describes an unstoppable state-sanctioned steamroller that effectively and
efficiently flattens license holders on the blacktop of an administrative
appeal for the smallest of errors.
The majority finds that the bland language gives fair notice of the
existence of the unstoppable state-sanctioned forfeiture steamroller. I
don’t see it. For sure, the notice gives fair warning that in the event you
lose the appeal, the state will come after you and may even deduct from
payments owed the amount of payments improperly billed. But the notice
would not advise the average Jill or Joe that the state will clobber you if
you get payments during the pendency of the appeal and you do not clean
the state’s clock completely and thoroughly on each and every issue raised
in the administrative appeal.
If the notice were a statute, we would not construe it as does the
majority. We may harken back to our law school days, where we learned
that statutes should be construed to avoid forfeitures. United States v.
32
One 1936 Model Ford V–8 Delux Coach, Motor No. XX-XXXXXXX, 307 U.S.
219, 226, 59 S. Ct. 861, 865 (1939). While we are not faced with a
question of statutory interpretation, it seems to me that we should require
that notice of a forfeiture or penalty such as that advocated by DHS should
be in very clear, maybe even in bold type. Cf. Bell v Yale Dev. Co., 429
N.E.2d 894, 897 (Ill. Ct. App. 1981); Sclafani v. Eastman Kodak Co., 727
N.Y.S.2d 277, 279–81 (Sup. Ct. 2001).
The above problem is compounded by the phrase “if the
Department’s action” is correct. What does that mean? What exactly is
the department’s action? What about where the department’s position on
incorrect billing is mostly wrong?
For the above reasons, I conclude that the notices received by
Endress were constitutionally deficient under the due process clauses of
the Iowa and United States Constitutions.
B. Unjust Enrichment. The plurality concludes that Endress is
entitled to pursue an unjust enrichment claim in the district court. The
plurality sees the same equities as I do in this case but puts it in a different
legal package. In the alternative, however, since the due process argument
as outlined in division II.A of my opinion has not prevailed, I too would
remand to the district court for consideration of the unjust enrichment
claim.
C. Attorney Fees Under Iowa Code Chapter 625.29. The key
question under this fee-shifting statute is whether DHS’s action was
“primarily adjudicative.” DHS’s position throughout, however, has been
that the only issue in the administrative adjudication was the amount of
overpayment as defined by DHS. The other powerful issues, including the
validity of the rules and constitutional issues of due process, could not be
decided in the administrative process.
33
Endress and DHS do not have a dispute about the amount of money
received by Endress for earned services during the pendency of the original
administrative appeal. No one disputes that it amounts to be about
$16,000. Thus, the only issue that DHS believed could be considered in
the administrative process was uncontested and does not have any
bearing in this appeal.
In denying Endress’s claim for attorney fees, the district court stated
that “the primary action in this case was to adjudicate the value of the
overpayment.” I do not agree. Instead, the key issues in this case related
to the statutory authority of DHS to promulgate rules and the application
of due process to the agency’s action seeking to disgorge earned payments
from Endress. These issues were not considered as they were outside the
scope of the administrative process. As noted in Branstad v. State ex rel.
Natural Resources Commission, the term adjudication in the statute means
“to settle finally (the rights and duties of the parties to a court case) on the
merits of the issues raised.” 871 N.W.2d 291, 297 (emphasis added)
(quoting Webster’s Third New International Dictionary 27 (unabr. ed.
2002)).
The fighting issues in this case, then, at least as they relate to due
process, did not arise from an adjudication by DHS but instead arose from
unreviewed administrative action of the department. 4 Under these
circumstances, I would find Iowa Code section 625.29 fully applicable.
III. Conclusion.
For the above reasons, I would affirm the decision of the district
court on the due process issue. In the alternative, I would remand the
case to the district court for consideration of the unjust enrichment claim.
4The ALJ did, however, decide the unjust enrichment claim on the merits. Under
our caselaw, if DHS is acting primarily in an adjudicative capacity, no attorney fees are
available.
34
I would reverse the decision of the district court on the question of
availability of attorney fees under Iowa Code section 625.29.
35
#18–1329, Endress v. Iowa Dep’t of Human Servs.
McDONALD, Justice (concurring in part, dissenting in part).
I concur in part and dissent in part. I concur in the plurality
opinion’s resolution of the due process issue. The plurality does not
address the district court’s ruling or Endress’s argument that the Iowa
Department of Human Services (DHS) exceeded its statutory authority in
promulgating the recoupment rule. Nor does the plurality address the
district court’s ruling or Endress’s argument that the recoupment rule is
unconstitutionally vague. I assume the plurality concludes both that DHS
had the authority to promulgate the recoupment rule and that the rule
passes constitutional muster because the plurality remands the matter for
reconsideration of Endress’s unjust enrichment claim asserted in response
to enforcement of the rule. If the plurality so concludes, I concur that DHS
had the authority to enact the rule and that the rule is not
unconstitutionally vague. However, I disagree Endress can assert a
defense of unjust enrichment in response to DHS’s effort to enforce a valid
law, and I dissent on this issue. I thus join divisions III.A and III.C of Chief
Justice Christensen’s opinion, while dissenting as to division III.B.
I.
The plurality dislikes the recoupment rule and the application of the
recoupment rule because it works a hardship on Endress. Fair enough. I
agree. However, “[o]ur job as judges is not to write a decision to avoid an
unfair result.” Mulhern v. Catholic Health Initiatives, 799 N.W.2d 104, 126
(Iowa 2011). Our job is to apply the law to the case at hand. At this job,
the plurality falls short. The plurality relies on facts not supported by the
record, uses these facts to construct a non sequitur, ignores controlling
law, and then ignores the relevant portions of the persuasive authority
upon which it relies that are directly contrary to the plurality opinion and
36
that demand the opposite result. The end result is an opinion that is
irreconcilable with itself and “an example of the aphorism that bad facts
can make bad law.” Mitchell v. Cedar Rapids Cmty. Sch. Dist., 832 N.W.2d
689, 705 (Iowa 2013) (Waterman, J., dissenting).
A.
As an initial matter, this case does not appear to be a case, or at
least a quintessential case, of unjust enrichment. The plurality states
Endress provided a benefit to the state, but it is not clear she did. Endress
provided child-care services to one or more persons while her appeal was
pending. The beneficiaries of her services were the persons receiving the
child-care services. See, e.g., Krieger v. Iowa Dep’t of Human Servs., 439
N.W.2d 200, 203 (Iowa 1989) (“The DHS was not ‘enriched’ by the services
rendered for the [beneficiary]. Krieger worked for the [beneficiary], not for
the DHS, and the DHS received no benefits from his services.”). DHS was
merely the third-party payor for the services provided. Endress’s claim of
unjust enrichment more appropriately lies against the persons to whom
she provided child-care services and not DHS. The plurality cites no case
or authority allowing for a claim of unjust enrichment against a third-party
payor under the circumstances presented.
Finding no authority allowing for an unjust enrichment claim
against a third-party payor, the plurality finds DHS was a direct
beneficiary of Endress’s services. The plurality’s finding is based on the
following facts and rationale: in some circumstances, certain day-care
providers provide services for children with protective needs; this,
according to the plurality, implicates the state’s duty as parens patriae;
and, according to the plurality, when DHS acts as parens patriae it is the
beneficiary of any services provided to the families.
37
The doctrine of parens patriae is simply inapplicable here. There is
nothing in the record to show Endress was providing protective services
during the relevant time period. There is also nothing in the record to
show the state was acting as parens patriae in this case. The fact that
some other child-care providers might provide protective services for some
other children under some other program not at issue in the case does not
change the fact DHS was merely a third-party payor for the services
Endress provided to someone else.
Even if the doctrine were applicable here, the doctrine does not
actually support Endress’s claim of unjust enrichment. The “doctrine is
derived from the English common law and is inextricably linked to a
superiority of the state in its relations with its subjects.” B.A.A. v. Chief
Med. Officer, Univ. of Iowa Hosps., 421 N.W.2d 118, 121 (Iowa 1988)
(quoting Contemporary Studies Project: Facts and Fallacies About Iowa Civil
Commitment, 55 Iowa L. Rev. 895, 958–59 (1970)). It merely explains the
state’s duty and authority to act to protect others. The plurality fails to
cite any authority that would support a claim that an unauthorized service
provider can demand money from the government or refuse to repay money
lawfully owed the government merely because the government was acting
in its capacity parens patriae. The invocation of the doctrine is a non
sequitur.
B.
Even if one were to assume Endress’s provision of child-care services
constituted a benefit to DHS, the principles underlying the doctrine of
unjust enrichment do not support her claim. The doctrine of unjust
enrichment is not an open-ended doctrine that allows a court to “sit like a
kadi under a tree dispensing justice according to considerations of
individual expediency.” Terminiello v. City of Chicago, 337 U.S. 1, 11, 69
38
S. Ct. 894, 899 (1949) (Frankfurter, J., dissenting). “ ‘[U]njust enrichment’
is a term of art.” Restatement (Third) of Restitution & Unjust Enrichment
§ 1 cmt. b, at 4 (Am. Law Inst. 2011) [hereinafter Restatement (Third)]. The
concept of unjust enrichment is not a judicial remedy to correct perceived
injustices, unfairness, or inequities in a broad sense. Rather, the doctrine
involves a “narrower set of circumstances giving rise to what might more
appropriately be called unjustified enrichment.” See id. at 5. In the
technical sense, “[u]njustified enrichment is enrichment that lacks an
adequate legal basis.” Id.
To the extent DHS was enriched by Endress’s service, there is an
adequate legal basis to justify the enrichment: Endress was given notice
that any payments made to her under the child-care assistance program
during the pendency of her appeal would have to be repaid in the event
she lost her appeal. Specifically, the notice of decision told Endress she
could “continue to receive child-care assistance funding pending the
outcome of [her] appeal.” It continued, stating “any benefits [she receives]
while [her] appeal is being decided may have to be paid back if the
Department’s action is correct.” The notice then directed Endress to the
administrative rule requiring recoupment. The plurality agrees DHS
provided Endress notice that any compensation paid to her while her
appeal was pending was subject to recoupment.
DHS’s notice of recoupment to Endress precludes her defense of
unjust enrichment against DHS. See Restatement (Third) § 16 cmt. a, at
214 (explaining that a legal entity, such as government agency, would have
a claim to recover benefits conferred under a contract where a statute
limited the entity’s authority to contract); id. § 33 cmt. f, at 538 (explaining
a party has no claim for unjust enrichment where the party acts despite
having notice of a limitation on the government’s authority to contract
39
“because the restitution claim may not be intentionally employed as a
means either to circumvent procedural requirements or to expand the
scope of [government] authority”). While the plurality relies on the
Restatement (Third) to support its conclusion, it ignores these sections of
the Restatement (Third) that directly address the question presented in
this case and that expressly reject the plurality’s conclusion that unjust
enrichment is available against the government where the party asserting
the claim had notice.
More problematic for the plurality is the Restatement (Third)’s rule
is in accord with Iowa law. “The theory of unjust enrichment ‘is premised
on the idea that it is unfair to allow a person to benefit from another’s
services when the other expected compensation.’ ” Waldner v. Carr, 618
F.3d 838, 848 (8th Cir. 2010) (quoting State Pub. Def. v. Iowa Dist. Ct. for
Woodbury Cty., 731 N.W.2d 680, 684 (Iowa 2007)). When Endress
pursued her administrative appeal, DHS provided her with notice she
would have to repay the funds if her appeal was unsuccessful. The
plurality opinion agrees DHS provided Endress with notice. Upon
receiving notice, Endress had no expectation she would be able to retain
the funds under the circumstances presented. In the absence of an
expectation that she would be entitled to retain the funds, Endress has no
claim for unjust enrichment.
There is an additional adequate legal basis to justify DHS’s
recoupment rule: the government’s general duty and authority to protect
the fisc. See, e.g., Brock v. Pierce County, 476 U.S. 253, 262, 106 S. Ct.
1834, 1840 (1986) (stating “the protection of the public fisc is a matter
that is of interest to every citizen”). Part of the government’s general duty
and authority to protect the fisc is the promulgation of statutes, rules, and
regulations establishing the purposes, terms, and conditions for the
40
expenditure of public funds. See Godfrey v. State, 847 N.W.2d 578, 588–
89 (Iowa 2014) (Waterman, J., dissenting) (explaining the legislature
established a statutory certification procedure to determine when public
funds should be available to defend a lawsuit and the statutory procedure
should not be overridden by the court at the urging of a party’s attorney).
An additional part of the government’s general duty and authority to
protect the fisc is the recoupment of funds paid from the fisc where the
payment violated the statutes, rules, and regulations authorizing the
purpose, terms, and conditions for the expenditure of public funds. See
Fernandez v. Iowa Dep’t of Human Servs., 375 N.W.2d 701, 709 (Iowa
1985) (“More importantly, as a department of the state government it had
a duty and implied authority to recoup from the provider payments
incorrectly made when the payments were made because of rule violations
by the provider.”); see also In re Holyoke Nursing Home, Inc., 372 F.3d 1, 5
(1st Cir. 2004) (“Both by statute and by contract, the [government agency]
has the unqualified right to recoup these overpayments in full, and to
return the funds to the public fisc, where they can be used to fund other
facilities providing care to . . . beneficiaries.” (Emphasis omitted.)).
The government’s general duty and authority to protect the fisc is so
fundamental to the sound operation of government that certain claims and
defenses cannot be asserted against the government to create liability or
deny liability in contravention of statute. For example, “[l]aches . . . does
not apply against the government.” State ex rel. Miller v. Vertrue, Inc., 834
N.W.2d 12, 33 (Iowa 2013). “[I]n Iowa, it is well recognized that a statute
of limitations does not run against the state unless specifically provided
by statute.” Fennelly v. A-1 Mach. & Tool Co., 728 N.W.2d 163, 169 (Iowa
2006). By way of another example, “no right of prescription may be
acquired against the government.” State v. Hutchison, 721 N.W.2d 776,
41
782 (Iowa 2006). Also, as a general rule, “equitable estoppel will not lie
against a government agency.” ABC Disposal Sys., Inc. v. Dep’t of Nat. Res.,
681 N.W.2d 596, 607 (Iowa 2004).
One of the claims that cannot be asserted against the government
to create liability or, as here, as a defense to liability are claims of quantum
meruit and unjust enrichment. See United States v. $30,006.25 in U.S.
Currency, 236 F.3d 610, 614 (10th Cir. 2000) (“[W]e [are not] aware[] of
any general waiver of sovereign immunity for unjust enrichment claims.
Moreover, fairness or policy reasons cannot by themselves waive sovereign
immunity.”); see also United States v. Craig, 694 F.3d 509, 513 (3d Cir.
2012)). The appellate courts of this state have explicitly rejected the
contention that a party can demand payment from the government under
a theory of quantum meruit or unjust enrichment where the payment
would be in contravention of statute.
In Iowa District Court for Woodbury County, an attorney was
appointed to serve as a guardian ad litem. 731 N.W.2d at 682. She failed
to comply with the statutory requirements in submitting her application
to exceed the statutory fee limitation. Id. The attorney sought fees for
services she actually performed. 731 N.W.2d at 683. We disallowed the
attorney’s demand for payment under a theory of quantum meruit on the
ground that “[a]llowing a theory of quantum meruit to supersede clear
statutory requirements would serve to undermine the legislature’s purpose
in enacting section 815.10A(2).” Id. Similarly, in State Public Defender v.
Iowa District Court for Clarke County, we concluded the district court erred
in approving an attorney’s fee claim “based on the [district] court’s ‘plenary
powers to exercise justice among the parties’ ” where the fee claim was
contrary to statute. 745 N.W.2d 738, 739, 740 (Iowa 2008). Finally, in
Madrid Lumber Co. v. Boone County, we held a contractor was not entitled
42
to payment when it provided services to a county but the contract for the
services was not approved in accord with statute. 255 Iowa 380, 386, 121
N.W.2d 523, 527 (1963).
The court of appeals has relied on our precedents in this area. The
court of appeals has interpreted Iowa District Court for Woodbury County
for the proposition that a claim for quantum meruit “could not be used to
supersede the affirmative requirements of the statute.” In re G.P., No. 09–
0156, 2009 WL 3337641, at *1 n.1 (Iowa Ct. App. Oct. 7, 2009). In
Jacobsma v. Iowa District Court, No. 06–1877, 2007 WL 4553636, at *3
(Iowa Ct. App. Dec. 28, 2007), the court of appeals rejected an attorney’s
claim for compensation under theories of unjust enrichment and quantum
meruit. The court explained it was for the legislature to address any
inequity caused by the statutory requirements:
While we sympathize with Jacobsma and understand his
frustration with the public defender’s denial of his fee claim,
it is up to the legislature and not this court to determine
whether changes should be made in the fee approval/denial
process it has established for court-appointed attorneys.
Id. The court of appeals’ rationale in Jacobsma is applicable here. While
the plurality opinion may think the recoupment provision is unfair, this
court does not have the authority to countermand a statute and
administrative rule that six justices hold is valid and enforceable.
Pursuant to this controlling authority, this court has explicitly
rejected claims of unjust enrichment asserted against DHS and other
government agencies. In Ahrendsen ex rel. Ahrendsen v. Iowa Department
of Human Services, this court held a party’s claim of unjust enrichment
would not lie where the department administered a program consistent
with the relevant statutes and regulations. 613 N.W.2d 674, 679 (Iowa
2000). In Marshall v. State, this court explained the department was
43
required and entitled to recoupment of welfare benefits despite it being a
“harsh result.” 559 N.W.2d 612, 613, 615 (Iowa 1997). The court further
explained it lacked the authority to modify the statutory regime to achieve
an “equitable result.” Id. at 615. Similarly, in Krieger, this court rejected
the claimant’s contention the department would be unjustly enriched by
recoupment of benefits paid. 439 N.W.2d at 203. This court explained
there was strong public policy supporting the enforcement of the
recoupment statute and “denying recoupment would frustrate that policy.”
Id. Our cases are consistent with the Restatement (Third)’s legal standard
of unjust enrichment as opposed to the plurality’s moral standard of
unjust enrichment.
The government’s duty and authority to recoup funds hold even
when the recipient of said funds was not at fault and the recoupment of
said funds might be inequitable, in the colloquial sense, under the
circumstances presented. See State ex rel. Mack v. Mack, 479 N.W.2d 327,
329 (Iowa 1992) (“However sympathetic Michele’s plight may be, her legal
defenses to the State’s reimbursement effort lack merit.”); Fernandez, 375
N.W.2d at 709 (“We conclude that the hearing officer’s interpretation that
the administrative rules gave the department authority to recover from the
appellant any incorrectly paid assistance by suspending or withholding
[M]edicaid payments is neither plainly erroneous nor inconsistent with
chapter 249A.”); Powell v. Emp’t Appeal Bd., 861 N.W.2d 279, 281 (Iowa
Ct. App. 2014) (holding state was entitled to recoupment of unemployment
compensation benefits notwithstanding the recipient’s “lack of fault in
incurring the overpayment”); see also Heckler v. Cmty. Health Servs. of
Crawford Cty., Inc., 467 U.S. 51, 62, 104 S. Ct. 2218, 2225 (1984) (“There
is no doubt that respondent will be adversely affected by the Government’s
recoupment of the funds that it has already spent. It will surely have to
44
curtail its operations and may even be forced to seek relief from its debts
through bankruptcy. . . . [B]ut questions concerning the Government’s
method of enforcing collection are not before us.”).
There is a related but additional reason Endress’s claim of unjust
enrichment fails here: DHS’s general interest in protecting the fisc is
bolstered in this case by federal command. The federal government
provides funding to the states for child-care programs and services
pursuant to the Child Care and Development Block Grant. See 42 U.S.C.
§§ 618, 9858 (2018). Funds from the block grant program are placed with
matching dollars from the state into the Child Care Development Fund.
See id. §§ 618(a)(2), 9858. Pursuant to federal law, DHS is required to
administer the Child Care Development Fund “responsibly to ensure that
statutory requirements are met.” 45 C.F.R. § 98.1(b)(6)(2019). DHS also
has the “overall responsibility for the administration of the program.” Id.
§ 98.11(b);see also 42 U.S.C. § 9858b (requiring a lead agency and
outlining its duties). This includes the duty to promulgate rules and
regulations for the program and the duty to oversee the funds. See 45
C.F.R. § 98.11(b)(1)–(8); see also 42 U.S.C. § 9858c (outlining
administration and enforcement guidelines). This also includes the duty
to regulate who can receive payment as an eligible child-care provider. See
45 C.F.R. § 98.2 (defining eligible child-care provider); id. § 98.40–.41
(discussing eligibility criteria).
In seeking recoupment, the state, generally, and DHS, specifically,
are discharging their obligation to administer the Child Care Development
Fund in a lawful manner. The Iowa General Assembly instructed DHS to
implement rules for the “administration” of the program. See Iowa Code
§ 237A.12(1)(g) (2017). This included rules to govern the disbursement
and recoupment of funds for the child-care assistance program at issue in
45
this case. DHS’s rules provide “excess assistance paid pending a final
decision shall be recovered to the date of the decision.” Iowa Admin. Code
r. 441—7.9(7) (2017). DHS’s rules provide DHS shall recoup all “benefits
or payments issued pending an appeal decision.” Id. r. 441—170.9(2). The
plurality agrees DHS had the authority to promulgate and enforce the
rules. The recoupment proceeding here is thus merely the lawful
enforcement of valid rules.
No claim of unjust enrichment lies under the circumstances
presented in this case. The law of restitution is not concerned “with
unjust enrichment in any such broad sense . . . because the justification
in question is not moral but legal.” Restatement (Third) § 1 cmt. b, at 5.
Properly understood, unjust enrichment is not applicable where there is a
legal justification for the enrichment. See id. There are numerous legal
justifications why Endress cannot assert a defense of unjust enrichment
against DHS. The plurality simply ignores the black letter law and the
controlling precedents requiring that conclusion. The plurality’s failure to
follow the relevant principles and precedents renders the plurality opinion
irreconcilable with itself. The plurality holds DHS’s recoupment statute
and rule are valid and enforceable except when DHS seeks to enforce the
statute and rule. The plurality’s fallacious expansion of the doctrine of
unjust enrichment is bad law. “[U]njust enrichment is not a catchall cause
of action to be used when others fail.” Corsello v. Verizon N.Y., Inc., 967
N.E.2d 1177, 1185 (N.Y. 2012).
C.
Not only is the plurality opinion bad law, it is bad policy. The
plurality ignores the adverse impact its decision will have on the
administration of the child-care assistance program. Child-care
assistance providers now have additional incentive to appeal contract
46
termination decisions and drag out the administrative appeal process for
as long as possible. The plurality rule removes all risk to the child-care
assistance providers from pursuing an appeal of DHS’s decision to
terminate a provider agreement given that DHS is now powerless to recoup
funds paid during the appeal period. The plurality rule is bad policy and
forces DHS into de facto noncompliance with its federal and state
mandates.
II.
Unfortunately for the legislative and the executive branches, there
is no way to fix the problem the plurality opinion creates. The plurality
concludes the legislature passed a law allowing recoupment of payments
made to unlicensed providers. The plurality concludes DHS passed a rule
allowing recoupment of payments made to unlicensed providers. The
plurality concludes these laws are valid, pass constitutional muster, and
are enforceable except when DHS seeks to enforce them. Under the
plurality’s interpretation, the legislative and executive branches are not
entitled to set the terms and conditions upon which funds can be
disbursed from the public fisc if the court does not think it fair. That is a
shocking conclusion. Literally unprecedented. The plurality opinion does
not cite a single case in which a payee was able to successfully assert a
claim for unjust enrichment against the government where, pursuant to a
valid statute and administrative rule, the government put the payee on
notice the government would seek recoupment of payments because the
payee was not eligible to receive the payments. The legislative and
executive branches have no recourse. What can they do? Reenact the
same law the plurality concludes is valid except this time with the proviso,
“This time, we really, really mean it.” I dissent.
Oxley and McDermott, JJ., join this concurrence in part and dissent
in part.