In Re Appeal of Houston

¶ 1. Claimant Kenneth Houston appeals from the Human Services Board’s dismissal, without prejudice, of his appeal of a decision by the Department for Children and Families (DCF) to terminate his Long-Term-Care Medicaid benefits. DCF sent claimant notice that his benefits would be terminated as a result of the sale of his home and the transfer of the proceeds for less than fair market value. Claimant appealed to the Human Services Board, and DCF began requesting information for discovery purposes. Claimant opposed DCF’s discovery requests on relevance grounds. Claimant also filed a motion to dismiss the action, alleging DCF’s notice failed to state a valid basis for terminating his benefits. The hearing officer assigned to the appeal denied claimant’s motion to dismiss and ordered him to provide the documents requested by DCF. When claimant refused to comply with this order, the hearing officer recommended that the Board dismiss his appeal. The Board dismissed claimant’s appeal without prejudice. The Secretary of the Agency of Human Services approved the dismissal, and this appeal followed. Claimant contends the Board erred by: (1) improperly dismissing claimant’s appeal; (2) failing to rule on claimant’s motion to dismiss termination of his benefits; and (3) failing to decide claimant’s appeal on the merits. We hold that the Board was not required to consider claimant’s motion to dismiss, but that it prematurely dismissed claimant’s appeal, so we do not reach the issue of whether the Board was required to hold a hearing on the merits of claimant’s appeal. We reverse in part and remand to the Board for further proceedings.

¶ 2. Claimant receives long-term care at the Woodridge Nursing Home in Barre, Vermont. Medicaid pays most of the cost of his nursing care. Under Medicaid, claimant’s eligibility and his “patient share” — the share of nursing costs he must pay out of pocket — are determined by the amount of his financial resources. Medicaid Manual § M430, 5 Code of Vermont Rules 13 170 008-191. To prevent Vermont recipients of Medicaid benefits from hiding assets that would alter or eliminate their eligibility for benefits, DCF administers regulations prohibiting transfers of patient resources, with certain exceptions. Medicaid Manual § M440.2 & 3, 5 Code of Vermont Rules 13 170 008-201 & 202/204. Medicaid recipients DCF finds have improperly transferred resources are subject to having their benefits terminated for penalty periods defined by the regulations. Medicaid Manual § M440, 5 Code of Vermont Rules 13 170 008-201.

¶ 3. Claimant began receiving long-term-care benefits in November 2003, at which point, DCF set claimant’s patient share at $1,515.59 per month, to be paid out of claimant’s income. Between November 2003 and August 2004, claimant failed to pay his patient share to Wood-ridge. In August 2004, claimant sold his home. Claimant provided notice of the sale to DCF, and informed DCF that the net proceeds, $64,550, had been disposed of through several transactions and should not affect his Medicaid eligibility. According to this notice, claimant used some of the proceeds of the sale to pay his overdue patient share, and he transferred additional funds to a revocable trust. Under the trust agreement, claimant’s son and daughter were named trustees and claimant was the trust’s beneficiary. Claimant’s daughter, as trustee, loaned herself the entire amount of the trust principal, with her own home as security, in exchange for a promissory note, which required repayment over the course of seven years and seven months, primarily through a payment of $26,432.61 at the end of this period. DCF responded to claimant’s notice on September 1, 2004, with a Notice of Decision reading:

Long-Term Care Medicaid eligibility for Kenneth W. Houston ends 09-13-04 because of resource transfers of $11,242.24 for patient share payment to Woodridge and $26,432.61 for promissory note beyond life expectancy. The penalty period resulting from these two resource transfers begins 08-01-04 and ends 03-02-05. (M440, M440.4)

¶ 4. Claimant appealed DCF’s decision through its fair hearing process, and he requested that his benefits continue during the process, which they did. In preparation for claimant’s fair hearing, DCF sent a letter requesting documents containing information pertaining to the proceeds of the sale of claimant’s home, and it subpoenaed claimant’s bank records.¹ Claimant refused to turn over certain of the requested documents and filed an objection with the hearing officer to DCF’s request for information, arguing that the information sought by DCF was not relevant to his appeal. Claimant also filed a motion to dismiss DCF’s termination of his benefits, arguing that as a matter of law, DCF’s Notice of Decision did not contain sufficient grounds to merit termination.

¶ 5. On February 2, 2005, the hearing officer² issued an order: (1) granting DCF’s requests to produce and ordering claimant to turn over the requested documents by February 11, 2005, warning claimant that “[f|ailure to provide this information will result in a recommendation that [DCF’s] decision be affirmed based on [claimant’s] failure to provide reasonable verification of his financial status”; (2) requiring DCF to “furnish [claimant] and the Board with a concise written explanation of all the factual and legal bases of the action it is taking” by February 18, 2005; (3) denying claimant’s motion to dismiss; and (4) stating that a hearing would be held on the merits without further delay. DCF responded with a “Statement of Law and Facts” dated February 17, 2005, reiterating its view of the transfers leading to its decision to terminate claimant’s benefits. Claimant, did not respond to the February 2 order. Instead, he submitted a letter requesting appointment of a new hearing officer, citing the officer’s lack of impartiality due to a pending action in federal district court.

¶ 6. On March 10, 2005, the hearing officer submitted a recommended decision to the Board, detailing the procedural history of the appeal and recommending that the Board dismiss the appeal based on claimant’s refusal to comply with the February 2 discovery order. The Board, following oral argument regarding the hearing officer’s recommended decision, issued a final decision on March 23, 2005, dismissing claimant’s appeal without prejudice for failure to comply with the hearing officer’s discovery order. The Board determined that while the hearing officer’s order was subject to review, claimant was required to move for review of the order prior to February 11, instead of ignoring the order and challenging the relevance of the documents following the hearing officer’s recommendation of dismissal. The Board noted that at oral argument claimant based his objection to the hearing officer’s discovery order on the same relevance arguments rejected by the hearing officer, and stated that “the Board also rejects those arguments.” The Board’s order stated that if claimant “is willing to follow the directives of the hearing officer consistent with the Board’s rules, he is free to refile his appeal in this matter. However, he shall not be entitled to continuing benefits pending any further consideration of this matter by the Board or its hearing officers.” Claimant appealed the Board’s decision to the Secretary of the Agency of Human Services. The Secretary approved the Board’s decision, and this appeal followed.

¶ 7. Claimant contends the Board committed numerous errors in dismissing his appeal. In essence, he argues that the Board erred by: (1) dismissing his appeal as a sanction for discovery violations; (2) failing to rule on his motion to dismiss; and (3) failing to decide his appeal on the merits. While we presume the validity of certain agency actions, “adjudicatory functions of an administrative body are reviewed with special vigilance.” In re Vt. Verde Antique Int'l, Inc., 174 Vt. 208, 211, 811 A.2d 181, 183-84 (2002). We disagree with claimant’s argument that the Board was required to rule on his motion to dismiss, but we agree with claimant that the Board improperly dismissed his appeal, so we need not reach his third argument regarding his entitlement to a hearing on the merits notwithstanding any procedural violations he may have committed.

¶ 8. Claimant’s first several claims of error relate to the Board’s dismissal of his appeal for discovery violations. Claimant argues that the Board lacked authority, under both its authorizing statute and its own regulations, to dismiss his appeal for any discovery violation, no matter how egregious. He also argues that even if the Board was authorized to dismiss his appeal for violating a discovery order, it was premature for the Board to dismiss his appeal under these circumstances because the hearing officer’s order was not final. We agree with claimant that the Board’s dismissal was improper, but only under the particular circumstances in this case. The Board possessed discretionary authority to use dismissal as a discovery sanction, but it abused its discretion by dismissing claimant’s appeal in the absence of conduct demonstrating bad faith or willful disregard of a discovery order. The dismissal must therefore be reversed. See Hall v. Dep’t of Soc. Welfare, 153 Vt. 479, 484, 572 A.2d 1342, 1345 (1990) (stating that an agency’s discretionary decision should be overturned when it is an abuse of discretion resulting in prejudice to a party).

¶ 9. We disagree with claimant that the Board lacked statutory or regulatory authority to compel discovery or punish discovery violations. An administrative body “has only such powers as are expressly conferred upon it by the Legislature, together with such incidental powers expressly granted or necessarily implied as are necessary to the full exercise of those granted.” Perry v. Med. Practice Bd., 169 Vt. 399, 403, 737 A.2d 900, 903 (1999) (quotations omitted). The Legislature granted the Board or “a hearing officer appointed by the board” power to conduct fair hearings, and enabled the Board to “adopt rules with reference to appeals, which shall not be inconsistent with this chapter” and which “shall provide for reasonable notice to parties, and an opportunity to be heard and be represented by counsel.” 3 V.S.A. § 3091(b). The Board’s explicitly delegated authority to conduct fair hearings would be meaningless without the incidental power to compel parties to provide relevant evidence.

¶ 10. Claimant argues that a fair hearing need not involve the collection of evidence because it is a “review de novo,” which may be conducted based only on the evidence in DCF’s possession at the time of its initial decision, and not a full evidentiary “hearing de novo.” See State v. Madison, 163 Vt. 360, 370, 658 A.2d 536, 543 (1995) (stating that “the term ‘review de novo’ contemplates a non-deferential review that generally relies on, but is not restricted to, the record,” while a “hearing de novo” contemplates “an entire trial”) (quotations omitted); In re Bushey-Combs, 160 Vt. 326, 329, 628 A.2d 541, 543 (1993) (describing Board hearing as “review de novo”). This conclusion relies on a misinterpretation of the case law surrounding fair hearings. We have sometimes referred to fair hearings using the term “review de novo,” but we have also explicitly stated that we used that expression “to describe a de novo hearing,” and not “as a term of art.” Madison, 163 Vt. at 369, 658 A.2d at 542 (explaining passing use of term “review de novo” in In re Bushey-Combs and describing Board fair hearings as “evidentiary”). The Board has the authority to conduct fair hearings based on evidence, and this necessarily implies the authority to compel the production of evidence.

¶ 11. The Board’s regulatory authority to compel discovery is found in its fair hearing rules:

Upon request a party shall promptly furnish an adverse party with copies of all documents and records that are relevant to the issues raised by the appeal. Disputes on the question of relevancy shall be resolved by the hearing officer in the first instance, subject to the board’s review on the motion of either party.

Vermont Human Services Board, Fair Hearing Rule 11 (1995). There is no provision in either the statute or the fair hearing rules for dismissal of an appeal for failure to comply with an order following resolution of a relevance dispute. As the Board noted, however, Vermont Rule of Civil Procedure 37 allows dismissal when a party fails to comply with a discovery order. V.R.C.P. 37(b)(2)(C). While the rules of civil procedure are not applicable to administrative hearings, it was logical for the Board to consult Rule 37 in fashioning an appropriate sanction for a discovery violation in the absence of statutory or regulatory guidance, and it was reasonable for the Board to conclude from its examination of Rule 37 that it could use dismissal as a sanction. The Board could not reasonably have concluded, however, that dismissal is appropriate for every failure to comply with a discovery order. When a trial court invokes the sanction of dismissal under Rule 37, it must “indicate by findings of fact that there has been bad faith or deliberate and willful disregard for the court’s orders, and further, that the party seeking the sanction has been prejudiced thereby.” John v. Med. Ctr. Hosp. of Vt., Inc., 136 Vt. 517, 519, 394 A.2d 1134, 1135 (1978); see also Manosh v. First Mountain Vt., L.P., 2004 VT 122, ¶ 10, 177 Vt. 616, 869 A.2d 79 (mem.) (reversing default judgment issued as discovery sanction in the absence of findings showing bad faith, consideration of lesser sanction, and prejudice to opposing party); C.C. Miller Corp. v. Ag Asset, Inc., 151 Vt. 604, 606, 563 A.2d 626, 627 (1989) (relying on John to reverse default judgment despite party’s failure to respond to discovery request for approximately two years). In John, we held that absent such findings, “a less drastic sanction should be used,” noting that “dismissal of an action because of a genuine inability to comply with a pretrial production order raises due process issues” under the federal Constitution. 136 Vt. at 519-20, 394 A.2d at 1135. While Rule 37’s specific provisions are inapplicable in the context of a hearing before the Board, John stands for the principle that in the interest of avoiding due process violations, dismissal is inappropriate absent bad faith. This principle is just as applicable to administrative proceedings as it is to civil trials.

¶ 12. The conduct the Board’s order describes did not merit dismissal of claimant’s appeal. Following the hearing officer’s February 2 order, there is little question claimant should have either turned over the documents at issue prior to the February 11 deadline, or else objected to the hearing officer’s determination of the documents’ relevance prior to that deadline. Instead, claimant waited until the hearing officer recommended a decision to the Board to challenge the hearing officer’s resolution of the question of relevance. Although, as claimant points out, neither the hearing officer’s February 2 order nor the Board’s fair hearing rules specify that motions for review of a hearing officer’s finding of relevance must be made prior to the hearing officer’s recommended decision, the Board may be correct that the objection was untimely. Nevertheless, claimant committed only a minor transgression by objecting after the hearing officer’s recommended decision instead of after his initial discovery order.

¶ 13. The Board had ample opportunity to review the hearing officer’s decision despite the timing of claimant’s objection. After the hearing officer issued his recommended decision, claimant objected in writing, and the Board heard oral argument regarding the hearing officer’s discovery order. According to the order dismissing claimant’s appeal, during oral argument, claimant “essentially reiterated the same ‘relevancy1 arguments previously submitted and implicitly rejected by the hearing officer in his February 2 rulings.” Upon hearing these arguments, the Board may well have been justified in finding that the challenged documents were relevant and rejecting claimant’s objection. The Board’s order, however, fails to establish the relevance of the documents requested by DCF, or even to list the requested documents. The order characterizes claimant’s untimely objection to the hearing officer’s order as a choice to ignore it, and it relies on this choice to justify dismissing claimant’s appeal. The Board is statutorily required to “issue written findings of fact” or adopt the hearing officer’s written findings only after a hearing on the merits of an appeal. 3 V.S.A. § 3091(c). Here, however, prior to dismissing claimant’s appeal, the Board should have made written findings establishing either the relevance of the challenged documents or claimant’s bad faith and willful disregard of the hearing officer’s order. Without such findings, the Board’s order gives the appearance that the Board dismissed claimant’s appeal solely on the basis of his untimely objection to the hearing officer’s discovery order. This was not a sufficient reason to deny claimant a fair hearing on the merits of the termination of his benefits. See John, 136 Vt. at 519, 394 A.2d at 1135 (“The imposition of the dismissal sanction cannot be imposed merely as punishment for failure to comply with the court’s order.”).

¶ 14. If claimant had objected prior to the hearing officer’s February 11 deadline, the Board would have heard his objection and made a decision regarding relevance. If claimant then continued to withhold the documents, the Board might then have been justified in dismissing the appeal. Even in that instance, dismissal would be only one of several available sanctions, see V.R.C.P. 37(b)(2)(A)-(D) (listing potential sanctions, including adverse inference regarding the subject matter of the discovery order, refusal to allow “designated claims or defenses,” striking out of specific pleadings, and contempt), and depending on the nature of claimant’s continued refusal, a “less drastic sanction” may have been more appropriate. John, 136 Vt. at 520, 394 A.2d at 1135. The only difference between that scenario and the facts of this case is that claimant arguably filed his objection late. If the Board saw claimant’s untimely objection, or some other conduct, as evidence of bad faith and willful disregard, it should have expressed that view in its order, and if it insisted on dismissal as a sanction for that bad faith, it should have explained why a lesser sanction was inappropriate. See Manosh, 2004 VT 122, ¶ 10 (taking into account whether the court considered discovery sanctions other than dismissal or default judgment). It was an abuse of discretion for the Board to dismiss claimant’s appeal without establishing the relevance of the challenged documents or explaining its choice of sanction. We must therefore reverse the dismissal and remand claimant’s appeal to the Board for further proceedings.

¶ 15. Our dissenting colleagues disagree that additional findings were necessary prior to dismissal of claimant’s appeal, relying primarily on two assertions: (1) that John is inapplicable because the Board’s dismissal was without prejudice; and (2) that the Board did not need to make additional findings under John because the key factual issues are undisputed. There is little significance to the distinction between a dismissal without prejudice and a dismissal with prejudice under these circumstances. The effect of the Board’s dismissal was to terminate payment of claimant’s benefits pending appeal, putting him at some risk of eviction from his nursing facility. Moreover, if claimant were somehow unable to produce the documents in question, the dismissal would be indistinguishable from a dismissal with prejudice. Whatever the actual consequences, the potential consequences for claimant were severe enough to merit requiring the Board to make findings of bad faith or willful disregard.

¶ 16. We acknowledge that claimant’s conduct would likely have supported such findings. The history of claimant’s appeal gives the impression that claimant was uncooperative and confrontational in every aspect of the process, and his failure to timely respond to the hearing officer’s determination that the requested documents were relevant is only one example of his intransigence. It also seems likely that a sanction short of dismissal may have been insufficient. This is immaterial, however, because the Board failed to include findings to this effect in its order. Any conclusions distinguishing claimant’s conduct from ordinary, good faith pursuit of an objection — albeit an untimely objection — are absent, and can be found only by reviewing the broader record on appeal.

¶ 17. The purpose of the findings required by John is to protect against arbitrary dismissals that may violate principles of due process. Such requirements can always be characterized as time-consuming and burdensome, especially when the litigant alleging a procedural violation does not seem particularly deserving of protection. The John rule strikes a balance between efficiency and procedural fairness by allowing dismissals, but requiring them to be supported by findings of bad faith or willful disregard. The rule does not contain an exception covering “self-evident” bad faith or willful disregard, and we will not create one here.

¶ 18. As a final matter, claimant contends the Board erred by failing to rule on his motion to dismiss DCF’s termination of his benefits. The Board’s fair hearing rules state in relevant part: “Motions to dismiss ... may be submitted for the board’s consideration prior to the time the case in chief is submitted. The board shall dispose of outstanding motions before proceeding to rule on the merits.” Fair Hearing Rule 9. Claimant’s “motion to dismiss” challenged DCF’s basis for terminating his benefits as a matter of law. The only disposition made with respect to this motion was a single line in the hearing officer’s February 2 order stating that claimant’s motion was denied. While the fair hearing rules allow only the Board, and not its hearing officers, to consider motions to dismiss, claimant’s motion was not a conventional motion to dismiss. Instead, it essentially asked for summary reversal of DCF’s initial determination. The Board was within its discretion to ignore claimant’s motion and consider his substantive legal arguments along with the merits of the appeal.

Reversed and remanded to the Human Services Board for further proceedings consistent with the views expressed herein.

1 Claimant filed an unsuccessful action in superior court to quash the subpoena of his bank records; that action is not at issue in this appeal. Claimant also filed an action in federal district court challenging DCF’s life expectancy calculation. In this Court, claimant filed a motion to supplement the record on appeal with a memorandum from DCF in which it alters its position regarding claimant’s life expectancy. This motion is denied. As the appeal can be decided on the record before us, we need not consider supplemental evidence. State v. Koveos, 169 Vt. 62, 72 n.4, 732 A.2d 722, 729 n.4 (1999).

2 A new hearing officer, Daniel Jerman, was assigned to the appeal during the course of the proceedings, replacing the original hearing officer, Shelley Simpson Jerman.