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THE SUPREME COURT OF NEW HAMPSHIRE
___________________________
Department of Health and Human Services
No. 98-816
APPEAL OF MCKERLEY HEALTH FACILITIES & a.
(New Hampshire Department of Health and Human Services)
August 15, 2000
Stebbins, Bradley, Wood & Harvey, P.A., of Hanover (David Putnam on the brief) and Dinse, Knapp & McAndrew, P.C., of Burlington, Vermont (Samuel Hoar, Jr. on the brief and orally), for the petitioners.
Philip T. McLaughlin, attorney general (Suzan M. Lehmann, assistant attorney general, on the brief and orally), for the New Hampshire Department of Health and Human Services.
GROFF, J. The petitioners, James McKerley, Forrest McKerley, Matthew McKerley, and McKerley Health Facilities, appeal a final decision of the New Hampshire Department of Health and Human Services Administrative Appeals Unit (the department). The department concluded that the New Hampshire Division of Human Services (the division) properly assessed depreciation recapture in connection with the sale of "partnership interests" in McKerley Health Facilities to two subsidiaries of Genesis Health Ventures, Inc. (Genesis). We affirm in part, vacate in part, and remand.
On June 10, 1988, petitioners James McKerley, Forrest McKerley, and Matthew McKerley (the McKerleys) formed a general partnership, McKerley Health Facilities, that acquired and operated several nursing homes in New Hampshire and Vermont. As a Medicaid program participant, McKerley Health Facilities received $781,562 in depreciation cost reimbursement from the State of New Hampshire between June 1, 1988, and November 30, 1995. "[Depreciation cost reimbursement] payments [a]re designed to reflect the progressive exhaustion of the . . . facility and equipment in the course of caring for Medicaid patients." N.H. Division of Human Services v. Allard, 141 N.H. 672, 673, 690 A.2d 566, 567 (1997) (quotation omitted).
On August 18, 1995, the McKerleys entered into a purchase agreement with Genesis whereby Genesis acquired the right to purchase the partnership interests of McKerley Health Facilities. In the purchase agreement the McKerleys agreed, inter alia, to: (1) indemnify Genesis for Medicaid or Medicare "recapture" obligations triggered by the transactions to the extent that any such obligations exceeded $700,000; (2) hold in escrow an amount necessary to secure the partnership's indemnification obligations; (3) prepare a final partnership tax return; and (4) provide Genesis with a list of the partnership's tangible property, leases, real property, inventory, accounts receivable, contracts, trade accounts payable, accrued liabilities, and cash balances of bank accounts. Genesis agreed to indemnify and hold the McKerleys harmless for events occurring after the closing date.
On November 30, 1995, Genesis assigned the right to purchase the partnership interests to Meridian Healthcare, Inc. and Meridian Health, Inc. (collectively Meridian), two of its subsidiaries. That same day, the McKerleys sold all of their partnership interests in McKerley Health Facilities to Meridian. As part of the transaction, the parties amended the partnership agreement to reflect the withdrawal of the McKerleys from the partnership and the substitution of Meridian as partners. In the assignment, the McKerleys
irrevocably assign[ed], transfer[ed], and set over to Meridian Healthcare and Meridian Health all of their right, title and interest in and to all of the issued and outstanding partnership interests of [McKerley Health Facilities] owned by them, together with all of their rights in and to their capital accounts, as reflected in the books and records of [McKerley Health Facilities], their interests in [McKerley Health Facilities'] profits, losses, distributions, and any and all of their other rights and interests as partners of [McKerley Health Facilities].
The division subsequently determined that the transaction produced a gain and sent Forrest McKerley a notice of depreciation recapture. See N.H. Med. Asst. Manual 9999.7(b)(4). The McKerleys refused to pay and requested administrative review. Following a hearing, the department ruled that the division was entitled to recover the depreciation payments made to the partnership in the years prior to the sale. The McKerleys filed a motion for rehearing, which was denied. This appeal followed.
As a preliminary matter, the McKerleys maintain that this appeal is governed by RSA chapter 541. RSA 541:2 (1997), however, provides for review under that chapter only "[w]hen authorized by law." Neither the department's regulations nor any statutory provision authorizes an appeal from a decision of the department to this court. Although the McKerleys have mistaken their remedy, we will treat their appeal as a petition for writ of certiorari. See Petition of Ann Crane, 132 N.H. 293, 298, 564 A.2d 449, 452 (1989). "Accordingly, the petitioners are entitled to the limited determination of whether [the department] has exceeded its jurisdiction or authority, otherwise acted illegally, abused its discretion, or acted arbitrarily, unreasonably, or capriciously." Id. at 299, 564 A.2d at 452 (quotation omitted).
At the time of the transaction, under both the federal Medicare and Medicaid programs, States that received program funds were required to reimburse providers for the costs of caring for qualified patients. See 42 U.S.C.