SUBJECT: Kermit Healthcare Center,

Petitioner,

Centers for Medicare & Medicaid Services

FINAL DECISION ON REVIEW OF

ADMINISTRATIVE LAW JUDGE DECISION

Kermit Healthcare Center (Kermit, Petitioner) appealed a September 10, 2001 decision by Administrative Law Judge (ALJ) Carolyn Cozad Hughes Denying Petitioner's Motion to Vacate Dismissal of Case. See Kermit Healthcare Center, DAB CR817 (2001) (ALJ Decision). The effect of the ALJ Decision was to deny Kermit the opportunity to challenge the determination by the Centers for Medicare & Medicaid Services (CMS) to impose a denial of payment for new admissions for the period January 3, 2001 through February 10, 2001.⁽¹⁾

Kermit had filed a timely request for a hearing and had received a stay of its appeal until July 30, 2001. Kermit failed to file its required Report of Party Readiness until August 16, 2001; on that same day, the ALJ issued an "Order Dismissing Case" for abandonment. Kermit filed a timely request for the ALJ to vacate the dismissal. The ALJ Decision that followed is the subject of this appeal.

The ALJ made three numbered findings of fact and conclusions of law; Kermit has taken exception to only one of them:

3. Petitioner has not established "good cause" for vacating the dismissal of its hearing request.

As part of its exception, Kermit contends that the ALJ failed to follow the procedures outlined in the applicable regulations for dismissing a hearing request on the grounds of abandonment. Kermit maintains that dismissal without notice constitutes a violation of its due process rights. Kermit also contends that applicable legal standards require that a dismissal be set aside where the failure to prosecute was not intentional or the result of conscious indifference but rather was due to accident or mistake.

For the reasons discussed below, we conclude that the ALJ's analyses of applicable law, including the regulation governing dismissal for abandonment, are erroneous, and that there is not substantial evidence in the record to support her determination that dismissal of the hearing request as a sanction for failure to prosecute was warranted. Accordingly, we vacate the dismissal and remand this case for further proceedings in accordance with this decision.

Standard of Review

Our standard of review of an ALJ decision on a disputed issue of law is whether the ALJ erred. Our standard of review on a disputed finding of fact is whether the ALJ Decision is supported by substantial evidence on the record as a whole. See, e.g., Lake Cook Terrace Nursing Center, DAB No. 1745 (2000). The bases for modifying, reversing or remanding an ALJ decision include the following: a finding of material fact necessary to the outcome of the decision is not supported by substantial evidence; a legal conclusion necessary to the outcome of the decision is erroneous; the decision is contrary to law or applicable regulations; a prejudicial error of procedure (including an abuse of discretion under the law or applicable regulations) was committed. Guidelines for Appellate Review of Decisions of Administrative Law Judges Affecting a Provider's Participation in the Medicare and Medicaid Programs, � 4(b), at http://www.hhs.gov/dab/guidelines/prov.html; see also Community Nursing Home, DAB No. 1807 (2002).

The record here includes the record before the ALJ and the briefs of the parties on appeal.

Applicable Law

Section 1128A(c)(4) of the Social Security Act (the Act), made applicable to civil money penalty proceedings⁽²⁾ involving nursing facilities by section 1819(h)(2)(B)(ii) of the Act, provides:

The official conducting a hearing under this section may sanction a person, including any party or attorney, for failing to comply with an order or procedure, failing to defend an action, or other misconduct as would interfere with the speedy, orderly, or fair conduct of the hearing. Such sanction shall reasonably relate to the severity and nature of the failure or misconduct. Such sanction may include-

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(B) prohibiting a party from introducing certain evidence or otherwise supporting a particular claim or defense,
(C) striking pleadings, in whole or in part,
(D) staying the proceedings,
(E) dismissal of the action,
(F) entering a default judgment,
(G) ordering the party or attorney to pay attorneys' fees and other costs caused by the failure or misconduct,
(H) refusing to consider any motion or other action which is not filed in a timely manner.

The regulations governing the conduct of ALJ hearings at 42 C.F.R. Part 498 provide that the ALJ may dismiss a hearing request for abandonment under the following circumstances:

Dismissal for abandonment.

(a) The ALJ may dismiss a request for hearing if it is abandoned by the party that requested it.

(b) The ALJ may consider a request for hearing to be abandoned if the party or its representative--

(1) Fails to appear at the prehearing conference or hearing without having previously shown good cause for not appearing; and

(2) Fails to respond, within 10 days after the ALJ sends a "show cause" notice, with a showing of good cause.

42 C.F.R. � 498.69.

The regulations also provide that--

An ALJ may vacate any dismissal of a request for hearing if a party files a request to that effect within 60 days from receipt of the notice of dismissal and shows good cause for vacating the dismissal.

42 C.F.R. � 498.72.

Factual Background

Kermit, through its then-counsel, timely appealed two CMS determinations, dated December 11, 2000 and January 29, 2001, that Kermit was out of compliance with applicable standards for participation in the Medicare program. The two CMS determinations imposed several remedies, all of which CMS subsequently rescinded, except for the remedy of denial of payment for new Medicare admissions for the period of non-compliance, which was eventually established as January 3 through February 10, 2001.

On February 27, 2001, the ALJ issued a standard order directing the parties to submit one of several documents within 60 days, including, as relevant here, a report of readiness to present evidence for adjudication of the case. By letter dated April 30, 2001, Kermit's current counsel submitted a notice of appearance stating that it had recently been retained to represent Kermit, and requesting a stay of the matter for at least 90 days.

On June 25, 2001, the ALJ issued an order staying proceedings for 90 days, until July 30, 2001, and directing the parties to submit the required documents by that date. The order stated that, absent compelling reasons, no additional stays would be granted, and that should Petitioner fail to file any document required by the order, the ALJ may deem such failure to be "evidence of abandonment." June 25 Order at 1.

On July 30, 2001, CMS submitted its report of readiness, serving a copy on Kermit's counsel that day by U.S. mail.

On August 16, 2001, the ALJ issued an order dismissing the case for abandonment. Also on August 16, Kermit submitted its own detailed report of readiness via Federal Express; the report was received on August 17, 2001.

On August 20, 2001, Kermit submitted a motion to vacate the ALJ's order dismissing the case. Kermit's counsel argued that Kermit had not abandoned its appeal, and that its report of readiness was filed late because counsel was awaiting authorization from Kermit regarding whether to proceed with the appeal in light of CMS's earlier recission of the remedy of civil money penalties. Counsel reported being unable to obtain authority to proceed until the prior week, due to Kermit's corporate representative being out of the office for a lengthy period of time.

In her decision, the ALJ first noted the legal standard for vacating a dismissal: the ALJ may vacate any dismissal of a hearing request if a party establishes good cause for vacating the dismissal. 42 C.F.R. � 498.72(b). The ALJ noted that "good cause" is not defined by the regulations, but had been interpreted in other ALJ decisions as a circumstance or circumstances beyond a party's ability to control. ALJ Decision at 2.

The ALJ found that the cited circumstances -- the inability of Kermit's counsel to communicate with Kermit's corporate representative to obtain authorization to proceed, due to the representative's extended absence from the office -- did not constitute a circumstance beyond Kermit's control, but instead constituted avoidable human error that did not establish good cause for the ALJ to vacate her dismissal of the case.

Kermit contends that 42 C.F.R. � 498.69(b) requires that, prior to summarily dismissing its appeal, the ALJ should have issued an order directing Kermit to show cause why its failure to file the readiness report timely should not be considered as an abandonment of its request for a hearing. Kermit argues that the ALJ's dismissal of its hearing request without such notice constitutes a violation of its due process rights. Citing Texas law, Kermit also contends that applicable legal standards require that a dismissal be set aside where the failure to prosecute was not intentional or the result of conscious indifference but rather was due to accident or mistake. Kermit Appeal Br. at 3-6.

CMS argues that an ALJ is not required to issue a show cause order before dismissing an appeal under section 498.69(b), and is empowered generally under section 1128A(c)(4) of the Act to dismiss an appeal for abandonment for reasons other than those specified in section 498.69(b). CMS argues that the two conditions for dismissal for abandonment in section 498.69(b)(1) and (2) are alternate, independent grounds, such that when a petitioner fails to attend a hearing or prehearing conference without having previously shown good cause for not appearing, as described in section 498.69(b)(1), the ALJ may dismiss the appeal for abandonment without first issuing the show cause notice referred to in section 498.69(b)(2). CMS also contends that Kermit received an opportunity to show good cause when it filed its motion to vacate the ALJ's dismissal order. CMS maintains that the ALJ appropriately found that Kermit did not show good cause to vacate the dismissal order. Finally, CMS argues that the case was, in fact, abandoned, given Kermit's failure to either file the readiness report timely or seek an extension of time. CMS Br. at 7-11.

The regulations do not define "abandoned" or "abandonment," other than describing a set of circumstances in which an ALJ may consider an appeal to be abandoned. Black's Law Dictionary defines abandonment as "[t]he relinquishing of a right or interest with the intention of never again claiming it." Black's Law Dictionary (7th ed. 1999). As CMS notes, the Board has previously ruled in Osceola Nursing & Rehabilitation Center, DAB 1708 (1999), that an ALJ may reasonably construe failure to file a prehearing document as tantamount to failure to appear for a prehearing conference or hearing, as referred to in section 498.69(b)(1). Thus, the Board concluded that the fact that Osceola did not fail to physically appear at a prehearing conference or hearing did not preclude dismissal. (Kermit disputes the ALJ's authority to dismiss for failure to appear in writing, but acknowledges as applicable Board precedent the Osceola holding.)

However, in Osceola the ALJ had issued an order to show cause to the tardy appellant. We conclude that this procedure was required to invoke section 498.69(b). CMS's interpretation here of sections 498.69(b)(1) and (2) as providing alternate, independent grounds for dismissal ignores the plain language of the regulation. Certainly the plain meaning of a provision that contains two conditions connected by the word "and" is that both conditions must be satisfied for the provision to be properly invoked. Consequently, to the extent that the provision upon which the ALJ based dismissal of Kermit's hearing request was section 498.69(b), failure to issue an order to show cause was an error.⁽³⁾ If the regulation requires issuance of an order to show cause where the party's failure is as blatant as failure to appear in person, surely a failure to appear in writing should be inquired after with an order to show cause. Moreover, even if the ALJ were relying on section 498.69(a) as authority to dismiss the appeal without an order to show cause, saying that one untimely submission will be "considered evidence of abandonment" is not sufficiently clear to serve as sufficient warning that dismissal might be imminent. Osceola at 12.

Furthermore, the opportunity to challenge the dismissal order by filing a motion to vacate did not cure the error. The failure to issue a show cause order prior to dismissal placed the appeal in a procedural posture prejudicial to Petitioner. Had the ALJ issued a show cause order instead of the notice of dismissal, Petitioner's readiness report would have been in the record while the appeal was still active, and the ALJ could have considered this fact, along with Petitioner's earlier tardiness, in considering whether the appeal was abandoned.

Having found that the ALJ did not issue a show cause order or otherwise make it sufficiently clear that dismissal was imminent, and that this failure was not cured by the ALJ's consideration of Petitioner's motion to vacate, we next consider whether the ALJ erred in finding that dismissal of this appeal for abandonment was appropriate. Clearly, Kermit demonstrated that its failure to file timely was not abandonment as that term is defined in the law -- an intentional relinquishment of its right to an opportunity for a hearing. As we did in Osceola, we look for guidance to analogous rules of civil procedure concerning dismissal for failure to prosecute, and we find that while the ALJ was authorized to sanction Petitioner's failure to obey a deadline, the sanction of dismissal does not reasonably relate to the severity and nature of the failure or misconduct.

As we stated in Osceola,

A dismissal pursuant to section 1128A(c)(4) in a . . . proceeding against a nursing facility results in the loss of an important, statutorily conferred right to an opportunity for a hearing. Given the serious consequences of such a dismissal and the explicit admonition that any sanction must be reasonably related to the party's failure or misconduct, we conclude that dismissals should be reviewed pursuant to specific standards. For guidance for such standards, we examined cases analyzing dismissals pursuant to Rule 41(b) of the Federal Rules of Civil Procedure. Rule 41(b) vests district courts with discretion to dismiss an action "[f]or failure of the plaintiff to prosecute or to comply with . . . any order of court."

Osceola, at 11-12.

In McNeal v. Papasan, 842 F.2d 787 (5^th Cir. 1988), which we cited in Osceola, the court articulated the following considerations in reviewing a Rule 41(b) dismissal for failure to prosecute:

We have repeatedly recognized, however, that a dismissal with prejudice for failure to prosecute is an extreme sanction which is to be used only when the "plaintiff's conduct has threatened the integrity of the judicial process [in a way which] leav[es] the court no choice but to deny that plaintiff its benefits." Rogers v. Kroger Co., 669 F.2d 317, 321 (5^th Cir. 1982). Therefore, under our abuse of discretion review, we have consistently refused to permit a court to impose this sanction unless the history of a particular case discloses both (1) a clear record of delay or contumacious conduct by the plaintiff, and (2) that a lesser sanction would not better serve the best interests of justice. Sturgeon [v. Airborne Freight Corp.],778 F.2d [1154] at 1159 [5^th Cir. 1985]; Rogers, 669 F.2d at 321 (collecting cases); see also Price v. McGlathery, 792 F.2d 472, 474 (5^th Cir. 1986) (applying Rule 41(b) standards to a Rule 16(f) dismissal with prejudice). Moreover, because of our reluctance to visit such a harsh sanction upon a party solely because of the sins of his counsel, in close cases we have often looked for proof of one of the following "aggravating factors"-- (1) the plaintiff's personal contribution to the delay, (2) the defendant's actual prejudice because of the delay, and (3) delay that can be characterized as intentional. Sturgeon, 778 F.2d at 1159; Rogers, 669 F.2d at 320.

842 F.2d at 790.

Using the McNeal case as guidance for our analysis (because it is the applicable federal law for the circuit in which Kermit is located), we note that Kermit's delay in filing its readiness report was a mere two weeks, and there was no other infraction of the procedures. There is no indication in the record that the ALJ considered the lesser sanctions available to punish this minor infraction. Consideration of lesser sanctions mandated by courts in Rule 41 cases is consistent with the statute authorizing ALJ dismissals in civil money penalty cases, which directs consideration of a variety of sanctions, and the selection of one that reasonably relates to the severity and nature of the failure or misconduct. Section 1128A(c)(4) of the Act. Although the reason that Kermit gave for its late filing was unsatisfactory, the late filing itself indicates that abandonment of the appeal was never intended. It appears from the record that Petitioner submitted its readiness report prior to receiving the notice of dismissal and was proceeding with its appeal, albeit tardily. There was no showing of prejudice to the opposing party (CMS did not object to the previous 90-day stay) or to the ALJ from this small delay. (In contrast, the McNeal court found that even the substantial prejudice caused by cancellation of a trial for which the court and opposing party's witnesses had traveled a significant distance was not enough to warrant dismissal.) The ALJ did not find that Kermit's delay was "intentional" in the sense used by the court, which was that the action by the sanctioned party was not undertaken to purposefully delay trial by a substantial period.

Judged in this light, we conclude that dismissal of the appeal was, under the circumstances present in this case, not authorized under the applicable legal standards. Loss of the opportunity to contest a remedy, a right conferred by statute, is too severe a sanction for a mere two-week delay in filing. There is no evidence to support a determination that dismissal here is reasonably related to the severity and nature of Petitioner's failure or misconduct.

Conclusion

Based on the analysis above, we vacate the dismissal of Kermit's request for hearing and remand it to the ALJ for further proceedings.

Judith A. Ballard

Donald F. Garrett

M. Terry Johnson
Presiding Board Member

1. CMS was previously named the Health Care Financing Administration (HCFA). See 66 Fed. Reg. 35,437 (July 5, 2001).

2. Although the present proceeding no longer involves a civil money penalty, CMS suggested that this provision was applicable to the remedy imposed in this case, the denial of payment for new admissions (DPNA) (CMS Br. at 6). Since neither the statute nor the regulations citing section 1128A as a source of authority, 42 C.F.R. � 498.1(h), apply to DPNAs, we decline to adopt that interpretation. However, as the impact of a DPNA, a loss of funds to the provider, is similar, we look to the language of that provision for guidance as to the appropriate standard to apply to dismissals for cause.

3. The ALJ simply cited "section 498.69" in her June 25, 2001 letter noting her authority to dismiss for abandonment if Kermit failed to file a document, in her August 16, 2001 dismissal order, and in her September 10, 2001 Decision denying the motion to vacate the dismissal. She did not specify upon which subsection of section 498.69 she was relying.