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Health Net of California, Inc v. Department of Health Care Services

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT (Sacramento)


July 19, 2011

HEALTH NET OF CALIFORNIA, INC., PLAINTIFF AND RESPONDENT,
v.
DEPARTMENT OF HEALTH CARE SERVICES, DEFENDANT AND APPELLANT.

(Super. Ct. No. 00CS00523)

The opinion of the court was delivered by: Raye , P. J.

Health Net of California v. Dept. of Health Care CA3

NOT TO BE PUBLISHED

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

In the prior appeal in this case, we found, in relevant part, that the Department of Health Care Services (Department) breached its contract with Health Net of California, Inc. (Health Net).*fn1 On remand, the trial court awarded Health Net prejudgment interest as provided by statute on the prepayment discount refund and on the recalculated capitation rate differential. (Civ. Code, § 3287.) We reject the Department's argument that the plain meaning of the contract usurps Health Net's statutory right to prejudgment interest and affirm the judgment.

FACTS

Whether Health Net is entitled to prejudgment interest turns on the applicable statutes and the terms of its contract with the Department. Thus, the few facts needed to provide a context can be extracted from our earlier opinion.

In 12 California counties, beneficiaries of California's Medicaid program (Medi-Cal) can choose between two prepaid health plans, a commercial plan or a local initiative, under what has come to be known as the two-plan model. (Cal. Code Regs., tit. 22, §§ 53800, subd. (a), 53810, subd. ll.) The Department is the agency responsible for implementing the Medi-Cal program. In 1996 Health Net and the Department executed a two-plan model managed care contract (the contract). Health Net agreed to provide all covered services to eligible Medi-Cal beneficiaries in Contra Costa, Fresno, Los Angeles, and Tulare Counties regardless of cost in return for a fixed capitation rate per member per month. The Department agreed to recalculate the capitation rates annually. In 1998 the parties amended the contract.

THE STATUTES

Civil Code section 3287, subdivision (a) creates a statutory right to prejudgment interest as follows: "Every person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day . . . ." The Department does not argue that the amount of its obligation is not "capable of being made certain by calculation." "'If allowable, interest is an element of damages provided by statute.' [Citations.]" (North Oakland Medical Clinic v. Rogers (1998) 65 Cal.App.4th 824, 830, fn. 4.)

Instead, the Department argues that the contract rate of interest prevails over the statutory rate as set forth in Civil Code section 3289, subdivision (a): "Any legal rate of interest stipulated by contract remains chargeable after a breach thereof, as before, until the contract is superseded by a verdict or other new obligation." The Department contends that the contract prohibits the award of interest and therefore, pursuant to the terms of section 3289, Health Net was not entitled to interest. The contractual interest rate applies "up to the date of judgment." (Reid v. Balter (1993) 14 Cal.App.4th 1186, 1196.) We therefore must ascertain whether the contract provided for interest applicable to the date of judgment.

THE CONTRACT

The Department bases its appeal on language found within the "Disputes and Appeals" section of the contract, including language contained in amendment 7 to the contract. The dispute resolution provision outlines the procedures to be followed, from the initial notification that a dispute exists through the administrative appeal. Three sections provide the necessary context in which to determine the meaning of the sentence that the Department contends precludes prejudgment interest.

"3.22.3[.] Contracting Officer's or Alternate Dispute Officer's Decision[.]

". . . Any disputes concerning performance of this Contract shall be decided by the Contracting Officer . . . in a written decision stating the factual basis for the decision. Within thirty (30) days of receipt of a Notification of Dispute, the Contracting Officer . . . shall either render a decision or shall request from Contractor [documentation], which in the opinion of the Contracting Officer . . . is sufficient to allow the rendering of a decision. Within thirty (30) days of receipt of the additional substantiating documentation requested, a decision shall be rendered. A copy of the decision shall be served on Contractor."

"3.22.4[.] Appeal of Contracting Officer's or Alternate Dispute Officer's Decision[.]

"Contractor shall have thirty (30) calendar days following the receipt of the decision to file an appeal of the decision to the Director. All appeals shall be governed by Health and Safety Code Section 100171 . . . . An appeal shall be deemed filed on the date it is received by the Office of Administrative Hearings and Appeals. An appeal shall specifically set forth each issue in dispute, and include Contractor's contentions as to those issues. However, Contractor's appeal shall be limited to those issues raised in its Notice of Dispute filed pursuant to Section 3.22.2, Notification of Dispute. Failure to timely appeal the decision shall constitute a waiver by Contractor of all claims arising out of that conduct, in accordance with Section 3.22.6, Waiver of Claims. Contractor shall exhaust all procedures provided for in Section 3.22, Disputes and Appeals, prior to initiating any other action to enforce this Contract."

"3.22.5[.] Contractor Duty to Perform[.]

"Pending final determination of any dispute hereunder, Contractor shall proceed diligently with the performance of this Contract and in accordance with the Contracting Officer's . . . decision.

"If, pursuant to an appeal under Section 3.22.4, Appeal of Contracting Officer's . . . Decision, the Contracting Officer's . . . decision is reversed, the effect of the decision pursuant to Section 3.22.4 shall be retroactive to the date of the Contracting Officer's . . . decision, and Contractor shall promptly receive any benefits of such decision. [The Department] shall not pay any interest on any amounts paid pursuant to a Contracting Officer's . . . decision or any appeal of such decision."

ANALYSIS

We determine the meaning of a statute and the meaning of a contract de novo. (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465, 470; Orr v. City of Stockton (2007) 150 Cal.App.4th 622, 629.) Whether the court applied the proper interest rate is a question of law. (Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1585.)

While Health Net relies on the statutory right to prejudgment interest set forth in Civil Code section 3287, the Department relies on the limitation on that right provided in Civil Code section 3289. The question, however, is not what the statutes mean, but rather, what the contract means. In other words, does the Disputes and Appeals provision in the contract limit damages for prejudgment interest that Health Net would otherwise be entitled to under Civil Code section 3287?

It is true, as the Department suggests, that we must rely on the plain meaning of the words used in the contract. (Civ. Code, § 1644.) We must ascertain the plain meaning, however, by examining the language at issue in the context in which it appears. We are not at liberty to extract a solitary sentence and impute a meaning to it that is belied by a reading of the entire contract. In other words, we must ascertain the meaning of the disputed language from the contract as a whole and cohesive expression of the parties' intent.

Applying these basic principles of contract interpretation to the contract before us makes resolution of this appeal a rather simple matter. The Department focuses our attention on the last sentence of section 3.22.5 of the contract, which reads: "[The Department] shall not pay any interest on any amounts paid pursuant to a Contracting Officer's or alternate dispute officer's decision or any appeal of such decision." The Department urges us to broadly construe the word "appeal" to include judicial review of the administrative decision. Health Net insists that "appeal" is limited to the administrative appeal process described in the Disputes and Appeals provision of the contract. The trial court agreed. So do we.

The Department itself points out that the parties intended to avoid litigation by outlining a specific dispute resolution process. Thus, section 3.22.4 of the contract sets forth in precise detail the procedures to be followed when appealing a contracting officer's decision. As Health Net aptly observes, the "appeal" described at least eight times in section 3.22.4 refers to the administrative appeal required in the contract. For example, "All appeals shall be in writing and shall be filed with [the Department's] Office of Administrative Hearings and Appeals"; "An appeal shall be deemed filed on the date it is received by the Office of Administrative Hearings and Appeals"; "An appeal shall specifically set forth each issue in dispute, and include Contractor's contentions as to those issues"; and "However, Contractor's appeal shall be limited to those issues raised in its Notice of Dispute filed pursuant to Section 3.22.2, Notification of Dispute." (Italics added.)

The last sentence of section 3.22.4 distinguishes the appeal procedure set forth in the Disputes and Appeals provision from other actions, including judicial review of the administrative decision. The sentence reads: "Contractor shall exhaust all procedures provided for in Section 3.22, Disputes and Appeals, prior to initiating any other action to enforce this Contract." (Italics added.)

A loose interpretation of the word "appeal," unhinged from the contract provision in which it appears, might include the entire spectrum of challenges to the administrative decision, including a petition for a writ of mandate. But here "appeal" is necessarily limited to an administrative appeal. Indeed, the scope of the Disputes and Appeals provision is restricted to administrative appeals of the contracting officer's or alternate dispute officer's decision.

Moreover, section 3.22.5 expressly incorporates the limitations of section 3.22.4. We cannot interpret the last sentence of section 3.22.5 without taking into account the language that precedes it. The paragraph begins, "If, pursuant to an appeal under Section 3.22.4, Appeal of Contracting Officer's or Alternate Dispute Officer's Decision, the Contracting Officer's or alternate dispute officer's decision is reversed, the effect of the decision pursuant to Section 3.22.4 shall be retroactive to the date of the Contracting Officer's or alternate dispute officer's decision, and Contractor shall promptly receive any benefits of such decision." Thus, section 3.22.5 makes clear that the no-interest provision applies only to an administrative appeal as set forth in section 3.22.4.

The Department contends, however, that contract section 3.22.4's incorporation of Health and Safety Code section 100171 broadens the scope of "appeal" to include a state court judgment, as here. Section 100171, subdivision (a) states: "The proceeding shall be conducted pursuant to the administrative adjudication provisions of Chapter 4.5 (commencing with Section 11400) and Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code, except as specified in this section." The Department concludes that the contract's administrative hearing procedure thus follows the process set forth in the Government Code, which expressly permits judicial review of an administrative adjudication. (See Gov. Code, § 11523.) In the Department's view, state court judicial review is necessarily encompassed within the scope of "any appeal of such decision." We disagree.

As Health Net points out, Health and Safety Code section 100171 governs the manner in which the administrative appeal is procedurally conducted, but it does not thereby expand the definition of an administrative appeal to include judicial review. Section 100171 may envision judicial intervention, but that is not to say it defines the scope of the administrative appeal itself. In other words, the recognition that a contractor might exercise its right to seek judicial review after exhausting its administrative remedies does not answer the threshold question whether reference to an "appeal" taken pursuant to section 3.22.4 of the contract means an administrative appeal or any action challenging the contracting officer's decision. We continue to believe, section 100171 notwithstanding, that the parties agreed to suspend Health Net's statutory right to prejudgment interest only for the relatively short period of time involved in an administrative appeal. We reject the Department's claim that Health Net intended to waive its right to prejudgment interest in anticipation of years of protracted litigation with an amorphous reference to an "appeal" when the scope of the entire contractual provision dealt exclusively with administrative appeals.

Nor does the contractual requirement to exhaust administrative remedies expand the meaning of "appeal." The contract reads: "Contractor shall exhaust all procedures provided for in Section 3.22, Disputes and Appeals, prior to initiating any other action to enforce this Contract." The Department contends that the exhaustion requirement manifests that the section is not limited to administrative review because it recognizes the possibility of further action. Not so. The sentence distinguishes the appeal encompassed by section 3.22 from other actions a contractor might take following exhaustion of its right to an administrative appeal. In no way does it expand the administrative appeal to include those other actions, including judicial review, triggered by a petition for writ of mandamus.

If, as we have concluded, Health Net is entitled to prejudgment interest, the Department urges us to find that interest did not accrue until Health Net exhausted its administrative appeal. The Department insists that the contract plainly states that it need not pay any interest on any amount paid during the dispute resolution process. A close reading of section 3.22.5 suggests otherwise.

The entire section reads: "Pending final determination of any dispute hereunder, Contractor shall proceed diligently with the performance of this Contract and in accordance with the Contracting Officer's . . . decision.

"If, pursuant to an appeal under Section 3.22.4, Appeal of Contracting Officer's . . . Decision, the Contracting Officer's . . . decision is reversed, the effect of the decision pursuant to Section 3.22.4 shall be retroactive to the date of the Contracting Officer's . . . decision, and Contractor shall promptly receive any benefits of such decision. [The Department] shall not pay any interest on any amounts paid pursuant to a Contracting Officer's . . . decision or any appeal of such decision."

The second paragraph of the section describes the consequences of a reversal of the contracting officer's or alternate dispute resolution officer's decision "pursuant to an appeal under Section 3.22.4." For the benefit of a contractor, such as Health Net, the reversal is retroactive. But, as the Department points out, it is not obligated to pay interest on any amount paid "pursuant to . . . any appeal of such decision." The precise language of the contract brings us full circle because it depends on the meaning of "appeal."

The administrative appeal taken pursuant to section 3.22.4 did not reverse the contracting officer's decision. When Health Net failed to achieve its objective through the administrative appeal process, it commenced mandamus proceedings. It was only at the conclusion of those proceedings, by order of this court, that the contracting officer's decision was reversed. As a result, the last sentence of the paragraph does not, as the Department contends, apply. There is no interest to be paid on any amount paid "pursuant to . . . any appeal of such decision." And that sentence simply does not apply to the payment of statutory prejudgment interest. The contract does not waive Health Net's right to prejudgment interest, and it does not change the date of when that right began to accrue.

DISPOSITION

The judgment is affirmed.

We concur: NICHOLSON , J. MURRAY , J.


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