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Golden Day Schools, Inc. v. Office of Administrative Hearings

California Court of Appeals, Second District, Second Division

February 21, 2017

GOLDEN DAY SCHOOLS, INC., Plaintiff and Appellant,
v.
OFFICE OF ADMINISTRATIVE HEARINGS, Respondent CALIFORNIA DEPARTMENT OF EDUCATION, Real Party in Interest and Appellant.

         APPEAL from a judgment of the Superior Court of Los Angeles County No. BS142234. James C. Chalfant, Judge. Affirmed in part and reversed in part.

          Doll Amir & Eley, Gregory L. Doll and Lloyd Vu for Plaintiff and Appellant.

          No appearance for Respondent.

          ASHMANN-GERST Acting P. J.

         Kamala D. Harris, Attorney General, Julie Weng-Gutierrez, Assistant Attorney General, Lance E. Winters, Senior Assistant Attorney General, Ismael A. Castro, and Lisa A. Tillman, Deputy Attorneys General, for Real Party in Interest and Appellant.

         This appeal and cross-appeal arise out of the trial court's ruling on a petition for writ of administrative mandamus pursuant to California Code of Civil Procedure section 1094.5. In its appeal, Golden Day Schools, Inc. (Golden Day) contends the trial court erroneously upheld certain findings of the Administrative Law Judge (ALJ), which entitled the California Department of Education (Department) to recoup more than $3 million. In its cross-appeal, the Department contends the trial court erroneously overturned one of the ALJ findings.

         We conclude the Department was permitted under Education Code section 8448, subdivision (h) to conduct its own contract performance audit despite having accepted and closed Golden Day's independent financial and compliance audits. We also conclude substantial evidence supports the findings of the ALJ and the trial court that the Department was allowed to recoup (i) costs for commingling eligible and noneligible students, (ii) certain payroll costs for employees who also worked at a charter school on some of the same sites, and (iii) various nonreimbursable costs (the Department's Findings Nos. 2, 4, 6).

         FACTUAL AND PROCEDURAL BACKGROUND

         The Parties

         Golden Day is a nonprofit corporation founded by Clark Parker that has provided children from low-income families with daycare, education, and social development since 1968. Its schools are located at several sites throughout Los Angeles. The sites are owned by Clark Parker and his wife, Jeanette Parker (collectively the Parkers). The Parkers lease these sites to Golden Day, which in turn subleases four classrooms to Today's Fresh Start Charter School (Today's Fresh Start), a charter school founded in 2003 and operated by Jeanette Parker. Unlike Golden Day, Today's Fresh Start is authorized and overseen by the Los Angeles County Office of Education. Both Parkers are members of Golden Day's board of directors.

         The Department is the designated state agency responsible for implementing the Child Care and Development Services Act (Ed. Code, § 8200 et seq.). (Golden Day Schools, Inc. v. Department of Education (1999) 69 Cal.App.4th 681, 685.) The Department is therefore responsible for the “promotion, development, and provision of care of children in the absence of their parents during the workday or while engaged in other activities which require assistance of a third party or parties.” (Ed. Code, § 8206, subd. (a).)

         The Parties' Relationship

         Beginning around 1971, Golden Day began contracting with the Department to receive funds necessary to provide childcare services to eligible children in impoverished areas of South Central Los Angeles. The two contracts at issue here involve the fiscal/school years of 2006-2007 and 2007-2008. Under these contracts, the Department advanced to Golden Day $4, 324, 098 for fiscal year 2006-2007 and $4, 519, 980 for fiscal year 2007-2008. Golden Day agreed to abide by the “Funding Terms and Conditions” incorporated into the contracts, which, in turn, incorporated applicable statutory and regulatory provisions.

         Golden Day's Audits

         For each of the two years under review here, Golden Day submitted to the Department an annual “financial and compliance audit” as required by Education Code section 8448, subdivision (g). As required, the audits were performed by an independent licensed certified public accountant. (Ed. Code, § 8448, subd. (g).) The audits represented that Golden Day's financial statements were in conformity with generally accepted accounting practices, and included Golden Day's revenues and expenses for both the 2006-2007 and the 2007-2008 school years. The Department informed Golden Day that its audit reports met the Department's reporting requirements and deemed the contracts closed for both fiscal years.

         The Department's Audit

         In 2008, the Department conducted a performance review of Golden Day, termed the “Limited Scope Review, ” building upon Golden Day's audits, for the purpose of “determining whether Golden Day operated the child care and development programs in compliance with applicable laws, regulations, and agreement terms and conditions for the period July 1, 2006 through June 30, 2008.” The review was prompted by the Department's concerns over the validity of parent employment records necessary to establish eligibility for funding. The review consisted of the Department's representatives visiting Golden Day's sites, interviewing employees and staff, and examining nearly all of Golden Day's business records, including inventory, payroll, invoices, receipts, checks, student sign-in sheets, time cards and journal entries.

         At the end of the process, the Department notified Golden Day of its conclusion that “Golden Day failed to meet the minimum contractual requirements for compliance, did not have effective internal controls over its fiscal and program operations, and charged a significant amount of non-reimbursable and unallowable expenditures to the child development program.” The Department made nine specific findings (Findings) regarding various issues and sought to recoup $3, 257, 732 for the period between July 1, 2006, and June 30, 2008. Golden Day disputed the propriety of the review itself, and further disputed the merits of the Department's Findings.

         Procedural History

         Golden Day appealed the Department's Findings to the Office of Administrative Hearings. Golden Day moved to dismiss the Department's Findings on the ground the Department was barred from conducting its own review after accepting Golden Day's independent financial and compliance audits. After an expedited evidentiary hearing, the ALJ denied the motion, and also denied Golden Day's motion for reconsideration. The matter proceeded to trial. Following a two-week trial during which thousands of documents were admitted, the ALJ issued its final decision, overturning some of the Department's Findings and sustaining others.

         The case was then brought before the trial court by way of a petition for administrative writ of mandamus, filed by Golden Day. The trial court denied the petition with the exception of one issue.

         Golden Day filed this appeal and the Department filed a cross-appeal.

         DISCUSSION

         In its appeal, Golden Day argues that the Department's own performance review seeking to recoup more than $3 million after the Department had accepted Golden Day's independent financial and compliance audit is barred by Education Code section 8448 and title 5 of the California Code of Regulations section 18072. Alternatively, Golden Day challenges three specific Findings upheld by the trial court: The disallowance of 17, 793 days of service due to commingling of eligible and noneligible students (Finding No. 2); the disallowance of salaries totaling $930, 657 due to teachers' overlapping work schedules with Today's Fresh Start (Finding No. 4); and the disallowance of over $400, 000 in various expenditures (Finding No. 6).

         In its cross-appeal, the Department challenges the trial court's reversal of the ALJ's decision to uphold the disallowance of certain rental payments (Finding No. 5).

         Standard of Review

         Where no fundamental vested right is involved, the reviewing court, like the trial court, reviews the administrative record to determine whether the agency's findings were supported by substantial evidence, resolving all conflicts in the evidence and drawing all inferences in support of them. (JKH Enterprises, Inc. v. Department of Industrial Relations (2006) 142 Cal.App.4th 1046, 1058.) “Even though the fundamental vested right determination is made on a case-by-case basis, as a general rule, when a case involves or affects purely economic interests, courts are far less likely to find a right to be of the fundamental vested character.” (Id. at p. 1060.) The trial court properly applied the substantial evidence review. (Pacific Coast Medical Enterprises v. Department of Benefit Payments (1983) 140 Cal.App.3d 197, 207-208 [No vested right to particular cost reimbursement from government agency].) Of course, “pure issues of law are always subject to independent appellate court review.” (Id. at p. 1058, fn. 11.)

         The Appeal

         I. The Department's Audit Was Not Barred

         Golden Day's first argument is a legal one-whether the Department was precluded by statute, regulation or contract from conducting its own audit after accepting Golden Day's independent ...


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