On appeal from the Superior Court of New Jersey, Law Division, Morris County.
Antell, Dreier and Brochin. The opinion of the court was delivered by Dreier, J.A.D.
[230 NJSuper Page 539] Plaintiffs*fn1 appeal from a Law Division order upholding but limiting the effect of a certificate of debt filed by the Director
of the Division of Medical Assistance and Health Services. The certificate was entered as a judgment by the Clerk of the Superior Court against plaintiffs Irving Sendar and Aileen Marmon, Executrix of the estate of her late husband, Dr. Martin G. Marmon. The certificate was filed pursuant to N.J.S.A. 30:4D-17(h), a section of the New Jersey Medical Assistance and Health Services Act. Plaintiffs argue that this section of the Act is unconstitutional in its application to them, since a judgment should not be entered prior to their having an opportunity to be heard on the merits of the State's claim. Furthermore, plaintiffs claim that the filing of the certificate against them as stockholders of a former corporate recipient of payments from the Medicaid program also failed to accord them due process. They contend that their claim under 42 U.S.C.A. § 1983 should not have been dismissed.
The trial judge refused to vacate the certificates, but construed them as merely inchoate liens against plaintiffs' property, incapable of supporting an execution proceeding unless or until there is a final adjudication of plaintiffs' responsibility. We agree with the trial judge's limitation on the effect of the certificate. However, we do not agree that the certificates could be filed against the individuals without a threshold showing of either their responsibility based upon mistaken or improper receipt of Medicaid payments made to the corporation or as active managers of the corporation.
Plaintiffs Irving Sendar and the Estate of Martin G. Marmon each own 50% of the stock in Twin Oaks Nursing Home Inc., the former owner of a Morristown, New Jersey nursing home which participated in the Medicaid program. The nursing home was established in 1972, and in 1984 the corporation assigned its lease and the physical assets to a new nursing home operator. Marmon was the company's president; Sendar was never an officer or director of the nursing home corporation, but he apparently did take some "active role" in the company. In 1985, the defendant Division of Medical Assistance and Health Services began a field audit of Twin Oaks. The preliminary
field audit concluded that Sendar (not the company or Marmon), owed the defendant $646,639.37 for Medicaid overpayments made to the company over a ten-year period. A supplemental determination added Marmon and the corporation. All of the years of operation have not been finally audited, even at this point.
On December 11, 1987, the Division sent Sendar a letter notifying him that it was filing a certificate of debt against him for the $646,439.37 pursuant to N.J.S.A. 30:4D-17(h), which gives such certificates "the same force and effect as the entry of a docketed judgment in the Superior Court." The letter informed Sendar that he had 20 days from receipt of the letter to request a pre-hearing conference if he wished to dispute the audit and not reimburse the State. Only four days later, the defendants sent Sendar a copy of the formal Certificate of Debt, the original of which was filed with the Clerk of the Superior Court on or about January 16, 1987.
On February 5, 1987, Sendar obtained an order to show cause why the State's certificate should not be declared null and void. Sendar's complaint in lieu of prerogative writs raised three main issues: (1) it was the nursing home, Twin Oaks, Inc., not Sendar, who applied for and received Medicaid benefits, and the State had no authority to file against Sendar as an individual because it had no reason to pierce the corporate veil; (2) by filing the Certificate without notice and the opportunity for a hearing, the State had violated his rights to due process; and (3) by refusing to vacate the Certificate, the State had slandered Sendar's credit reputation.
On April 15, 1987, after a hearing on the return date of the order, the trial judge denied the requested relief and dismissed the complaint. At the hearing, however, he allowed the plaintiff to amend the complaint to add the nursing home and Marmon as parties plaintiff so that the same attack could be made upon the certificates filed against them. The judge interpreted N.J.S.A. 30:4D-17(h), as it applies to an interim
determination of responsibility, to mean that instead of entering a judgment against the plaintiff, only an "inchoate lien" would be placed on Sendar's ability to transfer the property. The judge further restricted the effect of the interim filing:
If there is not a prompt hearing before an Administrative Law Judge, and if the existence of the Certificate of Debt causes hardship to any of the plaintiffs, any plaintiff may apply on motion in this action for relief from the Certificate of Debt.
Plaintiffs appealed, and on August 11, 1987 this Court remanded the case to the trial judge for clarification of his April 15, 1987 order. Upon remand, the judge reiterated his interpretation of the statute, stating:
A true . . . enforceable . . . judgment . . . cannot Constitutionally be obtained in the way which this statute facially seems to authorize. . . . The statute, if it were construed as creating a true judgment, would be unconstitutional.
He then explained that his order of April 15
construed the statute not as creating a judgment, but instead as creating an inchoate lien. . . . I think I in effect reformed the statute so that it passes Constitutional muster.
The State takes no issue with the trial judge's interpretation.
From the time Twin Oaks was founded in 1972 until the initial audits, the State accepted the nursing home's cost reports detailing the expense of providing the prior year's nursing home services. The State utilized these reports to set the reimbursement rate for the ensuing year, subject to the State's right to audit the operation and seek recovery if there was an overpayment. The Division of Medical Assistance and Health Services had no problems accepting the corporation's accounting practices through and including December 31, 1984, when the nursing home was sold. The Division received copies of all pertinent documents and was informed in advance of the assignment, and has continued to deal with the successor. Under the terms of the sale, Twin Oaks Nursing Home Inc. is to receive 1.2 million dollars over the next ten years, and yet the Division issued its certificate for $646,639.37 against each of the stockholders, of which more than $200,000 is attributable to interest. The assessment was timely protested by Twin Oaks,
and if there is no settlement, Twin Oaks intends to appeal the final assessment.
There has been no claim of fraud, overreaching or any other individual or corporate misconduct in connection with receipt of payments. The differences between the parties stem from accounting issues such as appropriate basis of depreciation, classification of expenses, the propriety of borrowing funds as opposed to injecting new working capital. When plaintiffs inquired as to why certificates were filed against them individually, the Division explained that it was its customary practice to enter such judgments after the ...