text:
    SPARTANBURG GENERAL HOSPITAL, Plaintiff, v. Margaret M. HECKLER, Secretary of Health and Human Services, Defendant.
    Civ. A. No. 7:84-2157-3.
    United States District Court, D. South Carolina, Spartanburg Division.
    April 26, 1985.

      Roy McBee Smith, Spartanburg, S.C., Leonard C. Homer, Robert E. Mazer, Ober, Kaler, Grimes & Shriver, Baltimore, Md., for plaintiff.
    James D. McCoy, III, Greenville, S.C., Carl H. Harper, Regional Atty., Edgar M. Swindell, Asst. Reg. Atty., Dept, of Health & Human Services, Atlanta, Ga., for defendant.
   MEMORANDUM OPINION AND ORDER

GEORGE ROSS ANDERSON, Jr., District Judge.

This case is before the Court on the defendant’s motion for judgment on the pleadings and the plaintiff’s cross-motion for summary judgment. The plaintiff is a non-profit general community hospital (the “provider”) which is an approved provider of hospital services under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. (“the Medicare program”). The defendant is the Secretary of Health and Human Services (“the Secretary”), who is responsible for the administration of the federally funded Medicare program which provides health insurance for the elderly and disabled. Under Part A of Medicare, approved hospitals receive reimbursement directly from the program for the reasonable costs of allowable items and services that they provide to such beneficiaries.

Plaintiff instituted this action to challenge a final decision of the Secretary concerning reimbursement of certain capital-related costs incurred during a construction project for a hospital addition. The costs in dispute are architectural fees relating to the development of final construction drawings which the provider “abandoned” in favor of a second set of plans designed by a different architect. The change in architects was occasioned by the failure of the construction bids for the original plans to come within the cost estimate for the project. Specifically, the provider challenges the determination by the Secretary that the fees should be capitalized as an element of the historical cost of the completed addition with reimbursement accomplished through periodic depreciation allowances over the useful life of the facility rather than immediate recognition as an expense in the cost year in which the fees were incurred.

Plaintiff challenges the Secretary’s decision to capitalize these costs on the grounds that such decision is arbitrary and capricious, an abuse of discretion, inconsistent with the Medicare Act, implementing regulations and policy, an improper retroactive reversal of agency policy in violation of the due process clause of the Constitution, and unsupported by substantial evidence. In addition, plaintiff alleges that the provisions of the Provider Reimbursement Manual (“the Manual”) relied upon by the Secretary in her accounting treatment of the costs involved, and her administrative interpretation thereof, are substantive, rather than interpretive, in nature, and therefore are invalid because not promulgated with notice and comment pursuant to the Administrative Procedure Act (“the APA”), 5 U.S.C. § 551 et seq.

The Court’s jurisdiction over this challenge is premised on 42 U.S.C. § 1395oo(f)(l). The Court has carefully studied the lengthy and comprehensive memoranda submitted by both sides including plaintiff’s post-hearing reply brief, the oral arguments of counsel, and the administrative record herein and finds that this case is amenable to summary disposition as a matter of law. Accordingly, for the reasons hereinafter stated, the Court will grant defendant’s motion for judgment on the pleadings as to all issues raised by the plaintiff, and deny plaintiff’s motion for summary judgment.

I. Factual and Procedural Background.

In 1977, the provider, Spartanburg General Hospital, engaged a local architectural and engineering firm, Lockwood Greene Engineers, Inc. (“Lockwood Greene”), to formulate a proposal to construct an addition to the existing hospital facility comprised of a psychiatric unit and a 600 space parking structure, and augmented later in the planning process to include a radiation therapy department. The project was subject to a cost estimate of $6.7 million dollars, which was the maximum expenditure the provider stated it could afford.

In August 1979, the provider contracted with Lockwood Greene to provide all necessary professional services leading to the preparation of final construction drawings to be let for bid, and culminating in the supervision of the construction phase. The Lockwood Greene design called for the integration of the hospital components into the parking structure. Prior to being let for bid, the architect revised its cost estimate to $8.2 million dollars, but the lowest bid received was $10.3 million. After modifying the specifications through negotiation with the parties, the successful bidder revised its bid downward to $8.3 million. The provider elected, however, on January 27,1981 to reject all bids and terminate the services of Lockwood Greene. Total compensation paid to the architect was $560,-106.

At this time the provider was faced with having to get construction underway by June 1981 when the certificate of need for the project would expire. On February 2, 1981, the provider signed a contract with the second architect, Freeman White Associates, Inc., (“Freeman White”), for the design of a psychiatric facility, parking garage, and radiation therapy unit. The agreed compensation was $325,000 which was capitalized as part of the historical cost of the facility and is not in dispute in this action.

The Lockwood Greene plans were given to Freeman White and served as a basis for discussion of the provider’s desired design concepts. Freeman White decided that to come within the provider’s budget, the parking component would have to be deleted and constructed as a separate structure at a later date. Freeman White thus designed a two-story addition for the psychiatric and radiation therapy departments, and a low bid of $5.6 million dollars was received on June 9, 1981. Additional parking for 1,055 spaces was later constructed as a separate project for $2.7 million dollars.

When the provider filed its annual cost report seeking Medicare reimbursement for the year ending September 26, 1981, it claimed as a current year expense the entire $560,106 paid to Lockwood Greene. The provider had considered these costs to be for architectural plans that it had entirely abandoned and from which it derived no remaining discernible benefit such that the costs could be expensed under generally accepted accounting principles.

The fiscal intermediary, Blue Cross and Blue Shield of South Carolina, acting pursuant to contract with the Secretary, was required to audit the cost report submitted by the provider and adjust the amount of reimbursement claimed, if necessary, to ensure compliance with the Medicare manuals and regulations. 42 U.S.C. § 1395h. The intermediary determined in this case that the provider had not abandoned its plans to construct a psychiatric-radiation therapy addition, and consequently all preliminary planning costs attributable thereto should be capitalized as part of the historical cost of the completed addition to the facility, pursuant to Provider Reimbursement Manual (HIM-15), Part I, § 2154.4(A). The intermediary agreed, on the other hand, that the provider had abandoned its then present intention to build a parking structure.

These determinations were reflected in the Notice of Program Reimbursement issued by the intermediary on August 12, 1982 which allowed as a current year expense $70,000 in fees attributed to the parking garage and disallowed the remaining $490,106. The adjustment reduced Medicare reimbursement for that period by $185,932.

Pursuant to 42 U.S.C. § 1395oo(a), the provider requested a hearing before the Provider Reimbursement Review Board (“PRRB” or “the Board”). In a written decision issued May 14, 1984, the Board reversed the determination of the fiscal intermediary, finding that the second architect did not use the original plans in rendering his design for the structure. On June 1. 1984, the Administrator of the Health Care Financing Administration sent written notification to the parties of her intent to review the Board’s decision, pursuant to 42 U.S.C. § 1395oo(f). On July 11, 1984, the Deputy Administrator on behalf of the Secretary rendered the final agency decision reversing the Board and reinstating the fiscal intermediary’s determination in full. The Deputy Administrator concluded that discernible benefit had been established through application of the Manual provision concerning preliminary plans and by adequate proof of actual benefit. This appeal seeking a review on the record followed.

II. Statutory and Regulatory Background.

The Medicare program is structured around the concept of reimbursement to the provider for the reasonable cost of providing medical services to Medicare beneficiaries. 42 U.S.C. § 1395x(v)(l)(A). The Secretary is authorized to establish, by regulation, methods by which to determine reasonable cost and the items to be included in such a determination. Id. The Secretary has defined reasonable costs to include “costs which are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities.” 42 C.F.R. § 405.451(b). Capital-related costs associated with the acquisition and dedication of the necessary plant, equipment, supplies, and materials used in providing care to eligible beneficiaries are allowed to the extent of depreciation as provided in 42 C.F.R. § 405.415. The regulation requires such depreciation to be identifiable, recorded, based on the historical costs of the asset, and prorated over its useful life. 42 C.F.R. § 405.415(a).

“Historical cost” is defined as the “cost incurred by the present owner in acquiring the asset.” 42 C.F.R. § 405.415(b)(1). The Secretary has interpreted the plant acquisition costs to include not only the cost of brick and mortar items, but also other direct and'indirect capital costs related to the rendering of care to Medicare patients.

The treatment of architectural fees and other planning costs is discussed in sections 2154.1 et seq. of the Manual. Specifically, reasonable and prudent costs attributed to planning activities are recognized under Medicare as part of the historical cost of a completed facility, provided the construction or acquisition project has satisfied the requirements of state certificate of need laws and section 1122 of the Social Security Act, 42 U.S.C. § 1320a-l. PRM, Part I, § 2154.3. The treatment of “abandoned” planning costs is addressed in Manual section 2154.4, the interpretation of which is at issue in this case.

III. Scope and Standard of Review.

Judicial review of a decision of the Deputy Administrator is limited to determining whether the decision is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law or unsupported by substantial evidence on the record taken as a whole. 5 U.S.C. § 706(2)(A), (E); 42 U.S.C. § 1395oo(f)(1). In the course of its review, the Court must recognize that because of the expertise and policy-making responsibilities of the agency, administrative decisions should be given deference. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, — U.S. -, 104 S.Ct. 2778, 2793, 81 L.Ed.2d 694 (1984); Udall v. Tollman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965); Lexington County Hospital v. Schweiker, 740 F.2d 287, 289 (4th Cir.1984).

Moreover, the deferential standard in this case is not lessened because the decision of the PRRB differed from that of the Secretary. St. Francis Hospital Center v. Heckler, 714 F.2d 872, 874 (7th Cir.1983), cert. denied — U.S. -, 104 S.Ct. 1274, 79 L.Ed.2d 679 (1984); Homan & Crimen, Inc. v. Harris, 626 F.2d 1201, 1205 (5th Cir.1980), cert. denied 450 U.S. 975, 101 S.Ct. 1506, 67 L.Ed.2d 809 (1981). The decision under review is the final agency determination, not that of subordinate hearing officers. American Medical International v. Secretary of Health, Education, and Welfare, 466 F.Supp. 605, 611 (D.D.C.1979), aff'd 677 F.2d 118 (D.C. Cir.1981).

IV. Discussion.

1. Accordance With Law.

The Court will first address the provider’s allegation that the administrative decision violates applicable laws, regulations, and policy. Specifically, the provider contends .that the decision is contrary to Medicare regulations requiring that providers be reimbursed on an accrual accounting basis; contrary to regulations allegedly requiring adherence to generally accepted accounting principles (“GAAP”); and contrary to the “plain-meaning” of Manual section 2154.4(A).

Accrual accounting procedures contemplate the expensing of costs associated with items that provide no discernible future benefit. Statement No. 4, Accounting Principles Board, AICPA Professional Standards, AC § 1026 et seq. The procedures also provide that if there is a discernible future benefit, the costs are capitalized and matched incrementally with future revenue or otherwise deferred to future accounting periods. Id. at § 1026.19. Accrual accounting principles clearly recognize both expensing and capitalization depending upon the resolution of the discernible benefit question. Therefore the Secretary’s decision would be contrary to these principles only if the Secretary capitalized the costs where there was no discernible benefit. • In light of the Court’s conclusion that the Secretary properly found remaining discernible benefit, hereinafter discussed, the provider’s arguments are without merit.

Furthermore, the Court finds that while the Secretary is directed to consider standardized definitions and reporting practices widely accepted in the hospital industry, 42 U.S.C. § 1395x(v)(l)(A), 42 C.F.R. § 405.-406(a), she is not required to adopt them. Consequently, the Secretary permissibly amended Manual section 2154.4(A) in June 1978 to add a provision which deems benefit within the basic GAAP concept for “all feasibility studies and preliminary plans” in a single, continuous project which is ultimately completed.

The Court finds the deeming provision to be a reasonable presumption grounded upon a common sense observation. Mistakes, false starts, and discarded plans are to be expected in the execution of any construction project, i.e., not all facets of any construction project are executed with what hindsight would show to be optimal efficiency, and yet the costs are considered part of the completed project. Moreover, such mistakes often provide valuable' information. But even if this were not the case, the presumption relieves the Secretary and her agents from having to gauge the relative benefits derived from specific architectural and engineering endeavors and from such difficult, technical tasks as the tracing of design elements and determining whether a common feature in two sets of plans is the result of borrowing or would have appeared in the particular type of building anyway.

The provider takes issue with the Secretary’s application of the Manual provision, however, claiming that the Lockwood Greene plans were final plans, not preliminary plans, and had no effect on the hospital’s decision whether to build the facility, and therefore the presumption was not applicable by its express terms. While the provider’s argument is not wholly unreasonable, the Secretary’s conclusion that the costs of the original final plans can be treated as preliminary planning costs in the context of later events leading to the ultimate completion of the project is equally reasonable. The Lockwood Greene plans were preliminary in time to the Freeman White plans. The Court finds that the Secretary’s interpretation is “within the range of reasonable meanings that the words of the [provision] admit.” Lexington, 740 F.2d at 290, citing Psychiatric Institute of Washington, D. C. v. Schweiker, 669 F.2d 812, 814 (D.C.Cir.1981). Under the applicable standards of deference, where two interpretations appear reasonable, it follows that the Secretary's should control. Lexington, 740 F.2d at 290; Fairfax Nursing Center, Inc. v. Califano, 590 F.2d 1297, 1301 (4th Cir.1979).

The provider asserts that any deference on this issue is precluded because the Secretary allegedly construed the Manual provision differently in a 1980 appeal involving Takoma Adventist Hospital, Greenville, Tennessee. That case also dealt with a change in architects and the treatment of “abandoned” plans, but notably it involved a change in projects. The Board stated that the first plans were “final plans, not simply studies and preliminary plans, relating to the refurbishing and expansion project, not to the building project.” Medicare & Medicaid Guide (CCH) 1130,831 at 9555-6. (Emphasis in original). The Court is satisfied that-the aside distinguishing between preliminary and final plans was dicta and that the result was predicated on the existence of two separate projects. The hospital abandoned plans to refurbish and expand its existing building in favor of constructing an entirely new building. Since the first project was never completed, the Manual provision deeming benefit would not have applied by its express terms, and the Board’s reference to it was unnecessary in view of its factual finding of distinct projects. The Takoma decision was allowed to stand without opinion by the Administrator, and the Court finds that fact may be read as a concurrence with the result, rather than agreement with every phrase in the decision.

Finally, the provider’s argument about the phrase, “used as part of the decision-making process on whether to build the facility,” can be summarily dismissed. The phrase does not state a condition for application of the Manual section, but instead states one reason for the presumption. Furthermore, the Lockwood Greene plans and activities were part of the process of determining whether to continue to build the project as planned or to delete portions.

2. Arbitrary and Capricious Test.

The provider contends that the Secretary’s decision is arbitrary, capricious, and an abuse of discretion based on an allegation that similarly situated providers have been treated differently. The only reported cases addressing the issue of “abandoned” architectural plans are PRRB Hearing Decision No. 77-D43, Medicare and Medicaid Guide (CCH) [1977 Transfer Binder] If 28,523, affd HCFA Administrator Decision, ¶ 28,602, the Takoma case referred to previously, and the case at bar.

Board Decision No. 77-D43 presented facts nearly identical to the case at bar, but it involved a cost year prior to the addition of the deeming of benefit provision to the Manual by Transmittal No. 203, (June 1978), effective for all cost reports open on or after June 1, 1978. Furthermore, there was no indication in that case that the original plans were ever given to the subsequent architect or formed a basis of discussion of the provider’s design concepts as in the case at bar. The Takoma case is clearly distinguishable on the basis of the presence of two different projects.

During the pendency of its appeal before the Board, the provider learned of informal, unpublished advice rendered by a Medicare official to an intermediary concerning treatment of architectural fees in the case of St. Joseph’s Hospital, Philadelphia, Pennsylvania. This advice has been referred to by the parties as the “Patashnik letter.” The facts outlined in the intermediary’s letter seeking advice appear to be similar to the present case, but the official reached an opposite conclusion. The Court is satisfied, however, that the letter did not enunciate Departmental policy and appears to be an error in application of policy to specific facts. The Court notes that the intermediary’s letter indicates that the St. Joseph’s case was similar to one in which the PRRB had recently ruled in favor of a provider. The Takoma decision was issued December 18, 1980, only three weeks prior to the intermediary’s reference in its letter of January 7, 1981. It is possible that the official’s advice was affected by the assertion of similarity to the Tako-ma case. One mistake in a case upon which this provider never relied or had any prior knowledge does not compel the agency to perpetuate the error. See Sirbo Holdings, Inc. v. Commissioner of Internal Revenue Service, 509 F.2d 1220, 1222 (2d Cir.1975) (“While even-handed treatment should be the Commissioner’s goal, ... perfection in the administration of such vast responsibilities cannot be expected.... The making of an error in one case, if error it was, gives other taxpayers no right to its perpetuation.”).

Furthermore, the St. Joseph’s case did not receive the full agency deliberation and complete factual development that occurred in the cases before the PRRB and the Administrator. Where the full resources of the agency have been brought to bear upon the issue, the Court is satisfied that the Secretary has applied the Manual provision as the specific facts dictate with sufficient consistency, such that her actions have been neither arbitrary, nor capricious, nor an abuse of discretion.

3. Consistency With The Administrative Procedure Act.

The Court concludes that the Manual section 2154.4(A) and the Secretary’s interpretation of the provision are “interpretive” in nature so as to come within the exception to the notice and comment requirements of the APA. 5 U.S.C. § 553(b)(3)(A). See Fairfax Nursing Center, 590 F.2d at 1301. The Court finds that the provision interprets the regulations concerning treatment of capital-related costs and, in particular, defines the term “historical cost” by noting a constituent element of that concept. Furthermore, the Manual expressly provides that it does not have the force of regulations. While the Court is not bound by the Secretary’s general characterization, the provision at issue has been properly described.

The provider argues, however, that the provision and its interpretation cannot be “interpretive” because they effect a substantial change or reversal in Medicare policy. The Court finds this assertion to be incorrect. A mere change, if that is present, is not automatically substantive; rather it must be analyzed under the appropriate test. Under this Court’s test for distinguishing between substantive and interpretive rules, enunciated in Spring Mills, Inc. v. Consumer Product Safety Commission, 434 F.Supp. 416, 430 (D.S.C.1977), the Court is satisfied that the contested Manual provision and its interpretation are interpretive. They are neither complex nor pervasive; they do not effect drastic changes in existing law; they are not retroactive, nor are there practical difficulties with compliance.

The Manual provision alters the basic GAAP concept only slightly by deeming benefit for preliminary planning activities in a single, continuous project which is ultimately completed. The Secretary’s interpretation of the terms in the provision effected no change in policy, as noted earlier. Also, the Secretary’s accounting treatment is relatively simple to understand and to comply with. Furthermore, changing architects and discarding whole sets of plans is hardly a routine occurrence or pervasive problem. The provider complains of the “substantial impact” of the interpretive rule in this particular case. Apart from the fact that the provider is viewing the impact from its particular perspective and not from that of the industry as a whole, where the impact would be infrequent at best, the substantial impact test for distinguishing between “substantive” and “interpretive” rules is of dubious reliability and has been rejected by a number of courts. See Calais v. Egger, 690 F.2d 234, 237-238 (D.C.Cir.1982) (“Interpretive and substantive rules may both vitally affect private interests, thus, the substantial impact test has no utility in distinguishing between the two.”). Furthermore, the impact on the provider is hardly severe. It fully expected to have to capitalize the Lockwood Greene fees in the first place before the cost overrun occurred; and because of the hospital’s paramount concern with the budget problems, its behavior would likely have been the same regardless of the Medicare treatment of architectural fees.

In conclusion, the Court finds no violation of the APA. In any event, were there any procedural infirmities under the APA, they would be akin to harmless error in light of the fact that the Secretary alternatively found actual discernible benefit, without the benefit of the presumption.

4. Constitutional Claim.

The provider alleged the existence of an improper retroactive reversal of policy constituting a denial of due process. The provider failed, however, to press the constitutional claim in its brief or at oral argument. It suffices to reject the constitutional challenge by noting that the Manual provision was not retroactive, and that the Secretary’s interpretation did not change any existing policy, but merely applied general principles to specific facts which were distinguishable from prior adjudications.

5. Substantial Evidence.

In reviewing the agency’s factual finding for substantial evidence, the Court may not reverse simply because it is possible to draw a different or inconsistent conclusion from the same evidence. In-Home Health Care v. Harris, 512 F.Supp. 84, 87 (N.D.Ill.1981) citing Consolo v. Federal Maritime Commission, 383 U.S. 607, 86 S.Ct. 1018, 16 L.Ed.2d 131 (1966). The Court need only determine whether there was “such relevant evidence as a reasonable mind might accept as adequate to support the conclusion reached.” Consolo, 383 U.S. at 620, 86 S.Ct. at 1026. Apart from the discernible benefit provided by the presumption, the Secretary’s decision noted that “the original plans, although not directly used in the final drawings, were referred to by the subsequent consultants and may have influenced some of the decisions made concerning the subsequent plans.” Although there is ample testimony in the record that the second architect did not directly use the original plans in creating his design and that there are notable differences between the two, these facts do not negate the benefit derived from Lockwood Greene’s activities in the context of a continuous project facing an imminent deadline.

The record indicates that the second architect was anxious to look at the plans to see what the problems were, “what another architect would do given the same solution,” and “why this gross overrun of estimated cost [occurred].” The hospital vice-president admitted that the plans were given to Freeman White because “[t]hey served as a basis of discussion in terms of our design concepts and ideas that we had that the staff had generated and discussed with Lockwood Green [sic] from the field trips that they had made.”

It was established that Lockwood Greene worked closely with the psychiatry staff and the radiation staff in ascertaining design concepts appropriate to their respective types of work and reviewed flow patterns, cabinet work, room arrangements, and square footage requirements.

The inference of some remaining discernible benefit is supportable; the benefit need not be substantial. Although the provider argues that the Secretary relied on “but two or three sentences taken out of nearly 200 pages of the transcript of the hearing before the PRRB” and points to testimony by the second architect that he did not use the Lockwood Greene plans at all, that he received no benefit from the work Lockwood Greene had done, and that generally he approached the project as if the Lockwood Greene plans did not exist, the Court concludes that such testimony can be viewed in light of the understandable reluctance of a professional to admit to any short-cuts or borrowing of concepts. Furthermore, such testimony, albeit largely conclusory, can be said to detract only from the substantiality of the benefit, which is not an issue, rather than the weight of evidence supporting a finding of some discernible benefit, however small. If the plans were as worthless as the provider contends, one would wonder why they were kept at all.

The Court is of the opinion that the Secretary may reasonably have inferred that the benefit was actually significant. The Secretary’s counsel argues in his brief that Lockwood Greene’s work in the design phase enabled the hospital staff to be more conversant in design terminology, more clear about their environmental preferences and requirements, and consequently better equipped to impart this data to the subsequent architect. Noting that the provider’s witness admitted that the department heads were educated by their contact with the previous architect, counsel asserted that this would have enabled Freeman White to spend less time in its interviews with the staff, which was significant when considered in light of the time restraints imposed on Freeman White by the impending expiration of the certificate of need within six months. The provider attacks this argument as a post hoc rationalization of the kind proscribed in Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971). However, that case cannot be fairly read to proscribe all use of a lawyer’s analytical skills to describe the relationship of actual evidence in the record to the agency conclusion reached and to advance probative inferences and legal arguments fairly derivable from the record and the administrative decision. Although the Court does not accord the counsel’s argument probative weight and the Secretary’s articulation of her basis for finding actual discernible benefit is brief, the Court may, nevertheless, “uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned.” Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 286, 95 S.Ct. 438, 442, 42 L.Ed.2d 447 (1974); International Ladies’ Garment Union v. Donovan, 722 F.2d 795, 814 (D.C.Cir.1983). Counsel’s argument merely highlights a reasonable inference that can be derived from the record and that is inherent in the indirect benefit found to exist by the Deputy Administrator.

V. Conclusion.

The Court concludes that the Secretary’s decision is reasonable, in accordance with law and supported by substantial evidence. Capitalization will result in the costs being reimbursed both at the time Medicare patients actually use the building and commensurate with the changing levels of Medicare utilization over the years. The Court defers to the Secretary’s policy choice, cognizant of her responsibilities as the steward of a public trust.

Accordingly, it is ADJUDGED and ORDERED that the plaintiff’s motion for summary judgment be and the same is hereby denied, and that the Secretary's motion for judgment on the pleadings be and the same is hereby granted.

IT IS SO ORDERED.

      .This provision reads in pertinent part:
      2154.4 Planning Costs Where Plans Are Abandoned.—
      A. Allowable. — If a provider abandons its plans to construct or purchase a facility, the cost of such plans is allowable if the planning was for the purpose of expanding, rebuilding, or relocating the operations of the certified facility. (See § 2155 for abandoned construction-in-progress.) Plans are deemed abandoned when there is no remaining discernible benefit to a provider. If a facility is completed, all feasibility studies and preliminary plans relating to the building project have a discernible benefit to a provider since they are used as part of the decision-making process on whether to build the facility. Thus, such plans, even if they are not directly used in the building of the facility, are not considered abandoned. The costs of such plans should be included in the historical cost of the facility when it is completed. (Effective for all cost reports open on or after June 1, 1978).

      . PRRB Hearing Decision No. 84-D120 reported in Medicare and Medicaid Guide (CCH), New Developments Binder ¶ 34,074.

      . HCFA Administrator’s Decision reported in Medicare and Medicaid Guide (CCH), New Developments Binder ¶ 34,075.

      .The cost reimbursement system was in effect during the period at issue in this litigation. By statute effective October 1, 1983, Congress provided for phase-in of a new prospective payment system. 42 U.S.C. § 1395ww et seq.; Social Security Act § 1886(d), as amended by the Social Security Act Amendments of 1983, Pub.L. 98-21. For cost reporting periods beginning on or after October 1, 1983, hospitals are paid a prospectively determined rate for Part A inpatient operating costs on a per discharge basis determined according to specific diagnostically related groups. See 42 C.F.R. § 405.470 et seq. Capital-related costs, such as those involved in this action, were excluded from the prospective payment system, and these items continue to be reimbursed on the basis of reasonable costs through at least October 1, 1986. 42 U.S.C. § 1395ww(a)(4), 42 C.F.R. § 405.454(m). Congress ordered the Secretary to conduct a study and report on proposals for including capital-related costs in the prospective payment system after that date. Section 603(a) of Pub.L. 98-21. The provider contends, that as a result of the possible changes, if it is not allowed to expense the fees, it would no longer receive reimbursement for its actual capital costs through periodic depreciation allowances. The request for a study, however, does not presage any conclusions by the Secretary or Congressional response to such a report. The future treatment of capital-related costs and the manner in which Congress may address depreciation allowances existing at the time of any change are matters of speculation. The Court is unpersuaded that this is a basis for expensing costs incurred well before enactment of the prospective payment system.

      . Examples of costs related to the construction of a new plant which Medicare recognizes as properly capitalizable include: planning costs (PRM, Part I, § 2154.1 et seq.); legal fees and architect fees (PRM, Part I, § 104.10); interest costs on construction loans during construction period (PRM, Part I § 206); advertising costs in connection with obtaining bids for construction or renovation projects (PRM, Part I, § 2136.1); and start-up costs (PRM, Part I, § 2132).

      . Technically, the review is not a determination of whether there is any genuine issue as to any material fact as in a ruling on a summary judgment motion, but rather whether the agency action satisfies the enumerated standards in the Administrative Procedure Act. Good Samaritan Hospital, Corvallis v. Mathews, 609 F.2d 949, 951 (9th Cir.1979). The respective motions in this case will be referred to as denominated by the parties, but will be treated as motions to affirm or set aside the agency action in accordance with the APA.

      . The record indicates that the provider's accounting expert, who was also a member of the Board of the hospital, conceded that Medicare policy may differ from GAAP and takes precedence. (Certified Administrative Record at 238, 253).

      . PRRB Hearing Dec. No. 80-D102, December 18, 1980 (cost reporting period ending June 30, 1977) (Takoma Adventist Hospital, Greenville Tennessee), reported in Medicare & Medicaid Guide (CCH), New Developments Binder ¶ 30,-831.

      . The letter, dated February 27, 1981, from Bernard J. Patashnik, Director, Division of Institutional Services Reimbursement, Bureau of Program Policy, Health Care Financing Administration, to Eugene J. Ott, Senior Director, Reimbursement Accounting, Blue Cross of Greater Philadelphia was obtained through the Freedom of Information Act and was not relied upon by the provider in the preparation of its cost report.

      . The Court does note a peculiar similarity mentioned in the record. It appears that in the radiation therapy department an electric skylight was substituted in lieu of a real skylight called for in the Lockwood Greene plans.


source: Caselaw Access Project

author: STERN, District Judge.

license: Public Domain

text:
    Creola WHEELER, Plaintiff, v. Margaret M. HECKLER, Secretary of Health and Human Services, Defendant.
    Civ. A. No. 83-2494.
    United States District Court, D. New Jersey.
    April 28, 1985.
    Jeffrey G. Paster, West Orange, N.J., for plaintiff.
    Mary G. Courtney, Sp. Asst. U.S. Atty., Newark, N.J., for defendant.
   OPINION

STERN, District Judge.

This matter was opened to the Court by Jeffrey G. Paster, plaintiff’s counsel, seeking an award of attorney’s fees under section 206(b) of the Social Security Act, 42 U.S.C. § 406(b). The Secretary of Health and Human Services (Secretary) does not object to an award of fees, only to the amount. For the reasons following, we find that Mr. Paster is entitled to the full sum requested.

FACTS

On January 24, 1984, this Court reversed the earlier decision of the Secretary, which denied plaintiff Title II Social Security disability benefits, and remanded to the Secretary solely for a computation and payment of benefits on plaintiff’s behalf. While Mr. Paster’s firm was successfully representing plaintiff on her disability claim, plaintiffs means decreased. So, on the law firm’s recommendation, she applied also for Supplemental Security Income (SSI). See Pltf’s Letter-Brief of Feb. 19, 1985 at 1. Apparently, when this Court in January directed payment of disability benefits, the Social Security Administration (SSA) concurrently, or soon thereafter, awarded plaintiff SSI benefits as well.

Subsequently, plaintiff was notified that her retroactive disability benefits for November 1982 through May 1984 amounted to $7,184.00, but that this sum would be reduced by $3,045.02 “because you received Supplemental Security Income payments for 05/83 through 06/84.” Id. at Exh. B. (We note immediately that this statement was not entirely accurate since plaintiff had not actually received SSI payments during those months.) Moreover, the SSA noted that it was withholding $813.47, a sum allegedly representing the maximum 25 percent available from her retroactive benefits as payment for attorney’s fees. Id. Quick arithmetic shows that the SSA computed the 25 percent after reducing her retroactive Title II benefits by part of her retroactive SSI award. By this device, the potential fee available to plaintiff’s counsel shrank from 25 percent of $7,184.00, or $1,796.00, to $813.47.

Plaintiff’s counsel objects to this procedure, arguing that where SSI is awarded concurrently or subsequently to an award of disability benefits, and both are computed for retroactive periods, the SSI award should not reduce the amount available for attorney’s fees under 42 U.S.C. § 406. The Secretary counters that the language of the Social Security Act and the regulations restrict fees to 25 percent of past-due disability benefits “as " reduced under 42 U.S.C. § 1320 by the amount of SSI payments received by plaintiff for the period in which she was entitled to retroactive Social Security benefits.” Def’s Brief at 4.

DISCUSSION

The question is whether the Secretary may properly apply 42 U.S.C. § 1320 to reduce an award of retroactive Title II disability benefits, for purposes of computing attorney’s fees under 42 U.S.C. § 406(b), when SSI benefits are awarded concurrently with, or subsequently to the disability payments. Section 406(b) of Title 42 of the United States Code was enacted, in part, to ensure adequate representation of Social Security claimants. See, e.g., Reid v. Heckler, 735 F.2d 757, 760-61 (3d Cir.1984); MacDonald v. Weinberger, 512 F.2d 144, 146 (9th Cir.1975); Dawson v. Finch, 425 F.2d 1192, 1195 (5th Cir.), cert. denied, 400 U.S. 830, 91 S.Ct. 60, 27 L.Ed.2d 60 (1970). It provides that the court

may determine and allow as part of its judgment a reasonable fee for such representation, not in excess of 25 percent of past-due benefits to which the claimant is entitled by reason of such judgment and the Secretary may ... certify the amount of such fee for payment to such attorney out of, and not in addition to, the amount of such past due benefits.

42 U.S.C. § 406(b).

Section 1320a-6 of Title 42 directs the SSA to reduce retroactive Social Security disability payments if the individual also received SSI for the same period. The amount of the offset is the amount of SSI which would not have been paid if the individual had received the Title II benefits when they were due, instead of retroactively. See 42 U.S.C. § 1320a-6 (amended 1984). If this offset also operates to reduce the base amount for calculating attorney’s fees under section 406(b), then it would severely undercut the purpose of that provision to encourage legal representation of Social Security claimants. We do not think that this was an intended or a necessary effect of section 1320a-6.

The explicitly stated intent of section 1320a-6 was to recover windfalls from those who had over-collected SSI benefits in light of a subsequent retroactive award of Title II disability benefits. See H.Conf. Rep. No. 96-944, 96th Cong., 2nd Sess. 69, reprinted in 1980 U.S.Code Cong. & Ad. News, 1277, 1416; S.Rep. No. 96-408, 96th Cong. 2nd Sess. 78, reprinted in 1980 U.S. Code Cong. & Ad.News 1277, 1356. Congress sought to remedy a specific problem created by individuals who were dual beneficiaries of payments under both the SSI and disability programs. To emphasize this point it is worth reprinting a passage from the legislative history of section 1320a-6:

Present law. — A substantial proportion of SSI recipients are also eligible for benefits of old-age, survivors, and disability insurance program under title II of the Social Security Act. The proportion of dual eligibility can be expected to increase in the future since many of those who are now ineligible for title II benefits are simply so old that their period of work history occurred prior to the time that social security coverage was available_
Though the two programs are administered by the same agency, it can sometimes happen that an individual’s first check under one program will be delayed. If the SSI check is delayed, retroactive entitlement takes into account the amount of income the individual had from social security. However, if the title II check is delayed, a windfall to the individual can occur since it is not possible to retroactively reduce his SSI benefit beyond the beginning of the current quarter.
Committee bill. — Under the committee provision the statute would be amended to provide that an individual’s entitlement under the two titles shall be considered as a totality so that payment under either program shall be deemed to be a payment under the other if that is subsequently found to be appropriate. Thus, if payment under title II is delayed so that a higher payment is made under title XVI, the adjustment made in the case of any individual will only be the net difference in total payment.

Id. Quite clearly, then, Congress intended to repair a glitch in the payment mechanism of the two systems which arose when eligibility for Title II benefits was determined after SSI benefits had already been paid.

Section 1320a-6 was enacted after section 406(b). Yet Congress nowhere stated or implied that section 1320a-6, designed to stop windfall benefits to claimants, was to serve double duty as a procedure for reducing the amount available for attorney’s fees under 42 U.S.C. § 406(b). See Burnett v. Secretary of Health and Human Services, 563 F.Supp. 789 (W.D.Ark.1983).

The Secretary argues that section 1320a-6 is imported into the attorney’s fee provision by the use, in section 406(b), of the term “past-due benefits.” This phrase is defined at 20 C.F.R. § 404.1703 as follows:

“Past-due benefits” means the total amount of benefits payable under title II of the Act to all beneficiaries that has accumulated because of a favorable administrative. or judicial determination or decision, up to but not including the month the determination or decision is made.

She argues, apparently, that the entire amount of a claimant’s retroactive Social Security benefits are not “payable” where they must first be reduced by the over-payment of SSI under section 1320a-6. Whatever the merits of this reasoning may be for cases in which SSI was actually received during the applicable retroactive period, it is not persuasive where, as here, SSI is also awarded retroactively.

If SSI is awarded concurrently with, or subsequently to an award of disability benefits, there is no language in the Act or regulations which directs that the Secretary should compute and pay SSI benefits first, thereby artificially reducing the amount “payable” as “past-due” disability. This procedure has the effect of reducing the amount of benefits available for attorney’s fees under section 406(b) — an effect which we found above was unintended by the drafters of section 1320a-6.

The preamble to the final regulations implementing section 1320a-6 is not to the contrary. There, the Secretary stated that:

The amount payable is the amount of retroactive benefits less the amount of any deductions, reductions, or over-payments applicable to the retroactive period. Thus, the amount of retroactive benefits payable for purposes of withholding an attorney’s fee is the amount of retroactive Social Security benefits reduced by the amount of any SSI payments received in the retroactive period.

20 C.F.R. § 404.408(b), preamble, 47 Red. Reg. 4986 (February 3, 1982) (emphasis added). One court has found this language inapplicable because the Secretary was addressing a question concerning fees authorized by the Secretary for administrative awards of benefits under section 406(a). See Burnett, 563 F.Supp. at 793. By contrast, we are here concerned with court-authorized fees under section 406(b). Even if the Secretary intended her comments to cover court-awarded fees, however, they would not apply to this case where SSI benefits were not received during the retroactive period.

Thus we find that where SSI benefits are awarded concurrently with, or subsequently to Social Security disability and computed for a retroactive period, the Secretary should compute and pay Title II disability benefits before Title XVI SSI benefits so as not to artificially and inappropriately penalize attorneys who apply for fees under section 406(b). This result conflicts neither with section 1320a-6, nor the regulations promulgated thereunder. Moreover it best preserves the congressional intent of section 406(b) to encourage lawyers to represent Social Security claimants. See Carlisi v. Secretary of Health & Human Services, 583 F.Supp. 135 (E.D.Mich.1984). In the present case, then, the Court finds that plaintiff’s attorney is entitled to a reasonable attorney’s fee of $1,796.00, representing 25 percent of plaintiff’s total past-due Social Security benefits.

      . This section was amended recently by Public Law 98-369. However, the substitute provision does not apply to reductions of retroactive Social Security benefits or SSI payable, as here, prior to the seventh month following enactment (July 1984). See Deficit Reduction Act of 1984, Pub.L. 98-369, § 2615(b), 42 U.S.C. § 1320a-6 (1984). We of course do not decide the effect of the amendments on our' decision today, except to note that the new provision similarly makes no reference to reducing attorney’s fees under section 406(b); furthermore, the amendment appears specifically to contemplate a reduction of SSI where an individual is a dual beneficiary. See Id.; H.Conf.Rep. No. 98-861, 98th Cong., 2nd Sess. 1391 (1984), reprinted in 1984 U.S. code Cong. & Ad.News, 697, 2079.

      . The Secretary cites Cloyd v. Weinberger, 527 F.2d 1167 (6th Cir.1975), a case which is apparently inapposite for the same reason. That is, there is no indication in the opinion that the workman's compensation benefits involved were awarded retroactively. Moreover, reduction of disability on account of workman’s compensation is governed by 42 U.S.C. § 424a, a provision not at issue in this case.


author: PAINE, District Judge.

text:
    UNITED STATES of America v. Louis J. RAGONESE, Defendant.
    No. 82-6104-Cr-Paine.
    United States District Court, S.D. Florida.
    April 29, 1985.

      Robert J. Lehner, Special Atty., U.S. Dept, of Justice, Miami, Fla., for Government.
    Joel Hirschorn, Miami, Fla., for defendant.
   PAINE, District Judge.

This cause is before the Court on the government’s attempt to secure a forfeiture of certain properties belonging to the defendant, Louis J. Ragonese, pursuant to 18 U.S.C. § 1963(a). Ragonese was convicted of violating the substantive provisions of RICO in February, 1985. The defendant has waived a jury determination of the forfeiture aspect of this case and the government agreed to a non-jury determination. A forfeiture hearing was held on April 11, 1985 at which time the Court heard the arguments of counsel.

The government announced during the course of the hearing its theory that the properties sought to be forfeited came under 18 U.S.C. § 1963(a)(2), which provides that

[wjhoever violates any provision of section 1962 of this chapter shall be fined not more than $25,000 or imprisoned not more than twenty years, or both, and shall forfeit to the United States, ... (2) any—
(A) interest in;
(B) security of;
(C) claim against; or
(D) property or contractual right of any kind
affording a source of influence over; any enterprise which the person was established, operated, controlled, conducted, or participated in the conduct of, in violation of section 1962; ....

The parties agree that the government must establish the nexus between the property sought to be forfeited, Cypress Villas Apartments and R.J. Louis & Co., and the substantive RICO violation beyond a reasonable doubt. In this instance, therefore, the government must show that Rago-nese’s interests in Cypress Villas and R.J. Louis Co. afforded him a source of influence over the enterprise consisting of the association in fact of Ragonese, Liuzzo and Carbonia. In support of its argument the government cites United States v. Conner, 752 F.2d 566 (11th Cir.1985) and United States v. Cauble, 706 F.2d 1322 (5th Cir.1983).

In Cauble the defendant was found guilty of substantive RICO violation by virtue of the importation and distribution of over 147,000 pounds of marijuana over a two year period. Cauble, 706 F.2d at 1329. The jury also found that the defendant’s interest in Cauble Enterprises should be forfeited. It is apparent from the language used in the verdict form that the government sought forfeiture pursuant to § 1963(a)(2). Id. at 1346, n. 90. Unfortunately Cauble does not illucidate the extent to which a source of influence must have been exerted.

The Conner case is not really determinative in this instance because the government in Conner sought forfeiture of interests acquired or maintained by reason of a substantive RICO violation. In Conner the Court upheld the forfeiture of certain sums of money which were received by defendants as kickbacks. Those kickbacks formed, in essence, the cornerstone of the substantive RICO violations. The Conner decision is helpful in the context of this proceeding from the standpoint that the Conner Court cited the Cauble decision with approval. Id. at 576. Upon the basis of the limited authority in this area and on the arguments of counsel and evidence the Court makes the following findings of facts and conclusions of law.

Findings of Fact

1.That Anthony Cardonia conducted drug deals from the two apartments he occupied during the course of his stay at Cypress Villas Apartments (hereinafter C.V.).

2. That Louis Ragonese was the general partner of the entity that owned C.V.

3. That Ragonese used C.V. as a tax shelter for his legitimate investors. (T. at 979, testimony of John Oleroogy).

4. That Ragonese’s plan was to improve the quality of tenants and physical plant at C.V. (Testimony of Oleroogy; T. at 736, 1694, 1696).

5. That Ragonese was upset with Car-bonia for dealing in drugs at C.V. because these activities frustrated his plan to improve the quality of C.V. (T. 738, 740, 797, 903, 996, 1027).

6. That the planes purchased by R.J. Louis Co., which were used in connection with activities of which Ragonese was convicted, were bought principally for legitimate business purposes. (Testimony of John Oleroogy; T. at 907, 988).

7. That Carbonia was required to pay charter fees for unauthorized use of the plane for a flight to Jacksonville. (T. at 1018, 1027).

8. Ragonese made attempts to secret the planes from Carbonia. (T. 1020, 1037).

Conclusions of Law

The jury, by its verdict has already determined that Ragonese and Carbonia constituted an association in fact which formed the enterprise for purposes of the RICO claim. All that remains for this Court’s determination is whether Ragonese’s interest in C.V. and R.J. Louis afforded him a source of influence over the conduct of the affairs of the enterprise. Again the Court notes that, for purposes of this question, it has been designated as the trier of fact by the parties. In making the factual assessments the Court accepts, as it must, the jury’s findings that Ragonese was guilty of a substantive RICO violation in addition to numerous predicate acts alleged in the indictment. The only issue is whether in conducting the affairs of the enterprise through a pattern of racketeering Rago-nese used his interests to exert influence on the enterprise.

As noted above there is a dearth of law on the question of what constitutes a “source of influence”. Numerous cases have discussed what constitutes an “interest” for purposes of forfeiture considerations. See e.g. Russello v. U.S., 464 U.S. 16, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983); U.S. v. McManigal, 708 F.2d 276 (7th Cir.1983); U.S. v. Martino, 681 F.2d 952 (5th Cir.1982). The “source of influence” portion of the statute has not, however, been the topic of such in depth analysis by the appellate courts. Therefore, this Court must address the matter with relatively little guidance from the appellate bench in an effort to set forth some boundaries.

The forfeiture provisions of RICO are, unlike other forfeiture mechanisms, an in personam penalty levied against a defendant convicted of a substantive RICO offense. U.S. v. Conner, 752 F.2d 566, 576 (11th Cir.1985). The forfeiture is mandatory, but there clearly must be some nexus between the racketeering activity and the assets subject to forfeiture. In other words a RICO forfeiture should not be considered synonymous with England’s common law forfeiture of estate wherein all a convicted felon’s assets were escheated to the government or Lord. Cauble, 706 F.2d at 1345, n. 84. See also, Webb & Turow, Rico Forfeiture in Practice: A Prosecutorial Perspective, 52 U.Cin.L.Rev. 404, 405 (1983).

The articulated purpose behind passage of RICO was the “removal of organized crime from our organizations, prevention of their return and, where possible, forfeiture of their ill-gotten gains.” 116 Cong. Rec. 592 (1970) (Comments of Senator McClellan, the act’s major sponsor.) See also, United States v. Turkette, 452 U.S. 576, 585, 101 S.Ct. 2524, 2529, 69 L.Ed.2d 246 (1981).

The United States Court of Appeals for the Eleventh Circuit recently addressed the issue of forfeiture under 18 U.S.C. § 1963(a)(2) in United States v. Zielie, 734 F.2d 1447 (11th Cir.), reh’g en banc denied, 740 F.2d 979 (11th Cir.1984). In defining what assets would be subject to forfeiture under section 1963(a)(2) the Court held that

[properties that are owned by a RICO defendant and used by him to further the affairs of a RICO enterprise afford the owner/participant a source of influence over the enterprise and are thus subject to forfeiture....

Id. at 1459.

Based on the findings of facts and the Court’s review of the record available, it is the Court’s view that Ragonese did not use his interest in C.V. to further the activities of the enterprise beyond a reasonable doubt. Indeed there is support for the theory that Ragonese attempted to curtail the use of C.V. for drug sales. That theory is reasonable and consistent with the overall purposes to improve the quality of C.V.

The Court does find however that Ragonese did further the activities of the enterprise by use of Rockwell 685 Aero Commander during the Beliz trip. (T. 1852). That fact alone, however, does not justify forfeiture of Ragonese’s entire interest in R.J. Louis Company as it is clear that most of his interest in that entity was not used to further the activities of the enterprise. United States v. Zang, 703 F.2d 1186 (10th Cir.1982). Accordingly, it is

ORDERED and ADJUDGED that the Rockwell 685 Aero Commander, or its proceeds, are hereby forfeited to the United States pursuant to 18 U.S.C. § 1963(a)(2).


author: GLASSER, District Judge:

text:
    Elemerree WORTHY, Plaintiff, v. SCHERING CORPORATION, Defendant.
    No. 85 Civ. 0207.
    United States District Court, E.D. New York.
    April 29, 1985.
    Paul S. Mirman, P.C., Brooklyn, N.Y., for plaintiff.
    Solin & Breindel, P.C., New York City, for defendant.
   MEMORANDUM AND ORDER

GLASSER, District Judge:

This is a products liability action against a pharmaceutical firm, Schering Corporation. The case was recently removed from New York Supreme Court on the basis of diversity. Plaintiff has moved for a remand, arguing that the petition for removal was untimely and made with improper motives. For the reasons that follow, this action is remanded for lack of diversity jurisdiction, without an award of costs to plaintiff.

Background

This litigation arises from a malpractice action, Elemerree Worthy v. Dr. Michael Kaiser, filed in New York Supreme Court, Kings County, against Dr. Michael Kaiser, a New York resident. Plaintiff is also a New York resident. The complaint in that action, dated January 7, 1983, alleges in extremely vague terms that on or about June 7, 1981, Kaiser was negligent in performing “certain [unspecified] surgical procedures” on plaintiff and in treating and caring for plaintiff. The complaint further recites that plaintiff suffered [unspecified] injuries as a result of Dr.- Kaiser’s negligence. The action was assigned index number 21812/83.

On or about April 25, 1984, Schering was served with a document entitled, “Amended Complaint,” bearing the caption Elemerree Worthy v. Dr. Michael Kaiser & Schering Corporation. Paragraphs 1-10 of that “Amended Complaint” reiterate verbatim the allegations against Kaiser set forth in the first complaint. The remaining allegations in the Amended Complaint are addressed to claims against Schering, alleging that plaintiff was injected with a drug manufactured by Schering called “Solga-nol,” which caused plaintiff to suffer serious [unspecified] injuries. The complaint is largely devoid of any allegations as to the specific dates of the Solganol injections, except for the allegation that the last injection occurred on or about August 6, 1982. For reasons that are not entirely clear to me, both plaintiff and Schering seem to assume that the Amended Complaint created a second, independent action. It nonetheless appears that the “second action” was never assigned an independent index number in the Supreme Court. It further appears that the files for both “actions” were transmitted to this Court by the Clerk of the Supreme Court. Defendant contends that the claims against Schering and Kaiser involved “totally different circumstances.” However, a Bill of Particulars submitted by plaintiff after the first complaint was served states that Kaiser’s negligence occurred between June 7, 1981 and September 1982, and specifies about two dozen negligent acts, virtually all of which concerned the administration of Solganol.

On or about July 30, 1984, plaintiff moved in Supreme Court to consolidate the two actions. Schering sought and received •several adjournments of that motion, though Schering maintains that it sought only brief adjournments and the Court sua sponte adjourned the motion to January 22, 1985. At oral argument, Schering further explained that one of the adjournments was granted at the request of plaintiff. Plaintiff’s affirmation in support of that/ motion, dated July 30, 1984, stated that the first action “was commenced by” service on Kaiser and the second “was commenced by” service on Schering. See Affirmation of Paul S. Mirman. As discussed below, plaintiff maintains that these statements in this affirmation did or should have alerted Schering that Kaiser was never served in the second action.

In a letter to plaintiff’s counsel dated January 10, 1985, Schering’s recently substituted counsel stated that it did not have a record indicating that Kaiser was served in the second action and asked for a copy of the proof of service. Plaintiff replied, in a letter dated January 14, 1985, that Kaiser was not served in the new action, but was served in the original action only. On January 22, 1985, Schering appeared before the Supreme Court and requested an adjournment to file a petition for removal. The petition for removal was filed in this Court that same day.

At oral argument on this motion, plaintiff’s counsel informed the Court that plaintiff had moved in the Supreme Court for leave to amend the complaint in the first action to add Schering as a defendant. Plaintiffs counsel stated that leave to amend had been granted and that Schering had been served in the first action. Plaintiff did not, however, offer a copy of the order granting leave to amend. Counsel explained that the Clerk of the Supreme Court could not locate the order because the file in that case had been transmitted to the Clerk of this Court, and the order was somehow misplaced. The cause of that problem is obvious — the Clerk of the Supreme Court apparently believed, with good reason, that the “two actions” actually constituted one single case, filed under one index number, and transmitted the entire file in that case to this Court after the petition for removal was filed.

Discussion

Plaintiff urges essentially two grounds for a remand: (1) the petition for removal was untimely, and (2) the removal was the result of improper motives and “chicanery.” Plaintiff alternatively argues that if a remand is denied, the first action should be removed to this Court under 28 U.S.C. § 1441(c). Plaintiff did not cite any cases in support of her arguments.

It appears that a remand is indeed necessary because the Court lacks diversity jurisdiction over this case. It is well established that an action based on state law cannot be removed to federal district court if any nondiverse defendant is joined in the complaint, even if the nondiverse defendant was never served. Pullman Co. v. Jenkins, 305 U.S. 534, 59 S.Ct. 347, 83 L.Ed. 334 (1939); Pecherski v. General Motors Corp., 636 F.2d 1156, 1160-61 (8th Cir.1981); 14A C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3723, at 319-21 (1985). Where the nondi-verse defendant has not been served, the action cannot be removed unless and until that defendant has been formally dropped from the case. 14A Wright, Miller & Cooper, § 3723, at 319-21. Kaiser’s citizenship is not diverse from plaintiff’s and he has not been dropped from this action. In any event, notwithstanding plaintiff’s concession that Kaiser was not served in the second action, Kaiser could be deemed effectively served since he was served in the first action and any argument that the two actions are separate would seem an unjustifiable emphasis upon form over substance.

Schering argues that an action between diverse parties can be removed if a nondi-verse codefendant has not been served. In making this argument, Schering fails to recognize that there are two separate requirements for removal in diversity cases. First, only actions over which the Court could have exercised original jurisdiction can be removed. 28 U.S.C. § 1441(a). This requires a showing of complete diversity. 28 U.S.C. § 1332(a); Pecherski, 636 F.2d at 1160-61. Second, a diversity case can only be removed “if none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.” 28 U.S.C. § 1441(b). Although, as discussed above, the failure to serve a nondiverse defendant will not avoid the requirement of complete diversity, some courts have held that the existence of an unserved defendant who resides in the forum state will not bar removal under § 1441(b). See 14A Wright, Miller & Cooper, § 3723 at 341-42. Wright, Miller & Cooper have observed that the apparent inconsistency between the rules regarding unserved defendants under § 1441(a) and § 1441(b) “is unfortunate and can only be justified in terms of the nondiverse party’s presence being a more fundamental defect in subject matter jurisdiction than is the presence of a local defendant in violation of Section 1441(b).” Id. In any event, the courts in this Circuit have held that a diversity action cannot be removed when a resident defendant is named in the complaint but has not been served. Allied Programs Corp. v. Puritan Ins. Co., 592 F.Supp. 1274, 1276 (S.D.N.Y.1984); Sands v. Geller, 321 F.Supp. 558, 562 (S.D.N.Y.1971).

The existence of a nondiverse, unserved defendant will not require a remand when the removing party can prove that joinder of the nondiverse defendant was a “fraudulent” effort to defeat removal. Allied Programs, 592 F.Supp. at 1276. Such fraud must be asserted with particularity and supported by clear and convincing evidence. 14A Wright, Miller & Cooper, § 3723 at 342-43. The test for fraudulent joinder is stringent: it must be established “ ‘that there can be no recovery [against the unserved defendant] under the law of the state on the cause alleged, or on the facts in view of the law as they exist when a petition for remand is heard.’ ” Allied Programs, 592 F.Supp. at 1276 (citations omitted).

Schering has not articulated any evidence of fraud. Schering merely speculates that Kaiser was not served in the second action because the statute of limitations had expired, but offers no facts or law in support of that contention. Scher-ing Memorandum at 4 n. 1. Such an unsupported allegation does not satisfy the test for fraudulent joinder. Furthermore, it is undeniable that the original complaint against Kaiser was served before the statute of limitations had expired, and the complaint in the second action, denominated by plaintiff as an “Amended Complaint,” contained the same allegations concerning Kaiser as the first complaint. Under both federal and New York rules, the claims against Kaiser in the amended complaint should relate back to the time of service of the original complaint for statute of limitations purposes. Fed.R.Civ. 15(c); N.Y. Civil Practice Law & Rules, § 203(e) (McKinney 1972). Consequently, it is doubtful that the claim against Kaiser is time-barred.

I therefore hold that this case must be remanded to the state court because, in the absence of complete diversity, this Court lacks subject matter jurisdiction over all of the claims raised by plaintiff. Plaintiff also requests an award of costs “to compensate for the enormously time-consuming motion practice in the above matter.” Plaintiffs Memorandum at 3. Section 1447(c) of Title 28, United States Code, provides that the Court “may order the payment of costs” when remanding, but such an award is discretionary. 28 U.S.C. § 1447(c) (emphasis added); 14A Wright, Miller & Cooper, § 3739 at 586-87. As I believe that all of the grounds for removal asserted in plaintiffs papers are meritless, I hereby deny the request for costs.

Specifically, plaintiff first asserts that the petition for remand was untimely because the July 30, 1984 affirmation accompanying plaintiffs motion to consolidate should have alerted Schering that Kaiser had not been served. . The affirmation merely stated that the second action was commenced by service on Schering. I do not see how this should have alerted Schering that Kaiser was never served. The affirmation merely contained a pro for-ma recitation of the appropriate means of commencing an action in New York Supreme Court — by the service of process on the defendant. See N.Y. Civil Practice Law & Rules, § 304 (McKinney 1972). As I recently held in another case, the period for filing a petition for removal runs only after the defendant receives a document from which it can “ ‘intelligently ascertain removability.’ ” E. W. Howell Co. v. Underwriters Labs. Inc., 596 F.Supp. 1517, 1520 (E.D.N.Y.1984), citing Ardison v. Villa, 248 F.2d 226, 227 (10th Cir.1957). Assuming arguendo that the motion would have been removable if Kaiser had not been served, Schering could not have made an intelligent assessment of the removability of this action from the Mirman affirmation.

Plaintiff alternatively argues that remand is appropriate because Schering’s motive in removing the action was improper. This argument is specious — the right to remove is “statutory and absolute, regardless of motivation_” White v. Wellington, 627 F.2d 582 (2d Cir.1980). Furthermore, a district court can only order a remand for grounds specified in the controlling statute, 28 U.S.C. § 1441(c). Thermtron Products, Inc. v. Hermansdorfer, 423 U.S. 336, 344, 96 S.Ct. 584, 589, 46 L.Ed.2d 542 (1976). District courts do not have the power to remand actions for purely discretionary reasons such as improper motive, which are not authorized by § 1441(c). Id. at 345 n. 9, 96 S.Ct. at 590 n. 9.

In light of the above, the remand of this action is, in effect, a sua sponte order for lack of subject matter jurisdiction. I therefore do not believe that an award of costs to plaintiff would be appropriate.

SO ORDERED.

      . The circumstances surrounding the motion to amend are also described in a "Reply Affirmation” submitted in conjunction with the present motion. That affirmation was filed and served during the day preceding oral argument of this motion, in disregard of the motion rules of this Court. Those rules are published every Tuesday in the New York Law Journal. Plaintiff was advised at oral argument that her untimely papers would not be considered by the Court.


author: BRIEANT, District Judge.

text:
    Dr. Richie HERINK, Plaintiff, v. HARPER & ROW PUBLISHERS, INC. and Gifford Pinchot, Defendants.
    No. 85 Civ. 2484-CLB(WP).
    United States District Court, S.D. New York.
    April 29, 1985.

      Spellman & Joel, White Plains, N.Y., for plaintiff.
    Lankenau, Kozner & Bickford, New York City, for defendants.
   MEMORANDUM AND ORDER

BRIEANT, District Judge.

Defendants in this diversity action for damages and injunctive relief are the publisher and author, respectively of a book entitled “Intrapreneuring-Why You Don’t Have to Leave the Corporation to Become an Intrapreneur.” The book, consisting of approximately 350 pages defines an “Intra-preneur” as “any of the ‘dreamers who do’, those who take hands-on responsibility for creating innovation of any kind within an organization. The intrapreneur may be the creator or inventor but is always the dreamer who figures out how to turn an idea into a profitable reality.”

Plaintiff, Dr. Richie Herink, is apparently regarded by the author as an intrapreneur. He is referred to only in pages 97 through 100 under a subheading entitled “Profile, RICHIE HERRINK: (sic) Selling to Your Own Company.” There follows a short vignette referring to plaintiff as “Richie”, and describing his “success story” as an executive with the International Business Machines Corporation (“IBM”).

No purpose will be served in quoting the article in full. Essentially it appears to portray plaintiff as an aggressive and creative builder of an internal educational empire within IBM, who worked long hours, and after “two years of fantastic success” found his internal organization [which] crossed corporate boundaries,” terminated as a result of “what may seem like bureaucratic bumbling [but] is probably corporate wisdom”. The author pointed out that thereafter plaintiff and his immediate superior were made head of a “new division of IBM, Technology Management Education which will be responsible for education companywide”. The vignette ends with the following: “as Richie Herrink put it, ‘we are answering a higher calling’ ”.

The Complaint filed April 1, 1985 alleges a count said to arise under Section 51 of the New York Civil Rights Law for the unauthorized use of plaintiff’s name for advertising purposes and for purposes of trade without written consent. Complaint, ¶ 4. The Complaint contains a second count against Pinchot only, which seems to allege defamation, invasion of privacy and injury to reputation by having portrayed plaintiff in a false light, and charges that:

“by assigning inferences to plaintiffs’ actions which are untrue defendant Pinchot has given an impression that plaintiff is an IBM employee run amok; a person interested solely in individual gain and success. Plaintiffs reputation among his peers and among the business community in general has suffered greatly by the constant misspelling of his name, by the inferences drawn from his profile as written by defendant Pinchot and by illusions created by defendant Pinchot which are not based on fact.” Complaint ¶ 12.

The third count, pleaded only against Harper & Row apparently also alleges a false light claim.

Plaintiff demands exemplary damages in the amount of $1,500,000, and an injunction prohibiting the sale distribution and advertising of the book, and its recall, together with damages for unjust enrichment by having appropriated “plaintiffs name and reputation,” together with attorneys fees.

Essentially plaintiffs grievance as amplified in his attorney’s affidavit filed April 19, 1985 seems to be that his name was misspelled, that he is not an “intrapreneur” within IBM, and that the article was in some way hurtful to him in his business relations with his colleagues.

By order to show cause issued April 1, 1985 plaintiff sought a preliminary injunction to prevent further distribution of the book and to recall some 77,000 copies extant in customary trade channels. By motion filed April 10, 1985, defendants moved to dismiss the complaint and for sanctions for having brought it, and the motion for a preliminary injunction, in violation of Rule 11, F.R.Civ.P. Both motions were heard and fully submitted on April 23, 1985.

A copy of the book has been submitted and read in support of the motions. The work appears to be a nonfrivolous hard cover nonfiction book intended to be read by corporate executives. In essence it is a “self-help” volume which seeks to advise and assist executives of large corporations to avoid the inhibiting effect of intracorpo-rate bureaucracy and hardened corporate arteries upon original thought and the opportunity to experiment with innovations. Essentially, readers are urged to conceive of an idea for an internal improvement in services to be rendered to their own enterprise, and are instructed, with reference to case histories, how to implement such a project and make it succeed, to their own career advantage first, but also to the ultimate benefit of the corporations. Intra-preneuring, a term invented apparently by the author, can but need not necessarily lead to the development of new products or better ways of doing things.

Since the truth of the profile cannot be ascertained on this motion the court assumes that Dr. Herink may have been placed in a false light. Implicit also in the situation is an inference that “intrapren-eurs”, because self-aggrandizement is at least part of their motivation, are not well received in a large hidebound corporation which may likely be organized on a military model, where employees are expected to be team players, all glory is funneled to the top, and innovations are usually killed in committee.

Use of a person’s name or face in a book of this sort is not a violation of Section 51 of the New York Civil Rights Law, and is not, as a matter of law, a “use for the solicitation of patronage for a particular service or product.” Pagan v. New York Herald Tribune, 32 A.D.2d 341, 343, 301 N.Y.S.2d 120 (1st Dep’t.1969), aff'd 26 N.Y.2d 941, 310 N.Y.S.2d 327, 258 N.E.2d 727 (1970). The advertising purposes prong of Section 51 is not violated where the use of a plaintiff’s name is not designed primarily to solicit purchasers for defendant’s products. See Lerman v. Flynt Distributing Co. Inc., 745 F.2d 123, 130 (2d Cir.1984), applying New York law. Neither does the fact that a writer or publisher has a profit motive or a motive to increase circulation by using the name of a private citizen violate the trade purposes prong of the New York Civil Rights Law provided the content of the writing is informative or newsworthy. Id. The observations of an author concerning the internal corporate bureaucracy at IBM, and a report as to how its perceived inhibiting affect was evaded by Dr. Herink, are both informative and newsworthy. Were § 51 of the New York Civil Rights Law to read on these facts, it would be violative of the First Amendment to the United States Constitution. See Stephano v. News Group Publishing, 98 A.D.2d 287, 470 N.Y.S.2d 377 (1st Dep’t.1984) (Asch, J. dissenting).

The Complaint as now presented to this Court does not plead a false light or defamation claim. It is not the function of this Court to rewrite the complaint, or construe it to be such. It is far from clear that the profile read as a whole is other than laudatory, or that it contains any actionable innuendo of the sort which would tend to degrade or prejudice the plaintiff in the eyes of the community. If plaintiff wishes to plead such a claim under New York Law, the particular words said to be defamatory must be alleged, and special damages in excess of $10,000 would also have to be pleaded. Ladany v. William Morrow Co. Inc., 465 F.Supp. 870, 875 (SDNY 1978).

There is no common law claim for invasion of privacy under New York law beyond § 51 of the New York Civil Rights Law Lerman v. Flynt Distributing Co. Inc., supra at 129.

The motion for a preliminary injunction must be denied since there is no likelihood of success at trial on so much of the complaint as is founded on § 51 of the New York Civil Rights Law, and because equity will not enjoin a libel. Brandreth v. Lance, 8 Paige 24 (NY 1839).

Defendant’s motion for summary judgment dismissing the First Count is granted. The Second and Third Counts are dismissed for failure to state a claim, with leave to replead within thirty (30) days if so advised, and if such a pleading can be signed without violating Rule 11. Court declines at this time to make the finding contemplated by Rule 54(b), F.R.Civ.P.

Since we are not absolutely certain that this complaint cannot be repleaded as a defamation action, the Court is reluctant at this time to impose sanctions upon plaintiff. To do so might have the effect of chilling access to the Courts by others. So much of the defendant’s motion which seeks sanctions is denied with leave to renew depending on the future course of the litigation.

So Ordered.


author: CALDWELL, District Judge.

text:
    Sara Jane BAILEY, Administratrix of the Estate of Hazel Stehman, Plaintiff v. ELI LILLY CO., INC., and the United States of America Food & Drug Administration, Defendants.
    Civ. A. No. 84-1529.
    United States District Court, M.D. Pennsylvania.
    April 29, 1985.

      Howard B. Krug, Purcell, Nissley, Krug & Haller, Harrisburg, Pa., for plaintiff.
    Sally A. Lied, Asst. U.S. Atty., U.S. Atty.’s Office, Harrisburg, Pa., for defendants.
    Nina M. Gussack, Pepper, Hamilton & Scheetz, Philadelphia, Pa., for Eli Lilly Co.
   MEMORANDUM

CALDWELL, District Judge.

I. Introduction

Pursuant to Fed.R.Civ.P. 12(b), defendant, United States of America, has moved to dismiss plaintiffs complaint based upon the discretionary function exception to the Federal Tort Claims Act. 28 U.S.C. § 2671 et seq. Plaintiffs complaint alleges that the Food and Drug Administration (FDA) negligently failed to follow its own regulations in permitting Eli Lilly Co., Inc. to market the drug Oraflex and in also failing to take appropriate aetion to restrict the use of the drug or take it off the market after deaths and other injuries from its use became apparent. Plaintiffs decedent, taking Oraflex as a treatment for arthritis, allegedly died from bladder cancer caused by the drug. For the reasons set forth below, we grant the motion.

II. Discussion

The United States has waived its sovereign immunity from suit under certain circumstances.

[T]he district court shall have exclusive jurisdiction of civil actions on claims against the United States ... for injury or loss of property, or personal injury or death caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.

28 U.S.C. § 1346(b).

The waiver, however, does not apply to any claim “based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused.” 28 U.S.C. § 2680(a).

The FDA is statutorily charged with determining whether a new drug is, among other things, “safe for use” before approving the drug’s marketing or in deciding to remove an already approved drug from use by the public. See 21 U.S.C. § 356. Defendant contends that this is a discretionary function protected by section 2680(a). Plaintiff argues, on the other hand, that the FDA’s regulations have refined its statutory duty and that the FDA can be found liable for failing to follow its own regulations, program decisions, standards and data. Her claim does not involve-second guessing the FDA in the general area of drug approval. Rather, it involves holding the agency responsible for failing to comply with its own specific, objective procedures which, if followed correctly, would have inevitably led to Oraflex’s never being approved, and once approved, its removal from the market. Hence, in plaintiffs view, this case does not call into question the exercise of the agency’s discretion.

Plaintiff cites in her support Griffin v. United States, 500 F.2d 1059 (3d Cir.1974), and Gross v. United States, 676 F.2d 295 (8th Cir.1982), but we find these cases distinguishable. Gross is cited for the proposition that intentionally refusing to carry out a regulatory duty and consistently disregarding program standards and decisions does not fall within the discretionary function exception. In Gross, plaintiff sued state and county officials for excluding him from a United States Department of Agriculture feed grain program. The court rejected the discretionary function exception defense because the local officials had been ordered by national ones to permit plaintiff into the program. Unlike the FDA here, the local officials had no discretion to exercise.

'• In Griffin, the Third Circuit Court of Appeals held that the discretionary function exception did not apply to the government’s negligence in releasing for public use, in violation of a regulation, a quantity of polio vaccine which exceeded a reference strain in neurovirulence. The court stated:

[T]he implementation called for a judgmental determination as to the degree to which each of the enumerated criteria indicated neurovirulence in monkeys. The judgment, however, was that of a professional measuring neurovir-ulence. ... At issue was a scientific, but not policy-making, determination as to whether each of the criteria listed in the regulation was met and the extent to which each such factor accurately indicated neurovirulence.

Id. at 1066 (footnote omitted) (brackets added).

In the instant case, a scientific evaluation was not the crux of the FDA’s allegedly wrongful conduct. Hence, Griffin is inapplicable although there is some similarity between it and the instant case in that in both of them there is no challenge to the propriety of regulations but merely the manner in which they were implemented.

The regulations involved in the instant case, however, are materially different from the one at issue in Griffin. While, of course, these regulations are more specific than section 355, we are in complete agreement with the court in Miller v. Secretary, No. 83-595 (E.D.Pa.1983), that they “speak as an enhancement to the judgmental or discretionary function of the FDA in reviewing data submitted by drug companies for determination by FDA of whether or not a drug is safe for use and effective in use.” Slip op. at 4. As such, these regulations still involve the exercise of discretion by the FDA. See also Gray v. United States, 445 F.Supp. 337 (S.D.Tex.1978).

For example, plaintiff complains that defendant violated its own regulation when it approved Oraflex even though 21 C.F.R. § 314.110(a)(3) provides that an application for approval of a new drug shall not be considered complete unless it contains full reports of adequate preclinical tests on the safety and effectiveness of the drug. Because the same application with the same tests had allegedly previously been rejected by the FDA, plaintiff concludes that the eventual approval must have been based upon inadequate tests and in violation of the regulation. She claims that the FDA’s “disregard of its own decision ... cannot be regarded as discretionary under its regulatory directives.” Plaintiff’s brief at 12.

We think plaintiff’s argument highlights the discretionary nature of these regulations rather than downplays it. What constitutes an “adequate preclinical” test falls squarely within the judgmental role assigned to the agency. Also, it does not necessarily follow that the agency violated its regulations merely because it had previously denied the same application. The judgmental nature of this type of regulation distinguishes it from the polio virus neurovirulence regulation at issue in Griffin.

Plaintiff also argues that her “cause of action against the FDA is founded upon its intentional action of refusing to carry out its regulatory directives and disregard of program decisions and standards.” Plaintiffs brief at 13. Section 2680(a), however, insulates the government from any claim “based upon the failure to exercise or perform a discretionary function.” (emphasis added). Thus, we must reject this argument as well.

In United States v. S.A. Empresa De Viaco Aerea Rio Grandense (Varig Airlines), — U.S. -, 104 S.Ct. 2755, 81 L.Ed.2d 660 (1984), the United States Supreme Court discussed the discretionary function exception and stated as follows:

First, it is the nature of the conduct, rather than the status of the actor, that governs whether the discretionary function exception applies in a given case.... Thus, the basic inquiry concerning the application of the discretionary function exception is whether the challenged acts of a Government employee — whatever his or her rank — are of the nature and quality that Congress intended to shield from tort liability.
Second, whatever else the discretionary function exception may include, it plainly was intended to encompass the discretionary acts of the Government acting in its role as a regulator of the conduct of private individuals.... This emphasis upon protection for regulatory activities suggests an underlying basis for the inclusion of an exception for discretionary functions in the Act: Congress wished to prevent judicial “second-guessing” of legislative and administrative decisions grounded in social, economic, and political policy through the medium of an action in tort.

Id. at -, 104 S.Ct. at 2765, 81 L.Ed.2d at 674-75 (footnote omitted).

Here, the actions of the FDA were plainly of the “nature and quality that Congress intended to shield from tort liability.” Further, even if the agency mishandled the approval of Oraflex negligently or inten'tionally, the exemption still applies. “As the statute itself provides, discretionary functions are exempt whether or not the discretion involved be abused. 28 U.S.C. § 2680(a).” General Public Utilities Corp. v. United States, 745 F.2d 239, 245 (3d Cir.1984). Additionally, judicial intervention in such decisionmaking and regulatory activity would be contrary to Congress’s intention in passing the discretionary function exception.

We will issue an appropriate order.

      . The defendants originally named in the complaint were Eli Lilly Co., Inc. and The United States of America Food and Drug Administration. Plaintiff has settled with Eli Lilly Co., Inc. and The United States of America was named as the other defendant by order, dated January 18, 1985.

      . See also 28 U.S.C. § 2674.