APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 76-1197)
Before Aldisert, Van Dusen and Weis, Circuit Judges. Argued Feb. 21, 1978. Resubmitted En Banc July 10, 1978. Before Seitz, Chief Judge, and Van Dusen, Aldisert, Adams, Gibbons, Rosenn, Hunter, Weis, Garth and Higginbotham, Circuit Judges.
This case arises from a threatened termination by the Department of Health, Education & Welfare of federal Medicaid funding for Shore Manor Nursing Home because the facility did not comply with federal quality standards. The termination of federal funding would have forced the transfer of the Medicaid patients residing at Shore Manor to other available facilities which qualified as Medicaid providers. HEW refused to provide the patients a pretermination evidentiary hearing on Shore Manor's qualification for continued participation in Medicaid. Several residents and the commissioner of the state Medicaid agency filed a class action on behalf of all Shore Manor Medicaid patients seeking to enjoin termination of Medicaid funding for Shore Manor and to compel HEW to conduct evidentiary hearings. The district court initially granted a preliminary injunction but later dissolved it. The district court then conducted further proceedings after which it granted summary judgment on one count of the class action plaintiffs' complaint. The court's order enjoined HEW from terminating federal funding unless the Shore Manor residents were first afforded a pretermination evidentiary hearing. HEW appealed from the district court's order.
Subsequent to the district court's order, Shore Manor rectified conditions and was recertified by the state Medicaid agency as a qualified Medicaid provider for the period January 31, 1978, to July 31, 1978. This recertification has dispelled the threat of a cut-off of federal funding and obviated the transfer of Medicaid patients from Shore Manor. These events pose the issue of mootness. We conclude that HEW's appeal is moot as regards prospective application of the district court's injunction. However, the appeal is not moot as concerns HEW's intention to seek recoupment from the State of New Jersey for past expenditures in compliance with what it asserts to be a wrongfully granted injunction. We find no merit in HEW's contention that the district court erroneously compelled federal funding for Shore Manor until the residents were given a pretermination hearing. Accordingly, HEW is not entitled to recoupment of its expenditures in compliance with the district court's injunction. We therefore remand the case to the district court, with directions to dismiss the action as moot, subject, however, to our determination that paragraph (2) of the April 1, 1977, district court order, See note 4 Infra, was proper in its holding that a hearing for the class plaintiffs was required.
A brief summary of the Medicaid program will put in context the Shore Manor residents' claim of a right to an evidentiary hearing prior to termination of federal funds for the Home. Title XIX of the Social Security Act, 42 U.S.C. §§ 1396 Et seq., established Medicaid, a cooperative, jointly funded, federal-state program to financially assist low income persons in securing medical care. Under Medicaid, HEW prescribes medical care delivery standards but state agencies administer eligibility requirements and distribute federal grant money to individual recipients. An individual determined by the state to be eligible for Medicaid benefits may obtain recompensable care from any institution, agency or person qualified to provide the relevant medical services. 42 U.S.C. § 1396a(a)(23). A state may not terminate, suspend or reduce an individual's benefits without providing notice and a hearing. 45 C.F.R. § 205.10(a)(5). Nursing home facilities must comply with statutory quality requirements and implementing federal regulations in order to qualify as a Medicaid provider. 42 U.S.C. §§ 1396a(a)(28), 1395x(j); 20 C.F.R. §§ 405.1101, Et seq. The state is primarily responsible for determining whether Medicaid providers comply with the federal standards. 42 U.S.C. § 1396a(a)(33). If found qualified, a Medicaid provider may receive payments from the state for its Medicaid eligible patients.
Between January 1, 1975, and April 1976, repeated state health inspections revealed that Shore Manor did not comply in substantial respects with federal quality standards.*fn1 Effective June 1975, HEW revoked Shore Manor's certification for participation in the Medicare program. HEW did not similarly disqualify the Home from Medicaid, purportedly because the Medicaid patients residing there could not then be promptly relocated due to a shortage of beds in other qualified facilities. In May 1976, HEW notified New Jersey's Medicaid agency that because of Shore Manor's noncompliance with federal requirements, federal Medicaid funding for patients at the Home would be terminated effective June 16, 1976.*fn2 On June 8, 1976, the New Jersey Department of the Public Advocate wrote HEW on behalf of the Shore Manor Medicaid patients, requesting an evidentiary hearing for the patients prior to suspension of funding. HEW responded that the patients were not entitled to a hearing because disqualification of Shore Manor would not reduce their Medicaid benefits insomuch as the state would be required to transfer the patients to qualified facilities. Denied their hearing, the residents of Shore Manor filed this class action, asserting in the fourth count of their complaint an entitlement to a pretermination HEW hearing under the due process clause of the Fifth Amendment.
On June 28, 1976, the district court granted a preliminary injunction forestalling suspension of federal funding for Shore Manor until September 1, 1976, after which time the court would consider modification of its order were Shore Manor still not in compliance with federal standards. On timely motion by HEW, the district court determined that Shore Manor remained in noncompliance and, therefore, dissolved its preliminary injunction as of October 14, 1976. By accompanying order, HEW was required to continue federal funding for 30 days from October 14, 1976, pursuant to federal regulations. See 45 C.F.R. § 249.10(b)(4)(i)(c). Federal financial participation was terminated November 14, 1976. The district court also conducted a hearing on November 8, 1976, at which the Public Advocate argued plaintiffs' rights to a permanent injunction. Plaintiffs' motion for summary judgment as to the Fourth Count*fn3 of the complaint was filed December 6, 1976.
In an opinion filed March 31, 1977, the district court held that termination of federal financial participation in Shore Manor and the concomitant forced transfer of Medicaid residents to other nursing care facilities would deprive the residents of property interests cognizable under the due process clause of the Fifth Amendment. The district court also held that the process due the Medicaid patients at Shore Manor included a pretermination hearing at least coextensive with the hearings given an individual Medicaid recipient before reduction or cessation of his or her benefits pursuant to 45 C.F.R. § 205.10. In an order entered April 1, 1977, the district court granted summary judgment for plaintiffs on Count Four the due process count of their complaint and further enjoined HEW from terminating funding of Shore Manor until completion of the mandated administrative hearing.*fn4 The United States appealed from the district court's April 1, 1977, order.
Shore Manor's recertification as a qualified Medicaid provider bodes well for the Medicaid residents who desire to remain at the Home. HEW, in a post-argument memorandum to this court, expressly disclaimed any objection to federal Medicaid funding for Shore Manor during the period of recertification, January 31 through July 31, 1978. Appellants' Memorandum on the Question of Mootness served on the parties April 26, 1978.*fn5 With the advent of Shore Manor's compliance with federal standards, there is no present need for a hearing to be afforded the residents on the question of Shore Manor's eligibility to participate in Medicaid. Medicaid funds will not be cut off and the residents will not be compelled to relocate. In short, recertification of Shore Manor has obviated the district court's injunction. In light of this, we have no hesitation in holding that the dispute over prospective application of the district court's injunction is now moot.*fn6
The usual disposition of a case mooted on appeal is for the appellate court to remand the case with directions to dismiss the action. United States v. Munsingwear, 340 U.S. 36, 39-40, 71 S. Ct. 104, 95 L. Ed. 36 (1951); 13 Wright, Miller & Cooper, Federal Practice & Procedure § 3533, at 292-94 (1976). See e. g. Hart v. United Steelworkers of America, 482 F.2d 282 (3d Cir. 1973). If the original action is not dismissed, the prior district court judgment would be accorded Res judicata effect. United States v. Munsingwear, 340 U.S. at 40, 71 S. Ct. 104, 95 L. Ed. 36 .
HEW attempts to resuscitate its appeal by asserting a right to recoup funds expended under an allegedly wrongful injunction. Under HEW's theory, an appellate court reversal on the merits of the district court's order forbidding summary termination of federal funding of Shore Manor is a prerequisite to its maintaining a recoupment action. The issue before the court is whether the prospect of an HEW suit for recoupment on the grounds of a wrongfully granted injunction requires this court to reach the merits of the injunction, rather than to divest the district court judgment of Res judicata effect by remanding with directions to dismiss plaintiff's suit as moot.*fn7
Were we to direct that plaintiffs' suit be dismissed as moot and thereby be deprived of Res judicata Effect, we assume HEW could bring its recoupment action and, in that forum, collaterally challenge the district court's injunction. However, the availability of a forum to collaterally challenge the district court's order does not imply that HEW's direct appeal is moot. In the analogous context of preliminary injunction bonds,*fn8 even if the underlying dispute is mooted prior to appellate review, the prospect of a suit on the bond challenging the propriety of the injunction is sufficient to sustain the life of the appeal and to require the appellate court to review the merits of the preliminary injunction order. In Liner v. Jafco, Inc., 375 U.S. 301, 84 S. Ct. 391, 11 L. Ed. 2d 347 (1964), the Supreme Court considered an appeal from a state court injunction barring union picketing at a building site. The owner of the building project had given a bond to indemnify the union in damages if the injunction were wrongfully sued out. The state courts granted a preliminary ex parte injunction and later, after a hearing, a permanent injunction. By the time the union obtained state appellate court review, the construction project had been completed. The Supreme Court held that although events had quieted the underlying labor dispute, the appeal was not mooted because of the union's stake in the bond. Id. at 305, 84 S. Ct. 391.
This court considered a similar situation in American Bible Society v. Blount, 446 F.2d 588 (3d Cir. 1971). There a group of mailers sought preliminary injunctions blocking the Post Office from instituting new regulations allocating the cost of sorting bulk mailings. The district court granted the preliminary injunctions on the condition the plaintiff-mailers posted security to cover any damages sustained by the Post Office in the event the preliminary injunctions were wrongfully granted. Before the court completed further proceedings, the mailers and the Post Office reached accord on a new plan for allocating bulk mailing costs. The plaintiffs moved to dismiss their suits and discharge the bonds. The Post Office opposed discharge of the bonds until damages were assessed. The district court ruled that with the new agreement the plaintiffs' suits were now moot, the preliminary restraints would be vacated, and the bonds could be discharged. On appeal, this court noted that were the actions dismissed as moot, the Post Office would challenge the merits of the preliminary injunction in an independent action on the bond. Because judicial economy would not have been served by ...