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JDK MANAGEMENT v. COMMONWEALTH PENNSYLVANIA (10/22/86)

decided: October 22, 1986.

JDK MANAGEMENT, INC., PETITIONER
v.
COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE, RESPONDENT



Appeal from the Order of the Department of Public Welfare in case of Appeal Of: JDK Management, Inc., Re: Klingerman -- File Nos. 24-83-134; 23-84-57; 23-84-58 and 23-84-215.

COUNSEL

Elizabeth Place, with her, Charles O. Barto, Jr., for petitioner.

Bruce G. Baron, Assistant Counsel, for respondent.

Judges MacPhail and Palladino, and Senior Judge Barbieri, sitting as a panel of three. Opinion by Judge MacPhail.

Author: Macphail

[ 101 Pa. Commw. Page 426]

JDK Management, Inc. (Petitioner), which operates Shenandoah Manor Nursing Center (Shenandoah), appeals from the final administrative action of the Department of Public Welfare (DPW) disallowing certain depreciation and interest costs which were submitted for the purpose of calculating medical assistance reimbursements for the fiscal period ending December 31, 1982. We affirm in part and reverse in part.

The facts of this case date to 1979, when Phillip Krause undertook the task of obtaining a certificate of need (CON) for a 120-bed long term nursing care facility. Mr. Krause ultimately received approval of the CON and approached John D. Klingerman for assistance in building a nursing facility. On December 29, 1980, Valley Health Concerns, Inc. (VHC) was incorporated for the purpose of building Shenandoah. Mr. Krause agreed to transfer the CON to VHC in return for a development fee of $50,000. VHC subsequently began its search for a building contractor. The successful bidder was required to pay a construction supervision fee to Mr. Klingerman totaling $50,000. In conducting an

[ 101 Pa. Commw. Page 427]

    audit of Shenandoah for a one month period ending December 31, 1982, DPW disallowed depreciation and interest expense on capital funds borrowed to finance the CON development fee and the construction supervision fee described above. Petitioner appealed these audit adjustments.

Following a fair hearing, DPW's disallowance of the costs at issue was affirmed by the Hearing Officer who based his ruling on two theories: (1) that the $50,000 fees represented "related-party costs" and (2) that the payments constituted costs of investment by Mr. Krause and Mr. Klingerman. Petitioner's further appeal was denied by the Office of Hearings and Appeals.*fn1 The instant petition for review followed.

Petitioner contends that the fees at issue are not among those subject to related party treatment by DPW regulations and that they constitute allowable construction costs. In the alternative, Petitioner contends that even if the fees do constitute related party costs, they should nevertheless be allowed as reasonable compensation for services provided. Petitioner also argues that the Hearing Officer erred in concluding that the fees were properly disallowed as owners' costs of investing.

It should be noted at the outset that DPW does not dispute the fact that the supervision fee paid to Mr. Klingerman would ordinarily be allowable as a construction cost. DPW also concedes that both fees were paid for services performed and were not unreasonable in amount.

Our scope of review here is limited to a determination of whether DPW's decision is in accordance with law, whether the fact findings are supported by substantial ...


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