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Court of Appeals of Minnesota

May 15, 2017

Partners in Nutrition's Appeal of Disapproval of Site Expansion in the CACFP Program

         Department of Education

          Ll. Rhyddid Watkins, Faegre Baker Daniels, LLC, Minneapolis, Minnesota (for relator Partners in Nutrition)

          Martha J. Casserly, Jason Marisam, Assistant Attorneys General, St. Paul, Minnesota (for respondent Department of Education)

          Considered and decided by Worke, Presiding Judge; Jesson, Judge; and Smith, John, Judge. [*]

         SYLLABUS

         A state agency charged with administering federal regulations proceeds under an erroneous theory of the law when it substitutes its own legal standards for those expressly stated in the federal regulations.

          OPINION

          JESSON, Judge

         Relator Partners in Nutrition challenges a decision by respondent Minnesota Department of Education (MDE) denying relator's application to sponsor multiple sites under the federal Child and Adult Care Food Program (CACFP) based on a determination that Partners in Nutrition is not a financially viable organization. Because MDE's rejection of Partners in Nutrition's application does not comply with federally required procedures and legal standards and is arbitrary and capricious, we reverse and remand.

         FACTS

         Relator Partners in Nutrition is a Minnesota nonprofit corporation formed for the purpose of participating in the federal Child and Adult Care Food Program (CACFP). On August 18, 2015, Partners in Nutrition began an application process with MDE to become a sponsoring organization under CACFP.

         Pursuant to procedures then applied by MDE, Partners in Nutrition began the application process by submitting a letter of intent. On September 17, 2015, MDE approved the letter of intent, which authorized Partners in Nutrition to submit a management plan and apply to be a sponsor beginning with a single site. MDE approved Partners in Nutrition as a single-site sponsor on November 5, 2015.

         Under the next step of its application procedures, MDE considered whether Partners in Nutrition could be approved to expand from a single-site sponsor to a multi-site sponsor. The parties engaged in a series of discussions related to Partners in Nutrition's financial viability. Because Partners in Nutrition was a new organization, MDE indicated that it would review Partners in Nutrition's application based on financial projections for its anticipated operations under the CACFP. In addition to submitting financial projections, Partners in Nutrition informed MDE that it had a $1 million forgivable line of credit provided by one of its founders and her husband. And Partners in Nutrition informed MDE of significant sources of revenue separate from its expected CACFP revenue (non-program revenue).

         MDE issued a written denial of the request to expand to multiple sites on January 11, 2016. The denial letter stated that "PIN [Partners in Nutrition] has been unable to demonstrate that it has adequate sources of funds to operate CACFP on a daily basis, to continue to pay employees and suppliers during periods of temporary interruptions in program payments and/or to pay debts when fiscal claims have been assessed against the institution." MDE further expressed its "concerns about dependence on federal food program reimbursement being the primary source of income for a new organization."

         Partners in Nutrition took an available administrative appeal to an MDE appeal panel. On the issue of financial viability, Partners in Nutrition submitted an expert report and expert testimony detailing its expected revenues from sponsored centers and expected reimbursements. The expert testified to his professional opinion that Partners in Nutrition was financially viable and would be even if limited to CACFP revenue. Partners in Nutrition also offered testimony regarding anticipated funding from grants, anticipated nonprogram revenue, and the line of credit.

         On April 26, 2016, the appeal panel issued a decision concluding that MDE had erred in several respects, reversing MDE's decision, and remanding the matter for redetermination of Partners in Nutrition's application. The appeal panel determined that MDE's application process was inconsistent with federal regulations; that MDE failed to "set forth specific criteria it uses to determine whether sponsors are financially viable"; and that MDE used inconsistent methodology throughout the application process and communicated with Partners in Nutrition in a confusing manner. The appeal panel also stated that MDE had erred by relying on financial projections in reviewing Partners in Nutrition's application. The appeal panel directed MDE to redetermine Partners in Nutrition's application in a manner consistent with federal regulations.

         Following the appeal panel's remand, MDE sent a letter to Partners in Nutrition on May 3, 2016, requesting Partners in Nutrition to submit a current year-to-date balance sheet, a current year-to-date income statement, and a current cash-flow statement. MDE also articulated the following as the methodology it would use to determine whether Partners in Nutrition was financially viable:

• Current ratio (Ratio 1:1) - Current Assets/Current Liabilities
• Cash on hand (at a minimum it must not be a negative) - Cash and Short-term ...

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