SC Administrative Law Court Decisions

STATEMENT OF THE CASE

This matter is before me pursuant to the appeal of BP Staff, Inc. (Appellant), from an Order Adopting Report issued by the Director of Insurance, Eleanor Kitzman, on July 8, 2005. Petitioner initiated this action on November 4, 2003, by filing a request for a contested case hearing pursuant to the requirements of the South Carolina Workers’ Compensation Rate Appeals Process. The Director of the South Carolina Department of Insurance (Department) issued a final decision on July 8, 2005, adopting the Hearing Officer’s Report. Afterwards, the Petitioner appealed that decision to the Administrative Law Court (ALC or Court) pursuant to S.C. Code Ann. § 38-3-210 (2005). Oral arguments were heard on May 24, 2006. Upon consideration of the briefs and the arguments presented at the hearing, together with a review of the applicable law, the decision of the Department is affirmed.

STANDARD OF REVIEW

As set forth above, this case is before the Court as an appeal of an agency action. It is heard by the ALC pursuant to S.C. Code Ann. § 1‑23‑600 (D) of the Administrative Procedures Act (APA) upon appeal from the final decision of a contested case. As such, the Administrative Law Judge sits in an appellate capacity under the APA rather than as an independent finder of fact. In South Carolina, the provisions of the APA -- specifically Section 1-23-610 (C) -- govern the circumstances in which the ALC may reverse or modify an agency decision. That section states that the ALC “may affirm the decision or remand the case for further proceedings; or it may reverse or modify the decision if the substantive rights of the petitioner have been prejudiced because of the finding, conclusion, or decision is:

(a) in violation of constitutional or statutory provisions;

(b) in excess of the statutory authority of the agency;

(c) made upon unlawful procedure;

(d) affected by other error of law;

(e) clearly erroneous in view of the reliable, probative, and substantial evidence on the whole record; or

(f) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.”

S.C. Code Ann. § 1-23-610 (C) (2005).

A decision is supported by “substantial evidence” when the record as a whole allows reasonable minds to reach the same conclusion reached by the agency. Bilton v. Best Western Royal Motor Lodge, 282 S.C. 634, 321 S.E.2d 63 (Ct. App. 1984). The well-settled case law in this state has also interpreted the “substantial evidence” rule to mean that a decision will not be set aside simply because reasonable minds may differ on the judgment. Lark v. Bi-Lo, 276 S.C.130, 276 S.E.2d 304 (1981). The fact that the record, when considered as a whole, presents the possibility of drawing two inconsistent conclusions from the evidence does not prevent the agency's finding from being supported by substantial evidence. Waters v. S.C. Land Res. Conservation Comm’n, 321 S.C. 219, 467 S.E.2d 913 (1996); Grant v. S.C. Coastal Council, 319 S.C. 348, 461 S.E.2d 388 (1995).

In applying the substantial evidence rule, the factual findings of the administrative agency are presumed to be correct. Rodney v. Michelin Tire Co., 320 S.C. 515, 466 S.E.2d 357 (1996), citing Kearse v. State Health and Human Services Finance Comm'n, 318 S.C. 198, 456 S.E.2d 892 (1995). Furthermore, the reviewing court is prohibited from substituting its judgment for that of the agency as to the weight of the evidence on questions of fact. Grant v. S.C. Coastal Council, 319 S.C. 348, 461 S.E.2d 388 (1995), citing Gibson v. Florence Country Club, 282 S.C. 384, 318 S.E.2d 365 (1984). Finally, the party challenging an agency action has the burden of proving convincingly that the agency's decision is unsupported by substantial evidence. Waters, supra, citing Hamm v. AT&T, 302 S.C. 210, 394 S.E.2d 842 (1994).

BACKGROUND

Appellant, BP Staff, Inc., was established by Blanton Phillips as a South Carolina corporation in July 2002. Following its inception, BP Staff attempted to obtain workers’ compensation insurance through the voluntary market but was unsuccessful. It then sought coverage through the South Carolina assigned risk pool and was designated coverage though Capital City Insurance Company, Inc. (Capital City).

Capital City was thus assigned the responsibility of determining the appropriate premium to charge the company. In determining the premium for workers’ compensation insurance, insurance companies utilize an “experience rating.” BP Staff sought to establish itself as a new company. Typically, a new company obtains a neutral experience modification factor of 1.0, which means that it would pay the same premium as the norm for the industry in which it operates. However, Capital City determined that BP Staff was not a new, independent company but merely a continuation of the operations of SB Phillips. It therefore applied the experience modification factor of 1.33, the same experience modification factor that SB Phillips had been assigned prior to the application. As such, the premium it was obliged to pay for workers’ compensation insurance was calculated by multiplying the premium normally paid by others in the industry by the experience modification factor. Thus, for every dollar of premium normally due, the application of the 1.33 experience modification factor requires payment of an additional $.33.

BP Staff appealed this decision to the National Council on Compensation Insurance (NCCI), administrator for the Assigned Risk Plan. NCCI ultimately ruled in favor of Capital City regarding the application of the experience modification factor. Petitioner then appealed that determination to the Department who also determined that Capital City properly applied the experience modification factor in the calculation of the premium due from BP Staff.

ISSUES ON APPEAL

1. Whether the Department incorrectly based its decision upon the unpublished “intent” of the NCCI Experience Rating Plan Manual and failed to apply the written terms of such Plan Manual; and

2. Whether the Department’s determination to apply the experience modifier of S.B. Phillips Company, Inc. to the workers’ compensation coverage of Appellant BP Staff, Inc. is supported by substantial evidence in the record; and

3. Whether the Department failed to rule upon each proposed finding of fact submitted by BP Staff and failed to make sufficiently detailed findings of fact; and

4. Whether the Department erred in refusing to consider supplemental information submitted by BP Staff after the conclusion of the contested case hearing.

DISCUSSION

Interpretation of Plan Manual

The Experience Rating Plan Manual (Experience Manual), promulgated by NCCI and adopted by the Department, provides the rules for determining an experience rating to get workers’ compensation insurance when voluntary coverage is not obtainable in the open market and is the applicable governing document concerning the issues in this case. The Department found that “although there may have not been a change in the ownership [of SB Phillips] in the literal sense”, a change in ownership occurred pursuant to Part III B of the Experience Manual. The Department further found that if it accepted that interpretation, it would essentially be ignoring the intent or spirit of the rule.

Appellant argues that the Department’s reliance on the “intent” of the Experience Manual was an error of law because intent is not published in the Manual and is contrary to the plain language contained within this regulation.[1] Therefore, they argue that the Department fabricated a basis for transferring S.B. Phillips’ modifier to BP Staff.

Part III B of the Experience Manual provides that:

Changes in ownership interest may affect the continued use of an entity’s experience in future experience ratings. Based on the rules of this section of the Plan, when a change occurs, a determination shall be made to exclude or retain an entity’s experience.

For purposes of this Plan, a change in ownership includes any of the following:

a. sale, transfer or conveyance of all or a portion of an entity’s ownership interest.

b. sale, transfer or conveyance of an entity’s physical assets to another entity which takes over its operations.

c. merger or consolidation of two or more entities.

d. formation of a new entity subsequent to the dissolution or non-operative capacity of an entity.

e. voluntary or court mandated establishment of a trustee or receiver, excluding a debtor in possession, a trustee under a revocable trust or a franchisor.

In making its determination the Department found that “the situations in Part III B of the Manual are not an exhaustive list of the ways an entity might attempt to evade the application of an experience modification.” Appellant on the other hand, contends that examples listed in Part III B (a through e) are the only instances in which the Department can find a transfer of ownership occurred.

As when seeking to determine the meaning of statutes, the rules of statutory construction apply to the interpretation of the meaning of regulations. See Converse Power Corp. v. S.C. Dept. of Health and Envtl. Control, 350 S.C. 39, 564 S.E.2d 341 (Ct. App. 2002). “Where a word is not defined in a statute, our appellate courts have looked to the usual dictionary meaning to supply its meaning.” Lee v. Thermal Engineering Corp., 352 S.C. 81, 91-92, 572 S.E.2d 298, 303 (Ct. App. 2002). “Include” is defined as: “1. To take in as a part, an element, or a member.  2. To contain as a secondary or subordinate element. 3. To consider with or place into a group, class, or total.” American Heritage Dictionary of the English Language 684 (3d ed. 1993). Black's Law Dictionary 766 (6th ed. 1990) also defines “include” as meaning “to contain as a part of something. The participle including typically indicates a partial list.” Therefore, the use of the term “including” in Part III (B) of the Experience Manual does not restrict the Department to finding a change of ownership only when it determines that an act listed in Part III (B)(a through e) occurs. In fact, numerous appellate decisions in South Carolina have employed that interpretation of “include” in their writings. E.g. Adkins v. S.C. Dept. of Corr’s, 360 S.C. 413, 602 S.E.2d 51 (2004); Douglass ex rel. Louthian v. Boyce, 344 S.C. 5, 542 S.E.2d 715 (2001); Reliance Ins. Co. v. Smith, 327 S.C. 528, 489 S.E.2d 674 (Ct. App. 1997).

Moreover, “[i]n construing statutory language, the statute must be read as a whole and sections which are a part of the same general statutory law must be construed together and each one given effect.” S.C. State Ports Auth. v. Jasper County, 368 S.C. 388, 398, 629 S.E.2d 624, 629 (2006). Furthermore, “[t]he true guide to statutory construction is not the phraseology of an isolated section or provision, but the language of the statute as a whole considered in light of its manifest purpose.” Floyd v. Nationwide Mut. Ins. Co. 367 S.C. 253, 260, 626 S.E.2d 6, 10 (2005). See also Grant v. City of Folly Beach, 346 S.C. 74, 551 S.E.2d 229 (2001) (“It is well-settled that statutes dealing with the same subject matter are in pari materia and must be construed together, if possible, to produce a single, harmonious result.”). Here, the Experience Manual also suggests an expansive view of the application of the experience modification. Part I (A)(1) provides that:

The application of this Plan is mandatory for all eligible insureds. Any action taken in any form to evade the application of an experience modification determined in accordance with this Plan is prohibited.

The purpose of the regulation is thus to make sure that parties are not allowed to use devices of any sort to avoid the proper application of an experience modification factor to an insured. Application of Appellant’s construction of the Experience Manual would permit an employer, in a case such as this case, to simply set up a new company, transfer the workers to that company, and expect that the experience modification factor would be eliminated even though the workers continued to work at the same locations, with the same supervisors, and with the same Risk Manager. That result would certainly not be in keeping with the manifest purpose of the regulation. Therefore, in determining whether the actions of BP Staff and SB Phillips rise to the level of a change in ownership, it is proper to consider whether or not their actions would “evade the application of an experience modification.”

Finally, the Department interpreted Part III (B) of the Experience Manual as providing examples of instances in which there is a change of ownership, but not as a restrictive list. “The construction of a statute by an agency charged with its administration will be accorded most respectful consideration and will not be overruled absent compelling reasons.” Jasper County Tax Assessor v. Westvaco Corp., 305 S.C. 346, 348, 409 S.E.2d 333, 334 (1991). Here, the construction by the Department is reasonable, especially in light of the purpose of the regulation as set forth in Part I (A)(1). Accordingly, that construction should be upheld.

Substantial Evidence

BP Staff contends that though “[t]here is evidence that BP Staff has taken on a significant portion of the operations of S.B. Phillips,” the evidence clearly shows that there has been no change in ownership of S.B. Phillips. In support of that argument the Appellant repeatedly referenced the testimony of Paula Shields and Dennis Kokulak regarding their interpretation that Part III (B) did not apply to this case. More specifically Appellant argued that:

When questioned regarding why she did not rely on the rules in Part Three of the Manual in applying the 1.33 modifier to BP Staff, Paula Shields stated that these rules were not applicable in the case of BP Staff. Likewise, Dennis Kokulak specifically testified that “there’s been no change in ownership” between S.B. Phillips and BP Staff and thus the rules in Part Three, Section B did not apply to this case.

That assertion, however, does not present a clear picture of their testimony. Ms. Shields testified that in this case the clients and employees moved from one company to another and that BP Staff “was a successor-type company.” Therefore, based upon Part I (A), she believes that the modifier should follow to BP Staff. In fact, NCCI has frequently used Part I (A) as a basis to apply an experience modification to another company. When asked if she was “talking about is a kind of change in ownership,” she replied, in part, “not necessarily.” Furthermore, Mr. Kukulak was not involved in the decision to apply the 1.33 modifier to BP Staff. Moreover, though Mr. Kukulak testified that there was “no combinability here,” he also testified that “there is something of an alter ego successor entity situation here where the risk that created the experience modification of 1.33 has gone somewhere.” He concluded that “without question” the experience modification should move to BP Staff.[2]

In Osprey, Inc. v. Cabana Ltd. P’ship, the Court held that “[w]e are free to decide a question of law with no particular deference to the lower court.” 340 S.C. 367, 372, 532 S.E.2d 269, 272 (2000) citing, in part, S.C. Const. art. V, §§ 5 and 9; S.C. Code Ann. §§ 14-3-320, -330 (Supp. 2005); S.C. Code Ann. § 14-8-200 (Supp. 2005). See also Watkins Motor Lines, Inc. v. Span-America Medical Systems, Inc., 296 S.C. 175, 177, 371 S.E.2d 2, 3 (Ct. App. 1988) (on appeal, an appellate court “may affirm a trial judge's decision on any ground appearing in the record and, hence, may affirm a trial judge's correct result even though he may have erred on some other ground.”), I'On, L.L.C. v. Town of Mt. Pleasant, 338 S.C. 406, 526 S.E.2d 716 (2000) (an appellate court “may affirm the lower court's ruling for any additional reasons regardless of whether those reasons have been presented to or ruled on by the lower court.”). Likewise, the ALC hears this case on appeal to determine if the Department’s decision was “in excess of the statutory authority of the agency; . . . made upon unlawful procedure; or characterized by abuse of discretion.” S.C. Code Ann. § 1-23-610(D) ((b)(c) or (f)) (2005); See also 1-23-380 (A) ((b)(c) or (f)) (2005). Accordingly, it appears that the ALC is free to decide questions of law with no particular deference to the hearing officer.

Here, in confirming the application of SB Phillips experience rating to BP Staff, the Department found that BP Staff is wholly owned by Blanton Phillips. At the time of the application, Blanton Phillips was employed as a Risk Manager with SB Phillips, a company which provided temporary employees to a variety of businesses in South Carolina and in other states. SB Phillips is owned by Sam Phillips, the father of Blanton Phillips. Shortly after BP Staff’s formation, the temporary employee staff of SB Phillips was transferred to BP Staff. BP Staff then provided those employees to SB Phillips for placement at SB Phillips’ client companies and became responsible for paying the temporary employees and providing their workers’ compensation insurance. Of the 2,200 employees transferred to BP Staff, only four employees were not temporary workers.

The Department further found that the payroll of SB Phillips became the payroll of BP Staff. It also noted that Blanton Phillips testified that he did not think that new employee files were even opened at BP Staff. He also could not recall if the employees signed new employee agreements or if the names on the personnel files were ever switched.

Based upon these facts the Department concluded that “although there may have not been a change in the ownership in the literal sense . . . as a practical matter the effect was the same.” In other words, SB Phillips’ transfer of over 90 % percent of its total employees and 100 % of its temporary employees to BP Staff was “a significant ‘transfer or conveyance of an entity’s physical assets to another entity. . . .’”, although the Department’s determination that there was a transfer of “physical assets” is questionable. Nevertheless, the Department also found that “[a]pplying Rule One and Three of the Manual, the experience modification factor of SB Phillips should apply to BP Staff. As found above, pursuant to Part I (A)(1) and III (B) the Department can review the facts presented at the hearing and determine if an applicant changed the ownership of the business to evade the application of an experience modification. The above facts provide substantial evidence to support the Department’s determination to that effect, and thus supports the conclusion that the experience modification of SB Phillips should be applied to BP Staff.

The record further supports the Departments finding. The record reveals that the address listed upon the application as the business location for BP Staff was Blanton Phillips’ home address. However, when the Department conducted its audit of BP Staff, the Department’s staff was sent to a building without any indication that BP Staff operated a business at the location. There appeared to be no business conducted at the address. No phones were ringing, there were no computers at the location, and by all appearances, the only people in the building were the auditors and the representatives for BP Staff. At each of the audits, the representatives were not able to answer basic questions about the operations of BP Staff. They were not even able to tell the auditors how they were paid by BP Staff, even though they were listed as the permanent employees of BP Staff. After each audit, BP Staff would provide additional information to answer the questions posed at the audits. On more than one occasion, those persons responding on behalf of BP Staff used SB Phillips letterhead, SB Phillips email addresses, and utilized reports generated on SB Phillips systems. Blanton Phillips also acknowledged that it was remarkable that he could start a company which immediately had an annual payroll of $20,000,000. He further agreed that all of his “client” companies came from his father or his father's business.

Furthermore, as set forth above, Part III B of the Experience Manual provides that a change in ownership includes the transfer of all or a portion of an entity’s ownership interest. Here, S.B. Phillips is wholly owned by Sam Phillips and BP Staff is solely owned by Blanton Phillips. Nevertheless, though SB Phillips did not own their employees, they certainly had an interest in keeping them on their payroll. In other words, in examining the worth of SB Phillips, certainly the roster of temporary employees that the company developed is an asset. In fact, SB Phillips primary business was placing those temporary employees in other businesses. Additionally, though BP Staff did not take over all of the operations of S.B. Phillips, it certainly took over a substantial portion of those operations. Under the facts of the case, a reasonable person could conclude that Sam Phillips transferred at least a portion of his ownership interest in SB Phillips to his son, Blanton Phillips. Furthermore, a reasonable person could also conclude that the substantial transfer of his interest warrants applying the 1.33 modifier to BP Staff.

Sufficiency of the Findings of Fact

Following the contested case hearing, both parties requested the right to submit post-hearing briefs to the Department; therefore post-hearing briefs were subsequently filed by both parties. Appellant contends that the Department of Insurance violated the Administrative Procedures Act because it failed to include a ruling in its decision upon each proposed finding of fact submitted by BP Staff and failed to sufficiently set forth all facts supporting the decision. More specifically, Appellant argues that the Department’s decision blatantly ignores the substantive evidence in the record that Part One does not provide a basis for transferring a modifier from one entity to another.

S.C. Code Ann. § 1-23-350 (2005) provides that: “If, in accordance with agency rules, a party submitted proposed findings of fact, the decision shall include a ruling upon each proposed finding.” Furthermore, in Able Communications, Inc. v. S.C. Public Service Comm’n,

The findings of fact of an administrative body must be sufficiently detailed to enable the reviewing court to determine whether the findings are supported by the evidence and whether the law has been properly applied to those findings. Implicit findings of fact are not sufficient. Where material facts are in dispute, the administrative body must make specific, express findings of fact. No particular format is required. However, a recital of conflicting testimony followed by a general conclusion is patently insufficient to enable a reviewing court to address the issues.

290 S.C. 409, 411, 351 S.E.2d 151, 152 (1986) (citations omitted).

Concerning the findings themselves, our Court has held that “the mere recitation of general factors without describing their relevancy to this case as well as no explanation as to what and why certain portions of the expert testimony were adopted cannot serve as a substitute for a finding of facts.” Porter v. S.C. Public Service Comm'n, 504 S.E.2d 320 (1998). See also Heater of Seabrook, Inc. v. Public Service Comm'n of S.C., 332 S.C. 20, 503 S.E.2d 739 (1998). (“[T]he writing of orders without sufficient detail or analysis . . . can make [agency’s] decisions as a practical matter unassailable on appeal”). Likewise, in a case cited by Appellant, the Court found that “it is impossible for this Court to review the basis of the orders ‘since the reasons underlying the decision are left to speculation.’” Kiawah Property Owners Group v. Public Service Comm’n, 525 S.E. 2d 863, 865 (1999) quoting Able, supra. Here, however, as addressed in the analysis of the sufficiency of the evidence, the findings in this case are supported by the sufficient facts and are also set forth the reasons underlying the decision. In other words, the record provides a sufficient basis under the substantial evidence standard of review to affirm the Department.

Moreover, an appellant must set forth more than a conclusory statement to support their position. Medical Univ. of S.C. v. Arnaud, 360 S.C. 615, 620, 602 S.E.2d 747, 750 (2004) (issues raised by appellant were deemed abandoned because the arguments on those issues were conclusory). An appellant also has the burden of showing, not only error, but also prejudice. Cartee v. Cartee, 295 S.C. 103, 366 S.E.2d 269 (Ct. App.1988). Here, Appellant asserted that the Department ignored evidence relating to Part I of the Experience Manual. That assertion, however, relates not to the sufficiency of the findings of fact but to whether the case was supported by substantial evidence. Other than asserting that the Department ignored evidence relating to Part I, Appellant failed to point out any proposed findings that the Department failed to make. Therefore, Appellant’s arguments are merely conclusory and thus this issue is deemed abandoned.

Relatedly, Appellant also contests a statement in the Department’s decision. The decision states that “[t]here is much more evidence presented at the hearing that further buttresses my conclusion that BP Staff was a continuation of the operations of SB Phillips, however, not all of that evidence is discussed in this report as it is reflected in the extensive record of this matter.” Appellant argued that the Department’s failure to include all evidence that “buttresses” its conclusion does not comport with the requirements of the Administrative Procedures Act and the holding in Kiawah Property Owners Group. Moreover, this failure to reference all evidence that supports the Department’s decision is extremely prejudicial to Petitioner, as it adversely impacts the ability to make arguments on appeal. In light of the case law above, this statement adds nothing to the Department’s decision. However, the Department did not base its determination upon that sentence, but rather sought to further support its case with the assertion. Moreover, since the assertion adds nothing, it inversely causes no prejudice to Appellant.

Reopening the Record

BP Staff also contends that the hearing officer erred in not allowing evidence obtained post hearing into the record. On November 3, 2004, approximately three weeks after the hearing in this matter, Wendy Steinberg, an official in the Experience Rating Department at NCCI, issued a letter regarding an ownership change involving Meridian Resources, Inc. In that letter, Steinberg ruled that “S.B. Phillips Inc. and BP Staff Inc. are not combinable with each other.” Since this letter did not exist at the time of the October 14 hearing, it was not entered into the record as evidence during the hearing. On November 24, 2004, Petitioner filed its Post-Hearing Brief with the Department of Insurance. In its Brief, Petitioner requested that the Department consider the November 3 letter of Ms. Steinberg as evidence in the case. In conjunction with its Brief, Petitioner also submitted the Affidavit of Blanton Phillips to establish that the November 3 letter was not in existence at the time of the October 14 hearing. Respondent then submitted a Motion to Strike Portions of Petitioner’s Post-Hearing Brief.[3] The Department’s hearing officer subsequently granted Respondent’s Motion.

The decision whether to reopen an administrative record for additional evidence is within the Department’s “sound discretion and will not be disturbed on appeal absent an abuse of that discretion.” Brenco v. S.C. Dept. of Transp., 363 S.C. 136, 145, 609 S.E.2d 531, 536 (Ct. App. 2005). Absent a showing that the evidence would make a difference in the outcome of the matter, a tribunal may properly decline to reopen the record. Wright v. Strickland, 306 S.C. 187, 410 S.E.2d 596 (Ct. App. 1991). The appellant has failed to make such a showing. Moreover, it is also proper to consider whether the evidence is merely cumulative or impeaching. c.f. Lanier v. Lanier, 364 S.C. 211, 612 S.E.2d 456 (Ct. App. 2005). Here, there was already evidence in the record that a staff member of NCCI had determined that S.B. Phillips and BP Staff were not combinable with each other. Therefore, the Department could have properly determined that the evidence was cumulative. Moreover, as referenced above, consideration of the testimony concerning the meaning of Part I or III is questionable. Accordingly, even if Petitioner properly sought to admit the evidence, there was no showing that the evidence would have made a difference in the outcome of this matter.

For all of the foregoing reasons, the decision of the Department of Insurance is upheld.

AND IT IS SO ORDERED.

____________________________ Ralph King Anderson, III

Administrative Law Judge

August 23, 2006

Columbia, South Carolina