Case Title: Crofton Convalescent v. Dept of Health

Citation: 413 Md. 201

Docket Number: 32/08

State: maryland

Court: Maryland Supreme Court

Date: 2010-04-08T00:00:00Z

Document:
Crofton Convalescent Center v. Dep’t of Health & Mental Hygiene, Nursing Home Appeal Board, No. 32,  September
Term 2008
HEALTH - DEPARTMENT OF HEALTH & MENTAL HYGIENE - MEDICAID
REIMBURSEMENT - MORTGAGE INTEREST - SWAP AGREEMENT — Medicaid
provider claimed interest paid under a swap agreement as reimbursable mortgage interest.
The Department of Health and Mental Hygiene disallowed reimbursement.  The Nursing
Home Appeals Board found the payments were not mortgage interest.  The Nursing Home
Appeals Board looked to the Medicaid Provider Reimbursement Manual and found that the
manual specifically denied reimbursement for payments made pursuant to a swap agreement.
Payments made by Medicaid provider pursuant to a swap agreement are not
reimbursable as mortgage interest under COMAR 10.09.10.10. 
Circuit Court for Baltimore City
Case No. 24-C-06-001345
IN THE COURT OF APPEALS
OF MARYLAND
No. 32
September Term, 2008
CROFTON CONVALESCENT
CENTER, INC.
v.
DEPARTMENT OF HEALTH &
MENTAL HYGIENE, NURSING HOME
APPEAL BOARD
Bell, C.J.
Harrell
Battaglia
Greene
Adkins
Barbera
Eldridge,  John C.
 (Retired, specially assigned),
JJ.
Opinion by Barbera, J.
Harrell and Adkins, JJ., Dissent.
Filed:   April 8, 2010
1 Unless otherwise noted, all references to COMAR are to Title 10, Subtitle 09,
Chapter 10, which contains regulations governing the Department of Health and Mental
Hygiene’s federally approved reimbursement plan for nursing facilities.
In this case we decide whether, under the Code of Maryland Regulations (“COMAR”)
10.09.10.10,1 a Medicaid provider that made payments pursuant to an interest rate swap
agreement can claim reimbursement of those payments as mortgage interest.
The petitioner, Crofton Convalescent Center (“Crofton”), is a nursing facility certified
to provide medical care through the Maryland Medical Assistance Program (“Medicaid”).
In 1998, Crofton entered into a financing arrangement that, through the use of an interest rate
swap agreement, exchanged the variable interest rate on Crofton’s  mortgage for a fixed rate.
Crofton then submitted the interest payments made according to the swap agreement (“swap
payments”) as mortgage interest payments for reimbursement from the respondent
Department of Health and Mental Hygiene (“DHMH”).  DHMH, however, disallowed
Crofton’s claim that interest paid under its swap agreement was a reimbursable expense
under COMAR.  
Crofton appealed DHMH’s decision to the Nursing Home Appeal Board (“the
Board”), which hears appeals from providers participating in Maryland’s Medicaid program,
and which ultimately affirmed DHMH’s decision.  Crofton then petitioned for judicial review
in the Circuit Court for Baltimore City, which reversed the Board’s decision.  On appeal,  a
divided panel of the Court of Special Appeals held, in an unreported opinion, that the swap
payments were not reimbursable. 
Crofton argues that, because the financing arrangement that included the swap
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agreement was incidental to refinancing Crofton’s mortgage, the Court of Special Appeals
erred when it determined that the swap payments were not mortgage interest payments.  For
the reasons that follow, we hold that the Board applied the proper definition of mortgage
interest and that Crofton’s swap payments do not qualify as mortgage interest under that
definition.  We therefore affirm the judgment of the Court of Special Appeals.
I.
Crofton provides nursing and other medical services, in part, through Maryland’s
Medical Assistance Program (“Medicaid”), which is a state program partially funded by the
federal government.  Liberty Nursing Center, Inc. v. Dep’t of Health and Mental Hygiene,
330 Md. 433, 438, 624 A.2d 941, 943 (1993).  “When a state elects to participate in the
[federal] medicaid program, it prepares and submits for approval by the federal Health Care
Financing Administration . . . a state medicaid plan for the provision of medical assistance
that complies with the federal Medicaid Act[.]”  Jackson v. Millstone, 369 Md. 575, 580, 801
A.2d 1034, 1037 (2002).  “If the federal agency approves the state plan, then the state
qualifies for federal funding, whereby the federal government will reimburse the state up to
50% of the cost of the medicaid program.”  Id. at 580, 801 A.2d at 1037.  
Maryland’s Medicaid program is administered by DHMH.  Id. at 581, 801 A.2d at
1037.  Pursuant to federal and state law, the Maryland Medicaid program reimburses nursing
homes for patient-related costs of medical care, including interest payments on loans
necessary for patient care.  See Title XIX of the Social Security Act, 42 U.S.C.A. §§ 1396
et seq. (2006); 42 C.F.R. §§ 430-456 (2008); Md. Code (2009 Repl. Vol.), §§ 15-103, 15-105
2 At the time of the financing, the fixed rate loan offer came from First National Bank.
M&T Bank subsequently bought a successor to First National Bank.
3 LIBOR stands for London Interbank Offered Rate, “a well-known index in the
financial markets measuring interest rates.”  Citizens First Nat’l Bank of Princeton v.
Cincinnati Ins. Co., 200 F.3d 1102, 1105 (7th Cir. 2000). 
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of the Health General Article; COMAR 10.09.10 et seq.  The Maryland Medicaid statutes
charge DHMH with the promulgation of rules and regulations to govern the reimbursement
of providers.  See §§ 15-103, 15-105 of the Health General Article.  Crofton’s status as a
Medicaid provider in Maryland entitles it to State reimbursements, which are issued by
DHMH. 
When DHMH denies reimbursement to a provider participating in Maryland’s
Medicaid Program, the Board considers the provider’s appeal.  The present case arises out
of the Board’s denial of Crofton’s request that DHMH reimburse the swap payments Crofton
made subsequent to refinancing its mortgage.    
This Case
In 1998, the term on Crofton’s $4.2 million mortgage was expiring, bringing due a
balloon payment on the loan.  To avoid making the balloon payment, Crofton sought to
refinance the mortgage through a fixed rate loan.  Crofton considered several bids, including
a bid from M&T Bank (“the Bank”) for a loan with a 6.55% fixed interest rate.2  Seeking an
even lower rate, Crofton entered negotiations with the Bank, which then produced a
financing package that consisted of  a $4.2 million term loan with an interest rate of LIBOR3
plus one percent, a $500,000 term loan at an interest rate of LIBOR plus one percent, and a
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“swap agreement” trading the variable interest rate on the two term loans for a fixed interest
rate of 5.5% based on a $4.7 million “notional amount,” both of which quoted terms we next
explain.   
A basic, “plain vanilla,” swap agreement “is a contract between two parties, . . . to
exchange or ‘swap’ cash flows at specified intervals, calculated by reference to a particular
rate or index.”  See S. Lawrence Polk & Bryan M. Ward, A Guide to the “Regulatory No
Man’s Land” of Over-The-Counter Interest Rate Swaps, 124 Banking L.J. 397, 399 (2007).
The “[m]ost commonly employed [interest rate swaps] are fixed/floating rate swaps in which
the first counterparty pays the second at designated intervals, a specific amount of interest
based on a fixed interest rate multiplied” by an agreed principal amount called the “notional”
amount.  Stuart Somer, A Survey of Legal & Regulatory Issues Relevant to Interest Rate
Swaps, 4 DePaul Bus. L.J. 385, 387 (1992).  Concurrently, the second counterparty pays the
first counterparty based on a floating interest rate, such as LIBOR, applied to the notional
amount.  Id.  The notional amount is used solely to calculate the interest payments and is not
exchanged between the parties.  Thrifty Oil Co. v. Bank of America Nat’l Trust and Sav.
Ass’n, 310 F.3d 1188, 1191 (9th Cir. 2002) (adopting 249 B.R. 537 (S.D.Cal. 2000)),
modified, Thrifty Oil Co. v. Bank of America Nat’l Trust and Sav. Ass’n, 322 F.3d 1039, 1043
(9th Cir. 2003) (addressing counsel fee issue).  The swap enables a party to hedge against
interest rate fluctuations by exchanging “interest payment streams of one debt instrument for
those of another, where both debt obligations are the same amount.”  Somer, supra at 387.
In Thrifty Oil Co., a panel of the Ninth Circuit Court of Appeals explained a
4 “An ‘amortizing’ interest rate swap is a swap whose notional amount declines at
specified intervals during its term.”  Thrifty Oil Co., 310 F.3d at 1193 n.5.  Crofton’s swap
agreement was subject to an amortization schedule that declined at the same monthly rate as
the total principal balance owed on Crofton’s two term loans. 
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hypothetical five-year interest rate swap between Counterparties A and B:
(1) Counterparty A agrees to pay a floating interest rate equal to LIBOR . . .
; (2) Counter-party [sic] B agrees to pay a 10% fixed interest rate; (3) both
counterparties base their payments on a $1 million notional amount and agree
to make payments semiannually.  If LIBOR is 9% upon commencement of the
first payment period, Counterparty B must pay A: (10%-9%) * $1 million *
(.5) = $5,000.  These net payments vary as LIBOR fluctuates and continue
every six months for the term of the swap.  If interest rates rise, the position of
Counterparty B, the fixed-rate payor, improves because the payments it
receives increase.  For example, if LIBOR rises to 11% at the beginning of the
next payment period, Counterparty B receives a net payment of $5,000 from
A.  Conversely, the position of Counterparty A, the floating-rate payor,
improves when interest rates fall.  The party whose position retains positive
value under the swap is considered ‘in the money’ while a party with negative
value is considered ‘out of the money.’
310 F.3d at 1191-92.
Interest rate swaps are typically documented in a confirmation and a master
agreement.  Id. at 1192.  The master agreement is often a standard form agreement prepared
by the International Swaps and Derivatives Association (“ISDA”).  Id.  In this case, Crofton
and the Bank memorialized the swap in an ISDA master agreement accompanied by a
separate confirmation and amortization schedule.4  Pursuant to the financing package,
Crofton agreed to refinance its mortgage with a term loan with a variable interest rate of
LIBOR plus one percent and then to swap the variable rate with the Bank for a fixed rate of
5.5%.  During the relevant time period, however, the variable interest rates were below 5.5%,
5 A provider challenging a DHMH decision may elect the manner in which the Board
considers the appeal.  COMAR 10.01.09.03D.  A provider may request that the Board
consider the appeal based solely on written materials; based on written materials and an
informal oral argument; or based on evidence presented at a full evidentiary hearing.  Id.
When a provider chooses to argue an appeal at a full evidentiary hearing, the Board may
designate an agency to conduct the hearing, but the Board is the ultimate administrative
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and thus Crofton was required under the swap agreement to pay the difference to the Bank.
If the LIBOR plus one percent rate had been above 5.5%, Crofton would have paid the
variable rate loan amounts, and the Bank would have reimbursed Crofton for the difference,
effectively bringing Crofton’s interest payments back down to the 5.5% interest rate.  
Under Crofton’s accounting system, Crofton treated the swap payments as mortgage
interest payments, which are reimbursable costs under COMAR 10.09.10.10.C.  Crofton
reports costs for which DHMH should reimburse providers (“allowed costs”), to DHMH each
fiscal year.  DHMH reviews the reports and adjusts the costs by disallowing costs that are
not reimbursable under the applicable laws and regulations.  In 2002, DHMH hired Clifton
Gunderson, LLP, to review Crofton’s 2002 cost report and to recommend adjustments.
Based on its review, Clifton Gunderson determined that Crofton’s swap payments were not
eligible for reimbursement.  Accordingly, DHMH disallowed the costs. 
The Litigation
Crofton appealed the decision to the Board, which referred the appeal to the Office
of Administrative Hearings for a contested evidentiary hearing before an Administrative Law
Judge (“ALJ”).5  The ALJ issued his recommended findings of fact and conclusions of law,
decision maker.  See COMAR 10.01.09.06, 10.01.09.07 (providing that, when the Board does
not conduct the hearing, the hearing officer should make recommendations to the Board,
which issues the final decision).       
6 If exceptions are made to the ALJ’s findings, the Board will hold a hearing on the
exceptions and make the final decision including findings of fact and conclusions of law.
COMAR 10.01.09.06, 10.01.09.07.
7 The Board accepted the ALJ’s background factual findings that Crofton is a nursing
facility and part of the Medicaid program; Crofton sought to refinance its debt with a fixed
rate mortgage, and the Bank offered it a variable rate mortgage; and, during the period at
issue, the variable interest rate was below 5.5% and therefore Crofton was required to make
swap payments.  
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finding that the interest payment should have been reimbursed on the grounds that the swap
payments were part of an integrated mortgage transaction and mortgage interest payments
are allowable costs.  The ALJ’s decision was based, in part, on the following findings of fact:
10. A separate agreement, the swap interest agreement, was entered into with
a fiscal intermediary.  The swap agreement required payments that would
convert the floating rate term payments into a fixed 5.5% interest rate.
15. Mortgage interest paid by Medicaid providers is reimbursable by
Medicaid.
17. The above referenced notes are part of a total capital financing agreement
that includes linked mortgage interest and swap interest.
18. Under Generally Accepted Accounting Principles (“GAAP”), all of the
above referenced interest payments to the bank are treated as mortgage
interest.
DHMH filed exceptions with the Board, which then held a hearing at which both parties
presented oral arguments.6 
The Board accepted the ALJ’s findings except the above-mentioned four findings of
fact.7  The Board determined:
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Fact 10. The parties to the loan entered into a separate agreement called an
interest swap rate agreement.  (swap agreement or interest swap agreement)
Under the interest swap agreement, the two parties exchanged monthly interest
payments, i.e., Crofton exchanged its variable or floating mortgage interest
rate of LIBOR plus 1 for a fixed interest rate of 5.5%.
***
Fact 15. Mortgage interest paid by Medicaid providers is reimbursable by
Medicaid, subject to certain ceilings and exceptions.
***
Fact 17. M & T Bank treats the 4.2 million dollar mortgage note and the
second $500,000 mortgage note as one agreement requiring one monthly
payment at the variable interest rate.  It treats the swap interest agreement as
a separate, independent agreement, requiring a separate payment.
Fact 18. Under Generally Accepted Accounting Principles (GAAP), the above
referenced interest payments are treated as mortgage interest.  However, under
Medicaid reimbursement rules, GAAP is not controlling, state and federal
regulations are.
After making these findings, the Board concluded that the interest payments under the swap
agreement were not reimbursable.  The Board reasoned as follows. 
First, the Board evaluated the nature of a swap agreement and determined that
payments under it did not meet the definition of mortgage interest.  In reaching that
conclusion, the Board noted that Maryland’s Medicaid program applies the federal Medicare
definition of mortgage interest, which is “the cost incurred for the use of borrowed funds.
Interest on current indebtedness is the cost incurred for funds borrowed[.]”  42 C.F.R.
413.153(b)(1).  Because Crofton’s swap payments were interest paid on a notional amount,
not on money borrowed under a mortgage agreement, the Board determined that the
payments did not qualify as mortgage interest.  Then, noting that COMAR does not expressly
address swap payments, the Board, based on the COMAR provision that directs the Board
8 The PRM is a federal guide, published by the Health Care Financing Administration,
that states use to determine whether costs of care will be reimbursed by the federal
government. 
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to applicable federal law, see COMAR 10.09.10.29, concluded that the federal Provider
Reimbursement Manual (“PRM”) provision addressing swap interest applied.8  Under PRM
§ 202.2, swap interest payments are prohibited and, therefore, the Board affirmed the
disallowance of the swap payments.
Crofton filed a petition for judicial review in the Circuit Court for Baltimore City.
The Circuit Court reversed the Board’s decision, finding that the refinanced mortgage and
the subsequent interest rate swap agreement were two parts of an integrated transaction that
effectively converted the swap payments into mortgage interest payments.  The court
therefore found that the swap payments were costs for which Crofton was entitled to
reimbursement. 
DHMH appealed to the Court of Special Appeals.  That court first addressed the
applicable standard of review of administrative agency decisions and rejected DHMH’s
contention that the court should review an agency decision for “substantial evidence.”
Instead, the court applied the standard articulated by this Court in Adventist Health Care, Inc.
v. Maryland Health Care Comm’n, 392 Md. 103, 896 A.2d 320 (2006), which directs
appellate courts to defer to an agency’s interpretation of a regulation unless plainly erroneous
or inconsistent with the regulation.  Id. at 120, 896 A.2d at 330.  
Then, citing Thrifty Oil Co., 310 F.3d 1188, a bankruptcy case that examined interest
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rate swap agreements, the court concluded that swap payments are not interest payments
because swap payments do not compensate a lender for the loan of any underlying debt.
Further, the court determined that the Board appropriately applied PRM § 202.2 because
COMAR does not define mortgage interest and COMAR 10.09.10.29 provides that, in the
absence of any contrary state regulation, the reimbursement regulations should be interpreted
in conformity with applicable federal statutes and regulations.  PRM § 202.2 expressly denies
reimbursement of swap payments.  Accordingly, the Court of Special Appeals reversed the
Circuit Court, holding that even though the swap payments were made incident to the
refinanced mortgage, such payments are not interest on a loan and thus, as a matter of law,
are not mortgage interest payments.  
We granted certiorari, Crofton Convalescent Center, Inc. v. Dep’t of Health & Mental
Hygiene, 405 Md. 62, 949 A.2d 651 (2008), to address the following questions, the order of
which we have reversed: 
1. Should interest paid by a nursing care facility pursuant to an integrated
mortgage financing transaction securing commercial real property that
includes a swap agreement be treated without regard to the integrated nature
of the transaction? 
2. Does Thrifty Oil Co. v. Bank of Am. Nat’l Trust & Sav. Ass’n, 310 F.3d
1188 (9th Cir. 2002) establish Maryland law governing whether interest paid
by a nursing care facility pursuant to a swap agreement that secures the
facility’s real property is mortgage interest under the Maryland Medicaid
regulation making mortgage interest an allowable, reimbursed cost?
II.
To determine whether, regardless of a provider’s intent to “integrate” its swap and
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loan agreements, COMAR treats swap payments as mortgage payments for reimbursement
purposes, we must examine the scope of the term “mortgage interest” as it appears in
COMAR.   
Crofton argues that the definition of mortgage interest is controlled by Maryland
common law, which defines a mortgage as follows: 
A loan is secured by a mortgage when: the property is conveyed or assigned
by the mortgagor to the mortgagee, in form like that of an absolute legal
conveyance, but subject to a proviso or condition by which the conveyance is
to become void, or the estate is to be reconveyed, upon payment to the
mortgagee of the principal sum secured, with interest, on a day certain; and
upon nonperformace of this condition, the mortgagee’s conditional estate
becomes absolute at law, and he may take possession thereof[.]
Norwest Bank Minnesota v. Pence, 132 Md. App. 363, 369, 752 A.2d 681, 684 (2000)
(quoting Equitable Trust Co. v. Imbesi, 287 Md. 249, 253-54, 412 A.2d 96 (1980)).  Based
on this definition, Crofton argues that whether the swap payments constitute mortgage
interest payments under Maryland law hinges on whether the Bank could foreclose on
Crofton’s property if Crofton failed to fulfill its swap payment obligations.  Consequently,
Crofton contends that because the swap agreement was secured by Crofton’s property, which
was therefore subject to foreclosure upon Crofton’s default, “the interest due under the Swap
Agreement was mortgage interest[.]”  (Emphasis in original).  
Crofton further argues that the Board improperly relied on the PRM’s guidelines
because the Board should only rely on federal statutes and regulations when COMAR is
silent.  Crofton asserts that COMAR is not silent as to mortgage interest reimbursement
9 COMAR 10.09.10.10C provides that “[t]he final Medical Assistance per diem
reimbursement for capital in investor-operated and non-investor-operated facilities shall
include . . . [m]ortgage interest (including bond interest).”  10.09.10.10C(3). 
10 COMAR 10.09.10.10A provides that the “Capital cost center includes . . . mortgage
interest[.]”  10.09.10.10.A(3).
11 COMAR 10.09.10.10I provides that “refinancing of existing debt is permitted as
the basis for reimbursement calculations only to the extent of the outstanding principal
balance remaining on the existing debt when . . . [t]he existing debt has ballooned in
accordance with the scheduled date reflected in the debt instrument[.]”  10.09.10.10I(1).
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because COMAR 10.09.10.10C,9 10.09.10.10A,10 and 10.09.10.10I11 explicitly refer to
mortgage interest and the reimbursement of interest costs associated with refinancing existing
debt.    
DHMH counters that COMAR does not explicitly refer to swap payments or interest
paid pursuant to a swap agreement.  DHMH argues, moreover, that without evidence that the
agency intended the term mortgage interest, as referenced in the regulations, to include swap
payments, COMAR cannot be construed to encompass swap payments.  DHMH contends,
instead, that mortgage interest should be interpreted according to the PRM as required by
COMAR 10.09.10.29, which provides:  “Except when the language of a specific regulation
indicates an intent by the Department to provide reimbursement for covered services to
Program recipients without regard to the availability of federal financial participation, State
regulations shall be interpreted in conformity with applicable federal statutes and
regulations.”  COMAR 10.09.10.29.   
An agency’s interpretation of a regulation is a conclusion of law.  Adventist Health
Care, 392 Md. at 121, 896 A.2d at 331; Kushell v. Dep’t of Natural Resources, 385 Md. 563,
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576, 870 A.2d 186, 193 (2005).  Yet even when reviewing an agency’s legal conclusions, an
appellate court must respect the agency’s expertise in its field.  Adventist Health Care, 392
Md. at 121, 896 A.2d at 331; Kushell, 385 Md. at 576, 870 A.2d at 193.  “[A]n administrative
agency's interpretation and application of the statute which the agency administers should
ordinarily be given considerable weight by reviewing courts.”  Maryland Aviation v. Noland,
386 Md. 556, 572, 873 A.2d 1145, 1154 (2005) (internal quotation marks and citations
omitted); see also Adventist Health Care, 392 Md. at 120, 896 A.2d at 330 (“Judicial review
of the decision of an administrative agency rendered in a quasi-judicial proceeding is quite
narrow.”).  Likewise, “‘a great deal of deference is owed to an administrative agency’s
interpretation of its own regulation.’”  Adventist Health Care, 392 Md. at 119-20, 896 A.2d
at 330 (quoting Maryland Transp. Auth. v. King, 369 Md. 274, 288, 799 A.2d 1246, 1254
(2002)).  “Despite the deference, ‘it is always within our prerogative to determine whether
an agency’s conclusions of law are correct.’”  Adventist Health Care, 392 Md. at 121, 896
A.2d at 331 (quoting Kushell, 385 Md. at 576, 870 A.2d at 193).  Accordingly, we determine
whether the Board’s conclusions are “plainly erroneous or inconsistent with the regulation.”
King, 369 Md. at 288-89, 799 A.2d at 1254 (internal quotation marks and citations omitted);
Noland, 386 Md. at 574 n.3, 873 A.2d at 1156 n.3 (“[A] reviewing court must determine if
the administrative decision is premised upon an erroneous conclusion of law.” (internal
quotation marks and citations omitted)).             
Although we keep in mind the considerable weight afforded an agency’s interpretation
of its regulations, we may not abdicate our responsibility to examine independently the
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regulations upon which the Board relied in deciding Crofton’s appeal, to “‘determine if the
administrative decision is premised upon an erroneous conclusion of law.’”  Noland, 386 Md.
at 574 n.3, 873 A.2d at 1156 n.3 (quoting United Parcel v. People’s Counsel, 336 Md. 569,
577, 650 A.2d 226, 230 (1994)).  To do so in the present case, we must rely on principles of
statutory interpretation to determine the meaning of the term “mortgage interest” under
COMAR.  Miller v. Comptroller of Maryland, 398 Md. 272, 282, 920 A.2d 467, 473 (2007)
(“‘[T]he interpretation of an agency rule is governed by the same principles that govern the
interpretation of a statute.’”) (quoting Maryland Comm’n on Human Relations v. Bethlehem
Steel Corp., 295 Md. 586, 592-93, 457 A.2d 1146, 1149 (1983)).  
“The cardinal rule of statutory interpretation is to ascertain and effectuate the intent
of the Legislature.”  Kushell, 385 Md. at 576, 870 A.2d at 193 (citing Collins v. State, 383
Md. 684, 688, 861 A.2d 727, 730 (2004)).  “Statutory construction begins with the plain
language of the statute, and ordinary, popular understanding of the English language dictates
interpretation of its terminology.”  Adventist Health Care, 392 Md. at 124 n.13, 896 A.2d at
333 n.13 (internal quotation marks and citations omitted).  When a statute’s plain language
is unambiguous, we need only to apply the statute as written, and our efforts to ascertain the
legislature’s intent end there.  Id. at 125, 896 A.2d at 333; Price v. State, 378 Md. 378, 387,
835 A.2d 1221, 1226 (2003).   
COMAR’s Department of Health and Mental Hygiene Title, Title 10, refers to
mortgage interest several times.  COMAR 10.09.10.10A and 10.09.10.10C address,
respectively, costs included in a nursing facility’s capital cost center and capital costs eligible
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for capital per diem reimbursement.  Each provision lists allowable costs, which include
“mortgage interest (including bond interest).”  COMAR 10.09.10.10A(3), 10.09.10.10C(3).
Apart from this express statement clearly treating bond interest as mortgage interest, we
agree with the Board that Title 10 does not define the scope of mortgage interest.  See
COMAR 10.09.10.01 (“Definitions”).  
The absence of an express definition of a term, however, does not preclude us from
construing its plain meaning.  When searching for a statute’s plain meaning, we consider the
language of the relevant provision not in isolation but within the context of the statutory
scheme as a whole.  Adventist Health Care, 392 Md. at 125 n.13, 896 A.2d at 333 n.13; see
also Price, 378 Md. at 388, 835 A.2d at 1227 (“We do not read the statute divorced from its
textual context, for ‘adherence to the meaning of words does not require or permit isolation
of words from their context.’” (citations omitted)).  Moreover, when construing a statute’s
plain language, we “avoid constructions that are illogical, unreasonable, or inconsistent with
common sense.”  Price, 378 Md. at 387, 835 A.2d at 1226 (acknowledging that a court may
not “seek to construe the statute with forced or subtle interpretations that limit or extend its
application”) (internal quotation marks and citations omitted).       
An examination of COMAR 10.09.10.10A and 10.09.10.10C, within the context of
Title 10 (DHMH) in its entirety, compels the conclusion that swap payments are explicitly
excluded from the definition of mortgage interest.  Specifically, Title 10's “Interpretive
Regulation,” COMAR 10.09.10.29, directs us, in the absence of express evidence of the
DHMH’s intent to reimburse costs “without regard to the availability of federal financial
12 COMAR 10.09.10.08B(1) also provides that allowable costs for covered services
are determined “according to the principles established under Title XVIII of the Social
Security Act, 42 U.S.C. § 1395 et seq., and contained in the Medicare Provider
Reimbursement Manual, HCFA Publication 15-1, unless otherwise specified by this
chapter[.]”   
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participation,” to interpret State regulations “in conformity with applicable federal statutes
and regulations.”  COMAR 10.09.10.29; see also Dep’t of Health & Mental Hygiene v.
Riverview Nursing Centre, Inc., 104 Md. App. 593, 598, 657 A.2d 372, 374 (1995) (“Where
COMAR does not specify otherwise, federal Medicare principles of reimbursement,
contained in the Medicaid Act, Provider Reimbursement Manual (PRM), and Medicare
regulations control”).  COMAR 10.09.10.10 contains no indication of the DHMH’s intent
to reimburse costs “without regard to the availability of federal financial participation”;
therefore, as directed by COMAR 10.09.10.29, we must interpret the term “mortgage
interest” in conformity with the applicable federal authority.  COMAR 10.09.10.07C(5), in
turn, specifically directs us to the Medicare regulations and the PRM for guidance.12  Id.
(“Following the close of the provider’s fiscal year, the Department or its designee shall
determine the final per diem rates for that fiscal year.  Appropriate final settlement and
payment adjustments shall be made according to the Medicare Provider Reimbursement
Manual, HCFA Publication 15-1, and this chapter.”); see also Liberty Nursing Center, 330
Md. at 438-39, 624 A.2d at 943-44 (“[DHMH] has chosen to calculate a provider’s ‘final per
diem rate’ according to the principles established under Title XVIII of the Social Security
Act . . . and contained in the Medicare Provider Reimbursement Manual [“PRM”] . . . unless
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otherwise specified by this chapter.” (citations omitted)); Riverview Nursing Centre, 104 Md.
App. at 598 n.3, 657 A.2d at 374 n.3 (explaining that the PRM “elaborate[s] upon the
Medicare reimbursement regulations found in 42 C.F.R. Part 413”).   
 
Both the C.F.R. and the PRM define interest as “the cost incurred for the use of
borrowed funds.” 42 C.F.R. § 413.153(b); PRM § 202.1.  Only necessary interest, however,
qualifies as an allowable cost.  42 C.F.R. § 413.153(a); PRM § 202.2.  Interest is necessary
if it is “incurred on a loan that is made to satisfy a financial need, [f]or a purpose related to
patient care, and [i]ncurred on a loan that is reduced by investment income.”  42 C.F.R.
413.153(b)(2); PRM § 202.2.  “The burden of proof to show that there is a financial need for
the borrowing . . . rests with the provider.”  PRM § 202.2A.  Section 202.2A explicitly
provides, however, that “[i]nterest expense incurred under an interest rate swap agreement
is not recognized for Medicare payment purposes because the interest expense incurred under
such agreement does not result from a loan made to satisfy a financial need of the provider.”
§ 202.2A.  
To illustrate this point, § 202.2A includes the following example:
Hospital A has $10 million in bonds at a variable interest rate of prime plus
2%.  The bonds were issued for a patient care related purpose and the interest
is an allowable expense under Medicare.  The hospital prefers a fixed rate and
enters into a swap interest rate agreement with a bank.  The amount of the note
is $10 million.  The agreement stipulates that the hospital will pay the bank a
fixed rate of 12% and the bank will pay the hospital a variable rate of prime
plus 2%.
For the first year, prime remains at 10% and there is no exchange of funds
between the bank and the hospital.  For the second year, the prime drops to
8%.  The hospital pays the bank $200,000 in interest.  This interest is NOT
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reimbursable under Medicare.  For the third year, the prime rate increases to
12%.  The bank pays the hospital $200,000.  This is NOT considered
investment income for Medicare reimbursement.  The transaction has no
impact on the allowability of the interest expense associated with the bonds.
Although this example does not address mortgage interest specifically, the example is
especially instructive because it addresses swap payments substituted for otherwise allowable
interest payments. 
Crofton distinguishes its swap payments by arguing that, unlike Hospital A’s swap
agreement, which was separate from the bonds, Crofton’s swap agreement was an
inseparable piece of an integrated financing package, and because the package refinances a
mortgage secured by Crofton’s property, the swap payments constituted mortgage interest
payments.  Crofton further argues that the swap payments must be construed as mortgage
interest payments because the “Bank and Crofton intended the Notes, Loan and Security
Agreement, Swap Interest Agreement and Deed of Trust to function as a singular, non-
severable transaction, not a separate, independent, stand alone agreement,” and Maryland
contract law requires courts to construe contracts in conformance with the parties’ intent.
Moreover, Crofton argues that Maryland public policy supports treating the swap agreement
and the related loan as one integrated transaction because Crofton entered into the swap
agreement in an effort to operate more efficiently and to lower Crofton’s fixed costs.    
Conversely, DHMH agrees with the Board’s finding that the swap agreement was
related to Crofton’s loans only because the swap agreement enabled Crofton to “exchange
interest rates without modifying the terms of the mortgage loan agreement” and “[t]he fact
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that in 2002 Crofton paid interest under both the loan and the swap agreements does not
make the interest paid under the swap agreement reimbursable[.]”  DHMH further agrees
with the Board’s determination that COMAR only allows reimbursement of interest expenses
incurred to refinance existing debt or to obtain a new loan.  Therefore, DHMH argues that
the Board properly referred to the PRM to determine whether Crofton’s swap payments were
allowable costs.   
We are not persuaded that Crofton’s intent to integrate the swap and mortgage
agreements overcomes the PRM’s clear directive that swap payments, even when incurred
in place of allowable interest expenses, are not reimbursable interest payments.  Similar to
Crofton, “Hospital A” entered into its swap agreement to secure a fixed interest rate on bonds
upon which, but for the swap agreement, the provider would have made allowable interest
payments.  Even though the hypothetical swap agreement supplants the bonds’ variable
interest rate, the PRM explains that the swap payments are not bond interest payments and
thus are not reimbursable.  The PRM’s analysis focuses on neither Hospital A’s intent nor
the swap agreement’s effect–replacing the variable bond interest rate with a fixed rate.
Consequently, to treat Crofton’s intent and the timing of the transactions as determinative in
this case would be inconsistent with the PRM, and we decline Crofton’s invitation to do so.
In promulgating its rules governing reimbursement of expenses, DHMH has elected,
in the absence of an express indication of its intent to reimburse a specific expense, to decide
reimbursement questions by resort to the C.F.R. and the PRM.  See COMAR 10.09.10.29.
This DHMH is authorized to do.  See §§ 15-103, 15-105 of the Health General Article;
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Adventist Health Care, 392 Md. at 119, 896 A.2d at 330 (recognizing the authority of
administrative agencies to “‘promulgate legislative-type rules or regulations in order to
implement [a] statute.  Such rules or regulations will often, of necessity, embody significant
discretionary policy determinations.’”) (quoting Christ v. Dep’t of Natural Res., 335 Md.
427, 445, 644 A.2d 34, 42 (1994)).  We owe deference to that discretionary exercise of
DHMH’s authority.  Cf. Liberty Nursing Center, 330 Md. at 438-39, 624 A.2d at 943-44
(recognizing DHMH’s authority to “calculate a provider’s ‘final per diem rate’ according to
. . . the [PRM]” (citations omitted)).  
We have said that COMAR does not explicitly encompass swap agreements;
consequently, our interpretation of COMAR must be consistent with the C.F.R. and the
PRM.  The PRM’s clear delineation of the difference between swap payments and otherwise
allowable interest expenses compels the conclusion that the term “mortgage interest” under
COMAR does not encompass swap payments regardless of a provider’s intent to substitute
those payments for otherwise reimbursable interest expenses.  See COMAR 10.09.10.29.  
Accordingly, we hold that the Board correctly relied on the PRM to determine that
Crofton’s swap payments were not reimbursable as mortgage interest payments under
COMAR.  We further hold that, because the PRM governs the interpretation of COMAR in
this case, a provider’s swap payments are not reimbursable as mortgage interest payments
under COMAR 10.09.10.10, regardless of a nursing care facility’s intent to integrate a swap
agreement and a mortgage refinancing agreement into a single transaction. 
III.
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Our ruling that the PRM governs our interpretation of COMAR 10.09.10.10 obviates
the need to address the second question Crofton presents, which invokes the correctness of
the Board’s application of Thrifty Oil to the analysis.  We therefore affirm the judgment of
the Court of Special Appeals on the sole ground that the Board properly referred to the PRM
to determine that swap payments are not reimbursable mortgage interest under COMAR.  
JUDGMENT OF THE COURT OF SPECIAL
APPEALS AFFIRMED.  COSTS TO BE PAID
BY PETITIONER.
Circuit Court for Baltimore City
Case No. 24-C-06-001345
IN THE COURT OF APPEALS
OF MARYLAND
No. 32
September Term, 2008
CROFTON CONVALESCENT
CENTER, INC.
v.
DEPARTMENT OF HEALTH
& MENTAL HYGIENE,
NURSING HOME APPEAL BOARD
Bell, C.J.
Harrell
Battaglia
Greene
Adkins
Barbera
Eldridge, John C.
                    (Retired, specially assigned),
JJ.
Dissenting Opinion by Adkins, J., which
Harrell, J., joins.
Filed:     April 8, 2010
I respectfully dissent from the majority’s holding that payments made pursuant to a
interest rate swap agreement are, by definition, not “mortgage interest” under the Code of
Maryland Regulations (“COMAR”) 10.09.10.10.  In my view this holding ignores the
fundamental nature of the transaction between Crofton Convalescent Center, Inc. (“Crofton”)
and First National Bank of Maryland (“First National”).
Examining the facts of the transaction reveals that the parties took a complicated route
to reach a simple result.  Crofton sought a fixed-rate loan from First National.  After initial
negotiations, First National offered Crofton a 6.55% fixed-rate loan, which was not accepted
by Crofton.  Subsequently, First National proposed a more complicated, two-step transaction.
First, Crofton paid interest according to a variable rate.  Second, First National and Crofton
exchanged the difference between the variable rate and the 5.5% fixed rate, which was the
swap role.  The variable interest payments existed only in form; in substance, they were
subject to an immediate adjustment, via the swap payment, to the 5.5% level.     
The majority, like the Board, dismantled the parties’ Loan and Security Agreement,
in order to reach its conclusion that the swap payments were a separate transaction from the
mortgage loan, and therefore were not reimbursable because they were not “mortgage
interest.”   In doing so, it ignored the clear and undisputed intent of the lender and borrower.
The majority defers to the Board’s reasoning that the swap arrangement is separate
from the mortgage loan simply because First National requested that Crofton make two
separate payments, one for the swap, and one for the variable-rate loan.  This bookkeeping
accommodation made by Crofton for the lender is an insufficient basis for the Board’s ruling
that the swap payments were not part of an integrated loan agreement made for the purpose
of refinancing the existing mortgage loan when the parties’ clear written agreements say
otherwise.  
The Master Agreement, which sets up the swap arrangement between the parties,
2
explicitly states:
All Transactions are entered into in reliance on the fact that this
Master Agreement and all Confirmations form a single
agreement between the parties . . . and the parties would not
otherwise enter into any Transactions.  
“Transactions” is defined in the Master Agreement as “one or more transactions . . . that are
or will be governed by this Master Agreement, which includes the schedule . . .and the
documents and other confirming evidence . . . exchanged between the parties confirming
those Transactions.”  Correspondingly, the Loan and Security Agreement says: “The
Borrowers and the Bank have entered into an ISDA Master Agreement dated the date hereof
(which . . . is herein called the ‘Swap Agreement’).”  The Term Note for the $4,200,000
indebtedness proves that it is issued “pursuant to the provisions of” the Loan Agreement.
The Term Note for the $500,000 contains the same provision.
Equally important is the undisputed fact that Crofton sought from the bank a fixed
5.5% loan, turned down the bank’s offer for a 6% loan, and deferred to the bank’s proposal
that this more complicated deal would accomplish what Crofton sought in the first place - -
a 5.5% loan for capital purposes.  Yet the Board concluded as follows:
The ALJ found that the swap agreement was an agreement
linked to the above referenced notes, [i.e. for the $4.7 million
dollar loan], to ensure that the interest rate was 5.5%.  But that
is exactly what a swap interest rate agreement is supposed to do.
It allows one of the parties to swap the uncertainties of a floating
or variable interest rate for the certainty of a fixed interest rate.
Nor is the fact that the interest rate swap agreement includes a
notional principal amount [footnote 2 omitted] that is the same
as the amount of the loan unusual, controlling, or change the
character of the agreement. Most, if not all, swap agreements
refer to an amount that is the principal amount of a loan (i.e. the
swap agreement’s notional principal.) . . . The stated amount of
principal is “notional,” because an interest swap agreement is a
separate, independent, stand alone agreement [footnote 3
omitted] that does not modify or exchange the principal amount
owed on the loan. In short, the interest swap agreement in
question, like all interest rate swap agreements, did not produce
1See, e.g., InvestorWords.com–Investing Glossary, http://www.investorwords.com,
(last visited March 12, 2010); Investopedia.com, http://www.investopedia.com (describing
swap agreements as: “Traditionally, the exchange of one security for another to change the
maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have
changed. Recently, swaps have grown to include currency swaps and interest rate swaps.”)
(last visited March 12, 2010). 
3
a new loan or any additional principal for either of the parties to
the agreement.  The swap agreement simply allowed the parties
to exchange interest rates without modifying the terms of the
mortgage loan agreement. 
The Board’s rationale is circular and mischaracterizes this loan transaction. The
Board’s thinking goes like this: most transactions using swap agreements involve no actual
loans; therefore the Crofton-First National transaction was not a mortgage loan because it
included an interest swap agreement.  This logic falls apart upon close perusal: classification
of the transaction as a mortgage loan does not depend on whether the amount of interest
payable is at a set rate, or is determined by a formula.  What COMAR says is that mortgage
interest is reimbursable.  So the Board should have considered whether the swap payments
were mortgage interest, not whether most transactions involving swap payments involved
actual loans.  Instead, the Board made a sweeping generalization about swap agreements, and
ignored the undisputed fact that the Loan Agreement, Notes, and Master Agreement
constituted a refinance of an existing mortgage loan entered into by Crofton for operation of
its facility.
 Rather than looking at the transaction in question, as the Administrative Law Judge
did,  the Board relied on several internet definitions of swap agreements, which indicate that
in the typical swap transaction the principal amount is never exchanged.1  The possibility or
popularity of using swap payments as investments securities should play no role in the
Board’s consideration of whether the bank actually loaned  money to Crofton pursuant to a
loan agreement and whether the swap payments were an integral part of that agreement.  
2The Board utilized the definition of “mortgage interest” offered by the Department
of Health and Mental Hygiene: “interest is the cost incurred for the use of borrowed funds.”
This is consistent with the definition of “interest” in Black’s Law Dictionary as “[T]he
compensation fixed by agreement or allowed by law for the use or detention of money, or for
the loss of money by one who is entitled to its use; esp. the amount owed to a lender in return
for the use of borrowed money.” Black’s Law Dictionary 886 (9th ed. 2009). 
4
Contrary to Respondent's suggestion, there is no evidence that Crofton entered into
the swap agreement to gamble on market rates.  The Administrative Law Judge found as a
fact that the “swap agreement required payments that would convert the floating rate term
payments into a fixed 5.5% interest rate.”  The parties’ intent that Crofton pay 5.5% interest
on the capital loan is undeniable.
COMAR 10.09.10.10(C) lists five classes of capital expenses which are reimbursable:
“(1) Property taxes; (2) Property insurance; (3) Mortgage interest (including bond interest);
(4) Net capital value rental; and (5) Central office capital costs.”  While the regulations
provide detailed and complex reimbursement procedures and formulas, they do not provide
further details regarding reimbursable capital expenses generally or mortgage interest in
particular.2
As the majority acknowledges, “we may not abdicate our responsibility to examine
independently the regulations upon which the Board relied in deciding Crofton’s appeal[.]”
Majority Op., supra, at 14-15.  In my view, the majority does exactly this when it accepts the
Board’s reliance on the Federal Provider Reimbursement Manual (“PRM”) Section 202.2A
to justify its conclusion, because the limitations set forth in that subsection clearly do not
apply to an integrated loan agreement like this one.  PRM Section 202, titled
“DEFINITIONS,” provides the details to flesh out the requirement, set forth in PRM Section
200, that a cost will be reimbursable for “[n]ecessary and proper interest on both current and
capital indebtedness[.]”  It includes a subsection (Section 202.2) on what is considered
5
“necessary” interest, which says that the interest must be “[i]ncurred on a loan that is made
to satisfy a financial need” of the provider.  Subsection A of Section 202.2 addresses what
is meant by “financial need,” and it starts out as follows: “When borrowed funds create
excess working capital, interest expense on such borrowed funds is not an allowable cost.”
It is in this context that the PRM sets forth the example relied on by the Board for the
proposition that swap interest payments are never reimbursable. The example involves a
hospital that has issued ten million dollars in bonds, on which it pays interest to bondholders
at a variable rate.  Not liking the variable rate it must pay to the bondholders, the hospital
hedges its risk by entering into a separate agreement with a bank, using the notional amount
of ten million dollars principal, and stipulating that “the  hospital will pay the bank a fixed
rate of 12% and the bank will pay the hospital a variable rate of prime plus 2%[.]”  Under the
PRM, this transaction constitutes use of excess working capital, and is therefore not
reimbursable.
This example is not applicable to Crofton’s loan.  Unlike Crofton’s loan, the swap
interest rate agreement in the example does not “satisfy a financial need of the provider”
because the hospital already had the capital it needed, which it obtained when it issued the
bonds.  The swap interest rate agreement was with a third party, and thus was separate and
apart from the borrowing represented by the bonds.  The third party bank never lent any
money to the hospital.  
Accordingly, I submit that it was wrong, as a matter of law, for the Board, tasked with
applying the clear language of COMAR 10.09.10.10, which requires reimbursement to a
nursing home for mortgage interest on capital loans, to rest its decision on the federal PRM
addressing dissimilar financial arrangements utilized by a hospital that had issued bonds. 
The deference we give to agency determinations of law has limits.  As the majority
6
recognizes, “‘it is always within our prerogative to determine whether an agency’s
conclusions of law are correct.’”  Adventist Health Care, Inc. v. Md. Health Care Comm’n,
392 Md. 103, 121, 896 A.2d 320, 331 (2006) (quoting Kushell v. Dep’t of Natural Res., 385
Md. 563, 576, 870 A.2d 186, 193 (2005)).  In my view, the majority errs in declining to
exercise its prerogative to overrule the Board’s misreading of the unambiguous term
“mortgage interest[,]” contained in COMAR 10.09.10.10.
Judge Harrell has authorized me to state that he joins in this dissenting opinion.