*1 68, [840 99] NE2d 806 NYS2d Appellants-Respondents, U.S., Inc., al., et Consumers Union Respondents-Appellants, al., v State et York New Appellant, al., et Foundation, Charitable Asset Respondents. Argued April 2005; decided June *5 OF COUNSEL
POINTS City (Mark York New Scherzer, Scherzer Mark Law Office of counsél), appellants- and A. Wieber Christopher allegations takings respondents. claim. state a I. Plaintiffs’
333
(Cranley
Vt.,
105;
v National
Ins. Co.
318 F3d
Arnav In
Life
of
Raysman,
dus.,
Brown,
Millstein,
Inc.
v
Retirement Trust
Felder
Steiner,
Martinez,
83;
300;
NY2d
Leon v
84
&
96
NY2d
Rovello
Realty Co.,
633;
Kamali,
v
40 NY2d
Ullmann v Norma
Orofino
Philip
Harshbarger,
Inc.,
Morris,
691;
207 AD2d
v
159 F3d
Inc.
Deposit
Deposit
670; Meriden Trust &
v Federal
Ins.
Co.
Safe
Corp.,
449;
Sullivan,
62
v
913,
F3d
Garelick
987 F2d
cert denied
Shalala,
821;
nom.
sub
Garelick v
510
Allied Structural
US
Spannaus,
Chicago,
Q.
Co. v
234;
Steel
438 US
B. & R. Co. v
226.)
Chicago,
adequately alleged
US
166
II. Plaintiffs
a due
process
(Niagara Recycling
Niagara,
claim.
v Town
83 AD2d
of
Surrogates
Supreme
Reporters
316; Association
&
Ct.
Within
of
City
York,
766,
N.Y. v State New
F2d
US 1058;
940
502
of
of
982.)
City
York,
Burtnieks v
New
F2d
III.
716
Plaintiffs
of
(Trustees
allege
adequately
impairment
an
of contract claim.
of
[17 US]
Pennsylva
Woodward,
Dartmouth
v
4
Coll.
518;
Wheat
York,
nia R.R. Co. State
269;
v
New
15 AD2d
Matter Mount
of
of
103.)
Hosp.,
§
Sinai
250
42
NY
IV Plaintiffs’
USC 1983 claims
(fifth
action).
survive with its constitutional claims
Plaintiffs have
cause of
V
adequately alleged
Corporation
Not-For-Profit
fiduciary duty
Law, breach of
and constructive trusts claims
action). (Henness
(sixth,
eighth
seventh and
causes
Hunt,
of
v
756.)
legislation
272 AD2d
VI. Plaintiffs state a claim that the
(Matter
III,
violates article
17 of the New York Constitution.
of
Ferry
Co.,
New York R.R.
327;
El.
70 NY Matter Union
Co.
of
of
Brooklyn,
Corp.,
139;
NY98
Matter
v
Decker Pouvailsmith
of
1;
252
York,
NY 19th St.
State
380,
Assoc. v
New
AD2d
172
79
of
People
434;
Giordano,
NY2d
v
441;
87
Term.
NY2d
Bush
Co. v
City
Hermitage
Goldfogle,
York,
New
152
144;
Misc
Co. v
204
of
App
Virgin
Div
236
554;
Islands,
NY
Smith v Government of
Ry.
714;
Kobbe,
375 F2d
Matter Gilbert El.
Co. v
70
361;
NY
of
72.)
Mayor
[Elm
Matter
St.],
N.Y.
246 NY
VII. Plaintiffs’
of
of
preliminary injunction against
election not
seek a
the conver
sion does
entitle
defendants to dismissal of the amended
(Nassau
complaint.
Corp.,
Trust Co. v
Prods.
Montrose Concrete
Besicorp Group Enowitz,
175;
56 NY2d
v
761;
235 AD2d
Matter
York,
336;
Schulz v
York
State New
81 NY2d
New
Pub.
Groups
Egan,
Levitt,
Interest
AD2d 1074;
Research
v
62
Burns v
Saratoga County
Pataki,
117 AD2d
v
38;
Chamber Commerce
Minorco,
801;
S.A.,
100 NY2d
Consolidated Gold Fields PLC v
Wellington
Corp.
Assoc.,
252;
871 F2d
Sonesta
Hotels
v
Intl.
483
247.)
F2d
Spitzer, Attorney
City {Robert
General,
Eliot
York
H. Eas-
New
counsel),
Halligan
ton and
J.
New York
Caitlin
State of
respondents-appellants.
Health-
others,
I. Given
pursue
plaintiffs’
voluntary
conversion,
Choice,
decision to
Inc.’s
(Sega
for want of state action.
v State
constitutional claims fail
Cranley
York,
183;
Ins.
v National
Co.
New
60 NY2d
Life
Metropolitan
Co.,
Vt.,
F3d
105;
F3d
v
Ins.
Tancredi
Life
Mall,
Smith Haven
942;
539 US
SHAD Alliance v
NY2d
People
City
York,
577;
94 NY2d
496;
New York v State New
Communications, Inc.,
Devlin,
269;
v
v
FCC Beach
NY
Harshbarger,
Philip Morris,
670;
v
159 F3d
Meri
307;
US
Inc.
*7
Deposit
Corp.,
Deposit
62
&
Co. Federal
Ins.
den Trust
v
Safe
913.)
Sullivan,
F2d
II. In the
449;
v
absence
Garelick
987
F3d
plaintiffs’
impairment
any
thereof,
of
contract
substantial
(Energy
properly dismissed.
Contracts Clause claim was
Light
Group,
Co.,
400;
Inc. Kansas Power &
459 US
v
Reserves
Pennsylvania
v
Koch,
v
89
R.R. Co. State
51;
Ballentine
NY2d
of
Dodge
Chicago,
York,
Ed.
302
504;
New
11 NY2d
v Board of
of
City
Dist., AD2d
74;
US
v Board
School
79
Camardo
of
of Educ.
323.)
City Binghamton,
795;
v
48 NY2d
864, 53 NY2d
Cook
of
properly
process
III.
due
claims were
dismissed.
Plaintiffs’
(Board
Colleges
Regents
Roth,
564;
v
408 US
Town
State
of
of
of
Magee,
Hosp.,
Orangetown
41;
NY2d
Mount Sinai
v
88
Matter of
County
App
Co.,
103;
v
Mut. Ins.
39
Div
250 NY
Grobe Erie
Eye,
Hosp. v
613;
Ear & Throat
169 NY
Matter Manhattan
of
126;
Washington Legal
Spitzer,
Phillips
186
2d
v
Founda
Misc
College Savings
Prepaid Post
tion,
156;
US
Bank v Florida
524
secondary
Armstrong
Expense Bd.,
v
666;
US
United
Ed.
527
Co.,
164;
States,
R.R.
125
40;
364
Kane v New York El.
NY
US
680.)
takings
Rogin
Twp., 616 F2d
IV Plaintiffs’
v Bensalem
(Meriden
Deposit
properly
Trust
dismissed.
&
claims were
Safe
Deposit
Corp.,
449;
v
62 F3d
Sulli
Co. v Federal
Ins.
Garelick
Found,
Energy Community
v
van,
913;
987 F2d
Illinois Clean
Teleprompter
Filan,
934;
v
Manhattan CATV
392 F3d
Loretto
City
Corp.,
York,
419;
Duck Kim v
New
90 NY2d
458 US
Soon
of
Keystone
Pennsylvania
Mahon,
393;
v
260 US
1;
Coal Co.
DeBenedictis,
470;
US
Ruckelshaus
Coal Assn. v
480
Bituminous
Monterey
986;
Co., 467
v Del Monte Dunes
v Monsanto
US
Connolly
Monterey, Ltd.,
v Pension
687;
526 US
Benefit
211.) Guaranty Corporation,
1 of the Laws of
475 US
V.
comports
Privileges
it
Clause because
2002
with the Exclusive
(Matter
monopoly.
rights in
Union
no
the nature of
confers
of
Brooklyn,
People
Ferry
Giordano,
139;
98 NY
v
87 NY2d
Co. of
Mayor
[Elm St.],
72;
246 NY Matter
N.Y.
441; Matter
of
of
of
Farrington
Pinckney,
Henneberger,
74;
1
420;
NY2d
NY
v
City
Exempt
v
Fund
N.Y.
Firemen’s
Trustees
Benevolent
of
of
of
People
Tyroler
City
Roome,
313;
v
93 NY
ex rel.
Warden
Prison
of
City
City
N.Y.,
116;
157 NY
York v State New
New
of
of
of
of
Proprietors
People
York,
577;
Devlin,
v
269;
NY2d
33 NY
of
Bridge
[36
Proprietors
Bridge,
Charles River
v
11 Pet
Warren
of
420.)
US]
(Steven
Manges
City
Weil,
LLP,
&
York
Gotshal
New
Alan
counsel),
Reiss, Janet L. Horn and Adam K.
of
and Hin
Grant
Albany (.Bartley
Kimberly
PC.,
Costello,
man Straub
III
J.
counsel),
C.
of
HealthChoice,
Inc.,
Lawrence
respondent-appellant.
complaint
I. The
must be dismissed
(Matter
nonjusticiable
implicates
political question.
because it
Inspection,
Empls.,
New York State
Sec. & Law
Enforcement
82, AFSCME,
Cuomo,
Dist. Council
233;
AFL-CIO v
64 NY2d
Repub
Third
Ave. Assoc. v Consulate Gen.
Socialist Fed.
Yugoslavia,
152;
Karadzic,
lic
218 F3d
Kadic v
336 Supp Corp. City 656; F N.Y., 940 Trade Commn. v Waste of of Supp Metropolitan Co., 2d 80, Ins. 149 F 316 Tancredi v Life Colleges Regents Roth, 942; State v 308, F3d 539 US Board of of Dept. City 564; N. v New York 408 Matter Cadman Plaza US of Dev., 344; v South Caro & 290 AD2d Lucas Hous. Presero. of County Council, v Mut. 1003; lina US Grobe Erie Coastal 505 App Mount Sinai Co., 613; Div 169 NY Matter 183, Ins. Hosp., 39 of Armstrong States, 40; v 364 US 103; NY United 250 Keefe 647.) Realty App Annpaul Co., 301, V Div 243 NY v 215 authorizing process claim fails because the Plaintiffs’ due legislation provides procedures adequate contest and chal Supp lenge (Rudolph Cuomo, 1308, v 916 F the conversion. affd Eldridge, Cuomo, 424 253; Allen F3d Mathews v sub nom. v 100 City Recycling York, Indus., Inc. & v New 319; US Sanitation of Wegman’s York, 76 985; v State New 107 F3d Food Mkts. of Agnew, Highland Dairy, 608; Inc. v 300 US 95; AD2d Farms County Regional Planning v Comm’n Hamilton Williamson City, Empire Mix, Tr. Inc. v Giu 172; Bank 473 US Johnson of 331.) properly Supp liani, F 2d VI. The courts below plaintiffs’ claim of the Contracts Clause. for violation dismissed (Tancredi Supp Metropolitan Co., 80, Ins. 149 F 2d v Life Bldg. Blaisdell, v 942; & Loan Assn. 308, F3d 539 US Home Jersey, 431 398; Trust N.Y. v New United States Co. US Light Energy Group, Co., Inc. & 1; v Kansas Power US Reserves Socy. Sobol, 78; v 192 AD2d 400; State N.Y. 640; US Medical Equitable People Shepard, v Assur. 50 NY2d Lord v Life Pennsylvania Socy. US., R.R. New 212; Co. v State 194 NY Hosp., 103; York, 269; AD2d Mount Sinai NY Matter Hosp. Brooklyn Fund, 178, v Ins. 117 Misc 2d State Methodist 801.) VII. The courts below 102 AD2d 64 NY2d 474 US denying motion to dismiss because erred in defendants’ complaint article fails state cause action under amended (Hotel Trust York Dorset Co. v III, 17 of the Constitution. New City N.Y., *9 358; Matter 46 NY2d Resources Cultural of of of for Mayor Ferry [Elm St.], Co. 72; 246 NY Matter Union N.Y. of of Exempt Brooklyn, 139; Benevo Trustees Firemen’s 98 NY of of lent Corp. v Roome, 313; Gas & Elec. v 93 NY Rochester Fund City N.Y., 313; 71 NY2d New State Public Serv. Commn. of of of People Devlin, NY York, 577; 33 New 94 NY2d York v State of Pinckney, Pinckney, Stapleton Farrington 74; v 1 NY2d 269; v City York, 28 Indus. v New 330; 293 American Consumer NY of 38.) failing erred dismiss AD2d VIII. The courts below may complaint be no relief that because there is amended (Richardson Coy, granted against Empire Inc. v HealthChoice,
337
640;
York,
28 AD2d
336;
Matter
Schulz v State New
81 NY2d
of
of
Egan,
v
38;
Burns
117 AD2d
New York Pub. Interest
Groups Levitt,
Research
Fields PLC
v F2d 252; 871 Sonesta Intl. Hotels Corp. Wellington Sperry Assoc., 247; v 483 F2d United v States Corp., Props. Hoy, 52; 493 All Terrain AD2d 87; US v 265 Mc Sherry Supp Giannuzzi, 238; v F 717 Simon v Glass Safelite 68.) Corp., F3d 128 (Steven City LLP,
Proskauer Rose New York E. Obús and counsel), appellant. Edward S. Kornreich of I. The dismissal (Trustees plaintiffs’ complaint of should affirmed. Dartmouth of [17 US] Equi Woodward, Co v 4 518; ll. Wheat v Lord Socy. U.S., Gravure, table Assur. 212; 194 NY Aleo Inc. v Life of Knapp Hosp., Found., 458; 64 NY2d Matter Mount Sinai 128 of App Armstrong Misc 223 Div 836, 103; NY v 250 United Multiple Org. States, 40; 364 US Matter Sclerosis Serv. N.Y. of of City [New Multiple Socy.], York Ch. Natl. Sclerosis 68 NY2d of Found, Energy Community 32; Illinois Clean Filan, v 392 F3d 934; Pharmacies, Beckwith, Webb’sFabulous Inc. v 155; 449 US Phillips Washington Legal Foundation, v 524 US Matter 156; of 70.) Wolpoff Cuomo, v 80 NY2d II. 1 of the Laws of comports 2002 with article 17 of III, the New York Constitu (Trustees Exempt City tion. Firemen’s Benevolent Fund of of of Ferry Brooklyn, Roome, v 313; N.Y. 93 NY Matter Union Co. of of Ry. 98 NY Matter 139; Kobbe, Gilbert 361; El. Co. v 70 NY of Equitable Socy. U.S., Lord v Assur. 212; 194 NY Matter Life of of Prendergast, App Home v Div 549; NY Montefiore Cuomo, Grumet v NY2d 57; Hotel Dorset Co. v Trust City N.Y., Cultural Resources Matter 358; NY2d of McAneny Apportionment City N.Y., v Board Estimate & Socy., 377; 232 NY Fox v Mohawk & Hudson Riv. Humane 447.) App 517; Co., v NY Bush New York Ins. Div Life OPINION OF THE COURT J. Read, appeals plaintiffs issue these is whether have stated a challenge legislation authorizing
viable cause action doing Inc., HealthChoice, conversion defendant (Empire) from a business as Blue Cross and Blue Shield directing for-profit corporation, to a certain assets be used for various health and purposes. For follow, charitable the reasons that we conclude plaintiffs’ allegations legally support are insufficient to cognizable of action. cause
338
I. Empire’s Origins and Evolution (AHS), a Service Hospital as the Associated Empire began provide formed in 1934 to workers corporation1 membership of “the outgrowth was an with affordable care. AHS hospital vol- disturbing consequence it: especially and one Depression they edge bankruptcy on because untary stood hospitals (the in business while cause of their lacked the revenues to stay and other hospital millions of citizens went without problems) it” lacked the for money pay needed care because they in New Identity and Culture: Organizational (Brown, Capture Cross, [Winter L York Blue Pol, 651, J Health & Pol’y 1991]).2 task” when founded was “key
AHS’s organizational needed care a between who financing linkage people “build[ ] (id. 655). AHS did this that needed revenue” at hospitals and which channeled “hospital plans,” service by offering prepaid avail- hospital and made affordable care revenue the hospitals fee, AHS contracted with monthly able to workers. For AHS year. care a days hospital up subscribers directly them closely hospitals, paying “work[ed] with the then hospitals whom the billed. indemnifying patients instead be, the hospitals’ exchequer, and was intended was, [AHS] (id.). their alter ego” financial they York. to New As unique service were
Hospital plans nation, depart- “[a] number state spread throughout contracts, hospital had that service ments of insurance ruled and of insurance even if one were form hospital, issued and only by issued stock service could be hospital policies met the require- established companies mutual insurance (Rorem, stock, reserves, and assessments” ments as to capital Plans, L Hospital Service Enabling Legislation Non-Profit [1939]). to a head” This “came 528, & Probs issue Contemp of Insurance Superintendent York when New function, desirable, could although such a “advised New company. a stock or mutual insurance only by performed trustees, and administrators leaders, hospital York civic an enabling drafting sponsoring cooperated physicians predecessor of the Not-For- Corporations Law was Membership 1. The Corporation N-PCL Profit Law complaint. incorporated article into their 2. Plaintiffs (id. 529-530; 595; Comment, act” Group see L ch see also Legal Aspects,
Health Plans: Some 53 Yale Economic LJ tory 162, 173-174 [1943] *11 [discussing legislation adopting statu adapted group plans]). The result was controls health Legislature article 14 of Insurance Law. In the recodi 1939, the replaced IX-C, the fied Insurance Law and article with article indemnity nonprofit corporations medical as which addressed (L corporations hospital as service ch well These corporations subject exempt and were from state and local taxes were requirements. present-day
to tailored 43 of Article governs nonprofit plans, Law, Insurance which health derives from articles 14 and IX-C. urging hospitals,
At the of its member AHS became intermediary for Medicare Part A in York in In New 1965. tak- ing Empire thoroughly on this role, became even more enmeshed operation by hospitals specifying of its member account- ing practices, cost definitions and cost Medicare. allocations for (UMS),
In Service, United Medical Inc. also member- ship corporation, provide coverage physician was formed for merged services. AHS and UMS to form Blue Cross and Type corporation Blue Shield of Greater B York, New under Corporation merged entity the Not-For-Profit This Law. with Blue Cross of York, Northeastern New Inc. in 1985 and became Empire Blue and Cross Blue Shield.
Empire initially only group plans, offered but added in- later coverage. premiums according “community dividual It fixed rating,” locality given charged all which subscribers in a are regardless “open risk, the same rate of health and allowed accepting applicants. many years, enrollment,” all For com- routinely coverage, mercial insurers did not health offer profitable, competi- not was viewed as and no so had government encouraged plans Further, tion. federal like Empire by granting tax-exempt them under status section (4) (c) ([IRC] USC) of the Internal Code as social Revenue organizations.3 welfare
Empire experienced very financial difficulties almost from its beginnings high open because costs of enrollment and leagues welfare with the “common and [2] [i]). promotion social A Many social improvements” organizations organizations of social welfare good (IRC organization welfare”]). and (Treasury with federal organized general [c] [4] [A] “Social welfare” [26 CFR] § 1.501[c][4]-l [a] Regulations has welfare” and with “civic betterments tax-exempt [provides as profit its exempt but tax status are not operated equated exemption function exclusively for regulation the social charities, “(c)ivic
community slowly began rating. Further, commercial insurers entering By using experience rat- market. the health insurance avoiding ing, experience, premiums on claims with based open offer lower enrollment, commercial insurers were able to groups premiums and individuals. to healthier While rating products, experience continued its for some it also used open-enrollment community rating policies “insurer of last resort.” care role in York’s health
Because of critical New continuing delivery system high financial costs and Legislature troubles, favored it over its commercial counterparts. example, Empire For allowed to reimburse hospitals commercial costs, on the of actual while insurers basis charges. Legisla- required hospital When the were to reimburse *12 Prospective Hospital ture in York 1983 enacted New (NYPHRM), system Methodology a for cost Reimbursement rate-setting hospitals, Empire afforded an was controls and advantage required insurers, over commercial which were by Empire pay paid Empire. surcharge over the rate a and above “every exempt county, municipal state, from and school was § ft])- tax” Insurance Law 4310 Empire a severe when the mid-1980’s, In the suffered blow Accounting report a United States General concluding Office issued underwriting Empire practices and other plans to those of commercial insurers. Blue Cross were similar 4 exemption. Congress by revoking responded tax the Blues’ early Empire management 1990’s, In the was with beset causing problems, high expenses fraud, all administrative (IRC (IRC [5]), § § 501 including organizations [c] labor 501 trade associations (IRC (IRC [10]) [6]), § § [c] 501 [c] [7]). [c] fraternal 501 and social clubs societies their Act within certain other narrow from that used ability Internal Revenue certain tax Conundrum.: table activities subsidize organizations 2085, 4. See basis Status, nonprofit 1986, to secure that the premiums consist[ ] Tax (1986), advantages by calculating taxable income Blue Cross 23 Am JL & Med The State and Federal are Reform Act structure when tax-exempt Code exempt selling codified at commercial providing commercial-type plans many of insurance was from taxation financing and [m], IRC exceptions; were 1986, 221, first established under low-income enrollees insurers); § . . . This left Blue Cross stripped Response Hospitals’ Pub n 24 (m) “only under L yet see also (providing 99-514, (“As if no substantial their unable to sell stock because IRC charitable a result of the Tax Reform federal tax insurance,” § Singer, § enabling that section 501 in manner 833, their activities Changes activity plans (a), the Blues legislation”). exemption, part 100 US unless without the Conversion under in Chari- different retain [their] [c] they Stat fall [4] on significant growth of maintenance financial losses. The health (HMOs) organizations further the 1990’s eroded groups healthier and individuals switched to subscriber base as managed plans. more economical care
By Upon applying 1992, future looked bleak. Superintendent significant suggested Empire increases, rate that without in a them cash reserves would be exhausted January Legislature 1993, matter In of months. averted this (L l).5 crisis with a million ch 1993, cash infusion These $100 Empire supposed up funds were to shore until a series of laws Empire competi- took effect, which were crafted to make more by eliminating major tive distinctions between it and com- example, Legislature required mercial For insurers. health organizations maintenance group and commercial insurers the small (L community rating 501); market to use 1992, ch “risk adjustment” essentially process required enacted, compensate providers insurers and HMOs to other who offered coverage higher-risk (id.); populations Legislature and the policies open- mandated that HMOs offer on an individuals (L 504). enrollment/community rated basis ch These unique statutes relieved of its role New York’s Accordingly, Legislature “insurer of resort.” last soon enjoyed removed the favorable rate had differential that (L under NYPHRM ch
Empire’s Original Restructuring Plan *13 Notwithstanding legisla- state and other subsidies favorable Empire roughly tive action, lost half million and its sub- $800 10-year period light scriber in base the from 1986 to In deteriorating prospects, Empire its decided to restructure. Empire’s original restructuring substantially plan, Under all assets, its and liabilities were to be to businesses transferred wholly for-profit exchange owned subsidiaries in of the for 100% outstanding newly subsidiaries’ and issued common stock. This by public offering transfer was to followed an initial in portion public. a of the would be to the Proceeds from stock sold offering outstanding approximating the all stock, and 100% of not-for-profit’s assets, the value transferred would then be newly tax-exempt Empire from “old” to a formed charitable availability promoting foundation and acces- “dedicated contingent Empire’s discontinuing 5. This upon bailout was lawsuit challenging financing malpractice of a the State’s and use insurance fund. sibility high quality related healthcare and services Empire people York.” would dissolve of the State New “Old” Empire insurance, “new” continue to offer health and would corporation greater potential for-profit with for becom- but as ing remaining competitive. of Directors and Board including dissolving merging options, or with looked other restructuring along entity, another but determined that these lines was more desirable.6 restructuring subject proposed Not-For-Profit
This governing Corporation provisions disposition of a Law’s corporation’s example, 511, and assets. For under N-PCL 510 Type not-for-profit corporations may B all sell their assets with Attorney Supreme approval on General. Court and notice to dissolution, After by corporation
“[a]ssets . . received held . one more or shall be distributed to domestic corporations organizations engaged foreign or other substantially similar to those the dis- activities by corporation solved ... as ordered court plan approval under which such is submitted (N-PCL (Authorization plan)” section added]). [emphasis [a] [3] [A]
Although brightened picture financial its had somewhat Empire its form 1998, the end concluded that capital compete crippled ef- chances to attract sufficient its fectively care restructur- York’s health market. Without New ing, predicted losses, and future financial so serious plan actively pursued restructuring Department with Insurance. formally hearings in 1999, held
Public were proposed plan Superintendent later that submitted its Attorney opined year. In General 1999, the fall of change require Empire’s restructuring Insurance would regulatory ap- (j) Supreme as well as Court Law Spitzer Sept. proval Airs Concerns Release, Press <http://www.oag. Conversion, on Blue Shield Cross/Blue *14 provided “no mechanism to unlock For dissolution have example, 6. would [and] could Empire’s profitable business lines going-concern value Millstein, (Testimony of Ira M. significant of valuable assets” entail waste Assembly Standing Empire, York State before New outside counsel Health, 1997, Apr. 11, It would also Insurance and Committees on State, lessening competition to the Empire York as an insurer New remove detriment consumers. [last state.ny.us/press/1999/sep/sep01a_99.html> updated Jan. <http://www.courts.state.ny.us/reporter/ 24, 2003], cached at webdocs/spitzer_concerns_bluecross_conversion.htm>; also see May Attorney Proposed 1999 Mem to General, Conversion to by Empire For-Profit Status Blue Shield, Cross and Blue in Jo- sephson, Litigation: Health Care What YouNeed to Know After Pegram; Fiduciary Accountability; Investiga- Recent Cases and 711).7 Pending PLI/Corp tions; Cases, 1216 On December Superintendent opinion 29, 1999, the issued an and decision approving Empire’s reorganization plan. nonetheless Disagreeing Attorney with the General about the need for legislative Superintendent opined action, the that section 4301 (j) prohibits “which the conversion of a health corporation for-profit corporation, [was] service ap- into a plicable Empire’s restructuring.” According Superin- Empire’s restructuring governed tendent, under articles 71 and 74 of the Insurance Law, and was not “conversion” as “Empire exchange having will its assets for different assets equal independent entity value and transfer those assets to an carry not-for-profit public purposes,” formed to out and would then dissolve. Superintendent’s approval
While secured the of its re structuring plan, Attorney proved General’s endorsement press January more In elusive. release dated 5, 2000, the At torney oppose principle General stated that he did “not “legally protect wish convert,” but was bound to organization enjoyed interest when an that has mil change lions in profits earning state subsidies seeks to its mission to private by Attorney owners” Statement General Spitzer Regarding Proposed Empire Eliot Blue Cross/Blue <http://www.oag.state.ny.us/press/2000/jan/ Shield Conversion, jan05b_00.html> updated [last <http:// 24, 2003], Jan. cached at www.courts.state.ny.us/reporter/webdocs/spitzers_statement_ Law, In article 43 of the Insurance the article under which operated, provided (j) at section 4301 expense indemnity “[n]o medical corporation, expense dental indemnity corporation, corporation, health hospital service or corporation service corporation shall be converted into a organized pecuniary profit. Every corporation such shall be operated maintained and for the benefit of its members and co-operative as a corporation.” subscribers Section specifies 7301 of the Insurance organized “[n]o Law insurer chapter type licensed under this shall except convert to different of insurer provided in this article.”
344 added]). [emphasis He then identi bluecross_conversion.htm> by objections restructuring plan approved the fied the several legal Superintendent, bar first and foremost the of Insurance § (j)-8 Empire pursue I* not reor end, Law the elected 4301 by ganization restructuring plan approved the under the 1999 Superintendent. Act Workforce Recruitment and Retention
Health Care January Legislature Chapter 1 of 25, 2002, the enacted On and 2002, the Care Recruitment the Laws of Health Workforce (Chapter Chapter purposes include “allow- Retention Act l’s giving corporation, ing] [Empire] for-profit to a convert capital Empire ability compete ef- the needed to the raise fectively providing market”; revenue health care the current help providers and from the health care recruit conversion “to they “increasing] improving] and and need”; retain the staff working the dis- children, health access for women and care (Senate Support L Mem in ch abled” 1639-1640). McKinney’s NY, Session Laws (j) adding § Chapter by five amends Insurance Law (2) addressing specifically paragraphs, including paragraph new provision Attorney would the contention that this General’s preclude Empire’s creates 1 also otherwise conversion.9 Law, a new Insurance which directs section 7317 (Insurance § plan proposed of conversion Law to submit [1]) Superintendent approving [a] prohibits from this and hearings plan determined until after he has convened and that it adversely applicant’s
“[would] not con- affect protect [would] members, tractholders negatively impact [would] on interests of Attorney principal objections other were “old” 8. General’s receiving continued control over charitable foundation control; assets; such the foundation would receive fair value under whether “new” would Empire’s continued control over and whether “old” compromise length of the conversion. an arm’s valuation (2) (j) provides § now Insurance Law before December initial or other organization, “[a]n article section same opinion and decision issued entity organized may [7317] forty-three amended, may thirty-first, such chapter.” corporation case, in pecuniary profit, nineteen be accordance converted hundred superintendent on or was the with or into into ninety-nine, subject corporation provisions for-profit an delivery the the the the of health care benefits and services to
people of the state of New York and results in equitable winding fair, convenient down (Insur- applicant” business affairs of the [b]). ance Law 7317 (f) (i) jurisdiction Supreme Section 7317 vests Court with sole *16 any challenge Superintendent’s to consider to the final determi- 30-day approve pe- nation to conversion, sets a limitations judicial question riod, and limits review to the whether Superintendent arbitrary capricious acted in an manner with respect reaching to his determination.
Section 7317 (f) (ii) specifies “[t]his section [7317] shall legal supercede applicable be deemed to all otherwise laws and requirements” grants Empire’s immunity and Board for (f) (ii) participation in the conversion.10Section 7317 addition- ally provides that approved by superintendent
“a transaction shall purposes be deemed for all to abe transaction that applicant promote is fair and reasonable to an and to purposes applicant, of that and the use of proceeds as described herein shall be deemed for all purposes purpose to be a use for a that is consistent may purposes with and as near as be to the for applicant originally organized which the and subsequently operated.” plan by Empire pursuant
The of conversion submitted Chapter many ways plan approved by 1 was similar in Superintendent plan accomplishes Empire’s in 1999. This through conversion a assets, transfer of creation new for- profit corporations holding company, a and and a stock sale. key original plan respect, 1 modifies in one dedicating upon however. Rather than of the assets freed Chapter 100% foundation, conversion to a charitable 1 calls for 95% entity for-profit of the fair market of the value to be transferred (f) (ii) Specifically, section 7317 states that “compliance (j) with this section and subsection of section four chapter thousand three hundred one of this and the use such (k) section, provided funds as in such and in subsection section, compliance shall be deemed to constitute with and shall supercede legal including, all requirements, such other but not to, statutory, requirements limited common and other law relating not-for-profit corporations fiduciary requirements applicable any company filing plan to the board of directors of pursuant to this section.” (Insurance § [j] § “public [4]; 7317 Law 4301 asset fund” [e]). remaining a “charitable or- transferred to The 5% is [1]) (Insurance § § [k] [j] ganization” [5]; 7317 Law 4301 pursuant tax-exempt organization operate to IRC aas shall (c) (3) expansion § to health of access mission is and whose generally.11 care managed by a board of directors is to be asset fund by appointed
consisting the Governor members, three of five Temporary appointed of the Sen- President one each (Insurance Ij] § Assembly Speaker Law 4301 and the ate [4] [B]). The net proceeds in the fund are to be transferred preexisting Pool Initiatives Control and Insurance Tobacco (Insurance § [j] [4] also Public Health Law [O]; see Law 4301 2807-v). Chapter § for recruit- the funds be used 1 directs that nonsupervisory ing retaining care workers with health (L §§ part responsibilities 1, patient A, ch care direct Coverage 7-b); Elderly Pharmaceutical Insurance 1-b, 2, (EPIC) needy plan state-sponsored prescription program, (id. 29); can- and cervical *17 treatment breast senior citizens (id. (id. 69); § quality 60); persons § for disabled cer Medicaid (id. 26); §§ nursing programs improvement and as- 5, homes programs.12Any public residual funds health for other sistance go previously Pool Health Care Initiatives created would 2807-Z) (Public proportionally § Law and be distributed Health (L § purposes part among purposes These A, ch its benefitting programs chil- and underinsured uninsured include to be the Foundation’s mission is stated 11. The Charitable Asset “(A) by extending health in- to health care expansion of access purchase afford to coverage residents who cannot to state surance inadequate to coverage that coverage or who have their own needs; meet their “(B) by to health care enhancement of access expansion and ser- creating programs care that deliver augmenting and health or that to access health care populations that are unable vices to health; and improve public “(C) by supporting program priorities augmentation of its other Yorkers about inform and educate New programs that these issues communities to address empower and health issues articulating health identifying and by becoming more effective at implementing solutions. care needs and by organiza- the charitable instituted “Programs or initiatives by the or institutions served neglect the residents tion shall not (Insurance § [k] Law 7317 prior to the conversion” applicant [3]). Empire’s conversion estimation, the funds from By roughly 65% of our 12. and retention. years employee recruitment three directed over were (Child Plus), expanded catastrophic health dren Health and and delivery programs, care as well rural health care and access [1]). § programs Health 2807-l Public Law
II. August plaintiffs complaint Supreme 20, 2002, On filed a challenging Chapter Court 1. include subscrib- Plaintiffs premiums allegedly adversely ers whose and benefits will af- by organizations conversion, fected with and work chronically allegedly ill individuals whose will be made work Empire’s longer more difficult are when assets no dedicated to not-for-profit purposes. The include the defendants State Empire, including various of entities, of its members Board. complaint eight13 consists of causes action. Plaintiffs
allege
Chapter
violates
Due Process Clause of article
§I, 6 of the State Constitution and the Contract Clause of article
§
deprives plaintiffs
I, 10 of the
Constitution;
Federal
property rights
process
and
Chapter
due
of law;
without
taking
Empire’s
an
effects
unauthorized
plaintiffs’ private property
I,
interests
violation of article
of the State Constitution and the Fifth and Fourteenth Amend-
ments of the
Constitution;
Federal
the conversion is invalid
because the
members
Board failed to follow the
procedures
Corporation
Law;
the Not-For-Profit
and the
fiduciary
members of
Board
their
breached
duties
agreeing
by Chapter
sup-
to the conversion
l.14The
authorized
position common to these causes of action—the heart of
action,
subsequently
Plaintiffs
a ninth
al-
withdrew
cause of
*18
leged
Empire
qualify
that
Chapter
does not
to convert under the terms of
1.
by
sought
plaintiffs
The relief
on this cause of action was a declaration that
Chapter
permit Empire’s
1 does not
conversion.
1983,
alleged
requested
14. Plaintiffs also
a
a
violation of 42 USC
and
action).
(purportedly
constructive trust
enforcing
a cause of
Section 1983 is a vehicle for
rights,
presupposes
constitutional
which
state action
Tancredi v
Metropolitan
Co.,
[2d
2003] [no
Ins.
Plaintiffs enjoining defendants federal constitutions and the state and carry taking any direc- the unconstitutional “from action to out declaring Legislation”; members of that the tives of the Empire’s fiduciary duty; enjoining the Board their breached disposition any proceeding conversion or other Board from with Corpora- complying without with the Not-For-Profit assets sought perma- “a the relief tion Law. Plaintiffs summarized injunction prohibiting or, alternative, in the the conversion nent proceeds paid requiring a foundation that all to be conversion carry Empire’s charitable mission.” will on along paral- progressed conversion This lawsuit required plan paths. Empire to the Su- lel perintendent submitted the new litigation, Empire and the 2002; in June in this pre-answer the 2002, In October State filed Superintendent approved motions dismiss. op- plaintiffs plan, filed their
the plaintiffs requested position to the motions. In November directing any proceeds provisional from stock sale that the relief during Comptroller separate account held they litigation’s pendency;15 sale, did not seek to block the stock Supreme granted place 8, 2002.16 Court took on November they requested. plaintiffs provisional relief that granted February Supreme Court defendants’ 28, 2003, On entirety. Preliminarily, complaint in its motions to dismiss plaintiffs, subscribers to determined that who were the court injury plans,17 had demonstrated threatened health increases) (anticipated premium and therefore had stand- fact plaintiffs also commenced a CPLR article 15. In November approving Superintendent’s final determination proceeding to contest only asset disputed the distribution to Empire’s plan. Plaintiffs against judgment from a obtained proceeds fund of 100% of the proceeds have been arguing that 5% of these should companies, seven tobacco They other organization. did not contest to the charitable distributed determination, including his conclusion Superintendent’s final aspect or benefits. adversely premiums affect would not subscribers’ conversion WellChoice, Empire, raised million holding company $417.5 shares, day. or 20.3% of About 16.7 million market on the IPO’s first the stock $25, valuing company stock, price at an initial company’s were sold (Freudenheim, Judge Raised Health Freezes Proceeds at about billion $2 from C14). Times, 9, 2002, Sale, York Nov. Insurer’s Stock New U.S., Inc., Union of plaintiffs include Consumers 17. These subscriber contract, individuals. group and five which held subscriber *19 349 organizational Conversely, ing. court concluded that standing supposed plaintiffs their did not have either because injury speculative, or because the interests that in fact was too germane organizational they sought to their to assert were not purposes.
Supreme plaintiffs’ against the dismissed claim State Court impairment “for reason that of contract the self-evident impairment of a contractual there can be no relationship” (citing a contract absent [1996] [ben- Koch,
Ballentine v 89 NY2d program efit statute does not involve contract authorized rights]). plaintiffs’ process claim The court dismissed due always against ground the State on the that statutes “are statutory subsequent repeal,” and vulnerable to amendment or deprivation that the alterations here did not amount to a of due “[e]ven process; takings if because, and dismissed the claims it deciding, plaintiffs property have a assumed, without that (a highly assumption), interest assets dubious require claims . . . must fail because the Statute does not Empire (citing Deposit & v convert” Meriden Trust Co. Safe [2d 1995] [where Deposit Corp., Federal Ins. F3d Cir company “voluntarily subject(s) obligation to a itself known occur(s)”]). taking addition, . . . no unconstitutional In against alleging plaintiffs’ court dismissed claims Corporation viola- tion of the and breach of fidu- Not-For-Profit Law ciary duty, noting Chapter “supersedes all inconsistent § statutory common-law and duties” Insurance Law 7317 [ii]). Kl alleged
Supreme Court, however, also concluded that the facts “clearly support suffice to a cause of action for violation (unnumbered 12) § III, Article subsection of the State Con- Accordingly, Privileges stitution,” the Exclusive Clause. granted plaintiffs permission an amended court complaint to serve restraining in effect.
and left the order alleges only complaint, 31, The amended filed on March § Legislature III, that the violated article 17 of the State Consti- privilege “by specifically applying granting the tution to and only plaintiffs Empire.”18 around, . . conversion to sought judgment declaring . This time unconstitutional; 1 was illegal declaring already undertaken was that the conversion complaint York Charitable Asset 18. The amended also added the New (Insurance Foundation, by Chapter 1 organization the charitable authorized [k]), Law 7317 as a defendant. *20 enjoining requesting sale; defendants and rescission of the stock any carry “taking action to out the unconstitu- from further Legislation”; enjoining from the Board tional directives of the disposition proceeding any or other of assets with conversion Corporation complying Law; without with Not-For-Profit directing proceeds Comptroller received to “return all a of conversion ... to the owners of from result its Empire, proportional to the number of shares owned.” shares of April the amended In defendants moved to dismiss granted Supreme complaint. 2, 2003, Court On October respect unopposed to the indi- motion to dismiss with re- Board, but denied the motions with vidual members spect Empire, the motion to vacate to the State and and denied restraining temporary 1 order. The Court held that § by giving III, violates article 17 of the State Constitution right not-for-profit insurers; otherwise denied to other (1). (j) right 4301 is, the to convert under Insurance Law Appellate parties cross-appealed The mously and the Division unani- Upon parties’ application, the affirmed both orders. granted appeal Appellate leave to and certified to us Division affirming question of whether its decision and order Supreme properly made. Court’s orders was
III. Standing Plaintiffs’ categories purposes Plaintiffs’ claims fall into two distinct fiduciary standing: analyzing Board violated Corporation Law; and that duties and the Not-For-Profit rights (property, Chapter 1 individual constitutional violates standing process rights).19 have to contract and due Plaintiffs sufficiently cognizable only they “a claims if have assert these dispute cast[ ] in a form in the outcome so as stake (Community judicial traditionally capable Bd. resolution” [citations Borough internal Manhattan v quotation Schaffer, marks omitted]). NY2d [1994] parties au of the classes Plaintiffs are not within challenge Corporation Law to the Not-For-Profit thorized standing bring challenged plaintiffs’ of the defendants 19. None Constitution, only York alleges violation of New complaint, amended III, § 17. article [b]).20 they Consequently, the Board’s conduct N-PCL [1985]) (64 Knapp rely Gravure, Found. NY2d Inc. v on Alco against Empire. standing press There, a claims their corpora York was established as New foundation aiding employees purpose associ of businesses tion with the sought Knapp. Joseph trustees P The foundation’s ated with promote incorporation broader amend the certificate they purposes range could transfer so that of charitable did foundation, which assets to a North Carolina foundation’s Attorney tax-exempt. The Gen not assist individuals object Supreme approved amendment; Court eral did not to this it. *21 employees the foundation seek-
Aleo York sued Gravure’s New enjoin standing by applying ing found the transfer. We beneficiary noting “possible principles a law, of that while trust standing normally to sue trust” does not have of charitable does), Attorney (only for enforcement of the trust General people general may yield particular group of rule where “a purpose, special for a charitable as has a interest funds held they preference of are entitled to a in the distribution when sharply potential is such funds and the class of beneficiaries (id. The Aleo defined and limited in number” Gravure standing Knapp plaintiffs employees of a because, had as company, they primary remained the beneficiaries of purposes stop the and so could seek to foundation’s charitable adding foundation from new beneficiaries. by plaintiffs—“high
Here, the mission ascribed to pos- quality, population as affordable care for as much of the “particular public whole, to a sible”—inures to the as a group people” “special held for a interest in funds of with plans, Empire’s purpose.” health As charitable subscribers they any greater plaintiffs cannot and do not claim that have public right Empire’s Plaintiffs than the as a whole. assets employees, comparable who to Aleo Gravure’s New York are not recipients potential private of of a trust as were beneficiaries merely purchasers of foundation. Plaintiffs are loans from the parties with transaction insurance, health to a commercial Empire. corpora- (b), concerning of the an action transfer 20. Under N-PCL 720 or, General, Attorney by corporation may brought by the tion’s be assets receiver, officer; trustee by a director or right corporation, in the of the member; certifi- creditor; or holder of a subvention
bankruptcy, judgment or property or corporation of cash other contributor cate $1,000 or more. value plaintiffs’ standing alleged Next, to enforce violations rights taxpayer-based cannot their individual constitutional they complain public misused. do not funds have been Standing under Aleo is unavailable to them because Gravure their are not at the constitutional claims directed government’s alleged corporation, Chapter 1 and but at rights. Standing to these violation of their constitutional assert completely rights claims intertwined with the of the nature supposedly violated. only property right plaintiffs assert is “dedica Empire’s ei Plaintiffs,
tion assets to its charitable mission.” Empire’s plans ther as subscribers to health or as members whole, however, as a do not an enforceable have “property or in the interest” in the value of assets dedication of those assets to mission Soon Duck City [1997] [“Because Kim York, v New 90 NY2d rights obligations property that constitute State defines any superseding law, in the Federal the threshold absence of step takings inquiry light whether, in a is to determine existing pos understandings plaintiffs law, ever rules or of State property they sessed the interest now claim has been taken (citation challenged governmental action” and internal omitted)]; quotation Regents marks see also Board State Colleges property [1972] [“To Roth, v have a US person clearly than an benefit, interest in a must have more *22 need or for it. He have more than a unilat abstract desire must legitimate expectation a claim must, instead, eral of it. He have it”]). property enforce, of entitlement interest Without there can be no injury Suffolk, in fact, 77 NY2d standing “an actual 761, 772, legal Society stake [1991] Plastics Indus. v in the matter [standing requires County being adjudicated,” injury interests, an the zone of as well as within “tying injury governmental act chal the in-fact asserted to the lenged”]). injury plaintiffs on
Further, have not established fact anticipated premiums an in their or reduc account of increase injury flatly supposed contradicted in tion in This is benefits. Superintendent’s plaintiffs determination, final chose challenge aspect determination in their CPLR not to this of his assuming injury plaintiffs proceeding. fact, article Even (i.e., injury premiums purported increased have not linked this benefits) wrong they that seek to reduced and/or Empire’s “dedicate] Legislature’s neglect . . . redress—the remedy” “principal assets to its charitable mission”—or the they right supposed wrong—implementation of this seek (i.e., directing Empire’s original restructuring plan 100% tax-exempt, [c] [3] Empire’s foundation). IRC 501 charitable value to injury only arguably anything, alleged could If (that again ignoring Superintendent’s final determina- is, tion) Legislature’s Empire’s be connected to the authorization of changeover not-for-profit for-profit insurer, not the from a to a disposition proceeds. Plaintiffs, however, do of the conversion’s change Empire’s corporate form. contest plaintiffs actually quasi-derivative
In fact, what seek here is standing They argue Empire’s to vindicate interests. Chapter Attorney General, has disabled both the tradi- guardian tional beneficiaries, interest and trust duty Board, and the which has of obedience to honor fulfilling customary mission, from their roles. The Attorney they General, assert, has been “defrocked” virtue statutory obligation Legislature’s of his to defend the enact- ments. Because actions, the statute immunized its the Board jeopardize by questioning has no incentive to conversion Empire’s property whether 1 diverts from its traditional not-for-profit purposes. consequence, only As a the subscribers champion Empire. remain to argument winning. particulars
This Aleo in its Gravure support plaintiffs’ standing, already does not Still, discussed. recognized may “special we in Aleo Gravure that there inter causing standing est” factors us to relax the usual rules of in a (64 specific case where a charitable interest is involved NY2d at 465).21 Attorney disability The General’s and the Board’s are special plaintiffs Further, interest factors here. are not while they beneficiaries, true as subscribers benefit from whatever vestiges may remain from traditional role as the “insurer last resort” for those New Yorkers otherwise unable ignore obtain needed health care. Nor can we the billions Goldschmid, Compare Fiduciary Nonprofit Duties Directors and (1998) Paradoxes, Problems, Proposed Reforms, Corp L 23 J *23 Officers: donor, beneficiary (suggesting cautiously opening the door for member and de- actions, conversions, likely especially challenge rivative to which are to be one-shot, Atkinson, entity), nonprofit decisive transactions in the life of a with (Else) Standing: Unsettled Should the Duties Charitable Who Enforce of (1998) ?, Corp (pointing conceptual practi- 23 J L Fiduciaries 655 out flaws standing of problems broadening cal with for to enforce the duties theories fiduciaries); Crossley, Standing see Blasko and to Sue in the charitable also (1993). Sector, L Charitable 28 USF Rev 37 Attorney Accordingly, General’s because of the dollars at stake. adoption Chapter unique position 1, of after the and the Board’s standing prosecute plaintiff have hold that subscribers we solely purposes protecting not-for- of this action profit assets.
Takings (a) of the State Constitu- I, invoke article Plaintiffs both public property (“[p]rivate use shall not be taken tion just compensation”) and the Fifth Amendment to without (“nor private property taken for Federal Constitution shall support just compensation”) public their claims use, without illegal taking Empire’s private Chapter an of 1 constitutes that property. They allege Chapter exaction, a 1 effected an taking per taking. regulatory and a se 1. Exaction (4 [2004]), 1, 10 v Town Mendon NY3d In Matter Smith “[enactions land-use decisions are defined as
we held that prop- development conditioning approval on the dedication (citations quotation erty public marks omit- and internal use” ted). placed exaction, an and therefore A condition on land use is taking, if lacks an “essential an the condition unconstitutional (see imposed Nol- interest for which it is nexus” with the state [1987]), and Comm’n, 483 US lan v Coastal California impact proposed ]” “rough[ly] proportional is not Tigard, City development 512 US Dolan v [1994]). rejected petitioners’ claim that Mendon, In we Town of upon conditioning plan approval Planning of site Board’s acceptance did was an exaction. We of a conservation easement “rough proportionality” nexus” and not reach the “essential analysis apply deciding does not “where tests, that exaction property public use and the restric- there is no dedication (4 development” merely places conditions on NY3d tion analysis where the to those cases confined our exaction We have “right property others,” to exclude owner’s condition affects physical imposed dedication of “in lieu of the and where a fee is (id., citing Corp. property v Twin Lakes Dev. use” [2003]). Monroe, 1 Town NY3d imposes exac an find that Plaintiffs ask us to upon is conditioned conversion tion on because legislatively articulated assets to dedication
355 accept plaintiffs’ public purposes. decline to and charitable We analysis beyond expand the realm of invitation to our exaction regulation.22 so, however, Even if were to do land-use we passes “rough proportional- the “essential nexus” and both ity” tests. challenged property placed Empire’s
The is the condition on not-for-profit dedication of assets to the recruitment and reten- public programs. tion of Empire began But health care workers and health captive hospitals, always as a and has inhabited government-sponsored a borderland between a entitlement program, Medicaid, a such as commercial insurer. traditionally financing has functioned as a device for both hospitals and a means to make economical health care available many possible. to as Yorkers as The dedication of conver- New public support programs sion assets to health and to recruit wholly retain health care workers is consistent with these activi- only short, In ties. there is not a nexus but a direct correlation enacting Chapter 1—allowing between State’s interest in carry to continue to out its dual historic mission—and imposed—that Empire’s not-for-profit the condition be assets purposes specified Chapter used health in l.23 (a) The “essential nexus” test does not mirror N-PCL 1005 (3) (A), Type not-for-profit’s which calls for B distribution of upon foreign assets dissolution to “one or more domestic or corporations organizations engaged or other in activities substantially corporation” similar to those the dissolved Judge 22. R.S. Smith in thing “[n]o his dissent observes that in the Supreme suggests Court’s exactions decisions that their rationale is limited to (R.S. property” dissenting Court, real part op Supreme Smith in however, applied analysis has never exactions outside the context of land-use (544 U.S.A., regulation. Lingle In its recent decision v Chevron Inc. US —, —, 2074, 2081, [2005]), placed 125 S Ct the Court Nollan and Dolan exactions,” special in “the context of land-use and referred to a “land-use violating exaction the standards forth in Nollan and Dolan” as one of four set seeking challenge might pursued plaintiff distinct theories that be government regulation uncompensated taking. anas important property It to note that a far different interest is at stake cases, here than the case in Nollan and Dolan. In those the landowners required right property— others from their were to surrender their to exclude commonly rights are “one of the most essential sticks in the bundle of (Nollan, exchange permits 483 US property”—in characterized as for land-use omitted]). Here, Empire would quotation [internal at 831 marks and citation any restructuring pro- required to distribute its assets under (a) (3) (A). Thus, cess, this case including the one outlined in N-PCL conversion, that, ensuring upon entails more limited interest mission. assets will be used accordance with its historic Serv. added) Matter Sclerosis Multiple also (emphasis Socy.], Sclerosis Multiple York Ch. Natl. City [New Org. of N.Y. [1986]).24 to N-PCL pursuant is not here appeal This 68 NY2d does not apply test quasi cy pres so section 1005’s follow, event, it does not In conversion. *25 1005 assume, that under N-PCL seem to plaintiffs to a entirely would have to be distributed assets not-for-profit (3) (c) Indeed, an charitable foundation. IRC 501 tax-exempt, as an more nearly qualifies insurer arguably other not-for-profit Although activities. substantially in similar entity engaged and refer charity” to a “private liken Empire plaintiffs has analogy. Empire out the “donors,” does not bear history an chari explicitly or carried out relied on philanthropy never federal tax- noted, former As agenda. already table (c) (4) a § 501 as social welfare was based on IRC status exempt (c) (3) charity; 501 never section Empire was organization. for free.25 enroll did not subscribers to the impact “roughly the condition is Finally, proportional” convert if were to conversion because of Empire’s statutory fol- Sclerosis, interpreted this standard Multiple 24. In we lows: cy Corpora- pres of the Not-For-Profit quasi “Under the standard ap- determining whether to Law, Supreme
tion
prove
board,
Court Justice
by
corporation’s
proposed
plan
of distribution
organizations distribu-
if
other charitable
and not what
(1)
made,
the source of the funds
consider
tion should be
to be
should
subscription
distributed,
through public
received
whether
(2)
instrument;
or other
provision
the trust
of a will
or under
cer-
corporation as enumerated
its
powers
of the
purposes
(3)
in fact carried out and
the activities
incorporation;
tificate of
(4)
by
relationship
actually
corporation;
provided
services
distributee(s) to
proposed
purposes
of the activities
(5)
corporation, and
the bases for
dis-
dissolving
those of the
tribution recommended
(68
at
the board”
NY2d
exemption—their
lost federal tax
reason that the Blues
25. For the same
fundamentally
of commercial insurance
from those
do not differ
activities
awkwardly
the framework
fit but
within
companies—their conversions
(see
Ins.,
Health,
250
Inc. v Commissioner
e.g. ABC
charitable trust law
for
149,
[2001],
252
2d
644 NW2d
review denied Wis
2d
Governmental
effects a
ap
if it is “so onerous that
effect
a direct
is tantamount
propriation
2081).
Lingle,
—,
or ouster”
Plaintiffs contend that had no true choice in the mat- Chapter compelled ter, that conversion under because it was Found, Energy Community 26. Plaintiffs’ reliance on v Illinois Clean (392 [ICECF]) There, misplaced. Filan F3d 934 Illinois au- [7th. 2004] Cir is long power plants thorized a billion sale of Commonwealth Edison’s so as $4.8 utility agreed energy $225 to fund a new conservation foundation with Later, proceeds. million from the the foundation had been sale’s after established, Legislature authorizing require the State amended the statute to give the State. The Seventh $125 million of its assets to foundation ICECF, taking property. Circuit found this a of the foundation’s In the founda- retroactively require it to legislation tion sued over which was amended to Here, hand, given turn assets over to the State. on the other was any option Empire’s only But duress for survival. realistic not-for-profit inability prosper Empire’s as a from stemmed organization, pressure From at exerted the State. not from merge Empire planned early or dis- convert, as least solve. unduly Chapter with interfere event, 1 does
In legitimate property Empire’s in our exac- As we noted interests. support of conversion assets discussion, the dedication tion public programs care and retain health and to recruit health wholly Empire’s mission. historic consistent with workers is corporation, for-profit Chapter as a to continue allows competitive position placing than otherwise would in a it better Empire’s that the Board has determined lot. have been its Since continuing provider way of health insur- as a most feasible restructuring, through said it cannot be ance in New York assets to l’s dedication that public legiti- unduly purposes interferes with health expectations.” property or “investment-backed mate interests Taking 3. Per Se allege sale’s of the stock the transfer
Plaintiffs taking per proceeds se fund constitutes asset Empire’s property physical invasion” it is a “direct because Corp., Teleprompter 458 US Manhattan CATV Loretto v [1982]). There can no merit. This claim is without 419, 426 voluntarily corporation physical elects where a direct invasion allowing proceed from a to convert it a statute under for-profit entity. financially not-for-profit to a new distressed Due Process *27 prop- Empire Chapter deprives allege its 1 Plaintiffs that process erty on This claim is based due law. interests without § Fifth Amendment and the State Constitution I, article 6 applicable the states Constitution, made of the Federal person provide no shall “be that Amendment, which Fourteenth deprived process liberty, property, of law.” due or without life, lacking Chapter process because contend that Plaintiffs any input encompass safeguards procedural from the do not l’s Supreme Attorney into how public, or Court General deployed. Empire’s not-for-profit To the con assets are to be process Empire Chapter provides trary, 1 with however, not-for- did, Chapter 1 directs that its convert, if it knowing that choice to purposes. public health be used for profit assets will plaintiffs remedy grieve many Superintendent’s awith of the determinations. proceed
First, had to choose to with the conversion. public hearings required. Superinten- Second, Third, were only approve dent could if conversion he first determined adversely that it would not affect subscribers or “the delivery people of health care benefits services to the of the (Insurance [b]). § Finally, state of New York” Law 7317 if plaintiffs Superintendent’s approval took issue with the plan, they right challenge had the it in a CPLR article 78 proceeding.
Contract Clause (1) Chapter § Plaintiffs contend that I, violates article provides “[n]o the Federal Constitution, which that State shall pass any impairing Obligation . . . . . . Law of Contracts.” provision enacting legislation impair This “bars the States from (Patterson ing obligation Carey, of contracts” v 41 NY2d [1977]). bring 714, 721 Plaintiffs also claim under article I, § provides “[n]o 6 of the New York Constitution, which person deprived liberty property shall be life, without due process provision may deprive of law.” Under this “the State party to a contract of an essential contractual attribute (41 720). process without due of law” NY2d at incorpora Plaintiffs assert that certificate of (COI) public, tion ais contract between and the substantially impaired by Chapter that this contract was 1. City Binghamton, COI is not a contract Cook v 48 NY2d (i.e., [1979] [while legislation providing N-PCL COI) corporate begins filing may existence with create not]). rights, presumption contractual is that it There nois does. Legislature, enacting indication that the the Not-For-Profit Corporation binding Law, intended to make the COI a contract not-for-profit corporations public. “[W]here between and the existing agreement regarding there is no contractual the terms changed by legislation, there is no need to consider whether impairment there an fact and whether it was substantial” (Ballentine, 89 NY2d at may impair (see changed 1 does not A COI. COI ways [allowing corpora- [b] [2] number of N-PCL change corporate purposes]; [giv-
tion to Const, X, NY art ing Legislature authority change corpora- laws under which *28 formed]). Chapter change are 1 COI; tions did not actions 360 changed Superintendent Moreover,
by Empire the COL and the only “impairment” challenge that results plaintiffs do not not-for-profit namely, Empire’s Chapter from conversion 1; from corporation, not-for-profit for-profit was As a status. to purposes, not-for-profit carry these but out its to bound impairs. Chapter 1 purposes a contract that not constitute do Duty/N-PCL Fiduciary notwithstanding Chapter broadly allege 1, the that Plaintiffs procedures required 510 N-PCL to follow the conversion was They its fi- Board breached that also contend and 511. duciary duty by allege plaintiffs deciding Indeed, to convert. Chapter Board breached enacted, 1 even before “invit[ing] politician-legislators” duty by to decide fiduciary than rather after the conversion be used how its assets should making determination. its own Chapter response 1 this claim is that to
The short statutory duties supersedes common-law all inconsistent [ii]). (Insurance § [f] the Court to some Even were Law judgment rule, which obstacle, the business how overcome (100 recently St. v Pullman in 40 W. 67th most discussed we [2003]), plaintiffs’ extent that claims. To the bars NY2d occurring Chapter complain 1 was plaintiffs before about action Legislature (i.e., “inviting” al decide how to enacted assets), merit is without this claim locate presented plan the one of conversion—whether because presented him after Superintendent in 1999 or the one judgment, neces Chapter in the Board’s enactment—was, l’s viability v safeguard Empire’s Auerbach sary continued [1979] judgment [the rule business 619, Bennett, 47 NY2d corporate judicial taken inquiry directors into actions “bars judgment law in the good of honest in the exercise faith and corporate purposes”]). legitimate furtherance ful and Privileges Clause Exclusive § argue III, article violates Plaintiffs authorizing Empire convert to alone to Constitution State for-profit corporation. Legislature § prohibits III, 17
Article speci- falling “private 1 of 14 adopting into local bill” from “[grant- encompasses category categories. bills The twelfth fied privilege, im- any private corporation ing . . . exclusive required are munity elements Thus, two whatever.” or franchise must First, the bill III, 17. article to offend for a bill in order *29 (see single entity Henneberger, directed at a Matter be 155 NY of only [1898] [“the operates upon 420, an 425-426 fact that act a upon persons specified locality area, limited generally throughout or a within and not reasonably is, cases, a state,
the most by general accurate test to whether act is determine the (internal omitted)]). quotation local” Second, or marks the bill privilege upon single entity must confer a the the to exclusion elements—singleness exclusivity—must all of others. Both and present. legislation single entity Otherwise, all a directed at would be invalid.
Chapter “private applies 1 is local or bill” because it only Empire. Chapter to But 1 does an not confer exclusive privilege prevent because it does not authorize to others seeking parameters, promise from Empire to convert under similar or not-for-profits granted
that other will not be similar (see rights Exempt Trustees Firemen’s Benevolent Fund City [1883] [“exclusive” Roome, N.Y.v 93 NY means privilege beneficiary the receives from the local or private law would be or “disturbed invaded if State should give corporation” rights]; to another same Matter Union Ferry Brooklyn, [1885] [“The Co. 98 NY constitu prohibition evidently monopolies. grant tional aimed at At ing corporations merely privileges to or not individuals by possessed right franchises not others, but the to exclude oth enjoyment privileges ers from the exercise or of like or franc hises”]).27 Chapter only grants Empire right Indeed, to operate for-profit right as a insurer, that numerous other currently enjoy may insurers York, in New and which others upon application Superintendent. receive privilege granted Because the Chapter exclusive, is not 1 does not violate article III,
IV challenge Empire’s Plaintiffs do actual conversion from a for-profit they corporation. decry to a Instead, proceeds—Empire’s not-for-profit to which uses the conversion’s put. They particularly object funding assets—will be They recruitment and retention of health care workers. warn that unless favor, we rule their mark will “but the 27. The expressly Ferry’s 1938 Constitutional Convention endorsed Union reasoning that Privileges monopolies the Exclusive Clause was at aimed Comm, Report Relating 1938 NY Constitutional Convention Probléms Legislative Organization Powers, step progressive New York’s non-
first profit in a cannibalization of justi- by Legislature.28 strong These words are
sector” neutralizing Legislature, plaintiffs fied, insist, because the after Attorney capacity appetite and the Board’s General’s designat- Empire’s not-for-profit ignored purposes resist, when Empire’s not-for-profit ing uses for assets. agree. plaintiffs Even define mission
We cannot coverage,” “promoting care affordable accessible health Fidelity purpose expression purpose. does not broad to health mandate creation of a charitable foundation devoted entirety Empire’s not-for-profit assets, care funded *30 Fidelity surely plaintiffs’ policy purpose preferred choice. to this hospitals. compel neglecting needs of York’s does not New always Empire mutually sup hospitals played and have complex portive in health care roles our interrelated and state’s delivery Specific programs system. be with conversion to funded proceeds—such the un as EPIC and Child Health Plus—benefit designates short, In insured or the underinsured. range comfortably of that fall within health-related uses not-for-profit interpretation Empire’s reasonable historic mission.
Accordingly, Appellate Division be the order should by granting mo- defendants, defendants’ modified, with costs to complaint modified, so af- and, tions to the amended as dismiss nega- question be in the firmed. The certified should answered tive. (dissenting join part). I in J. in the dissent G.B. Smith,
Judge plaintiffs stated addition, Smith. In because have Robert fiduciary duty against of a a viable cause of action for breach Empire doing Inc. HealthChoice, busi- the Board of Directors (Empire), Empire I dissent Blue Cross and Blue Shield ness not-for-profit direc- of that claim. Because from the dismissal administer as- and tors that serve charitable entities charitable decidedly more Although language Judge R.S. Smith’s dissent hypotheti- tempered, “parade to focus on a of horribles” and it likewise tends of an art legislative (e.g., legislation “compel[ling] the use 95% cal abuses op dissenting part money prison [R.S. construction” Smith museum’s 377]) Miller far facts case. Justice Samuel removed from the of this As (106 [1882]): “Hypothetical v Lee US instructed in United States may by imagination fruitful great suggested particularly cases evils or every of the individual regard upon depends rights almost law upon capac- government, depend laws is their and if the existence of criticism, must ity the whole fabric the law fail.” such withstand directors) (e.g., Empire’s fiduciary- fiduciaries, sets are and the loyalty govern care, and duties of obedience the conduct of such fiduciary obligations directors, far their are too important adequate superceded to be an statute without justification explanation. permit I would therefore plaintiffs proceed on this claim.
Facts
Background1 incorporated Type corporation B as a under (N-PCL) Corporation
Not-For-Profit Law and under chartered provide prepaid article 43 Insurance Law to affordable, hospital coverage and medical lower services/insurance persons middle income complish statewide. endeavored to ac- through this mission a combination of chari- initial funding, subscription receipts, exemptions, donations, table tax hospital private governmental rates, reduced adminis- trative contracts. (i.e.,
In the 1990’s, 1980’s and a number of events the re- hospital moval of favorable reimbursement dif- exempt [based ferential; revocation of tax status on *31 Accounting finding the United States General Office Empire’s underwriting practices were similar to com- those of hospital mercial insurers]; and fact that and medical costs rates), approved subscription Empire’s rose faster than and (a employment community single rating premium applicable regard past history to all subscribers without medical resources) projected open use of medical and enrollment (guaranteed coverage) insurers, access to allowed commercial Empire, compete who offer could lower rates than for and siphon ultimately Empire’s larger groups.2 off and healthier competition coupled This increased from insurers, commercial rapid growth management organizations with the of health controversy 1. this Because involves motions to for failure to state dismiss a [7]), cause of action CPLR 3211 truth [a] court must assume the reasonably allegations pleading, “resolve all inferences which flow (Sanders 391, Winship, therefrom pleader” in favor of the v 57 NY2d [1982]) any cogni alleged and “determine . . whether the facts fit within . (Morone [1980]). theory” legal Morone, 481, zable v 50 NY2d markets, 2. Empire group retained of the which most individual and small generally healthy contained less subscribers. high (HMOs), Empire attri- to suffer a rate subscriber caused tion.3 major Legislature 1997, the eliminated
Between 1993 and Empire insurers with and the commercial distinctions between community requiring employ competed, it that insurers previously rating open mentioned, and, and enrollment eliminating hospital differential between reimbursement Empire, commercial insurers. insurers, like and Empire’s Although Empire recover, eventu- started to directors corpora- ally for-profit a it had to restructure as concluded that remain viable. tion in order to restructuring proposal Empire 1990’s, late drafted
In the newly-organized Empire foundation, into a charitable transform for-profit by new, of a funded the sale of 100% of stock plan, Empire Empire. proposed its would transfer Under for- and to two insurance, HMO, and other businesses assets for-profit profit Empire Inc., Care, stock Health subsidiaries Empire wholly Empire. corporation that would be owned portion Empire Care, Health Inc. shares would then sell a Empire public, Inc. issue and sell Care, and Health would proceeds sales, of these new of its common stock. shares stock, Care, Health unsold shares Inc.’s charitable foundation transferred to new would be years plan’s implemen- two of the would dissolve within tation.4 plan through proposed went 29, 1999, after the
On December subject Attorney of a number various revisions and was the Superinten- General-sponsored public sessions, the information opinion approving and decision of Insurance issued final dent 1995, million Empire’s operating $800 net losses exceeded 3. From 1986 to 5 million. from 10 million to less than and its subscriber base dwindled Millstein, Empire, testified April Ira M. outside counsel to On Standing Assembly Committees on Insurance New York State before the respon- plan light of the restructuring regarding proposed Health directors, given the economic circumstances sibilities *32 oper- in competitive Empire changing environment which company and the (i.e., length Empire’s duties directors ates. at the owed Millstein discussed obedience). However, regarding care, duty duty of duty loyalty of and the of stated, operating obedience, the duty Millstein “When environment the of Mr. uneconomic, for operation is continuing quo changes, that status such perpetuate and challenge protect to assets profit a considerable boards face graphically meeting ‘duty of This is obedience.’ organization, the while the (Millstein Testimony Empire” case in the of demonstrated restructuring plan in mind testimony original given with the Millstein’s was foundation). (100% Empire’s value to a charitable of plan Empire for-profit corpora- for the into a the conversion Superintendent approved plan spite tion. the in of Insur- (j) which, time, ance Law at that barred such conver- argued (j) Superintendent sions. The that section 4301 was not Empire’s applicable proposed However, to the conversion. State Attorney Office, General’s to from 1997 2001 considered Empire’s restructuring plan and modified awith view towards preserving protecting Empire’s asset, and value as a charitable disagreed Superintendent regarding plan with the whether the approved given existing legal the Insurance Law and N-PCL. Attorney questions validity
After the the General raised as to restructuring proposed plan existing the law, under the Empire plan. Empire Instead, did not restructure under this sought legislative changes plan. necessary This the to effect the proposed legislation, strong opposition however, met with from powerful organizations, Hospital the two New York Greater As- (GNYHA) sociation and the health and human service union (Local 1199), initially passed.5 was not Faced with what they “political Empire’s stasis,” termed Directors, Board of in August Majority 2001, sent a letter to Pataki, Governor Senate (1) Speaker Assembly Leader Bruno and Silver to seek Legislature’s getting legislation passed; the in assistance (2) Legislature judgment to ask the to. substitute its for determining disposi- that of Board of Directors in suggest Empire tion assets.6 Plaintiffs received political through maneuvering, the assistance it wanted some alleged, belief, upon 5. Plaintiffs information and GNYHA Local 1199, in or June agreed drop opposition plan about their in exchange Empire’s agreement go for that half of the funds realized would (with proposed goal increasing foundation access to health care and coverage) go “supporting hospitals’ while the other half would to foundation systems purchases computer . . technology help [to] ‘new information . ” eliminate medical errors.’ August pertinent part: 6. The in provides, letter your “We write call attention to the fact that failure enact year, legislation enabling corporation to become a for- profit enterprise, put viability will at risk—for no explicable beyond political puts reason Failure to stasis. act also at risk creation $1 of a foundation worth billion to used for health care New York residents. seeking engaged process “1. has been for-profit company years. Empire’s as a five restructure viability competitive compromised continued market passage legislation. legislation without of this Similar has states, recently been enacted a number other most New *33 366 belief, representa-
i.e., information they upon allege, in or Pataki, about Local 1199 Governor tives from in 2001, engaged negotiations/discussions secret November to assets fund use the majority how to regarding and members of the GNYHA. the union labor contract between 24, 2002, the Governor thereafter, January on or about Shortly day the Laws of 2002. Within proposed Chapter the enacted Legislature Chapter the Governor’s proposal, of 2002. Laws § Insurance Law paragraphs added five new to Chapter ,7 1 does § Chapter Insurance Law 7317.8 While
(j) and created not- to conversion of respect amend law with the generally Memorandum insurers, according to the bill for-profit sponsor’s including Blue Jersey. Many other Blue Cross Plans Connecticut . to . . declared their intention convert. Cross have worth) on (Empire’s the “7. There is billion of current value $1 care, health ready placed be in a dedicated to table to foundation legislation passed. the once is significant delay can at this only reason we see “8. for inability agree the is on how to divide point an foundation’s resolve, you only can is not an issue can income. This it. . resolve . . in you If billion founda- agree $1 “10. cannot on how to divide the pass, or proceeds, legislation create one more tion then let foundations, and let foundation boards make the decision. value, pub- put in opportunity $1 “The unlock billion be York, something is people health use of New lic care added.) (Emphasis not be wasted.” should (j) general § (1), forth the 7. Insurance Law 4301 which sets example, For may indemnity corporations not convert to for- expense rule that medical entities, provides profit that: However, (j) ments for provides that: (2). For maintained subscribers indemnity organized for service “[a]n “[n]o medical opinion and on may pecuniary profit, case, chapter.” Section 4301 or an example, be converted before December article exception restructuring plan that must be submitted accordance with corporation shall be converted corporation, as a decision issued [43] Insurance (j) pecuniary profit. expense co-operative to the above rule (2) operated for corporation into a or into a provides that: Law 7317 [31, 1999], indemnity corporation, corporation health for-profit corporation.” provisions which Every service superintendent [of insurance] benefit of its members and (a) (1), was the set forth organization, in such other corporation, of section same which sets into a corporation shall be entity subject may Insurance dental [7317] organized corporation under or forth the amended, an hospital expense of this initial Law such require- § one of the the bill was to “authorize Support, purposes (2002 conversion of Blue Cross to status.”9 for-profit 1635.) NY, at Cons Laws of McKinney’s called
Contrary Empire’s original restructuring plan, *34 for the distribution of of the of assets Empire’s 100% value towards 1 would require charitable that 95% purposes, Chapter of the of value stock be deemed a asset” and Empire’s “public [5]).10 (see a [j] [3], § 5% “charitable asset” Insurance Law 4301 1 Chapter directs that the be turned over to a public pub asset [e]) lic § asset fund Insurance Law man [j] [4]; § 4301 7317 aged by Governor, board the five-person appointed by President of Temporary the Senate and the of the As Speaker sembly. net of the asset fund are proceeds public transferred the Budget Director of the for deposit into Tobacco 11 Control and hand, Insurance Initiatives Pool. On other (5% 1 directs that Chapter charitable asset of total Empire’s value) over anticipated be turned to a charitable organization/ (sec [1]) § foundation Law [j] [5]; Insurance 7317 [k] by governed political various appointees.
On 18, 2002, or about June pursuant Chapter 1, Empire filed an Amended Plan of Conversion Depart- with New York ment of Insurance. filed Plan this Amended knowing that the requirements of pertaining allocation its value ary profit opinion December submit approval pursuant to this section.” “[a]n article convert into a a proposed and [31, 1999], or into decision issued [43] corporation corporation, plan a for-profit organization as the conversion to by same or other which, may superintendent was the entity be amended, organized subject superintendent on or before which for kind shall an initial pecuni- seeks for Additionally, Chapter supercedes statutory relating and common law not- for-profit corporations, fiduciary requirements applicable and to the hoard of (a) (1) (see filing plan pursuant directors § to section 7317 Insurance Law [ii]). [f] 9. Although applying generally, the statute is it been written has occasions, on acknowledged ary including in Febru- Supreme number Court’s order, legislation only apply Empire. this meant to Chapter provides though for value allocation even both the Su- perintendent Attorney recognized previously Insurance and the had General entire value was a charitable asset. 11. Under million, represents over thirds $700 about two (and anticipated nearly public total value of asset 75% fund), pay hospitals, nursing personal be in certain would used to homes and agencies nonmanage- recruiting care order to assist in the and retention of year i.e., professionals period, rial health over a three the monies would during used to fund salaries and raises for these workers that time. (95% Plan uses determined the Amended under foundation) drastically for a were the State and 5% charitable its restruc- provided original different than the allocation uses). (100% for charitable plan turing History and Parties Procedural action 20, 2002, commenced the instant August plaintiffs
On Court, York and vari- County, against Empire Supreme New defendants).12 (State Plaintiffs ous New York State defendants claims, fiduciary duty.13 one for breach including asserted nine of fiduciary duty, of action for breach the cause Regarding that, Directors abdicated plaintiffs alleged “Empire’s obedience care, duties of fiduciary loyalty breached their (i) ; Plan . . . Restructuring 1997] by[]: abandoning [original (ii) judgment to substitute its asking the Legislature (iii) assets; ignor- determining disposition and instead fiduciary duty simply to exercise ing requests *35 of value for in the Legislature’s taking Empire’s acquiescing mission.” carrying other than out purposes 20, 2002, and the State defendants Empire both September On deci- entirety. By in its plaintiffs’ complaint moved dismiss (and 28, 7, filed March and dated 2003 February sion order that a number of the 2003), plaintiffs Court found Supreme Court remaining plaintiffs, Supreme As standing. lacked each cause of ac- motions and found that granted defendants’ (1) U.S., Consumers Union of 12. This action was commenced on behalf of: (3) (2) (CU); Society, City Multiple Chapter; New York Sclerosis Inc. National (4) (5) York; Inc.; Works, Metropolitan Action of New Housing Disabled in (6) (7) Friedwald; Council, Inc.; Jeffrey York Senior Action New Betty Statewide (8) (9) Sicher; Meyer; and Filiz. Of these and Charles Carla Alain Sicher plaintiffs standing to sue. Their plaintiffs, only CU and the individual have CU, complaint according has this action follow. which interests Empire, alleges premiums or “[i]ncreased that group subscriber contract with Empire payments” resulting from the conversion would reduced benefit alleges harm costs. further that this would increase CU’s administrative CU coverage. The employees Empire and who have elected individual complaint both it Filiz) (Friedwald, Sichers, allege in Meyer and plaintiffs go up a result of the they premiums their “will be harmed when promoting greater acces- diverted from conversion and assets are affordability coverage sibility health and care.” and of (2) (1) contract; impair- impairment of of consisted of causes action (3) law; rights process due of un- property interests without ment of vested (4) use; taking property private property taking of reasonable (5) rights in violation of just deprivation of civil compensation; without (6) 1983; is invalid for fail- § for a declaration that conversion USC a demand (7) fiduciary 510, seq.; comply N-PCL et breach ure to with and/or (9) (8) trust; trust; and a demand for a duty and enforcement constructive Empire. the instant conversion permit 1 does declaration that complaint upon tion in the failed state of action cause granted. relief could be
Although against plaintiffs it dismissed all claims asserted Supreme both defendants, Court, and State on its own expressed allegations initiative, the view that the “factual complaint clearly support suffice to cause of action for (unnumbered 12) III, violation of Article subsection Privileges Clause].” State [i.e., Constitution the Exclusive With plaintiffs complaint, court, leave an filed amended dated alleged 31, 2003, March ileges one violation the Exclusive Priv- again Clause. and State defendants moved to (and By dismiss. decision and 1, order dated October filed 2003), Supreme 2, October Court denied these motions. May Appellate Department
On Division, First (1) plaintiffs’ August affirmed: complaint; the dismissal of 20, 2002 (2) Supreme
and Court’s decision to sustain plaintiffs’ alleging Privileges claim a violation of the Exclusive Appellate granted plaintiffs Clause. The Division appeal. defendants leave to
Discussion not-for-profit organizations generate Given the fact that spend many not-for-profit of dollars, billions boards and individ- for-profit counterparts ual directors rival their in terms of influ- power ence exerted and However, wielded. on the checks power not-for-profit for-profit quite directors are differ- Attorney normally ent.14In York, New the State General’s Office oversees the conduct directors York New *36 Attorney Regulatory State Bureau, General Charities The Role Attorney chttp:// Bureau, General’s Charities www.oag.state.ny.us/charities/role.pdf>, <http:// cached at www.courts.state.ny.us/reporter/webdocs/role.pdf>). However, in regarding Attorney case, this the instant the transaction, charged defending General’s Office, which is also with the Legislature’s prevents enactments, has a that it conflict from oversight performing unique situation, role.15 this Because of paramount importance only standing given it is of not that be (a plaintiffs majority), to the the conclusion reached but also example, 14. For not-for-profit organizations and their directors are not subject Exchange to the the Com- requirements disclosure of Securities and mission. fact, Attorney In way the the General has not commented one other plaintiffs’ fiduciary duly on breach of claim. and fiduciary adhere to their duties directors not-for-profit that in enforced. be fiduciary general, strictly that requirements, care, and obedience are the fiduciary loyalty of The duties of boards not-for-profit that the conduct govern standards legal to the in their day-to-day relationship and individual directors (a) in states serve.16 N-PCL organizations they Specifically, of the duties their discharge “Directors and officers shall part, care, loyalty Attorney of and obedi- Bureau, 16. The General enforces the duties Attorney Regulatory Role of the General’s Charities ence The 3-4). of are set forth below. Definitions these duties duty duty requires “1. of care: The common law care trustees, organizations be and officers of charitable the attentive to the directors actively organization’s and finances and activities includes way managed. the in assets are This oversee which its meetings, attending reading in and understand- participating and documents, properly man- ing ensuring that funds are financial asking exercising judgment. New York aged, questions and sound duty § of care in N-PCL has codified the standard for the provides directors and officers of respective posi- the corporations discharge ‘shall duties their diligence, good degree in faith with the care and skill tions ordinarily prudent exercise under similar [persons] would which circumstances 11-1.7, §§ positions.’ EPTL 11-2.2 like See also & 11-2.3. duty duty loyalty requires loyalty: The common “2. The law trustees, pursue the and mis- and officers to interests directors allegiance. organization with undivided of the charitable sion Private interests must The N-PCL charity’s placed interests. above duty. example, For aspects certain addresses ‘good faith’ requires and officers act the N-PCL directors (N-PCL against 717), prohibition § loans contains an absolute 716) (N-PCL § on contains restrictions and officers directors (N-PCL 715), § § 406 EPTL 8- self-dealing transactions & as does 1.8. duty duty obedience The common law “3. The of obedience: obligation of to act within directors and officers includes corporation’s mis- organization’s purposes and ensure that duty of obe- explicit is reference to pursued. There no sion dience However, may by the duty be inferred N-PCL. corporate set forth in the imposed upon activities as limitations (N-PCL 201, §§ incorporation of the certificate of purposes clause (2)) (a) obligations & and the directors’ officers’ (N-PCL not-for-profit organization managers of the corporate (b) (3) (B) 713). explicitly EPTL 11-2.3 refers § 701 & (id. at beneficiaries” needs of trust’s allegiance Further, duty to have undivided loyalty “requires a director *37 position his or informa- using power organization’s mission when (see Bjorklund organization property” or its possesses concerning the tion he ll-3[a], Analysis § al., Law Practice: With Tax Nonprofit York and et New [1997]). respective good positions degree in faith and with that of dili gence, ordinarily prudent care and skill which men would positions.” Proper exercise under similar discharge in circumstances like not-for-profit of these duties ensures that a board’s soundly legally, financial decisions are made and an that indi opportunity director, vidual when faced an with that could ben organization organiza efit him/herself, both and in acts prudently manages first, tion’s interest and that the board organization’s assets furtherance of its stated charitable purpose, among way, things. fiduciary other Put another these high not-for-profit duties are the standards which hoards and individual directors are held for accountable the decisions they they engage Being make and transactions in. held to such high accountability especially a standard of would seem important not-for-profit when directors initiate and follow through plan drastically changes awith that the fundamental corporation, character of the like the instant Amended Plan of Conversion. (f) (ii)17
Turning § provides Insurance Law 7317 supercedes statutory that it all inconsistent common-law and including fiduciary requirements. Chapter duties, 1 does not set justification adequate explanation why an ap- forth as to it is (1) propriate fiduciary not-for-profit to: eliminate a director’s (2) responsibilities; and immunize that director from breach of fiduciary duty fiduciary gov- above, claims. As discussed duties performs daily ern how a director his or her functions. Accord- ingly, importance of these duties necessitates a rule that (f) (ii) provides: Insurance Law 7317 “This supercede appli- section shall be deemed to all otherwise legal requirements cable and compliance laws and with this sec- (j) tion and subsection of section four thousand three hundred chapter one of section, provided this and the use of such funds as in such (k) section, and subsection shall be deemed to compliance supercede constitute with and shall all such other
legal requirements, including, to, statutory, but not limited com- mon law and requirements relating other corporations fiduciary requirements applicable and to the board any company filing pursuant plan directors to this section. addition, In foregoing, limitation of the a transaction approved by the superintendent purposes shall be deemed for all to be a that applicant transaction is fair and reasonable an promote purposes herein and to applicant, the use of proceeds all purposes as described shall be deemed for may purpose be use is consistent with and near as purposes originally be to the the applicant organized subsequently operated.” *38 prevent legislation kind of an ade- of this in the absence would justification explanation. Assessing quate here, are or the facts loyalty a care, obedience, not-for- of and duties that duties repugnant profit generally to, director must adhere so efficacy Chapter deprive and it of its 1 that their survival would provisions nugatory Shubert, render Woollcottv NY its [1916])? yes, question is that 212, 220 If the answer to this justification eliminating might explanation proper or be a fiduciary not-for-profit responsibility particular director’s the realm However, such a conclusion is not within transaction. contemplation.18 of Empire’s plaintiffs argue above, that Board breached
As noted fiduciary duty Empire’s pursue preserve assets and its Legislature corporation’s asked the mission when it charitable disposition judgment determining in the acquiesced of substitute letter) Empire’s (August in the assets substantially Empire’s Legislature’s taking of value for all (June carrying purposes out mission other than Conversion). According majority, “the to the Amended Plan of grievance [ ] plaintiffs’ from the restruc- heart of assets turing going historic not to be used to further are 347-348). (majority purposes” op at charitable making majority plaintiffs’ contention two counters “super- arguments. majority argues Chapter 1 First, the (id. statutory at all common-law and duties” sedes inconsistent [f| [ii]).19 majority Second, 360; see Insurance Law 7317 argues that, to somehow overcome this “Even were the Court plaintiffs’ judgment rule . . claims” obstacle, business . bars 360).20 (majority op fact, justification explanation for appears adequate In no or there be 18. fiduciary obligations not-for-profit of directors.
elimination of judgment) their results show legitimate limitation and free ted)]). Note, taken ment, propriation of Business 19. As noted general honest in expediency See good Corporation Law. furtherance doctrine Auerbach interests that what Auerbach involved a and unselfish corporate funds to advance faith and in the exercise above, I of contracts from bars v Bennett they believe this restraint, judicial corporate purposes. corporation decision, did was unwise or (47 action, adequacy inquiry for-profit corporation formed under the NY2d provision for their may corporate into honest 619, 629 exercise of not ‘Questions should actions inexpedient’ powers judgment interests, questioned, consideration, [1979] be struck down. them for the common therein are corporate policy in ” (citation omit- [“(The are left although lawful and lawful directors business manage- solely without ap- majority’s argument, Chapter only As first not improperly fiduciary responsibility eliminates the of directors any judicial prevent but also seeks to of their actions. review only eliminating improper long-standing 1 is fiduciary responsibility imposed upon directors corporations by by effecting taking but N-PCL also {see violation of both the federal and state constitutions dissent- J.). ing part op Smith, R.S. *39 why majority’s addition,
In there are two reasons second argument judgment generally ap First, fails. the business rule plies apply in commercial as contexts; such, the rule does to not Empire organized or other entities under the In N-PCL. Matter (75 Levandusky Corp. [1990]), Apt. v One Ave. NY2d 530 Fifth judgment this Court considered whether the business rule applied building policy should be ato made decision directors cooperative corporation governing of a residential board. This analogous Court held that a standard of to review the business (see judgment Levandusky, applied rule should be at NY2d 537). concluding, recognized cooperative In so Court this housing corporations for-profit function like entities and that they Corporation are formed under the Also, Business Law.21 this Court limited this standard of review the decisions of co (see operative Levandusky, and condominium boards NY2d at did Court not make a as to statement whether a applied similar rule would be to review the other decisions of types not-for-profit corporations organizations. or judgment analogous
Second, even if the rule, business or an applicable significant rule here, were tension rule between the not-for-profit fiduciary and the directors’ duties is evident. judgment inquire Under rule, the business cannot into courts corporate good actions of taken directors faith and in the judgment legitimate exercise of honest in the lawful further corporate purposes. ance of However, it is well settled that judgment apply business rule or does boards individual good scope who directors fail to act in faith or within authority Levandusky Mgrs. 538; their Board Realty Dept [1st Co., Condominium v J.P.S. 308 AD2d 2003]). good not-for-profit Thus, in order director to act in necessarily fiduciary faith, responsibilities he etc., or she must exercise his/her obedience). loyalty (e.g., the care, duties of corporations cooperative housing formed under the Business While are Law, Corporation pursuant was formed the N-PCL. majority argues Relying judgment rule, the on the business that, complain plaintiffs action
“To the extent that about (i.e., occurring Chapter 1 was enacted ‘invit- before ing’ Legislature to decide how allocate assets), Empire’s not-for-profit claim is without plan merit because the of conversion—whether presented Superintendent in 1999 one presented one to him after l’s enactment— judgment, safeguard necessary was, the Board’s op viability” (majority Empire’s at 360 continued omitted]). [citation August “inviting”
However, the directors’ 2001 letter Legislature how to allocate to decide plan, assets, well as the June 2002 conversion activities corporate clearly derogation mission and are purpose, arguably responsibility22 amount to abdications fiduciary loyalty care, and obe- breaches of the duties and/or dience. In other question words, since there is a as to whether *40 fiduciary duty, it cannot be the presently directors breached their argued Empire’s engaged type of that directors the judicial inquiry from under the actions that would shield them Accordingly, judgment, analogous, is rule. it business premature (1) judgment rule to assert that: the business bars (2) inquire plaintiffs’ claims; and a court is not able to into the Empire’s directors. actions of Empire’s by seeking directors, from a not- sum,
In to convert entity, by seeking legislation for-profit for-profit the neces- to seeking sary by conversion, to the assistance facilitate such Legislature pass legislation, es- of the and the such Governor exchange sentially sought by In for State. to be bailed out the agreed of the value of bailout, the directors that 95% the Empire’s to be determined assets would be used uses purposes. In for charitable addition the State and 5% Empire’s agreeing above, direc- to the asset allocation set forth fiduciary obliga- elimination of their also acceded to the tors Although specifically apparently record, stated in the tions. challenges from wanted to be immunized directors (a), managed by its “corporation shall be board 22. Under N-PCL 701 the body. Clearly, the directors,” government board Legislature not the or other the management management responsibility extends the of directors’ corporation’s assets. they immunity fiduciary that breached their This duties.23 provided Chapter for in l.24
Conclusion By upholding Chapter provides portion the for the fiduciary obligations not-for-profit of the direc- elimination dangerous precedent. striking tors, this Court sets a Instead of accountability corporate down a measure that weakens the majority upheld directors, the has it. State, New York like most (account- promote strong corporate governance states, seeks to ability) involving In rules. of recent for- view scandals both profit not-for-profit majority’s holding step entities, the backwards. purpose organization
The stated the charitable mission and primary importance not-for-profit are of when the board discharges fiduciary obligations. act in board must not legal contravention of that mission. Adherence to the standards guide not-for-profit fiduciary boards, the i.e., conduct loyalty day-to- care, obedience, duties of day ensures that the performed by functions are board consistent with organization’s purpose. mission and Here, annuls fiduciary obligations not-for-profit good rea- directors no Taking son.25 account, here, this into as well as the fact that, Attorney oversight General cannot exercise his normal role way over board,26 the conduct of no there is to hold board for its accountable actions related proposed for-profit entity, conversion from a to a recall, Empire’s regarding 23. But challenges outside counsel alluded to duty adhering to the of obedience n 4 at only fiduciary responsibilities While dissent addresses Empire, may plaintiffs argument respect directors of also a valid have with Constitution, III, Legislature New York article from forbids *41 any “[g]ranting private corporation, any to or individual exclusive association immunity privilege, majority or franchise whatever.” While the that concludes only here, the applies monopolies monopoly logical section no exists to the may, any involving Legislature result of that conclusion that the in a is case not-for-profit corporation, corporation public take over the assets of that for purposes any fiduciary responsibility. and eliminate challenges Empire 25. While outside counsel did allude to the adhering duty 364), faced in to the of n 4 this an ade- obedience is not quate justification explanation or for elimination of a the fiduciary obligations. director’s (a) (7), Attorney normally Under N-PCL the General can institute chapter an proceeding any right given action or enforce under to “[t]o this members, Type corporation.” B C For Type a director or an officer of a or purposes proceeding, Attorney the same of action or the General has the signif- change Empire transaction in a will the character of that way. they are Because not accountable icant and fundamental Empire to no incentive mount actions, for their director has challenge proposed 1. Put a under conversion organization’s way, one that the another there is no to ensure foregoing, purpose protected. on the the are Based mission portion provides Chapter 1 fi- for the elimination the that duciary obligations Empire’s should not stand. board plaintiffs for a of action sum,
In the have asserted valid cause fiduciary duty, a al- of a cause action that should be breach joining proceed to Therefore, in in addition lowed to court. Judge dissent, I from the dismissal Robert in his dissent Smith fiduciary duty. claim for breach ordinary part). Suppose (dissenting in an J. R.S. Smith, posi- private charity—say art itself the an museum—found operating, to here: continue but able tion of unable to selling “going large by its franchise or concern” realize sum charity private Suppose the the asked State value investors. charity the the so that the could dissolve and turn allow sale entity proceeds that would sales over to new charitable charity’s purposes. Suppose old continue advance the by only saying: it, can but 5% of the State answered “You do charity. public money go rest for can must used public purposes purposes.” suppose on And further worthy charity’s money spend were which the State chose to objects charity’s goals—the quite from construc- different example, prison, tion the retirement state of new anyone hypothetical that, facts, there on these debt. Can doubt just taking private property without be a use would compensation? ways: my hypothetical first, in two
This case differs from ordinary charity; secondly, private an not Empire’s property purposes State for the use of chosen purposes Empire. completely I are not remote from explain conclude, I these two distinc- below, for reasons plaintiffs’ complaint justify as insuf- do dismissal of tions face, I from the result on and therefore dissent ficient majority reaches. admittedly more the result troubles me than
What upholding Chapter majority, case, however, is that close member, brought on can also be such director or officer. Actions status as N-PCL 720. corporation pursuant behalf of the *42 rely wholly I the Laws of does not on the two factors peculiar Empire the have mentioned—the nature of and uses to money. parts putting Empire’s the Some the which majority’s reasoning sweep State is broadly, and seem to more would justify hypothetical upholding state action I have the described. majority’s reasoning, might, In other the State words, under compel of an these, like the use of 95% art circumstances money prison parts for I think these museum’s construction. majority unnecessary opinion may result, are and to its cause trouble future cases. validity Chapter
To decide the of 2002 under Laws Takings constitutions, Clauses the federal state I find (1) necessary questions: property it to address three Is the (2) Empire private property? so, free, If is the State under the Takings property Clauses, to demand as of that as it much wants exchange allowing Empire profit- to a sell its assets (3) making entity? If the State not free to all it wants, is demand Takings permit? does 1 demand more than the Clauses yes question I answer to the first no to second. I question definitively conclude that the third cannot answered on the face of the statute. Empire’s property private?
I. Is opinion majority points Empire many As the out, differs in ways private typical charity. from a One difference is that Empire relationship has more with, had a intimate and has government derived more from, benefit the state than most private, nonprofit important recognizing State, entities. The purposes Empire repeatedly served, has has intervened to keep allowing hospitals it afloat, it to from at collect favorable giving large outright subsidy, imposing rates, it a limits on 340-341). Empire’s op majority competitors majority however, does not assert, that these facts make into entity, they protection quasi-public or that lessen property Takings Thus, afforded to Clauses. under majority, Empire’s previous relationship it seems that may simply background it that, with the State while make taking property by offensive, the State seem less directly is not relevant to the constitutional issue. agree government prior
I acts favoritism they constitutionally Empire’s prop- irrelevant; do not make are authority holding erty private. I no that the know of less *43 property destroyed private is or diluted because nature government previous received, its has and I benefits owner Takings purposes, create, it unwise for Clause think would be to government special category dependents property whose is a Empire really help did not have to in not their own. The State ways it have more conditions to did, it and could attached help gave; example, required it it for have that the could, subsidy given paid in dollar 1993 be back hundred million cash Empire Legislature imposed no such if requirement, to dissolve. But were say Empire, effect, “I am it is free to to in not your taking your property I life back then.” now because saved may country able There farmers in this who have been to years government for or decades because of remain business govern- farms, their farms are still their subsidies—but just paying compensation. them ment cannot take without distinguish majority factors The mentions some other that charity, Empire ordinary private seem to me from an but these Surely private clearly Empire is not less a more irrelevant. entity purposes, a was, it for federal tax welfare” because “social (26 USC) (c) organization under Internal Revenue Code (4), (c) (3) organization section rather than a “charitable” under 356). Congress
(majority op at fact And the that exemption stripped Empire it its of its tax because found activi- 340) weighs, anything, (majority op if too at ties “commercial” private. making Empire more side that much on the private, property short, In I conclude that uncompen- protection to from entitled the same constitutional taking private property. other sated Empire’s property much of as it II. Can the State demand as exchange allowing for wants, conversion? problematic majority opinion implies Chapter 1 is not The majority Empire Empire, gives notes, it a choice. because required profit-making legally to “convert” to status (more entity profit-making precisely, a to transfer assets public exchange stock, and . and then sell the stock dissolve). compel “Chapter convert. . does not . (majority only place Empire [Conversion if takes so chooses” 357). may acknowledges majority op have at The “any practical matter, but adds that duress had no choice as inability prosper as a from stemmed {id. organization, pressure not from exerted State” Supreme The clear, however, United States Court has made Takings power acquire private that the property by inducing Clause limits a state’s exchange
the owner to surrender it in government a needed authorization. Nollan v Coastal California (483 [1987]) Comm’n US 825 involved homeowners who needed permit from the California Coastal Commission rebuild granted permission, only their home. The Commission but on pass condition that the Nollans an allow Supreme easement to property. across their Court held that this was taking, relying on lack of an “essential nexus” between the government permit purpose condition attached to the and the (483 by refusing permission that could have been served US at 836-837). Supreme In the absence of a nexus, such Court *44 right said, the State’s restriction on the Nollans’ to rebuild “ ” plan their home amounted to ‘an out-and-out of extortion’ (id. quoting Assoc., at J.E.D. Atkinson, Inc. v Town [1981]). City Tigard 581, 584, NH 432 A2d In Dolan v (512 [1994]), Supreme “rough US 374 Court added a proportionality” requirement to the “essential nexus” test. Even where a nexus existed, held, the Court the surrender of property permitting that the state demands aas condition to development roughly proportional of land must be impact expected development. adverse that can be from the These “exactions” that, cases refute the idea since the State was free to refuse to allow conversion, it was also free Empire give to allow it on condition that the State a share 95% proceeds. argue majority here, Defendants do not and the (more holdup hold, does not that such blatant blatant than case) actually happened pass what in could muster under argue, majority the exactions cases—but the State does and the agree, analysis place seems to that exactions no has outside the (Majority op [“We land-use context. at 355 decline ... expand analysis beyond our exaction the realm of land-use regulation”].) implication, presumably, “plan The is that no gross, State, extortion” no matter how invalid is under Takings property Clause unless it an is interest real that being suggestion unaccept- extorted. This seems to me both principle Supreme able in and inconsistent with the Court’s exactions decisions.
It is true use; that the Nollan and Dolan cases involve land many, probably takings prop- indeed, most, cases real involve erty. But the relevant clauses of the state and federal constitu- apply personal e.g. Phillips property tions to real and alike [1998]). Washington Legal I know Foundation, v 524 US private precedent suggesting account in a bank no the cash Takings subject protection than a under the Clauses is private less property tract of Different kinds of house or land. may be course, different and it well rules, sometimes call for involving Nollan that in land use the details of the cases not proportionality modified, will but and Dolan nexus and tests provides protection at that the no it is unthinkable Constitution against personal property. all exactions of Nothing suggests Supreme in the Court’s exactions decisions property. Indeed, their limited real the Nol- rationale is of Ruck- lan case that it is not so limited its discussion shows (467 [1984]), involving elshaus v Monsanto Co. US 986 a case argued property real not but trade secrets. dissent Nollan (Nollan, 859), that Nollan was similar to Monsanto 483 US (Nollan, majority distinguished US at while the Monsanto 2)—but suggested inapplicable 833 n neither that Monsanto was majority Thus, it because was not a land-use both the case. reasoning appli- dissent like in Nollan assumed that personal property. Dolan, And in the Court cable real and governing clear rules exactions are derived made that the any peculiar from of land-use but from characteristics cases ” conditions,’ “the doctrine of well-settled ‘unconstitutional require government’s power of a limits surrender discretionary right exchange “in constitutional benefit *45 385). (Dolan, by government” 512 US at conferred the in v Mendon does our decision Matter Smith Town Nor (4 [2004]) analysis inapplicable imply NY3d that exactions is property no Town Mendon did involve where real involved. property, our in that case focused on whether real discussion property in the Town’s invasion of the Smiths’ interest real analysis. trigger it was exactions We concluded that sufficient physical required “the dedication not because the Town had not property only public on conditions of development permits” use” but “more modest
(id. analysis applies would here; I it thus conclude that exactions require, al- as for the State to a condition be unconstitutional lowing Empire’s Empire pay assets conversion, 95% of its worthy. recipients I the State the State found or to whatever language majority, despite some of the cannot believe that Requiring opinion, a reach different conclusion. would entity’s turning private not what we of a wealth is over of most to a needed Mendon “modest” condition called Town of governmental permission. question, I The critical to which now actually happened fundamentally turn, is whether what here is blatant, different from such a unconstitutional exaction. Empire’s property?
III. Has the State taken addressing question Chapter provides In whether proceed by successively refining an exaction, unconstitutional I question. Chapter I First, conclude that is unconstitu- Takings only tional under the if, if, Clauses but a similar statute unconditionally compelled prop- the same uses of erty Secondly, would be unconstitutional. I conclude that that question depends compelled in turn on whether uses destroyed Empire’s expectations.” Finally, “investment-backed question I conclude that the answer to that on turns whether provided reasonably the uses the statute are consistent purposes Empire. with the To this last restatement of the question, Chapter I find no clear answer on the face of I 1, and development would therefore hold that further of the facts is necessary. purportedly voluntary challenged
Where a transaction is Takings under the preliminary step Clauses as an exaction, unconstitutional analysis
in the is to consider whether the trans- involuntary, taking property. action, if would be a Thus, Supreme began by saying in Nollan the Court that if the State “simply required had the Nollans to make an easement across their beachfront available to the ... we have no doubt (Nollan, taking” 831); there would have been a 483 US at inquired taking Court then whether the transaction was imposition response permit view of its an exaction in to a request. preliminary step Here, then, the is to consider whether taking simply required there would have been a if the had State provides, to distribute its assets as without offering Empire possibility forgoing even the theoretical continuing quo. conversion the status preliminary step case, In I believe, this turns out to be analysis: involuntary decisive for the exactions if an transaction taking, purportedly “voluntary” would have been a nature *46 imposition transaction, i.e., exaction, its as an does not Empire’s save it. in as- claim, essence, Plaintiffs that the uses Chapter transferring requires equivalent sets that are the treasury. plaintiffs 95% of If are assets state right percentage in this—or even if the correct is as low as Chapter 60%—plaintiffs If correct should win the case. it is that a tak- effect so enormous the exactions context would outside collapsed. impossible analysis ing, It seems exactions is then the argue, argue, on such a that an exaction and no one does “rough proportional- pass “nexus” and could either the scale counterpart ity” to those Dolan, or whatever tests of Nollan involving prop- might applied real to an exaction not tests (The analysis, majority erty. I does offer an exactions analysis accept premise does not below, discuss but that assets.) effectively acquiring most of is State taking dispositive be a is whether it would Thus, the issue quite apart compel Empire, property from for the State way provided plan, its assets in the conversion to distribute summary takings by Supreme Chapter recent 1. The Court’s (544 Lingle jurisprudence U.S.A., 528, 125 in v Chevron Inc. US [2005]) approaching provides a framework S Ct question. Lingle per categories taking: three se
identifies
physical
taking,
government appropriation or
i.e., a “direct
(544
2081),
private property”
Ct at
—,
US at
125 S
invasion of
Corp.
exemplified by
Teleprompter
v
Manhattan CATV
Loretto
(458
taking”—
[1982]);
“regulatory
kinds of
US 419
two
by
exemplified
Council
Lucas v South Carolina Coastal
one
(505
[1992]),
regulation “completely
in which
US 1003
us[e]’
economically
deprive[s]
of her
of all
beneficial
an owner
quoting
property” (Lingle,
—,
125 S Ct at
Lu
544 US at
Lucas]);
[emphasis in
and another involv
at 1019
cas, 505 US
destroying
property’s
ing regulation
though
value
that,
completely,
effect is
“so onerous that
to the owner
(Lingle,
appropriation
544 US
or ouster”
tantamount
to a direct
2081).
challenges
Regulatory takings
in this
—,
at
125 S Ct at
category
governed
forth
Penn
are
the standards set
last
(438
Lingle,
City
Transp.
[1978];
US 104
Co. v New York
Central
2081-2082).
lists a
Ct at
Penn Central
—,
383 arguably regulatory taking context, a and the issue of would expectations” called what Penn Central “investment-backed may The seem awkward should be decisive. word “investment” entity, discussing expectations not-for-profit but I in of meaning expectations” in this think the of “investment-backed expectations simply Empire’s as to the context is reasonable Chapter property. 1 future of It clear that if does use its seems expectations Empire’s interfere reasonable there has with taking. expectations hand, been no On the other if these are large enough portion Empire’s property, contradicted as to a of Central-type taking assuming occurred, a Penn that has even (Loretto) (Lucas) taking. per regulatory there is no se or “total” question Chapter thus 1 is boils down to whether consis- expectations tent with property. for the of its reasonable use that,
It is true in the situation it faced when passed, Empire expected keep money 1 was could not have account—or, indeed, its own bank to have continued in exis- going Empire longer tence as a profit concern. a non- was no viable as provider. Empire expect, health however, insurance could protected by that its assets would be some limitation similar to “quasi cy pres” requirement embodied in Not-For-Profit (a) (3) (A). § Corporation says That Law statute that as- “Type not-for-profit corporation Empire sets of a B” like shall “organizations engaged be distributed after dissolution to substantially corpora- activities similar to those of the dissolved (See Org. Multiple tion.” also Matter Sclerosis Serv. N.Y. [New City Socy.], Multiple York Ch. Natl. Sclerosis NY2d [1986].) correctly, point out, defendants that While Legislature constitutionally altering prohibited was not from destroy Empire’s standard, the N-PCL 1005 it not free to was expectations entirely. Empire right expect had a as- way remaining paid sets after its would be used debts were reasonably Empire purposes consistent with the charity property existed. This is the sense in which the although entity “private” property; other may personal gain, property it has a owner of the not use it for right continuing property to certain dedication Found, Community purposes Energy Filan, v Illinois Clean 2004]) [observing, [7th in a 392 F3d Cir discussion taking property, “claims of of a charitable foundation’s taking expectation”]). unconstitutional are matters Empire’s purposes specified in article 43 of the Insurance are (a), § “for the existed Law. Under Insurance Law furnishing expense indemnity persons purpose ... medical Empire. Under Insurance . . . covered under contracts with” (j) (1), operated “maintained and Law 4301 was short, In and subscribers.” the benefit of its members general purpose help need for affordable meet the coverage, reasonably expect that, after it could health care *48 remaining be devoted to that dissolution, its assets would reasonably purpose something close to it. original Empire’s expectations, re-
In accordance with those including existing structuring plan the value, for its called public offering, proceeds to a charitable the to be transferred of availability promoting and acces- “dedicated to the foundation sibility high quality to the health care and related services of by plan approved people of York.” This of the State New Superintendent effect, at least Insurance, of but never took Attorney part it General, could because, in the view of the majority op {see accomplished legislation without new not be 341-344). give Chapter proposal legislation, to 1, alters the
That new Empire’s existing a charitable foundation. The statute value to consisting “public Empire’s asset,” of “as- into a divides assets ninety-five percent representing fair market of of the value sets consisting corporation” asset,” and a “charitable the remaining [5]). (Insurance [j] [3], The charitable Law 4301 5% to a foundation not dissimilar is to be turned over asset money. original plan, all the was to receive that, one under the expenses, public for destined, after asset, however, is The from it is Pool, Initiatives Tobacco Control and Insurance Chapter of Health as the Commissioner to be distributed summary, appears Chapter to take From brief directs. this leaving only Empire’s public use, 5% assets 95% Empire’s purposes. charitable continue appearance superficial argue, however, that this Defendants They misleading. public-to-charitable division of a 95%-5% public argue specific purposes as- for which that, when the relationship they enough spent examined, are bear set is to be reasonable that charitable mission so property expectations have not been of its as to the use my defendants turns, view, on whether The case frustrated. possibility argument, and I do not rule out can sustain they on the however, that it can be said think, can. I do not right. Chapter defendants are 1 alone that face by majority’s public estimate Most of the asset—some 65% 12)—will (majority op n devoted to what at 346 be “[g]eneral hospital and retention of health recruitment calls (L 1),§ compensation part 2002, 1, A, i.e., ch care workers” hospital employees. assert that this benefits for Plaintiffs “special legislation” designed aspect of the interest statute is accomplish “political goals”—specifically, funding labor constitutionality legisla- reviewing contract. But required Legislature tion we are to assume that believed supplementing the care an income of health workers important public goal, validity legislative judg- and the of that may questioned University ment not be here Paterson v McKinney’s N.Y., 432, [1964]; State NY2d Cons Laws §§ expen- NY, Book To Statutes assume that this policy, public however, diture of funds is wise does not establish Empire’s property has not taken been use. property has been taken unless the “recruitment and reten- expenditures way advancing Empire’s tion” are a reasonable purposes.
Giving weight presumption validity attaching due to the of legislation, portion I cannot conclude on this record that the Chapter Empire’s 1 that devotes assets to the “recruitment and upheld. retention of health care workers” should be There is no Legislature Empire’s indication that the found that this use of Empire’s purposes, funds was consistent with or that it ever question. any presentation considered the Nor has there been analysis support finding. facts or that I would such would present analysis that, minimum, insist at a defendants some supporting the conclusion that this use funds will advance Empire’s making coverage generally aim of health care more the If available to citizens of New York. a reasonable case can be legislation I made, valid, would find the and if not I would find deny it have, invalid. On the record we I would defendants’ mo- takings claim, tion to dismiss the and would leave the issue by summary judgment be determined a trial if motions at necessary. validity open I the would also leave the other uses though public by Legislature, I ac- asset directed the (listed major- knowledge pages that at 346-347 of the those uses ity Empire’s opinion) seem on their face more consistent with purposes. majority’s analysis Empire’s
The “investment-backed conclusory expectations” that is limited to the assertion “wholly by Chapter directed 1 are consistent” distributions 358). majority (majority op Empire’s as- at The mission with spend free to discussion, that the State is sumes, without (id. purposes” money any “public Empire’s it chooses health hospital 358), supplementing including workers’ at reject on limitations idea that the constitutional income. I They taking private property must little force. are of so expendi- require that reasoned demonstration at least some Empire’s by advance indeed chosen the State will tures yet purposes. to be made. demonstration has That by Empire’s purposes assumption will be advanced Empire’s property Chapter for the is also the basis l’s use of majority implies, Though majority’s analysis. Ias exactions analysis inappropri- exactions above, that it thinks mentioned analysis upon such an concludes, alternative, in the ate, it legislation nexus” the “essential survive, because would “rough proportionality” and Dolan the Nolían called only majority Specifically, finds “not nexus but exist. cases enacting the State’s interest correlation between a direct carry 1—allowing Empire out its dual Chapter continue to Empire’s imposed—that the condition historic mission—and not-for-profit speci- purposes health for the assets he used (majority op that “the It also finds 1” at fied in impact proportional’ ‘roughly to the condition is through any other to convert if were conversion because required not-for- to dedicate its mechanism ... it would purposes it formed profit to those for which was similar assets to 356-357). majority (majority op Thus, finds .” . . according ma- because, for exactions to be satisfied tests being jority, Empire’s diverted from are not assets “mission.” unnecessary analysis majority’s is both *50 exactions
I think the explained unnecessary if wrong. above, because, as I and Empire’s It is way being with in a consistent are used assets legislation expectations, would be valid reasonable unconditionally legislatively-prescribed were uses if the even no need compelled. no exaction and case, there is If that is analysis. an exactions to do wrong, analysis majority’s what also because is exactions
The
majority
require
assumes, a
not, as the
cases
the exactions
imposed
and its
the State
condition
nexus between
They
legislation.
enacting
must
hold that there
purpose in
permission
attached to
conditions
a nexus between
be
grounds
State could
given by
on which the
the State and
(See
permission.
[The
have withheld that
Nollan,
Judge Judge part separate G.B. Smith dissents in a Read; opinion; Judge part opinion dissents in another R.S. Smith Judge Judge taking G.B. Smith concurs; Chief Kaye no part.
Order modified, etc.