New York Law Review

Tag: 64th Associates

  • 64th Associates, LLC v. Manhattan Eye, Ear & Throat Hospital, 2 N.Y.3d 585 (2004): Judicial Oversight of Not-for-Profit Asset Sales

    64th Associates, LLC v. Manhattan Eye, Ear & Throat Hospital, 2 N.Y.3d 585 (2004)

    When a not-for-profit hospital seeks judicial approval for the sale of its assets, any termination-payment clause or similar damages provision in the sales transaction should be reviewed under the Not-For-Profit Corporation Law (N-PCL) 511 standard of fairness, reasonableness, and furtherance of corporate purpose.

    Summary

    Manhattan Eye, Ear & Throat Hospital (MEETH), a not-for-profit hospital, sought to sell its assets, including buildings, to a real estate developer (64th Associates) and another hospital. The sale contract included a provision requiring MEETH to reimburse the developer’s expenses up to $800,000 if judicial approval for the sale was not obtained. The New York Supreme Court disapproved the sale. 64th Associates then sued MEETH to recover expenses under the reimbursement clause. The lower courts ruled that the judicial disapproval rendered the entire contract, including the reimbursement provision, inoperative. The New York Court of Appeals reversed, holding that the reimbursement provision must be evaluated under N-PCL 511(d) to determine if it is fair, reasonable, and furthers the not-for-profit’s purpose.

    Facts

    MEETH, a not-for-profit hospital, decided to sell its buildings and close the hospital due to financial difficulties. It contracted to sell buildings to 64th Associates for apartments and to Memorial Sloan-Kettering Cancer Center for medical purposes. The contract required MEETH to reimburse 64th Associates for expenses if judicial approval was not obtained, up to $800,000. Because the sale involved a substantial portion of its assets, MEETH was required to seek judicial approval under the Not-For-Profit Corporation Law.

    Procedural History

    MEETH petitioned the Supreme Court for judicial approval of the sale. The Attorney General opposed the sale. The Supreme Court denied MEETH’s petition, disapproving the transaction. 64th Associates then sued MEETH for breach of contract, seeking reimbursement of expenses per the contract’s termination-payment provision. The Supreme Court dismissed the action, holding the contract was inoperative without judicial approval. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a termination-payment clause in a contract for the sale of assets by a not-for-profit corporation is subject to review under N-PCL 511(d) to determine if it is fair, reasonable, and furthers the corporation’s purpose, even after the court disapproves the underlying sale.

    Holding

    Yes, because the statute requires that the court examine “the consideration and the terms of the transaction” (N-PCL 511 [d]), which includes all facets of the agreement, encompassing any termination-payment clause or similar damages or reimbursement provision.

    Court’s Reasoning

    The Court of Appeals reasoned that unlike for-profit entities, not-for-profits lack shareholders, necessitating greater public oversight of their finances and major transactions. N-PCL 510 and 511 are designed to “preserve charitable assets to serve public purposes.” The Court held that N-PCL 511’s requirements apply to the contract as a whole, not just the asset sale itself. It emphasized that the statutory language requires the court to examine “the consideration and the terms of the transaction” (N-PCL 511 [d]), encompassing all facets of the agreement. The court reasoned that judicial scrutiny protects not-for-profit organizations against board actions that might be adverse to the entity’s well-being. The Court acknowledged the Attorney General’s argument that such provisions may be valuable to not-for-profits, allowing them to negotiate beneficially. Because the lower courts did not examine the reimbursement provision under the N-PCL 511(d) standard, the Court of Appeals reversed and remitted the matter to the Supreme Court for further proceedings to determine whether the reimbursement provision was fair and reasonable and in furtherance of the not-for-profit’s corporate purpose. The court stated that reimbursement provisions “should be reviewed, whenever appropriate, in the same proceeding and under the same standard in which the court is asked to approve the sale.”