New York Law Review

Tag: Asset Sale

  • 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.”

  • New York Telephone Co. v. Public Service Commission, 95 N.Y.2d 40 (2000): Ratepayer Benefit from Utility Asset Sales

    95 N.Y.2d 40 (2000)

    A public service commission can order a utility to pass on profits from the sale of an asset to ratepayers if the ratepayers funded the asset’s value, even if the asset was not part of the utility’s rate base.

    Summary

    New York Telephone Company (NYT) sold its share of Bellcore, a research and development company jointly owned by regional phone companies. The Public Service Commission (PSC) ordered NYT to credit its ratepayers with the intrastate portion of the profit from the sale, arguing that ratepayers had funded NYT’s investment in Bellcore through their phone bills. NYT challenged the order, arguing that the PSC lacked jurisdiction and that the sale involved a non-utility asset. The Court of Appeals held that the PSC acted rationally and within its authority, as ratepayers had effectively funded Bellcore’s value; therefore, they were entitled to a share of the profits.

    Facts

    Following the breakup of AT&T in 1984, NYNEX (NYT’s parent company) acquired an interest in Bellcore, a research and development company. NYT’s ratepayers indirectly funded Bellcore through payments for research and services included in their phone rates. In 1996, NYNEX decided to sell its interest in Bellcore. The PSC then ordered NYT to pass along the intrastate portion of the profits from the sale to its ratepayers.

    Procedural History

    The PSC ordered NYT to credit its ratepayers with the intrastate portion of the profit from the Bellcore sale. NYT filed an Article 78 proceeding to annul the PSC’s order. The Supreme Court upheld the PSC’s order. The Appellate Division reversed, holding that the PSC lacked jurisdiction. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the PSC has the authority to order NYT to pass on to ratepayers the profits from the sale of Bellcore, an asset not included in NYT’s rate base, on the grounds that ratepayers had funded NYT’s interest in Bellcore.

    Holding

    Yes, because the PSC’s determination that ratepayers funded NYT’s investment in Bellcore provided a rational basis for ordering the surcredit to ratepayers.

    Court’s Reasoning

    The Court of Appeals emphasized that the PSC’s rate-making determinations are entitled to deference unless they lack a rational basis or reasonable support in the record. The court rejected a rigid formula requiring ratepayers to bear the risk of loss on an asset before sharing in the gains from its sale. Instead, the court focused on whether the ratepayers had funded the asset’s value.

    The Court found that NYT’s customers had effectively funded Bellcore’s value through their telephone rates, which included charges for research and services provided by Bellcore and its predecessor, Bell Labs. The Court cited Matter of Rochester Tel. Corp. v. Public Serv. Commn., which upheld the imputation of royalties on transfers of intangible assets because “the ratepayers have borne the costs for creating value in * * * those assets.”

    The Court reasoned that because NYT’s customers bore the costs of creating the intrastate portion of Bellcore’s value, they were entitled to reap the corresponding share of NYT’s gains on the sale of Bellcore. The Court also noted that by fully funding Bellcore, NYT’s customers effectively eliminated the risk of loss on the investment and funded dividends to shareholders, including NYT. Therefore, the PSC’s order was a rational exercise of its rate-making authority.