Sale of Not-For-Profit Healthcare Facility Approved Over Objection of Attorney General—Price Fair and Reasonable and Furthered the Interests of the Organization—Valid Reasons For Not Accepting Highest Bid

A petitioner, not-for-profit corporation, “owns…a licensed 82-bed residential healthcare facility” (facility) and a 7.59 acre parcel of real property. The petitioner applied “to sell the facility and substantially all of its assets” to a purchaser (purchaser) for $3,457,501. It asserted that this was “not the highest offer, but fair and reasonable, and accepted based on petitioner's assessment of [purchaser's] ability to maintain quality care” and the petitioner's own financial concerns. The attorney general (AG) objected to the sale, since the purchaser refused “to commit to continued operation of the facility for a minimum five-year period after the sale.”

The court held that “the consideration and terms of the sale were fair and reasonable and would promote petitioner's purposes and interests of its members.” The petitioner had conducted diligence as to all potential purchasers. There was no evidence that the purchaser “planned to flip the property, as was of concern to the AG.” The court explained that given the petitioner's “financial status, the risk of the facility closing was more imminent if it was not sold” and authorized the transfer to the purchaser.

Most of the petitioner's revenue is derived from Medicaid reimbursement and the reimbursement rate was “inadequate to cover its operating expenses.” The petitioner was concerned that it would run “out of cash” and a failure to sell would harm “its mission” and “its nursing home residents, staff and employees.”

The court explained:

The procedure set forth in N-PCL 510 and 511 is “designed to preserve charitable assets to serve public purposes”.… The Attorney General is made a statutory party to applications under N-PCL 510 and 511 “to ensure that the interests of the ultimate beneficiaries of the corporation, the public, are adequately represented and protected from improvident transactions”.… In determining whether to grant an application under N-PCL 510 and 511, the court “must assess whether 'the consideration and the terms of the transaction are fair and reasonable to the corporation and that the purposes of the corporation or the interests of the members will be promoted'”….

An appraisal estimated that “the going concern value” of the petitioner's assets and operations was $4.5 million. That appraisal assumed receipt of a NYS Department of Health grant. However, the grant had expired and that reduced the “going concern value.” The petitioner had received five offers. Most offers were in the range of $4 million.

The petitioner evaluated each offer, including the proposed purchase price, “the quality and culture of the potential purchasers' other long-term care facilities, the potential purchaser's apparent ability to preserve quality nursing home services…, the relative certainty of successfully completing the transaction, and the purchaser's overall ability to achieve [petitioner's] mission and economic objectives.”

Although the purchaser's offer was not the highest, the petitioner accepted such offer based on its assessment of the purchaser's “ability to maintain quality care” in the region. The purchaser had acquired and/or was in the process of acquiring, through its affiliates, other facilities in the same region. Moreover, the petitioner had “doubts about the ability [of other potential purchasers] to consummate a transaction at the prices that they had offered,” and their ability “to structure the transaction so that all liabilities would in fact be adequately assumed.”

The petitioner argued that since the purchaser would continue to operate the facility as a nursing home and make “the transition in ownership smooth for both patients, staff, and employees,” the purposes and interests of the petitioner's members would be promoted by the sale. Furthermore, absent the subject sale, the petitioner would likely have to close the facility.

The AG countered that the transaction should not be approved unless the purchaser committed to operate the facility for five years. The AG noted that two New York City based non-for-profit nursing homes had closed after they had been purchased by “for-profits.” “Based on the expectation that the for-profits would continue to provide…nursing services on the sites,” the AG had not objected to and the Supreme Court had approved those sales. However, those for-profits “subsequently terminated the nursing home operations within one year of the purchase.” One “for-profit sold the…real estate to developers at a substantial profit.” The AG argued that since the subject facility was located close to a ski resort, the purchaser may terminate the nursing home and sell the property to the developer for a profit. The AG also cited potential “risk of transfer trauma to [these residents] if they are forced to relocate….” and the “purposes” stated in the petitioner's certificate of incorporation.

The petitioner asserted that the sale of its Adirondack region facility could not be compared to a sale of a nursing facility in Manhattan, which was the location of a recent transaction cited by the AG. Additionally, there was no evidence that the purchaser intended to flip the property and rezoning the subject property for commercial purposes would involve a very lengthy process. Additionally, the petitioner submitted an appraisal that valued the property at $1.54 million since it was “zoned for 'public and semi-public' uses, which excludes tourist accommodations.”

The court concluded that under all of the circumstances, “the consideration and the terms of the sale are fair and reasonable” and “the sale will promote petitioner's purposes and the interests of its members” and based on the petitioner's financial condition, there was a real risk that the facilities would be closed imminently, if the facility was not sold.

The AG had asked for additional time “to conduct a full real estate appraisal” and to provide “an affidavit regarding the 'reasonable likelihood'” of “a change in zoning.” The court denied that application, explaining that even if the appraiser finds that “the real property is worth more than $1.54 million and a zoning change is reasonably achievable,” the record is devoid of any evidence that the purchaser would sell the property or “use it for anything other than a skilled nursing facility.” Accordingly, the court granted the petition and authorized the transfer of title to the purchaser.

Disclosure: My firm is counsel to a purchaser of one of the nursing facilities located on the lower eastside of Manhattan which was cited by the Attorney General.

Comment: Not-for-profit and religious organizations, as well as private sellers, may have valid reasons to sell to a bidder that did not submit the highest bid. For instance, the highest bidder may not have a good reputation for timely closing on a transaction. If a bid is unrealistically high and subject to financing, the bidder may be unable to obtain necessary financing and the property may then become entangled in litigation. Moreover, a high bidder may require conditions that are unacceptable, such as a lengthy due diligence period, a lengthy closing date, an unreasonably low deposit, or the obtaining of land use approvals.

Matter of Adirondack Tri-County Nursing & Rehab. Ctr., Sup. Ct., Warren Co., Index No. 64771, Muller, J.

NYC Water Board One Time $183 Bill Credit For Owners of Tax Class One
Properties Upheld—Dissent Asserted That Board Failed to Exercise Independent
Judgment and Arbitrarily Enacted Mayor's Request

The NYC Water Board (board) “collects revenue to keep the city's water and sewer systems financially self-sustained.” The board “leases the infrastructure of the water supply and wastewater systems from the city, pursuant to an agreement providing that rental payments are required 'only to the extent requested by the city in each Fiscal Year.'”

The mayor of the city of New York announced, on April 25, 2016, that “the city would forbear collecting rents from the [board] through Fiscal Year 2020, resulting in a saving of $122 million in Fiscal Year 2017.” The mayor also proposed that “the board issue a one-time bill credit of $183 for the fiscal year to all account holders that owned properties…belonging to Tax Class 1, a category to which almost 80 percent of the…board's account holders belong.” Tax Class 1 property is defined as “[m]ost residential property of up to three units (family homes and small stores or offices with one or two apartments attached), and most condominiums that are not more than three stories.” The mayor also proposed that in Fiscal Years 2018-2020, the rent forbearance savings would be “passed on to all account holders.”

In early April 2016, the board and the NYC Department of Environmental Protection (DEP), issued “a rate proposal notice for Fiscal Year 2017, with a rate increase of 2.1 percent, to fund a $76 million gap between projected needs and revenues.” The board and DEP also proposed the extension of an assistance program for “low-income, senior, and disabled homeowners;” “the establishment of [a new assistance program] for owners of affordable housing, providing a per-unit credit not to exceed $250; and a rate freeze for account-holders using less than 95 gallons of water per day.” The board accepted the mayor's proposal and issued a revised notice for Fiscal Year 2017, held hearings and approved “the 2.1 percent rate increase and the bill credit,” plus “the assistance programs and low-consumption rate freeze.”

The petitioners, landlords ineligible for the bill credit and a landlords' not-for-profit association (RSA), commenced an Article 78 proceeding against the board and DEP, challenging the resolution and rate schedule. The petitioners contended that “the…board's determinations were irrational, arbitrary and capricious, and exceeded the board's authority.”

The New York Court of Appeals (court) explained that “a utility has 'unfettered discretion to fix [rates] as it will so long as invidious illicit discriminations are not practiced and differentials are not utterly arbitrary and unsupported by economic or public policy goals, as it reasonably conceives them'….” Moreover, the board may consider “'the views and policies of any elected official or body, or other person' and ultimately 'appl[ies] independent judgment in the best interest of the authority, its mission and the public'….” Additionally, the board has “leeway to charge more than the bare minimum necessary for revenue recovery,” since “the rates are to generate 'revenues which, together with other revenues…, if any, shall be at least sufficient at all times so that such system or systems shall be placed on a self-sustaining basis'….”

The court held that the board's respondents' actions were not “'utterly arbitrary and unsupported by economic or public policy goals, as it reasonably conceives them'….” The court reasoned that “Tax Class 1 owners as a class had been excluded for years from rate relief programs…, and had enjoyed other benefits only if individually eligible based on income or usage.” The court opined that “[t]he decision to allocate the relatively modest gain from the rent forbearance so as to be meaningful to this very large category of ratepayer, without requiring a complex eligibility and application process that would entail administrative costs, was not irrational.” Furthermore, the board did not have to demonstrate that “the beneficiaries of the one-time credit were,” more financially “needy,” “in comparison with other landowners.” In sum, “the distinction between beneficiaries…did not have to be drawn with surgical precision…, and must be upheld in the absence of invidious discriminations or a differential that is entirely unsupported by rational goals.”

The petitioners argued that “by using the $122 million in rental forgiveness to dispense the same amount in credits, respondents recreated the funding gap it had identified in the original budget.” The court explained that the board need not “set the lowest possible rate every year; it can balance rate-setting with other needs and goals.” An expert opined that “elimination of the one-time credit would not remove the need for the rate increase, because the…board sets water rates to maintain revenue stability over at least a five-year forecast.” The court found that the decision to maintain “the original planned rate increase was not entirely irrational,” especially since “the board would have kept the rate increase at around 2 Percent per year.”

Finally, the court stated that the board did not act “ultra vires or levy a tax,” since “'any rate variance can be framed as a decrease in some ratepayers' charges at the expense of other ratepayers,' but such a disparity does not amount to impermissible taxation where, as here, the rate increase was tied to a utility's forecast of the cost of furnishing a service….” Accordingly, the court dismissed the petition.

A dissenting opinion recognized the board's “broad authority to set rates for water usage,” but emphasized that the board must exercise informed judgment in doing so. The dissent also noted that “[t]he rate schedule must be 'at least sufficient at all times so as to provide funds in an amount sufficient together with other revenues . . .' to cover the board's many expenses….”

The dissent asserted that the record established that “the board's decision to issue a one-time $183 credit…while simultaneously imposing a 2.1 Percent rate increase” did not result from its “independent judgment and was therefore irrational.” The dissent stated that the credit “re-created a budgetary shortfall that had been more than eliminated by the city's” $122 million forbearance in rental payments. Although “the board…kept its proposed 2.1 Percent rate increase for Fiscal Year 2017,” it “changed its justification, claiming that the rate increase was necessary to close the gap the board…created with its credit.” The dissent argued that there was no rational basis to create a credit and a rent increase.

The dissent reviewed the procedural history of the rate increase, noting, inter alia, the Mayor's statement that “'the city has been using the water bill as a cash cow for the general treasury'….” and this credit would “give something back to so many hardworking homeowners…who deserve a break.'” Two days after the mayor's announcement, “the board issued a new notice for public hearings,” which included the same proposed 2.1 percent rate-hike “and was otherwise identical to the prior rate schedule notice, with a single exception. Without explanation, the new notice included a new board project: an added proposal for '[a] bill credit based on the F[iscal] Y[ear] 2017 elimination of the rental payment.'” Over numerous objections, the board adopted the proposed new rate schedule, “including the 'one-time bill-credit of $183 based on the elimination of the F[iscal] Y[ear] 2017 rental payment for each water and sewer account” that was a Tax Class 1 property.

The dissent stated that “[e]ven under the most charitable reading of this chronology, only one conclusion is possible: the board failed to adhere to its statutory requirements and did not engage in an independent assessment of the potential impact of the rent-forbearance on the board's legislatively-mandated economic and public policy goals.”

The dissent contended, citing the record, that the board had not considered “costs, liabilities, future project expenses, and payment burdens on financially vulnerable service users, as well as prospective revenues.” The dissent argued that “[t]he…two-day turnaround on the second notice of its proposed rate schedule and its immediate adoption of the mayor's proposed credit—down to the exact dollar, without any suggestion of a board plan for how to capitalize on the city's announced multi-year forbearance—shows no evidence that the board gave this proposal the consideration that rate-setting requires, particularly where there is nothing to suggest that the board had previously considered whether to provide class-one homeowners with specific relief distinct from that provided to other classes of users.” The dissent also asserted that judicial deference was not required, since “the board did not 'apply…judgmental considerations based upon the expertise and experience of the agency.'”

The dissent acknowledged that the board could consider the mayor's proposal. However, the dissent stated that board members still must “apply independent judgment in the best interest of the authority, its mission and the public” and there was “no record support…that the board did so here.” The dissent emphasized that the board did not explain “how the credit fits within [its] goals, as it provided no analysis about how it reached the same conclusion as the mayor—i.e. that a $183 credit to a class of homeowners addressed a historically-unfair burden.”

Additionally, the dissent noted that “the credit departs from the board's prior programs of economic differentiation.” “Those rate-differentials and special programs had distinguished between users on the basis of financial need,…, or in the interest of implementing programs encouraging user behavior that furthered…long-term conservation and modernization goals.” The dissent contended that “[t]he board's additional explanations for the 2.1 Percent increase are post-hoc justifications that are not substantiated by the record.”

The dissent acknowledged that the board may, inter alia, “address the disparate circumstances of those who use its services,” but argued that the board cannot “change course from its original proposed rate schedule to reinstate a shortfall without first considering how using the forbearance as a credit to a class of homeowners comports with its own statutorily-defined economic and public policy goals.” The dissent agreed that “the court may not substitute its judgment for that of the board,” and believed that “the record lacks any indicia that the board exercised any judgment at all.”

Disclosure: My firm represented the petitioners in the subject litigation.

Comment: Mayor Bill DeBlasio stated, inter alia, that “[t]he court's decision clears the way for the Water Board to provide welcome financial relief for more than 664,000 New York homeowners.… They can now receive a credit on an upcoming water bill….” The mayor further explained that “[t]he $183 credit represents a nearly 17 percent savings on the annual water and sewer bills for a typical single-family homeowner. For approximately 150,000 homeowners, many of whom are seniors, who use less than 95 gallons of water per day and pay the minimum charge, the credit represents a nearly 40 percent savings on their annual water and sewer bills.”

Michael Berengarten, of Herrick, Feinstein, advised that “[f]ollowing the subject decision, the Water Board determined to implement the bill credits, while repealing the challenged rate increase in Fiscal Year 2017. Further, the Water Board elected not to raise water rates in Fiscal Year 2018 either, because the DEP reported that the water and sewer system is in strong financial condition due to the rent forbearance. The Water Board's decision to not increase water rates in fiscal year 2018, exceeded the relief requested in our petition. So, in effect, both homeowners and building owners will now benefit.” Berengarten noted that “this case demonstrates that although it is difficult to challenge the rationality of determinations made by public agencies, a public agency may reexamine its action following litigation.”

Matter of Prometheus Realty v. New York City Water Board, NY Court of Appeals, Case No. 130, decided Dec. 19, 2017, Opinion by Fahey, J.; Stein, Garcia, Wilson and Feinman, JJ. concur. Rivera, J. dissents in an opinion in which Ch. J. DiFiore concurs.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John's University School of Law.