64th Assoc., L.L.C. v Manhattan Eye, Ear, & Throat Hosp.

[*1] 64th Assoc., L.L.C. v Manhattan Eye, Ear, & Throat Hosp. 2006 NY Slip Op 50410(U) [11 Misc 3d 1067(A)] Decided on March 22, 2006 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on March 22, 2006
Supreme Court, New York County

64TH ASSOCIATES, L.L.C., Plaintiff,

against

Manhattan Eye, Ear, & Throat Hospital; LENOX HILL HOSPITAL; LINDSAY C. HERKNESS, NORMAN STRAUSS, CHARLES S. WHITMAN, ROZLYN ANDERSON, ISABEL M. CARDEN, E. GAYLE MCGUIDAN, JR., JOSE W. NOYES, CHIPS CHAPMAN PAGE, RICHARD W. PENDLETON, JR., JACOB B. UNDERHILL, JANET B. YORK, ROBERT ARNOT, and LAWRENCE B. THOMPSON, as Directors of Manhattan Eye, Ear & Throat Hospital, Defendants.



600639-2001

Bernard J. Fried, J.

On December 3, 1999, after a thirteen day evidentiary hearing, I denied a N-PCL

§ 511 petition, brought by the Manhattan Eye, Ear & Throat Hospital (MEETH), to sell substantially all of its assets, i.e., its three buildings located on the Eastside of Manhattan, to Memorial Sloan Kettering Cancer Center (MSKCC) and 64th Street Associates, L.L.C. (Associates or Downtown)[FN1]. After the denial of this petition on the grounds that it did not satisfy the two-pronged test of section 511, which requires "that 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", MEETH's Board of Directors ultimately voted to accept a proposal from Lenox Hill Hospital (Lenox Hill), to continue MEETH as an acute care hospital at the same location, with Lenox Hill to become its sole corporate member. I approved this proposal on February 10, 2000, and it was consummated on March 8, 2000.

On January 24, 2000, while Lenox Hill was seeking to assume sponsorship of MEETH, it sought "clarification" of my December 3rd decision, arguing that denial of the petition had the effect of invalidating all the terms and conditions of the contract of sale, including provisions expressly designed to take effect in the event of judicial denial of MEETH's petition to sell these [*2]assets. After briefing and argument I dismissed Lenox Hill's application, stating that "[h]aving concluded that the proposed sale should not be approved, I had no occasion to consider these now-disputed specific provisions of the sales contract. None of these provisions were at issue during the proceedings which led to my decision, as to which clarification is now being sought." It was my view, at the time, that "these are issues that should be decided if, and when, such provisions are sought to be enforced, and not on a motion for clarification". (The subsequent decision of the Court of Appeals [FN2] in MEETH II, proved this view to be incorrect.)

As required by the disapproved contract, a Notice of Appeal was filed on February 18, 2000, by MEETH. Notices of Appeal were also filed by Associates (February 11, 2000) and MSKCC (February 17, 2000). On July 17, 2000 MSKCC wrote to MEETH that it was in breach of the contract, i.e., the best efforts provision [FN3], by its failure to perfect its appeal, and gave it twenty days to cure the breach. When MEETH failed to do so, MSKCC, on July 31, 2000, gave notice that it was terminating the contract and sought the return of its down payment, and monies owed under the Reimbursement Provision [FN4]. MEETH responded that it would not [*3]authorize release of the deposit while an appeal was pending, and that the decision denying approval of the sale "rendered the Contract null, void and unenforceable, thereby obviating any obligation on MEETH's part to pay any portion of such expenses".[FN5] Thereafter, MSKCC withdrew its notice of appeal and its deposit was returned. On September 15, 2000, Associates notified MEETH, it was in breach; however, "in light of the position set forth by MEETH"[FN6], it also withdrew its notice of appeal, and demanded the return of its deposit, which it obtained, and the payment of its out-pocket-expenses, as required by the contract, which MEETH similarly refused to pay.

On February 2, 2001, this action was commenced (MEETH II), in which Associates alleged breach of contract (1st cause of action) in that MEETH "violated the Reimbursement Provision and breached the Agreement," averred "out-of-pocket expenses under the [contract] in [*4]excess of $1,000,000.00"[FN7] and claimed entitlement "to recover compensatory damages in an amount to be proved at trial but believed to be at least $2,000,000.00"[FN8]. Also pleaded were causes of action involving quantum meruit (2nd), negligent misrepresentation (3rd), and tortious interference with a contractual relationship (4th). In an opinion, dated November 20, 2001, Justice Ira Gammerman dismissed the entire complaint, concluding that because judicial of the sale of the assets was rejected, this rendered the "whole agreement void." On appeal, the Appellate Division unanimously affirmed this dismissal [FN9], holding that Justice Gammerman had correctly rejected Associates' argument that the judicial disapproval only related to the transfer of the property, leaving intact the contractual terms which related to the "consequences of a judicial disapproval". Thereafter, on June 8, 2004, the Court of Appeals reversed the Appellate Division, and remitted the case for further proceedings [FN10].

Judge Rosenblatt, writing for a unanimous Court, rejected the argument that, as a matter of law, judicial disapproval under section 511, renders the entire contract, including a reimbursement provision, "inoperative"; rather, he held that where a court "disapproves a sale transaction of this type, it must also address reimbursement or similar provisions under the N-PCL 511 (d) standard, to determine whether the provision is fair, reasonable and in furtherance of the not-for-profit's purpose." He went on to require that such review be

"under the N-PCL 511 standard of fairness, reasonableness and furtherance of corporate purpose." Further recognizing, as the Attorney General urged, that "provisions of this type may be valuable to not-for-profits, permitting their boards to negotiate beneficially. At the same time, judicial scrutiny protects not-for-profit organizations against board actions that might be adverse to the entity's well-being". Moreover, stating that the Attorney General's contention - that it "is hard to imagine a good reason for the MEETH Board to agree to such a [reimbursement] term, which allowed Associates and [and MSKCC ] together to incur up to $1.6 million in expenses risk-free, while obtaining the East 64th Street property at a fire-sale price" - was "cogent", Judge Rosenblatt nevertheless concluded that it would be "improvident" for the Court of Appeals "to make a legal determination as to the efficacy of the reimbursement provision, considering that neither the parties nor the courts below have addressed it under N-PCL 511(d) criteria." Therefore, the case was remanded to determine "whether the reimbursement provision was fair and reasonable and in furtherance of the not-for-profit's corporate purpose." Recognizing that there had been a trial, which included "an extensive review of the relevant background" and "a great many findings and conclusions", it was left for the trial court to decide "if additional proof is necessary".

At issue, then, as ordered by the Court of Appeals, is whether the reimbursement provision, paragraph 19(a), satisfies section 511.

After this present action was assigned to me, I held a conference where the parties stipulated that, for the purposes of this motion the entire record in the section 511 petition could be used. Downtown [FN11], however, made clear that this stipulation did not "represent a concession that [my] findings in that [petition], based upon the limited questions before [me], are somehow findings of fact and law that are binding on this matter". It was clear, that the stipulation was that the "record [in the petition] be made a part of this [motion]....But the decisions that were made, the effect of those decisions are independent."[FN12] At that time, I suggested that there may be some limited discovery, on an informal basis. At the subsequent oral argument, MEETH argued that no further proof was necessary; that the record of the section 511 proceeding was sufficient. On the other hand, while Downtown's argument, as well as its papers in connection with this motion related to the facts developed at that proceeding, as did MEETH's, it contended that further discovery was necessary. Following oral argument I received a letter from the Attorney General, a nonparty, whose views I said I would "welcome", which letter has been responded to by Associates.

Since the final submission, I have obtained, and reviewed, the extensive record in

the section 511 petition, i.e., transcripts, exhibits and various other affidavits and papers. Having done so, I am satisfied that additional discovery is unwarranted, and that the question posed by the Court of Appeals can be resolved on the existing record, as if, in the language of the Court, it was "reviewed, whenever appropriate, in the same proceeding and under the same standard in which the court is asked to approve the sale".



FINDINGS OF FACT [FN13]

MEETH, not unlike other speciality care hospitals, began experiencing financial difficulties in the 1990s. Matters reached a head following the October 22, 1998 "Friends of MEETH" letter, which led Lindsay C. Herkness, President of the Board of Directors to tell Dr. Sherrell Aston, Chairman of the Plastic Surgery Department, that "if you guys give me a hard time, I'm going to sell the hospital". Prior to this, there had been an offer, not reported to the Board of Directors, from MSKCC "to buy" MEETH. On February 5, 1999, with the approval of [*5]the Board of Directors, MEETH retained Shattuck Hammond Partners, (Shattuck) an investment banking firm which provided services to the healthcare industry.

At the February 22, 1999, Board of Directors Meeting, held in Executive Session [FN14], Mr. Herkness reported a "possible offer[] from" MSKCC, and that he had appointed a Strategic Committee to, among other things, "review" that offer. At this meeting, Cushman & Wakefield, which had been retained by MEETH as real estate consultants, stated that the "value of the real property assets was in the range of $46-55 million it being understood that an approximately 12 month marketing period would be required to realize such value in the real estate market." Downtown contends that this "appraisal referenced in the record was not entered into evidence..."[FN15] To the contrary, the appraisal report, i.e., Cushman & Wakefield "Restricted Appraisal Report" (Cushman Report), dated February 9, 1999, was a part of the 1999 record ,[FN16] and is appended to the February 22nd Board minutes. It provides as follows: "Based upon our restricted appraisal, we have formed an opinion that the

range in market value of [MEETH's] property...as of January 12, 1999 was:

FORTY SIX MILLION DOLLARS TO FIFTY FIVE MILLION DOLLARS

$46,000,000 to $55,000,000 Based upon available market data, coupled with our discussions with knowledgeable brokers in the commercial property, a marketing period of approximately 12 months is believed to be typical in today's market for buildings such as the subject."

(Boldface in original)

After the Cushman presentation, "[a]mple time for discussion among the Board member was provided to discuss the important issues presented". It was then resolved "that the President or Treasurer and the Secretary (the "Officers") be authorized to negotiate a transaction to sell the real property and related assets to [MSKCC]...or any other -not-for -profit health care provider for a price as near as possible to $45 million," and "that such officers be authorized to execute a Contract of Sale containing the terms and conditions of such sale to the ultimate purchase...."

After this meeting MEETH entered into a March 11th agreement, not with MSKCC, but with Mt. Sinai-NYU Medical Center, to sell the properties for $46 million, the minimum appraised market value. At the March 22, 2006 Executive Committee of the Board meeting [FN17], it was reported that a "deal" with Mt. Sinai was expected to be "consummated". However, at the [*6]April 15th Board meeting [FN18], it was reported that Mt. Sinai, and MSKCC, were only interested at a price substantially lower than $46 million. The Board then voted to open up the sale process.

At the April 29, 1999 Board meeting [FN19], after the Board was again informed that the "appraisal performed by Cushman & Wakefield valued the real estate at $46 million", it was again resolved to sell the "real property and related assets". Notwithstanding the $46 million evaluation, the Board authorized a sales price "in excess of $40 million, with the actual price and other terms and conditions to be as determined by such Officers to be in the best interests of the Hospital". No mention was made of the Cushman Wakefield comment that "12 months" marketing period was typical in the current market; rather there was a rush to sell, and at a cost below the property's lowest appraised value. The Board then authorized its officers "to execute a Contract of Sale containing the terms and conditions of such sale".

A Board meeting was held at noon on May 5, 1999 [FN20], at which time, there four separate proposals on the table: (1) a $44 million proposal from RFR/Davis; (2) the MSKCC/Downtown $41 million proposal; (3) a $40.5 million Rockrose Development Corp. proposal; and (4) two alternative proposals from Mt. Sinai: one a $27 million proposal with MEETH to be closed; the other a vague offer to acquire both the hospital and its operations, for a price in the range of $5-11 million. At this meeting, the Board agreed to accept the MSKCC/Downtown offer "promptly" and confirmed its April 29th Resolution authorizing the officers "to negotiate and enter into a contract of sale for the real property assets...and to authorize such officers...to take all necessary implementing actions". At no time was there mention of a requirement by MSKCC/Downtown that the contract contain a provision which could obligate MEETH to potentially $1.6 million damages, as ultimately provided for in the sales contract.

That same day, May 5th, Mr. Herkness on behalf of MEETH signed and "[a]greed, [a]ccepted and [a]cknowledged a bid on Downtown's stationery, which provided that it was "subject to negotiation execution, and delivery of a mutually acceptable purchase agreement among us that is satisfactory to our respective attorneys" it would be purchasing the properties for $41 million.[FN21]

At the subsequent May 24, 1999 meeting of the Board,[FN22] Mr. Herkness "stated that MEETH had signed a letter of intent with MSKCC...." There was no mention of the damages provision, with the $1.6 million potential obligation. Indeed, at this meeting, Thomas W. [*7]Ruggiero, Esq., MEETH's attorney, "gave a brief review of the history and status of the [MSKCC/Downtown] negotiations." He acknowledged during this meeting that "MSKCC[/Downtown] was not the highest bid but it was the one selected." (emphasis added) Mr. Ruggiero explained to the Board, that they had not "signed a contract of sale and cannot do so until the judge rules [FN23], but MEETH is, as permitted by the court, continuing discussions and negotiations with MSKCC." A special meeting of the Board was held on June 25, 1999 [FN24] to examine another proposal, from an investor group, led by Alexandros Demetriades which had offered $42 million for the "real estate, equipment, trade name of MEETH, Harlem facility and potentially $5 million of restricted assets". The Shattuck representative summarized the "problems and drawbacks to such proposal", and "recommend[ed] continuing to pursue MSKCC/64th Associates transaction".

On June 29, 1999, Mr. Herkness and Charles S. Whitman, III, Secretary, Board of Directors, signed on behalf of MEETH, the "Real Property Contract of Sale", which contained the damages provision at issue here. [FN25]

Prior to this contract being signed, there was substantial activity concerning MEETH's decision to sell its Eastside buildings. On April 25, 1999, the New York Times reported that MEETH was for sale.[FN26] Following this article, on April 27, 1999, Paula Gellman, Esq., Assistant Attorney General, Division of Public Advocacy, wrote to George A. Sakar, MEETH's Executive Director, and requested a copy of a draft section 511 "petition and exhibits" before they are filed in the Supreme Court, "so that we may review the papers and raise any questions or concerns we have in advance".[FN27] On May 3rd, responding to this letter, Mr. Herkness wrote that MEETH "will seek your review and, hopefully, concurrence, well in advance of any formal submission to the Supreme Court as required under said §511 of the N-PCL."[FN28] No mention of this correspondence with the Attorney General appears in the minutes of the May 5th Board [FN29] meeting. On May 10, 1999, the hospital's medical staff brought an Article 78 petition, and sought a TRO to prevent a sale of the hospital. On May 28,1999, following an evidentiary [*8]hearing, I dismissed the petition because the petitioner, Board of Surgeon Directors of MEETH, lacked standing under Article 78. I further stated that if the Board's "action were permitted to be judicially examined under Article 78....It cannot be concluded that the decision of the Board of Directors, which followed the commissioning of a strategic options report, either is irrational or violates the business judgment rule or was taken in bad faith." This, as I wrote is "the limit of the scope of Article 78 review".[FN30]

Thereafter, on June 3, 1999, William Josephson, Esq., Assistant Attorney in Charge, Charities Bureau, wrote to Mr. Ruggiero, noting that he had been advised that MEETH had frustrated the medical staff and lawyers in their efforts to obtain financial information necessary to "make a responsible and competitive bid for MEETH". Mr. Josephson stated "that if and when MEETH's petition to sell the hospital comes before the New York State Department of Law, we will scrutinize it to ensure, among other things that the Board has carried out its fiduciary duty to maximize the charitable assets available for MEETH's charitable purposes," which, as he put it, meant that MEETH had "to entertain all reasonable proposals, not to favor any bidder over another in the process, and to treat all bidders and potential bidders identically and fairly". He warned that otherwise, "our review of the petition will be unnecessarily prolonged and complicated".[FN31]

Mr. Josephson's letter was responded to on June 4th by Mr. Ruggiero, who wrote to request "a meeting with your office, as soon as would be convenient, next week." The meeting was requested to clear up Mr. Josephson's "misunderstanding as to certain important facts."[FN32] Rather than a meeting, Mr. Josephson and Mr. Ruggiero had a telephone call "prompt[ly]" after the June 4th letter. Following this conversation Mr. Ruggiero's wrote on June 7th that "MEETH is negotiating with MSK/Downtown Development, with a view towards executing a purchase contract with such parties. Such negotiations, with the agreement of the parties involved, are continuing."[FN33] On June 23rd, Mr. Josephson responded and wrote that "[w]hat we are not aware of is one single shred of evidence that MEETH is actively exploring in good faith all or any of these [other] expressions of interest." He requested that Mr. `Ruggiero "promptly advise in writing each MEETH director, with copies to me, that if the present circumstances, as described above, continue to prevail, it will be impossible for the Attorney General to advise the Court, as Not-for-Profit Corporation section 511 requires, that the purposes of MEETH will be promoted by the proposed transaction with Memorial Sloan-Kettering Hospital."[FN34] Could there have been [*9]clearer notice to the Board that the planned sale to MSKCC/Downtown, if not doomed, was facing dangerous shoals?

The Attorney General's June 23rd letter was responded to the next day by Mr. Ruggiero, in a letter, dated June 24, 1999, which expressed concern that Mr. Josephson had "apparently unilaterally concluded, without the benefit of any additional information regarding MEETH's proposed real estate sale to....[MSKCC/Downtown], that [such] a sale to MSK[CC], a most worthy institution', would not be supported by the Attorney General in a N-PCL §511 hearing."[FN35] Mr. Ruggiero contended that they were "following its fiduciary duty under a process that will lead to a judicial review that MEETH believes, will sustain the correctness and reasonableness of its eventual actions." At the June 25th meeting, the Strategic Committee of the Board considered and rejected Demetriades' offer, and Mr. Ruggiero's June 24th letter "which raised certain due diligence facts with respect to the Demetriades proposal" was "referred to", although the minutes do not record that there was any discussion of the Attorney General's concerns over what was happening, and that he likely would not approve the transaction. [FN36] Following this meeting the contract with MSKCC/Downtown was signed.

On June 29th, MEETH received a proposal from Continuum Health Partners,[FN37] as well as from Mt. Sinai-NYU Medical Center and Health System [FN38] (involving several alternatives). It also received a proposal from Lenox Hill Hospital on July 1st. [FN39]

Deputy Attorney General Dietrich L. Snell, Division of Public Advocacy, wrote to Mr. Ruggiero on June 30th, that the Attorney General learned from a MSKCC press release, that the contract had been signed, and stated that "we are deeply concerned" over the execution of the contract "at a time when major institutions have approached MEETH with proposals that would enable MEETH to...fulfill its charitable purposes." Mr. Snell requested a meeting with MEETH. Responding to this letter, Mr. Ruggiero wrote on July 2nd that the "proposals received" would be reviewed and that MEETH would have a meeting with the Attorney General "after such Board review of the Continuum offer rather than before".[FN40] This led to Mr. Snell's July 2nd letter, in which he stated that "I imagine such proposals include not just the one from Continuum (to which you refer)...." [*10]

At the July 26th Board meeting , Attorney General representatives were present, and Shattuck discussed the contract which MEETH signed "on June 27, 1999",[FN41] and other offers. The Board was provided copies of the decision denying the Article 78 petition, and Mr. Ruggiero explained that "[t]he next litigation event for the Hospital would be the Section §511 [sic] application....[which] would be a contested petition."[FN42] Thereafter, at 6:00 p.m., the Board, with the Attorney General's representatives present, convened in Executive Session, and the Lenox Hill offer was discussed. The Shattuck representative, James S. Scibetta, stated that the Lenox Hill offer "would require breaking its contract with MSKCC." This was the subject of some discussion, however, no reference was made to the damages provision in the contract, by either Mr. Scibetta, or Mr. Ruggiero, who noted that "it was enforceable subject to regulatory approval." There no mention that the failure to obtain such regulatory approval would have rendered MEETH liable for up to $1.6 million. Mr. Ruggiero also said that "MEETH would not have signed the contract unless it believed that it was going to pursue it in good faith". At the close of this meeting, Mr. Herkness told the Board "it could continue to evaluate the offers through the Strategic Committee while keeping to the current course with MSKCC." A fellow Board member, Lawrence B. Thompson, Esq., "was of the opinion that the Board had a deal it was going ahead with. If an offer came to the attention of the Strategic Committee that the Committee clearly thought was better than the current one, then the Committee would report to the full Board."[FN43]

Following this meeting, Mr. Snell wrote a letter, dated July 30, 1999, to Mr. Ruggiero, in which he referred to the Directors at the July 26th meeting, who "indicated that the Board should honor its signed contract with MSK[CC] without considering the possible superiority of another proposal." He went on to state that "[t]he elaborate closing contingency provisions in the MEETH-MSK[CC/Downtown] agreement evidence the parties' understanding that they might not ultimately be able to consummate that transaction." Mr. Snell fe[lt] compelled to inform [Mr. Ruggiero] that if the Board continues on its current course, the Attorney General will be left with no choice but to oppose MEETH's proposed asset sale."[FN44]

CONCLUSIONS OF LAW

As explained above, the Court of Appeals, held that the reimbursement provision, i.e., the damages clause, be "reviewed, whenever appropriate, in the same proceeding and under the same standard in which the court is asked to approved the sale." And the action was remanded "so that Supreme Court may determine, under N-PCL 511 (d), whether the reimbursement provision was fair and reasonable and in furtherance of the not-for-profit's corporate purpose". In order to [*11]comply with this direction, with the agreement of the parties, although Downtown, as noted above, requested additional discovery, I have considered the voluminous record developed on the section 511 petition, and am satisfied that "additional proof is [not] necessary...to address the validity of the reimbursement provision."[FN45] Moreover, while this is a plenary action, and the instant motion is one to dismiss [FN46], this motion has been treated as the Court of Appeals directed: the entire record has been reviewed, in order for me "to address the validity of the reimbursement provision" under section 511. Thus, while procedurally anomalous [FN47], the evidentiary record has been considered in order to determine the issue framed by the Court of Appeals.

At issue in the original petition was whether I was satisfied that the "consideration and terms of transaction are fair and reasonable " and that the "purposes of the corporation will be furthered". In 1999, after an exhaustive review of MEETH's actions, I was not so satisfied. I further found that the "proposed use of the assets involves a new and fundamentally different corporate purpose." Certainly, these findings - with regard to the transaction, itself - were not made with a view toward the damages provisions, which, was neither the subject nor the focus of my attention at the time. However, now that this issue has been remanded, I have considered it, as if I had done so in 1999, and in doing so, my 1999 findings are not irrelevant: the parties are the same and they have stipulated that the record in the section 511 petition may be used by me in connection with this motion.

The Board of Directors was focused entirely on its desire to "monetize" the assets of MEETH, as I exhaustively detailed in 1999. The motivation to sell, was MEETH's perceived precarious financial position, or as Mr. Herkness put it at trial, the decision was spurred by the "doomsday scenarios" he had received in a January 15, 1999 memorandum from MEETH's Chief Financial Officer. Although there was a cascade of events, including strategic reports, various board meetings, and involvement of the Attorney General, the extensive record before me contains not a hint [FN48] that the Board was either aware of, or considered the inclusion of the substantial damages or reimbursement provision in the contract, let alone the significance of such provision to MEETH, in the event the approvals were not obtained. Indeed, the record [*12]convincingly demonstrates the opposite. It is hardly likely that the Board, which believed that MEETH s finances were in dire straits, would have added to its imperiled finances, the significant risk of up to $1.6 million in damages, if it failed to obtain the requisite judicial, governmental and regulatory approvals. Moreover, prior to the actual signing of the contract, the Attorney General had entered the picture, and advised MEETH of its concerns over the deal, that it would be scrutinized, which ineluctably should have led to the recognition that approval was not a foregone conclusion. Significantly, after the contract was signed, MEETH continued to evaluate other proposals, and if there was a "better" offer, the Strategic Committee was to "report to the full Board".[FN49]

Section 511 requires that "terms of the sale...are fair and reasonable to the corporation". Here, should the transaction be disapproved, which was at the time of the signing not an unlikely eventuality, the emergence of an obligation by MEETH to pay up to $1.6 million in damages, would certainly had a tremendous impact upon its precarious financial situation. This is made clear by the Attorney General, who has pointed out that "MEETH's own economic weakness seemed to preclude its agreement to a provision that could have rendered it insolvent, or nearly insolvent, in the event that the sale did not close. MEETH could not afford to agree to the provision at issue..."[FN50] This, alone, compels the conclusion that the reimbursement provision was not "fair and reasonable to the corporation". Moreover, as further pointed out by the Attorney General "the overall sales price MEETH agreed to accept was $5 million less than the low end fair market value determined by appraisals,"[FN51] i.e., the Cushman & Wakefield appraisal. While Downtown now asserts that the appraisal "has serious flaws"[FN52], the point is that, "[i]t is hard to imagine a good reason for the MEETH Board to agree to such a [reimbursement] term which allowed ...[Downtown/MSKCC] together to incur up to $1.6 million in expenses risk-free, while obtaining the East 64th Street property at a fire-sale price". This argument which was "cogent" to the Court of Appeals, although it declined "to make a legal determination" since it had not been addressed in the lower courts, is entirely persuasive to me, now that I have reexamined the record . Additionally, it is hard to imagine a good reason for the rush to sell (and there was none), in light of the appraisal's statement that a typical marketing period would be "approximately 12 months."

It is not whether the appraisal was flawed, as Downtown now urges, but whether the Board disregarded its own expert's opinion, as it did, in its hurry to sell the property at a price $5 million less than its own appraiser's minimum valuation. While Downtown further [*13]contends that such a "provision is similar to provisions routinely contained in corporate or commercial real estate transactions which require subsequent approvals or other contingencies"[FN53], and whether this is common or not with regard to non-profits, the point is that the analysis is from the viewpoint of MEETH, and from that viewpoint, the provision was neither fair nor reasonable. It had an higher minimum appraisal value; it had been told that the marketing period would be typically twelve months; yet it entered into an agreement which transferred all the risk from the buyer. This warrants the conclusion that I have reached.[FN54]

The second inquiry, is whether "the purposes of the corporation will be promoted" by the terms of the sale. First, the proposed sale itself, as I found in 1999, certainly did not promote MEETH's purposes, as stated in its Certificate of Incorporation, which were to operate an acute care, speciality teaching and research hospital dedicated to "plastic surgery" and to the treatment of persons suffering from diseases of the eye, ear, nose or throat." I then concluded that the transaction "involves a new and fundamentally different corporate purpose." In reaching this conclusion, of course, I was not focused on the reimbursement provision. However, my analysis is still relevant: it was clear to me, and I so wrote, that the Board's action violated its "duty of obedience", i.e., the obligation of charitable directors to "be faithful to the purposes and goals of the corporation". Again, it is appropriate to look at the challenged provisions through the same eyes that earlier examined the proposed sale transaction. And this leads to the conclusion that the provision did not promote the purposes of MEETH.

With the proposed sale to MSKCC/Downtown, the Board sought to transform the "purposes of the corporation". Had the Board not abdicated its fiduciary responsibility, there would have been no contract, and of course no such provision. This provision was crucial to Downtown, as made clear in an affidavit submitted, in opposition to this motion, by its real estate expert: "Had this provision not been included, it is [un]likely [FN55] that DDG [Downtown] or any other purchaser would have committed irrevocably to the purchase, and advanced a substantial down payment during a time of fiscal uncertainty until months or years later"[FN56]. This is reiterated by Downtown's counsel: "Both Associates and MSK have made clear that this provision was an essential element of the purchase arrangement and price"[FN57]. The Board was not [*14]advised of this provision [FN58]. But even if it had full knowledge, it would have approved a provision which, under the circumstances, did not promote the corporate purpose, as set forth in its Certificate of Incorporation.

If anything, this provision was designed to facilitate an improper change in the corporate purpose. It is no answer to contend, as Downtown argues, that if it "was error [for MEETH and MEETH's Board to enter into this contract] the mistake lay with MEETH and MEETH's Board, and any payments to Associates should be recovered ultimately against the Board (or its insurer) under the provisions of the NFPCL designed for that purpose".[FN59] The Court of Appeals did not hold that if the provision was improvident, nevertheless, Downtown would be entitled to reimbursement from MEETH, and that MEETH may have an action against the Board. Rather the Court explained that "judicial scrutiny protects not-for-profit organizations against board actions that might be adverse to the entity's well-being".[FN60] Required, on this remand, was that I "address the validity of the reimbursement provision."[FN61] Clearly, if the provision failed to meet the strictures of section 511, as it did not, than it is invalid, and Downtown is not entitled to reimbursement.

CONCLUSION Accordingly, for the foregoing reasons, the motion to dismiss is granted.

Dated:__________________

_____________________________________

J.S.C. [*15]

Footnotes

Footnote 1: Manhattan Eye, Ear & Throat Hospital v. Spitzer, 186 Misc 2d 126 (1999)(MEETH I).

Footnote 2:64th Associates, L.L.C. v. Manhattan Eye, Ear & Throat Hospital, 2 NY3d 585 (2004)(MEETH II)

Footnote 3:Paragraph 7. Pre-closing Cooperation (a) Prior to Closing, Seller shall, at its sole cost and expense, use all reasonable and best efforts, in good faith, to make all filings and applications and to give all notices and obtain all judicial, governmental and regulatory consents, approvals, orders, qualifications and waivers necessary or reasonably desirable in order to enable the Seller to sell and transfer the Property, including, without limitation (i) such consents, approvals or waivers, as the case may be, as required under the Public Health Law of the State of New York and regulations thereunder to authorize the Closing and sale of the Property, (ii) such judicial orders, consents, approvals or waivers, as the case may be, as required under the Not-for-Profit Corporation Law of the State of New York to authorize the Closing and sale of the Property and (iii) pursuing an appeal of any adverse decision under (i) or (ii). Nothing contained in this Paragraph 7, shall require Purchaser to accept and agree to any condition to the issuance of any consent, approval, order, qualification or waiver that is materially adverse to its interests. If purchaser is not willing to so agree to any condition to the issuance of any consent, approval, order, qualification or waiver that is materially adverse to its interests, than it shall be deemed that Seller was unable to obtain the approvals required under this Paragraph 7(a). Purchaser agrees to agree to any condition to the issuance of any consent, approval, order, qualification or waiver that is not materially adverse to its interests.

Footnote 4:Paragraph 19. Damages (a) In the event that this Agreement is terminated as a result of Purchaser's default, all payments made by Purchaser to Seller prior to such termination (including, without limitation, the Deposit delivered to the Escrow Agent), together with accrued interest, if any (the "Prior Payments"), shall be retained by seller as liquidated damages (and not as a penalty) as Seller's sole remedy (subject to the following) for all loss, damage and expense suffered by Seller, including, without limitation, the loss of their bargain, and neither party hereto shall have any further right or obligation to the other except for those which by the express terms hereof survive such a termination (and Purchaser's liability with respect to its indemnity obligations hereunder associated with Purchaser's pre-closing activities shall be in addition to the retention of the Prior Payments). Notwithstanding any provision of this Agreement to the contrary, in the event that Purchaser terminates this Agreement as a result of Seller's default (including failure to satisfy Seller's conditions precedent or Seller's failure to obtain the approvals set forth in Paragraph 7 hereof or Downtown elects to terminate pursuant to Paragraph 4(a) (and solely with respect to Downtown, if Seller terminates this Agreement with respect to Downtown as a result of the termination of the MSKCC Contract), then Purchaser shall have, as its sole and exclusive remedy, the right to have the Deposit returned along with accrued interest as well as be reimbursed for its out-of-pocket costs associated with this transaction up to a maximum of $200,000 in the aggregate with respect to MSKCC and $1,400,000 in the aggregate with respect to Downtown; provided however, that if Downtown terminates the Downtown Contract as a result of Seller not obtaining initial judicial approval (or initial Health Department approval with respect to the closing of the Hospital) on or before June 30, 2000, then the $1,400,000 reimbursement shall be decreased by $600,000 to a total aggregate of $800,000. As a condition to Seller making any such payments, Purchaser shall deliver to Seller copies of all documents in Purchaser's control related to the tax lot separation, variance, environmental due diligence, demolition as well as any other items related to the development of the Property which can be delivered without breaching a customary contractual obligation.

Footnote 5:Complaint (MEETH II) ¶ 53

Footnote 6:Complaint (MEETH II), ¶ 55

Footnote 7:Complaint (MEETH II), ¶ 58

Footnote 8:Complaint (MEETH II), ¶ 73

Footnote 9:301 AD2d 462 (1st Dept., 2003)

Footnote 10: By this time, Justice Gammerman had reached mandatory retirement age, and the case was re-assigned to me.

Footnote 11:Downtown, and other interested parties, had been permitted to intervene in the section 511 petition

Footnote 12: Tr. 29-30, 3/7/05

Footnote 13:The history of MEETH's now disapproved efforts to sell its 64th Street properties to Associates and MSKCC, and effect a fundamental change in its corporate purposes has been detailed in the findings of fact in my earlier decision and need not be repeated.

Footnote 14: Exhibits to Affidavit of William Josephson, Vol. I of II, Ex. 4

Footnote 15: October 7, 2005 letter from John W. McConnell, Esq. P.3

Footnote 16: Note 14, supra

Footnote 17:Index of 1999 Board Meeting Minutes, Ex. 2

Footnote 18:Index of 1999 Board Meeting Minutes, Ex. 3; Exhibits to Verified Petition, Ex. 10

Footnote 19:Index of 1999 Board Meeting Minutes, Ex. 4

Footnote 20:Affidavit of Thomas W. Ruggerio, Ex. 19

Footnote 21:Affidavit of Thomas W. Ruggerio, Ex. 12

Footnote 22:Index of 1999 Board Minutes, Ex. 5

Footnote 23:This refers to an Article 78 Petition (Index # 109692/1999), brought by the medical staff on May 10, 1999 to enjoin the proposed sale. I dismissed this petition on May 28, 1999.

Footnote 24:Index of 1999 Board Minutes, Ex. 6

Footnote 25:Exhibits to Verified Petition, Ex. 12

Footnote 26:Exhibits to Verified Petition, Ex. 4

Footnote 27:Exhibits to Affidavit of William Josephson, Vol. I of II (MEETH I), Ex. 7

Footnote 28:Exhibits to Affidavit of William Josephson, Vol. I of II (MEETH I), Ex. 8

Footnote 29:Note 20, supra

Footnote 30:Exhibits to Verified Petition, Ex. 13

Footnote 31:Exhibits to Affidavit of William Josephson, Vol. I of II, Ex. 16

Footnote 32:Exhibits to Affidavit of William Josephson, Vol. I of II, Ex. 17

Footnote 33:Affidavit of Thomas W. Ruggerio, Ex. 10

Footnote 34:Exhibits to Affidavit of William Josephson, Vol. I of II, Ex. 20

Footnote 35:Exhibits to Verified Petition, Ex. 16

Footnote 36:Index of 1999 Board Meeting Minutes, Ex. 6

Footnote 37:Exhibits to Affidavit of William Josephson, Vol. I of II, Ex. 22

Footnote 38:Exhibits to Affidavit of William Josephson, Vol. I of II, Ex. 24

Footnote 39:Exhibits to Affidavit of William Josephson, Vol. I of II, Ex. 25

Footnote 40:Exhibits to Affidavit of William Josephson, Vol. I of II, Ex. 28

Footnote 41: The contract is dated "June 25, 1999."

Footnote 42:Index of 1999 Board Minutes, Ex. 7

Footnote 43:Index of 1999 Board Meeting Minutes, Ex. 8

Footnote 44:Exhibits to Affidavit of William Josephson, Vol. II of II (MEETH I), Ex. 36

Footnote 45: 2 NY3d supra at 592

Footnote 46: CPLR 3211

Footnote 47:Cf. CPLR 3212 ( c) and see, 2 Haig, Commercial Litigation in New York State Courts (2nd ed., 2005), §7.66.

Footnote 48:Although Scott Sabbagh, a member of 64th Development Associates LLC, which is a member of Downtown, averred that "[t]he Provision was the subject of extensive negotiation among the parties" (McConnell Affirmation, Ex. 4 [Sabbagh Aff., ¶ 9), there is no indication that the Board had been so advised. However, as discussed in the text, my decision does not turn exclusively on the Board's knowledge or lack of knowledge of the provision.

Footnote 49: Note 42, supra

Footnote 50:September 27, 2005 letter from Sandra Giorno-Tocco, Esq., Assistant Attorney General, Charities Bureau

Footnote 51: Id. at p. 4

Footnote 52: Supra Note 12.

Footnote 53:McConnell Affirmation, Ex. 4 [Sabbagh Aff., ¶ 4)

Footnote 54:I have considered and rejected Downtown's other arguments on this prong of the test.

Footnote 55: This is obviously a typographical error; clearly intended to read "unlikely".

Footnote 56:McConnell Affirmation, Ex. 4 [Barenholtz Aff., ¶ 10; see also Sabbagh Aff. ¶ 9)

Footnote 57: Memorandum in Opposition to the Motion to Dismiss the Complaint, p. 31

Footnote 58:This finding that the Board was unaware of the provision, is further supported by events following the signing of the contract: MEETH's Board continued to accept and evaluate alternate proposals for the sale of its real estate; and at no time was there any indication that the Board was aware that if it had accepted an alternate proposal, and terminated the MSKCC/Downtown contract, it was exposing itself to reimbursement damages amounting to as much as $1.6 million. For example, at the July 26th Board meeting, while Mr. Scibetta advised the Board that one of the offers "would require breaking its contract", there was no mention that in doing so, MEETH would become obligated to pay up to $1.6 million.

Footnote 59: Memorandum in Opposition to the Motion to Dismiss the Complaint, p. 8

Footnote 60: 2 NY3d supra at 591

Footnote 61: 2 NY3d supra at 592