MANHATTAN EYE, EAR v. Spitzer

• Decision Date: 03 December 1999
• Citation: 715 N.Y.S.2d 575,186 Misc.2d 126
• Court: New York Supreme Court
• Parties: In the Matter of MANHATTAN EYE, EAR & THROAT HOSPITAL, Petitioner, and MEMORIAL SLOAN KETTERING CANCER CENTER et al., Intervenors,<BR>v.<BR>ELIOT SPITZER, as Attorney General of the State of New York, Respondent, and BOARD OF SURGEON DIRECTORS of MANHATTAN EYE, EAR & THROAT HOSPITAL et al., Intervenors.

186 Misc.2d 126
715 N.Y.S.2d 575

In the Matter of MANHATTAN EYE, EAR & THROAT HOSPITAL, Petitioner, and MEMORIAL SLOAN KETTERING CANCER CENTER et al., Intervenors,
v.
ELIOT SPITZER, as Attorney General of the State of New York, Respondent, and BOARD OF SURGEON DIRECTORS of MANHATTAN EYE, EAR & THROAT HOSPITAL et al., Intervenors.

December 3, 1999.

LeBoeuf, Lamb, Greene & MacRae, L. L. P. (Peter K. Vigeland, John M. Aerni and Patricia A. Taylor of counsel), for

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petitioner.

Eliot Spitzer, pro se, and William Josephson, J. Robert Pigott and Sandra Giorno-Tocco of counsel), for Eliot Spitzer, respondent.

Paul, Weiss, Rifkind, Wharton & Garrison (Michael P. Gutnick and Steven B. Rosenfeld of counsel), for Memorial Sloan Kettering Cancer Center, intervenor.

Wachtel & Masyr, L. L. P. (John W. McConnell of counsel), for Downtown Development Group/Colony Capital, intervenor.

Stillman & Friedman, P. C. (Charles A. Stillman, Scott M. Himes and Peter E. Dolotta of counsel), for Board of Surgeon Directors of Manhattan Eye, Ear & Throat Hospital and another, intervenors.

McDermott, Will & Emory (Andrew B. Roth of counsel), for Lenox Hill Hospital, intervenor.

Swidler, Berlin, Shereff, Friedman, L. L. P. (Kevin O'Brien and Heather Gottry of counsel), for Continuum Health Partners, Inc., intervenor.

Levy, Ratner & Behroozi, P. C. (Elizabeth A. Baker of counsel), for 1199 National Health & Human Service Employees Union, intervenor.

OPINION OF THE COURT

BERNARD J. FRIED, J.

The Manhattan Eye, Ear & Throat Hospital (MEETH or the Hospital) has petitioned for authorization to sell substantially all of its assets, pursuant to Not-For-Profit Corporation Law § 511, which requires that the court be satisfied that the "consideration and the terms of the transaction are fair and reasonable" and that the "purposes of the corporation * * * will be promoted." (Not-For-Profit Corporation Law § 511 [d].) What is sought to be sold is MEETH's hospital facility located at 64th Street in Manhattan to Memorial Sloan Kettering Cancer Center (MSKCC) and Downtown Group/Colony Capital (Downtown), a real estate developer. The Honorable Eliot Spitzer, in his capacity as Attorney General of the State of New York (AG), a statutorily necessary party, has opposed this petition. A 13-day evidentiary hearing was held which, with the agreement of all parties, merged the preliminary injunction application with the hearing on the merits of the section 511 petition.

Findings of Fact A. Manhattan Eye, Ear & Throat Hospital

Established in 1869, originally located on East 34th Street, and then on East 41st Street, MEETH relocated to its present East 64th Street location in 1906, where it ultimately erected three buildings: the Old Hospital Building, the New Hospital

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Building and the Annex. At this location, it presently operates a highly sophisticated research and teaching (until it terminated its residency program on June 30, 1999), world-renowned, acute care specialty hospital, providing outpatient and inpatient medical services in three specialized areas: ophthalmology, otolaryngology, and plastic surgery. In February 1995, MEETH opened an Outpatient Extension Center in Harlem (the Harlem Center), which, unlike the 64th Street facilities, does not provide inpatient care. Instead, it currently functions similarly to the outpatient clinic at 64th Street, and refers patients to 64th Street, for subspecialty clinics and surgery.

According to its certificate of incorporation, MEETH's corporate purposes are: "to establish, provide, conduct, operate and maintain a hospital in the City, County and State of New York for the general treatment of persons suffering from acute short-term illnesses; performing general plastic surgery; treating persons suffering from diseases of the eye, ear, nose or throat; and maintaining a school for post graduate instruction in the treatment of such illnesses, performing such surgery, and the treatment of such diseases, and conducting associated and basic research."

By all accounts, MEETH has outstandingly realized these corporate purposes. In order to fulfill its teaching purposes, it developed premier residency programs in the fields of ophthalmology and otolaryngology, as well as a premier fellowship program in aesthetic or plastic surgery. It has consistently been ranked among the top specialty hospitals in the United States. Its physicians have achieved world acclaim for their advancements in medical care and for their provision of acute care in these specialty areas. As to this there is no dispute.

In recent years there have been significant advances in medical technology, and an upheaval in the dynamics and economics of health care. The impact of these changes has not escaped specialty hospitals, such as MEETH. Inpatient censuses have been drastically decreasing, a trend which is expected to continue, if not accelerate, with the ongoing shifts to ambulatory surgery. Concomitant with the reduction of inpatient activity, which phenomenon itself has resulted in the reduction of hospital revenues, there have been fundamental changes in hospital economics. This, too, has impacted MEETH, which derives its revenues from several sources, including self-paying patients, reimbursements from Medicare, Medicaid and private heath care insurers, and charitable contributions. The Balanced

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Budget Act of 1997 (Pub L 105-33, 111 US Stat 251) has resulted in a reduction of Medicare revenues. There have also been similar reductions in reimbursements from State Medicaid and private health care insurers. This containment of medical expenses, spawned in no small part by the advent of managed care, which has decreased inpatient admission in favor of ambulatory surgery, and other cost-cutting measures, is not expected to abate.

MEETH sought to cope with this changed landscape. In 1993, the hospital obtained approval to decertify beds and to establish six additional operating rooms for ambulatory surgery. In 1995, it opened its Harlem Center as a community outreach program, which also served to funnel patients to 64th Street. Dr. George A. Sarkar, Ph D, J.D., MEETH's Executive Director, sent to the Board members a "proposed strategic plan," dated November 4, 1998, in which he discussed the "Sale or Lease of the Annex Building" and establishment of the proposed Brooklyn Extension Center (Brooklyn Center). Thereafter, in December 1998, MEETH applied to the State Department of Health (DOH) for authorization to open the Brooklyn Center. In its application, MEETH explained that it "is a specialty hospital located * * * at east 64th Street." Although approved, the Brooklyn Center has not been opened.

Then in 1999 MEETH's Board of Directors abruptly decided to sell the 64th Street facility to MSKCC and Downtown; to terminate its residency programs; to close the Hospital; to transform the Harlem Center and the planned Brooklyn Center from extension centers to free-standing Diagnostic and Treatment (D&T) Centers; and to eventually add further D&T Centers in the South Bronx. Following these decisions, MEETH entered into a nonbinding "Memorandum of Understanding" for a sponsorship agreement with New York-Presbyterian Hospital (NYPH), under which NYPH would become MEETH's sole corporate member. Implementation of these plans necessitated the sale of the 64th Street facility, i.e., substantially all of the assets of MEETH, and led to this litigation.

B. "Friends of MEETH" Letter

On October 22, 1998, the Board of Directors received a confidential memorandum, "Re: Crisis at MEETH," from "a group of physicians practicing at Manhattan Eye, [Ear] and Throat Hospital comprising substantially all of the members of the medical staff * * * an informal group known as the `Friends of MEETH.'" This memorandum stated that there was a "crisis at MEETH," discussed a host of problems and

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recommended "that the Board of Directors, in keeping with its fiduciary responsibility to the Hospital, appoint an independent hospital consulting firm to examine the operations of MEETH in their entirety." Upon receipt of this memorandum, Mr. Lindsay C. Herkness, III, the Board President, contacted Dr. Sherrell Aston, Chairman of the Plastic Surgery Department, and requested that they meet "immediately." Mr. Herkness stated that "[the Friends of MEETH letter] is a bad document, a dangerous document, that could be harmful to both the physicians and the hospital" and asked Dr. Aston "to use [his] influence on the medical staff to withdraw it." When Dr. Aston refused, Mr. Herkness replied if "you guys give me a hard time and don't do that, I'm going to sell the hospital." Mr. Herkness did not deny that he made the remark. Rather, he testified that he did not "recall anything about selling the hospital. It was not on my mind."

Thereafter, Mr. Herkness appointed a Special Committee, consisting of himself, Charles S. Whitman, III, Esq., and Mr. Norman Straus, to "look into the matters raised in the memorandum and to report to the full Board." Mr. Herkness testified that there "was a great deal of concern about the allegations and the need to get to the bottom of it." Deloitte & Touche L. L. P., the Hospital's auditors, were retained to review the financial concerns expressed in the Friends of MEETH letter. In addition, the Special Committee directed the Hospital staff to respond, point-by-point, and the Committee had informal meetings with members of the medical staff.

On December 16, 1998, there was a Board meeting where members of the medical staff were invited to express their views. As Secretary of the Board, Mr. Whitman prepared one page of minutes from the staff notes, which merely mentioned that the physicians in attendance were allowed to state their concerns, but it did not indicate the nature of the statements. Mr. Whitman explained that "[a]s a corporate lawyer you manage to keep your Board of Directors minutes sanitized." It...