Nicholas v. Kahn

• Decision Date: 26 April 1979
• Citation: 47 N.Y.2d 24,389 N.E.2d 1086,416 N.Y.S.2d 565
• Parties: , 389 N.E.2d 1086 In the Matter of Edward NICHOLAS et al., Respondents, v. Alfred E. KAHN, as Chairman of the Public Service Commission and Administrative Head of the New York State Department of Public Service, et al., Appellants. In the Matter of Howard J. READ, Respondent, v. Alfred E. KAHN, as Chairman of the Public Service Commission of the State of New York, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 565

416 N.Y.S.2d 565

47 N.Y.2d 24, 389 N.E.2d 1086

In the Matter of Edward NICHOLAS et al., Respondents, v. Alfred E. KAHN, as Chairman of the Public Service Commission and Administrative Head of the New York State

Department of Public Service, et al.,

Appellants.

In the Matter of Howard J. READ, Respondent, v. Alfred E. KAHN, as Chairman of the Public Service Commission

of the State of New York, Appellant.

Court of Appeals of New York.

April 26, 1979.

Peter H. Schiff and Charles R. Gibson, Albany, for appellants

Michael J. Smith, Albany, for Edward Nicholas and others, respondents.

Garry, Cahill, Edmunds & Breslin, Albany, for Howard J. Read, respondent.

OPINION OF THE COURT

COOKE, Chief Judge.

Respondents, Chairman of the Public Service Commission, and the State Department of Public Service, appeal from orders of the Appellate Division which unanimously granted summary judgment to petitioners, employees of the commission. The judgments declared the "Rules with respect to Personal Investments by Employees of the Public Service Commission and Public Service Department" promulgated by the chairman unconstitutional. In essence, those rules prohibit commission employees, their spouses and minor children from owning any interest in certain business concerns whose performance is related, at least in part, to companies regulated by the commission. A limited class of employees and their families are entitled to apply for an exemption from the operation of the rules.

The threshold issue presented is whether the authority to promulgate these rules was delegated to the chairman by the Legislature. Should that inquiry be answered in the affirmative, the remaining question is whether the exemption procedures contained in the rules articulate objective standards so that an aggrieved employee may seek meaningful judicial review of an adverse determination by the chairman.

The orders of the Appellate Division should be modified. Under the code of ethics for State officers and employees (Public Officers Law, § 74) and its enabling legislation (Executive Law, § 74), the Legislature has recognized that the task of implementing and defining the ethical considerations set forth in the statute are to be vested in the person ultimately responsible for the performance of the commission's functions its chairman (see Public Service Law, § 3; 48 N.Y.Jur., Public Utilities, § 10, p. 457). While it is true that an administrative agency possesses no inherent legislative power, it may constitutionally exercise its authority by promulgating rules within the boundaries of its legislative delegation. Those rules prohibiting commission employees and their families from investing in certain companies are well within the legislative delegation and are therefore valid.

However, that portion of the rules pertaining to the right of an employee to secure an exemption from their operation vests that decision in the unfettered discretion of the chairman. As presently drafted, this segment of the rules contains no criteria to guide the chairman in determining whether to grant an exemption, thereby circumventing the procedural safeguards available to those applying for an exemption through judicial review. Thus, because of the lack of guidelines any denial of an exemption by the chairman was arbitrary and capricious as a matter of law. Accordingly, the rules may not be applied, in their present form, to those employees who have heretofore sought an exemption until such time as a valid exemption rule is promulgated or the chairman determines that no exemptions from the operation of the rules are warranted.

Seeking to avoid both actual conflicts of interest and the very appearance of conflicts by employees of the Public Service Commission and Department of Public Service, respondents adopted eight rules governing the personal investments of these employees and their immediate families. The rules prohibit these persons from holding any interest, direct or indirect, in five categories: ¹ Rule 1, companies subject to the jurisdiction of the commission; Rule 2, out-of-State utility companies not subject to the jurisdiction of the commission; Rule 3, manufacturers and suppliers of major electric utility equipment; Rule 4, companies which sell utility fuels; and, Rule 5, suppliers and manufacturers of telephone terminal equipment or specialized communications carriers. Rule 6 authorizes any person employed by the commission before the effective date of the rules to seek an exemption from the operation of Rules 2 through 5 on behalf of himself, his spouse or unemancipated children. Rules 7 and 8 deal with enforcement and violations of Rules 1 through 5.

Following the effective date of the rules, each of the petitioners sought exemptions. Those requests were initially rejected by the secretary of the commission and then by the chairman upon administrative appeal. These article 78 proceedings ensued. In support of their contentions that the rules are invalid, petitioners argue that the Legislature has not delegated the chairman authority to regulate the outside investments of commission employees and that the promulgation of the rules constituted an administrative usurpation of legislative prerogatives. We disagree.

Initially we note that, aside from the separation of powers and delegation arguments raised by petitioners, no one contends that the commission does not have a vital interest in regulating the outside investments of its employees (cf. Rapp v. Carey, 44 N.Y.2d 157, 165, 404 N.Y.S.2d 565, 569, 375 N.E.2d 745, 749; Evans v. Carey, 40 N.Y.2d 1008, 391 N.Y.S.2d 393, 359 N.E.2d 983). The real problem in any of these situations is to strike the delicate balance between the interest of the employee in managing his or her investment portfolio or outside business activities and the interest of the administrative body in promoting the efficiency of the services it must necessarily perform through human agencies. By statute (Executive Law, § 74, subd. 2, par. (c)), that determination is vested with the chairman, whose expertise in both the nature of duties of commission employees and the problems inherent in the functioning of the agency render him particularly well suited to accomplish this task. Although the commission is free to strike a different balance, if it so chooses, the approach that has been taken is sustainable.

It is fundamental that employees of any State agency must administer the law in accordance with the will of the Legislature, rather than in accordance with their own will or with an eye toward the viability of their investments. They are charged with the duty of administering the law without bias or favoritism and in complete disregard of their own personal interests. The major point of the rules now under attack is to eradicate this possibility by ensuring that such favoritism, however subtle or unconscious that partiality may be, is eliminated. Equally important, there is yet another consideration underlying the administrative judgment. It is not only essential that the commission and its employees in fact avoid basing their decisions on personal financial considerations, it is also critical that they appear to the public to be avoiding that evil. Connotations of favoritism, whether justified or not, inevitably arise where those who regulate have a direct or indirect interest in that which they regulate. Resort to any other path would effectively erode the public's confidence in its agents.

Irrespective of the wisdom or advisability of the rules, it must be determined whether the chairman was delegated the power to promulgate them by the Legislature. For in the absence of such delegation, the administrative action would constitute an unauthorized exercise of legislative power in contravention of the separation of powers doctrine (Rapp v. Carey, 44 N.Y.2d 157, 162, 404 N.Y.S.2d 565, 567, 375 N.E.2d 745, 747, Supra; Matter of Broidrick v. Lindsay, 39 N.Y.2d 641, 646, 385 N.Y.S.2d 265, 267, 350 N.E.2d 595, 597; People ex rel. Ingenito v. Warden & Agent of Auburn Prison, 267 App.Div. 295, 299-300, 46 N.Y.S.2d 72, 75-76, affd. 293 N.Y. 803, 59 N.E.2d 174).

It is elementary that ours is a system in which the governmental powers are distributed among three branches the executive, legislative and judicial (N.Y.Const., art. III, § 1; art. IV, § 1; art. VI). It is equally obvious that one of these branches may not arrogate unto itself the powers residing wholly in another branch (Youngstown Co. v. Sawyer, 343 U.S. 579, 72 S.Ct. 863, 96 L.Ed. 1153). Although oftentimes combining legislative, executive and judicial functions, administrative agencies are but creatures of the Legislature and are possessed only of those powers expressly or impliedly delegated by that body (Finger Lakes Racing Assn. v. New York State Racing & Wagering Bd., 45 N.Y.2d 471, 480, 410 N.Y.S.2d 268, 273, 382 N.E.2d 1131, 1135; Matter of City of Utica v. Water Pollution Control Bd., 5 N.Y.2d 164, 168-169, 182 N.Y.S.2d 584, 586-587, 156 N.E.2d 301, 303-304).

That the Legislature cannot delegate its lawmaking power to an administrative agency is a principle firmly rooted in the system of government ordained by our Constitution. At the same time, however, there is a manifest distinction between the legislative power to be exercised only by that body and an ancillary power to implement the policies enacted into law (see, generally, Martin v. State Liq. Auth., 43 Misc.2d 682, 686, 252 N.Y.S.2d 365, 369, affd. 15 N.Y.2d 707, 256 N.Y.S.2d 336, 204 N.E.2d 496). The cornerstone of administrative law is derived from the principle that the Legislature may declare its will, and after fixing a primary standard, endow administrative agencies with the power to fill in the interstices in the legislative product by prescribing rules and regulations consistent with the enabling legislation (see, e. g., Matter of Bates v. Toia, 45 N.Y.2d 460, 464, 410 N.Y.S.2d 265, 267, ...