Consumers Union of U.S., Inc. v. State

R.S. Smith, J.

(dissenting in part). Suppose an ordinary private charity—say an art museum—found itself in the position of Empire here: unable to continue operating, but able to realize a large sum by selling its franchise or “going concern” value to private investors. Suppose the charity asked the State to allow the sale so that the charity could dissolve and turn the sales proceeds over to a new charitable entity that would continue to advance the old charity’s purposes. Suppose the State answered by saying: “You can do it, but only 5% of the money can go to charity. The rest must be used for public purposes.” And suppose further that the public purposes on which the State chose to spend the charity’s money were worthy objects quite different from the charity’s goals—the construction of a new prison, for example, or the retirement of state debt. Can anyone doubt that, on these hypothetical facts, there would be a taking of private property for public use without just compensation?

This case differs from my hypothetical in two ways: first, Empire is not an ordinary private charity; and secondly, the purposes chosen by the State for the use of Empire’s property are not completely remote from the purposes of Empire. I conclude, for reasons I explain below, that these two distinctions do not justify dismissal of plaintiffs’ complaint as insufficient on its face, and I therefore dissent from the result the majority reaches.

What troubles me more than the result in this admittedly close case, however, is that the majority, in upholding Chapter 1 *377 of the Laws of 2002, does not rely wholly on the two factors I have mentioned—the peculiar nature of Empire and the uses to which the State is putting Empire’s money. Some parts of the majority’s reasoning sweep more broadly, and would seem to justify upholding the hypothetical state action I have described. In other words, under the majority’s reasoning, the State might, in circumstances like these, compel the use of 95% of an art museum’s money for prison construction. I think these parts of the majority opinion are unnecessary to its result, and may cause trouble in future cases.

To decide the validity of Chapter 1 of the Laws of 2002 under the Takings Clauses of the federal and state constitutions, I find it necessary to address three questions: (1) Is the property of Empire private property? (2) If so, is the State free, under the Takings Clauses, to demand as much of that property as it wants in exchange for allowing Empire to sell its assets to a profit-making entity? (3) If the State is not free to demand all it wants, does Chapter 1 demand more than the Takings Clauses permit? I answer yes to the first question and no to the second. I conclude that the third question cannot be answered definitively on the face of the statute.

I. Is Empire’s property private?

As the majority opinion points out, Empire differs in many ways from a typical private charity. One difference is that Empire has had a more intimate relationship with, and has derived more benefit from, the state government than most private, nonprofit entities. The State, recognizing the important purposes that Empire has served, has repeatedly intervened to keep it afloat, allowing it to collect from hospitals at favorable rates, giving it a large outright subsidy, and imposing limits on Empire’s competitors (see majority op at 340-341). The majority does not assert, however, that these facts make Empire into a public or quasi-public entity, or that they lessen the protection afforded to Empire’s property under the Takings Clauses. Thus, for the majority, it seems that Empire’s previous relationship with the State is simply background that, while it may make the taking of Empire’s property by the State seem less offensive, is not directly relevant to the constitutional issue.

I agree that prior acts of government favoritism to Empire are constitutionally irrelevant; they do not make Empire’s prop *378 erty any less private. I know of no authority holding that the private nature of property is destroyed or diluted because of previous government benefits its owner has received, and I think it would be unwise to create, for Takings Clause purposes, a special category of government dependents whose property is not really their own. The State did not have to help Empire in the ways it did, and it could have attached more conditions to the help it gave; it could, for example, have required that the hundred million dollar cash subsidy given in 1993 be paid back if Empire were to dissolve. But the Legislature imposed no such requirement, and it is not free to say to Empire, in effect, “I am taking your property now because I saved your life back then.” There may be farmers in this country who have been able to remain in business for years or decades because of government subsidies—but their farms are still their farms, and the government cannot take them without paying just compensation.

The majority mentions some other factors that distinguish Empire from an ordinary private charity, but these seem to me more clearly irrelevant. Surely Empire is not less a private entity because it was, for federal tax purposes, a “social welfare” organization under Internal Revenue Code (26 USC) § 501 (c) (4), rather than a “charitable” organization under section 501 (c) (3) (majority op at 339, 356). And the fact that Congress stripped Empire of its tax exemption because it found its activities too “commercial” (majority op at 340) weighs, if anything, on the side of making Empire that much more private.

In short, I conclude that Empire’s property is private, and entitled to the same constitutional protection from uncompensated taking as any other private property.

II. Can the State demand as much of Empire’s property as it wants, in exchange for allowing conversion?

The majority opinion implies that Chapter 1 is not problematic because it gives Empire a choice. Empire, the majority notes, was not legally required to “convert” to profit-making status (more precisely, to transfer its assets to a profit-making entity in exchange for stock, and then sell the stock to the public and dissolve). “Chapter 1 does not compel Empire to convert. . . . [Conversion only takes place if Empire so chooses” (majority op at 357). The majority acknowledges that Empire may have had no choice as a practical matter, but adds that “any duress stemmed from Empire’s inability to prosper as a not-for-profit organization, not from pressure exerted by the State” {id. at 358).

*379 The United States Supreme Court has made clear, however, that the Takings Clause limits a state’s power to acquire private property by inducing the owner to surrender it in exchange for a needed government authorization. Nollan v California Coastal Comm’n ( 483 US 825 [1987]) involved homeowners who needed a permit from the California Coastal Commission to rebuild their home. The Commission granted permission, but only on condition that the Nollans allow the public an easement to pass across their property. The Supreme Court held that this was a taking, relying on the lack of an “essential nexus” between the condition attached to the government permit and the purpose that could have been served by refusing permission ( 483 US at 836-837 ). In the absence of such a nexus, the Supreme Court said, the State’s restriction on the Nollans’ right to rebuild their home amounted to “ ‘an out-and-out plan of extortion’ ” (id. at 837, quoting J.E.D. Assoc., Inc. v Town of Atkinson, 121 NH 581, 584, 432 A2d 12, 14 [1981]). In Dolan v City of Tigard ( 512 US 374 [1994]), the Supreme Court added a “rough proportionality” requirement to the “essential nexus” test. Even where a nexus existed, the Court held, the surrender of property that the state demands as a condition to permitting the development of land must be roughly proportional to the adverse impact that can be expected from the development.

These “exactions” cases refute the idea that, since the State was free to refuse to allow Empire’s conversion, it was also free to allow it on condition that Empire give the State a 95% share of the proceeds. Defendants do not argue here, and the majority does not hold, that such a blatant holdup (more blatant than what actually happened in this case) could pass muster under the exactions cases—but the State does argue, and the majority seems to agree, that exactions analysis has no place outside the land-use context. (Majority op at 355 [“We decline ... to expand our exaction analysis beyond the realm of land-use regulation”].) The implication, presumably, is that no “plan of extortion” by the State, no matter how gross, is invalid under the Takings Clause unless it is an interest in real property that is being extorted. This suggestion seems to me both unacceptable in principle and inconsistent with the Supreme Court’s exactions decisions.

It is true that the Nollan and Dolan cases involve land use; indeed, many, probably most, takings cases involve real property. But the relevant clauses of the state and federal constitutions apply to real and personal property alike (see e.g. Phillips *380 v Washington Legal Foundation, 524 US 156 [1998]). I know of no precedent suggesting that the cash in a private bank account is subject to less protection under the Takings Clauses than a private house or tract of land. Different kinds of property sometimes call for different rules, of course, and it may well be that in cases not involving land use the details of the Nollan and Dolan nexus and proportionality tests will be modified, but it is unthinkable that the Constitution provides no protection at all against exactions of personal property.

Nothing in the Supreme Court’s exactions decisions suggests that their rationale is limited to real property. Indeed, the Nollan case shows that it is not so limited in its discussion of Ruckelshaus v Monsanto Co. ( 467 US 986 [1984]), a case involving not real property but trade secrets. The dissent in Nollan argued that Nollan was similar to Monsanto (Nollan, 483 US at 859 ), while the majority distinguished Monsanto (Nollan, 483 US at 833 n 2)—but neither suggested that Monsanto was inapplicable because it was not a land-use case. Thus, both the majority and the dissent in Nollan assumed that like reasoning was applicable to real and personal property. And in Dolan , the Court made clear that the rules governing exactions are derived not from any peculiar characteristics of land-use cases but from “the well-settled doctrine of ‘unconstitutional conditions,’ ” which limits the government’s power to require surrender of a constitutional right “in exchange for a discretionary benefit conferred by the government” (Dolan, 512 US at 385 ).

Nor does our decision in Matter of Smith v Town of Mendon ( 4 NY3d 1 [2004]) imply that exactions analysis is inapplicable where no real property is involved. Town of Mendon did involve real property, and our discussion in that case focused on whether the Town’s invasion of the Smiths’ interest in real property was sufficient to trigger exactions analysis. We concluded that it was not because the Town had not required “the physical dedication of property to public use” but only “more modest conditions on development permits” (id. at 12).

I thus conclude that exactions analysis applies here; it would be unconstitutional for the State to require, as a condition to allowing Empire’s conversion, that Empire pay 95% of its assets to the State or to whatever recipients the State found worthy. I cannot believe that the majority, despite some of the language in its opinion, would reach a different conclusion. Requiring the turning over of most of a private entity’s wealth is not what we called in Town of Mendon a “modest” condition to a needed *381 governmental permission. The critical question, to which I now turn, is whether what actually happened here is fundamentally different from such a blatant, unconstitutional exaction.

III. Has the State taken Empire’s property?

In addressing the question of whether Chapter 1 provides for an unconstitutional exaction, I proceed by successively refining the question. First, I conclude that Chapter 1 is unconstitutional under the Takings Clauses if, but only if, a similar statute that unconditionally compelled the same uses of Empire’s property would be unconstitutional. Secondly, I conclude that that question in turn depends on whether the compelled uses destroyed Empire’s “investment-backed expectations.” Finally, I conclude that the answer to that question turns on whether the uses provided for by the statute are reasonably consistent with the purposes of Empire. To this last restatement of the question, I find no clear answer on the face of Chapter 1, and I would therefore hold that further development of the facts is necessary.

Where a purportedly voluntary transaction is challenged under the Takings Clauses as an unconstitutional exaction, a preliminary step in the analysis is to consider whether the transaction, if involuntary, would be a taking of the property. Thus, in Nollan the Supreme Court began by saying that if the State had “simply required the Nollans to make an easement across their beachfront available to the public ... we have no doubt there would have been a taking” (Nollan, 483 US at 831 ); the Court then inquired whether the transaction was a taking in view of its imposition as an exaction in response to a permit request. Here, then, the preliminary step is to consider whether there would have been a taking if the State had simply required Empire to distribute its assets as Chapter 1 provides, without offering Empire even the theoretical possibility of forgoing the conversion and continuing the status quo.

In this case, I believe, this preliminary step turns out to be decisive for the exactions analysis: if an involuntary transaction would have been a taking, the purportedly “voluntary” nature of this transaction, i.e., its imposition as an exaction, does not save it. Plaintiffs claim, in essence, that the uses of Empire’s assets that Chapter 1 requires are the equivalent of transferring 95% of Empire’s assets to the state treasury. If plaintiffs are right in this—or even if the correct percentage is as low as 60%—plaintiffs should win the case. If it is correct that Chapter *382 1 outside the exactions context would effect so enormous a taking, then the exactions analysis is collapsed. It seems impossible to argue, and no one does argue, that an exaction on such a scale could pass either the “nexus” and “rough proportionality” tests of Nollan and Dolan , or whatever counterpart to those tests might be applied to an exaction not involving real property. (The majority does offer an exactions analysis, which I discuss below, but that analysis does not accept the premise that the State is effectively acquiring most of Empire’s assets.)

Thus, the dispositive issue is whether it would be a taking of property for the State to compel Empire, quite apart from any conversion plan, to distribute its assets in the way provided for by Chapter 1. The Supreme Court’s recent summary of takings jurisprudence in Lingle v Chevron U.S.A., Inc. ( 544 US 528 , 125 S Ct 2074 [2005]) provides a framework for approaching that question. Lingle identifies three categories of taking: a per se taking, i.e., a “direct government appropriation or physical invasion of private property” (544 US at —, 125 S Ct at 2081 ), exemplified by Loretto v Teleprompter Manhattan CATV Corp. ( 458 US 419 [1982]); and two kinds of “regulatory taking”— one exemplified by Lucas v South Carolina Coastal Council ( 505 US 1003 [1992]), in which a regulation “completely deprive[s] an owner of all economically beneficial us[e]’ of her property” (Lingle, 544 US at —, 125 S Ct at 2081 , quoting Lucas, 505 US at 1019 [emphasis in Lucas]); and another involving a regulation that, though not destroying the property’s value to the owner completely, is “so onerous that its effect is tantamount to a direct appropriation or ouster” (Lingle, 544 US at —, 125 S Ct at 2081 ). Regulatory takings challenges in this last category are governed by the standards set forth in Penn Central Transp. Co. v New York City ( 438 US 104 [1978]; Lingle , 544 US at —, 125 S Ct at 2081-2082 ). Penn Central lists a number of factors to be used in evaluating claimed regulatory takings; primary among these, the Court noted in Lingle , are “ [t]he economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations’ ” (Lingle, 544 US at —, 125 S Ct at 2081-2082 , quoting Penn Central, 438 US at 124 ).

In Nollan and Dolan , the Court found that the dedications of landowners’ property, if they had been imposed outside the exactions context, would have been per se takings. In this case, the requirements of Chapter 1, if imposed outside the exactions *383 context, would arguably be a regulatory taking and the issue of what Penn Central called “investment-backed expectations” should be decisive. The word “investment” may seem awkward in discussing the expectations of a not-for-profit entity, but I think the meaning of “investment-backed expectations” in this context is simply Empire’s reasonable expectations as to the future use of its property. It seems clear that if Chapter 1 does not interfere with Empire’s reasonable expectations there has been no taking. On the other hand, if these expectations are contradicted as to a large enough portion of Empire’s property, a Penn Central-type taking has occurred, even assuming that there is no per se (Loretto) or “total” regulatory (Lucas) taking.

The question thus boils down to whether Chapter 1 is consistent with Empire’s reasonable expectations for the use of its property. It is true that, in the situation it faced when Chapter 1 was passed, Empire could not have expected to keep its money in its own bank account—or, indeed, to have continued in existence as a going concern. Empire was no longer viable as a nonprofit health insurance provider. Empire could expect, however, that its assets would be protected by some limitation similar to the “quasi cy pres” requirement embodied in Not-For-Profit Corporation Law § 1005 (a) (3) (A). That statute says that assets of a “Type B” not-for-profit corporation like Empire shall be distributed after dissolution to “organizations engaged in activities substantially similar to those of the dissolved corporation.” (See also Matter of Multiple Sclerosis Serv. Org. of N.Y. [New York City Ch. of Natl. Multiple Sclerosis Socy.], 68 NY2d 32 [1986].) While defendants point out, correctly, that the Legislature was not constitutionally prohibited from altering the N-PCL 1005 standard, it was not free to destroy Empire’s expectations entirely. Empire had a right to expect that any assets remaining after its debts were paid would be used in a way reasonably consistent with the purposes for which Empire existed. This is the sense in which the property of a charity or other not-for-profit entity is “private” property; although the owner of the property may not use it for personal gain, it has a right to the continuing dedication of the property to certain purposes (see Illinois Clean Energy Community Found, v Filan, 392 F3d 934, 937 [7th Cir 2004]) [observing, in a discussion of the taking of a charitable foundation’s property, that “claims of unconstitutional taking are matters of expectation”]).

Empire’s purposes are specified in article 43 of the Insurance Law. Under Insurance Law § 4301 (a), Empire existed “for the *384 purpose of furnishing medical expense indemnity ... to persons . . . covered under contracts with” Empire. Under Insurance Law § 4301 (j) (1), Empire was “maintained and operated for the benefit of its members and subscribers.” In short, Empire’s general purpose was to help meet the public need for affordable health care coverage, and it could reasonably expect that, after its dissolution, its remaining assets would be devoted to that purpose or something reasonably close to it.

In accordance with those expectations, Empire’s original restructuring plan called for its existing value, including the proceeds of the public offering, to be transferred to a charitable foundation “dedicated to promoting the availability and accessibility of high quality health care and related services to the people of the State of New York.” This plan was approved by the Superintendent of Insurance, but never took effect, at least in part because, in the view of the Attorney General, it could not be accomplished without new legislation {see majority op at 341-344).

That new legislation, Chapter 1, alters the proposal to give Empire’s existing value to a charitable foundation. The statute divides Empire’s assets into a “public asset,” consisting of “assets representing ninety-five percent of the fair market value of the corporation” and a “charitable asset,” consisting of the remaining 5% (Insurance Law § 4301 [j] [3], [5]). The charitable asset is to be turned over to a foundation not dissimilar to the one that, under the original plan, was to receive all the money. The public asset, however, is destined, after expenses, for the Tobacco Control and Insurance Initiatives Pool, from which it is to be distributed by the Commissioner of Health as Chapter 1 directs. From this brief summary, Chapter 1 appears to take 95% of Empire’s assets for public use, leaving only 5% to continue Empire’s charitable purposes.

Defendants argue, however, that this superficial appearance of a 95%-5% public-to-charitable division is misleading. They argue that, when the specific purposes for which the public asset is to be spent are examined, they bear enough relationship to Empire’s charitable mission so that Empire’s reasonable expectations as to the use of its property have not been frustrated. The case turns, in my view, on whether defendants can sustain this argument, and I do not rule out the possibility that they can. I do not think, however, that it can be said on the face of Chapter 1 alone that defendants are right.

*385 Most of the public asset—some 65% by the majority’s estimate (majority op at 346 n 12)—will be devoted to what Chapter 1 calls “[g]eneral hospital recruitment and retention of health care workers” (L 2002, ch 1, part A, § 1), i.e., to compensation and benefits for hospital employees. Plaintiffs assert that this aspect of the statute is “special interest legislation” designed to accomplish “political goals”—specifically, the funding of a labor contract. But in reviewing the constitutionality of the legislation we are required to assume that the Legislature believed supplementing the income of health care workers to be an important public goal, and the validity of that legislative judgment may not be questioned here (see Paterson v University of State of N.Y., 14 NY2d 432, 438 [1964]; McKinney’s Cons Laws of NY, Book 1, Statutes §§ 150, 151). To assume that this expenditure of funds is wise public policy, however, does not establish that Empire’s property has not been taken for public use. The property has been taken unless the “recruitment and retention” expenditures are a reasonable way of advancing Empire’s purposes.

Giving due weight to the presumption of validity attaching to legislation, I cannot conclude on this record that the portion of Chapter 1 that devotes Empire’s assets to the “recruitment and retention of health care workers” should be upheld. There is no indication that the Legislature found that this use of Empire’s funds was consistent with Empire’s purposes, or that it ever considered the question. Nor has there been any presentation of facts or analysis that would support such a finding. I would insist that, at a minimum, defendants present some analysis supporting the conclusion that this use of funds will advance Empire’s aim of making health care coverage more generally available to the citizens of New York. If a reasonable case can be made, I would find the legislation valid, and if not I would find it invalid. On the record we have, I would deny defendants’ motion to dismiss the takings claim, and would leave the issue to be determined by summary judgment motions or at a trial if necessary. I would also leave open the validity of the other uses of the public asset directed by the Legislature, though I acknowledge that those uses (listed at pages 346-347 of the majority opinion) seem on their face more consistent with Empire’s purposes.

The majority’s analysis of Empire’s “investment-backed expectations” is limited to the conclusory assertion that the distributions directed by Chapter 1 are “wholly consistent” *386 with Empire’s mission (majority op at 358). The majority assumes, without discussion, that the State is free to spend Empire’s money for any “public health purposes” it chooses (id. at 358), including the supplementing of hospital workers’ income. I reject the idea that the constitutional limitations on the taking of private property are of so little force. They must require at least some reasoned demonstration that the expenditures chosen by the State will indeed advance Empire’s purposes. That demonstration has yet to be made.

The assumption that Empire’s purposes will be advanced by Chapter l’s use of Empire’s property is also the basis for the majority’s exactions analysis. Though the majority implies, as I mentioned above, that it thinks exactions analysis inappropriate, it concludes, in the alternative, that upon such an analysis this legislation would survive, because the “essential nexus” and “rough proportionality” called for by the Nolían and Dolan cases exist. Specifically, the majority finds “not only a nexus but a direct correlation between the State’s interest in enacting Chapter 1—allowing Empire to continue to carry out its dual historic mission—and the condition imposed—that Empire’s not-for-profit assets he used for the public health purposes specified in Chapter 1” (majority op at 355). It also finds that “the condition is ‘roughly proportional’ to the impact of Empire’s conversion because if Empire were to convert through any other mechanism ... it would be required to dedicate its not-for-profit assets to purposes similar to those for which it was formed . . .” (majority op at 356-357). Thus, the majority finds the tests for exactions to be satisfied because, according to the majority, Empire’s assets are not being diverted from Empire’s “mission.”

I think the majority’s exactions analysis is both unnecessary and wrong. It is unnecessary because, as I explained above, if Empire’s assets are being used in a way consistent with Empire’s reasonable expectations, the legislation would be valid even if the legislatively-prescribed uses were unconditionally compelled. If that is the case, there is no exaction and no need to do an exactions analysis.

The majority’s exactions analysis is also wrong, because what the exactions cases require is not, as the majority assumes, a nexus between the condition imposed by the State and its purpose in enacting the legislation. They hold that there must be a nexus between the conditions attached to a permission given by the State and the grounds on which the State could *387 have withheld that permission. (See Nollan, 483 US at 837 [The issue is whether “the condition substituted for the prohibition . . . further(s) the end advanced as the justification for the prohibition”].) The majority may be implicitly reasoning that the State could have refused Empire permission to convert, and that its grounds for doing so would have been to cause Empire “to continue to carry out its dual historic mission” (majority op at 355). If that is the majority’s reasoning, I find it unconvincing. Everyone in this case agrees that, if Empire had not been permitted to convert, it would have promptly gone out of existence, not fulfilling its “dual historic mission” or any other.

To me, the majority’s exactions analysis is one of many aspects of its opinion that tend to obscure the basic question: whether Empire’s reasonable expectations as to the use of its property have been respected. Because, to my mind, that question remains in doubt, I dissent from the decision dismissing plaintiffs’ takings claims.

Judges Ciparick, Rosenblatt and Graffeo concur with Judge Read; Judge G.B. Smith dissents in part in a separate opinion; Judge R.S. Smith dissents in part in another opinion in which Judge G.B. Smith concurs; Chief Judge Kaye taking no part.

Order modified, etc.