Manhattan Eye, Ear & Throat Hospital v. Spitzer
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Full Opinion
OPINION OF THE COURT
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
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 Bal
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
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 was after this testimony, and as a result of a court order to produce the staff notes, that 26 single-spaced pages of notes were produced. These notes show that 20 physicians spoke out. Mr. Herkness not only described the meeting as “historic” and said that the Special Committee and the “Friends of MEETH” would meet soon, but he sent a memorandum to the members of the Board of Surgeon Directors confirming that “[o]nce the staff has made their report to the Special Committee, we can meet with the Medical Staff Leadership.” No such meeting ever oc
C. Decision to Monetize MEETH’s Assets and to Sell the Hospital
1. Retention of a Strategic Advisor
What occurred was that, as Mr. Whitman put it, there was “[a] bid from [MSKCC] to buy the entire hospital which came out of the blue in the middle of January of 1999.” Mr. Whitman had learned of “the approach” from Mr. Herkness, and advised Mr. Herkness that “we have to consider it [the offer] and we would need a committee to do that,” which caused Mr. Herkness to reconstitute the Special Committee into a Strategic Committee. Mr. Whitman also advised Mr. Herkness that a “financial advisor was necessary * * * because the board would need to have the offer analyzed from a financial point of view.” This led to the retention of Shattuck Hammond Partners, a Division of PricewaterhouseCoopers Securities, L. L. C. (Shat-tuck Hammond), an investment banking firm that provides services exclusively to the health care industry. According to Mr. Herkness, the offer from MSKCC was not what caused retention of Shattuck Hammond. Rather, he testified that the strategic advisors were retained after he received a draft of “Proposed 1999 Operating and Capital Budgets,” dated January 15, 1999, which he described as “horrific.” It is clear, however, that Shattuck Hammond was retained because of the MSKCC proposal.
On February 5, 1999, Mr. Herkness, with the approval of the Strategic Committee, entered into a written retention agreement with Shattuck Hammond to assist MEETH in evaluating its strategic options. The retainer agreement also authorized Shattuck Hammond to seek out parties “interested in entering into a Transaction with the Hospital,” a task which seems irreconcilable with the determination of an appropriate strategic recommendation, a determination which should have come first.
MEETH agreed to pay Shattuck Hammond a retainer fee of $100,000, and agreed that “[u]pon the closing of a Transaction,” it would pay a “Transaction Fee” of 1% of the “Aggregate Transaction Value.” According to Mr. Herkness, he had been informed that this fee arrangement was “standard in the industry.” The evidence confirms that there was an understanding that a sale was not only contemplated at the time Shattuck Hammond was retained, but was the actual expectation of the parties. Thus, Shattuck Hammond had a direct financial interest in an outcome which would require sale of the real estate. Significantly, while the fee arrangement was discussed by the members of the Strategic Committee, it does not appear to be the subject of any discussion by the Board. Indeed, neither Rozlyn Anderson, Esq., nor Mr. Underhill, both Board members, and not members of the Strategic Committee, was aware that if there was no transfer or acquisition of assets, Shattuck Hammond would not be entitled to the 1% transaction fee, although Ms. Anderson testified that had she known it would have been irrelevant.
2. MEETH is Put Up For Sale
On February 22, 1999, Mr. Herkness reported that he had appointed a Strategic Committee to assist in the review of “(1) whether MEETH can survive in today’s medical and economic environment as an independent specialty care hospital; (2) what are the strategic options available; and (3) how should MEETH respond to the possible offers from Memorial Sloan Kettering Cancer Center * * * and Mt. Sinai-NYU Medical Center Health System [Mt. Sinai].” The Mt. Sinai possibility, as noted by various Board members, “would not involve the closure of the Hospital.”
Shattuck Hammond’s written report, which Mr. Herkness had described as a “fairness opinion,” was presented. However, at trial he acknowledged that it was not a “fairness opinion,” which of course, as a financial advisor at a major brokerage firm, Mr. Herkness would have known is a term of art in the securities field.
Neither Shattuck Hammond nor the Board considered MEETH, itself, as having any ongoing economic value. Nor was there recognition or any discussion of the value of MEETH’s name, which was considered by Mr. Morton P. Hyman, Chairman of Continuum Health Partners, Inc. (Continuum), to have “great value,” and by Mr. Terrence M. O’Brien, Executive Vice-President and Chief Operating Officer of Lenox Hill Hospital, to have “marquis value” as “one of the top hospitals in the country.” Even Mr. Herkness conceded at trial that the name had “franchise value.”
Under the heading “Outlook for MEETH as a Going Concern,” Shattuck Hammond concluded that “market forces have been and are expected to be increasingly unfavorable for the provision of services in a hospital setting,” that many of the services provided by MEETH “are being provided in doctors’ offices, free standing ambulatory surgery centers, and a number of neighboring hospitals that are competitive for such services with MEETH,” and that as a specialty hospital MEETH “has an inherently riskier business model than non-specialty hospitals with considerable financial resources and harmony
The report continued, “[i]f the [MSKCC] offer were accepted following the implementation and finalization of the plan of closure,” Public Health Law article 28 would require surrender of the hospital operating certificate; MEETH would be required to obtain certification “to conduct diagnostic and treatment activities in clinic settings”; and “[i]t is unlikely that, given the applicable statutory and regulatory framework, the corporation will be permitted to retain the name ‘Manhattan Eye, Ear and Throat Hospital.’ ” While the latter may or may not be accurate, its inclusion in the report indicates that Shattuck Hammond recognized, and communicated to the Board, its understanding that the sale of the real estate would definitively alter MEETH’s mission. Moreover, although there had been discussion at previous Board meetings about expanding the extension centers, such discussion was always in the context of the continued existence of an acute care hospital on 64th Street. The free-standing D&T Center proposal appears to be mentioned for the first time as an option identified in the Shattuck Hammond report, as it sought to “reprioritize” MEETH’s mission.
At the February 22nd meeting, Cushman & Wakefield submitted a “Restricted Appraisal Report,” concluding that value of the 64th Street real estate “was in the range of $46 to $55 million, it being understood that an approximate 12-month marketing period would be required to attempt to realize such
Mr. Herkness testified that this decision to sell was impelled by the “doomsday scenarios” set forth in a January 15, 1999 memorandum from Mr. Leonard Weil, MEETH’s Chief Financial Officer, containing three proposed operating budgets for 1999. Mr. Herkness did not know if any of these budgets, which forecast “bottom line losses” ranging from $6,369,000 to $3,417,000, which he described as “warning shots * * * was actually adopted.” It was this memorandum that “heightened” his concerns about MEETH’s financial situation, and which led to the decision, taken within five weeks, to sell the real estate and to close MEETH as an acute care specialty hospital.
3. Expressions of Interest in Keeping MEETH (Prior to February 22, 1999)
Prior to the February 22nd decision to sell, there had been expressions of interest in keeping MEETH as an acute care specialty hospital which were neither mentioned at the Board meeting, nor in the Shattuck Hammond report. One such expression came from the New York Eye & Ear Infirmary (NYEEI), which in February was well into joining Continuum. Discussions with NYEEI had, in fact, been ongoing for years. Continuum had also shown interest in MEETH: the previous year, in March 1998, Dr. Robert G. Newman, Continuum’s President and CEO, met with Dr. Sarkar. Nothing came of that meeting. Thereafter, on December 18, 1998, Mr. Hyman met with Mr. Herkness, and other MEETH officials, in connection with MEETH’s desire to sell the Annex. At this meeting, Mr. Hyman referred to Continuum’s discussions with NYEEI and suggested that they explore “possibly merging the two institutions [MEETH and NYEEI].” Mr. Herkness replied that
4. March 22, 1999 Board Meeting: Mt, Sinai Offer Discussed
On March 11, 1999, Mt. Sinai and MEETH entered into a 30-day, binding agreement, which contained a no-shop clause,
5. Board’s Decision to Open the Bidding Up
At its April 15, 1999 meeting, the Board was told by Mr. Scibetta that both MSKCC and Mt. Sinai had “backed away from their initial proposals and have indicated an interest only at a price substantially below the $46 million minimum amount * * * in the appraisal.” Mr. Scibetta recommended that MEETH should “open up the process and inject some competitive forces into the negotiations.” Because the Board “wanted to be able to offer [the properties] to real estate developers as
Previously, however, in late February or early March, Mr. Hyman, from Continuum, had spoken with Mr. MacRae, MEETH’s attorney, who, as required by the no-shop clause, said “that the negotiations between MEETH and another hospital were so far along that they did not feel they could discuss any other corporate possibilities with [Continuum] or anyone else, and that they felt ethically and morally bound not to enter into such discussions.” The Board was not informed of this conversation. From the evidence it is clear that by the time the Mt. Sinai offer had lapsed and Cushman & Wakefield had been retained, the Board’s goal, as Mr. Scibetta testified, was “to obtain fair value for the assets, and for the bids to be in by basically, I think we had established early May.” No reason has been provided for this haste to sell the real estate, a haste which seems particularly unnecessary in light of the Cushman & Wakefield Restricted Appraisal Report, which had stated that the required marketing period would be approximately one year. Nor was there any reason as to why Continuum’s interest in preserving MEETH by entering into a nonsale transaction was not included in Shattuck Hammond’s report as a possible strategic option.
On April 25, 1999, the New York Times reported that MEETH was for sale.
Thereafter, a scheduled annual Board meeting was held on April 29, 1999, at which time Mr. Scibetta said bids were expected to be received, beginning on April 30th, and he reiterated that Shattuck Hammond had determined “that the Hospital’s business had no value.” He also advised the Board that “[ajlthough Shattuck Hammond Partners tried to interest Mt. Sinai in taking over MEETH, Mt. Sinai was disinterested in keeping the business and only interested in the real estate aspect of the transaction, at a figure much lower than the appraisal.” At this meeting, the Board voted to sell the Hospital, at a price in excess of $40,000,000. There was no explanation for this decision to sell the real estate for less than its appraised value of $46 to $55 million. At this meeting, authorization to seek regulatory approvals was again provided. Moreover, the Board now realized that its sale and closure plan,
Now, two months after the Board initially had voted to sell its real estate, the minutes for the first time identify, in the context of discussion of the New York Times article, that the Board had decided that “the Hospital was going back to its original mission of serving the poor in underserved areas, and redirecting its charitable assets to accomplish this goal.” Other than the Shattuck Hammond report, which discusses the Hospital’s “original” mission, there is no written record concerning this momentous decision. There had been no study concerning this so-called return to the “original mission” and no proposal or recommendation on the subject was provided to the Board for its review and deliberation. Notably, there was no management plan or recommendation discussing the need to return to this “original” mission, nor do prior Board minutes report any discussion held on the subject.
6. Board Accepts Downtown and MSKCC Offer
By the May 5, 1999 Board meeting, four separate proposals had been received, including a $41,000,000 bid from Downtown and MSKCC (and two proposals from real estate developers). According to this offer, MSKCC would open a breast cancer facility in the New Hospital Building, and the remaining real estate, to be purchased by Downtown, would be used as a building site for an apartment building. Mt. Sinai submitted two alternative proposals: (1) a $27,500,000 offer for the real estate, with the Hospital closed, and (2) an offer to acquire the Hospital and its operations for “a very substantially reduced price.” Because the second Mt. Sinai offer was “vague,” the Board took a “short break” in its meeting during which Mr. Scibetta, at the Board’s request, placed a telephone call to Mr. Barry Friedman, Mt. Sinai’s President and Chief Financial Officer, who stated that Mt. Sinai would seek a “very reduced price,” in the range of $5 to $11 million, and would only commit to running MEETH for up to two or three years. This spur-of-the-moment telephone conversation persuaded the five Board members who were present that the MSKCC offer should be accepted “promptly.” Somehow, this telephone call to Mr. Friedman had confirmed Shattuck Hammond’s view that MEETH had no value, beyond the real estate it was “sitting” on, warranting acceptance of the MSKCC offer.
The Board took no further steps to seek a bidder which would save MEETH’s long-established mission. Instead, it decided
The May 5th minutes record that after the decision to sell was approved, “[t]he Board then discussed the issue of closing the Hospital. The Board noted that no actual decision had been made to close the Hospital.” (Emphasis added.) Previously, on April 29, 1999, the Board had terminated the residency program and authorized the President to prepare for possible Hospital closure. However, even as of May 5th, as the minutes show, the Board did not seem to believe that it was actually closing the Hospital. One has to wonder exactly what the Board thought it was doing. Then, without a record of further discussion or Board authorization following this May 5th meeting, MEETH submitted a closure plan to the DOH on June 14, 1999, as an attachment to a letter from Dr. Sarkar, in which he also “requested issuance of a diagnostic and treatment center operating certificate for the existing Harlem facility.” It was after this that Mr. Herkness sought (and obtained) “a resolution reaffirming the Hospital’s intent to close the East 64th Street facility.” This occurred at the July 26, 1999 Board meeting.
As of July 26th, the Board had neither received nor commissioned any study with regard to the Board’s planned use of the sales proceeds to establish D&T Centers, the necessity for such centers, or the viability of such centers. It was an idea in progress. It may be that written documentation, at this point, was not needed, if there had been any other type of evaluation; however, there was none. There had been no consultation with the medical staff or other medical experts or health care experts or anyone else concerning its feasibility or viability. Rather, Mr. Herkness testified that the “best feasibility study is five years of experience.” It bears noting, however, that MEETH had no experience with free-standing D&T Centers. At best, this plan evolved from the Harlem Center, which was an extension center, and not a free-standing center. Nonetheless, without such seemingly basic information, the decision to sell and close was made.
MEETH began to act, i.e., it terminated the residency program, upon the assumption that it would receive DOH approvals for closure and establishment of the D&T Centers. It executed a letter evidencing its intent to sell to MSKCC, and chose to take steps to effectuate closure and receive regulatory approval for its plan, to enter into a contract for sale, and then to seek court approval under section 511. This would have had the effect of presenting the court with what would have been essentially a fait accompli. To put it another way, if everything went as hoped for, MEETH would have been able to present the section 511 petition pertaining to an already closed hospital, with DOH approval for the D&T Centers, and it would have asked the court to find “that the purposes of the corporation * * * will be promoted.” This would have effectively neutralized, or substantially compromised, any meaningful judicial role in the section 511 process. Indeed, under the scenario envisaged by MEETH, denial of the petition would have been a pyrrhic victory for its opponents: the Hospital would already be closed; under such circumstances, a court order could hardly have restored MEETH.
D. Events Following the Decision to Sell and Close MEETH
1. MEETH Doctors Seek to Enjoin the Proposed Sale
On May 10, 1999, a CPLR article 78 petition was filed to enjoin the proposed sale to Downtown and MSKCC. The Attorney General did not participate in this proceeding. Rather, in a letter from William Josephson, Esq., Assistant Attorney General, Charities Bureau, the court was advised that “[s]ince the proposed transaction is in a preliminary stage, it would be premature for us to take a formal position on it.” On May 28, 1999, the petition was dismissed. What the article 78 proceeding demonstrated, however, is that the medical staff played no role in the decision to sell and close the Hospital: it was not
2. MEETH Commissions Business Plan Re: D&T Centers
Following the June 14, 1999 submission of the closure plan to DOH, Mr. Wayne M. Osten, Director, Office of Health Systems Management, DOH, wrote to Dr. Sarkar on July 22, 1999, and requested “a business plan or financial feasibility analysis on the proposed MEETH Diagnostic and Treatment Centers.” This request caused MEETH, which had made the decision to transform MEETH’s mission without detailed analyses, and had no studies, reports or other documents concerning the D&T plan, to retain outside consultants, Dr. Frank Cicero of Cicero Shapiro Velazquez & Cicero, and Mr. Charles Kachmarick, President, Sterling Health Capital Management. These consultants were retained “to develop a business plan in support of the proposed MEETH Diagnostic and Treatment Center.” Significantly, they were charged with supporting the already decided-upon plan. The Cicero/Sterling study, entitled “Manhattan Eye, Ear & Throat Hospital Business Plan For Fulfillment of Mission Statement” (Business Plan), not unsurprisingly supported closure of the Hospital, and the transformation of MEETH from a world-class teaching hospital to operating two D&T “sites in under-served areas in Harlem and Brooklyn.” The Board had decided upon the mission statement, and the retained consultants then wrote the “Operational Plan,” and provided a “Need Assessment” and “Financial Projections.” Neither Dr. Cicero nor Mr. Kachmarick looked at or evaluated, or were asked to look at or evaluate, any of the proposed alternatives to closing MEETH. Indeed, Dr. Cicero, who testified that he was aware of Continuum’s interest, and “possibly Mt. Sinai,” stated that it would have been “inappropriate” for him to talk with interested potential bidders for MEETH.
At its September 21, 1999 meeting, the Business Plan was accepted by the Board. It was also at this meeting that the Board authorized the filing of a petition seeking court approval of the sale of the Hospital’s real estate. Under the terms of the June 25, 1999 contract, this petition should have been filed
3. Attorney General Becomes Involved
Since as a type B, i.e., charitable, corporation, MEETH does not have shareholders, the Attorney General, acting as parens patriae, is statutorily involved whenever such a charity seeks to dispose of all, or substantially all, of its assets, as MEETH resolved to do (N-PCL 511). Upon learning from the New York Times article of the decision to sell, Paula Gellman, Esq., Assistant Attorney General, Division of Public Advocacy, wrote to Dr. Sarkar on April 27, 1999, and explained that it was “common practice” for the AG to become involved “before a formal submission is made to the Supreme Court so that we may review the papers and raise any questions or concerns we have in advance.” This led to a meeting at the AG’s office, which was followed by a June 3rd letter from Mr. Josephson to Thomas Ruggiero, Esq., one of MEETH’s counsel, stating that since it decided to sell the Hospital, the Board is required “to entertain all responsible proposals, not to favor any bidder over another in the process, and to treat all bidders and potential bidders identically and fairly.” This letter was submitted because the AG had received complaints alleging that other interested buyers were not able to obtain pertinent information. In response, the AG was advised that “a successful bidder has been selected and pursuant to a letter of intent, good faith negotiations regarding the definitive contract are continuing.” The AG was not told that the letter of intent was not binding, and that it did not contain a no-shop clause. Nor were other interested parties advised that it was nonbinding. Mr. Scibetta testified that MEETH could not “be seen actively soliciting proposals, but we are more than willing to review any proposals, and the board would have a fiduciary responsibility to do so.” This statement was incorrect; there was nothing in the nonbinding letter which would have prohibited MEETH from actually seeking to preserve its mission.
On June 23, 1999, Dietrich L. Snell, Esq., Deputy Attorney General, Division of Public Advocacy, wrote to MEETH’s counsel, complaining that there were other “bona fide offerors” and that “[w]e are not aware of * * * one single shred of evidence that MEETH is actively exploring in good faith all or
Thereafter, the AG’s representatives were ultimately invited to attend the July 26, 1999 Board meeting, both the full meeting attended by several doctors from the medical staff, and the Executive Session. At both of these meetings, Mr. Scibetta evaluated various offers, and reiterated that it was the opinion of Shattuck Hammond that the Hospital’s “business had negative value.” At the end of the Executive Session, Mr. Herkness said that “[i]t was the sense of the Board of Directors to monetize the real estate.” The decision to go forward with the sale to MSKCC and Downtown was unchanged.
Representatives of the AG continued to meet with MEETH, DOH officials, and others, over the additional concern that MEETH was engaging in a de facto closure of the Hospital, since its closure plan had not received DOH approval. The AG also continued to insist that MEETH must negotiate in good faith with other potential bidders. When MEETH filed this petition, the AG opposed it on the ground that other offers had been submitted, which would have preserved MEETH, and that there had been no genuine effort to negotiate with these bidders in good faith.
E. Alternative Proposals Designed to Preserve MEETH
1. Continuum Proposal
Mr. Hyman, Chairman of Continuum, having been told in late February or early March that MEETH was in negotiations which were “far along” with an unnamed hospital, and that it could not discuss other proposals, did nothing further until he read the New York Times article. He then met with MEETH’s physicians and he agreed to try to accommodate at Continuum the medical staff, who would be dislocated upon the sale of the Hospital, and the residents, whose program was being discontinued on June 30, 1999. This led to Mr. Hyman writing a letter on June 29, 1999 to Mr. Herkness in which he proposed a solution which would allow MEETH to continue its mission. Mr. Hyman testified that Continuum proposed “to take the facility over. We were confident that with different management * ** * as well as our financial strength * * * we could continue MEETH in furtherance of its mission.” Continuum’s offer was that MEETH “join” its health care network and combine with NYEEI, which had just joined Continuum. It was not an offer to purchase the assets. Continuum would have maintained the Harlem Center; however, no commitments were made with regard to the proposed D&T Centers since the specific proposal
A condition of Continuum’s proposal was that “the existing members of the Board of Directors of MEETH are to resign upon the consummation of this transaction.” As Mr. Hyman put it, Continuum’s proposal left no money for the use of MEETH’s Board in its plan to establish the two D&T Centers, or to expand into other geographical areas. He pointedly testified that the Board did not “have an interest separate and apart from the institution itself,” and questioned “why a board insists upon receiving money to go off and do their own thing.” He explained that if “the standard of comparing a hospital’s value as an ongoing concern [is] by looking at the operating income and the operating expenses versus the asset value, then * * * almost every hospital in Manhattan would have to sell its real estate and go out of business.” To preserve MEETH, Continuum was prepared to keep, as minority members, those current Board members who are prepared “to support” the “one hundred and thirty year old” mission of MEETH.
On July 1, 1999, Mr. Hyman proposed an “immediate” merger between MEETH and NYEEI, and agreed to “guarantee all obligations now existing at MEETH.” He received no response from Mr. Herkness to either of his letters. However, on July 10, 1999 Mr. Hyman received a letter from Mr. Scibetta, asking him to meet with him. On July 13th, they spoke on the telephone, and Mr. Scibetta wanted to know “what Continuum was prepared to bid for the MEETH real estate.” Told that Continuum did not want to buy the real estate, but rather to “continue MEETH exactly where it was,” Mr. Scibetta replied “that’s very nice, but our board has decided that we are going to sell the real estate.” When asked the “purpose” of having a meeting, since Continuum was not a bidder for the real estate, Mr. Scibetta replied that “you know what this is all about and
What occurred is that after the telephone conversation, Mr. Hyman invited representatives of the AG to the meeting, “because so many misunderstandings seem to have cropped up already, that I didn’t want to come out of a meeting and have more misunderstandings.” The morning of the meeting, Mr. Scibetta learned that Mr. Hyman had invited representatives of the AG, and told Mr. Hyman that he would not attend the meeting. When asked why, Mr. Scibetta replied that “what he had to tell me he would not [say] in front of the Attorney General.” Mr. Scibetta confirmed that he had refused to attend the meeting with representatives of the AG. He testified, as he had informed the Board, that it was inappropriate for these representatives of the AG to attend the meeting with Continuum, in light of the fact that other potential bidders had not made similar requests.
At the July 26, 1999 Board’s Executive Session, Mr. Scibetta reported that on July 1st Continuum had submitted a proposal. He explained that MEETH would become a “subsidiary,” the Board would be required to resign, and then he incorrectly characterized the proposal merely as an offer to “invest up to $10 million * * * [which] was inferior in all respects to the Mt. Sinai proposal of May 5, which had already been rejected by the Board of Directors.” Neither orally nor in the written report was the Board advised of the full scope and nature of Continuum’s proposal, including that it would guarantee all of MEETH’s losses for five years.
Thereafter, in mid-September, Mr. Hyman received an invitation to meet with Mr. Scibetta, and on September 17, 1999, he attended a meeting with Mr. Scibetta, Mr. Herkness, and two other Board members, Mr. Chips Chapman Page, and Mr. Richard W. Pendleton, Jr. Continuum’s proposal, which included that it was prepared to take over and run MEETH within 24 hours, was described. Continuum was also prepared to invest beyond the $15 million, “if we had an opportunity to discuss the proposal with the MEETH board.” Mr. Hyman further explained that if MEETH’s real estate were to be sold in the future, the proceeds would remain “within the MEETH facility to support its mission.” Mr. Herkness and Mr. Scibetta told Mr. Hyman that “the board has decided that we want to sell the real estate. [And asked:] Are you prepared to make a bid,” to which Mr. Hyman replied “absolutely not.” During the