Judge preserves MEETH’s charitable mission

His decision upheld the physicians’ wishes and cast doubt on the motives of its trustees and their advisers.

Manhattan Eye, Ear and Throat Hospital must consider all offers and choose the one that best reflects its charitable mission, according to a judge’s decision.

Now the hospital and doctors will have to sit down face to face and consider the offer of a half-dozen interested purchasers who could take over the facility or merge it in with their own programs. Two doctors, a union representative and three members of its board of trustees will sift through the offers of other health care entities and decide which offer is best.

The panel will take its decision to the board of trustees, which already had voted to sell the hospital. The trustees will have to vote on the offer, while heavily weighing the panel’s choice.

The court also accused the hospital’s advisers of having a vested and undisclosed interest of a half-million dollars in selling the hospital, which according to a filed court document led to the strategic adviser suggesting the sale of the building and not considering other options that would have preserved the hospital’s mission but did not involve selling the building.

“Fair and reasonable”

The 130-year-old institution on Manhattan’s Upper East Side, usually called MEETH, faced closure and sale to Memorial Sloan-Kettering Cancer Center and also conversion to apartment buildings.

MEETH’s trustees wanted to sell its buildings and use the proceeds to build diagnostic and treatment clinics in New York’s medically underserved boroughs. However, doctors protested the sale and brought in the state Attorney General to halt the sale. That office, which by law oversees every charity in the state, filed its objection with the Supreme Court of the State of New York, County of New York.

New York State Attorney General Eliot Spitzer must approve any change in the purpose of a not-for-profit group. In the case of MEETH, he did not approve of the change. Selling MEETH’s assets would needlessly abandon its historic mission, said Assistant Attorney General Robert Pigott, who argued the case during a 13-day evidentiary hearing in December before Judge Bernard Fried.

The judge denied the sale Dec. 3 because:

• the proposed sale amount was not “fair and reasonable” because it did not consider MEETH’s value as an ongoing concern;
• the deal did not promote MEETH’s charitable purposes;
• the trustees have a duty to further MEETH’s charitable mission; and
• the proposed diagnostic and treatment clinics involve a fundamentally different purpose than MEETH’s historic mission.

MEETH wanted to sell its three buildings to Memorial Sloan-Kettering Cancer Center and to a real estate developer for more than $40 million.

Other health care entities had made different offers to MEETH. Instead of buying the buildings, some health care groups would have given MEETH operating capital of $15 million and a promise to cover operating losses. The buildings would remain under MEETH’s control.

Judge Fried wrote in his decision that under the state law governing not-for-profit groups, MEETH would have to have shown two aspects — that the sale was “fair and reasonable” and that the hospital’s mission would be promoted.

He added that since selling the hospital’s buildings is part of closing the hospital, the court had to consider more than the fair market value of the buildings — that continuing operation of acute care facilities, residency program and income also were valuable, yet were not considered by the trustees.

Doctors react

MEETH doctors told Ocular Surgery News they were happy to hear the judge’s decision.

Steven Fochios, MD, president of the surgeon board of directors at MEETH, said, “It became clear to [the judge] that this board did not act in a way that would have continued the mission of the hospital. He denied [the motion] and in so doing has laid the foundation for a situation that will preserve the mission and allow the hospital to remain.”

Dr. Fochios now sits on the panel that is considering proposals from all interested buyers of MEETH.

The panel met for the first time Dec. 15 and solicited bids from a half-dozen other health care providers such as Lenox Hill, Continuum and Mount Sinai/New York University. The panel will consider requests for proposals from each health care group — their final and best offer — and make a recommendation as to which course to pursue. The attorney general’s office acts as a non-voting observer to the panel’s discussions.

Mr. Pigott represented the Attorney General’s office as a nonvoting adviser during the panel’s meetings.

“These six individuals, who had never worked together before, had a very productive meeting,” he said. “There was a lot of discussion between the AG’s office and MEETH’s council about which board members would make most sense to serve on this special committee. There was a recognition that it made sense to have board members who were less actively involved in supporting the prior transaction that the MEETH board sought approval for.”

The panel met again Dec. 21 to mull over their choices. Dr. Fochios said the panel may decide sometime in January. Criteria include which facility will continue MEETH’s charitable mission and its work as an acute care facility, as well as who can restore its residency program. Trustees dismantled the program and told residents to find other ones in an effort to sell the hospital.

“The preliminary meeting went quite well, and obviously we want to conclude this as rapidly as possible,” he said. “There’s some urgency to concluding this negotiation because the hospital would in fact run out of money.”

While the panel’s recommendation is not binding, the trustees are expected to weigh it heavily in making a final decision, said Scott Himes, JD, a lawyer who represents the physicians at MEETH.

“The medical staff wants to assure that the basic charitable mission of the hospital will be preserved,” Mr. Himes said. “That’s a real fundamental requirement. We have to see what the institutions will offer and evaluate all the different transactions.”

Mr. Pigott said, “They will make a recommendation to the board of directors. It’s the decision of the whole MEETH board, but the process has been set up in such a way that the board members will give great weight to the recommendation of the special committee.”

All parties are well aware of the options prescribed by the judge, he added.

Intent to appeal

The trustees will likely appeal the court’s decision, but the trustees may not have that chance, said John Aerni, the lawyer who argued on behalf of the trustees during the 13-day evidentiary hearing. He works for the law firm LeBoeuf, Lamb, Greene and MacRae.

MEETH’s trustees cannot file an appeal until the paperwork — filing the decision with the clerk of courts and formally serving upon the trustees — is finished. These clerical steps take time, and the board members’ positions may be threatened if they are replaced by another health care facility.

Mr. Aerni said, “When that time comes [to appeal], MEETH’s board may or may not still be in place. If it is, I think it’s fair to say it intends to appeal. That is a step down the road and MEETH’s current board may not be in place when that time comes.”

“Disabling” interest

Also, the judge found that credible evidence existed that the trustees’ decision to sell was driven by Memorial Sloan-Kettering’s offer to buy some of its property. This offer led trustees to recognize the value of its real estate, which in turn drove the decision to retain Shattuck Hammond Partners, an investment banking firm that serves the health care industry.

Shattuck Hammond had a financial interest in seeing the building sold, the court decided, because they would have received a 1% fee from the sale of the building. This, with other fees, could have amounted to more than $500,000. Had the building not been sold, but instead merged into another facility, Shattuck Hammond would not have received the transaction percentage fee.

The judge wrote: “It is not necessary for me to conclude that this conflict of interest compromised the result; the fee arrangement certainly gives the appearance that the integrity of the process was flawed and that the Board had not obtained the assistance of a truly independent expert.”

Also, at least two trustees did not know about the 1% fee, and the full board had not discussed the “direct, and perhaps disabling, financial interest in the outcome of the strategic option it was recommending.”

The court also said, “This becomes more troubling in view of the manner in which Shattuck Hammond dealt with bidders such as Continuum [Health Partners, a consortium of New York hospitals] and Lenox Hill [Hospital, a major health care provider], which were not interested in purchasing the real estate, by providing misleading information concerning their offers, often omitting crucial details, and by asserting that the only realistic option was the sale of the real estate.”

Attorneys at Shattuck Hammond did not return calls placed by Ocular Surgery News.

For Your Information:

• Steven Fochios, MD, can be reached at Manhattan Eye, Ear and Throat Hospital, 210 E. 64th St., New York City, NY 10021; (212) 838-9200; fax: (212) 249-2054. Dr. Fochios has no direct financial interest in any of the products mentioned in this article, nor is he a paid consultant for any companies mentioned.
• Scott M. Himes, JD, can be reached at Stillman and Friedman, 425 Park Ave., New York, NY 10022; (212) 223-0200; fax: (212) 223-1942. Mr. Himes is a partner at Stillman and Friedman.
• John Aerni practices at LeBoeuf, Lamb, Greene and MacRae, 125 W. 55th St., New York, NY 10019; (212) 424-8231; fax: (212) 424-8500. Mr. Aerni is a partner at LeBoeuf, Lamb, Greene and MacRae.
• Robert Pigott can be reached at the Office of Attorney General, 120 Broadway, New York, NY 10271-0332; (212) 416-8397; fax: (212) 416-8393. Mr. Pigott is New York state assistant attorney general.