Birnbaum v. State

OPINION OF THE COURT

The question in this case is whether a "taking” of property occurs, giving rise to the obligation to pay fair compensation (NY Const, art I, §7; US Const 5th & 14th Amends), when the State requires a nursing home to remain open until reasonable alternative arrangements can be made for the continued care of the patients. We conclude that under the facts and circumstances presented here the State’s actions, preventing the precipitous closing of a nursing home in contravention of the regulations of the Department of Health, did not constitute a "taking” of property under the Federal or State Constitutions.

The facility in question, known as "Abbott Manor Nursing Home” and situated in Buffalo, New York, was operated by Bernard Birnbaum until his death on February 13, 1976. Shortly thereafter, the executors of Bernard’s estate, the respondents here, determined that the nursing home was currently unprofitable, primarily because the facility’s Medi

Following the issuance of the December 29, 1976 order providing them with the right to fully recover their operating costs, respondents’ attitude toward the prospect of closing the nursing home changed dramatically. Thus on December 20, 1978 respondents sought and received a temporary restraining order barring the State from removing any Medicaid patients from Abbott Manor, except voluntarily or in an emergency. Indeed, in support of this request respondents argued that closure was not in the "public interest” because of the lack of available alternative facilities for patients, and decried the affect of closure on patients who were "reluctant to leave” the "desirable” facility, where they have received "very satisfactory quality of medical care and services * * * during the period of their residence”. Nevertheless, the State was apparently successful in finding alternative means of care for the nursing homes patients, and after vacating the facility the Commissioner of Health moved in Supreme Court for an order terminating the receivership. This order was granted over the objection of respondents, and on September 14, 1979 the receivership was terminated, ceasing Abbott Manor’s operation as a nursing home.

Eventually, all issues concerning the propriety of the appointment of the various receivers and the award of full operating costs were consolidated in one appeal in the Appellate Division, Fourth Department. That court first held that although Public Health Law § 2810 did not specifically authorize the appointment of a receiver in the situation presented, the receivership appointments nevertheless were proper under the equitable powers of the court. The Appellate Division then determined, however, that the Court of Claims had sole juris

This regulatory scheme, designed to tailor supply closely to demand in an effort to contain health care costs, largely protects the nursing home operator from competition. It also results in a lack of excess nursing home facilities, which poses an obvious threat to the continuity of essential services if an operator closes a facility. In contemplation of this predicament, the Commissioner of the Department of Health promulgated section 401.3 (g) of title 10 of the NYCRR, which states that no nursing home "shall discontinue operation or surrender its operating certificate unless 90 days’ notice of its intention to do so is given to the commissioner [of health] and his written approval obtained.”

In the case now before us, although Abbott Manor was operating at a loss, the State refused to allow the closure of the facility by respondents before they complied with 10 NYCRR 401.3 (g). Respondents argue that this constituted a taking, because the State’s actions "place[d] a burden on [respondents] to continue the operation of the Home at a substantial loss for the benefit of patients, public, or the State of New York”.

To determine if a taking occurred here, indeed we must assess whether respondents were alone required to shoulder a public burden which, in fairness, should have been the responsibility of the public as a whole (see, e.g., Pennell v City of San Jose, 485 US 1 , —, 108 S Ct 849 , 856; French Investing Corp. v City of New York, 39 NY2d 587 , 596-597). This analysis generally requires an ad hoc, factual inquiry using the increasingly familiar factors of the economic impact of the government’s action, its frustration of "reasonable investment-backed expectations”, and the action’s public purpose or "character” (see, e.g., Penn Cent. Transp. Co. v New York City, 438 US 104 , 124; Kaiser Aetna v United States, 444 US 164 , 175; Rochester Gas & Elec. Corp. v Public Serv. Commn., 71 NY2d 313 , 324). Even if the economic impact upon an owner of property is minimal, however, and does not significantly affect investment-backed expectations, the Supreme Court of

While we have not previously analyzed how these factors should be applied, and whether a taking occurs, when a business is required to continue operations at a loss, the question is not novel; it has been recognized by the United States Supreme Court (see, e.g., Brooks-Scanlon Co. v Railroad Commn., 251 US 396 ; Regional Rail Reorganization Act Cases, 419 US 102 , 122) and thoroughly considered in the Federal courts (see, e.g., Matter of Valuation Proceedings Under §§ 303 [c] & 306 of Regional Rail Reorganization Act, 439 F Supp 1351 [Friendly, J.]; Gibbons v United States, 660 F2d 1227 ; Lehigh & New England Ry. Co. v Interstate Commerce Commn., 540 F2d 71 ). This line of cases begins with BrooksScanlon Co. v Railroad Commn. (supra, at 399), where Justice Holmes, writing for the court, stated that under the Fifth Amendment a person "cannot be compelled to carry on even a branch of business at a loss, much less the whole business”. Modern cases have emphasized the narrowness of the "BrooksScanlon” rule, however, and the limitation of a person’s right to cease business operations consistently has been held not a per se taking where a pervasively regulated industry is involved, and there exists an administrative procedure requiring that permission be obtained from a regulatory agency before service to the public is terminated (see, e.g., Gibbons v United States, supra; Lehigh & New England Ry. Co. v Interstate Commerce Commn., supra; Continental Air Lines v Dole, 784 F2d 1245 ). Under these circumstances, the courts have concluded that a business "may be made to suffer interim reasonable losses, without compensation, for a reasonable period of time during which solutions accommodating the public and private interests can be devised” (National Wildlife Fedn. v Interstate Commerce Commn., 850 F2d 694 , 708 [quoting Le-high & New England Ry. Co. v Interstate Commerce Commn., supra, at 837]).

"Long ago” stated the United States Supreme Court, "it was recognized that 'all property in this country is held under the implied obligation that the owner’s use of it shall not be injurious to the community’ ”, and that the State’s actions to enforce this obligation is not a taking (Keystone Bituminous Coal Assn. v DeBenedictis, supra at 491-492 [quoting Mugler v Kansas, 123 US 623 , 665]). Respondents in this case possessed the exclusive right to operate a nursing home solely because the public interest, as assessed by the Legislature and the Department of Health, required exclusivity. This grant by the State, while benefiting respondents, also put them in the position to create an immediate scarcity of medical care if services were terminated abruptly. When the State confers an exclusive franchise upon an individual incidental to providing a public good, it need not subject itself to the uncontrolled discretion of the individual to instantaneously create a public emergency. Instead, we conclude that the State may enforce the obligation, embodied in a regulation, that there shall not be immediate termination of nursing home services, because

Consequently, we agree with the apparently unanimous view of the courts that have considered the question, that under these circumstances the application of a regulation requiring that a business not terminate services, used for a reasonable period of time so that an agency may devise solutions accommodating the public and private interests, is a valid regulation and does not constitute a taking of private property for public use (see, e.g., Lehigh & New England Ry. Co. v Interstate Commerce Commn., supra, at 82; Gibbons v United States, supra, at 1238; Continental Air Lines v Dole, supra, at 1251-1252 ; Matter of the Valuation Proceedings Under §§ 303 [c] & 306 of Regional Rail Reorganization Act, supra, at 1371; see also, Davidson v Commonwealth, 8 Mass App 541 , 395 NE2d 1314 , 1318 [the government’s assumption of the operation of a nursing home in response to a public emergency was a valid exercise of the police power, and not a taking]). Therefore, the application of 10 NYCRR 401.3 (g) here, which barred respondents’ closure of the nursing home at least until such time as they applied to the Commissioner of Health to do so, did not by itself constitute an immediate taking of respondents’ property.

This is not to say that the State could force respondents to operate their business at a substantial loss indefinitely; it has been stated that there does come a time, after government has had a reasonable period to explore alternative solutions, when the individual’s right to terminate a business venture becomes paramount (see, e.g., Matter of Valuation Proceedings Under §§ 303 [c] & 306 of Regional Rail Reorganization Act, supra, at 1371). However, while the matter is not without some difficulty, particularly due to the state of the record, we conclude that respondents are not entitled to recover based upon the State’s unreasonable delay in closing Abbott Manor.

The record shows that respondents first attempted to close the nursing home without compliance with 10 NYCRR 401.3 (g), were prevented from doing so by the State, and in the process a receiver was appointed for the facility. Soon after the appointment of a receiver, respondents obtained an order, which proved erroneous, entitling them to full reimbursement for the cost of operating Abbott Manor during the receivership

Respondents do argue, however, that any application under 10 NYCRR 401.3 (g), which requires the Commissioner of Health’s approval for the closing of a facility, would have been futile, because there were no alternative facilities available to care for Abbott Manor’s patients; in fact, the Court of Claims accepted this contention. However, the fact remains that respondents’ never made an application to close the facility under 10 NYCRR 401.3 (g), which renders conjectural any conclusion on what would have occurred had a proper application been made. Moreover, on this record it appears that soon after respondents unlawfully attempted to close the nursing home their desire to close the facility ceased. Finally, and most importantly, respondents make no claim in this court that the State required the operation of the nursing home against respondents’ wishes beyond a reasonable time; instead, respondents’ arguments are limited to the contention that they had an absolute right to close Abbott Manor, and that the State’s initial intervention to keep the facility open constituted a taking. Consequently, under these circumstances we are unable to hold that the State’s delay in closing the nursing home at some point became a taking.

In light of our conclusion that no taking occurred here, either immediately upon the State’s prevention of the closing of Abbott Manor or at sometime thereafter, regardless of whether attorney’s fees could have been awarded to respondents had they recovered on their claim, no attorney’s fees may be recovered in this case.

Accordingly, the order of the Appellate Division should be reversed, with costs, and the claim dismissed.

Judges Kaye, Alexander, Titone, Hancock, Jr., and Bellacosa concur; Judge Simons taking no part.

Order reversed, etc.