Brightonian Nursing Home, et al., Respondents,v.Richard F. Daines, M.D., Commissioner of Health, State of New York, et al., Appellants.BriefN.Y.September 11, 2013To be argued by: Thomas G. Smith, Esq. Time Requested: 20 Minutes New York State Court of Appeals THE BRIGHTONIAN NURSING HOME, BAYBERRY NURSING HOME, MAPLEWOOD NURSING AND REHABILITATION CENTER, LEROY VILLAGE GREEN, ELDERWOOD HEALTH CARE AT BIRCHWOOD AND NEW YORK STATE HEALTH FACILITIES ASSOCIATION, INDIVIDUALLY AND ON BEHALF OF ITS RESIDENTIAL HEALTH CARE FACILITY MEMBERS IN NEW YORK STATE, Respondents, -against- RICHARD F. DAINES, M.D. AS COMMISSIONER OF HEALTH OF THE STATE OF NEW YORK, AND DAVID A. PATERSON AS GOVERNOR OF THE STATE OF NEW YORK, Appellants Monroe County Supreme Court Index No.: 13213-09 BRIEF ON BEHALF OF RESPONDENTS Thomas G. Smith, Esq. F. Paul Greene, Esq. John P. Bringewatt, Esq. HARTER SECREST & EMERY LLP Attorneys for Respondents 1600 Bausch & Lomb Place Rochester, New York 14604-2711 Telephone: (585) 232-6500 Fax: (585) 232-2152 i TABLE OF CONTENTS PRELIMINARY STATEMENT ........................................................................... 1 RESPONDENTS’ RESPONSE TO APPELLANTS’ JURISDICTIONAL STATEMENT ........................................................................................................... 7 RESPONDENTS’ QUESTIONS PRESENTED ................................................... 7 RESPONDENTS’ COUNTERSTATEMENT OF THE CASE ......................... 11 PROCEDURAL BACKGROUND ....................................................................... 23 ARGUMENT POINT I: PHL 2808(5)(C) VIOLATES SUBSTANTIVE DUE PROCESS A. PHL 2808(5)(c) Infringes Upon Protected Property Rights. ....................................................................................... 24 B. PHL 2808(5)(c) Has No Rational Basis or Reasonable Relationship to Any Legitimate State Interest. .................... 30 POINT II: PHL 2808(5)(C) IS AN IMPROPER DELEGATION OF LEGISLATIVE AUTHORITY. A. The Statute Impermissibly Granted the Commissioner Limitless Authority and Discretion Concerning Equity Withdrawals. ........................................................................... 34 B. Ejusdem Generis Cannot Rescue PHL 2808(5)(c). ............... 40 POINT III: PHL 2808(5)(C) IS VOID FOR VAGUENESS. ................... 45 POINT IV: PHL 2808(5)(C) PROVIDES NO PROCEDURAL DUE PROCESS. ............................................................................... 47 ii POINT V: PHL 2808(5)(C) IS AN IMPROPER PRIOR RESTRAINT OF SPEECH AND THEREFORE VIOLATIVE OF THE FIRST AMENDMENT TO THE UNITED STATES CONSTITUTION. ................... 51 POINT VI: PHL 2808(5)(C) IMPAIRS OBLIGATIONS OF PRE-EXISTING CONTRACTS. ..................................... 55 POINT VII: PHL 2808(5)(C) VIOLATES THE EQUAL PROTECTION CLAUSE. ................................................ 57 POINT VIII: THE “SUCH OTHER FACTORS” CLAUSE OF PHL 2808(5)(C) IS NOT SEVERABLE. ......................... 60 POINT IX: THERE IS NO REPORTED CASE APPLYING NEW YORK LAW THAT UPHOLDS A PROVISION SUCH AS PHL 2808(5)(C). ....................... 62 CONCLUSION ....................................................................................................... 64 iii TABLE OF AUTHORITIES Page(s) CASES 19th St. Assocs. v. New York, 79 N.Y.2d 434 (1992) ......................................................................................... 56 A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935) ............................................................................................ 63 Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978) ...................................................................................... 55, 56 Anti-Fascist Committee v. McGrath, 341 U.S. 123 (1951) ............................................................................................ 47 Bd. of Regents v. Roth, 408 U.S. 564 (1972) ............................................................................................ 28 Binkowski v. State, 322 N.J. Super. 359, 731 A.2d 64 (App. Div. 1999) .......................................... 44 Boreali v. Axelrod, 71 N.Y.2d 1 (1987) ............................................................................................. 35 Bower Assocs. v. Town of Pleasant Valley, 2 N.Y.3d 617 (2004) ........................................................................................... 57 Boyd v. United States, 116 U.S. 616 (1886) .............................................................................................. 1 Brandeis Sch. v. Lawrence, 18 Misc. 2d 550 (Sup. Ct. Nassau County 1959) ............................................... 26 Buckley v. Valeo, 424 U.S. 1 (1976) ................................................................................................ 51 Buffalo Teachers Federation v. Tobe, 464 F.3d 362 (2d Cir. 2006) ............................................................................... 27 Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001) ............................................................................................ 42 iv Citizens Utd. v. F.E.C., 130 S. Ct. 876, 558 U.S. 310 (2010) ....................................................... 52, 53, 54 City of Cleburne v. Cleburne Living Ctr., 473 U.S. 432 (1985) ............................................................................................ 58 City of Tonawanda v. Tonawanda Theater Corp., 29 A.D.2d 217 (4th Dep’t 1968) ....................................................... 34, 35, 37, 62 City of Utica v. Water Pollution Control Bd., 5 N.Y.2d 164 (1959) ........................................................................................... 34 Commercial Pictures Corp. v. Bd. of Regents, 305 N.Y. 336 (1953) ........................................................................................... 44 Connally v. Gen. Constr. Co., 269 U.S. 385 (1926) ............................................................................................ 45 Curiale v. Ardra Ins. Co., 88 N.Y.2d 268 (1996) ................................................................................... 47, 50 CWM Chem. Servs., L.L.C. v. Roth, 6 N.Y.3d 410 (2006) ........................................................................................... 60 Dickman v. Comm’r, 465 U.S. 330 (1984) ............................................................................................ 27 Dolan v. Tigard, 512 U.S. 374 (1994) ............................................................................................ 27 Fenster v. Leary, 20 N.Y.2d 309 (1967) ......................................................................................... 25 Gannett Co., Inc. v. Rochester, 69 Misc. 2d 619 (Sup. Ct. Monroe County 1972) ........................................ 25, 62 Gen. Motors v. Romein, 503 U.S. 181 (1992) ............................................................................................ 55 Grayned v. City of Rockford, 408 U.S. 104 (1972) ................................................................................ 45, 46, 47 v Gross v. Lopez, 419 U.S. 565 (1975) ............................................................................................ 47 Jiovan Anonymous v. City of Rochester, 13 N.Y.3d 35 (2009) ..................................................................................... 28, 60 Kaiser Aetna v. United States, 444 U.S. 164 (1979) ............................................................................................ 27 Koelbl v. Whalen, 63 A.D.2d 408 (3d Dep’t 1978) .......................................................................... 36 Kolender v. Lawson, 461 U.S. 352 (1983) ............................................................................................ 46 Levine v. Whalen, 39 N.Y.2d 510 (1976) ..................................................................................passim Long Island Coll. Hosp. v. Whalen, 68 A.D.2d 274 (3d Dep’t 1979) .......................................................................... 36 Manhattan Pizza Hut v. New York State Human Rights Appeal Bd., 51 N.Y.2d 506 (1980) ......................................................................................... 41 Med. Soc’y v. Serio, 100 N.Y.2d 854 (2003) ....................................................................................... 34 Miranda v. Arizona, 384 U.S. 436 (1966) ........................................................................................ 1, 40 Miranda v. Norstar Bldg. Corp., 79 A.D.3d 42 (3d Dep’t 2010) ............................................................................ 40 Nat’l Endowment for the Arts v. Finley, 524 U.S. 569 (1998) ............................................................................................ 46 New York Ass’n of Counties v. Axelrod, 78 N.Y.2d 158 (1991) ................................................................................... 58, 62 Olmstead v. United States, 277 U.S. 438 (1928) .......................................................................................... 2, 6 vi Packer Collegiate Inst. v. U. of State of New York, 298 N.Y. 184 (1948) ........................................................................................... 35 Passailaigue v. United States, 224 F. Supp. 682 (M.D. Ga. 1963) ..................................................................... 28 People v. Bunis, 9 N.Y. 2d 1 (1961) .............................................................................................. 25 People v. Faxlanger, 1 A.D.2d 92 (4th Dep’t 1955) ............................................................................. 26 People v. Gates, 41 Cal. App. 3d 590, 116 Cal. Rptr. 172 (Ct. App. 1st Dist 1974) .................... 44 People v. Illardo, 48 N.Y.2d 408 (1979) ................................................................................... 42, 44 People v. N.Y. Carbonic Acid Gas Co., 196 N.Y. 421 (1909) ..................................................................................... 25, 26 Schulman v. People, 10 N.Y.2d 249 (1961) ......................................................................................... 43 Slocum v. Berman, 81 A.D.2d 1014 (4th Dep’t 1981) ....................................................................... 47 State v. Hoffman, 149 N.J. 564, 695 A.2d 236 (1997) .................................................................... 45 Sunset Nursing Home v. DeBuono, 24 A.D.3d 927 (3d Dep’t 2005) .......................................................................... 50 Superior Films, Inc. v. Dep’t of Educ., 346 U.S. 587 (1954) ............................................................................................ 44 Timber Point Homes v. County of Suffolk, 155 A.D.2d 671 (2d Dep’t 1989) .................................................................. 36, 48 U.S. Tr. Co. v. New Jersey, 431 U.S. 1 (1977) ................................................................................................ 56 vii Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980) ...................................................................................... 28, 29 Whalen v. Roe, 429 U.S. 589 (1977) ............................................................................................ 28 Wulfsohn v. Borden, 241 N.Y. 288 (1925) ........................................................................................... 26 STATUTES N.Y. C.P.L.R. 5501(b) ........................................................................................... 7, 8 N.Y. C.P.L.R. 5522 .............................................................................................. 8, 24 N.Y. C.P.L.R. 5601(d) ............................................................................................... 7 N.Y. Public Health Law § 2808(5)(c) ...............................................................passim OTHER AUTHORITIES 17 C.F.R. § 240.15c3-1 ............................................................................................ 60 10 N.Y.C.R.R § 400.19(a)(3) ................................................................. 12, 38, 39, 61 McKinney’s Consol. Laws of N.Y., Book 1, Statues § 239(b) ............................... 43 1 PRELIMINARY STATEMENT Those who framed our Constitution and the Bill of Rights were ever aware of subtle encroachments on individual liberty. They knew that “illegitimate and unconstitutional practices get their first footing . . . by silent approaches and slight deviations from legal modes of procedure.” Miranda v. Arizona, 384 U.S. 436, 459 (1966) (quoting Boyd v. United States, 116 U.S. 616, 635 (1886)). This case concerns a legal challenge by private owners and operators of nursing homes in New York (the “Homes”) to the 2009-2010 expansion of an initially well-intentioned State statute, designed in the 1970s to prevent “unscrupulous or incompetent owners” from irresponsibly spending so much of their facilities’ revenues as to “create or increase a negative net worth.” Both Supreme Court Justice Rosenbaum and the Appellate Division, Fourth Department found that, as a result of amendments adopted in 2009 and 2010, this law had burgeoned into an unjustifiable encroachment upon the fundamental constitutional rights and liberties of these private owners. The lower Courts unanimously determined that the 2009 and 2010 amendments to Public Health Law § 2808(5) - - adding a new subsection “c” (“PHL 2808(5)(c)”) requiring owners to obtain permission from the Commissioner of Health for permission to spend their positive equity, i.e., their lawfully earned profits, for any reason other than their Home’s operating expenses - - violated 2 owners’ constitutional rights and constituted an improper delegation of legislative authority. Indisputably, the now stricken 2009-2010 amendments comprising PHL 2808(5)(c) imposed a mandatory “freeze” of 60 days or more on the ability of private owners to access their lawful earnings beyond a fixed threshold equal to 3% of their Homes’ revenues in the preceding year. The Courts below agreed that, notwithstanding the State’s salutary duty to assure high-quality care to its most infirm and vulnerable citizens, this statutory freeze on Home owners’ bank accounts constituted an unreasonable and unnecessary escalation from already existing regulations into the realm of excessive infringement upon protected rights. Experience should teach us to be most on our guard to protect liberty when the government’s purposes are beneficent . . . . The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning, but without understanding. Olmstead v. United States, 277 U.S. 438, 478 (1928) (Brandeis, J., dissenting). Still enforceable today as PHL 2808(5)(a) and (b) are two statutory restrictions on owners’ rights that have existed for almost 30 years and remain unchallenged. The first restriction, contained in the 1977 adoption of PHL 2808(5)(a), requires owners to obtain the Commissioner’s approval to withdraw funds from their Homes if such withdrawals either “create or increase” negative equity, i.e., place their facilities “in the red.” See L. 1997, Ch. 521, § 1. A 1984 3 amendment imposes specific penalties for violations of this restriction on negative equity withdrawals. Then, in 2008, PHL 2808(5)(b) was enacted, requiring that owners also provide “prior written notification” to the Commissioner before withdrawing positive equity exceeding 3% of their annual Medicaid revenues in the prior year. See L. 2008, Ch. 58, Part C, § 72, as amended by L. 2008, Ch. 57, Part OO, § 12. Because PHL 2808(5)(a) already required the Commissioner’s prior written approval for negative equity withdrawals, the effect of PHL 2808(5)(b) was exclusively on positive equity withdrawals, i.e., withdrawals of earnings that did not put a facility in the red. Other than this notification requirement - - which also remains unchallenged - - PHL 2808(5)(b) imposed no restriction or freeze on an owner’s right to freely access positive equity. In 2009, however, the Legislature leapt into constitutionally troubled waters by adopting new subsection “c,” imposing an unprecedented 60-day statutory freeze on all nursing home profits beyond a fixed threshold. See L. 2009, Ch. 58, Part D, § 11. Indisputably, no record evidence whatsoever exists to even suggest that the pre-existing restrictions contained in PHL 2808(5)(a) and (b) were somehow proving to be inadequate or subject to neglect or abuse. For the first time, beginning in 2009, subsection “c” ordained the Commissioner as the de facto conservator of every nursing home that was “in the 4 black.” This plainly paternalistic law relegated adult owners of nursing facilities - - who had skillfully managed to operate their Homes profitably in a challenging economic and regulatory environment - - to the status of children, requiring them to petition their “parents” for periodic “allowances” from their own bank accounts. In addition to there being no record evidence that this immense intrusion into the private affairs of Home owners was necessary or even helpful, the State has failed on each of its three chances (at Special Term, before the Appellate Division, and now here) to show any rational or reasonable relationship between the threshold for the freeze (3% of a prior year’s revenue) and any legitimate state goal. Rather, the State has admitted, time and again, that the 3% number was literally “picked out of a hat,” because the State had no information showing that the freeze was even necessary in the first place. Hence, not only has the State placed itself in loco parentis in relation to indisputably profitable Homes, it has adopted an arbitrary policy with effects that it must admit are random. In response, the State has pointed to the de facto increase of this arbitrary threshold from 3% of Medicaid revenues to 3% of total revenues, which change was enacted at lightning speed in response to the injunction below. In doing so, the State entirely ignores the effect of the 60-day freeze and the resulting infringement of Home owners’ constitutional rights. In truth, the amount of the threshold was never the problem itself. Rather, the freeze was infirm because it 5 bore no rational nor reasonable relationship to the State’s duties under the Public Health Law, nor did the threshold do anything to, as the State claimed in its ever evolving position on the subject, either promote availability of Medicaid services or ensure nursing home financial viability. Without taking into account a Home’s equity level or profit margin, revenue - - standing alone as a measure for the freeze threshold - - is simply a numerator without a denominator. It is part of the equation of a Home’s financial health but absolutely incapable, on its own, of predicting or creating any specific equity level, positive or negative, or of ensuring that a Home remains sufficiently “in the black.” And, since the State admits that owners need not apply for approval to spend funds for Home operations, equipment, etc., the Commissioner’s approval is only required for those withdrawals intended for private, personal reasons, i.e., withdrawals for non-Home uses. Thus in considering “the necessity for the [requested] withdrawal,” as required under the State’s own regulations, the Commissioner must always determine, in his unfettered discretion, whether he approves or disapproves of a private owner’s personal spending choices. Even in biblical times, such intrusions on private spending were unacceptable. “Is it not lawful for me to do what I will with mine own?” Matthew 20:15 (King James). 6 This was also of prime concern for the Framers: The makers of our Constitution undertook to secure conditions favorable to the pursuit of happiness . . . . They conferred, as against the Government, the right to be left alone - - the most comprehensive right and the right most values by civilized men. Olmstead, 277 U.S. at 478. Adding to these infirmities, PHL 2808(5)(c) provided neither notice nor the opportunity to be heard before its freeze took effect. It also restricted Home owners from engaging in political speech. And it violated both equal protection and Contracts Clause guarantees. Mere severance of the carte blanche discretion granted to the Commissioner concerning withdrawal applications cannot remedy these issues. Even without the “such other factors” clause - - upon which the State focusses, turning a blind eye to the immediate, constant, and detrimental effects of the freeze itself - - subsection “c” would remain constitutionally infirm. Indeed, it is subsection “c” in toto, not merely the “such other factors” clause, that must be severed from subsections “a” and “b” of PHL 2808, in order to maintain the Legislature’s clearly expressed intent to appropriately monitor Home equity levels. Accordingly, both Courts below properly struck and severed subsection “c” as an unconstitutional addition to subsections “a” and “b.” Respondents respectfully submit that this Court should affirm. 7 RESPONDENTS’ RESPONSE TO APPELLANTS’ JURISDICTIONAL STATEMENT Respondents agree with Appellants that this action is governed by N.Y. C.P.L.R. 5601(d) and 5501(b). Accordingly, the only matter presently before this Court is the Memorandum and Order of the Appellate Division, Fourth Department, dated March 23, 2012 (R. 906-91). To the extent Appellants’ Notice of Appeal to this Court (R. 898-99) seeks review or modification of the Stipulation and Judgment, dated July 16, 2012 (R. 901-05), such review or modification is beyond the scope of N.Y. C.P.L.R. 5501(b). RESPONDENTS’ QUESTIONS PRESENTED 1. Is a New York State statute that freezes for up to 60 days all private nursing home owners’ duly earned profits in excess of 3% of the facility’s revenues rationally related to the State’s interests in promoting financial viability of nursing facilities and quality of care? Answer Below: No. 2. Is a New York State statute that allows the Commissioner of Health to apply “such other factors” as he, in his sole discretion, deems “appropriate” in deciding whether or not to approve a private nursing home owner’s withdrawal of duly earned profits from a facility in excess of 3% of the facility’s revenues an 8 improper delegation of legislative authority under the New York State Constitution? Answer Below: Yes. 3. Is a New York State statute that allows the Commissioner of Health to apply “such other factors” as he, in his sole discretion, deems “appropriate” in deciding whether or not to approve a private nursing home owner’s withdrawal of duly earned profits from a facility in excess of 3% of the facility’s revenues void for vagueness under the United States Constitution? Answer Below: Yes. 4. Is a New York State statute that requires a private nursing home owner to apply for and obtain prior written approval from the Commissioner of Health for any withdrawal of duly earned profits from a facility in excess of 3% of the facility’s revenues, and wait up to 60 days for such approval, without a pre- deprivation opportunity to be heard or any basis for meaningful judicial review, violative of the procedural due process protections afforded under the New York State and United States Constitutions? Answer Below: The Appellate Division did not reach this question.1 1 As set forth herein, Respondents respectfully submit that the issues not reached by the Appellate Division are properly before this Court because they were considered by the Appellate 9 5. Is a New York State statute that requires a private nursing home owner to apply for and obtain prior written approval from the Commissioner of Health for any withdrawal of duly earned profits from a facility in excess of 3% of the facility’s revenues for any non-facility-related expenditures, including political speech, an improper prior restraint, and therefore barred by the First Amendment to the United States Constitution? Answer Below: The Appellate Division did not reach this question. 6. Is a New York State statute that requires a private nursing home owner to apply for and obtain prior written approval from the Commissioner of Health for any withdrawal of duly earned profits from a facility in excess of 3% of the facility’s revenues, violative of the Contracts Clause of the United States Constitution, where homes and home owners have previously pledged such funds as collateral in pre-existing contractual relationships? Answer Below: The Appellate Division did not reach this question. 7. Is a New York State statute that requires a private nursing home owner to apply for and obtain prior written approval from the Commissioner of Division in its interim, non-final order upon review here, and are pure questions of law. See N.Y. C.P.L.R. 5501(b). The State agrees. (Appellants’ Br. at 5.) To the extent the Court deems these issues beyond its scope of review, and to the extent necessary to afford final relief in this matter, Respondents respectfully request remittance to Special Term for an appropriate determination after further proceedings. See N.Y. C.P.L.R. 5522. 10 Health for any withdrawal of duly earned profits from a facility in excess of 3% of the facility’s revenues, which threshold creates disparate impacts across different homes without a rational basis, violative of the Equal Protection Clauses of the New York and United States Constitutions? Answer Below: The Appellate Division did not reach this question. 11 RESPONDENTS’ COUNTERSTATEMENT OF THE CASE The Undisputed Effect of the Statutory Freeze Upon Owners Owners who invest their personal funds and sweat equity into a private business (such as a private nursing home) typically rely on the resulting positive equity (i.e., profits) for their livelihood: to pay their family bills, the taxes owed from those profits, and their obligations to lenders who have enabled them to purchase or start-up the business, etc. (R. at 57, 60-61, 72, 96, 100, 109, 155.) These owners also use their net earnings to make charitable gifts, support political or social causes of their choosing, pay industry association dues, and pursue their personal desires and interests, free from government interference. By enacting the June 2010 amendment to PHL 2808(5)(c) (effective as of April 1, 2010), the Legislature improperly continued the mandatory freeze (first imposed in 2009) on an owner’s access to a Home’s profits beyond an arbitrary threshold amount. Before the Supreme Court struck down the amendment, owners were required to submit written applications and wait up to 60 days - - or more if the Commissioner so required - - to obtain bureaucratic approval to spend their own money to meet their personal needs, obligations, and wishes. (R. at 37-39, 57, 61-62, 92.) Any withdrawal above the threshold was presumed improper, and any withdrawal made without prior bureaucratic approval was subject to claw-back and 12 up to a 10% penalty, even if the withdrawal would have otherwise been approved. See PHL 2808(5)(c). The freeze was triggered at 3% of a Home’s revenues (previously set at 3% of a Home’s prior-year Medicaid reimbursement). This revenue trigger, however, bears no rational relationship to either the amount of equity (i.e., earned profits) in a Home or its financial viability going forward. Equity, by DOH’s own definition, is “the amount by which the assets of a nursing home exceed its liabilities, and thus it is a measure of the facility’s solvency.” (Appellants’ Br. at 8.) Revenue, however, taken alone, does not ensure any specific equity level (positive or negative) or degree of solvency. Compounding the problem of the freeze, owners had no assurance whatsoever that the Commissioner would permit any requested withdrawal, because PHL 2808(5)(c) granted the Commissioner complete discretion based on any factors he “deem[ed] appropriate,” including whether the Commissioner deemed the withdrawal “necessary.” See 10 N.Y.C.R.R. § 400.19(a)(3)(i). In short, this State agency head was, via PHL 2808(5)(c), placed in loco parentis, controlling access to the private funds of Home owners throughout New York. The Commissioner alone decided what “allowance” to give his “charges” above an arbitrary threshold. (R. at 854-55.) As one example of this intrusive oversight, the request made by LeRoy Village Green was inexplicably only 13 partially approved (in the amount of $150,000), despite more than adequate positive equity ($659,069) to cover the full amount of the original request ($370,000). (See id.) Moreover, the Commissioner - - without statutory authority - - set up, while PHL 2808(5)(c) was in effect, other ad hoc barriers between a Home owner and his or her profits, e.g., requiring applications to be submitted quarterly, further underscoring the periodic “allowance” analogy. (R. at 192, 210, 294, 347, 255, 371, 382, 420, 551, 562, 600.) There is nothing in PHL 2808(5)(c) allowing the Commissioner to require quarterly application submissions. Rather, the Commissioner’s quarterly submission requirement directly conflicted with the requirement in PHL 2808(5)(c) that all withdrawal requests be approved or rejected within 60 days. A request made in June for a withdrawal in December could not, by definition, be approved within 60 days, if the Commissioner required quarterly applications to review withdrawal requests on their merit. (R. at 860 (June request for withdrawal in December denied solely on basis of timing).) The Existing Statutory Power of the Commissioner Without the Statutory Freeze Respondents agree that the State has a genuine interest in assuring that Homes remain financially viable and avoid entering the arena of negative equity, where patient care might be compromised. However, these interests are fully 14 addressed in the original, still valid, subsections “a” and “b” of PHL 2808(5), and other sections of the PHL. Specifically, PHL 2808(5)(a) prohibits any withdrawal of equity so as “to create or increase a negative net worth position” without an owner first obtaining the Commissioner’s “prior approval” pursuant to specific regulations. See PHL 2808(5)(a). Thus, the public is well protected from withdrawals that create or increase negative equity, i.e., operation “in the red.” PHL 2808(5)(b), also amended in June 2010, further provides that no Home “may withdraw equity or transfer assets which in the aggregate exceed three percent of such facility’s total reported annual revenue for patient care services based on the facility’s most recently available reported data, without prior written notification to the commissioner.” See PHL 2808(5)(b) (emphasis added). Thus, an owner must notify the Commissioner before withdrawing net equity exceeding the threshold. Because PHL 2808(5)(a) remained in place, the practical effect of PHL 2808(5)(b) was on positive equity (i.e., profits) alone. And under PHL 2808(5)(b) (which remains in place), the Commissioner, after notification of a potential withdrawal, can - - among other things - - take remedial action, if he has reason to believe that a Home will enter or be dangerously close to a negative equity position, or if he otherwise has reason to believe that the noticed withdrawal will compromise patient care. For example, 15 the Commissioner can require an owner to post a bond, if the Home is in danger of not meeting its obligations (i.e., operating in the red). See PHL 2809. The Commissioner is also in constant contact with Homes concerning their financial viability, possessing the power to inquire, at any time and for any reason, into a Home’s “system of accounts, records, and the adequacy of financial resources and sources of future revenues.” See PHL 2803. The Commissioner can also revoke an operating certificate if a condition exists that is dangerous to health or safety, or if the Home evinces a pattern of violations of the PHL or a substantial violation of patient care standards. See PHL 2806-b. The Commissioner further has the ability to make unannounced visits to monitor patient care. See PHL 2803. Thus, at all times - - before and after the amendment of PHL 2808(5)(c) in June 2010 - - the Commissioner has had plenary authority (short of freezing private bank accounts) to take appropriate action, should a Home endanger operations or negatively affect patient care. The Homes do not challenge these sections of the PHL as they do not infringe upon the fundamental right of Home owners to freely access the profits their Homes have generated. Under these sections, withdrawal of positive equity is still presumed proper, unless and until the Commissioner can assert a valid objection, e.g., under PHL 2803, 2806-b, 2808(5)(b), or 2809. 16 Moreover, a nationwide review of nursing home regulatory schemes (which differ from state to state) has revealed no other state with a mandatory freeze of positive equity even remotely akin to that created by PHL 2808(5)(c). Nor has Respondents’ nationwide review revealed any requirement for state health commissioner approval for private, positive equity withdrawals. Hence, PHL 2808(5)(c) apparently exists in a vacuum, with no other state finding it necessary or reasonable to intrude upon the rights of private nursing home owners to freely access their duly earned profits. The Holding of the Courts Below Both the Supreme Court, Monroe County and the Appellate Division, Fourth Department held that new subsection “c,” even as amended, extended far beyond any legitimate, rational governmental restriction on creating negative equity or requiring advance notice of a withdrawal. Indeed, as the State has consistently read the statute, PHL 2808(5)(c) applies only to non-Home-related expenditures, e.g., personal expenditures, political donations, legal challenges to the Commissioner, etc. (Appellants’ Br. at 14.) As such, PHL 2808(5)(c) presumes that all non-Home-related withdrawals are improper, irrespective of the effect, if any, such a withdrawal would have on the Home. Such withdrawals are, by definition, frozen - - on pain of claw back and 17 10% penalty - - pending the Commissioner’s prior written approval, even where a Home is flush with positive equity and in no danger of compromising patient care. Moreover, as the Courts below found, the State has been unable to articulate any reasonable or even rational connection between total facility revenue (taken on its own) and a Home’s financial health. (R. at 14, 909-10.) While facility revenue is part of the equation, revenue alone is meaningless without taking into account the rate at which positive equity is created (i.e., profit margin), or the amount of positive equity already in the facility. A withdrawal of positive equity at a lower revenue facility equaling 4% of revenue (which would be prohibited under the statute without the Commissioner’s approval), creates no risk at all if the facility has, for example, equity in its accounts equal to 20% of revenues. Yet, a higher revenue facility with equity equal to only 2% of revenue could withdraw its equity down to zero without the freeze taking effect or even any notice to the Commissioner. Similarly, a low-equity (i.e., low-profit)/higher-revenue facility would have a higher withdrawal threshold than a more cost-efficient, profitable facility with lower revenues and expenses. Accordingly, the 3% threshold in PHL 2808(5)(c) (as amended in 2010) is just as nonsensical as the threshold contained in prior PHL 2808(5)(c), which was keyed to Medicaid reimbursement rather than revenue. 18 Further, as the Courts below held, the statutory freeze continues until the Commissioner, in his sole, total, and unfettered discretion, agrees to lift the ban - - a decision that he need not even make until 60 days after receipt of an owner’s application. (R. at 39.) Even then, as shown in the case of the Bayberry owners, the Commissioner can unilaterally extend the 60 days by demanding more “detailed information” from an owner regarding a withdrawal request. (R. at 92- 93.) As DOH has stated, this “detailed information” is only the “minimum” the Commissioner requires before he will even “review” a withdrawal request. (See id.) Neither the State nor the Commissioner, however, has ever identified any “maximum” of information DOH can require - - nor how many times DOH can require more “detailed information” before it begins its “review” - - stating only, without elaboration, that DOH would not require information that DOH deems “irrelevant to the request.” (R. at 145.) Yet subsection (c) sets no limits to the Commissioner’s discretion. It affords him the unlimited right to “consider. . . such other factors as [he] deems appropriate” when deciding upon a withdrawal. Thus, Home owners now have no ability to plan their personal and business affairs, to respond to financial emergencies, to meet immediate family needs, or even make substantial charitable gifts, as their privately earned and owned funds are frozen until the Commissioner 19 subjectively “deems it appropriate” or “necessary” to release them. (R. at 39, 45, 717.) The Undisputed Impact of the Statutory Freeze From the time PHL 2808(5)(c) was enacted until it was enjoined by Special Term, the impact of the statute was real and severe. David Perry, president of Century Health Capital, a company providing financing to nursing home owners in New York State, attested to the actual harm that the very existence of this law imposes upon nursing home owners - - both in its prior form and as amended. (R. at 40-43, 702-05 (Perry Original and Supplemental Affidavits).) This lending expert explained that a borrower’s unrestricted, immediate access to collateral or funds in his or her bank account is crucial to any lender’s decision to grant financing. (See id.) Where such funds or collateral are restricted or even temporarily frozen (as under PHL 2808(5)(c)), a Home owner’s ability to obtain a loan is seriously impaired, and the terms of existing loan agreements requiring an owner to maintain unrestricted collateral are violated. (See id.) Moreover, no owner could ever provide the routine assurance demanded by lenders that he would ever be allowed to use his own funds to pay his obligations, as the Commissioner’s discretion is boundless under the statute and implementing regulations. (See id.) 20 For Leonard Russ and his wife, the sole owners of the Bayberry home in New Rochelle, the application of this law in 2009 - - before it was enjoined - - meant that they were entirely beholden to the Commissioner’s review and approval before they could withdraw their duly earned profits. Because the Russ family owns Bayberry as a partnership, neither Mr. nor Mrs. Russ is permitted to draw a salary for their services to the Home. (R. at 60-61.) Instead, they must rely entirely upon their freedom to access the Home’s profits to pay their family’s living expenses. (R. at 59-93, 719-52 (Russ Original and Supplemental Affidavits).) Between them, the 3% threshold under subsection “c” set a bar (in 2010) at $169,449 as a proxy for their combined salary and benefits. (R. at 721.) Any personal, discretionary expenditures beyond that amount (e.g., for a family vacation, gifts, charitable or political donations, etc.), were prohibited and presumed improper until approved by the Commissioner, who had to decide, in his sole discretion, whether the Russes’ discretionary spending choices were “necessary.” Incredibly, DOH’s implementing regulations require the Commissioner to determine such matters as whether donations to the Russes’ church or synagogue were “necessary;” whether payment of private school tuition for their children would have been “necessary;” and whether their contributions to political (or judicial) candidates would have been “necessary.” 21 Adding insult to injury, although Bayberry had substantial positive equity reserves, when Mr. Russ applied for permission to withdraw additional equity in May 2009 consistent with the reasonable equity withdrawals he had made in 2007 of $188,000 and 2008 of $204,000, he was advised that his application was unacceptable, as it lacked sufficient detail. (R. at 92-93.) That determination effectively put his request in bureaucratic limbo, without any indication when it would be acted upon. John Bartholomew and his six fellow owners of LeRoy Village Green in LeRoy, New York depend upon their ability to freely and responsibly take distributions of their Home’s profits to meet their personal financial obligations as well. (R. at 96.) While they were required to pay combined 2009 taxes of roughly $200,000 on the earnings of their nursing home, the new law allowed them to only withdraw approximately $310,103 for the January 1, 2010-December 31, 2010 period without applying for approval to withdraw more. (R. at 94-97, 753-56 (Bartholomew Original and Supplemental Affidavits).) This left precious little to distribute among the seven owners of LeRoy Village Green without obtaining the Commissioner’s approval after a 60-day delay. And when the Home requested to withdraw $300,000 through the end of the year 2009, the Commissioner only approved a $150,000 withdrawal, requiring the Home to apply again the next quarter for the remaining funds, although there 22 was more than enough positive equity in the facility ($659,069) to accommodate the full amount requested. (R. at 600-01.) All this occurred despite the fact that, as the State concedes, no legislative history supports this change. No evidentiary basis was presented to the Legislature for this quantum leap from avoiding operation “in the red” to restricting an owner’s access to duly earned Home profits. Similarly, in this litigation, the State has presented no evidence whatsoever to justify this new governmental intrusion upon access to private earnings. And inexplicably, the Commissioner created an ad hoc, across-the-board quarterly application requirement, refusing, for example, $150,000 of the LeRoy Village Green request solely because the anticipated withdrawal was more than a quarter away. (R. at 600.) In response, the State argued before both Courts below that there was a real and immediate need for PHL 2808(5)(c) so as to deter owners from removing effectively all equity from their facilities, thereby endangering patient care. Yet, the State proffered no instance of such a calamity occurring at any time before the case below became final. The State had nearly three years to do so - - between November 20, 2009, when Special Term first enjoined PHL 2808(5)(c) and the Stipulation and Judgment from Special Term, entered on July 19, 2012, which gives rise to this appeal. 23 During these three years and even up to the present day, Home owners have been able to withdraw positive equity (i.e., profits) without any freeze or prior approval requirement. The State could muster no parade of horribles, however, to show that the freeze should have been preserved. (R. at 715.) There was no motion for renewal or reconsideration below, nor any attempt by the State to supplement the record in support of its alleged fear. Indeed, the very premise of the State’s alleged fear is baseless: it is undisputed that the Homes at issue are all well-run, profitable businesses - - otherwise there would be no positive equity to withdraw. There is simply no rational basis for this use of the government’s police power against responsible, financially successful owners of nursing homes. Mere unfounded speculation that they might suddenly turn profligate and run their businesses into the ground is not enough. Given all this, PHL 2808(5)(c) indisputably creates significant, ongoing harm to responsible business owners and citizens who own Homes in this State. It also impairs their substantial constitutional property rights as set forth herein. PROCEDURAL BACKGROUND The action below targeted PHL 2808(5)(c) as violative of both the New York State and United States Constitutions on the following grounds: (i) failure to ensure procedural due process; (ii) failure to ensure substantive due process; (iii) improper delegation of legislative authority; (iv) void for vagueness; 24 (v) violation of First Amendment rights; (vi) failure to ensure equal protection; and (vii) improper impairment of contractual obligations. The Home owners raised these challenges both “facially” and on an “as applied” basis. The State asserts that there is no as-applied challenge here, but the State is wrong. The facts underlying the various Home applications, as set forth above, clearly indicate an as-applied issue respecting the Commissioner’s delay and other arbitrary actions under the statute. And the underlying Petition clearly stated an as-applied challenge. Because of PHL 2808(5)(c)’s facial infirmity, however, neither Special Term nor the Appellate Division found it necessary to rule on Respondents’ as- applied challenge. To the extent the statute survives facial challenge here, and should it be necessary to effectuate relief, Respondents respectfully request remittance to Special Term for an appropriate determination after further proceedings. See N.Y. C.P.L.R. 5522. ARGUMENT POINT I PHL 2808(5)(C) VIOLATES SUBSTANTIVE DUE PROCESS. A. PHL 2808(5)(c) Infringes Upon Protected Property Rights. The very crux of this matter is that, by adopting PHL 2808(5)(c), the Legislature placed an across-the-board, immutable freeze on access to duly earned 25 Home profits above an arbitrary threshold level. Although property rights (such as an owner’s right to control the profits earned by his or her Home) are held subject to the police power of the state, that police power is not without limit. See Fenster v. Leary, 20 N.Y.2d 309, 314 (1967) (personal property held subject to reasonable restrictions under police power). The State somehow believes that this Court has no right to consider - - let alone adjudicate - - “the need for and wisdom of the prior approval requirement in § 2808(5)(c).” (Appellants’ Br. at 38.) The State is dead wrong. Where a statute limits constitutionally protected rights (such as the lawful use of property), there must be a fair, reasonable, and just connection to the goal the statute is intended to achieve. See id. (“[I]n order for an exercise of the police power to be valid, there must be ‘some fair, just and reasonable connection’ between it and the promotion of the health, comfort, safety and welfare of society.”) (citing People v. Bunis, 9 N.Y. 2d 1, 4 (1961)); Gannett Co., Inc. v. Rochester, 69 Misc. 2d 619, 625 (Sup. Ct. Monroe County 1972) (“A statute may not . . . deprive a person of his property by curtailing his power of sale unless this infringement and deprivation are reasonably necessary for the common welfare.”). Similarly, a statute may not even prohibit waste of private property without sufficient justification. See People v. N.Y. Carbonic Acid Gas Co., 196 N.Y. 421, 434, 440-41 (1909) (rejecting argument that the State can restrict waste of private 26 property). Indeed, as the Court of Appeals stated in the N.Y. Carbonic Acid Gas Co. case: under [the police] power the legislature cannot require an owner to use his property for the advantage and benefit of others or of the public, or even for his own benefit, nor restrain him from devoting it to such purpose as he sees fit, or even from wasting it, provided such use does not conflict with the rights of others or the public. Id. Rather, there must be a real and substantial relation between the statute’s goal and the restriction applied. See People v. Faxlanger, 1 A.D.2d 92, 95 (4th Dep’t 1955) (statute upheld where it had “real and substantial” relationship to public welfare). Where a due process challenge is raised, a court must - - at a minimum - - weigh the harm caused by the statute against the remediation achieved. See Brandeis Sch. v. Lawrence, 18 Misc. 2d 550, 558 (Sup. Ct. Nassau County 1959) (“When the due process objection is raised it is normally required that the court weigh the harm done by the exercise of the police power against the injury to the community which it is sought to prevent by exercising such power.”). Accordingly, a state statute restricting property rights must be reasonably adapted and designed to achieve its intended ends. See Wulfsohn v. Borden, 241 N.Y. 288, 299 (1925) (“[T]he validity of a police regulation must depend upon the circumstances of each case and the character of the regulation for the purpose of 27 determining whether it is arbitrary or reasonable and whether really designed to accomplish a legitimate public purpose.”) (emphasis added). If its effects are arbitrary or capricious, or go further than is reasonably necessary, the statute is violative of due process under the New York State Constitution. Interestingly, in its brief to the Appellate Division, the State cited the Second Circuit decision in Buffalo Teachers Federation v. Tobe, 464 F.3d 362, 368 (2d Cir. 2006), where the court defined a “legitimate public purpose” for justifying the use of police power as “one aimed at remedying an important general social or economic problem.” Here, indisputably, no evidence whatsoever exists even suggesting an “important general social or economic problem” that justifies the statutory freeze of owners’ positive equity as “reasonably necessary.” Under federal law, the right to use and dispose of personal property is protected by the Due Process Clause. See Dickman v. Comm’r, 465 U.S. 330, 337 (1984) (“[The] right to use money [is] a cognizable interest in personal property.”). Similarly, a property owner has a “right to exclude others” from interfering with his or her property. See Dolan v. Tigard, 512 U.S. 374, 384 (1994) (citing Kaiser Aetna v. United States, 444 U.S. 164 (1979)). The right to exclude others and determine one’s own use of property is “the most essential and beneficial” of all the “bundle of rights” an owner has. See id. As one federal court has stated: “[p]roperty” is more than just the physical thing . . . it is also the sum of all the rights and powers incident to ownership of the physical 28 thing. It is the tangible and the intangible. Property is composed of constituent elements and of these elements the right to use the physical thing to the exclusion of others is the most essential and beneficial. Without this right all other elements would be of little value, for if the owner is deprived of the use of the tangible thing, little more than a barren title is left in his hands. See Passailaigue v. United States, 224 F. Supp. 682, 686 (M.D. Ga. 1963). Due process protects not only private owners’ “bundle of rights,” but also the full range of conduct which an individual is free to pursue without governmental restriction. See Bd. of Regents v. Roth, 408 U.S. 564, 572 (1972) (due process protection extends to full range of liberty interests, not just property interests). Accordingly, the right to privacy also falls within the purview of due process. See Whalen v. Roe, 429 U.S. 589, 599-600 (1977) (acknowledging a protectable interest in “nondisclosure of private information”). Similarly, blanket restrictions on liberty interests and free speech that presume all such activity to be improper violate due process. See Jiovan Anonymous v. City of Rochester, 13 N.Y.3d 35, 54 (2009) (striking blanket restriction of liberty interest and free speech as violative of due process). Because of these protections, in Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980), the United States Supreme Court held that the Florida Legislature could not enact a statute that “recharacterized” private funds (deposited temporarily with a court clerk in an interpleader action) as “public 29 money,” because both the funds themselves and the earnings of the funds constitute private property. To put it another way: a State, by ipse dixit, may not transform private property into public property without compensation, even for the limited duration of the deposit in Court. This is the very kind of thing that the Taking Clause of the Fifth Amendment was meant to prevent. That clause stands as a shield against the arbitrary use of governmental power. Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 164 (1980). Here, PHL 2808(5)(c) violates Home owners’ most basic right to exclude others (i.e., the Commissioner) from interference with their private earnings. As in Webb’s Fabulous Pharmacies, the statute has effectively recharacterized the private, lawfully earned income of Home owners as “public money,” for use only as the Commissioner sees fit. If he - - in his discretion and without objective standards - - believes the money should remain in the business, there it will stay. If the Commissioner - - in his discretion - - wants to promote other kinds of expenditures, they will be promoted. Further, the statute (in both its prior and amended forms) takes a blunderbuss approach (freezing all positive equity at any facility over the 3% threshold, on pain of claw-back and 10% penalty), but gives zero assurance or even any indication of achieving more stability for the Homes at issue. Given the immediate impairment of liquidity it causes, PHL 2808(5)(c) is likely to destabilize Homes, or - - at a minimum - - reduce investment in already 30 profitable Homes. Further, PHL 2808(5)(c) creates a perverse incentive for a Home owner to withdraw as much as he or she can below the 3% threshold, in order to hedge against the Commissioner’s future recalcitrance when approval is needed. For example, PHL 2808(5)(c) incentivizes a Home to draw down its equity under the 3% threshold as far as possible - - even down to near zero and even if the withdrawal is not needed - - so as to build up a cushion of cash outside the facility, should future withdrawal needs exceed the threshold. This is the very opposite of the effect the State says it is targeting with the statute. B. PHL 2808(5)(c) Has No Rational Basis or Reasonable Relationship to Any Legitimate State Interest. Apart from this perverse incentive, the 3% of revenue threshold contained in PHL 2808(5)(c) lacks any reasonable or rational relationship to any legitimate state interest, such as fostering financial stability or quality of care. As explained below, revenue, standing alone, cannot predict any level of Home performance. Interestingly, the State’s position has evolved concerning the specific state interest involved. It began by asserting that the purpose of PHL 2808(5)(c) was to increase availability of Medicaid services throughout the State, the argument being that the more Medicaid patients a home accepted, the higher its annual Medicaid reimbursement and the higher its withdrawal threshold. (R. at 13, 147-48.) That argument completely ignored that, for almost all Homes outside of New York City, Medicaid reimbursement resulted in a net loss, creating a 13% 31 average shortfall (i.e., net loss) statewide. (R. at 53, 648.) The State apparently did not understand that a per-patient loss could never be made up on volume. Given that fact, no rational Home owner would ever increase the number of Medicaid patients (thereby increasing the Home’s losses) in order to obtain a higher equity withdrawal threshold. Doing so would quickly ensure that there would be no positive equity (i.e., profits) to withdraw. The shift from 3% of Medicaid reimbursement to 3% of revenue in the 2010 amendment to PHL 2808(5)(c) may have increased the withdrawal threshold, but it did nothing to change the threshold’s irrationality. Along with amendment came, from the State, changes in justification: first that the threshold was to keep unscrupulous owners from draining equity down to near zero and now that the purpose is to foster both financial stability and quality of care. (R. at 786; Appellants’ Br. at 29.) Yet, linking the threshold to total revenues (rather than Medicaid revenues only) did nothing to ensure that any facility would enjoy any specific equity level (positive or negative), any degree of solvency, or exhibit any level of care. An example elucidates the point. Consider two banks, Bank A with $10 million in annual revenues and Bank B with $1 million in annual revenues. Bank A has annual expenses in the amount of $9,900,000 and Bank B has annual expenses in the amount of $500,000, with neither bank having any other assets or liabilities. 32 On these facts, Bank A has 10 times the revenue as Bank B, but a fraction of the profits (i.e., positive equity, in DOH’s parlance). Hence, in relation to revenue, bigger simply does not indicate which bank is better. Recent history has underscored this axiom with more than a few examples, e.g., Lehman Brothers, etc. In order for any equity withdrawal limit to have the effects the State proffers (financial stability, solvency, etc.), it must, at minimum, take into account a Home’s: (i) current equity level; (ii) profit margin; and (iii) other sources of funding. The statute’s threshold is blind to these factors, and can - - by definition - - only have arbitrary effects. There is no way to predict, from the threshold as written, which Homes will be helped and which will be harmed. The State might as well throw dice to determine the threshold, or apply any other random number unrelated to actual financial health. The effects would be no more arbitrary than they are under the statute as written. Notably, the State does not seriously contest this. The State has already tacitly admitted that the original threshold (3% of Medicaid reimbursement) was arbitrary, since the Legislature quickly abandoned that threshold once it was enjoined below. The State has never challenged that injunction as it concerns the 3% of Medicaid threshold. Yet, if was in the State’s discretion to set the threshold at a certain number, why not defend the 3%-of-Medicaid threshold? The only 33 difference the State has identified between the Medicaid threshold and the revenue threshold is that the revenue threshold is bigger, allowing all Homes to withdraw more of their profits before those profits are frozen for at least 60 days. But bigger, as we have seen above, is entirely unrelated to better, at least when it comes to financial stability and quality of care. Realizing this, the State adopts a defense of pure avoidance - - arguing simply that the Homes’ position concerning rational basis review (as expounded above) is “totally without merit.” (Appellants’ Br. at 42.) This is the sum total of the State’s defense of the revenue threshold. The State offers no proof of any connection between the threshold and any legitimate state interest. Rather, the State admits that this threshold too (like the Medicaid threshold before it) was chosen at random because “there is no readily available and mathematically precise formula for determining when an application to withdraw equity should be submitted for prior approval.” (See id.) This admission speaks as loudly as any example of irrationality proffered above. Accordingly, given the complete lack of reasonable or even rational relationship between the threshold and any legitimate state interest, as well as the presumption under the threshold that all withdrawals above the threshold are improper, no matter what the purpose, the statute was properly stricken as violative of substantive due process. 34 POINT II PHL 2808(5)(C) IS AN IMPROPER DELEGATION OF LEGISLATIVE AUTHORITY. A. The Statute Impermissibly Granted the Commissioner Limitless Authority and Discretion Concerning Equity Withdrawals. The New York State Constitution guarantees a separation of powers between the State’s legislative, judicial, and executive branches of government. See, e.g., N.Y. Const. Art. III, § 1 (“The legislative power of this state shall be vested in the senate and assembly.”). Although the State Legislature may delegate implementation and gap-filling rulemaking to administrative agencies, it may not “cede its fundamental policymaking responsibility to [said] agency.” See Med. Soc’y v. Serio, 100 N.Y.2d 854, 864 (2003). Thus, when the Legislature delegates authority, it must also set sufficient boundaries within which the agency at issue must function. See Levine v. Whalen, 39 N.Y.2d 510, 515 (1976) (“The Legislature may constitutionally confer discretion upon an administrative agency only if it limits the field in which that discretion is to operate and provides standards to govern its exercise.”) (emphasis added); City of Tonawanda v. Tonawanda Theater Corp., 29 A.D.2d 217, 220 (4th Dep’t 1968) (same) (citing City of Utica v. Water Pollution Control Bd., 5 N.Y.2d 164, 168-69 (1959)). At a minimum, the Legislature must articulate some 35 “intelligible principle” to govern the Commissioner’s exercise of his delegated discretion. See Tonawanda, 29 A.D.2d at 220. Where the Legislature fails to provide such guidance, it is - - in effect - - leaving policy-making decisions to the whims of the agency. See Packer Collegiate Inst. v. U. of State of New York, 298 N.Y. 184, 189 (1948) (acknowledging that, where there is such open-ended delegation, “only the wildest guessing could give us any idea of what the Legislature had in mind”). As this Court stated in Small v. Moss: [t]he Legislature must set bounds to the field, and must formulate the standards which shall govern the exercise of discretion within the field. Without the second rule as a corollary to the first rule there would be no effective restraint upon unfair discrimination or other arbitrary action by the administrative officer. The law, but not the will of an administrative officer, may reasonably restrict the use of . . . property. 279 N.Y. 288, 299 (1938). Further, even where a broad enabling statute is otherwise constitutional, an agency improperly “stretch[es] that statute beyond its constitutionally valid reach” whenever it - - by its own actions - - usurps the policy-making function of the Legislature. See Boreali v. Axelrod, 71 N.Y.2d 1, 9 (1987) (constitutional enabling statute rendered unconstitutional via Commissioner’s broad exercise of discretion thereunder); Levine, 39 N.Y.2d at 519 (striking as unconstitutional certain 36 regulations granting Commissioner unbridled discretion vis-à-vis the operation of residential health care facilities). Thus, in Koelbl v. Whalen, 63 A.D.2d 408, 411 (3d Dep’t 1978), the Appellate Division struck down certain residential health care facility regulations because “[t]hey impose[d] no objective standard, but ultimately require[d] the facilities and services to meet the ‘approval’ or ‘satisfaction’ of the commissioner”). See also Timber Point Homes, 155 A.D.2d at 671 (striking down regulation granting the Commissioner of Health Services complete “discretion” to grant a zoning variance concerning sewage systems); Long Island Coll. Hosp. v. Whalen, 68 A.D.2d 274, 276 (3d Dep’t 1979) (disallowing Medicaid reimbursement policy adopted by Commissioner because it failed to express sufficient objective factors underlying its application). As the Appellate Division, Third Department stated in Long Island College Hospital: [w]hile inferences might be drawn from an examination of the reporting form attached to the [policy] memorandum as to which expenses will be disallowed, we conclude that defendant’s announced policy is totally lacking in specificity so as to adequately inform the affected facilities of the standards to be applied in determining which legal fees and litigation expenses will be disallowed. Failure to provide such objective standards renders defendant’s policy unreasonable and arbitrary . . . , particularly since the policy constitutes a dramatic departure from past practices. 68 A.D.2d at 276. 37 Here, by ceding to the Commissioner the right to “consider . . . such other factors as [he] deems appropriate,” the Legislature conferred unfettered discretion to decide whether and how Home owners can spend their own profits. See PHL 2808(5)(c). As noted above, the Commissioner could have exempted certain withdrawals from his scrutiny (which would have lessened the stark and immediate effect of PHL 2808(5)(c)). Instead, the Commissioner can - - and has - - reserved ultimate and, in the end, unquestionable discretion. The State argues that no abuse has yet taken place, but there is no proof in the record as to the actual criteria or internal processes that the Commissioner has applied. Only the “official” reasons for approving or rejecting a request have been addressed. Yet, the “such other factors” provision allows the Commissioner to approve or reject an application for any reason, or for no reason at all. No record is required, so there can be no control or review over the criteria applied. Such discretion is an improper delegation of legislative authority and violative of the New York State Constitution. See Tonawanda, 29 A.D.2d at 220-21 (statute allowing for theater licenses “issued at [the] discretion” of the Mayor held to be an improper delegation of legislative authority). The Levine case is particularly instructive in this regard. There, plaintiff challenged Section 2800 of the New York Public Health Law as unconstitutional for improperly delegating policy-making authority to the Commissioner. See 38 Levine, 39 N.Y.2d at 514-16. This Court held that because of the clear policy guidelines established in Section 2800, the Legislature had not improperly delegated its authority to the Commissioner. See id. The Commissioner, however, overstepped his bounds by granting himself unbridled discretion in relation to certain regulations promulgated under Section 2800. See id. Specifically, the regulations at issue: contained a substantial number of standards, the vast majority of which were modified by words, indicating that they were as “determined”, “acceptable”, “approved” or “permitted” by the department. Being subjective and in the absence of objectivity, these standards were unreasonable and arbitrary and therefore invalid. Id. (emphasis added). In striking down the regulations, this Court applied the same standards as if a duly enacted statute been at issue. See id. at 518 (“An administrative regulation, legislative in character, will be upheld as valid if it has a rational basis, that is, if it is not unreasonable, arbitrary or capricious.”). Under Levine, the Commissioner is barred from promulgating regulations that grant him the discretion to “determine,” “approve,” “accept” or “permit” action by a Home without some sort of objective, non-arbitrary standard. Hence, if the “such other factors” provision of PHL 2808(5)(c) were contained in a regulation (e.g., in 10 N.Y.C.R.R § 400.19(a)(3), to which the State points), it would be facially improper. 39 Yet, in a perfect bootstrap argument, the State uses 10 N.Y.C.R.R. § 400.19(a)(3), to rationalize PHL 2808(5)(c). (See Appellants’ Br. at 12.) (“[10 N.Y.C.R.R. § 400.19(a)(3)] set[s] forth criteria for specific review in requests for prior approval to withdraw equity.”).) If, under Levine, the Commissioner cannot grant himself unfettered discretion in a regulation (i.e., § 400.19(a)(3)), the Legislature cannot leave it up to the Commissioner (in his regulations) to define the “limits” of his discretion. The Legislature’s clear job is to provide the “intelligible principle” by which the Commissioner’s actions, and his regulations, are limited. Here, the Commissioner has again written his own rules, after the Legislature simply ceded the field. As a result, we are left with only the “wildest guess” as to what the Commissioner may consider. How does the Commissioner determine if an owner’s personal choice in seeking the withdrawal renders it “necessary?” Does the owner’s status as a favored or disfavored provider in the eyes of the Commissioner matter? What about an owner’s political affiliation or activism, or the fact that a Home or its owner has previously brought legal challenges to the Commissioner’s actions, or has criticized the Commissioner’s actions in the past? Will Respondents’ participation in this lawsuit affect the Commissioner’s decisions vis-à-vis requests for equity withdrawals going forward? 40 There is no way to know. Further, in the case of the Bayberry application and the Commissioner’s ad hoc, quarterly application requirement, the Commissioner has irrationally extended his discretion under PHL 2808(5)(c) beyond constitutional bounds. The Commissioner has shown that he intends to reserve complete discretion concerning the withdrawals, and take as much time as he wants to render his decision. (R. at 706-09, 719-52 (Supplemental Affidavits of Leonard Russ and Robert Nasso, C.P.A).) The Commissioner also transgressed upon constitutionally protected areas such as privacy rights, property rights, and free speech vis-à-vis an owner’s intended use of the proceeds of a withdrawal. (See id.) A more expansive grant of discretion to the Commissioner - - in clear violation of New York State’s anti-delegation principle - - is difficult to imagine. B. Ejusdem Generis Cannot Rescue PHL 2808(5)(c). Realizing this gap, the State falls back on the principle of ejusdem generis, which generally states that a catch-all term included in a list of more specific terms is to be read, and restricted, in light of those specific terms. See Miranda v. Norstar Bldg. Corp., 79 A.D.3d 42, 47 (3d Dep’t 2010). Ejusdem generis is no cure here. Miranda, for example, dealt with a scaffolding-law claim between private litigants (not discretion granted an administrative agency). The plaintiff sought a construction of the term “safety device” as used in the statute. See id. The question of whether or not an employer 41 or owner provided a “safety device,” however, is a specific, factual question, subject to a rational resolution. The scaffolding law does not require “safety devices as the State deems appropriate;” rather, it puts owners/employers on notice that certain, specific safety devices, as delineated under the statute and case law, are required. Here, there is no such delineation. Home owners have no guidance whatsoever as to what “other factors” the Commissioner will deem appropriate. They have no guidance as to what withdrawals the Commissioner will deem “necessary.” The State’s other cases on ejusdem generis are equally inapposite. Manhattan Pizza Hut was an employment discrimination case where the plaintiff sought an expansive reading of the phrase “marital status.” See Manhattan Pizza Hut v. New York State Human Rights Appeal Bd., 51 N.Y.2d 506, 512 (1980). This Court found that the general phrase “marital status” was limited because of, among other things, the words used (e.g., “status”) and the strong legislative history supporting such limitation. See id. The Court then turned to the canon of ejusdem generis, but applied it to the legislative history (which listed several terms to be understood under “marital status”), not to the statute itself. See id. Here, by contrast, the State applies ejusdem generis to the statute itself, and the relevant legislative history is devoid of the guidance this Court found so helpful in Manhattan Pizza Hut. 42 People v. Illardo involved a conviction for promotion of obscenity, and construction of the phrase “other similar justification” as contained in a statutory list of affirmative defenses. See People v. Illardo, 48 N.Y.2d 408, 416 (1979). Here, tellingly, the word “similar” is missing from the statutory catch-all, creating a vastly larger gulf to bridge via ejusdem generis than was the case in Illardo. Appellants’ Circuit City case involved an employer’s attempt to except all employment contracts from the Federal Arbitration Act, although most circuits had limited the relevant residual caveat to transportation workers. See Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 113 (2001). The Supreme Court declined the employer’s expansive reading because it would have rendered other stated limiting factors redundant, thereby violating the clear legislative intent that the stated factors should have meaning and effect. See id. at 144-15. “Under this rule of construction the residual clause should be read to give effect to the [stated clauses] . . . .” See id. In this regard, Circuit City militates strongly against the State’s position on ejusdem generis. If the “such other factors” is read as “such other factors concerning financial stability and quality of care,” as the State suggests, then it - - like the expansive reading proffered by plaintiff in Circuit City - - would swallow the rule. The other four stated factors would be rendered redundant and without effect, which demonstrates that Legislature intended, via the “such other factors” 43 clause, to create factors other than (i.e., independent and not redundant of) those listed. Only so does the statute make sense: with the “such other factors” clause extending to other, non-stated factors, to be determined by the Commissioner at his discretion. And therein lies the constitutional rub. Moreover, the alleged “specific factors” to which the State points (the first four factors in the statute) are themselves extremely broad, e.g., a “facility’s overall financial condition, any indications of financial distress,” etc. See PHL 2808(5)(c) (emphases added). As such, they do not provide the kind of specificity or “inevitable purport” required for ejusdem generis to apply. See McKinney’s Consol. Laws of N.Y., Book 1, Statues § 239(b). Indeed, because the alleged “specific factors” in the statute are themselves of a different nature (encompassing (i) a facility’s financial health; (ii) its payments to the Commissioner, as well as (iii) issues of patient care), ejusdem generis (which requires that all specific factors be of the same kind) cannot apply. See id. The irony here is that ejusdem generis is usually used as a shield against an overreaching state actor. See, e.g., Schulman v. People, 10 N.Y.2d 249, 256-57 (1961) (ejusdem generis limited state actor from expanding statutory power beyond intended bounds). But here, the State uses ejusdem generis as a sword, i.e., to wrest from Home owners control over their own, private bank accounts. And, by arguing that the “such other factors” language should be restricted by ejusdem 44 generis, the State tacitly admits that the statute should and could have been drawn more narrowly. Further, research has uncovered no case in the past 50 years where ejusdem generis was used to rehabilitate the constitutionality of a New York State statute granting, on its face, unlimited discretion to an administrative agency. Rather, the last such case involved the now-defunct censorship laws, under which it was left to the Board of Regents to determine whether a work of art (such as a film) was “immoral” or not. See Commercial Pictures Corp. v. Bd. of Regents, 305 N.Y. 336, 346 (1953). Shortly thereafter, the decision in Commercial Pictures was reversed, per curiam, by the United States Supreme Court. See Superior Films, Inc. v. Dep’t of Educ., 346 U.S. 587, 588 (1954). Hence, ejusdem generis appears to have little strength in New York to save an otherwise constitutionally infirm statute. Tellingly, the only cases the State can muster in support of a constitutional application of ejusdem generis are from other states and well over a decade old. (See Appellants’ Br. at 30-31.) And these out- of-state cases all involved residual clauses that were clearly limited by their own terms, as shown above in the Illardo case. See People v. Gates, 41 Cal. App. 3d 590, 595, 116 Cal. Rptr. 172, 175 (Ct. App. 1st Dist 1974) (construing “other related factors”) (emphasis added); Binkowski v. State, 322 N.J. Super. 359, 383, 731 A.2d 64, 77 (App. Div. 1999) (“any other similar action or activity”) 45 (emphasis added); State v. Hoffman, 149 N.J. 564, 576, 695 A.2d 236, 242 (1997) (“any other manner likely to cause annoyance or alarm”) (emphasis added). Here, there are no such inherent limitations contained in the phrase, “such other factors as the commissioner deems appropriate.” Further, even if ejusdem generis did apply to limit the expanse of these “other factors” (which it does not), it would not cure the lack of any reasonable or rational basis to PHL 2808(5)(c). POINT III PHL 2808(5)(C) IS VOID FOR VAGUENESS. Under the United States Constitution, a statute may not be unduly vague, such that a person has no guide against which to measure his or her conduct. See Grayned v. City of Rockford, 408 U.S. 104, 108 (1972) (“It is a basic principle of due process that an enactment is void for vagueness if its prohibitions are not clearly defined.”). “Void for vagueness” is, among other things, a “due process” infirmity, and occurs wherever a statute “either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application . . . .” See Connally v. Gen. Constr. Co., 269 U.S. 385, 391 (1926) (impermissibly vague prevailing wage law relied upon Commissioner to determine the scope of the terms “current rate of wages” and “locality”). 46 In order to survive a “void-for-vagueness” challenge, a statute must provide: (i) fair notice of the conduct required or prohibited; and (ii) certain minimal objective standards for application. See Kolender v. Lawson, 461 U.S. 352, 357-58 (1983) (certain minimal objective standards required to avoid a finding of void-for- vagueness). Further, the Supreme Court has made clear that such objective standards - - where they do exist - - must not invite arbitrary or discriminatory enforcement. See Grayned, 408 U.S. at 108-09. “Void-for-vagueness” challenges can apply to both criminal and civil statutes. See, e.g., Nat’l Endowment for the Arts v. Finley, 524 U.S. 569, 580-81 (1998) (void-for-vagueness challenge of civil statute). PHL 2808(5)(c) undeniably restricts all use of positive equity over an arbitrary threshold amount, no matter what the intended purpose. See PHL 2808(5)(c). As such, and given the limitless discretion the “such other factors” clause confers upon the Commissioner, PHL 2808(5)(c) fails to provide Home owners with any adequate guidepost by which they may direct their behavior. Under the statute as written, how is an owner supposed to know what withdrawals will be approved and what withdrawals will be denied? How is an owner supposed to know what non-Home-related withdrawals the Commissioner will deem “necessary?” And the statute does nothing to inhibit arbitrary action by the Commissioner. On the contrary, it invites the very kind of arbitrary and 47 discriminatory enforcement complained of in Grayned, such as the Commissioner’s ad hoc, quarterly application requirement. Accordingly, PHL 2808(5)(c) is void for vagueness and was properly stricken. POINT IV PHL 2808(5)(C) PROVIDES NO PROCEDURAL DUE PROCESS. The federal Due Process Clause requires that whenever substantive property rights are impaired, the owner must be afforded adequate notice and an opportunity to be heard. See Gross v. Lopez, 419 U.S. 565, 580 (1975) (requiring notice and an opportunity to be heard in school suspension statute); see also id. (“[Fairness] can rarely be obtained by secret, one-sided determination of facts decisive of rights . . . .”) (citing Anti-Fascist Committee v. McGrath, 341 U.S. 123, 170 (1951) (Frankfurter, J., concurring)). Opportunity to be heard must be afforded before substantive rights are infringed. See Curiale v. Ardra Ins. Co., 88 N.Y.2d 268, 278 (1996) (upholding N.Y. Ins. Law § 1213(c) because it provided “notice and an opportunity to be heard before being subjected to [a] preanswer security requirement”) (emphasis added). Under New York law, even where a statute or regulation provides for an opportunity to be heard, if its substantive requirements do not provide for meaningful judicial review, it will be stricken as unconstitutional. See Slocum v. Berman, 81 A.D.2d 1014, 1015 (4th Dep’t 1981) (“The regulations must give 48 sufficiently definite warning when measured by common understanding and practices and articulate an objective standard which governs the exercising of the discretion and affords the possibility of meaningful judicial review.”) (internal quotation marks and citations omitted); Timber Point Homes v. County of Suffolk, 155 A.D.2d 671, 671 (2d Dep’t 1989) (same). The Timber Point Homes court articulated this requirement well: In exercising the authority granted an administrative agency pursuant to enabling legislation, the Court of Appeals has stated that the agency must articulate objective standards against which an ultimate determination could be measured. The reasoning upon which this requirement is premised is that promulgation of adequate standards will serve to safeguard against arbitrary administrative action and to ensure meaningful judicial review. See Timber Point Homes, 155 A.D.2d at 671 (internal quotation marks and citations omitted). Here, PHL 2808(5)(c) provides that “after opportunity for a hearing, the Commissioner may require replacement of the withdrawn equity or assets and may impose a penalty for violation of the provisions of this subdivision in an amount not to exceed ten percent of any amount withdrawn without prior approval.” PHL 2808(5)(c) (emphasis added). This provision offers post hoc vindication only. And given the unlimited discretion provided to the Commissioner under the statute, there is no reasonable basis on which judicial review could proceed. 49 There is no requirement that the Commissioner ever articulate the reasons why he approves or denies a withdrawal request. There is no record required. And even if a record were created as a matter of course, there is no reasoned basis on which a court could decide whether the Commissioner’s discretion was proper. Rather, the Commissioner would - - under the letter of PHL 2808(5)(c) - - always be right (because his discretion is absolute) and his determination always final. Realizing this deficiency, the State argued before the Appellate Division that the withdrawal application process itself was an opportunity to be heard. By pointing to a pre-denial step in the process, however, the State admitted - - as it had to - - that a pre-denial right to be heard is required. Yet, the initial and most stinging deprivation of PHL 2808(5)(c) was imposed upon owners the moment it was enacted. From that moment on, every private bank account holding positive Home equity was frozen, and then any withdrawal above the threshold delayed - - at minimum - - for 60 days. As recent market swings have shown, 60 days can be a lifetime, financially. And this delay was exacerbated by the Commissioner’s ad hoc quarterly application requirement. Further, the application process to which the Commissioner pointed in the statute’s defense is itself solely governed by the Commissioner. Here, the Commissioner writes his own rules. “Trust me,” he says, when he takes control of a Home’s profits. “Trust me,” he says, when he 50 asks for an owner’s personal information. “Trust me,” when he waits for 60 days or more to give an answer, or requires quarterly applications. This process is plainly not an opportunity to be heard. Rather, it is - - in itself - - part and parcel of the unconstitutional nature of this statue. As for C.P.L.R. Article 78 (to which the State also pointed below), protection there can also only be had post hoc. It is, therefore, by definition, insufficient to satisfy due process. See Curiale, 88 N.Y.2d at 278. And at Special Term, Appellant argued that PHL 2801-c, provided due process protection. (R. at 789.) Appellant has dropped that argument here, because, under PHL 2801-c, a Home must first show a “violation” or a “threatened violation” of the Public Health Law. How can a Home ever show that the Commissioner overstepped his bounds when the Legislature has set no bounds at all? In this regard, courts have upheld DOH’s right to reinterpret and change its longstanding policies. See Sunset Nursing Home v. DeBuono, 24 A.D.3d 927, 928 (3d Dep’t 2005) (an attempt “to compel the Department to adhere to its so-called ‘policy’ or past practice . . . is nothing more than the assertion of estoppel which ‘cannot be invoked against a governmental agency to prevent it from discharging its statutory duties’”). Hence, should a future Commissioner articulate a different set of standards falling under the “such other factors” clause, or disclaim any standard, that too would be correct under PHL 2808(5)(c). 51 This completely undermines the State’s reliance here on its current withdrawal request form, in relation to which the State argues that there is no infringement of personal spending rights because no information is required for personal withdrawals. (See Appellants’ Br. at 43-44.) Under Sunsent Nursing Home and the statute as written, the Commissioner could - - at any time - - issue a new form that requires “detailed information” concerning a personal withdrawal request. See PHL 2808(5)(c) (withdrawal forms to be “acceptable to the department”). And, according to DOH, any Home-related request is not covered by PHL 2808(5)(c), hence, any request falling under the statute is, by definition, personal. Accordingly, under the statute as written, there is neither notice of what kinds of withdrawals are permitted, nor is there any reasonable basis for judicial review, as the Commissioner can and has applied whatever criteria he sees fit, without the need for a record. Subsection “c” thus fails to afford procedural due process, and should remain stricken. POINT V PHL 2808(5)(C) IS AN IMPROPER PRIOR RESTRAINT OF SPEECH AND THEREFORE VIOLATIVE OF THE FIRST AMENDMENT TO THE UNITED STATES CONSTITUTION. A restriction upon money used for speech-related activities can infringe First Amendment rights. See Buckley v. Valeo, 424 U.S. 1, 14 (1976) (statute affecting 52 political contributions “operate[s] in an area of the most fundamental First Amendment activities”). The government may not require prior approval of corporate expenditures intended for speech purposes, including political speech. See Citizens Utd. v. F.E.C., 130 S. Ct. 876, 888, 558 U.S. 310, ___ (2010) (holding that “[t]he Government may regulate corporate political speech through disclaimer and disclosure requirements, but it may not suppress that speech altogether.”) (emphasis added). “Laws that burden political speech are ‘subject to strict scrutiny,’ which places the burden on the Government to prove that the restriction ‘furthers a compelling interest and is narrowly tailored to achieve that interest.’” See id. at 898 (citing cases). Citizens United is highly applicable here. There, the Supreme Court struck as unconstitutional a regulatory scheme, enabled by federal law, which restricted a company’s ability to engage in political speech. See id. at 886-88. Companies were restricted from using their “general treasury funds,” i.e., their positive equity, to air political messages under certain circumstances. See id. In questionable situations, a company could apply for an advisory opinion, but there was no guaranty the speech at issue would be allowed. See id. 895-96. Under these circumstances, the Supreme Court held that This regulatory scheme may not be a prior restraint on speech in the strict sense of that term, for prospective speakers are not compelled by law to seek an advisory opinion from the FEC before the speech takes place. As a practical matter, however, given the complexity of the 53 regulations and the deference courts show to administrative determinations, a speaker who wants to avoid threats of criminal liability and the heavy costs of defending against FEC enforcement must ask a governmental agency for prior permission to speak. These onerous restrictions thus function as the equivalent of prior restraint by giving the FEC power analogous to licensing laws implemented in 16th- and 17th-century England, laws and governmental practices of the sort that the First Amendment was drawn to prohibit. See id. (initial emphasis added) (citations omitted). Here, the scheme envisioned by PHL 2808(5)(c) is even more onerous than that rejected in Citizens United. It is undisputed that - - if a Home owner wishes to spend more than 3% of his prior year’s revenues on political speech, or if an owner has already met his threshold and wants to spend one additional dollar on political speech from his Home’s profits - - the owner, on pain of claw-back and penalty, must apply to the Commissioner for permission, and then wait at least 60-days for a response. And, the Commissioner has required the owner must make such applications quarterly. There is no situation in which a withdrawal above the threshold for speech purposes would be proper (e.g., no exclusion under the statute or the Commissioner’s regulations for political contributions, lobbying efforts, etc.). Hence, all such withdrawals for speech purposes - - and it is uncontested that Home owners regularly make such withdrawals in the form of NYSHFA dues, etc. - - are presumed improper. Although perhaps not a “prior restraint in the strict sense of that term,” PHL 2808(5)(c) certainly requires Home owners to “ask a 54 governmental agency for prior permission to speak.” Accordingly, it “function[s] as the equivalent of prior restraint,” and was properly stricken. See id. The State admits that it is only targeting non-Home-related expenditures via PHL 2808(5)(c). This, by definition, includes the political speech in which Respondents regularly engage. Respondent NYSHFA is a leading advocacy group for residential health care facilities in New York State, lobbying the state and federal governments on behalf of member Homes. NYSHFA also frequently commences legal challenges on behalf of member Homes in the State and federal courts against the Commissioner’s regulatory actions. NYSHFA is funded by its members, many of whom, such as Leonard Russ, Robert Chur, and Robert W. Hurlbut, are active participants and supporters of local, state, and national political or industry groups, and provide funding to those causes or groups via Home equity withdrawals. Respondents are, in short, vocal proponents of their industry, often to the Commissioner’s strong displeasure. On several occasions in recent years, NYSHFA and its members have commenced successful legal actions against the Commissioner, holding him accountable to the law when he abused his discretion or acted irrationally (such as the successful challenges to PHL 2808(5)(c) below). Clearly, PHL 2808(5)(c), if reinstated, would impermissibly intimidate Home owners from challenging the Commissioner’s future actions in light of his 55 unfettered discretion to deny them access to their profits, or restrict such access on a quarterly basis. This intimidation is not speculative as the State dismissively contends. Rather as Richard Herrick, President and CEO of NYSHFA, attested in his Affidavit, owners who had pending applications before the Commissioner for approval of an equity withdrawal chose not to join the action below as named Plaintiffs because they feared possible bureaucratic retaliation. (R. at 45-47.) And such retaliation need not be overt. It can take the form (as in the Bayberry application) of an unexplained and - - under the statute as written - - uncontestable delay by the Commissioner to reach a decision, or a partial approval only (as in the LeRoy Village Green application). POINT VI PHL 2808(5)(C) IMPAIRS OBLIGATIONS OF PRE-EXISTING CONTRACTS. Under the Contracts Clause of the United States Constitution, “no State shall . . . pass any . . . Law impairing the Obligation of Contracts.” See U.S. Const. Art. I, § 10, cl. 1. In determining whether a state law runs afoul of the Contracts Clause, a court must determine: (i) “whether there is a contractual relationship;” (ii) “whether a change in law impairs that contractual relationship;” and (iii) “whether the impairment is substantial.” See Gen. Motors v. Romein, 503 U.S. 181, 186 (1992); Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244-45 (1978) (same). 56 Further, where a statute creates a “sudden, totally unanticipated, and substantial retroactive” change on contractual obligations without substantial justification, it will be stricken as violative of the Contracts Clause. See Allied Structural Steel Co., 438 U.S. at 249. Where there is substantial impairment, the statute at issue “must be upon reasonable conditions and of a character appropriate to the public purpose justifying its adoption.” See U.S. Tr. Co. v. New Jersey, 431 U.S. 1, 23 (1977) (retroactive alteration of contractual obligation violative of contracts clause); see also 19th St. Assocs. v. New York, 79 N.Y.2d 434, 444 (1992) (striking as violative of the Contracts Clause a state statute that had “tenuous connection” to otherwise legitimate state interest). As the United States Supreme Court has stated, where contractual rights or obligations are infringed, the standard of review is not rational basis - - as is the case with a substantive due process or equal protection challenge - - but rather the more stringent standard of whether the statute “is reasonable and necessary to serve an important public purpose.” See U.S. Tr. Co., 431 U.S. at 25-26 (emphasis added). Both now and before the Appellate Division, the State entirely failed to address the Homes’ Contract Clause challenge. The State’s silence is telling. As set forth in the Perry, Nasso, Chambery, and Russ Original and Supplemental 57 Affidavits, the freeze inherent in PHL 2808(5)(c) created a substantial impairment of the pre-existing contracts of Home owners, while the statute was in effect. Numerous NYSHFA members are parties to existing contracts that require their immediate access to Home profits. For example, individual owners, such as Gregory Chambery of Maplewood, are obligors under promissory notes arising from the purchase of their Homes or are guarantors on loans, and rely upon their free access to their Home’s profits to honor these obligations. The statute denies such free access, thereby impairing both existing contracts and future access to capital. Further, other owners are obligated by contracts to guarantee Home obligations, personal debts, or other business investments, which obligations are now substantially impaired by the 60-day freeze and requirement for prior approval. As a result, Respondents have met the criteria for a successful Contracts Clause challenge, and PHL 2808(5)(c) should remain stricken. POINT VII PHL 2808(5)(C) VIOLATES THE EQUAL PROTECTION CLAUSE. The gravamen of an equal protection challenge is that under a statute, similarly situated entities or individuals are treated differently. See Bower Assocs. v. Town of Pleasant Valley, 2 N.Y.3d 617, 630 (2004) (“The essence of a violation of the constitutional guarantee of equal protection is, of course, that all persons 58 similarly situated must be treated alike.”). Where the challenge - - as here - - does not involve a suspect classification (such as race, age or gender), the statute at issue is presumed constitutional if it is “rationally related to a legitimate state interest.” See City of Cleburne v. Cleburne Living Ctr., 473 U.S. 432, 440 (1985). Accordingly, where an across-the-board percentage threshold leads to disparate impact without any rational basis, it should be stricken. See New York Ass’n of Counties v. Axelrod, 78 N.Y.2d 158, 166-67 (1991) (striking as irrational a regulation imposing an approximate 3% across-the-board reduction in Medicaid reimbursement). The New York Association of Counties case is instructive in this regard. Although there the Court did not reach the question of constitutionality, it applied the same rational basis test at issue here. In New York Ass’n of Counties, the Commissioner recalibrated Medicaid rates by imposing an across-the-board percentage reduction in Medicaid reimbursement to all nursing homes across the State. This 3% reduction had a disparate impact among similarly situated homes that was unrelated to any stated goal of the Commissioner. See id. Specifically, certain facilities that had not engaged in “paper optimization” (thereby improperly inflating their reimbursement rate, according to DOH) were penalized, while others who had engaged in “paper optimization” received a windfall. See id. On that basis, this Court struck the regulation as irrational. 59 Under this analysis, PHL 2808(5)(c) fails to afford equal protection. To begin with, there is disparate treatment. Owners of financially sound Homes with high profit margins but lower total revenues are restricted from withdrawing even relatively small amounts of equity, while owners of Homes with low profit margins and higher revenues (e.g., Homes with a high Medicaid to Private Pay ratio) receive a windfall and may withdraw larger amounts at will, even down to zero. Second, the statute fails to exhibit any rational basis for this disparate treatment. Indeed, because Medicaid reimbursement fails to cover a Home’s allowable operating costs (admittedly causing 14% Medicaid shortfalls statewide), large Homes with higher Medicaid ratios, which may withdraw at higher levels, are more likely to suffer losses. If the State is aiming to prevent the failure of low- equity and/or low-profit Homes (as it seems to assert here), the withdrawal threshold must be keyed to something other than total revenue. Total revenue - - taken alone - - simply cannot provide an accurate picture of a Home’s financial health. This is the same issue rendering the statute unreasonable and irrational under the substantive due process analysis applied above. Had the State wanted to ensure some specific level of equity in a home, there are numerous examples that do not run afoul of equal protection. For example, the Securities and Exchange Commission regulates the financial health of broker- dealers by imposing a minimum (and rationally based) requirement that such 60 entities maintain net capital of “$250,000 or 2 percent of aggregate debit items . . . .” See 17 C.F.R. § 240.15c3-1. Here, no minimum is set, and no maximum to how far the Commissioner’s discretion reaches. Moreover, no other state in the union has apparently seen the need so pressing to the State to require a minimum equity level in a nursing home. Hence, the very “necessity” the State argues is in serious question. POINT VIII THE “SUCH OTHER FACTORS” CLAUSE OF PHL 2808(5)(C) IS NOT SEVERABLE. When a portion of a statute is unconstitutional, it may be severed if the remaining sections can stand alone and still effect the intent of the Legislature. See CWM Chem. Servs., L.L.C. v. Roth, 6 N.Y.3d 410, 424-25 (2006); see also Jiovan Anonymous, 13 N.Y.3d at 54 (concurring opinion) (striking ordinance where it did “not contain a severability provision and nothing in the record before us indicates that the [legislating body] considered this issue”). As set forth above, PHL 2808(5)(c) is unconstitutional in toto, and was properly stricken. Moreover, like the ordinance at issue in Jiovan, subsection “c” has no severability provision. Realizing this, the State attempts a classic straw- man move. It begins by defending the “such other factors” clause of PHL 2808(5)(c), claiming that the clause should stand solely because it hasn’t yet been 61 abused. The State then asserts that, if the clause is improper, it alone should be severable, so that the rest of PHL 2808(5)(c) can stand. In setting up (and knocking down) this straw-man, the State ignores the fact that the 60-day freeze and the irrational 3% threshold would remain intact. The Commissioner would also retain unfettered discretion to decide whether an owner’s proposed use of his own money is “necessary.” See 10 N.Y.C.R.R. § 400.19(a)(3). Furthermore, severing the “such other factors” clause alone would do violence to the intent of the Legislature in enacting PHL 2808(5)(c). The statute was clearly intended to confer very broad discretion on the Commissioner (in fact, impermissibly broad discretion), as shown by the other broad factors it calls on the Commissioner to consider, such as a “facility’s overall financial condition” or “any indications of financial distress.” See PHL 2808(5)(c) (emphases added). As long as pre-approval (with its concomitant freeze) remains in place, the Commissioner retains his unfettered discretion, which is clearly improper under Levine. What may be stricken, without affecting legislative intent, is PHL 2808(5)(c) in toto, leaving PHL 2808(5)(a) and (b) intact. PHL 2808(5)(c) was added to the statute separately from the other subsections and removing it alone - - as the Appellate Division rightly concluded - - would leave the other, wholly adequate protections concerning equity withdrawal in place. The Courts below 62 therefore properly applied the law on severability, and restricted their action to the offending subsection “c” of PHL 2808(5). POINT IX THERE IS NO REPORTED CASE APPLYING NEW YORK LAW THAT UPHOLDS A PROVISION SUCH AS PHL 2808(5)(C). As set forth above, New York courts have regularly stuck down laws or regulations vesting an administrative or other government official with carte blanche discretion to set public policy. See Gannett, 69 Misc. 2d at 625; Tonawanda, 29 A.D.2d at 220. Appellant’s only response is to argue that the Commissioner should be afforded deference under the statute, even if it the statute was technically overbroad. Yet, for all of the State’s protestations, it cites no case, either on the state or federal level, where a statute such as PHL 2808(5)(c) was upheld. Rather, as the New York Ass’n of Counties case (cited above) indicates, arbitrary thresholds that create disparate impact are irrational per se, and, as the Levine, Gannett, and City of Tonawanda cases (also cited above) show, an administrative or other government official may not wield unbridled discretion (no matter what its source). In fact, the State concedes, if only tacitly, that a law that establishes no standards at all is unconstitutional. (See Appellants’ Br. at 12, 24, 27-28 (arguing that certain standards must apply to the Commissioner’s discretion under PHL 2808(5)(c).) Yet the State offers no specifics, stating only that “[t]he Department 63 does not read the ‘other factors’ language to allow the Commissioner to consider factors that are irrelevant to the request or the purpose of the prior approval requirement.” (R. at 779, 808; Appellants’ Br. at 12.) “Trust me,” the State says again, but therein again lies the constitutional rub. There are no objective standards that the State must meet. The mere fact that PHL 2808(5)(c) can be read to encompass both relevant as well as irrelevant factors shows that the statute cannot pass constitutional muster. And, by arguing that PHL 2808(5)(c) should be read more narrowly than it is drafted, the State again admits that the statute should have been drafted more narrowly. Under Levine, it is not the Commissioner’s place to unilaterally concoct his own personal standards where the Legislature has failed to do so. It is not the Commissioner’s place to decide how broadly or narrowly to read the carte blanche discretion he has been granted. The United States Supreme Court - - in a case cited prominently by Defendants below but tellingly absent here - - is in accord. See A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495, 531-42 (1935) (striking a statute granting the President carte blanche discretion to promulgate fair-trade regulations as an “unconstitutional delegation of legislative power”). Indeed, A.L.A Schechter is the hallmark federal case barring improper delegation of complete discretion to an administrative agency. As a result, there is no authority directly on point stating that PHI, 2808(5)(c) should stand. Rather, the authority stands strongly against the statute, and it should remain stricken. For the reasons set forth above, Respondents respectfully request that this Court issue an order: (i) affirming the Memorandum and Order of the Appellate Division in all respects; and (ii) granting such other and further relief as this Court deems just, equitable, and proper. Dated: Rochester, New York Respectfully submitted, February 27,20 13 HARTER SECREST & EMERY LLP By: F. Paul Greene John P. Bringewatt Attorneys for Respondents 1600 Bausch & Lomb Place Rochester, New York 14604 Telephone: (585) 232-6500 COURT OF APPEALS STATE OF NEW YORK THE BRIGHTONIAN NURSMG HOME, BAYBERRY NURSING HOME, MAPLEWOOD NURSING AND REHABILITATION CENTER. LEROY VILLAGE GREEN. ELDERWOOD HEALTH CARE AT BIRCHWOOD AND NEW YORK STATE HEALTH FACILITIES ASSOCIATION, INDIVIDUALLY AND ON BEHALF STATEMENT PURSUANT TO OF ITS RESIDENTIAL HEALTM CARE F A C I L l n MEMBERS FN 22 N.Y.C.R.R. 5 500.1(~), NEW YORK STATE, RESPONDENTS, FUCHARD F. DAINES, M.D. AS COMMISSIONER OF HEALTH OF THE STATE OF NEW YORK, AND DAVID A. PATERSON AS GOVERNOR OF THE STATE OF NEW YORK, APPELLANTS. Pursuant to 22 N.Y.C.R.R. 5 500.l(Q, Respondents state that the following corporate parents, subsidiaries, or affiliates of the following Respondents exist: Respondent ParentlSubsidiaryIAffiliate The Brightonian Nursing Home The Brightonian, Inc. ElderWood Health Care at Birchwood ElderWood Senior Care Birchwood Health Care Ctr., Inc. Leroy Village Green Maplewood Nursing & Rehab. Ctr. Leroy Village Green Residential Health Care Facility, Inc. Maplewood Nursing Home, Inc. Otherwise, no such parents, subsidiaries, or affiliates of Respondents exist. Dated: Rochester, New York February 27,20 13 By: John P. Bringewatt, Esq. Attorneys for Respondents 1600 Bausch & Lomb Place Rochester, New York 14604 (585) 232-6500