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, 2013 Supreme Court, Monroe County – Index No. 13213-09 Court of Appeals of the State of New York 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. APPELLANTS’ REPLY BRIEF BARBARA D. UNDERWOOD Solicitor General ANDREW D. BING Deputy Solicitor General VICTOR PALADINO Assistant Solicitor General of Counsel ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Appellants The Capitol Albany, New York 12224-0341 Telephone No. (518) 473-4321 Facsimile No. (518) 473-8963 Dated: March 18, 2013 Reproduced on Recycled Paper i TABLE OF CONTENTS PAGE Table of Authorities ....................................................................................................... ii Preliminary statement .................................................................................................. 1 Argument Point I PHL § 2808(5)(c) Is A Constitutional Delegation Of Authority To The Commissioner And Is Not Void For Vagueness ................................................................................................. 5 Point II The Statute Does Not Deprive Plaintiffs Of Substantive Due Process.......................................................................... 7 Point III The Statute Does Not Deprive Plaintiffs Of Procedural Due Process ......................................................................... 11 Point IV Plaintiffs Produced No Evidence That The Challenged Statute Has Or Will Have Some Actual, Non-Speculative Chilling Effect On Their Speech............................................................ 15 Point V PHL § 2808(5)(c) Does Not Violate The Contract Clause..................... 17 A. PHL § 2808(5)(c) does not substantially impair pre-existing contracts .................................................................. 18 B. The prior approval requirement is reasonable and necessary to further a legitimate public purpose....................... 20 Point VI PHL § 2808(5)(c) Does Not Deprive Plaintiffs Of Equal Protection................................................................................................ 22 Point VII Plaintiffs’ Excess Of Authority Claim Is Unpreserved And, In Any Event, Without Merit................................................................. 24 Conclusion ...................................................................................................... 26 ii TABLE OF AUTHORITIES PAGE CASES Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978) ........................................................................................... 18 Association of Surrogates and Supreme Court Reporters Within the City of New York by O’Leary v. State of New York, 79 N.Y.2d 39 (1992)........................................................................................... 17 Balentine v. Koch, 89 N.Y.2d 51 (1996)........................................................................................... 17 Buffalo Teachers Federation v. Tobe, 464 F.3d 362 (2d Cir. 2006) ......................................................................... 20-21 Citizens United v. Federal Election Comm’n, 558 U.S. 310 (2010) ........................................................................................... 16 City of Cleburne v. Cleburne Living Cent., Inc., 473 U.S. 432 (1985) ........................................................................................... 22 Fiorenti v. Central Emergency Physicians, PLLC, 39 A.D.3d 804 (2d Dep’t 2007) .......................................................................... 16 Hotel Dorset Co. v. Trust For Cultural Resources of City of New York, 46 N.Y.2d 358 (1978)......................................................................................... 10 Interboro Institute, Inc. v. Foley, 985 F.2d 90 (2d Cir. 1993) ................................................................................ 13 Laird v. Tatum, 408 U.S. 1 (1972) ............................................................................................... 15 LaRossa, Axenfeld & Mitchell v. Abrams, 62 N.Y.2d 583 (1984)......................................................................................... 12 LaValle v. Hayden, 98 N.Y.2d 155 (2002)........................................................................................... 5 Lochner v. New York, 198 U.S. 45 (1905) ............................................................................................... 9 iii TABLE OF AUTHORITIES (cont’d) PAGE CASES New York Association of Counties v. Axelrod, 78 N.Y.2d 158 (1991)......................................................................................... 23 New York State Health Facilities Association, Inc. v. Axelrod, 77 N.Y.2d 340 (1991)......................................................................................... 19 Oberlander v. Perales, 740 F.2d 116 (2d Cir. 1984) .............................................................................. 13 Patchogue Nursing Center, Matter of v. New York State Dep’t of Health, 189 A.D.2d 1054 (3d Dep’t), lv. denied, 81 N.Y.2d 711 (1993) ................... 12-13 Port Jefferson Health Care Facility v. Wing, 94 N.Y.2d 284 (1999).................................................................................... 23,24 Rochester Gas & Electric Corp. v. Public Serv. Comm’n, 71 N.Y.2d 313 (1988)...................................................................................... 9,11 St. Joseph’s Hospital Center v. Department of Health of the State of New York, 247 A.D.2d 136 (4th Dep’t 1998), lv. denied, 93 N.Y.2d 803 (1999) ................ 13 Sal Tinnerello & Sons, Inc. v. Town of Stonington, 141 F.3d 46 (2d Cir. 1998) ........................................................................... 19,21 Salino v. Cimino, 1 N.Y.3d 166 (2003)........................................................................................... 24 Sanitation & Recycling Ind. v. City of New York, 107 F.3d 985 (2d Cir. 1997) ......................................................................... 19,21 Uhlfelder v. Weinshall, 47 A.D.3d 169 (1st Dep’t 2007) ...................................................................... 6,16 Uniform Firefighters of Cohoes, Local 2562, IAFF, Matter of v. City of Cohoes, 94 N.Y.2d 686 (2000)......................................................................................... 12 Veix v. Sixth Ward Bldg. & Loan Ass’n, 310 U.S. 32 (1940) ........................................................................................ 19,20 iv TABLE OF AUTHORITIES (cont’d) PAGE CASES Walton v. N.Y.S. Dep’t of Correctional Services, 13 N.Y.3d 745 (2009)......................................................................................... 22 Williams v. Town of Greenburgh, 535 F.3d 71 (2d Cir. 2008) ........................................................................... 15-16 STATE STATUTES CPLR article 78 ............................................................................................ 12,13,14 7804(e) ...................................................................................................... 14 PHL § 2808(5)(a) ..................................................................................................... 8,9 § 2808(5)(b) ..................................................................................................... 8,9 § 2808(5)(c) ...............................................................................................passim STATE RULES AND REGULATIONS 10 NYCRR § 400.19(a)(1) ....................................................................................................... 8 UNITED STATES CONSTITUTION U.S. Const. Art. 1, § 10 ................................................................................................ 17 First Amendment ......................................................................................... 6,15,16,17 PRELIMINARY STATEMENT The Governor and the Commissioner of Health explained in their opening brief that in order to protect a uniquely vulnerable population – the elderly and infirm – and to oversee the vast amounts of public Medicaid money paid to nursing homes, the State pervasively regulates every aspect of the nursing home business in New York. Plaintiffs assail one aspect of this comprehensive statutory scheme, namely, the requirement of Public Health Law (“PHL”) § 2808(5)(c) that a nursing home operator obtain the Commissioner’s approval before withdrawing equity from the business in excess of three percent of the nursing home’s total revenue. In their brief in this Court, plaintiffs defend the two grounds (substantive due process and unlawful delegation/vagueness) on which the Appellate Division mistakenly invalidated Public Health Law (PHL) § 2808(5)(c) and raise a number of additional arguments. They maintain that § 2808(5)(c) deprives them of procedural due process, imposes a prior restraint on speech in violation of First Amendment, impairs pre- existing contracts in violation of the Contract Clause of the United States Constitution, and deprives them of equal protection. And they 2 raise an unpreserved claim, contending that the Commissioner of Health has exceeded his authority by establishing a requirement that nursing homes submit applications to withdraw equity on a quarterly basis. As we explain below, none of these contentions is sufficient to declare § 2808(5)(c) unconstitutional on its face. Preliminarily, a number of the arguments that plaintiffs develop in the body of their brief are based on their mistaken characterizations of the statute early in their brief. For example, plaintiffs contend that PHL § 2808(5)(c) grants the Commissioner unlimited discretion over how they can spend the money in “their own bank accounts” (Br. at 4), that the statute allows the Commissioner to dictate “a private owner’s personal spending choices” (Br. at 5), that the statute presumes that all withdrawal requests are “improper” (Br. at 16) (emphasis in original), and that the use of a percentage of total facility revenue as a threshold is irrational because total revenue by itself is not a measure of the nursing home’s financial health (Br. at 17). These assertions are mistaken. The Commissioner’s discretion is not unlimited; the statute limits the Commissioner’s review to consideration of factors relating to the nursing home’s financial 3 condition and quality of care. Properly interpreted in accordance with settled canons of statutory construction, the statute’s authorization to consider “such other factors as the [C]ommissioner deems appropriate” limits the Commissioner’s consideration to other factors of the same type or kind as those the statute specifically enumerates relating to financial condition and quality of care. PHL § 2808(5)(c). Thus, because the Commissioner’s review is limited to the impact of the equity withdrawal on facility finances and quality of care, the statute does not allow the Commissioner to dictate plaintiffs’ personal spending choices. The Commissioner’s review does not encompass what plaintiffs propose to do with the money.1 1 Plaintiffs cite two instances (Br. at 20-22) purporting to show the statute’s unreasonable impact on the partners and S corporation shareholders of two nursing homes, who complain that the approval requirement doesn’t allow them unrestricted access to enough money to live on (R. 720-721) and to pay their taxes attributable to facility operations (R. 754-755). However, the approval thresholds in both cases are substantial ($169,449 [R. 721] and $310,103 [R. 755]) and the cited affidavits do not mention whether any of these individuals is entitled to a salary as compensation for services rendered to the facility as administrator (R. 720) or otherwise. Any such salaries would provide the owners with additional funds for their living expenses and to the extent treated as reasonable compensation would not count as equity withdrawals. In addition, the Department has approved withdrawals for taxes of partners and S corporation shareholders to the extent attributable to facility operations without regard to the facility’s equity (R. 804). 4 Contrary to plaintiffs’ claim, the statute does not presume that all withdrawal requests are improper. It simply provides the Commissioner an opportunity to review the impact of large equity withdrawals on facility finances and operations before the withdrawal is made. The statute is based on the State’s substantial interest in ensuring that the nursing homes maintain their financial condition and quality of care, and further reflects the fact that the nursing homes receive substantial public funds for their services. Nor is the statute’s use of a threshold based on total facility revenue improper or irrational. The threshold is not intended to measure a facility’s overall profitability, as plaintiffs mistakenly argue; instead, it is designed to limit the approval requirement to withdrawals that are sizable with respect to a particular facility, and that thus could impair facility finances or quality of care. Total revenues are one rational measure of the scope of a facility’s operations, and thus the three percent threshold is a rational measure of withdrawals that merit the Commissioner’s scrutiny. Accordingly, PHL 2808(5)(c) is a lawful and rational exercise of the Legislature’s comprehensive regulatory 5 power over New York’s nursing home industry and this Court should sustain it. ARGUMENT POINT I PHL § 2808(5)(C) IS A CONSTITUTIONAL DELEGATION OF AUTHORITY TO THE COMMISSIONER AND IS NOT VOID FOR VAGUENESS Appellants' main brief demonstrates that this Court should construe the “such other factors” clause in PHL § 2808(5)(c) in a manner that preserves the statute’s constitutionality. See Lavalle v. Hayden, 98 N.Y.2d 155, 161 (2002) (“courts must avoid, if possible, interpreting a presumptively valid statute in a way that will needlessly render it unconstitutional”). Applying the ejusdem generis canon of interpretation, this clause may permissibly be read as authorizing the Commissioner to consider unenumerated factors of the same general kind or class as those specifically mentioned (i.e., the financial and quality of care factors). Plaintiffs assert that their “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” like the law at issue here (Br. at 44). 6 Plaintiffs, however, overlook Uhlfelder v. Weinshall, 47 A.D.3d 169, 176-78 (1st Dep't 2007). There the First Department invoked ejusdem generis to sustain against a First Amendment challenge a New York City local law regulating the installation and maintenance of newsstands and the placements of advertising on them. The law at issue in Uhlfelder governed, among other things, the siting of newsstands, listing various objective criteria for determining whether a newstand’s location created a hazardous condition and concluding with a catchall provision that prohibited issuance of a license for a news stand that is located so as to “otherwise create[] a hazardous condition.” The Appellate Division rejected the plaintiffs’ arguments that the catchall phrase afforded the City’s officers unlimited discretion to determine what constitutes a hazardous condition and that the City might use that power to censor newsstands that displayed periodicals critical of City government. Reading the catchall provision in light of the specifically enumerated and objective factors in the preceding clauses, the Appellate Division concluded that the “hazardous condition” term did not confer unlimited discretion on local officials. Id. at 177-78. A similar conclusion is warranted here. 7 Plaintiffs argue (Br. at 42) that if the “such other factors” clause were read as authorizing the Commissioner to apply other factors of a similar kind to the four specifically enumerated factors in § 2808(5)(c), then the four specific factors would be “rendered redundant and without effect.” This is not so. Our main brief at page 30 gives two examples (a nursing home owner recently convicted of Medicaid fraud, and a draft audit finding of Medicaid overpayments) where factors similar but not identical to the specifically enumerated factors could be considered by the Department of Health in determining whether to grant a request to withdraw equity. These additional factors would not render the specific factors redundant. Accordingly, PHL § 2080(5)(c) is a lawful delegation to the Commissioner and is not void for vagueness. POINT II THE STATUTE DOES NOT DEPRIVE PLAINTIFFS OF SUBSTANTIVE DUE PROCESS Plaintiffs concede, as they must, that the State has a legitimate interest in ensuring that substantial equity withdrawals do not imperil the financial viability of nursing homes and their ability to provide high quality care to elderly and infirm patients. Yet they argue that 8 § 2808(5)(c) does not further those interests. In their view, § 2808(5)(c) is unnecessary because the pre-existing statutory requirement that nursing homes obtain prior approval if the equity withdrawal will create or increase a negative equity (§ 2808(5)(a)), combined with the prior notification requirement if the equity withdrawal exceeds 3% of total revenues (§ 2808(5)(b)), sufficiently protect these governmental concerns. And plaintiffs assert that the State is “dead wrong” in suggesting that the Court may not second-guess the need for or wisdom of the prior approval requirement (Br. at 24). The false premise underlying plaintiffs' argument is that a nursing home with a dollar or more of positive equity cannot be in financial jeopardy. But positive equity simply means that total assets exceed total liabilities. See 10 NYCRR § 400.19(a)(1). A nursing home can have positive equity yet be cash poor or illiquid. A business that is barely “in the black” may be teetering on the edge of solvency and, as a result, may cut back on services, compromising the quality of care. In enacting § 2808(5)(c), the Legislature reasonably concluded that substantial equity withdrawals could imperil nursing homes' financial stability even if those withdrawals do not create or increase a 9 negative equity situation. The pre-existing prior notification requirement in § 2808(5)(b) would not have prevented the harm from occurring, for once the equity was withdrawn it might not be possible to have the funds returned. This legislative judgment is entitled to substantial deference. Noticeably absent from plaintiffs' brief is any citation to this Court's substantive due process precedents from the last forty years. Plaintiffs' arguments suggest the now-discredited Lochner era, where courts routinely overturned state legislation based on their own notions of the most appropriate means for the State to implement its considered policies. See Lochner v. New York, 198 U.S. 45 (1905). In contrast, “modern substantive due process principles require that the judiciary give great deference to the Legislature” regarding “economic legislation” such as that involved here. Rochester Gas & Electric Corp. v. Public Serv. Comm’n, 71 N.Y.2d 313, 320 (1988). Plaintiffs argue (Br. at 3, 22, 24, 27) that there is no record evidence that § 2808(5)(a) and (5)(b) were inadequate. But there is a “presumption, long recognized by this court, that the Legislature has investigated and found facts necessary to support the legislation . . . as 10 well as the existence of a situation showing or indicating its need or desirability.” Hotel Dorset Co. v. Trust For Cultural Resources of City of New York, 46 N.Y.2d 358, 370 (1978). Likewise without merit is plaintiffs' argument that there is no rational relationship between the 3% threshold and any legitimate State goal. Plaintiffs observe, correctly, that the a nursing home's total revenues, standing alone, is no indication of its solvency without taking into account its level of equity and profit margin. But plaintiffs incorrectly view the 3% threshold in a vacuum. The 3% threshold is not a limit on the amount of equity a nursing home operator may withdraw from the business; it is merely a threshold for triggering the requirement to apply for prior approval to withdraw equity. That dollar threshold is rationally based on total revenues as a measure of the scope of facility operations. Once the threshold is met and the Commissioner’s review is required, factors such as the facility's level of equity, profit margin, and quality of care record are all evaluated in considering the application to withdraw equity. And in any case, plaintiffs’ assertion that the percentage of total revenue threshold might sometimes not target the nursing homes needing the most 11 scrutiny (Br. at 31-33) ignores the well settled law that substantive due process review in the economic sphere requires only that the fit between the statute’s means and its ends be rational, not perfect. See Rochester Gas & Electric Corp., 71 N.Y.2d at 320 (“the legislation must be sustained if it has any reasonable relation to the State's legitimate interests”). The fit here is rational. For all these reasons, PHL § 2808(5)(c) satisfies the requirements of substantive due process. POINT III THE STATUTE DOES NOT DEPRIVE PLAINTIFFS OF PROCEDURAL DUE PROCESS Plaintiffs argue that the statute is defective because it does not afford them pre-deprivation notice and an opportunity to be heard (Br. at 48-49). Preliminarily, and for the sake of clarity, to the extent plaintiffs challenge the existence of any statutory requirement that the Department of Health approve in advance significant equity withdrawals, their claim is one of substantive, rather than procedural, due process. That substantive due process claim is meritless for the reasons explained immediately above. 12 Moreover, the quantum of process provided here satisfies constitutional standards. “[D]ue process is a flexible constitutional concept calling for such procedural protections as a particular situation may demand.” LaRossa, Axenfeld & Mitchell v. Abrams, 62 N.Y.2d 583, 588 (1984). What process is constitutionally due is based on a balancing of three factors: the private interests at stake; the risk of error created by the State's chosen procedure; and the countervailing governmental interest supporting use of the challenged procedure. Matter of Uniform Firefighters of Cohoes, Local 2562, IAFF v. City of Cohoes, 94 N.Y.2d 686, 691-92 (2000). Applying that test here, nursing home operators have an opportunity to be heard when they submit their equity withdrawal applications for approval and supporting documentation to the Commissioner. If the Commissioner were to deny a request to withdraw equity, plaintiffs would have a further opportunity to be heard through an article 78 proceeding to review whether the determination is arbitrary and capricious. See, e.g., Matter of Patchogue Nursing Center v. New York State Dep’t of Health, 189 A.D.2d 1054, 1056-57 (3d Dep't) (article 78 review available following final 13 administrative determination of charges that the nursing home operator made unauthorized equity withdrawals), lv. denied, 81 N.Y.2d 711 (1993). Under these circumstances, the availability of article 78 review comports with procedural due process and there is no need for an administrative hearing or other process. See Interboro Institute, Inc. v. Foley, 985 F.2d 90, 93-94 (2d Cir. 1993) (article 78 review satisfied due process with respect to challenge to auditor's decision disallowing TAP payments to junior college); Oberlander v. Perales, 740 F.2d 116, 120 (2d Cir. 1984) (article 78 review was sufficient process to challenge Medicaid reimbursement rates); St. Joseph's Hospital Center v. Department of Health of the State of New York, 247 A.D.2d 136, 154 (4th Dep't 1998), lv. denied, 93 N.Y.2d 803 (1999) (availability of article 78 review to challenge reallocation of bad debt and charity care funds satisfies due process). Consequently, PHL § 2808(5)(c) and the availability of article 78 review afford plaintiffs all the process they are due here. There is no merit to plaintiffs' argument that § 2808(5)(c) deprives them of procedural due process because it does not specifically require the Department of Health to create a record sufficient for judicial 14 review of determinations denying requests to withdraw equity. The requirement to make an adequate record comes from other provisions of state law, specifically CPLR article 78. If a nursing home were to challenge a determination denying an equity withdrawal request, CPLR 7804(e) would require the Department of Health to supply the record on which its determination was based and the reasons for the denial. If the agency failed to do so, or if its reasons were arbitrary or capricious, the reviewing court could annul the determination. Plaintiffs also object to the statutory provision allowing the agency sixty days to issue a determination on the application to withdraw equity. The Legislature, however, acted reasonably in affording the Commissioner sixty days to issue final determinations on the applications. There are over 600 nursing homes statewide, which submitted 88 applications in the seven-month time period between the enactment of § 2808(5)(c) and Supreme Court's issuance of its injunction in November 2009. And determining if a facility's withdrawal of more than 3% of its total assets would imperil its financial solvency and ability to provide high quality care is a complex task. Beyond their conclusory claims that “60 days can be a lifetime, financially” (Br. at 15 49), plaintiffs have not met their heavy burden of demonstrating that 60 days is unreasonable as a matter of law. POINT IV PLAINTIFFS PRODUCED NO EVIDENCE THAT THE CHALLENGED STATUTE HAS OR WILL HAVE SOME ACTUAL, NON- SPECULATIVE CHILLING EFFECT ON THEIR SPEECH Contrary to plaintiffs' assertions (Br. at 51-54), § 2808(5)(c) does not impose a prior restraint on speech in violation of the First Amendment. Although the Appellate Division did not reach the issue, Supreme Court reasoned that § 2808(5)(c) might have a chilling effect on plaintiffs' ability to challenge decisions of the Commissioner or to support political activities contrary to the Commissioner's positions. But the mere “possibility” of a chilling effect is insufficient to support a claim under the First Amendment. Under the First Amendment, a plaintiff must show more than a mere subjective “chilling” effect on his speech. Laird v. Tatum, 408 U.S. 1, 13-14 (1972). To prove a deprivation of free speech, plaintiffs must “come forward with evidence showing either that (1) defendants silenced [them] or (2) 'defendants' actions had some actual, non- speculative chilling effect' on [their] speech.” Williams v. Town of 16 Greenburgh, 535 F.3d 71, 78 (2d Cir. 2008); see also Fiorenti v. Central Emergency Physicians, PLLC, 39 A.D.3d 804, 807 (2d Dep't 2007). The “abstract possibility of constitutional injury” is insufficient to establish a First Amendment violation. Uhlfelder v. Weinshall, 47 A.D.3d at179. Unlike Citizens United v. Federal Election Comm'n, 558 U.S. 310 (2010), on which plaintiffs heavily rely (Br. at 52-54), § 2808(5)(c) does not restrict spending on political campaigns or on speech at all. Any connection between the statute's regulation of equity withdrawals and political activity is too tenuous and speculative to implicate First Amendment concerns. Despite doing business in a pervasively regulated industry, nursing homes historically have not been cowed by regulatory officials and have not hesitated to speak out or challenge administrative action with which they disagree (R. 46-47, 110). Plaintiffs presented no evidence that defendants have silenced them or chilled their speech through the use of the equity withdrawal approval process. To the contrary, plaintiffs merely made self-serving assertions that the statute could possibly be used to retaliate against them for 17 political purposes. This is insufficient to establish a claim under the First Amendment. POINT V PHL § 2808(5)(C) DOES NOT VIOLATE THE CONTRACT CLAUSE Nor does the statute violate the Contract Clause. The United States Constitution’s Contract Clause provides in relevant part that “[n]o state shall . . . pass any . . . law impairing the obligation of contracts.” U.S. Const. Art. 1, § 10. “Analysis of a Contract Clause claim begins with a determination of whether the State law has, in fact, operated as a substantial impairment of a contractual relationship.” Ballentine v. Koch, 89 N.Y.2d 51, 60 (1996) (internal quote omitted). If this showing is made, the statute will nonetheless be upheld if the impairment is “reasonable and necessary to accomplish a legitimate public purpose.” Association of Surrogates and Supreme Court Reporters Within the City of New York by O'Leary v. State of New York, 79 N.Y.2d 39, 46 (1992). 18 A. PHL § 2808(5)(c) does not substantially impair pre- existing contracts. Plaintiffs failed to demonstrate that the statute substantially impairs any contractual obligations. They allege (Br. at 57) that “numerous” nursing homes are parties to existing contracts that require their immediate access to facility profits, and that the statute, by requiring prior approval to withdraw equity in excess of 3% of total revenue, substantially impairs these obligations. Plaintiffs, however, failed to submit even a single actual contract, and they further failed to establish any instance in which the statute actually caused them to be unable to comply with a contractual obligation. As plaintiffs acknowledge (Br. at 5), the use of facility funds for facility purposes is not a withdrawal under the statute; consequently the statute poses no barrier to plaintiffs’ ability to use facility funds for facility obligations. The alleged contract impairment is theoretical and unproven rather than substantial. See Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244-45 (1978). Moreover, “the primary consideration in determining whether an impairment is substantial is the extent to which reasonable 19 expectations under the contract have been disrupted.” See Sanitation & Recycling Ind. v. City of New York, 107 F.3d 985, 993 (2d Cir. 1997). “If the plaintiff could anticipate, expect, or foresee the governmental action at the time of contract execution, the plaintiff will ordinarily not be able to prevail.@ Sal Tinnerello & Sons, Inc. v. Town of Stonington, 141 F.3d 46, 53 (2d Cir. 1998). Where “an industry is heavily regulated, regulation of contracts may be foreseeable.” Sanitation & Recycling Indus., Inc., 107 F.3d at 993. “[W]hen a party purchases a company in an industry that is ‘already regulated in the particular to which he now objects,’ that party normally cannot prevail on a Contract Clause challenge.” Id. (quoting Veix v. Sixth Ward Bldg. & Loan Ass'n, 310 U.S. 32, 38 [1940]). It is difficult to conceive of an industry more heavily regulated than the nursing home business. As detailed in our main brief (pp. 7-8), nearly every aspect of nursing home finances and operations is pervasively regulated and overseen by New York State. See New York State Health Facilities Association, Inc. v. Axelrod, 77 N.Y.2d 340, 348 n.2 (1991) (nursing home industry is “pervasively regulated”); Blum v. Yaretsky, 457 U.S. 991, 1028 (1982) (Justice Brennan dissenting) 20 (“virtually every action by the operator is subject to state oversight”). Nursing homes often receive substantial public funds and their patients are an especially vulnerable population. Large withdrawals of nursing home assets have the potential to adversely affect patient care and well- being. For these reasons, since 1977, New York's comprehensive oversight has included restrictions on equity withdrawals, restrictions the Legislature has seen fit to increase in response to industry abuses (see Appellants' main brief at 8-12). Thus, the nursing home industry is “already regulated in the particular to which [plaintiffs] now object[ ].” Veix v. Sixth Ward Bldg. & Loan Ass'n, 310 U.S. at 38. Accordingly, further restrictions on equity withdrawals were readily foreseeable. B. The prior approval requirement is reasonable and necessary to further a legitimate public purpose. Even if the statute substantially impairs pre-existing contracts, it does not violate the Contract Clause because any impairment is a reasonable means to serve a legitimate public purpose. “A legitimate public purpose is one ‘aimed at remedying an important general social or economic problem rather than providing a benefit to special interests.’” Buffalo Teachers Federation v. Tobe, 464 F.3d 362, 368 21 (2d Cir. 2006) (quoting Sanitation and Recycling Indus., Inc., 107 F.3d at 993). Plaintiffs concede that the purpose of the statute – safeguarding the finances of nursing homes so they are able to provide safe and adequate care to elderly and infirm residents – is a legitimate public purpose. They take issue with the reasonableness of the means chosen by the Legislature to accomplish this purpose, but their objections are without merit. Where, as here, the statute affects private contracts and not contracts to which the State is a party, courts must accord “a healthy degree of deference” to the Legislature's conclusion that its approach reasonably promotes the public purpose for which the statute was enacted. Sanitation & Recycling Indus., Inc., 107 F.3d at 994. Under this standard, “it is not the province of this Court to substitute its judgment for that of [the Legislature] . . . by determining that there might have been a more appropriate method” to achieve the statutory purpose. Sal Tinnerello & Sons, Inc., 141 F.3d at 54-55. The State “need not prove its choice the best among the available alternatives; rather [plaintiffs] must prove that there is no rational relationship between the [State's] ends and its means.” Id. 22 As explained in the State's main brief (pp. 36-41), the prior approval requirement and the 3% threshold are reasonable means to accomplish the statutory ends. The Legislature rationally concluded that prior approval is warranted because significant equity withdrawals, even if they do not create negative equity, could so reduce the facility's assets as to impair its ability to operate and provide adequate care. The Legislature's judgment in this regard as to the necessity of the prior approval requirement is both reasonable and entitled to deference and the Court should uphold it. POINT VI PHL § 2808(5)(C) DOES NOT DEPRIVE PLAINTIFFS OF EQUAL PROTECTION Plaintiffs' equal protection claim also fails. The Equal Protection Clause “commands that ‘persons similarly situated should be treated alike.’” Walton v. N.Y.S. Dep't of Correctional Services, 13 N.Y.3d 475, 492 (2009) (quoting City of Cleburne v. Cleburne Living Cent., Inc., 473 U.S. 432, 439 [1985]). Where the governmental action does not infringe on a fundamental right or involve a suspect classification, the difference in treatment need only satisfy rational basis scrutiny to comport with 23 equal protection. Port Jefferson Health Care Facility v. Wing, 94 N.Y.2d 284, 289 (1999). Plaintiffs argue here as well that there is no rational connection between the 3% threshold and a nursing home's financial health (Br. at 59). As we explained at Points II and V(b) above, the 3% of total revenue threshold is a rational means of excluding relatively small equity withdrawals from the requirement for prior approval. Evaluation of a facility's financial health is undertaken when the Department of Health evaluates the request to withdraw equity, using the statutory criteria, including “the facility's overall financial condition, any indications of financial distress, and whether the facility is delinquent in any payment owed to the Department.” PHL § 2808(5)(c). Plaintiffs mistakenly assert (Br. at 58) that the State was required, but failed, to produce evidence supporting use of the 3% threshold. In making this argument, plaintiffs cite case law applicable to judicial review of administrative action (Br. at 58-59, citing New York Association of Counties v. Axelrod, 78 N.Y.2d 158, 166-67 [1991]). But that is not the standard that governs this case. Here, the governing 24 standard is the rational basis standard of review of statutes, under which a “classification must be upheld against an equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification.” Port Jefferson Health Care Facility v. Wing, 94 N.Y.2d at 289 (emphasis in original). For the reasons discussed in this brief and at pages 39-42 of the State's main brief, the 3% threshold is rational. Thus, PHL § 2808(5)(c) does not deny plaintiffs equal protection. POINT VII PLAINTIFFS' EXCESS OF AUTHORITY CLAIM IS UNPRESERVED AND, IN ANY EVENT, WITHOUT MERIT Finally, plaintiffs argue (Br. at 13) that the Commissioner has exceeded his statutory authority by establishing a requirement that nursing homes submit applications to withdraw equity on a quarterly basis. Plaintiffs did not raise this claim in the amended complaint (R. 690-700) or in their trial court memorandum of law or Appellate Division brief. The claim, raised for the first time in this Court, is therefore unpreserved. See Salino v. Cimino, 1 N.Y.3d 166, 173 (2003) (“[n]either court below having addressed preemption, we will not be the 25 first to do so”). Further, this claim, even if it were meritorious, would not provide a basis for invalidating the statute on its face as unconstitutional. In any event, this claim is without merit. “To ensure that the Department can effectively monitor the financial condition and the quality of care provided by [nursing homes] over the period in which [they] plan to make withdrawals, the Department will approve not more than one quarter (or three months) of scheduled withdrawals” (R. 192). The temporal proximity of the application to the requested withdrawal is a relevant consideration in deciding an application to withdraw equity. If a request is made too far in advance of the withdrawal, the financial condition of the facility and other circumstances may change significantly after the request is approved. This requirement therefore implements the statutory directive that the Department evaluate a facility's financial condition and quality of care in deciding applications to withdraw equity. In other words, the Department is authorized to consider the timing of the requested withdrawal under the “such other factors” clause. The requirement is therefore reasonable and the Department acted within its statutory authority in imposing it. It does 26 not limit how much equity a nursing home may withdraw; it simply requires that the application be made within three months of the requested withdrawal. CONCLUSION The Court should reverse the stipulation and judgment as well as the Appellate Division’s order, and declare that PHL § 2808(5)(c) is constitutional. In the alternative, if the Court finds that the “such other factors” clause is unconstitutional, it should sever that provision and declare the remainder of the statute constitutional. Dated: Albany, New York March 18, 2013 BARBARA D. UNDERWOOD Solicitor General ANDREW D. BING Deputy Solicitor General VICTOR PALADINO Assistant Solicitor General of Counsel Respectfully submitted, ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Appellants By: _____________________________ VICTOR PALADINO Assistant Solicitor General Office of the Attorney General The Capitol Albany, New York 12224 Telephone (518) 473-4321 Reproduced on Recycled Paper