text:
    In the Matter of Subway-Surface Supervisors Association, Appellant, v New York City Transit Authority, Respondent, and State of New York, Intervenor-Appellant.
    Argued February 6, 1978;
    decided March 28, 1978

      POINTS OF COUNSEL

      Moss K. Schenck for appellant.
    I. The New York State Financial Emergency Act for the City of New York, insofar as it suspends wages of Subway-Surface Supervisors Association’s members, is an improper exercise of the police power in that it unconstitutionally abrogates a contractual relationship. (Sgaglione v Levitt, 37 NY2d 507; Worthen Co. v Thomas, 292 US 426; Worthen Co. v Kavanaugh, 295 US 56.) II. The FEA, in the manner in which it fashions remedies, (1) is violative of the equal protection clause of the State and Federal Constitutions since it sets up classifications which are inequitable, unreasonable, unfair and discriminatory and (2) is violative of the constitutional bankruptcy provision and bankruptcy laws of the Federal Government. (Perry v Commercial Loan Co., 383 US 392; Shelton v Tucker, 364 US 479; Gulf, Colorado & Sante Fé Ry. v Ellis, 165 US 150; Baxstrom v Herold, 383 US 107; Matter of Kesselbrenner v Anonymous, 69 Misc 2d 181, 33 NY2d 161; Matter of Barry Equity Corp. [Marcia Hat Co.], 276 App Div 685; People v De Perez, 70 Misc 2d 982, 32 NY2d 880.) III. The FEA is violative of the State Constitution in that it impairs the pension protection clause. (Kleinfeldt v New York City Employees’ Retirement System, 36 NY2d 95; Hoar v City of Yonkers, 295 NY 274; Doyle v Wright, 201 Misc 884.)

      John A. Murray, Alphonse E. D’Ambrose, Helen R. Cassidy and James P. McMahon for respondent.
    I. This appeal should be dismissed since the statutory wage freeze is no longer applicable to petitioner. (Wilmerding v O’Dwyer, 297 NY 664; Yonkers School Crossing Guard Union of Westchester Ch., CSEA v City of Yonkers, 39 NY2d 964.) II. The statutory wage freeze is a valid exercise of the State’s police power and does not violate the impairment of the contract clause of the United States Constitution. (Home Bldg. & Loan Assn. v

      Blaisdell, 290 US 398; Patrolmen’s Benevolent Assn. of City of N. Y. v City of New York, 59 Misc 2d 556; California Teachers Assn. v Newport Mesa Unified School Dist., 333 F Supp 436; East N. Y. Bank v Hahn, 326 US 230; Patrolmen’s Benevolent Assn. of City of N. Y. v City of New York, 41 NY2d 205; New York City Tr. Auth. v Loos, 2 Misc 2d 733.) III. The statutory wage freeze does not violate the equal protection clause. (Tigner v Texas, 310 US 141; Safeway Stores v Oklahoma Grocers, 360 US 335; Matter of Pratt v Tofany, 37 AD2d 854.) IV. The wage freeze law does not violate the Federal bankruptcy law. (Committee of Interns & Residents v City of New York, 87 Misc 2d 504; Ropico, Inc. v City of New York, 425 F Supp 970.) V. The wage freeze law does not diminish pension benefits in violation of the State Constitution. (Hoar v City of Yonkers, 295 NY 274; Doyle v Wright, 201 Misc 884.)

      Louis J. Lefkowitz, Attorney-General (George D. Zuckerman and Samuel A. Hirshowitz of counsel), for intervenor-appellant.
    I. The wage freeze provision of the Financial Emergency Act is a valid exercise of the State’s police power in dealing with the fiscal crisis confronting the City of New York. (Committee of Interns & Residents v City of New York, 87 Misc 2d 504; Patrolmen’s Benevolent Assn. of City of N. Y. v City of New York, 52 AD2d 43, 41 NY2d 205; Home Bldg. & Loan Assn. v Blaisdell, 290 US 398; El Paso v Simmons, 379 US 497; Stone v Mississippi, 101 US 814; Beer Co. v Massachusetts, 97 US 25; Mugler v Kansas, 123 US 623; Northwestern Fertilizing Co. v Hyde Park, 97 US 659; Atlantic Coast Line v Goldsboro, 232 US 548; Denver R. G. R. R. Co. v Denver, 250 US 241.) II. The application of the Financial Emergency Act to employees of the Transit Authority is not violative of the equal protection clause of the State and Federal Constitutions. (Flushing Nat. Bank v Municipal Assistance Corp. for City of N. Y., 40 NY2d 731.) III. Petitioner’s claim that the wage freeze provision of the FEA is in conflict with the bankruptcy act is untimely and baseless. (Ashton v Cameron County Dist., 298 US 513; United States v Bekins, 304 US 27; Ropico, Inc. v City of New York, 425 F Supp 970.) IV. The court below erred in holding that the pension rights of petitioner’s members have been unconstitutionally impaired by the wage freeze provision. (Lessen v Lindsey, 238 App Div 262; Kerr & Co. v United States, 97 F Supp 796; Hoar v City of Yonkers, 295 NY 274; Doyle v Wright, 201 Misc 884; Kleinfeldt v New York City Employees’ Retirement System, 36 NY2d 95; Birnbaum v

      New York State Teachers Retirement System, 5 NY2d 1; Le Drugstore Etats Unis v New York State Bd. of Pharmacy, 33 NY2d 298; Matter of Rosenthal v Harwood, 35 NY2d 469; Matter of Carr v New York State Bd. of Elections, 40 NY2d 556.)

      W. Bernard Richland, Corporation Counsel (Stanley Buchsbaum and James Greilsheimer of counsel), for City of New York and another, amici curiae.

    I. The provision of the Financial Emergency Act which suspends wage increases does not violate the impairment of contract clause. (Sgaglione v Levitt, 37 NY2d 507; Wein v State of New York, 39 NY2d 136; Home Bldg. & Loan Assn. v Blaisdell, 290 US 398; East N. Y. Bank v Hahn, 326 US 230; Veix v Sixth Ward Assn., 310 US 32; Ropico, Inc. v City of New York, 425 F Supp 970; Wasmuth v Allen, 14 NY2d 391, 379 US 11; Nettleton Co. v Diamond, 27 NY2d 182, dsmd sub nom. Reptile Prods. Assn. v Diamond, 401 US 969; Williams v Mayor, 289 US 36; Tyson & Brother v Banton, 273 US 418.) II. The Financial Emergency Act does not deny the equal protection of the laws. Nor is it violative of the bankruptcy provision of the Constitution or the bankruptcy laws. (Flushing Nat. Bank v Municipal Assistance Corp. for City of N. Y., 40 NY2d 731; Metropolitan Co. v Brownell, 294 US 580; Dandridge v Williams, 397 US 471; Village of Belle Terre v Boraas, 416 US 1; Norvell v Illinois, 373 US 420; Tigner v Texas, 310 US 141; Bayside Fish Co. v Gentry, 297 US 422; East N. Y. Bank v Hahn, 326 US 230; City of Mount Vernon v Mount Vernon Trust Co., 270 NY 400; Pobreslo v Boyd Co., 287 US 518.) III. The Financial Emergency Act does not violate the provision of the State Constitution barring the diminishment or impairment of pension rights. (Hoar v City of Yonkers, 295 NY 274; Matter of Oliver v Postel, 30 NY2d 171; People ex rel. Guggenheim v Mucci, 32 NY2d 307.)
   OPINION OF THE COURT

Jones, J.

In this case we confront the issue not reached in Patrolmen’s Benevolent Assn. of City of N. Y. v City of New York (41 NY2d 205) — whether the New York State Financial Emergency Act for the City of New York is unconstitutional insofar as it precluded payment of wage increases provided in an existing collective bargaining agreement. We conclude that it is not.

Petitioner is the certified exclusive bargaining representative of several classes of supervisory personnel employed by respondent New York City Transit Authority, which is the public benefit corporation created by the New York State Legislature for the purpose of operating and maintaining mass surface and subway transit facilities owned by the City of New York and leased to the authority. Under a collective bargaining agreement entered into by the parties for the period from October 1, 1974 through September 30, 1976 the authority was obligated on October 1, 1975 to provide certain wage increases — namely, a 5% general wage increase, continuation of increased payments of specified increments and a 4% increase in shift differential.

Payment of these increases was barred however by action of the State Legislature in August, 1975 when it enacted the New York State Financial Emergency Act for the City of New York (FEA; L 1975, chs 868-870). The legislation by which this was accomplished, adopted at an extraordinary session, contained findings that a financial emergency existed in the City of New York, recited disasters that might be expected to befall the city in the event of its failure to meet its obligations to holders of outstanding securities and the need for the State to exercise its police and emergency powers under the Constitution to bring the emergency under control, and provided for a number of remedial measures, including the suspension of increases in salaries and wages, shift-differentials and increments effective after June 30, 1975 to employees of the city and of "covered organizations”, one of which as expressly named was respondent Transit Authority. It was also provided that for the purposes of computing the pension base of retirement allowances the suspended increases should not be considered as part of compensation or of annual salary earned or earnable. The suspensions were to be effective for the first pay period ending on or after September 1, 1975 and to continue for one year or until such later date as deemed necessary by the Emergency Financial Control Board (also created by the statute) to achieve the objectives of a financial plan devised by it, but in no event later than the end of the emergency period. Subdivision 2 of section 10 of FEA, which section imposed the wage freeze, provided that the section would be inapplicable to employees of the city or of a covered organization whose collective bargaining representative executed an agreement for deferment of salary or wage increases which was certified by the Mayor prior to September 1, 1975, or thereafter by the Financial Control Board, "as being an acceptable and appropriate contribution toward alleviating the fiscal crisis of the city”.

Following implementation of the wage freeze by the Transit Authority, petitioner instituted the present article 78 proceeding by which it sought a judgment declaring the legislation unconstitutional as violative of the contract impairment clause of the Federal Constitution, the equal protection clauses of the Federal and State Constitutions, and the provisions of the State Constitution prohibiting impairment of pension rights, and directing respondent to comply with the provisions of the collective bargaining agreement. Special Term treated the proceeding as a declaratory judgment action and rejected petitioner’s claims of unconstitutionality but ordered that a wage deferment agreement similar to those already executed and certified as to other groups of employees under FEA be made available to petitioner. The Appellate Division modified by declaring that, insofar as the wage freeze of FEA affects the calculation of pension benefits, it is in violation of section 7 of article V of the New York State Constitution and by adding a provision that the wage deferment agreement that Special Term had directed be made available to petitioner should be subject to the provisions of subdivision 2 of section 10 of the act. As so modified the judgment was affirmed.

The case is before us on cross appeals; petitioner appeals from that portion of the Appellate Division’s order that upheld the constitutionality of the wage freeze apart from its effect on pension computations, and the Attorney-General of the State of New York as intervenor appeals from that portion of the order that held FEA constitutionally invalid insofar as it affects pension computations.

The latter appeal may be disposed of promptly. Following determination of the appeal at the Appellate Division, as contemplated by the provisions of subdivision 2 of section 10 of FEA and the orders in both courts below, on March 10, 1977 petitioner, as collective bargaining representative of Transit Authority employees, and the Transit Authority entered into a wage deferment agreement, subsequently ratified by the Financial Control Board, which provided that a portion of the wage increases included in the collective bargaining agreement would be paid but that another portion would be deferred. The agreement further provided however that "For the purposes of computing retirement allowances * * * the salary rate during the period of deferral shall be treated as including the amount of the deferred increase”. As a consequence of this provision agreed to by the Transit Authority, pension computations have been made as though the wages provided for in the collective bargaining agreement had in fact been paid; thus there has been no change in the wage base used in calculation of pension benefits as a result of the enactment of FEA over what the base would have been had the statute not been enacted. Petitioner therefore now has no standing to challenge the bare provision of the statute as an impairment of the right to pension benefits protected by section 7 of article V of the New York State Constitution. Accordingly, the case should be remitted to Special Term for dismissal of the petition insofar as it seeks a judgment that the statute is violative of that constitutional provision.

We turn then to petitioner’s assertions that the wage freeze mandated by subdivision 1 of section 10 of FEA is an impairment in violation of the contract clause of the Federal Constitution. Indisputably FEA worked an impairment of contract rights under the collective bargaining agreement between the parties. We reject the contention, however, that such impairment violates the constitutional contract clause. It is conceded that the protection constitutionally extended to the integrity of contracts is not unlimited. Petitioner acknowledges that the State, in the exercise of its police power, may override the provisions of a contract when the impairment is "reasonable and necessary to serve an important public purpose” (United States Trust Co. v New Jersey, 431 US 1, 25); it is asserted, however, that the police power "must be exercised for an end which is in fact public and the means adopted must be reasonably adapted to the accomplishment of that end and must not be arbitrary or oppressive” (Treigle v Acme Homestead Assn., 297 US 189, 197, reh den 297 US 728). We note that petitioner quotes, without distinction, the standard for the exercise of police power that results in an alleged impairment of a public contract and that applicable when it is claimed that the provisions of a private contract are being impaired. If by "standard” it is intended to refer to the general proposition that "an impairment may be constitutional if it is reasonable and necessary to serve an important purpose” (United States Trust Co. v New Jersey, 431 US 1, 25, supra), the standard is indeed the same. In the present instance, such verbalization does not, however, advance analysis or aid in resolution. What is of legal and practical significance is to recognize that the application of this standard will be different in public contract cases than it is in private contract cases. "[C]omplete deference to a legislative assessment of reasonableness and necessity is not appropriate [in the former category] because the State’s self-interest is at stake” (id., p 26).

At the threshold of the application of the general standard to the present case, we note that petitioner fully accepts without intimation of doubt the reality of the financial crisis found by the Legislature to confront the City of New York. No challenge is raised to the validity of the Legislative finding and no invitation is made to judicial scrutiny of the Legislature’s determination in this regard. Thus, it is undisputed that the FEA wage freeze serves "an important purpose”. The critical focus of analysis must be directed to whether the means chosen by the Legislature to serve that purpose are "reasonable and necessary” so as to escape what would otherwise be the strictures of the contract clause.

The petitioner first bases its attack on FEA as applied to the Transit Authority on the argument that suspension of wage increases in the collective bargaining agreement between petitioner and the Transit Authority of the city was not necessary to meet the city’s financial emergency because the Transit Authority is an independent agency separate from the city and further because, it is asserted, the Transit Authority had available to it means for obtaining funds necessary to its functioning quite apart from the funds it obtains from the City of New York, such that the city could terminate its payments to the authority.

Both courts below have addressed the first branch of this argument and have found it without merit, as do we. The intertwinement between the city and the Transit Authority and of their finances is amply demonstrated. In recognition of this relationship the New York State Legislature has declared that in the operation and maintenance of the city’s mass transportation facilities the authority "shall be regarded as performing a governmental function”. (Public Authorities Law, § 1202, subd 2.) In the performance of that function the authority receives a substantial portion of its financial support from city funds, including: provisions for capital costs which by statute the city is required to make (Public Authorities Law, § 1203), payments which make up revenue which would otherwise be lost as the result of a reduced fare program for the elderly instituted at the request of the city (about $20,000,000 annually), a subsidy to provide reduced fares for school children (about $47,000,000 annually), and a contribution to operating expenses in the form of assumption of the cost of the Transit Police Department in the sum of approximately $92,000,000 a year. Additionally, the receipt of capital funds from both the Federal and State governments and of operating funds from the State of New York is dependent on payment of funds to the authority by the City of New York for like purposes. In both instances the subsidies run into the millions of dollars.

Faced with the financial distress under which the city was laboring and which threatened to overwhelm it, and with the interdependence between the finances of the city and of the Transit Authority, which was performing governmental functions of the city, the New York State Legislature determined that the imposition of the terms of the wage-freeze legislation on the employees of the authority, as well as on those employed by the city itself and by other related organizations, was a necessary and appropriate step toward relieving the financial crisis and thereby continuing the performance of governmental services. While "complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State’s self-interest is at stake” when legislation impairing public contracts is at issue (United States Trust Co. v New Jersey, 431 US 1, 26, supra), the statement of the principle itself implies that some deference at least is appropriate. Here, little deference is required, when the circumstances themselves so clearly demonstrate that the Legislature’s conclusion was a valid one. To contend, in the face of the considered and explicit inclusion of the Transit Authority by the Legislature, that for purposes of FEA the authority is an independent agency separate from the City of New York is wholly unrealistic.

With respect to the second branch of petitioner’s argument —that other means are available to the Transit Authority to meet its financial needs and thus its collective bargaining obligations — it suffices to observe that this contention is advanced only in argument. Nowhere in the record is there any support for the bald statement, nor is there any demonstration that the authority could continue to perform its governmental functions without the very substantial financial assistance it receives both from and on account of contributions provided by the City of New York.

Concluding that there is no basis on which to disturb the legislative finding that the imposition of the wage freeze on employees of the Transit Authority was necessary to the alleviation of the existing financial crisis, we move to a consideration of the reasonableness of the remedy. Here, too, we find no constitutional infirmity.

In reaching the result we do, we attach significance to the fact that the impairment of contract accomplished by the wage freeze provisions of FEA was prospective in nature. Thus, when the statute was enacted in August, 1975, the personal services for which the Transit Authority would be obligated under the existing collective bargaining agreement to pay increased wages after October 1 of that year had not yet been rendered. Full consideration had not passed from the employees and, as regards the services for which compensation at the increased rates provided by the agreement would be paid, the contract of employment was still executory. As noted above, petitioner, acting as bargaining agent for the affected employees, recognized the extreme financial predicament of the city and after negotiations on March 10, 1977 executed what must be taken in the circumstances to be an acceptable substitute compensation plan. In a theoretical sense, if the consequence of the mandated FEA suspension of increases in wages that had previously been bargained for was unacceptable to employees represented by petitioner, it was possible for them, after the extraordinary legislative session, still to withhold the principal consideration to come from them — namely, the personal services to be rendered to the Transit Authority — and, departing from its employ, to offer those services elsewhere. Thus, by its terms, FEA effected a limited intrusion on the contract rights petitioner had secured for the employees represented by it under the collective bargaining agreement; there was neither termination of existing employment nor deprivation of payment for services that had been rendered in the past. The effect was substantially less than what would have occurred had the statute withheld or reduced payment for services or consideration already performed or delivered — as for instance, by impairing the right to payment of suppliers who had delivered goods, contractors who had erected structures or bondholders who had advanced funds, all creditors who had fully performed their obligations under contracts with the city or with covered organizations.

Confronted with the necessity to lighten the financial burden under which the city was laboring, the Legislature’s choice of prospective impairment of executory aspects of wage contracts was reasonable. We therefore conclude that the enactment of FEA constituted a necessary and reasonable address to a concededly important public purpose.

As another ground for challenge to FEA, petitioner asserts that it has been denied equal protection of the laws in violation of Federal and State Constitutions. It predicates its argument on its reading of the statute as giving holders of bonds and other certificates of debt a preferred position over that of employees subject to the wage freeze. Petitioner originally complained that payments to the former were only deferred, not permanently lost, as are the wage increments which cannot be paid to employees, and noted that the lenders were also given a right to accrual of interest during the period of deferment. Based on the decision of our court in Flushing Nat. Bank v Municipal Assistance Corp. for City of N. Y. (40 NY2d 731), in which we held the New York State Emergency Moratorium Act for City of New York (L 1975, ch 874, as amd by ch 875) unconstitutional, petitioner presses its argument with renewed vigor.

Even were petitioner’s argument to be taken in its most extreme formulation — that the rights of bond and note holders were unaffected while employees were deprived of future wage increases — we would nonetheless conclude that such differentiated treatment would not contravene the equal protection clauses of our Constitutions. We adopt the decisive repudiation of petitioner’s claims articulated by Mr. Justice James D. Hopkins at the Appellate Division. We would further note, as stated above, that there is a significant and rational difference between impairment of governmental obligations arising out of contracts under which the engagement of the other contracting party is still executory and impairment of those arising out of contracts fully performed.

There is still another predicate for making a valid differentiation between obligations owed bondholders and those owed wage earners; the Legislature might well have concluded that the impact on the maintenance of governmental operations and services would be significantly greater and potentially more destructive if there were impairment of the right of holders to payment of their bonds and notes than if a freeze was placed on future wage increases. A default by the city on its promises to its lenders might be expected to have consequences affecting the ability of the city to obtain funds for the performance of its governmental functions well into the future and in a scope far broader than might be expected to attend the imposition of a suspension of wage increase payments. Indeed, an adverse effect on the power of the city to borrow on either short or long-term obligations might impair its ability not only to pay increases in wages but even to pay wages themselves.

Finally, petitioner argues that the wage freeze of FEA constitutes a "plan of composition” in violation of Federal bankruptcy law and an intrusion into an area vested exclusively in the Federal judicial system. We reject this argument as did the courts below.

Accordingly, for the reasons stated, the order of the Appellate Division should be modified, without costs, to the extent of remitting the case to Special Term with directions to dismiss the petition insofar as it seeks a declaration that FEA violates section 7 of article V of the New York State Constitution, and, as so modified, the order should be affirmed.

Chief Judge Breitel and Judges Jasen, Gabrielli, Wachtler, Fuchsberg and Cooke concur.

Order modified, without costs, and the matter remitted to Special Term for further proceedings in accordance with the opinion herein and, as so modified, affirmed.

APPENDIX

NEW YORK STATE FINANCIAL EMERGENCY ACT FOR THE CITY OF NEW YORK

"§ 10. Wage Freeze.

"1. Increases in salary or wages of employees of the city and employees of covered organizations which have taken effect since June thirtieth, nineteen hundred seventy-five or which will take effect after that date pursuant to collective bargaining agreements or other analogous contracts requiring such salary increases as of July first, nineteen hundred seventy-five or as of any date thereafter are hereby suspended. All increased payments for holiday and vacation differentials, shift differentials, salary adjustments according to plan and step-ups or increments for employees of the city and employees of covered organizations which have taken effect since June thirtieth, nineteen hundred seventy-five or which will take effect after that date pursuant to collective bargaining agreements or other analogous contracts requiring such increased payments as of July first, nineteen hundred seventy-five as of any date thereafter are hereby, in the same manner, suspended. For the purposes of computing the pension base of retirement allowances, the suspended salary or wage increases and the suspended other payments shall not be considered as part of compensation or final compensation or of annual salary earned or earnable. The suspensions provided herein shall be effective for the first pay period ending on or subsequent to September first, nineteen hundred seventy-five and shall continue until one year thereafter and, to the extent of any determination of the board that a continuation of such suspensions, to a date specified by the board, is necessary in order to achieve the objectives of the financial plan, such suspensions shall be continued to the date specified by such board, which date shall in no event be later than the end of the emergency period.

"2. This section shall not be applicable to employees of the city or employees of a covered organization covered by a collective bargaining agreement or an employee of the city or a covered organization not covered by a collective bargaining agreement where the collective bargaining representative or such unrepresented employee has agreed to a deferment of salary or wage increase, by an instrument in writing which has been certified by the mayor on or before September first, nineteen hundred seventy-five, or certified by the board after September first, nineteen hundred seventy-five as being an acceptable and appropriate contribution toward alleviating the fiscal crisis of the city. The board may, if it finds that the fiscal crisis has been sufficiently alleviated or for any other appropriate reason, direct that the suspensions of salary or wage increases or suspensions of other increased payments shall, in whole or in part, be terminated.”

      . The pertinent provisions of FEA are set forth in the Appendix.

      . By order of the Appellate Division and on consent of the parties, the Attorney-General was permitted to intervene to defend the constitutionality of the challenged statute on the appeal in that court.

      . Included among the findings on which the enactment of FEA was based were the following:
      "The city is unable to obtain the funds needed by the city to continue to provide essential services to its inhabitants or to meet its obligations to the holders of outstanding securities. Unless such funds are obtained the city will soon (i) fail to pay salaries and wages to employees and amounts owed vendors and suppliers to the city, (ii) fail to pay amounts due to persons receiving assistance from the city and (iii) default on the interest and principal payments due the holders of outstanding obligations of the city.
      "If such failures and defaults were to occur, the effect on the city and its inhabitants would be devastating: (1) unpaid employees might refuse to work; (2) unpaid vendors and suppliers might refuse to sell their goods and render services to the city; (3) unpaid recipients of public assistance would be unable to provide themselves with the basic necessities of life; and (4) unpaid holders of city obligations would seek judicial enforcement of their legal rights as to city revenues. These events would effectively force the city to stop operating as a viable governmental entity and create a clear and present danger to the health, safety and welfare of its inhabitants.” (L 1975, ch 868, § 1.)

      . Other organizations, the employees of which were made subject to the wage freeze, included the Board of Education of the City of New York, the Board of Higher Education of the City of New York, the Health and Hospitals Corporation, the New York City Housing Authority, the New York City Housing Development Corporation, City University Construction Fund, Battery Park City Authority, New York City Convention and Exhibition Center Corporation, Manhattan and Bronx Surface Transit Operating Authority, Staten Island Rapid Transit Operating Authority, the New York City Sports Authority and the Brooklyn Sports Authority.


source: Caselaw Access Project

author: Jones, J.

license: Public Domain

text:
    Rose Udoff, on Behalf of Herself as a Shareholder of Babcock and Wilcox Company, and on Behalf of All Others Similarly Situated, Appellant, v George C. Zipf et al., Respondents, et al., Defendants.
    Submitted February 7, 1978;
    decided March 29, 1978

      POINTS OF COUNSEL

      Stanley L. Kaufman and Irving Malchman for appellant.
    I. Plaintiff is entitled to summary judgment canceling the reduction in the exercise price of the stock options because the reduction violated the statutory requirement for stockholders’ consent and because the reduction also violated a condition of the stock option plan as consented to by the stockholders. (Penn v Robertson, 115 F2d 167; Benintendi v Kenton Hotel, 294 NY 112; Christal v Petry, 275 App Div 550, 301 NY 562; Amdur v Meyer, 15 AD2d 425; Gerstle v Gamble-Skogmo, Inc., 298 F Supp 66, 478 F2d 1281; Rogers v Guaranty Trust Co. of N. Y., 288 US 123; Gilbert v Burnside, 13 AD2d 982, 11 NY2d 960.) II. In any event defendants’ motion for summary judgment upon the general, conclusory, and hearsay claim that the reduction in price was a proper exercise of business judgment should have been denied as involving triable issues of fact. (Globe Woolen Co. v Utica Gas & Elec. Co., 224 NY 483; Blaustein v Pan Amer. Petroleum & Transp. Co., 293 NY 281; Glynn v Glynn, 30 AD2d 697; Gross v Neuman, 40 AD2d 772; Syracuse Tel. v Channel 9, Syracuse, 28 AD2d 638; Rosenfield v Fairchild Engine & Airplane Corp., 279 App Div 1086; Greenbaum v American Metal Climax, 27 AD2d 225; Schoenbaum v Firstbrook, 405 F2d 215, cert den sub nom. Manley v Schoenbaum, 395 US 906.)

      Marvin Schwartz and Paul P. Colborn for respondents.
    I. The court below held correctly that the reduction of the exercise price of the options was lawful and explicitly authorized by the plan. (Diamond v Davis, 265 App Div 919, 292 NY 554; Amdur v Meyer, 15 AD2d 425, 14 NY2d 541.) II. The business judgment rule bars judicial inquiry into the board’s action. (Kamin v American Express Co., 86 Misc 2d 809, 54 AD2d 654; Kutik v Taylor, 80 Misc 2d 839; Greenbaum v American Metal Climax, 27 AD2d 225; Leslie v Lorillard, 110 NY 519; India v Finkelstein, 23 NY2d 728; Kahn v City of New York, 37 AD2d 520, 30 NY2d 690; Heller v Boylan, 263 App Div 815.)
   OPINION OF THE COURT

Jones, J.

We conclude that plaintiff’s contention that the board of directors’ reduction of the exercise price of outstanding stock options was improper cannot be resolved on defendants’ present motions for summary judgment.

On the recommendation of the Board of Directors of The Babcock & Wilcox Company, a stock option plan was approved at the annual meeting of shareholders held on April 26, 1972. The objective of the plan was to authorize the board to grant eligible employees options to purchase shares of company stock. For present purposes the significant provision of the plan was the following: "(a) Option Price. The option price per share with respect to each option shall be determined by the Board of Directors but shall not be less than 100% of the fair market value of the Common Stock on the date the option is granted, as determined by the Board of Directors. Nothing herein contained shall, however, be deemed to prevent the Board from authorizing amendments of outstanding options including without limitation the reduction of the option prices specified therein * * * so long as the provisions of any amended option would have been permissible under the Plan if such option had been originally granted as of the date of such amendment with such amended terms.” In February, 1973 the corporation acquired 500,000 shares of its own common stock at a price of $24.267 for the purpose of meeting option calls. Pursuant to the plan, in December, 1972, January, 1973 and April, 1974 the board of directors granted options for 238,900 shares of the corporate stock at exercise prices of $23.75 — $26.625, the then market prices of the stock.

Paralleling the decline in stock market prices generally, the corporate stock dropped sharply to a low of 11% on October 3, 1974. At the October 31, 1974 meeting of the board, the directors reduced the exercise price of the outstanding options to the then market price of $13.625.

Appellant alleges two causes of action: first, that in reducing the exercise price of the outstanding options the directors failed to exercise due care and diligence in conducting the corporate affairs and wasted corporate assets, thereby breaching their fiduciary responsibilities to the corporation and its shareholders; second, that, because such reduction indisputably resulted in a material increase in the cost of the plan to the corporation, under applicable New Jersey law shareholder approval was required for the reduction, and concededly no such approval was obtained. We address these two causes of action in reverse order.

Plaintiff predicates her second cause of action on the provisions of a statute of the State of New Jersey, the State in which the corporation was organized: "Unless otherwise provided in the plan, the board may amend * * * any plan * * * provided that (a) any amendment made by the board to a plan which was approved by the shareholders * * * shall be submitted to the shareholders for approval, unless the board shall have determined that such amendment will not result in a material increase in the cost of the plan to the corporation”. (NJSA 14A:8-4.) Appellant’s argument based on this statute fails to recognize the difference between an amendment of the plan on the one hand and the amendment of outstanding stock options pursuant to express provision of the plan on the other. The statutory constraint is addressed only to the former. In this instance there was no amendment of the plan. By critical contrast the reduction in exercise price was made precisely in conformity with the express provisions of the original plan; in approving the adoption of the plan in 1972, the shareholders had expressly authorized the directors to amend outstanding stock options by the reduction of the option prices specified therein, provided that the options as so amended would have been permissible if originally granted as of the date of the amendment — that is to say, as applied to this case, if the reduced exercise price was no less than 100% of the fair market value of the stock at the time of the amendment. There is no showing or even contention that the reduction of October 31, 1974 did not meet this requirement. We therefore agree with the Appellate Division that defendants’ motion for summary judgment dismissing the second cause of action should have been granted.

The situation with reference to the first cause of action is otherwise. If it be assumed that the October 31, 1974 reduction in exercise price was legally authorized by the terms of the plan and not proscribed by statute, the question remains whether the particular exercise of the conceded authority in the circumstances disclosed in this record was proper. Normally we would look in the affidavit in opposition to the motion for summary judgment for a tender of evidentiary proof, based on personal knowledge, to support the conclusory allegations in the complaint of failure to exercise due care and diligence and of breach of fiduciary responsibility sufficient to require a trial of an issue or issues of fact; the absence of such tender would dictate that the motion be granted. That the affidavit in this instance does not contain such tender, however, does not mandate that defendants’ motion for summary judgment should be granted in the setting of this case. The factual circumstances surrounding the action of the board of directors on October 31, 1974 are peculiarly within the knowledge of defendants. As set forth in the affidavit in opposition to the motion, plaintiff has not yet had the advantage of pretrial discovery. On the record now before us it cannot be determined that there are no issues of material fact with respect to the propriety of the directors’ action on October 31,1974. The matter is not concluded by the tender of uncontested proof that the action was taken on advice of legal counsel. That advice related to the existence of legal authority, but would not establish the propriety of its exercise. It remains to develop the material facts with respect to the economic justification for the reduction in exercise price at the time when the action was taken. This will depend, inter alia, on an evaluation (under applicable New Jersey law) of the directors’ decision from the standpoint of the interests of the corporation and its shareholders, in light of the financial and market situation which confronted the directors at the time of their decision, with due recognition of the scope of discretion vested in a corporate board. Pertinent, of course, would be the interests of the employees for whose benefit the stock option plan was established, especially as those interests relate to the corporation. On the present state of the record, the motion for summary judgment dismissing the first cause of action should therefore be denied, without prejudice to the right of defendants, if they be so advised, to renew the motion after plaintiff has been afforded reasonable opportunity for pretrial discovery (CPLR 3212, subd [f]).

Accordingly, the order of the Appellate Division should be modified, with costs to abide the event, by' reinstating the order of Special Term to the extent that it denied defendants’ motion for summary judgment dismissing the first cause of action, and, as so modified, the order of the Appellate Division should be affirmed.

Chief Judge Breitel and Judges Jasen, Gabrielli, Wachtler and Cooke concur; Judge Fuchsberg taking no part.

Order modified in accordance with the opinion herein, with costs to abide the event, and, as so modified, affirmed.


text:
    In the Matter of Beekman-Downtown Hospital et al., Appellants, v Robert P. Whalen, as Commissioner of the Department of Health of the State of New York, et al., Respondents. In the Matter of Astoria General Hospital et al., Appellants, v Robert P. Whalen, as Commissioner of the Department of Health of the State of New York, et al., Respondents.
    Argued February 15, 1978;
    decided March 29, 1978

      POINTS OF COUNSEL

      Jacob Imberman, Robert M. Kaufman, Alexander Gigante, Jr., and Bruce E. Fader for appellants in the first above-entitled proceeding.
    I. The court below incorrectly concluded that the attachment was not part of the settlement agreements. (Berk & Co. v Derecktor, 301 NY 110; Laba v Carey, 29 NY2d 302; Corhill Corp. v S. D. Plants, Inc., 9 NY2d 595; Muzak Corp. v Hotel Taft Corp., 1 NY2d 42; Wood v Duff-Gordon, 222 NY 88; Du Pont De Nemours & Co. v Claiborne-Reno Co., 64 F2d 224, 290 US 646; Long Is. R. R. Co. v Northville Inds. Corp., 41 NY2d 455.) II. Blue Cross’ revisions of the methodology for the original 1974 hospital index projection violated the settlement agreements. (Delancey Kosher Rest. & Caterers Corp. v Gluckstern, 305 NY 250; Texas Eastern Transmission Corp. v Federal Power Comm., 306 F2d 345; Fleischman v Furgueson, 223 NY 235; O’Neil Supply Co. v Petroleum Heat & Power Co., 280 NY 50.) III. The State respondents are bound by their prior approval of the terms of the settlement agreements. (Matter of Drew v State Liq. Auth., 2 AD2d 75, 2 NY2d 624; Matter of Cupo v McGoldrick, 278 App Div 108; Matter of Lefrak Forest Hills Corp. v Galvin, 40 AD2d 211, 32 NY2d 796, cert den sub nom. Baum v Lefrak Forest Hills Corp., 414 US 1004; City of Chicago v Federal Power Comm., 385 F2d 629, cert den sub nom. Public Serv. Comm. of Wis. v Federal Power Comm., 390 US 945; People ex rel. Finnegan v McBride, 226 NY 252; Moser v United States, 341 US 41; Matter of 54/55 Sixth Realty Corp. [Silverstein] v Leventhal, 51 AD2d 714; Matter of Hugh v Dontzin, 43 AD2d 532.) IV. In any event, the State respondents’ failure to abide by the settlement agreements was arbitrary and capricious. (Matter of 125 Bar Corp. v State Liq. Auth. of State of N. Y., 24 NY2d 174; Matter of Swalbach v State Liq. Auth. of State of N. Y., 7 NY2d 518; Matter of Community Synagogue v Bates, 1 NY2d 445.) V. Respondents’ alterations of the final revised 1974 hospital index projection violate the Public Health Law.
    I. Leon Goodman and Michael F. McGahan for appellants in the second above-entitled proceeding.
    I. The court below incorrectly concluded that the attachment "revision of hospital index projection for 1974” was not part of the settlement agreements. II. A fair interpretation of the settlement agreement mandates the use of the revised index for 1974. (Delancey Kosher Rest. & Caterers Corp. v Gluckstern, 305 NY 250; Matter of Western Union Tel. Co. [American Communications Assn., C.I.O.], 299 NY 177; Rock Is. Ry. v Rio Grande R. R. Co., 143 US 596; O’Neil Supply Co. v Petroleum Heat & Power Co.,
      280 NY 50; Matter of Goldfield Corp. v General Host Corp., 29 NY2d 264; Rentways, Inc. v O’Neill Milk & Cream Co., 308 NY 342; Comey v United Sur. Co., 217 NY 268.) III. The State respondents are bound by their prior approval of the terms of the settlement agreements. (Matter of Cupo v McGoldrick, 278 App Div 108; Matter of Drew v State Liq. Auth., 2 NY2d 624; Matter of Lefrak Forest Hills Corp. v Galvin, 40 AD2d 211, 32 NY2d 796, cert den sub nom. Baum v Lefrak Forest Hills Corp., 414 US 1004; City of Chicago v Federal Power Comm., 385 F2d 629, cert den sub nom. Public Serv. Comm. of Wis. v Federal Power Comm., 390 US 945; People ex rel. Finnegan v McBride, 226 NY 252.) IV. In any event, the State respondents’ failure to abide by the settlement agreements was arbitrary and capricious. (Matter of 125 Bar Corp. v State Liq. Auth. of State of N. Y., 24 NY2d 174; Matter of Swalbach v State Liq. Auth. of State of N. Y, 7 NY2d 518; Matter of Community Synagogue v Bates, 1 NY2d 445.) V. Respondents’ changes of the final revised 1974 hospital index projection violates the Public Health Law.

      Donald B. da Parma and Harold B. Vasios for Blue Cross and Blue Shield of Greater New York, respondent in the first and second above-entitled proceedings.
    I. The court below was correct in its finding that Blue Cross did not breach any agreement with the hospitals. (Matter of Presbyterian Hosp. in City of N. Y. v Ingraham, 48 AD2d 491.) II. Even were there an enforceable contract between Blue Cross and the hospitals as construed by the hospitals, the State respondents would not be bound by its terms. III. The actions of Blue Cross and the State officials had a rational basis. (Matter of Fink v Cole, 1 NY2d 48; Semple v Miller, 38 AD2d 174.)

      Louis J. Lefkowitz, Attorney-General (Mark C. Rutzick and Samuel A. Hirshowitz of counsel), for Robert P. Whalen and another, respondents in the first and second above-entitled proceedings.
    I. Neither the commissioner nor the superintendent were parties to the settlement agreement between Blue Cross and the hospitals, and neither official even did or could agree to utilize a rate-producing formula blindly without knowledge of the rates to be produced thereby. (Tooker v Inter-County Tit. Guar. & Mtge. Co., 295 NY 386; Matter of Rhinelander, 290 NY 31; Straus & Co. v Canadian Pacific Ry. Co., 254 NY 407.) II. The final 1974 rates certified and approved by the State respondents had a rational basis and were proper under the Public Health Law. (Matter of Sands Point Nursing Home v Ingraham, 48 AD2d 897, 41 NY2d 837; Matter of Albano v Kirby, 36 NY2d 526; Matter of Sigety v Ingraham, 29 NY2d 110; Matter of Howard v Wyman, 28 NY2d 434; Matter of Colton v Berman, 21 NY2d 322.)
   OPINION OF THE COURT

Jones, J.

We hold that, consistent with the principles of litigation settlement, both Blue Cross and the State officials affected, the Commissioner of Health and the Superintendent of Insurance, must be held to the terms of agreements which were executed in settlement of prior litigation between the parties.

With the enactment of the Cost Control Act of 1969 (L 1969, ch 957), a system of prospective calculation of reimbursement rates to cover hospital costs was substituted for what had previously been retrospective calculation of reimbursement, in an effort to curb the disturbing continuing rise of such costs. The rationale was that prospective determination of reimbursement rates would create both compulsion and an incentive to control costs of operation. Under such a system reimbursement would not be made on the basis of costs actually incurred, but on the basis of predicted costs determined in advance; there would be no reimbursement for actual costs which exceeded the prospective rate, while if operating costs could be kept below that rate the hospital could retain the difference.

In conformity with this system, in November, 1973 Blue Cross-Blue Shield of Greater New York (Blue Cross) submitted to the Commissioner of Health a formula for the year 1974 called the "Prospective Reimbursement Method Effective January 1, 1974”. On January 24, 1974 the commissioner certified the 1974 formula as reasonably related to the costs of efficient production; the Superintendent of Insurance approved the 1974 formula on January 31, 1974. Under the formula a hospital’s 1974 Blue Cross rate was calculated in three successive steps. First, a base year rate was established, founded on a hospital’s actual 1972 costs, subject to certain maxima and minima. In the second step the base year rate was adjusted to reflect estimated price changes from 1972 to 1973. In the third and final step the 1973 rate was projected forward ("trended” is the term used) to 1974 by applying a hospital index projection. It is the proper calculation of this third step which is the subject of the present litigation.

The original 1974 hospital index projection was calculated by breaking down hospital costs into 13 components or cost groups and then weighting each component according to its percentage of total actual 1972 hospital costs. The weights were derived from the 1972 Uniform Financial Reports which the hospitals had filed with the commissioner and Blue Cross. Blue Cross then selected indices (termed "proxies”) reflecting elements in the general economy which reliably corresponded to comparable elements of the hospital economy. These proxies were used in estimating increases in the weighted hospital cost components. The projected percentage increase — or "movement” — in the proxies from 1973 to 1974 was computed by means of a three-year moving average. Schematically, then, hospital costs were analyzed by the weighting of the 13 components of cost along a vertical axis; each such component of cost was projected by the use of a proxy from the general economy along a horizontal axis.

Finally, to reach the ultimate hospital index projection, each weighted cost component was multiplied by the percentage figure which reflected the estimated movement of the corresponding proxy. The combination of the products of these 13 multiplications produced the original 1974 hospital index projection, 5.71% for teaching hospitals and 5.7% for other voluntary hospitals.

As Special Term found and as respondents concede, the original 1974 hospital index projection was calculated on the assumption that Federal wage and price controls in effect at the beginning of 1974 would continue throughout 1974. The Federal controls, however, were lifted in April, 1974. The result was an immediate and severe increase in wages in the general economy as well as in the hospital economy. Thus, the hospitals were incurring costs in an uncontrolled economy but were being reimbursed on the basis of a projection predicated on a controlled economy.

When Blue Cross refused to recalculate the 1974 hospital index projection, in June, 1974 four voluntary hospitals instituted a class action article 78 proceeding challenging the validity and accuracy of the 1974 hospital index projection and the resulting reimbursement rates (Matter of Mount Sinai Hosp. v Ingraham, Supreme Ct, NY County). In consequence of that litigation and related proceedings with respect to similar challenges to the 1973 Blue Cross rates, a settlement was reached between the individual hospitals and Blue Cross with respect to 1974 reimbursement rates. The disposition of the present appeal turns on the effect now to be given the agreements evidencing this settlement.

Substantially identical settlement agreements were executed between each of a number of proprietary and voluntary not-for-profit hospitals and Blue Cross, subject to certification and approval by the commissioner and the superintendent. In each instance the settlement agreement was manifested in four documents: a three-page "1974 Settlement Agreement and General Release” and three attachments thereto — a two-page "Computation of 1974 Prospective Reimbursement Rates”, a four-page "Revision of Hospital Index Projection for 1974”, and a seven-page "Forecast of 1974 Price Index for Hospitals in Greater New York”. The terms of the settlement included a release by the hospitals of all claims against the commissioner, the superintendent and Blue Cross with respect to the original calculation of the 1974 reimbursement rates. In return, Blue Cross agreed to reimburse the hospitals for 1974 at rates recalculated to reflect actual movement during 1974 of the 13 weighted cost components (as contrasted with the original movement, which had been predicated on what had proved to be the erroneous assumption of continued Federal wage-price controls). Inasmuch as the actual movement of the proxies — and thus of the cost components themselves — during 1974 could not be known until sometime in 1975, the final recalculation of the hospital index projection had necessarily to be deferred. The settlement agreements accordingly provided for adjustment in two stages: There would be an immediate interim adjustment to the original rates to relieve the hospitals’ cash flow problems in part; in the second stage the final revision of the 1974 hospital index projection would be made in 1975 when the actual movement of the proxies for 1974 would be known. The present controversy relates to the calculation of this final adjustment.

In December, 1974 the 1974 settlement agreements (including the "1974 Settlement Agreement and General Release” and the three attachments) were certified by the commissioner and approved by the superintendent.

The economic data for 1974 on which calculation of the final adjustment was to be based became available during the first quarter of 1975, and in May of that year Blue Cross submitted its proposed final revision of the 1974 hospital index projection to the commissioner for certification. This projection was based on the prior formula with two modifications, one with respect to the "other goods” cost component, the second with respect to the "depreciation” cost component. In consequence of these two modifications the hospital index projection was substantially lower than would have been the case without such modifications. Blue Cross estimates that in round figures the modification of the "other goods” component reduced reimbursement to the hospitals by some $6 million and the modification of the "depreciation” cost component reduced reimbursement by; another $3 million.

In the original 1974 hospital index, as the proxy to measure the "other goods” cost component Blue Cross had used the average wholesale price indices in the general economy for the following four items: (1) textile products and apparel; (2) fuel, related products and power; (3) paper, pulp and allied products; and (4) furniture and household durables. In its final revision submitted to the commissioner, Blue Cross removed the fuel factor from both the cost component and the proxy. The fuel economic indicator in the general economy was used as proxy for a newly created 14th component of hospital costs labeled "fuel and related products”. This new cost component was weighted along the vertical axis by applying data taken from a New York State Health Department survey of hospitals’ 1973 direct fuel costs. (The original 13 cost components had been weighted according to 1972 data and covered indirect fuel costs as well.) The resulting "other goods” cost component (i.e., minus "fuel and related products”) was correlated to the proxy based on the remaining three price indices (textiles, paper and furniture). We are told that the effect of this modification was to halve the impact of fuel and fuel-related costs in the computation of the final hospital index projection.

The other modification involved a change with respect to the proxy for the "depreciation” cost component. The original proxy for depreciation had been the weighted average of the proxies for all of the other nonsalary cost components (i.e., "Food”, "Drugs”, "Other Goods”, and "Other Services”). In its final revision, Blue Cross substituted as proxy the actual increase in historical depreciation of hospital plant and equipment. We are told that the effect of this modification was to reduce the percentage change in the depreciation cost component used to calculate the reimbursement rate to one fifth of what it would otherwise have been.

We immediately observe that it appears that each of these modifications made a good deal of economic sense. As to the first, during 1974 fuel prices had skyrocketed because of the international energy crisis. It was reasoned, and with apparent cause, that to continue the wholesale price index for fuel as one of the four indices used to determine the proxy for the "other goods” cost component would be grossly to distort that proxy and thus the projection percentage. The prior inclusion of fuel costs within the "other goods” cost component had been at least in part because there had been no data available as to the actual relative percentage of fuel costs to total hospital costs. Data becoming available in 1974 purportedly showed that fuel costs bore a much smaller ratio to total hospital costs than had previously been recognized. Accordingly Blue Cross factored out the item of fuel both from the cost component and from its corresponding proxy, with the dual effect of changing the "other goods” component and reducing the impact of fuel as a factor in determining the projection index.

By somewhat similar token, with respect to the depreciation cost component, the replacement of the prior proxy based on the combination of the proxies for the four nonsalary components by a new proxy based on actual increase in historical depreciation of hospital plant and equipment could certainly be expected to produce a correlation of much greater economic validity.

The hospitals took exception to the modification in the hospital projection index in these two respects. When Blue Cross and the commissioner and superintendent rejected their complaints, the present litigation ensued. Special Term upheld the position of the hospitals, annulled the determinations of the commissioner and superintendent certifying and approving the revised projection index as submitted by Blue Cross and the reimbursement rates based thereon, and remanded the 1974 Blue Cross rate schedules for recalculation. The Appellate Division reversed and dismissed the hospitals’ petitions. We now, in our turn, reverse the Appellate Division and reinstate the judgment of Special Term.

What is at the heart of the present proceedings is the integrity of litigation settlement — shall Blue Cross and the two State officials who were parties to the prior litigation and participated in the settlements reached be held to perform the commitments on the basis of which that litigation was settled?

We reject the arguments now advanced in support of the conclusion that the commissioner and the superintendent are not bound by the terms of the settlement agreements. True, they were not signatory parties to the agreements, but the agreements were expressly made subject to certification and approval by them, and, as previously stated, in December, 1974 the settlement in all its constituent parts was certified and approved by each.

Nor is there any merit to the argument that the authority and responsibility of the State officials was statutorily limited to approval of specific rates of reimbursement and that neither had authority or power to commit himself in advance to approval of any methodology of rate fixing. On this premise it is contended that the commitment of the State officials went only to the first stage of the settlement, i.e., the $18 million of reimbursement immediately authorized, and could not and did not extend as well to the formula for the final reimbursement rate fixing for the year 1974. Subdivision 3 of section 2807 of the Public Health Law does indeed prescribe that the reimbursement rates shall be "reasonably related to the costs of efficient production of such service”. We, too, would find in that provision a connotation of continuing supervision such as to preclude a long-term commitment either to a particular rate or to a specified formula. We find nothing in the law, however, which precludes the State officials, incident to the settlement of pending litigation, from making a binding commitment to adhere to a specified rate or formula for a period of such duration as was involved here, when no claim is or could be made that such commitment is illegal or involves an impermissible delegation of the authority and responsibility of those officials. Indeed to hold otherwise would be generally to deny the State officials the power to resolve litigation by settlement rather than by final judicial determination. From another perspective, it would ill become the State officials to accept the benefit of the general release of all claims against them in connection with payment rates for services rendered during the year 1974, without accepting the burden which commitment to the formula agreed on entailed.

We have little doubt that, in the absence of the constraints arising out of the settlement agreements, the State officials could have fixed the reimbursement rates based on the two modifications which they sought to make. Both appear economically sound and to be within the contemplation of section 2807. Had the State officials sought, however, to retain this degree of economic flexibility in fixing the final reimbursement rates for 1974, such reservation should have been set forth in the settlement agreements. We perceive no legal inadequacy in the authority of the commissioner and superintendent to enter into commitments to abide by the terms of the 1974 settlement agreements.

Turning then to the settlement agreements themselves, we can only conclude that the parties manifested an intention that the agreement comprise all four documents. Whatever degree of physical separateness might be said to exist, the three attachments constituted operative portions of the total agreement; otherwise there would have been little occasion to attach them. Nor do we find it of significance for present purposes that the "Revision of Hospital Index Projection for 1974” bore an earlier date or was cast in language of intention rather than of explicit commitment. We conclude that the settlement agreements were executed on the basis of the substantive provisions of this attachment and that its provisions became operative provisions of the settlement agreements.

Finally, we address the critical paragraph of the "Revision of Hospital Index Projection for 1974”: "3. a) Inasmuch as the revised projection of the hospital index is based on incomplete data for 1974, it is the intention of the Plan to revise the 1974 index projection in 1975 when complete data for 1974 is available. Such revised projection will be based on the actual movement of the components of the index for 1974 as compared with 1973.” We agree with the contention of the hospitals that by acceptance of this paragraph Blue Cross and the commissioner and the superintendent engaged to calculate the final adjustment of reimbursement rates for 1974 by what Blue Cross characterizes as "blind application of economic data to pre-existing components as weighted in the old index and using the old proxies”. It was just this sort of specificity on which the settlement was based. Respondents make no contention that the modifications introduced by Blue Cross in its submission of the final hospital index projection conformed to such a specific formula. To hold, however, as Blue Cross argues, that there was agreement only that the "revised projection will be based on the actual movement of the components of the index for 1974 as compared with 1973”, thereby to permit continuing adjustment of the various elements "in an economically realistic fashion” without commitment to the same vertical weighting and the same horizontal proxies from the general economy, would result in a wholly illusory settlement. Blue Cross and the State officials would be free to fix reimbursement rates on relevant economic data, precisely as was their statutory obligation and responsibility, entirely without reference to any constraints placed on them in consequence of the settlement agreements. We cannot accept that this was the intention of the settling litigants; certainly they manifested no such intention.

For the reasons stated, the order of the Appellate Division should be reversed, with costs, and the judgment of Supreme Court reinstated.

Chief Judge Breitel and Judges Jasen and Fuchsberg concur with Judge Jones; Judges Gabrielli and Cooke dissent and vote to affirm on the opinion of Mr. Justice Samuel J. Silverman at the Appellate Division (57 AD2d 1); Judge Wachtler taking no part.

Order reversed, etc.

      . By way of illustration see the tables accompanying this opinion which were attached to the petition herein as the tables prepared by Blue Cross under the 1974 formula, showing the cost components, proxies and calculations for the 1974 hospital index projection originally submitted for certification and approval.

      . (Matter of Presbyterian Hosp. in City of N. Y. v Ingraham, consolidated with Matter of Benedictine Hosp. v Ingraham, 78 Misc 2d 152, affd 49 AD2d 520, affd 39 NY2d 867.)

      . This interim adjustment resulted in an upward revision of the hospital index projection from the original 5.7% to 9.45% for voluntary hospitals and produced a prompt payment to the hospitals of some $18 million. A similar benefit presumably was received by the proprietary hospitals, the precise dimensions of which are not disclosed in this record.


author: Jasen, J.

text:
    In the Matter of the Estate of John P. Fay, Deceased. Violet J. F. Buck, Appellant; Florence S. W. Hunter et al., Respondents.
    Argued February 9, 1978;
    decided March 29, 1978

      POINTS OF COUNSEL

      William B. Lawless and James G. McGoldrick for appellant.
    I. Decedent’s baptismal certificate evidences his legitimacy and the marriage of his parents. (Ferrie v Public Administrator, 4 Bradf 28, affd sub nom. Caujolle v Ferrié, 23 NY 90; Matter of Benjamin, 34 NY2d 27; Blackburn v Crawfords, 3 Wall [70 US] 175; Matter of Kolodij, 85 Misc 2d 946; Matter of May, 305 NY 486; Eisenlord v Clum, 126 NY 552.) II. Decedent’s legitimacy and the marriage of his parents will be presumed. (Matter of Benjamin, 34 NY2d 27; Hynes v McDermott, 91 NY 451; Ferrie v Public Administrator, 4 Bradf 28, affd sub nom. Caujolle v Ferrié, 23 NY 90; Matter of Biersack, 96 Misc 161, 179 App Div 916; Matter of Matthews, 153 NY 443; Matter of Blackwood, 151 Misc 90; Matter of Thorps [Goode], 204 App Div 877.) III. Respondents have the burden to prove their benefactor’s illegitimacy. (Caujolle v Ferrié, 23 NY 90; Hynes v McDermott, 91 NY 451; Matter of Matthews, 153 NY 443; Matter of Findlay, 253 NY 1.) IV. Decedent’s birth certificate establishes his parentage but not his status. (Caujolle v Ferrié, 26 Barb 177; Matter of Macklin, 82 Misc 2d 376; Matter of Benjamin, 34 NY2d 27; Tracy v Frey, 95 App Div 579; Barry E. v Ingraham, 52 AD2d 96; Commissioner of Public Welfare of City of N. Y. v Koehler, 284 NY 260; Matter of Melis v Department of Health of City of N. Y, 260 App Div 772; Aalholm v People, 211 NY 406; Matter of King, 31 AD2d 758; Matter of Deutscher, 132 Misc 205.) V. EPTL 4-1.2 (subd [b]) creates an invidious discrimination against paternal kindred. (Olmsted v Olmsted, 190 NY 458, 216 US 386; Miller v Miller, 91 NY 315; Oregon v Haas, 420 US 714; Mathews v Lucas, 427 US 495; Norton v Weinberger, 364 F Supp 1117; Jimenez v Weinberger, 417 US 628; Gomez v Perez, 409 US 535; Weber v Aetna Cas. & Sur. Co., 406 US 164; Levy v Louisiana, 391 US 68; Eskra v Morton, 524 F2d 9.) VI. Appellant is the legitimate sister of the half-blood and a distributee of the decedent Fay. (Matter of Brown, 40 NY2d 938; Matter of Meehan, 150 App Div 681; Matter of Dugro, 261 App Div 236; Matter of Biersack, 96 Misc 161, 179 App Div 916; Matter of Foote, 5 Misc 2d 58; Matter of Carter, 69 Misc 2d 630, 42 AD2d 925; Matter of Anonymous, 74 Misc 2d 99; Matter of Macklin, 82 Misc 2d 376; Matter of Flemm, 85 Misc 2d 855; Matter of Vought, 29 AD2d 97.)

      Burton T. Ryan for Florence S. W. Hunter and others, respondents.
    I. The decedent, John Fay, was illegitimate. (Matter of Benjamin, 34 NY2d 27; Jacobs v Fowler, 135 App Div 713; Chamberlain v Chamberlain, 71 NY 423; George v Galani, 218 App Div 840; Matter of King, 31 AD2d 758;
      Anonymous v Anonymous, 1 AD2d 312; Matter of Findlay, 253 NY 1; Matter of Kirkby, 57 Misc 2d 982.) II. Under the provisions of EPTL 4-1.2 appellant, Buck, is not a distributee of the decedent. (Olmsted v Olmsted, 190 NY 458, 216 US 386.) III. EPTL 4-1.2 is constitutional. (Matter of Lalli, 38 NY2d 77; Weber v Aetna Cas. & Sur. Co., 406 US 164; Matter of Flemm, 85 Misc 2d 855; Matter of J. [Anonymous], 50 AD2d 890; Matter of Thomas, 87 Misc 2d 1033; Matter of Anonymous, 60 Misc 2d 163; Mathews v Lucas, 427 US 495; McGowan v Maryland, 366 US 420; McDonald v Board of Elections, 394 US 802; Reed v Reed, 404 US 71; Kahn v Shevin, 416 US 351.)

      Louis J. Lefkowitz, Attorney-General (Irwin M. Strum, Samuel A. Hirshowitz, Allan S. Meyers and Suzanne M. Mc-Grattan of counsel), for State of New York, respondent.
    EPTL 4-1.2 is constitutional. (Matter of Lalli, 38 NY2d 77, 43 NY2d 65; Matter of Flemm, 85 Misc 2d 855.)
   OPINION OF THE COURT

Jasen, J.

In this accounting proceeding by the Public Administrator of the County of New York, objections were filed by several potential claimants. This appeal involves only objections raised by Violet Josephine Fay Buck, who claims to be a half-sister of decedent by reason of a common father.

The decedent, John P. Fay, died intestate on August 19, 1970, in St. Nazaire, France. At his death, the decedent was a citizen of the United States and a domiciliary of the State and County of New York. His gross estate approximates $6,000,-000. Born in Edinburgh, Scotland, on April 20, 1892, the decedent’s birth certificate, registered in Edinburgh on August 11, 1892, was signed by one John Fay and Elizabeth Hunter Weatherall. Although the certificate provided for inclusion of the location and date of the marriage of the child’s parents, this information was left blank. Moreover, the certificate specifically stated that decedent’s birth was illegitimate.

On May 1, 1892, prior to the registration of his birth, decedent was baptized in Edinburgh. Unlike his birth certificate, decedent’s baptismal certificate was not signed by his parents. It did include in printed form, however, the word "conjugum”, symbolic of the lawful marital status of the child’s parents. Beyond decedent’s birth and baptismal certificates, there exists no documentary evidence concerning his legitimacy. There exists only the remarkable tale of his early life. There is little doubt that at an early age the decedent and each of his parents parted ways. From papers found in the decedent’s possession, it appears that sometime between 1898 and 1901 the decedent was enrolled in a boarding school in Ireland. For a number of years prior to his enrollment, decedent lived in a foster home with a woman, whom he addressed as "aunt”. By the age of 13, however, the decedent, having signed aboard a sailing vessel, was living entirely on his own. He continued to work as a seaman until 1910, when he decided to reside in the United States. It was in 1918 that decedent, while serving in the United States Army, applied for United States citizenship.

As for his parents, at decedent’s birth in 1892, his mother, Elizabeth Hunter Weatherall, who had been widowed in 1888, had three sons: Arthur, William and James. The issue of Arthur — Kate Weatherall Spencer and Florence S. Weatherall —and of William — Laurette Caillol — claim to be the sole distributees of the decedent. In 1900, decedent’s father, John Fay, married one Hattie Fadley. Appellant Violet Josephine Fay Buck, an issue of this union, claims, as stated before, to be a distributee of the decedent by reason of a common father.

After considering these claims, as well as others not relevant to this appeal, the Surrogate sustained the objections of Kate Weatherall Spencer, Florence S. Weatherall and Laurette Caillol, who claimed through the mother’s bloodline, and dismissed the objections of appellant Buck who claimed relationship by reason of a common father upon the ground "that decedent was not * * * legitimate”, thereby precluding inheritance through his putative father. The Appellate Division unanimously affirmed for the reasons stated by the Surrogate.

The issue in this case is twofold: whether the decedent was illegitimate; and, if so, whether EPTL 4-1.2 (subd [b]), which precludes inheritance by the paternal kindred of an illegitimate, is violative of equal protection.

There is an established legal presumption that every person is born legitimate. (Hynes v McDermott, 91 NY 451, 458; Matter of Matthews, 153 NY 443, 447; Fisch, New York Evidence [2d ed], § 1129; Richardson, Evidence [10th ed], § 59.) Although this presumption operates most commonly in cases in which the issue involved is not the validity of the parents’ marriage, but, rather, the paternity of the child, it does come into play in any case in which legitimacy is in issue. (Matter of Matthews, 153 NY, at p 447, supra.) It has often been described as "one of the strongest and most persuasive [presumptions] known to the law.” (Matter of Findlay, 253 NY 1, 7.) However, the presumption of legitimacy is not conclusive: it may be rebutted where to do otherwise would outrage common sense and reason. (Id., at p 8; Anonymous v Anonymous, 1 AD2d 312.)

The basic problem then is one of proof and it depends upon whether or not there is sufficient evidence in the record to sustain the Surrogate’s finding "that upon both the oral and documentary evidence presented it must conclude that decedent was illegitimate.” In reaching this conclusion, the Surrogate placed greater weight upon the decedent’s birth certificate than upon his baptismal certificate. As he noted, no evidence existed to establish that the decedent’s parents were present at the baptismal. This fact stands in marked contrast to the registration of the decedent’s birth — the certificate of which was signed by both parents and indicated that the child was illegitimate. As a result, the Surrogate determined that upon the evidence presented at trial, the presumption of legitimacy was overcome and therefore concluded "that decedent was not a legitimate child.” This question of fact, determined adversely to the appellant, was affirmed by the Appellate Division. Consequently, no question of law is presented which can be reviewed by our court. (See Howard v Murray, 38 NY2d 695, 699.)

With respect to the second issue on this appeal — whether EPTL 4-1.2 (subd [b]), which precludes inheritance by the paternal kindred of an illegitimate, is violative of equal protection — appellant argues that this statute discriminates unconstitutionally against decedent’s paternal kindred.

EPTL 4-1.2 deals with inheritance by or from illegitimate persons. It provides in pertinent part:

"(a) For the purposes of this article:
"(1) An illegitimate child is the legitimate child of his mother so that he and his issue inherit from his mother and from his maternal kindred.
"(2) An illegitimate child is the legitimate child of his father so that he and his issue inherit from his father if a court of competent jurisdiction has, during the lifetime of the father, made an order of filiation declaring paternity in a proceeding instituted during the pregnancy of the mother or within two years from the birth of the child.
* * *
"(b) If an illegitimate child dies, his surviving spouse, issue, mother, maternal kindred and father inherit and are entitled to letters of administration as if the decedent were legitimate, provided that the father may inherit or obtain such letters only if an order of filiation has been made in accordance with the provisions of subparagraph (2).”

In Matter of Lalli (43 NY2d 65, app docketed No. 77-1115, 46 USLW 3498), we recently upheld the constitutionality of EPTL 4-1.2 (subd [a], par [2]) which requires, before an illegitimate child may inherit from his father, a filiation order made within the lifetime of the father in a proceeding commenced during the pregnancy of the child’s mother or within two years of the child’s birth. In Lalli, we considered the constitutionality of our statute in light of the Supreme Court’s decision in Trimble v Gordon (430 US 762), wherein the court struck down an Illinois statute which permitted an illegitimate to inherit from his father only upon proof that his parents had subsequently intermarried. (Ill Rev Stat, ch 3, § 12 [1961].)

In distinguishing our statute, we noted that the standard of review to be applied "while 'less than strict scrutiny’, is nonetheless 'not a toothless one.’ ” (Matter of Lalli, 43 NY2d, at p 67, supra, quoting Trimble v Gordon, 430 US, at p 767, supra.) Although we acknowledged that a remote rational relationship between our statute and a legitimate State purpose would be insufficient to sustain its constitutionality, we also observed that the Supreme Court recognized that "[t]he orderly disposition of property at death requires an appropriate legal framework, the structuring of which is a matter particularly within the competence of the individual States. In exercising this responsibility, a State necessarily must enact laws governing both the procedure and substance of intestate succession. Absent infringement of a constitutional right, the federal courts have no role here, and, even when constitutional violations are alleged, those courts should accord substantial deference to a State’s statutory scheme of inheritance.” (Matter of Lalli, 43 NY2d, at pp 68-69, supra, quoting Trimble v Gordon, 430 US, at p 771, supra.)

With this standard of review in mind, we sustained the limitation upon an illegitimate’s right to inherit from his father contained in EPTL 4-1.2 (subd [a], par [2]). Appellant’s claim of unconstitutionality presents no greater challenge. An order of filiation declaring decedent’s father to be John Fay, also the father of the appellant by Hattie Fadley, was never made. Certainly, if in the absence of an order of filiation an illegitimate child may constitutionally be precluded from inheriting from his father, it is beyond reproach to preclude, in the absence of a filiation order, inheritance by the paternal kindred of the illegitimate. We are not concerned with a natural child claiming to be a distributee from his father, nor a situation where a putative father makes a claim as against his illegitimate child, but rather a situation where another individual who claims to be a half-sister of a decedent through a common father seeks a share in the illegitimate’s estate.

Appellant challenges, however, the facial constitutionality of the preclusion of inheritance by paternal kindred of an illegitimate, other than the father, irrespective of the existence of an order of filiation. Applying a less than strict scrutiny, but yet not a "toothless” standard of review, we hold that the preclusion of inheritance by the paternal kindred of an illegitimate, at least where there has been no order of filiation, is not violative of equal protection.

EPTL 4-1.2 was enacted by the Legislature on the basis of the study and recommendations of the Bennett Commission on Estates (Fourth Report, Temporary State Commission on the Modernization, Revision and Simplification of Laws of Estates, NY Legis Doc 1965, No. 19, pp 233-271). It was the commission’s belief that the maternal kindred of an illegitimate child would often have knowledge of the child’s birth whether or not an order of filiation was ever made. In contrast, the commission believed that frequently the paternal kindred of an illegitimate may not have knowledge of the child’s birth, notwithstanding the existence of an order of filiation. By excluding paternal kindred, other than the father, from the class of an illegitimate’s distributees, the commission sought to avoid creation "by law [of] a family group that did not exist in reality.” (Id., at p 266.)

It should not be overlooked that this exclusion is not directed at the illegitimate. It is not a punishment for the conduct of his or her parents. Nor are individuals related to the illegitimate decedent denied inheritance on the basis of their sex. It is merely a legislative judgment designed to ensure that only the true members of an illegitimate’s family are permitted to share in his or her estate. In addition, it serves a legitimate purpose in providing for the orderly settlement of estates and the dependability of title to property passing under our laws of intestate distribution. We thus find no constitutional infirmity in precluding inheritance by the paternal kindred of an illegitimate.

The order of the Appellate Division should be affirmed, with costs, payable out of the estate to all parties separately appearing and filing separate briefs.

Chief Judge Breitel and Judges Gabrielli, Jones, Wachtler, Fuchsberg and Cooke concur.

Order affirmed, etc.