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Probate Court Discusses Cy Pres Doctrine


The Facts:

On 1 November 1995, a doctor (“the doctor”) died. On 8 July 1996, his will was admitted to probate (for estate administration or estate litigation). Under the will, the doctor bequeathed $3,500,000 to a hospital (“the Hospital”), to be held as the Endowment Fund in perpetuity, with the income only to be used for general purposes. This was in addition to the $1,000,000 that he and his wife gave the hospital for the same purpose in December of 1988. In addition, the doctor bequeathed 5% of his residuary estate (up to a maximum of $10 million) and one quarter of the balance of the residuary estate to the hospital. His will directed that these amounts be added to the Endowment Fund and administered under the conditions established under the will. The hospital received approximately $37,000,000 from the estate of the doctor dedicated to the Endowment Fund.

On 8 April 1998, the doctor’s wife (“the wife”) died. On 30 December 1998, her will was admitted to probate. Under the will, she bequeathed $4,000,000 to the same aforesaid hospital as the Endowment Fund, to be held either in perpetuity with the income to be used for general purposes, or in part or in whole for the construction or acquisition of a building to be called in their names. In addition, she left 20% of her residuary estate to the hospital, to be added to the Endowment Fund and administered under the conditions established under the will. A New York Probate Lawyer said the hospital received approximately $98,000,000 from the estate of the wife dedicated to the Endowment Fund.

The present day value of the Endowment Fund is approximately $133,250,000.

The Prior Cy Pres Proceeding:

Since the death of the aforesaid donors, there have been dramatic changes in the health care industry that have negatively impacted the financial status of New York hospitals. As a result of the severe economic pressures, the hospital found itself in dire financial straits. In March 2000, the hospital adopted a recovery plan to meet these challenges. As part of the recovery plan, the hospital became a member of a larger system of hospitals consisting of several other hospitals, to provide for savings in purchasing and improving cash flow. However, key parts of the plan required the use of the donated funds to secure loans for capital improvements and working capital. Under the recovery plan, the hospital proposed to refinance its existing mortgage and increase the size of the loan by $63.4 million to fund necessary capital improvements that were projected to increase hospital utilization. It also proposed to obtain $25 million from commercial loans to provide additional working capital. However, these borrowings would require additional collateral. Since the hospital had already maximized its debt capacity, it proposed to use funds from the Endowment Fund as collateral. After the mortgage and the commercial paper loans were repaid, the collateral would be restored to the Endowment Fund as restricted funds. In addition, the hospital proposed to use $15 million from the Endowment Fund to purchase and renovate a medical treatment facility to be named after the donors.

Thus, the Hospital petitioned the court to modify the restrictions on the bequests under the wills pursuant to the doctrine of cy pres. Long Island Probate Lawyers said the hospital requested that the court exercise its cy pres powers to modify the restrictions in the wills to allow the Hospital to use a sufficient portion of the Endowment Fund to secure the new financing for strategic capital projects and working capital and to interpret the wife’s will to permit the Hospital to spend approximately $15 million to acquire and renovate the treatment facility. In its petition, the hospital emphasized that these measures were necessary if it is to compete successfully and survive economically in the changing health care environment. The Attorney General appeared and filed an affidavit in support of the petition.

The court found that the forces buffeting the health care industry in general and the hospital, in particular, were unforeseen changes that jeopardized the donors’ charitable intentions.

Thus, the court found that the proposed loan was the best practical solution that would preserve the donors’ charitable intent. The court applied the doctrine of cy pres to approve the use of restricted funds as collateral as requested. Pursuant to the decree, approximately $92,000,000 from the Endowment Fund was segregated to serve as collateral for the mortgage and the working capital short term loans.

The Instant Cy Pres Proceeding:

The original recovery plan, of which the cy pres proceeding was a key part, has achieved many of its goals. The Hospital has a new president and a chief executive officer. Its participation in the system of hospitals has resulted in improved cash flow from billing and collection, reduction of operating expenses and increased operating efficiency. Nassau County Probate Lawyers said it has made numerous capital improvements, including the modernization of facilities and creation of new laboratories and offices, the renovation of its ambulatory care center, emergency facilities, cancer care facilities and rehabilitative treatment facility. The refinancing has resulted in savings of millions of dollars in financing costs.

Nonetheless, the Hospital is still subject to the economic forces that have buffeted the health care industry. Almost two thirds of the Hospital’s income comes from reimbursement under the Medicare or Medicaid program. The reimbursement rates set by the federal and state governments have failed to keep pace with the rate of inflation, let alone the increased cost of providing health care. The growth in managed care and the increased number of uninsured patients, noted in the original cy pres petition, has reduced Hospital revenues. The Hospital has found itself in the position of servicing an increasing volume of patients, but receiving a lower amount of revenue.

Here, the Hospital is required to fund needed improvements in delivering health care out of operating surplus, which does not exist. This is in addition to increased costs mandated by requirements prescribed after the terrorist attack on the World Trade Center and the subsequent Anthrax scare. As a result, the hospital has experienced operating losses of approximately $12 million per year. This has forced the Hospital to forgo needed improvements and delay paying its suppliers, resulting in higher costs of supplies and the threat that its vendors will cease doing business with it. The result has been felt by the entire health care industry. Despite its economic situation, the success of the recovery plan depends upon the hospital’s ability to increase operating capital and achieve operating surpluses over the long haul. The hospital believes that it will be able to achieve this if it is able to borrow $15 million from the Endowment Fund to pay down its accounts payable and invest an additional $10 million to fund critical and strategic capital projects. The Attorney General has reviewed the petition and filed an affidavit in support.

The Issue:

The sole issue is the uncontested petition to release funds in the Endowment Fund, a restricted fund of the Hospital, under the doctrine of cy pres.

The Ruling:

Key factual issues in the instant cy pres proceeding were raised and determined in the prior cy pres proceeding. To the extent that these factual issues are identical to the issues in the current cy pres proceeding, and the parties in this proceeding had an opportunity to be heard in the prior proceeding, the factual issues determined in the prior cy pres proceeding should be binding and there is no need to relitigate them.

The use of the subject doctrine is rare because the factual issues determined in a cy pres proceeding involve facts specific to the charity seeking cy pres relief, limiting the usefulness of a prior cy pres proceeding to a charity not involved in the original proceeding. However, where a charity applies for additional relief under the doctrine, there is no inherent reason why the doctrine should not apply.

This is the situation in the instant case. In the prior cy pres proceeding, the court found that the gift to the hospital was charitable in nature, that the donors had a general charitable intent to benefit the hospital, that the hospital had severe financial needs due to changed circumstances in the health care industry, and that the proposed modification of the restriction of the bequests was the option that most closely preserved the donors’ original charitable intentions. Inasmuch as the Attorney General is the only other party in interest in this proceeding, and was a party to the prior cy pres proceeding, there is no impediment to using the doctrine of collateral estoppel.

Consequently, the findings made in the prior proceeding that the bequests to the Endowment Fund were charitable and that the donors’ charitable intent was a general, not specific, intent is established. Even without the benefit of the prior decision, the court notes that the record in this case leaves little doubt on these issues. However, in order to apply the doctrine of cy pres, there must also be a showing that the specific charitable purposes are no longer capable of being performed. There must be a showing that there has been a change of circumstances such that the particular charitable intention of the testator fails. As to this factual issue, that of a change of circumstances, public policy would seem to require that the charity not rely solely on the prior decision, but establish that events since the prior decision have acted to make the original plan approved in the prior proceeding ineffectual in achieving its goal of saving the Hospital.

Here, the record shows that since the approval of the prior petition, the Hospital has been damaged more by the economic forces discussed in the prior decision. In addition, since the terrorist attack on the World Trade Center and the Anthrax scare, hospitals have been required to expend additional monies to upgrade their security systems and preparedness for treating victims of terrorist and biological attacks. As a result, the Hospital finds itself once again on the edge of bankruptcy. Despite its economic situation, the Hospital believes that it will be able to increase operating capital and achieve operating surpluses over the long haul, if it is able to borrow $25 million from the Endowment Fund to pay down its accounts payable and to invest in critical and strategic capital projects. Moreover, the Hospital must establish that the application is the least invasive method of preserving the donors’ charitable intent. The Attorney General has carefully reviewed the proposal and the financial documents upon which they were based and is satisfied that the application is narrowly tailored to preserve the Endowment Fund as much as possible and that granting the petition will enable the hospital to fulfill its health care mission. He further reports that the relief requested is necessary to avoid a substantial risk of bankruptcy.

During the donors’ lifetimes, they were closely associated with the hospital and engaged in many activities to promote its existence and ensure its continuing medical service to the community. They made substantial monetary contributions to this end, both inter vivos and testamentary. This led the court to find in the prior proceeding that the donors would want the hospital to continue as a hospital. Since that has become impracticable in light of its current financial circumstances, it is proper that the court exercise its cy pres powers to prevent the suspension of a valuable community service and the failure of a definite charitable purpose. Literal compliance with the restrictive provisions of the Endowment Fund is impracticable because the income of the hospital is insufficient to allow the hospital to continue its operations and avoid bankruptcy. Modification of the restrictions to allow a sufficient portion of the Endowment Fund to be used to reduce the accounts payable and make the capital improvements to implement the hospital’s recovery plan has the potential to keep the Hospital in operation and preserve the donor’s overriding general charitable intent.

Henceforth, the court finds that the hospital has met the three required tests for application of the cy pres doctrine and grants the cy pres petition in its entirety.

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