Monday, May 19, 2008

Post-Service But Pre-Suit Suspension of MD Owner/Manager of PLLC Removes Standing to Maintain No-Fault Recovery Suit

A.B. Med. Servs. PLLC a/a/o Frantz Beauliere v. Travelers Indem. Co.
(Nassau Dist.Ct., decided 5/19/2008)

There have been a number of reported decisions in New York addressing the consequence of a doctor's post-service de-licensing on the recoverability of no-fault benefits, most if not all such courts holding that recovery is still allowed if the de-licensing occurred after the services otherwise were properly delivered. In this case, although the court did not vary from those holdings, it did deny recovery, at least temporarily, to the medical provider on a different, somewhat procedural ground.

A chronology of the facts salient to this case is as follows:

>> December 8, 1999 - A.B. Medical Services, PLLC, is formed, listing "A Braver" of Staten Island, as its sole member.

>> December 18, 2003 to January 8, 2004 - plaintiff PLLC provides treatment to the assignor.

>> June 15, 2006 - Dr. Alexander Braver, reportedly a psychiatrist and the sole member of the plaintiff PLLC, pleads guilty to one count of attempted grand larceny in the 3rd degree, a felony.

>> October 19, 2006 - Dr. Braver is sentenced to three years probation and ordered to make restitution of $28,000 for Medicaid billing fraud.

>> January 26, 2007 - Dr. Braver is suspended for three years from the practice of medicine by the New York State Board for Professional Medical Conduct.

>> March 3, 2007 - effective date of Dr. Braver's suspension.

>> August 14, 2007 - Plaintiff PLLC commences this action.

In defense of this action, Travelers argued that Dr. Braver's suspension rendered A.B. Medical Service, PLLC, a fraudulently formed entity under the holding of State Farm Mut. Auto. Ins. Co. v. Mallela, 4 NY3d 313, 794 NYS2d 700 (2005). Plaintiff PLLC argued in response that since the PLLC validly existed prior to Dr. Braver's suspension, it was entitled to collect such fees as it legally earned prior to the suspension of its managing doctor.

After discussing and distinguishing the core issue and holding of Mallela, Nassau District Court Judge David Goodsell reasoned:

The provision set forth in 11 NYCRR 65-3.16(a)(12) bars payment to a fraudulently formed entity regardless of whether the services it performed occurred before or after April 2, 2002, the effective date of the regulation. (Citations omitted). The proper licensing of the provider is a condition precedent to payment. (Citations omitted).

A distinction must be drawn between the terms "licensed" and "formed." While physicians within professional service corporations and limited liability companies are licensed in accordance with Education Law § 6522, corporations and limited liability companies are incorporated, organized or formed in accordance with Business Corporation Law § 1503 and Limited Liability Company Law § 1203. A professional limited liability may only practice medicine except by "individuals authorized by law to render such professional service, as individuals . . .," Limited Liability Company Law § 1204(a).

Noting that no evidence has been presented that the plaintiff PLLC was subjected to disciplinary proceedings, or had been subjected to any licensing sanctions, Judge Goodsell observed that the suspension of Dr. Braver involved medical services rendered by Dr. Braver which resulted in overbilling Medicaid, not no-fault insurers:

Therefore, the question presented is whether the suspension of the license of the sole member/manager of a professional limited liability company renders the existence of the entity to be fraudulent under the holding of Mallela, supra, and to violate Insurance Law § 5102(a)(1) and 11 NYCRR 65-3.16(a)(12) thereby precluding reimbursement for services rendered.
Finding that plaintiff's distinction as a "PLLC" (professional service limited liability company) was significant, Judge Goodsell turned to the provisions and requirements of New York's Limited Liability Company Law to reach his decision:

The Limited Liability Act [sic] § 1209 and § 1210 provide for a situation in which a member is disqualified from the practice of medicine. Under § 1209 a physician legally disqualified from the practice of medicine "shall sever all employment with and financial interests (other than interests as a creditor or vested rights under a bona fide retirement program) in such limited liability company forthwith or as otherwise provided by in § 1210 of this Article . . . . such legal disqualification . . . shall be deemed to constitute an irrevocable offer by the disqualified member to sell his, her or its membership interests to the professional service limited liability company pursuant to § 1210 of this Article."

The failure to enforce the disqualification process described in the statute is grounds for dissolution of the entity. Limited Liability Company Law § 1210 requires the sale of membership interests by a disqualified member with six months after the disqualification. The statute provides for a means to immediately value the company in the event of a repurchase of the interest by the entity in the event the operating agreement fails to do so. However, the failure to sell the interests provides no penalties to the disqualified member where there are no other members to effectuate buy-out since the only penalty is to award attorney's fees and costs to the buyer for the seller delaying such a sale. Additionally, the statute permits a sale within the six month window to a qualified third party purchaser again subject to the operating agreement. However, as noted above, the failure of the member to sever ties with the entity is grounds for dissolution. Limited Liability Company Law § 1209.

Section 1210 goes on to note that the provisions of the section do not prevent the company from paying pension benefits or other deferred compensation to a former member of the company. The guidelines for dissolution is set forth in Limited Liability Law § 701 in accordance with § 1213 which governs professional services limited liability companies. The entity since it is without members and since it has not taken steps to transfer ownership to a qualified member, must dissolve and wind up its affairs in accordance with Article VII of the Limited Liability Company Law.

The facts established in this case do not support the defendant that the entity is fraudulently formed as outlined in Mallela, supra. However, neither the plaintiff nor Dr. Braver offer any rationale for failing to adhere to the requirements of the Limited Liability Company Law. Dr. Braver raises through an affidavit in opposition that he is being persecuted by the insurance companies, but fails to offer any other defense to the defendant's allegation of fraudulent formation. Dr. Braver had the opportunity to avail himself voluntarily of options to continue the entity through a valid transfer but failed to do so. Therefore, the plaintiff while properly formed in light of the suspension of its sole member is now required to dissolve and wind up its affairs. As such, it does not have standing to the continued maintenance of this action.

Clearly, Dr. Braver is not permitted to continue as a member of the entity. This however does not mean that Dr. Braver must forfeit his rights to payment or that the potential debt of the defendant is erased. The entity is allowed as part of its winding up affairs to pursue claims Limited Liability Company Law § 703(b). Dr. Braver, as a creditor of the entity, would be entitled to payments earned.

The action was commenced after the suspension of Dr. Braver, but before the expiration of the six month period to take action on the disqualification. (Limited Liability Company Law § 1210). Therefore while the action was timely and properly commenced, the maintenance of the action without a qualified member in ownership of the entity must be considered a nullity. Even though the defendant failed to couch the application to dismiss on other than alleged fraudulent grounds, the plaintiff has not shown legal basis to maintain this action. Clearly, the plaintiff must satisfy the legal requirements in order to maintain its case and pursue causes of actions available.

In fashioning an appropriate remedy which considers both the rights of the plaintiff to seek payment for services provided and the defendant which is entitled to a prompt adjudication of the matter. [sic] CPLR § 2201 provides that a "court in which an action is pending may grant a stay of procedures in a proper case, upon such terms as may be just." In order to do so in this case a stay pursuant to CPLR § 2201 is granted sua sponte to allow for the filling of Articles of Dissolution and the appointment of a representative to wind up the affairs of the entity to allow final resolution of all matters including the present lawsuit. The stay shall suspend the accumulation of interest under no-fault regulations 11 NYCRR 65.3.9(a) should interest ultimately be awarded, retroactive to the date issue was joined until lifting of the stay since the plaintiff should not benefit from its failure to adhere to its statutory obligations under the Limited Liability Law (citations omitted).

In the end, the form of business and the named party matter. Adherence to the laws governing the conduct of a business must be followed. Therefore, the motion of the plaintiff is denied without prejudice since no authority to prosecute the claim exists. The cross motion is denied as the defendants have failed to demonstrate a fraudulent formation of the prosecuting entity. * * * This case is stayed for a period not to exceed six months or until such time as an order from a court of competent jurisdiction appoints a proper party to file Articles of Dissolution and to wrap up the affairs of the entity. (Emphasis added.)

In the end, this may be only a tempory "win" for Travelers, given that the court did not dismiss the suit, instead holding that it could not be maintained and prosecuted with its sole member having been suspended from the practice of medicine. Had the PLLC commenced this action more than six months after Dr. Braver's effective suspension date, however, Judge Goodsell presumably would have concluded that plaintiff PLLC lacked standing at the time this action was commenced and dismissed it as not having been properly commenced. Of course, it remains to be seen, and perhaps litigated, whether plaintiff PLLC or any similarly situated PLLC could bring such an action more than six months after the suspension of its MD owner by first filling Articles of Dissolution and appointing a representative to, as Judge Goodsell says, "wrap up the affairs" and pursue the accounts of the PLLC.

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