Report of Carothers Trial Result in New York Law Journal

Civil Court Jury Rejects Claims Of $23 Million In No-Fault Case
By Daniel Wise

New York Law Journal (c)
August 04, 2008

A six-person jury in a court that normally hears cases worth $25,000 or less has rejected $23 million in claims against 50 insurance companies from a doctor who claimed to own a professional corporation that performed MRIs for no-fault accident victims.

No other case involving no fault claims has "ever been remotely near" the $23 million figure, John E. McCormack, who was the lead counsel for the insurance companies in the unusual Staten Island Civil Court trial, said in an interview.

Mark W. Smith, who represented the professional corporation, the ownership of which was at the heart of the case, said in an interview that the verdict would be appealed because the trial judge misapplied a pivotal Court of Appeals case.

The fact that such a large figure was at stake was a product of a 2005 Court of Appeals decision and a 2006 procedural ruling by Civil Court Judge Peter P. Sweeney, who presided over the month-long trial that ended on July 17.

The Court of Appeal's 2005 decision in State Farm v. Mallela, 4 NY3d 313, formed the basis upon which the 50 insurers stopped making payments mid-term in the two-year life of the professional corporation, and on which they crafted their defense of the suit brought by radiologist Andrew Carothers, M.D., P.C.

In Mallela, the Court approved insurance companies withholding no-fault payments from companies that are only nominally owned by doctors but whose real owners are not licensed physicians.

With all the insurers relying on the Mallela defense, Judge Sweeney consolidated for trial the corporation's claims for payment of more than 32,000 MRIs performed for persons injured in no-fault accidents (NYLJ, Sept. 29, 2006). Magnetic Resonance Imaging (MRI) is used to detect internal injuries. The industry standard for MRI payment is $900.

The jury's verdict disallowed collection of any of those claims, finding that the corporation rather than being owned by Dr. Carothers had been "fraudulently incorporated."

That verdict represented "a significant victory for the insurance industry," said Harvey Aloni, a board member the New York Anti-Car Theft and Fraud Association, a group of 35 New York-based insurance carriers, because it showed that Mallela is "a potent legal weapon in barring medical professional corporations, illegally owned and controlled by lay persons, from collecting any no-fault billings."

But the corporation's lawyer, Mr. Smith, countered that the industry is "using this case to create a legal precedent that will permit it to refuse payment to countless New York doctors and medical practices who provide legitimate health care services."

The result may be, Mr. Smith added, that "fewer doctors may be willing to provide medical services to car accident victims under the New York no-fault law and regulations."

Ownership Is Key

The trial dealt primarily with the insurers' claim that although Dr. Carothers was listed as the sole owner of the professional corporation in legal documents, two other individuals, both laymen, were the real owners.

Dr. Carothers, who spent five days on the witness stand, steadfastly asserted that he was in fact the owner, and that the payments that the insurance companies asserted were "disguised profits" were in fact legitimate payments to the companies that had leased him space and equipment for the corporation's three offices in Brooklyn, Queens and the Bronx.

The insurers contended that the real owners of the professional corporation were Hillel Sher, the sole owner of two companies that leased space and equipment, including six MRI machines, to the Carothers corporation for $579,000 a month, and Irina Vayman, who functioned as the office manager.

Both Mr. Sher and Ms. Vayman took the Fifth Amendment during their depositions, and the two sides stipulated that they were unavailable to be witnesses at the trial.

According to Mr. McCormack, both Mr. Sher and Ms. Vayman are traveling abroad at different destinations and cannot be reached for comment.

Mr. McCormack, who heads a five-lawyer firm in Hempstead, said that the insurance companies' proof that Mr. Sher and Ms. Vayman were the true owners of the professional corporation had two main threads. First, they asserted that the costs for some of the equipment, particularly the MRI machines, were so inflated that they were in fact profits rather than payments to a supplier. And second, that Ms. Vayman transferred $2.5 million from the professional corporation to personal accounts controlled by either herself or Mr. Sher.

In addition, Mr. McCormack said, the proof showed that Dr. Carothers only received a total of $134,000 in payments, all in the form of check with a memo note of "payroll" or to similar effect, during the two years the corporation was in operation. During that same period, Ms. Vayman, whose title was executive secretary, received $2.5 million, Mr. McCormack said.

The Carothers corporation began operating in January 2005 and was no longer a functioning entity by the end of 2006, both sides said.

Mr. McCormack described two ways in which he said the cost of the equipment rented by Mr. Sher's companies had been inflated. First, the professional corporation was being charged $75,000 a month for each of the MRI machines which were readily available at a cost of less than $10,000 a month, he said.

Similarly, Mr. McCormack said, the three offices had 10 fax machines. The corporation paid $500 a month for each machine under the lease arrangement. The same machines could be purchased at Staples for $70 a piece, Mr. McCormack said.

Bank records subpoenaed by the insurance companies showed that funds that were transferred to Mr. Sher's and Ms. Vayman's personal accounts were used to pay down the mortgages on two properties they separately owned; to purchase six cars and pay the expenses of trips to the Caribbean, Cannes, Moscow, London and the Italian Riviera, Mr. McCormack said.

Lease Amounts Called Sound

Mr. Smith disputed that the space/equipment leases were inflated. The $579,000 monthly rent amount was reasonable in light of the business that Dr. Carothers' company was taking over, Mr. Smith said. Another radiologist had operated the offices as MRI centers for the previous five years, over the course of which his operation had generated revenues of $1.3 million a month.

Value is a function of location, Mr. Smith explained, with "a popcorn concession at Yankee Stadium a lot more valuable than one on a street corner."

Mr. Smith also sharply disputed the insurance companies' claims that Ms. Vayman had transferred $2.5 million in funds to accounts belonging to her and Mr. Sher.

During the startup of the company in early 2005, Mr. Smith said, Ms. Vayman had transferred $400,000 to a personal account at Citibank for the sole purpose of using Citibank's on-line payment system, with which she was familiar, to pay the corporation's bills.

When Dr. Carothers realized that Ms. Vayman was transferring funds to her personal account, he told her to stop, Mr. Smith said, and arrangements were made to set up a corporate account at Citibank so Ms. Vayman could use a system familiar to her.

With the sole exception of those startup funds, Mr. Smith said, all payments from the corporation went to Mr. Sher's leasing companies. As for the insurers' claims that the funds were used for extravagant personal purposes, he added, what Mr. Sher did with those payments is "none of our business."

Mr. Smith called the insurers' claims that Ms. Vayman was paid $2.5 million over the two years "ridiculous." There was evidence at the trial that during the two years the company was in operation Mr. Sher and Ms. Vayman became romantically linked, Mr. Smith said.

Mr. Smith also said that Dr. Carothers was paid less than $200,000 during the time the corporation was active only because the insurance companies had stopped making payments.

As the company was starting up, Mr. Smith said, Dr. Carothers was "a normal businessman who paid his bills rather than himself - then the insurance companies stopped paying claims."

In pursuing an appeal, Mr. Smith said, the corporation will focus on language in Mallela that limits the opinion to situations where ownership of a medical corporation by someone without a medical license reflects "behavior tantamount to a fraud."

The jury's verdict is "fatally flawed," he said, because Judge Sweeney "did not charge the jury with respect to either intent or scienter."

"We think the Second Department will adopt a different standard, and we expect to retry the case," Mr. Smith said.

Mr. Smith founded Smith, Valliere & Martinez, a five-lawyer Manhattan firm, in 2007. He had been a partner at Kasowitz, Benson, Torres & Friedman. Joining him on this case were Smith Valliere attorneys Timothy Valliere and Marvin Ben-Aron.

Also playing a major role in the insurers' defense were Craig J. Freiberg of Freiberg & Peck, Vincent Gerbino of Bruno, Gerbino & Soriano in Melville and Barry Levy, of Rivkin Radler in Uniondale.