NYSSIU Legal Update 2019-2020 Edition

 LEGAL UPDATE

I have been privileged since incorporating the New York State Chapter of Special Investigation Units (NYSSIU) in 1997 to serve as its Counsel.  Many times I have prepared and presented the NYSSIU Legal Update to members and guests at NYSSIU meetings.  Some of those updates even made it to NYSSIU's website.  

On May 6, 2020, my son Ryan Mura prepared and virtually presented the 2019-2020 edition of the NYSSIU Legal Update.  That edition digests eight no-fault, six property and two criminal law case decisions, as well as providing updates on New York legislative and regulatory developments affecting New York property and casualty insurers. 

You can read that Legal Update here.  Case decisions are hyperlinked within.  Questions can/should be directed to Ryan.

"Because We Don't Have the Money" -- Andrew Carothers and Former Counsel Fight Over Fees

NO-FAULT – MALLELA DEFENSE – ATTORNEYS' FEES – OVERBILLING – FRAUD
Collier, Halpern, Newberg, Nolletti & Bock, LLP v. Andrew Carothers, M.D., P.C.
(Sup. Ct., Westchester Co., decided 7/2/2010)

Someone should submit this case to Wikipedia as a footnote for its irony entry.

New York no-faulters will recall that in August 2008, a Richmond County (Staten Island) civil court jury rejected Andrew Carothers MD, PC's $23 million in consolidated claims for MRI services against 50 insurance companies, finding that the corporation rather than being owned by Dr. Carothers had been "fraudulently incorporated", i.e., the Mallela defense.

In Matter of Andrew Carothers, M.D., P.C. v Insurance Cos. Represented by Bruno Gerbino & Soriano, LLP, 26 Misc 3d 448 (NYC Civ. Ct., Richmond Co., decided 10/14/2009), Richmond County Civil Court Judge Peter Sweeney denied the plaintiff PC's post-trial motion to set aside the jury's verdict.  Those wishing to understand what a fraudulent incorporation or Mallela defense looks like should read Judge Sweeney's summary of the trial evidence in that case.  It is my understanding that the verdict has been appealed. 

The plaintiff law firm Collier, Halpern, Newberg, Nolletti & Bock, LLP did not represent Andrew Carothers, MD, PC (ACMDPC) in that case; the once über confident Mark W. Smith of Smith Valliere, PLLC, did (and is defending ACMDPC and Dr. Carothers in this action). Collier Halpern brought this action against ACMDPC, Dr. Carothers personally, and other defendants to recover $402,626.44 in legal fees and disbursements ACMDPC and Dr. Carothers allegedly failed to pay.  Collier Halpern had billed the PC and Dr. Carothers a total of $892,190.99 for defending them in 13 actions brought by various no-fault insurance companies.  The total amount of billings at issue in 11 of those 13 actions was $47,937.60. 

On defendants' motions to dismiss, the court dismissed the complaint against the Medtrex defendants and the quantum meruit and fraud causes of action against defendants ACMDPC and Carothers.  The Carothers defendants then answered and asserted nine affirmative defenses.  After discovery and the filing of a note of issue, plaintiff moved for summary judgment on the grounds of breach of the retainer agreement and account stated.  In support of their motion, plaintiff argued that there were no issues fact to preclude summary judgment because at his deposition when asked by plaintiff why its invoices were not paid Dr. Carothers replied "Because we don't have the money." Further, when asked if there was any other reason why plaintiff was not being paid, Dr. Carothers answered "No."

In addition to opposing plaintiff's motion on various grounds,the Carothers defendants cross-moved for leave to amend their answer to assert four counterclaims against the plaintiff for its alleged "gross overbilling" based on breach of contract, unjust enrichment, breach of fiduciary duty, and fraud.  In support of their cross motion, the Carothers defendants contended that in view of the fact that they allege plaintiff misstated the number of hours expended on various matters and marked up out-of-pocket expenses when only the actual cost of the expenses were to be charged, there was a valid claim for fraud.

In denying plaintiff's motion for summary judgment, Westchester County Supreme Court Justice William Giacomo ruled:

Here, there are significant questions of fact regarding the reasonableness of the legal fees billed in this case. There is no dispute that plaintiff charged approximately $900,000 in legal fees for cases worth about $48,000. Notably, the legal fees are about 20 times the value of the no-fault cases! While the Court is mindful of the fact that the avoidance of particular outcome in first party benefit no fault cases can be worth more than the medical reimbursement at stake, to wit, a finding that the health care provider was unlicensed or fraudulently licensed providers (see State Farm Mut. Auto. Ins. Co. v. Robert Mallela, 4 NY3d 313 320-22 [2005][Such a determination renders these entities "not eligible" for reimbursement .], it still seems to this Court that legal bills in excess of 20 times value of the no-fault cases warrants denial of summary judgment as the reasonableness of attorney's fees is always subject to court scrutiny. (See Matter of First Natl. Bank v Brower, 42 NY2d 471 [1977]; D'Antoni v. Ansell, 184 AD2d 678 [2nd 1992]; Reisch & Klar v Sadofsky, 78 AD2d 517 [2nd Dept 1980]).

As the First Department noted in Collier, Cohen, Crystal & Bock v. MacNamara, 237 AD2d 152 [1st 1997]), a similar case in which a law firm [a predecessor firm to the plaintiff?] was trying to collect fees which seemed on their face to be unreasonable, "[f]urther militating against summary disposition of this matter is the question of the reasonableness of the fees the firm is attempting to collect, to wit, $155,000 for less than six months work for defendant's interest in a partnership valued at less than $30,000. It is recognized that the courts possess the traditional authority "to supervise the charging of fees for legal services under the courts' inherent and statutory power to regulate the practice of law" (id at 152; see also Gair v Peck, 6 NY2d 97 [1959], cert denied 361 US 374 [1960]; Finkelstein v Kins, 124 AD2d 92, 100 [1st Dept 1987], appeal dismissed 69 NY2d 1023 [1987]).

Based on the foregoing, summary judgment is DENIED because "[t]he reasonableness of plaintiff's fees can be determined only after consideration of the difficulty of the issues and the skill required to resolve them; the lawyers' experience, ability and reputation; the time and labor required; the amount involved and benefit resulting to the client from the services; the customary fee charged for similar services; the contingency or certainty of compensation; the results obtained and the responsibility involved." (Morgan & Finnegan v. Howe Chemical Co., Inc., 210 AD2d 62 [1st Dept 1994]; see also Matter of Freeman, 34 NY2d 1, 9 [1974]; Marshall v New York City Health & Hosps. Corp., 186 AD2d 542, 543 [2nd 1992]; Gutin v Gutin, 155 AD2d 586, 587 [2nd 1989]; cf., Kramer, Levin, Nessen, Kamin & Frankel v Aronoff, 638 F Supp 714 SDNY 1986]).

The court also granted the Carothers defendants' cross motion to amend their answer to assert four counterclaims against plaintiff, holding:

Here, although the note of issue has been filed there can be no doubt that the allegations raised in the Carothers defendant's counterclaims are not a surprise to plaintiff. The amount and propriety of legal fees billed by plaintiff is the heart of the dispute between the parties. Therefore, the four proposed counterclaims arguable have merit. 

A fraudulent billings counterclaim being asserted by the Carothers defendants against the attorneys who defended them in actions alleging that Carothers fraudulently incorporated and billed under ACMDPC.  See the irony?

Nassau District Court Rules that a No-Fault Insurer May Not Obtain Documentary Material Relating to a Mallela Defense in an EUO Request

NO-FAULT – VERIFICATION – PROVIDER EUO – DOCUMENT REQUESTS – MALLELA DEFENSE
Dynamic Med. Imaging, P.C. a/a/o Staffa Pasqualino v State Farm Mut. Auto. Ins. Co.
(Nassau Dist, 1st Dist., decided 7/15/2010)

From the judge who last inspired me to quote Lewis Carroll's Jabberwocky comes this decision, another head scratcher.

New York no-fault mavens know that the Mallela defense is not subject to the 30-day pay-or-deny preclusion rule of Insurance Law § 5106(a) and 11 NYCRR § 65-3.8(a)(1).  They may also know that under New York procedural law, a litigant must have a good faith basis for alleging something that's in a complaint or an answer.  Having a good faith basis to allege something usually depends on having already obtained some factual information about the allegation or defense.  

In State Farm Mut. Auto. Ins. Co. v Mallela (4 NY3d 313 [2005]), the New York Court of Appeals held that a health care provider which is fraudulently incorporated or organized in violation of New York Business Corporation Law §§ 1507, 1508, and New York Education Law § 6507(4)(c) is not entitled to reimbursement from no-fault insurers for medical services rendered by licensed medical practitioners.  New York state licensing requirements prohibit nonphysicians from owning or controlling medical service corporations. Only an appropriately licensed professional licensed may be the owner of a profession corporation [Business Corporation Law §1507], a professional limited liability company [Limited Liability Company Law §1207]or a professional limited liability partnership [Partnership Law §121-1500(q)], and only licensed professionals can obtain payment of no-fault benefits. 11 NYCRR § 65-3.16(a)(12).

Plaintiff submitted bills to State Farm for lumber and cervical MRIs and 3D renderings ordered by the assignor's treating chiropractor.  State Farm sought to determine whether the plaintiff, Dynamic Medical Imaging, P.C., was properly incorporated and operating, so it requested that the PC's purported owner, Steven Brownstein, M.D., appear for an examination under oath (EUO) and produce the following documents and records:

(i) documents evidencing ownership of the P.C., at the time of the treatment for which you seek payment, by one or more licensed professionals, including but not limited to a copy of the certificate of incorporation for the P.C., receipts for filing, stock certificates, and the stock ledger for the P.C.;

(ii) documents relating to the income and expenses of the P.C., including but not limited to tax returns and general ledgers of the P.C. for the past twelve months;

(iii) a list of the individuals who provided and/or supervised the health care services for which you seek payment, identification of the type of professional license each individual holds, and documents (i.e, W-2, 1099, etc.) identifying the relationship between the individual and the P.C. (e.g. whether the individual is an employee or independent contractor and how that individual is compensated);

(iv) a list of days of the week and hours that any owner of the P.C. provides or supervises services for the P.C. during the period for which payment is sought for services rendered;

(v) all documents, including all schedules, attachments or addenda, relating to the relationship between the P.C., and/or any entity of individual that leases equipment or space to or from the P.C., or provides management, consulting, administrative or billing services to the P.C. and any payments made to any person or entity that rendered such services to the P.C.; and

(vi) complete, sign and return the enclosed NF-3 form.

Dr. Brownstein twice did not appear for the EUO, scheduled for October 30, 2007 and November 19, 2007, and none of the requested documents was provided to State Farm.  By letter dated December 12, 2007, State Farm denied payment of the plaintiff's bills, based on Dr. Brownstein's failure to appear for an EUO and the provider's failure to comply with 11 NYCRR 65-3.16(a)(12).  Plaintiff commenced this action on January 24, 2008 to recover payment of its bills, and State Farm moved for summary judgment.

In DENYING State Farm's motion, Justice Fred Hirsh concluded that by requesting Mallela materials, State Farm's EUO request was "palpably improper" and that a no-fault insurer should not be allowed to obtain what in essence Justice Hirsh believes constituted pre-action discovery in conjunction with a duly requested EUO:

No-fault is a statutory/regulatory system. See, Medical Society of the State v. Serio, 100 NY2d 854 (2003). No fault is in derogation of the common law. East Acupuncture, P.C. v. Allstate Ins. Co., 61 AD3d 202 (2nd Dept. 2009).  The rights of an insurer are limited to those expressly provided for by the statute and regulations. Presbyterian Hosp. in City of NY v. Maryland Cas. Co., 90 NY2d 274, rearg. denied 90 NY2d 937 (1997)The regulation provide for an examination under oath. The term "examination under oath" is not defined by the no-fault regulations. Word used in regulations that are not specifically defined in the regulations are to be given their ordinary meaning. Oefelein v. Town of Thomson Planning Board, 9 AD3d 556 (3rd Dept. 2004); Parker v. Kelly, 140 AD2d 993 (4th Dept. 1988); McCarter v. Beckwith, 247 App.Div 289 (2nd Dept. 1936: and McKinney's Statutes §76. Examination is defined as the questioning of a witness by an attorney. See, Law.Com Law Dictionary. Examination can also be defined as a formal interrogation. Webster's Unabridged Dictionary 2nd Ed. (1998) p.673. Therefore, the term "examination under oath" as used in the no-fault regulations means the insurer can request the injured party or the assignee of the injured party appear and give oral testimony after having been sworn or under affirmation.

The regulations do not provide an insurer with the right to obtain written documentation other than such documentation as may be demanded as verification. In addition to appearing for an examination under oath, the assignee can be compelled to execute a written proof of claim under oath and provide other pertinent information as may assist the insurer in determining the amount due and payable. 11 NYCRR 65-1.1. The regulation do not give the insurer to right to ask an assignee to produce documents relating to the corporate structure or finances of a medical provider. 11 NYCRR 65.3.5(a). Upon receipt of the completed verification form, the insurer can request additional verification. 11 NYCRR 65-3.5(b). The regulations only permit the insurer to obtain written information to verify the claim. 11 NYCRR 65-3.5(c). See generally, V.M.V. Management Co, Inc. v. Peerless Ins., 15 AD3d 647 (2nd Dept,. 2005). Nothing in the No-Fault regulations permits an insurer to request an assignee to produce corporate organizational and financial documents a week in advance of an EUO.

An examination under oath permits the insurer to question the injured party or the its assignee regarding the claim. While an examination under oath has been treated by the courts as condition precedent to coverage, the no fault regulations treat the examination under oath as a form of verification. Thus, where a carrier properly demands an examination under oath, "...the verification is deemed to have been received by the insurer on the day the examination was performed." 11 NYCRR 65-3.8(a)(1). The insurer has 30 days from the day the EUO is conducted to is conducted to pay or deny the claim. Id. 

The purpose for demanding verification is to extend or toll the carriers time to pay or deny the claim so the carrier can obtain information regarding the claim. Hospital for Joint Disease v. New York Central Mutual Fire Ins. Co., 44 AD3d 903 (2nd Dept. 2007); and 11 NYCRR 65-3.5(c); and 11 NYCRR 65-3.8(a)(1). The extension of time in which to pay or deny the claim is extremely important in circumstances in which the insurer is seeking information regarding a defense the insurer would be precluded from raising if the defense is not stated in a timely served denial. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., 10 NY3d 556 (2008); and Lincoln General Ins. Co. v. Alev Medical Supply Inc., 25 Misc 3d 1019 (Dist. Ct. Nassau Co. 2009).

However, this rationale does not apply to a Malella [sic] defense since a Malella [sic] defense is non-precludable. State Farm Mutual Ins. Co. v. Malella [sic], 4 NY3d 313 (2005).

While Malella [sic] has been called a fraudulent incorporation defense, the rationale underlying Malella [sic] is that only an appropriately licensed professional licensed may be the owner of a profession corporation [Business Corporation Law §1507], a professional limited liability company [Limited Liability Company Law §1207]or a professional limited liability partnership [Partnership Law §121-1500(q)] and only licensed professionals can obtain payment of no-fault benefits. 11 NYCRR 65-3.16(a)(12). The Malella [sic] defense permits an insurer to look behind a facially proper business structure to determine if persons not duly licensed to practice the profession are the actual owners of the medical provider. Andrew Carothers, M.D., P.C. v. Insurance Companies Represented by Bruno, Gerbino & Soriano, LLP, 26 Misc 3d 448 (Civil Ct. Richmond Co. 2009). If the provider is not owned by a licensed professional or if the provider is controlled by a non-professional, then the provider may not obtain payment of no-fault benefits. State Farm Mutual Ins. Co. v. Malella [sic], supra.

If a carrier believes the provider/assignee is subject to a Malella  [sic] defense, the proper way to assert it as an affirmative defense it in its answer. New York First Acupuncture P.C. v. State Farm Mut. Auto. Ins. Co., 25 Misc 3d 134(A) (App Term2nd, 11th & 13th Jud. Dists. 2009). 

The document demand contained in State Farm's EUO letters to Dynamic and Dr. Brownstein are essentially a demand for pre-action discovery regarding a Malella  [sic] defense. CPLR 3102(c) permits pre-action discovery only by court order and only to aid in bringing an action. Some of the documentation requested in the EUO letters State Farm might not be able to obtain even if it had been requested in a duly served notice for discovery and inspection.^[FN3]

The oft stated purpose of the No-fault Law is to insure prompt payment for medical services rendered to persons injured in motor vehicle accidents. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra; and Hospital for Joint Diseases v. Travelers Property Casualty Ins. Co., 9 NY3d 312 (2007); and Presbyterian Hosp. in City of NY v. Maryland Cas. Co., supra. Permitting an insurer to obtain what would be tantamount to full discovery regarding a Malella  [sic] defense as part of an EUO would defeat that purpose and is beyond the scope of the No-fault Law and regulations relating to EUO.

Permitting an insurer to demand what has been demanded by State Farm in this action for an EUO is fraught with the potential for abuse. See, Unitrim Advantage Ins. Co. v. Carothers, 17 Misc 3d 1121(A) (Sup. Ct. NY Co. 2007); and Gegerson v. State Farm Ins. Co., 27 Misc 3d 1207(A) (District Ct. Nassau Co. 2010). An insurer should not be able to defeat no fault claims by making an onerous and improper document demand relating to an EUO.

If an insurer has a reasonable basis for believing a medical provider cannot obtain payment of no-fault benefits because the provider is "fraudulently incorporated", then it should assert the defense in its answer and litigate the issue on the merits in the action brought by the provider for no-fault benefits. The insurer should move to consolidate all of the actions brought by the provider and have the issue of whether the provider is subject to a Malella  [sic] defense determined in one action. See, Andrew Carothers, M.D., P.C. v. Insurance Companies Represented by Bruno, Gerbino & Soriano, LLP, supra. Alternatively, an insurer can commence a declaratory judgment action seeking a judgment declaring the provider ineligible to receive no-fault payments. See, State Farm Mutual Ins. Co. v. Malella  [sic] , supra.

While State Farm may have reason to believe Dynamic is not eligible to receive no-fault benefits for Malella  [sic] reasons, State Farm cannot use a palpably improper EUO demand not subject to court review as a basis for obtaining summary judgment. See, Westchester Medical Center v. Progressive Casualty Ins. Co., 51 AD3d 1012 (2nd Dept. 2008). 

Since the EUO demand was improper, defendant's motion for summary judgment is denied.

Expect an appeal.  And a reversal, in my opinion.   In my respectful view, Justice Hirsh's misunderstanding of the Mallela decision and its defense is not confined to its spelling.  Denying no-fault insurers an opportunity to obtain verification of a provider's proper licensing and ownership in conjunction with the verification of their bills would force insurers to do something the New York courts have repeatedly said litigants should not do, i.e., allege something in a complaint or answer without a good faith, factual basis for doing so. And as to Footnote # 2, an NF-3 is the prescribed Verification of Treatment by Attending Physician or Other Provider of Service form, not the Verification of Hospital Treatment form, which is an NF-4.  Here's a bookmark of the current forms.

Appellate Term, Second Department, No-Fault Decisions

NO-FAULT – MAILING – PROVING IME NO-SHOW
Radiology Today, P.C. a/a/o Charles Rawlins v. GEICO Ins. Co.
(App. Term, 2nd Dept., 2nd, 11th & 13th, decided 10/23/2009)

Order of Richmond Civil (Katherine Levine, J.) REVERSED.  Defendant's unopposed motion for summary judgment dismissing the complaint should have been granted.

• Affidavit of a manager employed by the independent medical review service retained by defendant to schedule and conduct IMEs sufficiently set forth the standard office practice and procedure for the generation and mailing of IME notices designed to ensure that said notices were properly addressed and mailed.
• The affirmations and affidavits of the medical professionals who were to perform the IMEs established that plaintiff's assignor failed to appear for said IMEs.

NO-FAULT – SUFFICIENCY OF PEER REVIEW
Richmond Radiology, P.C. a/a/o Arkady Polevoy v. GEICO Ins. Co.
(App. Term, 2nd Dept., 2nd, 11th & 13th, decided 10/23/2009)

Order of New York Civil (Diane A. Lebedeff, J.) denying plaintiff's motion for summary judgment AFFIRMED. 

• The doctor performing the peer review did not conclude that he had insufficient information upon which to base a conclusion. Instead, the affirmed report raised a triable issue of fact because "the report clearly indicates that the pertinent [treating] physician's reports and other documentation had been requested and provided for the purpose of conducting a peer review, and the conclusion of lack of medical necessity is based on the peer reviewer's opinion, in effect, that there was no substantiation in the reports and documents reviewed of medical necessity for the [services] provided[.]"

NO-FAULT – PROOF OF MAILING – USE OF WORKERS' COMPENSATION FEE SCHEDULE FOR ACUPUNCTURE SERVICES
New Wave Oriental Acupuncture, P.C. a/a/o Gerard Ikezi v. Government Employees Ins. Co.
(App. Term, 2nd Dept., 2nd, 11th & 13th, decided 10/23/2009)

Order of New York Civil (Robin S. Garson, J.) granting summary judgment to plaintiff REVERSED. 

• The affidavit submitted by defendant sufficiently established that the denial of claim forms were timely mailed in accordance with defendant's standard office practices and procedures.
• It was proper for defendant to use the workers' compensation fee schedule for acupuncture services performed by chiropractors to determine the amount which plaintiff was entitled to receive.

NO-FAULT – LEAVE TO AMEND ANSWER – FRAUDULENT INCORPORATION DEFENSE  – COMPELLING DEPOSITION OF PROVIDER'S OWNER
New York First Acupuncture, P.C. a/a/o Anitta Allen v. State Farm Mut. Auto. Ins. Co.
(App. Term, 2nd Dept., 2nd, 11th & 13th, decided 10/23/2009)

Order of Richmond Civil (Diane A. Lebedeff, J.) granting defendant's motion to amend its answer to assert a fraudulent incorporation defense and compel plaintiff to produce its owner for a deposition AFFIRMED.

• The Civil Court did not improvidently exercise its discretion in granting defendant's application for leave to amend its answer in order to interpose the affirmative defense of fraudulent incorporation, in the absence of any showing that prejudice or surprise would result therefrom and since the proposed affirmative defense was neither devoid of merit nor palpably insufficient as a matter of law.
• Plaintiff's contention, that the defense of fraudulent incorporation must be asserted in a timely denial of claim form, is without merit. 
• Defendant sufficiently demonstrated that the deposition testimony of plaintiff's owner, Valentina Anikeyeva, regarding plaintiff's corporate structure was material and necessary so as to warrant the granting of the branch of its motion seeking to compel Ms. Anikeyeva's deposition.

Justice Golia's concurring memorandum is worth a look:

While I agree with the ultimate disposition in the decision reached by the majority, I strenuously disagree with the majority gratuitously raising a nonexistent issue, namely that a Mallela defense (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d 313 [2005]) may be disallowed if "prejudice or surprise would result therefrom." This impression was created by the majority in choosing here to excise an important requirement with regard to the law of amending an answer. The actual statement by the Court of Appeals in McCaskey, Davies & Assoc. v New York City Health & Hosps. Corp. (59 NY2d 755, 757 [1983] [emphasis added, citations and internal quotations marks omitted]) is that, "Leave to amend the pleadings shall be freely given absent prejudice or surprise resulting directly from the delay."

Inasmuch as it is inconceivable that a Mallela defense of fraudulent incorporation could ever create prejudice or surprise that resulted directly from the delay in raising such defense, it is clear that such analysis is unwarranted.

To me, it is extremely unlikely that an individual who creates a fraudulent entity for the purpose of defrauding an insurance company would forget that he/she did so and be prejudiced or surprised when it was discovered. Such would be akin to a person running a "Ponzi" scheme deciding to invest in his own firm because it was obtaining such good results.

So is Dave Gottlieb's observation on Justice Golia's point.  What do you think?  I get Justice Golia's point on the no surprise part, but I guess whether the "absent prejudice or surprise" aspect attaches to an insurer's leave to amend its answer to add a Mallela defense depends on one's definition of "prejudice". 


NO-FAULT – UNTIMELY PROOF OF CLAIM – WAIVER
Delta Diagnostic Radiology, P.C. a/a/o Frank Louigarde v. Interboro Ins. Co.
(App. Term, 2nd Dept., 2nd, 11th & 13th, decided 10/23/2009)

Judgment of Queens Civil (William A. Viscovich J.) in favor of plaintiff AFFIRMED.

• Although plaintiff's claim was submitted more than 45 days after the services at issue were rendered, defendant waived its reliance on the 45-day rule as a basis to deny the claim because defendant had failed to communicate to plaintiff, as required by the No-Fault Regulations, that late submission of the proof of claim will be excused where the applicant can provide a reasonable justification for the late submission. 
• Defendant also failed to demonstrate that discovery was needed in order to show the existence of a triable issue of fact.

Declaratory Judgment and Order of Restitution of No-Fault Payments Granted Based on Annulment of PC's Certificate of Incorporation

NO-FAULT – FRAUDULENT INCORPORATION – MALLELA – ANNULMENT OF MEDICAL PC'S CERTIFICATE OF INCORPORATION
Allstate Ins. Co. v. Plainview Professional Med., P.C.
(Sup Ct., Nassau Co., decided 9/24/2009)

Three Allstate companies brought this action against Plainview Professional Medical, P.C., Bruce Bromberg, D.C., Rafael Garcia, M.D., PPP Healthcare Management, Inc., and Handon Management, Ltd.: (1) for a declaration that the Allstate plaintiffs were under no obligation to pay pending, previously denied or future no-fault claims submitted to them by defendants since Plainview Professional Medical PC's certificate of incorporation was annulled by order of the New York State Department of Health, State Board for Professional Medical Conduct on or about October 6, 2008; and (2) to recoup payments made to defendants pursuant to New York State s no-fault law from April 4, 2002 through and including July 18, 2006, predicated on causes of action sounding in fraud and unjust enrichment/restitution.

Plaintiffs moved for summary judgment, contending that, as a consequence of their failure to comply with the state licensing requirements of § 1503(a) of the Business Corporation Law, defendants were not eligible to receive in excess of $600,000 in no-fault payments paid to them by the Allstate plaintiffs.  Specifically, Allstate argued that Plainview was formed in violation of Business Corporation Law § 1503 in that Rafael Garcia was not, in fact, Plainview's true owner and Plainview's certificate of incorporation was annulled by the New York State Department of Health, State Board for Professional Medical Conduct on or about October 6, 2008 after an evidentiary hearing at which neither Rafael Garcia nor Plainview appeared to contest the charges. The Hearing Committee found that unqualified individuals were instrumental in operating, controlling and/or handling Plainview's financial and operational affairs, to wit: according to the Findings of Fact contained in the Determination and Order of the Hearing Committee, Plainview "evaded the legal restrictions on incorporation, ownership and/or control of (Professional Corporations) by concealing * * * that legally unqualified individuals incorporated, owned, operated and controlled medical service corporations . While Rafael Garcia, M.D. was listed on Plainview's certificate of incorporation, filed with the Secretary of State on March 8 , 2000 as Plainview's sole shareholder, director and officer, he did not operate or control Plainview from its inception through the present. Although he apparently did not practice medicine at Plainview since in or about the summer of2000, he was compensated for the use of his name.

Allstate also asserted that once he surrendered his medical license, effective February 6, 2008, pursuant to Public Health Law § 230.12, defendant Rafael Garcia was no longer authorized to practice medicine, a further violation of §§ 1503(a) and (b) and 1504(a) of the Business Corporation Law.

Court Declines to Declare Six Informal Opinion Letters of New York State Insurance Department's Office of General Counsel Regarding Services Provided by Independent Contractors to be Irrational

NO-FAULT – FRAUDULENT INCORPORATION – BILLED SERVICES PROVIDED BY INDEPENDENT CONTRACTORS – JUSTICIABLE CONTROVERSY – DECLARATORY RELIEF
State Farm Mutual Automobile Ins. Co. v. Manuel Farescal, M.D., et al.
(Sup. Ct., Queens Co., decided 5/13/2009)

State Farm brought this action against to recover damages for common-law fraud and unjust enrichment, and for a judgment declaring that State Farm had no obligation to pay no-fault claims submitted by the professional corporation defendants as assignees of policyholders. State Farm alleged that defendant professional services corporations were fraudulently incorporated in the name of defendant Manuel Farescal, M.D., a physician, while, in fact, the professional corporations were owned, operated, and controlled by defendants Adnan Munawar and P. Clifford LoBrutto, unlicensed persons, in violation of applicable statutes and regulations. State Farm also alleged that the defendant professional corporations were not entitled to receive such payments because they were not owned and controlled solely by a licensed medical physician and the services provided were not rendered by employees but, rather, by independent contractors in violation of state law.

Defendants moved pursuant to CPLR 3212(e) for partial summary judgment declaring that six “informal opinions” of the office of General Counsel of the State of New York Insurance Department are irrational and not entitled to deference, and to dismiss State Farm's causes of action regarding services provided by independent contractors.

In denying defendants' motion, Queens County Supreme Court Justice Allan Weiss ruled that defendants had failed to assert any counterclaim for such affirmative declaratory relief, and any ruling, in the context of this case, that the opinion letters were irrational and not entitled to deference would constitute an impermissible advisory opinion.

A state court lacks subject matter jurisdiction in cases when no justiciable controversy is presented (see Matter of New York State Inspection, Security & Law Enforcement Employees, Dist. Council 82, AFSCME, AFL-CIO v Cuomo, 64 NY2d 233, 241, n 3 [1984]; Morrison v Budget Rent A Car Systems, Inc., 230 AD2d 253, 258-259 [1997]). It is well settled law that “[t]he courts of New York do not issue advisory opinions for the fundamental reason that in this State ‘[t]he giving of such opinions is not the exercise of the judicial function’ (Matter of State Indus. Commn., 224 NY 13, 16 [1918]) . . .,” (Cuomo v Long Island Light Co., 71 NY2d 349, 354 [1988]).

Any ruling by the court regarding the opinion letters would not be dispositive of a cause of action asserted by plaintiff (citations omitted). * * * Nothing about the opinion letters themselves constitutes a final determination by the State regarding the propriety of plaintiff’s actions, and the Farescal defendants are not aggrieved by their issuance. Rather, the question of whether plaintiff properly may withhold payments of no-fault benefits to defendants All Family, Universal and Painpro in instances where professional health services were rendered by independent contractors, as opposed to their employees, is one of law, which must be decided based upon interpretation of statute and regulation, and case law.

With respect to defendants' motion to dismiss State Farm's causes of action seeking a declaration that defendants were not entitled to recover for services provided by independent contraction, Justice Weiss held:

The Farescal defendants assert an insurer may not deny payment for no-fault benefits on the ground that the professional health services billed to plaintiff were performed by independent contractors. The Farescal defendants, therefore, argue plaintiff cannot obtain a judgment declaring that defendants All Family, Universal and Painpro are not entitled to collect no-fault benefits for charges submitted to it when such professional health services were rendered by independent contractors. The court notes that the Farescal defendants make no factual argument that the professional health services billed to plaintiff were performed by their employees, or that they exercised a particular level of control over the independent contractors. Their motion raises purely legal arguments regarding the propriety of plaintiff’s withholding of payments to the professional corporations based upon the rendering of services by independent contractors.

CPLR 3001, in relevant part, provides: “The supreme court may render a declaratory judgment having the effect of a final judgment as to the rights and other legal relations of the parties to a justiciable controversy whether or not further relief is or could be claimed.” “An action is justiciable when the controversy presented touches the legal relations of the parties having adverse interests from which harm is presently flowing or could flow in the future in the absence of a court determination of the parties’ rights” (Initiative For Competitive Energy v Long Is. Power Auth.,178 Misc 2d 979, 989 [1998]). “The controversy must be capable of disposition and be presented in an adversarial context with a set of concrete facts” (Goodwill Adv. Co. v State Liq. Auth.,14 AD2d 658 [1961]). The complaint herein demonstrates the existence of a controversy between the parties regarding plaintiff’s withholding of payments to defendant professional corporations to the extent the services were rendered by independent contractors, and the practical need for its resolution. The No-Fault Law, which supplants common-law tort actions for most victims of automobile accidents with a system of no-fault Insurance, has as its primary aims to ensure prompt compensation for losses incurred by accident victims without regard to fault or negligence, to reduce the burden on the courts and to provide substantial premium savings to New York motorists (see Medical Society of State v Serio, 100 NY2d 854, 860 [2003]). The Superintendent has promulgated regulations implementing the No-Fault Law, currently contained in 11 NYCRR Part 65. Section 65-3.11(a) of that part (formerly section 65.15[j][1]), in relevant part, provides, “An insurer shall pay benefits for any element of loss, . . ., directly to the applicant or . . . upon assignment by the applicant . . ., shall pay benefits directly to providers of health care services . . . .”

11 NYCRR 65-3.11(a) and its precursor, 11 NYCRR 65-3.15(j)(1), have been interpreted to mean that a medical provider cannot recover assigned no-fault benefits if services were provided by an independent contractor rather than by it or its employees (see Health & Endurance Medical, P.C. v Liberty Mut. Ins. Co., 19 Misc 3d 137[A], 2008 NY Slip Op 50864(U) [NY Sup App Term, 2d and 11th Jud Dists (2008)]). In Health & Endurance, a provider sought to recover assigned first-party no-fault benefits for services which were not rendered by it or its employees, but rather by a treating provider who was an independent contractor. The Appellate Term held that the plaintiff was not a “provider” of the medical services rendered within the meaning of Insurance Department Regulations (11 NYCRR) § 65-3.11[a]), and, therefore, was not entitled to recover “direct payment” of assigned no-fault benefits from the defendant insurer. Such holding is consistent with the holdings in A.M. Medical Services, P.C. v Progressive Cas. Ins. Co., (22 Misc 3d 70, 2008 NY Slip Op 28528, [App Term, 2d, 11th and 13th Jud Dists (2008)]); Health & Endurance Med. P.C. v State Farm Mut. Auto. Ins. Co., (12 Misc 3d 134[A], 2006 NY Slip Op 51191[U] [App Term, 2d and 11th Jud Dists 2006]);Craig Antell, D.O., P.C. v New York Cent. Mut. Fire Ins. Co., (11 Misc 3d 137[A], 2006 NY Slip Op 50521[U] [App Term, 1st Dept 2006]); Rockaway Blvd. Medical P.C. v Progressive Ins., (9 Misc 3d 52, 2005 NY Slip Op 25278 [App Term, 2d Dept 2005]); A.B. Med. Servs. PLLC v Liberty Mut. Ins. Co., (9 Misc 3d 36 [App Term, 2d and 11th Jud Dists 2005]); A.B. Med. Servs. PLLC v New York Cent. Mut. Fire Ins. Co., (8 Misc 3d 132[A], 2005 NY Slip Op 51111[U] [App Term, 2d and 11th Jud Dists 2005]). These opinions of the Appellate Term are persuasive authority, and the court is convinced of their reasoning. Under such circumstances, the third and fourth causes of action asserted by plaintiff state viable claims for declaratory relief.

A Spate of No-Fault Decisions from the Appellate Term, Second Department

NO-FAULT – NOTARY PUBLIC'S JURAT – TECHNICAL DEFECT – PEER REVIEW – MEDICAL NECESSITY
Complete Orthopedic Supplies, Inc. a/a/o Ana Valencia v. State Farm Mut. Auto. Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Appeal from a Queens Civil judgment for plaintiff DME provider on its motion for summary judgment.

REVERSED and State Farm's cross motion for summary judgment was granted. The notary public's jurat was missing the year State Farm's affidavits of mailing were signed. The Appellate Term held that this was a "technical defect" that the Civil Court should have disregarded since it did not prejudice a substantial right of a party, and plaintiff had raised no objection to it. State Farm's affirmed peer review report established prima facie that there was no medical necessity for the supplies provided by plaintiff, which proof plaintiff did not rebut. As a result, State Farm's cross motion for summary judgment dismissing the complaint should have been granted.


NO-FAULT – UNTIMELY SUBMISSION OF CLAIMS
Long Is. Multi-Medicine Group, P.C. a/a/o Sumira Lund v. Travelers Ins. Co.
(App. Term, 2nd Dept., decided 1/8/2009)

Appeal from a Queens Civil judgment for plaintiff on its motion for summary judgment.

AFFIRMED. Civil Court had granted plaintiff's motion based on its finding that Travelers waived its defense of claim submission untimeliness, since it failed to advise plaintiff that the claim would be reconsidered upon a showing of impossibility to timely submit the claims. The Appellate Term affirmed the judgment, not on that ground, but because Travelers' opposition motion papers annexed denial of claim forms that did not correspond to the claim forms upon which plaintiff sought summary judgment. As such, the court held that Travelers had failed to establish that it timely denied the subject claims and, as such, failed to raise a triable issue of fact with respect to the claims at issue.


NO-FAULT – ADMISSIBILITY OF BUSINESS RECORDS
Union Physician Healthcare, P.C. a/a/o Christopher Kelly v. Utica Mut. Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Appeal from a Kings Civil judgment for plaintiff on its motion for summary judgment.

REVERSED and plaintiff's motion denied. The affidavit by plaintiff's officer submitted in support of plaintiff's motion for summary judgment failed to lay a proper foundation for the admission of the documents annexed to plaintiff's moving papers and, as a result, plaintiff failed to establish a prima facie case. The affidavit submitted by plaintiff's officer was insufficient to demonstrate that he possessed personal knowledge of plaintiff's practices and procedures so as to lay a foundation for the admission, as business records, of the documents annexed to plaintiff's moving papers. Accordingly, plaintiff failed to make a prima facie showing of its entitlement to summary judgment (see Art of Healing Medicine, P.C. v Travelers Home & Mar. Ins. Co., 15 Misc 3d 144[A], 2007 NY Slip Op 51161[U] [App Term, 2d & 11th Jud Dists 2007], affd 55 AD3d 644 [2008]; Bath Med. Supply, Inc. v Deerbrook Ins. Co., 14 Misc 3d 135[A], 2007 NY Slip Op 50179[U] [App Term, 2d & 11th Jud Dists 2007]; Dan Med., P.C. v New York Cent. Mut. Fire Ins. Co., 14 Misc 3d 44 [App Term, 2d & 11th Jud Dists 2006]).


NO-FAULT – MVAIC – NOTICE OF CLAIM – INSURANCE LAW § 5208(A)
M.N.M. Med. Health Care, P.C. a/a/o Erick Papillion v. MVAIC
(App. Term, 2nd Dept., decided 1/9/2009)

Appeal from a Queens Civil order denying defendant MVAIC's motion for summary judgment.

REVERSED and MVAIC's motion granted, dismissing the complaint. The filing of a timely affidavit providing MVAIC with notice of intention to file a claim is a condition precedent to the right to apply for payment from MVAIC pursuant to New York Insurance Law § 5208(a). Compliance with the statutory requirement of timely filing a notice of claim must be established in order to demonstrate that the claimant is a "covered person" who is entitled to recover no-fault benefits from MVAIC. MVAIC's submissions in support of its motion for summary judgment made a prima facie showing that plaintiff's assignor failed to timely file a notice of claim. By defaulting on the motion, plaintiff did not demonstrate that its assignor timely filed a notice of claim or sought leave to file a late notice of claim. Thus, MVAIC's motion for summary judgment should have been granted.


NO-FAULT – NOTICE TO ADMIT – PRIMA FACIE CASE SHOWING
All Mental Care Medicine, P.C. a/a/o Augustin Martes v. State Farm Mut. Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Vista Surgical Supplies, Inc. a/a/o Tyrone Pearson v. State Farm Mut. Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Judgments for State Farm dismissing the complaints AFFIRMED. An admission that defendant received plaintiff's claim form is not a concession of the facts set forth in said claim form (Bajaj v General Assur. Co., 18 Misc 3d 25, 28 [App Term, 2d & 11th Jud Dists 2007]; Midborough Acupuncture, P.C. v New York Cent. Mut. Fire Ins. Co., 13 Misc 3d 132[A], 2006 NY Slip Op 51879[U] [App Term, 2d & 11th Jud Dists 2006]). By only submitting the notices to admit and producing no witnesses at trial, plaintiffs failed to make a prima facie case for recovery of no-fault benefits.


NO-FAULT – MOTION TO AMEND ANSWER TO ADD AFFIRMATIVE DEFENSES – RES JUDICATA – COLLATERAL ESTOPPEL BASED ON PRIOR ARBITRATION DECISION – FRAUDULENTLY INCORPORATED PC
Uptodate Med. Serv., P.C. a/a/o Jean Alberic v. State Farm Mut. Auto. Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Appeal from a Queens Civil judgment for plaintiff on its motion for summary judgment.

REVERSED, granting State Farm's motion to amend its answer and, upon such amendment, summary judgment dismissing the complaint. The Civil Court improperly denied State Farm's motion to amend its answer to add the affirmative defenses of res judicata and collateral estoppel. Generally, leave to amend a pleading pursuant to CPLR 3025 (b) should be granted where there is no significant prejudice or surprise to the opposing party and where the proof submitted in support of the motion indicates that the amendment may have merit. State Farm sought to add those affirmative defenses because there was a prior arbitration proceeding between the parties in which plaintiff had sought to recover assigned first-party no-fault benefits for services rendered from August 2003 through January 14, 2004, in which proceeding the arbitrator had determined that plaintiff was ineligible to receive reimbursement of no-fault benefits because it was a fraudulently incorporated professional service corporation. Plaintiff did not demonstrate prejudice or surprise from the proposed amendment.

State Farm established that the issue of whether plaintiff was ineligible to receive reimbursement of no-fault benefits because it was a fraudulently incorporated professional service corporation was identical to the issue previously decided by the arbitrator. In opposition to State Farm's cross motion, plaintiff failed to address the branch of the cross motion which sought summary judgment dismissing the complaint on the ground of collateral estoppel. Therefore, plaintiff failed to establish that it did not receive a full and fair opportunity to litigate in the arbitration proceeding. Thus, the branch of defendant's cross motion seeking summary judgment should have been granted.


NO-FAULT – ADMISSIBILITY OF BUSINESS RECORDS
V.S. Med. Servs., P.C. a/a/o Mohamad Nazir v. Travelers Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Appeal from a Queens Civil judgment after non jury trial for Travelers dismissing plaintiff's complaint.

AFFIRMED. While plaintiff produced a witness to testify regarding the claim forms plaintiff sought to have admitted into evidence, because said witness did not testify at all as to the generation of such claim forms, they were not admissible as business records (see CPLR 4518). Accordingly, plaintiff failed to establish a prima facie case (see Bajaj v General Assur., 18 Misc 3d 25 [App Term, 2d & 11th Jud Dists 2007]).

Not So Readiness

NO-FAULT – DISCOVERY – FRAUDULENT INCORPORATION DEFENSE – PLAINTIFF EBT
First Aid Occupational Therapy, PLLC a/a/o Morris Dennis v. State Farm Mut. Auto. Ins. Co.
(App. Term, 2nd Dept., decided 9/29/2008)

Although State Farm had served an EBT notice and notice for discovery and inspection of documents, plaintiff medical provider filed a notice of trial and certificate of readiness. State Farm moved to vacate the notice of trial and certificate of readiness, contending that discovery was not complete, and Kings Civil granted State Farm's motion, directing plaintiff to provide "complete and meaningful responses" to State Farm's discovery demands with respect to State Farm's defense of fraudulent incorporation and to appear for an EBT with respect to that defense.

On plaintiff's appeal, the Appellate Term AFFIRMED the lower court's order:

• Vacatur of the notice of trial and certificate of readiness was properly granted since the certificate of readiness contained the erroneous statement that discovery was completed or waived (see Savino v Lewittes, 160 AD2d 176 [1990]; Ava Acupuncture, P.C. v NY Cent. Mut. Ins. Co., 14 Misc 3d 141[A], 2007 NY Slip Op 50358[U] [App Term, 2d & 11th Jud Dists 2007]; Hillside Neurology Care P.C. v Travelers Ins. Co., 11 Misc 3d 127[A], 2006 NY Slip Op 50234[U] [App Term, 1st Dept 2006]).
• Moreover, contrary to plaintiff's contention, defendant is not precluded from raising a defense based upon plaintiff's allegedly fraudulent incorporation (see Multiquest, P.L.L.C. v Allstate Ins. Co., 17 Misc 3d 37 [App Term, 2d & 11th Jud Dists 2007]).
• In addition, defendant is entitled to conduct an EBT of plaintiff notwithstanding the fact that defendant also served a demand for discovery and inspection of documents (see Woods v Alexander, 267 AD2d 1060, 1061 [1999]; Iseman v Delmar Med.-Dental Bldg., 113 AD2d 276 [1985]; JMJ Contract Mgt. v Ingersoll-Rand Co., 100 AD2d 291, 293 [1984]).

Malella-Based Recovery Action Proceeds & Discovery of Financial Documents Granted

NO-FAULT – FRAUDULENT INCORPORATION – COMMON-LAW FRAUD & UNJUST ENRICHMENT CLAIMS – SUMMARY JUDGMENT – DISCOVERY OF FINANCIAL DOCUMENTS
One Beacon Ins. Group, LLC v. Midland Med. Care, P.C.
(2nd Dept., decided 9/9/2008)

OneBeacon brought this action against numerous medical PCs, management companies and the individuals who owned them, and licensed healthcare professionals, alleging that the PCs were fraudulently incorporated in the names of licensed healthcare professionals while, in fact, the PCs were owned, operated, and controlled by unlicensed persons and their management companies in violation of applicable statutes and regulations. Under theories of common-law fraud and unjust enrichment, OneBeacon sought recovery of no-fault bills already paid to the PC defendants, as well as a declaration that it was not obligated to pay outstanding claims.

Defendants David Stemerman and his radiology practice, Proscan Imaging, P.C. moved for summary judgment to dismiss OneBeacon's complaint, which was denied, Nassau Supreme finding a triable issue of fact to exist as to whether Proscan was fraudulently incorporated, and ordering those defendants' disclosure of certain financial documents to OneBeacon.

In AFFIRMING the lower court's order, the Second Department pointed out:

Applicable provisions of the no-fault law require insurers to reimburse patients or their medical provider assignees for "basic economic loss" (Insurance Law § 5102[a][1]). A provider of healthcare services is not eligible for reimbursement, however, "if the provider fails to meet any applicable New York State or local licensing requirement necessary to perform such service in New York" (11 NYCRR 65-3.16[a][12]). The Court of Appeals has interpreted 11 NYCRR 65-3.16(a)(12) to allow insurance carriers to withhold reimbursement for no-fault claims from fraudulently licensed medical corporations and to "look beyond the face of licensing documents to identify willful and material failure to abide by state and local law" (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d 313, 321). State law mandates that professional service corporations be owned and controlled only by licensed professionals (see Business Corporation Law §§ 1503[a]; 1507, 1508), and that licensed professionals render the services provided by such corporations (see Business Corporation Law § 1504[a]).

In the Second Department's view, although the appealing defendants had shown their entitlement to summary judgment by by submitting evidence that Stemerman, a licensed physician, was the sole shareholder of Proscan, performed or oversaw all medical services provided by Proscan, and was the sole signatory on Proscan's bank account, OneBeacon had submitted sufficient evidentiary proof to raise an issue of fact as to whether Proscan was actually controlled by a management company owned by unlicensed individuals in violation of the New York Business Corporation Law.

On the discovery dispute, the Second Department ruled that Nassau Supreme had properly granted that branch of OneBeaon's cross motion for disclosure of certain financial documents:

Contrary to the appellants' contention, the plaintiffs were not required to make a showing of "good cause" for such disclosure (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d at 322; see Matter of Andrew Carothers, M.D., P.C. v Insurance Cos., 13 Misc 3d 970, 972-973), as the documents were "material and necessary in the prosecution" of this action (see CPLR 3101[a]).

Injunctive Relief Granted in Mallela-Type Action

NO-FAULT – MALLELA CLAIM – FRAUDULENT INCORPORATION – INJUNCTIVE RELIEF – CHANGE OF VENUE
One Beacon Insurance Group, LLC v. Halima
(Sup. Ct., Suffolk Co., decided 7/15/2008)

OneBeacon, AutoOne and General Assurance brought this Mallela-type action against three groups of defendants, the Halima defendants, the Minick defendants and the Glassman defendants, alleging that all the various defendants and entities had engaged in a systematic scheme to defraud OneBeacon by submitting bills for reimbursement of no-fault related services allegedly rendered to individuals involved in automobile accidents. One Beacon contended that the named individual defendants who are physicians sold their names and allowed the use of their medical licenses to form the related professional corporations also named as defendants for the sole basis of obtaining benefits from OneBeacon, among others. OneBeacon alleged that the professional medical corporations were actually created and owned by laypersons, chiropractors and a now disbarred attorney. All but defendant Mark Slamowitz of the Halima defendants defaulted.

Claiming that it was currently litigating claims by the defendants in excess of $456,682.11, OneBeacon moved for injunctive relief seeking to stay all current and future no-fault proceedings against the defendants as well as payments pending resolution of this lawsuit. The Minick defendants moved to dismiss various causes of action of the complaint, including ones for declaratory relief (1st and 2nd), fraud (3rd), punitive damages (4th) and unjust enrichment (5th), based on the asserted failure of the complaint to state valid causes of action. Defendant Slamowitz also moved to change the action's venue from Suffolk County to Kings County.

On OneBeacon's motion for injunctive relief, Suffolk County Supreme Court Justice Peter Fox Cohalan ruled:

The plaintiff has established irreparable harm, likelihood of ultimate success on the merits and that the balancing of the equities lies in their favor. Trimboli v. Irwin, 18 AD3d 866, 796 NYS2d 659 (2nd Dept. 2005). However, because preliminary injunctive relief is an equitable remedy, the award of such relief is not only discretionary with this Court, but may be tailored to protect the interests of all the parties. See, Paddock Construction LTD. v. Automated Swim Pools. Inc., 130 AD2d 894, 515 NYS2d 662 (3rd Dept. 1987); Antinelli v. Toner, 74 AD2d 996,427 NYS2d 99 (4th Dept. 1980) appeal after remand, 78 Ad2d 576,432 NYS2d 421. Therefore, as to the defaulting defendants named, injunctive relief is granted without opposition; as to those defendants appearing in this action, the injunctive relief sought is granted unless these defendants present and file with the plaintiff, the corporate documents establishing a licensed medical professional is the owner, operator and in principal control of the corporation seeking reimbursement of no-fault benefits provided. A failure to so provide the corporate documents, resolutions and identity of the officers of the corporation seeking benefit payments will continue the injunction as to all defendants failing to provide such proof. The defendants are directed to provide to the Court copies of all documents identifying the principals in control of the various entities seeking payment for benefits provided under the no-fault provisions. The defendants are granted leave to renew their objections to injunctive relief if they have been unfairly denied reimbursement after having provided the documentation and proof required by this order. See, CPLR § 6314. The plaintiff is directed to file an undertaking in the amount of $100,000.00 pursuant to CPLR § 6312 (b).

Justice Fox Cohalan denied the Minick defendants' motion to dismiss the complaint based on their argument that the complaint failed to state valid causes of action:

CPLR § 3016 requires an action sounding in fraud to be pled with particularity and to set forth sufficient detail to clearly inform the defendant with respect to the incidents complained of. The plaintiff has set forth in detail that the named defendants and the corporations controlled by them are but shell corporations in the name of licensed medical physicians but are actually owned and controlled by nonlicensed non-medical individuals, such as Michael Scott Minick, a chiropractor, using the “dummy” corporations to bill the no-fault carrier for services allegedly not performed or performed contrary to law. The plaintiff provides an affidavit from Halima, a defaulting defendant and a cooperating one, as well as an affidavit from Nichole Matthews, an investigator for Autoone Insurance Company, that Halima, among others, sold his name to non-licensed non-medical professionals to incorporate “dummy or shell” corporations owned and controlled by others but carrying a licensed physician’s name to provide no-fault services which were billed to the named plaintiff seeking reimbursement for these no-fault services. While there may be some missing details, the New York Court of Appeals has held that the misconduct of the defendants complained of must be shown in some detail but particularity and/or specific conduct may await further discovery where it is impossible at this stage of the proceedings to detail the fraud.

* * * * *

As to the 4th cause of action sounding in punitive damages, the courts have long recognized that punitive damages are warranted where the conduct of the party being held liable evidences a high degree of moral culpability, where the conduct is so flagrant as to transcend mere recklessness or where the conduct constitutes wilful or wanton negligence or recklessness. * * * Since the plaintiff alleges in its complaint the commission of a tort in the nature of a fraud, independent of any contractual claim, the cause of action alleging punitive damages is proper. * * *

A review of the plaintiff's complaints and submissions demonstrates sufficient claims and principles well recognized in the New York Court of Appeals' decision in State Farm v. Mallela, supra, that there is no entitlement to no-fault reimbursement for a fraudulently incorporated medical corporation and the failure of the defendants to cooperate into a full airing of the underlying ownership and control of the various corporate entities by the individual defendants named is subject to the relief requested if established. For those reasons, the motion to dismiss the 1st and 2nd causes of action seeking declaratory judgment relief is denied.

Finally, the court denied defendant Slamowitz' motion to change venue to Kings County, finding that Suffolk County was a proper venue because OneBeacon maintains an office there, defendant Slamowitz failed to make a timely demand or motion to change venue, and failed to establish the identity of the witnesses of the movant who allegedly will be inconvenienced, their willingness to testify and the nature of their anticipated testimony.

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.

Do-Over Required Even Though Plaintiff Was Fraudulently Incorporated

NO-FAULT – MOTION PRACTICE – FRAUDULENT INCORPORATION
Multiquest, P.L.L.C. a/a/o Jean Joseph Jeune v. Allstate Ins. Co.
(App. Term, 2nd Dept., decided 4/3/2008)

Although issued on April 3rd, this decision just hit the New York State Law Reporting Bureau's website this morning.

Allstate moved for summary judgment to dismiss plaintiff's recovery action based on it having already been adjudicated in Multiquest, P.L.L.C. v Allstate Ins. Co., 17 Misc. 3d 37 (App Term, 2d & 11th Jud Dists 2007) that Multiquest PLLC was fraudulently incorporated. Queens Civil denied Allstate's motion, presumably with prejudice.

In a 2-1 decision (Pesce and Rios; Golia), the Appellate Term MODIFIED the order by providing that Allstate's motion was denied without prejudice to renewal upon proper papers, apparently because Allstate's motion papers did not include copies of the parties' complaint and answer, as summary judgment motions must do under CPLR Rule 3212 (b).

Justice Golia dissented:

The simplicity of the majority decision belies the reasoning which lies behind its singular determination. Indeed, my colleagues sua sponte raise the issue concerning the absence of the complaint and the answer, when a simple dismissal is not only the clear and obvious resolution but is also mandated by the facts and law. The pleadings are contained in the court's own file.

It is incontestable that at the time the services that are the subject of this claim were rendered, plaintiff Multiquest, P.L.L.C. was not eligible for reimbursement because it was fraudulently incorporated (see State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d 313 [2005]). This fact has been previously determined after the alleged incorporator, Dr. Kathryn Clark, testified that she was never an owner or manager of plaintiff (see Multiquest, P.L.L.C. v Allstate Ins. Co., 17 Misc 3d 37 [App Term, 2d & 11th Jud Dists 2007]).

I find it inappropriate under these facts to now search for reasons to burden the parties and the courts with additional motions.