New York No-Fault at SCOTUS -- Federal Court Class Action Jurisdiction

NO-FAULT – CLASS ACTION LITIGATION – CPLR 901
Shady Grove Orthopedic Associates, P.C. v. Allstate Ins. Co.
(U.S. Sup. Ct., decided 3/31/2010)

New York CPLR § 901(b) provides:

b. Unless a statute creating or imposing a penalty, or a minimum measure of recovery specifically authorizes the recovery thereof in a class action, an action to recover a penalty, or minimum measure of recovery created or imposed by statute may not be maintained as a class action.

Plaintiff commenced this class action in federal court action under Federal Rules of Civil Procedure Rule 23,  alleging that Allstate had routinely refused to pay interest on overdue no-fault benefits. Plaintiff medical provider sought relief on behalf of itself and at least 100 other members of the class.  Allstate sought dismissal of the action based on CPLR 901, arguing that interest on overdue no-fault payments constitutes a "penalty" and the New York Insurance Law does not specifically authorize the recovery of interest in a class action. 

The federal district court agreed with Allstate and dismissed the lawsuit after finding that statutory interest does constitute a "penalty" under New York law.  Plaintiff's individual claim of roughly $500 fell short of the amount that would have allowed its claim to remain in federal court.  The 2nd U.S. Circuit Court of Appeals affirmed.

Last week, the United States Supreme Court reversed and held, in a 5-4 decision, that CPLR 901 is not a state substantive law that trumps FRCP Rule 23.  Writing for the majority, Justice Antonin Scalia noted that "Rule 23 unambiguously authorizes any plaintiff, in any federal civil proceeding, to maintain a class action if the Rules' prerequisites are met."

Some have suggested that the Supreme Court's holding in this case could open federal courts to more class actions or will "upend" a large number of state statutes that limit remedies which can be sought by class actions or that outright prohibit certain class actions.  For a more detailed analysis of the Court's 72-page decision, head over the SCOTUS Blog's post about it.

New York Supreme Dismisses CPLR Article 78 Mandamus Proceeding Against NYS Insurance Department, NICB, State Farm, AutoOne and General Assurance

NO-FAULT – MANDAMUS RELIEF – CPLR ARTICLE 78
Matter of Okslen Acupuncture P.C. v. Dinallo
(Sup. Ct., New York Co., decided 6/26/2009)

In one man's crusade to invalidate the New York State special investigation units of State Farm, AutoOne and General Assurance Company and otherwise squelch certain investigations of no-fault providers, losses and claims suspected to be fraudulent, this is another battle lost.

Regarded by some as my no-fault nemesis, Brooklyn attorney Ray Zuppa began this campaign in June 2008 by filing a class action "bad faith" action in New York State Supreme Court, New York County, seeking only declaratory relief.  After reading the entire 225-page complaint, I called it "a mess" -- endearing me henceforth to its author -- and predicted its dismissal on motion.  I was only partly correct.

Instead of seeking dismissal of that action in state court, State Farm and two law firm defendants removed it to federal court pursuant to the Class Action Fairness Act of 2005 ("CAFA"), and then all plaintiffs except Okslen Acupuncture P.C.voluntarily discontinued their action against all defendants. Okslen then voluntarily dismissed its action against the two removing law firm defendants, leaving State Farm as the sole removing defendant.  Zuppa then filed a motion on behalf of Okslen to remand the action back to the more familiar environs of state court, which the federal court denied.  Following that decision, Zuppa discontinued the class  action against State Farm reportedly because he was unfamiliar with federal court procedure. 

Bowed but not broken, Zuppa returned to state court and commenced this special proceeding for mandamus relief against the New York State Insurance Department, the National Insurance Crime Bureau (NICB), State Farm, AutoOne and General Assurance Company pursuant to CPLR Article 78, which is entitled "Proceeding Against Body or Officer".  The chest-thumping Zuppa unprophetically self-proclaimed:

Ray Zuppa, the modern day gladiator, is relentless in his pursuit to fight the evil in the world of insurance. His latest advancement is an earthshattering [sic] Article 78 proceeding sure to set the world of No-Fault aflame. Please LexisNexis, skip the nomination process and just give this man the Person of the Year award.

Unrealized seismologic and incendiary predictions aside, in the Article 78 special proceeding the Petitioners asked that the court:

• order the Superintendent of Insurance to "thoroughly audit and investigate the claims practices of [the Carriers]...and take all appropriate action to remedy any and all infirmities, deficiencies and misconduct" and to publish such findings;
• order NICB and certain agents to cease all investigative activities until NICB is licenced under New York General Business Law §70; and 
• order the Carriers "to take all action necessary" to insure that all investigators who are members of Special Investigative Units be qualified under 11 NYCRR 86.6 and to provide a list of all non qualified investigators, and to order State Farm to conduct its investigations in a certain manner and conduct its medical examinations "purely on the application of medical science to the patient being examined and not as a pretext to deny a claim for which the decision to deny has already been made and to document its decisions."

The Superintendent of Insurance moved to dismiss the petition as against him on the grounds that under CPLR Article 78 mandamus may not be used to compel him to take discretionary enforcement action.  Then insurer respondents jointly cross-moved to dismiss the petition as against them pursuant to CPLR Rule 3211(a)(3) on the ground that the petitioners lacked legal capacity to sue them and pursuant to CPLR Rule 3211(a)(7) on the ground that the petition failed to state a cause of action against them.  NICB also cross-moved to dismiss the petition as against it pursuant to CPLR Rule 3211(a)(2) on the ground that the court lacked subject matter jurisdiction over the claim asserted against NICB, and pursuant to CPLR Rule 3211(a)(3) on the ground that petitioners lacked legal capacity to sue and pursuant to CPLR Rule 3211(a)(7), and also on the ground that the petition failed to state a cause of action against NICB.

In GRANTING the respondents' motions to dismiss the petition in its entirety, New York County Supreme Court Justice Lewis Bart Stone ruled:

►  CPLR Article 78 relief was not available against NICB because it is not not a governmental body and no petitioner is a member or employee of NICB or is otherwise subjected by governmental mandate to employment or regulation by NICB;

►  similarly, "the limited exception of the availability of CPLR Article 78 review of decisions of certain non-governmental bodies is wholly unavailable to review Petitioners' claims against the Carriers as the Carriers are business entities and petitioners are not shareholders, or have any special relationship with the Petitioners[;] [t]heir relationship is commercial"; and

►  mandamus relief is not available against the Superintendent for discretionary functions, including the Insurance Department's roles in investigating and auditing insurance companies; "as the Superintendent's power to act against any carriers for its claim settlement practices is at the discretion of the Superintendent, mandamus will not lie."

Denial of Class Certification to No-Fault DME Provider Upheld

NO-FAULT – DURABLE MEDICAL EQUIPMENT – CLASS ACTION CERTIFICATION
Globe Surgical Supply v. Allstate Ins. Co.
(2nd Dept., decided 4/21/2009)

Plaintiff no-fault DME provider brought this class action against Allstate for paying less that 150% of plaintiff's "documented costs" for durable medical equipment and supplies.  Plaintiff moved pursuant to CPLR §§ 901 and 902 for an order allowing the action to proceed as a class.

The five prerequisites for a class action under CPLR § 901(a) are:

1. the class is so numerous that joinder of all members, whether otherwise required or permitted, is impracticable;
2. there are questions of law or fact common to the class which predominate over any questions affecting only individual members;
3. the claims or defenses of the representative parties are typical of the claims or defenses of the class;
4. the representative parties will fairly and adequately protect the interests of the class; and
5. a class action is superior to other available methods for the fair and efficient adjudication of the controversy.
   

In deciding whether an action may proceed as a class in New York state court, a court must also consider the five factors of CPLR § 902:

1. the interest of members of the class in individually controlling the prosecution or defense of separate actions;
2. the impracticability or inefficiency of prosecuting or defending separate actions;
3. the extent and nature of any litigation concerning the controversy already commenced by or against members of the class;
4.   the desirability or undesirability of concentrating the litigation of the claim in the particular forum; and
5. the difficulties likely to be encountered in the management of a class action.

Nassau Supreme denied plaintiff's motion for certifcation of the class, and plaintiff appealed. 

The Second Department MODIFIED the order  by adding the words "without prejudice to renewal of the motion", holding:

This action is in all material respects identical to Globe Surgical Supply v GEICO Ins. Co. (59 AD3d 129). As in that case, and for the reasons stated therein, Globe Surgical Supply, as assignee of Charles Charlotin, met all of the class certification prerequisites in the instant matter except adequacy of representation (see CPLR 901[a][4]). Accordingly, that branch of its motion which was to certify a class action should have been denied without prejudice to renewal (see Globe Surgical Supply v GEICO Ins. Co., 59 AD3d 129). 

In Globe Surgical Supply v GEICO Ins. Co., 59 AD3d 129 (2nd Dept. 2008), the Second Department addressed "whether it is appropriate to certify a class action challenging the validity, under regulations in effect prior to October 6, 2004, of a no-fault insurer's use of the prevailing geographic rate or the reasonable and customary rate for health care services in calculating first-party benefits due to a claimant or health-care provider."  In that case, the Second Department reversed class certification of Globe Surgical Supply's action without prejudice, finding that plaintiff had not satisfied the fourth prerequisite under CPLR 910, namely, that "the representative parties will fairly and adequately protect the interests of the class[.]"

In that matter, the Second Department found that Supreme Court properly rejected Jean M. Francois, the owner of Globe, as an adequate representative for the class:

Although Globe attempts to couch Francois's problems in terms of "amorphous and generalized suppositions," it is clear that Francois was charged with insurance fraud for attempting to stage accidents and thereafter bill insurance companies. While he may have only pleaded guilty to disorderly conduct, he displayed his attempt to put his interest above others by invoking his Fifth Amendment rights at his deposition, although he later withdrew his invocation of the Fifth Amendment in a subsequently-filed reply affidavit. Moreover, there was adequate evidence that Francois was engaged in recycling invoices. In addition, Francois and the class are subject to a class action counterclaim which may or may not be meritorious.^[FN4] In any event, Francois's attempt to defend himself against any such counterclaim by GEICO would preoccupy him and detract from his representation of the class. 

Footnote 2 in the GEICO case explains Francois's insurance fraud arrest:

In his affidavit sworn to April 21, 2006, Christopher J. Jones, a "Detective with the NYPD's Fraudulent Accident Investigation Squad ... for the past 2½ years," stated that "[f]raud by DME suppliers against no-fault insurance companies is widespread. It has been a principal focus of our Squad's investigation . . . On or about June 1, 2005, Mr. Francois was arrested as the result of an undercover investigation in which I was involved. He was arrested for offering to pay an undercover agent to stage a phony automobile accident and refer the alleged 'victims' to a medical clinic. The specific charges were insurance fraud in the third degree and conspiracy in the fifth degree . . . Subsequently, Mr. Francois entered into a plea agreement, pleading guilty to disorderly conduct."

Two actions; neither certified as a class, due to the legal entanglements of plaintiff's owner. Will we see these actions re-sued by different representative plaintiffs?  Or will plaintiff divest its owner and re-move for certification?  Would that be enough to satisfy the Second Department?  Or will Globe simply proceed in these separate actions as a single plaintiff in each and seek to obtain a ruling from Nassau Supreme that it was owed 150% of its alleged documented costs, rather that what GEICO and Allstate decided were reasonable and prevailing reimbursement rates for the geographic billing areas?

Making a Federal Case Out of It -- AVA Acupuncture v. State Farm, et al.

NO-FAULT – DECLARATORY JUDGMENT ACTION – REMOVAL – MOTION TO REMAND FROM FEDERAL BACK TO STATE COURT
AVA Acupuncture, P.C. v. State Farm Mut. Auto Ins. Co.
(SDNY, decided 12/9/2008)

Coverage Counsel readers will remember this case, first blogged back in June, when I initially agreed to host the 225-page, 789+ paragraph complaint. Since then, I've been watching eCourts for what I thought would be a set of preemptive CPLR 3211 motions to dismiss what started as a New York County Supreme Court action.

While I was waiting, insurer defendant State Farm, and the law firm defendants Melli, Guerin & Wall, and Katten Muchin Rosenman, removed this putative class action to federal court pursuant to the Class Action Fairness Act of 2005 ("CAFA"), and then all plaintiffs except Okslen Acupuncture P.C. voluntarily discontinued their action against all defendants. Okslen then voluntarily dismissed its action against the two removing law firm defendants, leaving State Farm as the sole removing defendant.

Plaintiff then moved to remand this action back to state court, asserting two grounds: (1) that the federal court lacked subject matter jurisdiction because State Farm had failed to meet its burden of demonstrating that the plaintiffs' claims exceed the $5 million amount in controversy requirement under CAFA; and (2) that even if the amount in controversy requirement is met, the court should decline jurisdiction under CAFA's "local controversy" exception. The district court denied plaintiff's motion, which means that the case, in all likelihood, will proceed to conclusion in the federal court system.

On the amount in controversy issue, Southern District of New York United States District Court Judge Shira Scheindlin held:

Pursuant to New York insurance law, absent a valid denial, No-Fault benefits are rendered overdue if not paid within thirty days. By seeking to invalidate "each and every denial of claim form [] issued by State Farm that is based in whole or in part upon information obtained by State Farm's SIU," plaintiffs have made the "object" of the litigation worth at least forty million dollars. If declaratory relief is granted, there is a distinct possibility that as much as forty million dollars of benefit will flow to plaintiffs. As a result, State Farm has easily established that, within a "reasonable probability," the five million dollar amount in controversy requirement is met.

Plaintiff also argued that AutoOne, General Assurance, and the McDonnell & Adels law firm each qualified as a "signficant" local defendant such that the "local controversy" exception to CAFA jurisdiction should apply. Judge Scheindlin disagreed, holding:

[P]laintiffs offer little support for this assertion. For the two insurance company defendants -- AutoOne and General Assurance -- plaintiffs' principal argument is that they have engaged in many of the same practices as State Farm and are also the target of declaratory and injunctive relief. The only indication of AutoOne and General Assurance's relative significance is plaintiffs' assertion that 2,299 complaints, including complaints related to No-Fault denials, have been filed against the two insurance company defendants with the New York State Department of Insurance. No time frame is given for when these complaints were filed, and plaintiffs do not provide a breakdown with respect only to complaints related to No-Fault denials. Nevertheless, even the total number of complaints lodged against AutoOne and General Assurance pale in comparison with the more than sixty-seven thousand denials at issue with State Farm.

Furthermore, even plaintiffs acknowledge that they are alleging additional violations only against State Farm. For instance, plaintiffs note that they are alleging that State Farm "orchestrated . . . with bribes disguised as grants, a large criminal investigation [that] led to arrests and indictments in order to kill claims" and that State Farm "engages in a fraudulent Independent Medical Examination Scheme and Examination Under Oath Scheme." While plaintiffs put much emphasis on allegations unique to AutoOne and General Assurance -- AutoOne's "[maintenance of] inadequate reserves" and the engagement by AutoOne and General Assurance of "schemes" to "wear down claimants in violation of New York State Insurance Laws" -- this alleged misconduct appears to be less significant than or no different from the alleged misconduct against State Farm.

With respect to McDonnell & Adels, P.C., plaintiffs simply argue that the law firm aided State Farm and other insurance companies in their violations of the law and cite the number of claims plaintiffs are alleging against the firm. Plaintiffs do not offer any evidence from which this court can compare the significance of the relief sought from McDonnell & Adels, P.C. against the relief sought from State Farm.

Plaintiffs have therefore failed to meet their burden of establishing that there is a "significant" local defendant. As a result, the local controversy exception does not apply.

It's no secret that no-fault medical provider counsel don't like federal court all that much, so it shouldn't surprise anyone that plaintiff's counsel, who himself commented in that post about having mentioned in the complaint an "Act which says Feds must stay out of State's Insurance [sic]", sought to pull this case back to New York Supreme.

What one had touted as being "smart as hell" by having not sought money damages in the complaint, coupled with its alleged class action representation, actually landed this action in federal court. We'll all be watching to see how long or short its litigated life will be, now that it appears it will stay in that venue.