Carothers v Progressive Ins. Co., 2017 NY Slip Op 02614 (2d Dept. 2017)
Discussion of BLC
(1) “To incorporate, the licensed individual must obtain a “certificate . . . issued by the [New York State Department of Education (DOE)] certifying that each of the proposed shareholders, [*4]directors and officers is authorized by law to practice a profession which the corporation is being organized to practice” (Business Corporation Law § 1503[b]). The DOE may not issue a certificate of authority to a professional service corporation that does not meet these qualifications (see Education Law § 6507[c][i]). Once the professional corporation is formed, shareholders may not transfer their voting power to any person who is not a licensed professional in the field (see Business Corporation Law § 1507[a])” Any agreement by a shareholder transferring the voting power of his/her share to individuals who are not authorized by law to practice the profession is void (see Business Corporation Law § 1507[a]).
“insurers may look at the actual ownership and operation of the practice, to wit, whether the practice was actually controlled or owned by an unlicensed individual in violation of state and local law (see id. at 321; United States v Gabinskaya, 829 F3d 127, 133 [2d Cir]). In this context, however, the Court of Appeals cautioned that insurance carriers could not delay payments of reimbursement claims to pursue investigations unless they had “good cause” (State Farm Mut. Auto. Ins. Con v Mallela, 4 NY3d at 322; see 11 NYCRR 65-3.2[c]; Dynamic Med. Imaging, P.C. v State Farm Mut. Auto. Ins. Co., 29 Misc 3d 278, 285 [Nassau Dist Ct]) and that, in the licensing context, “carriers will be unable to show good cause’ unless they can demonstrate behavior tantamount to fraud”
Factors to determine whether there was fraudulent incorporation:
(1) “As the Appellate Term correctly determined, the charge properly focused the jury on the question of whether Carothers was a mere nominal owner of the plaintiff, and if, in actuality, nonphysicians Sher and Vayman owned or controlled the plaintiff such that the profits were funneled to them. The Civil Court properly instructed the jury to consider whether Sher and/or Vayman shared in the profits of the plaintiff, and that the jury could consider whether the leases entered into between the plaintiff and Sher’s companies were arms’ length or meant to funnel profits to Sher. The Civil Court charged the jury that, in order to succeed on its defense, the defendant was required to establish, by clear and convincing evidence, that Sher and/or Vayman, two nonphysicians, were “de facto owners” of the plaintiff or exercised “substantial control” over the plaintiff; and that to find de facto ownership, the jury must find that either Sher and/or Vayman exercised “dominion and control over” the plaintiff and its assets and that they “shared the risks, expenses, and interest in the profits and losses” of the plaintiff. To find control, the jury was instructed that they must find that Sher and/or Vayman had a “significant role in the guidance, management, and direction of the business.”
(1a) ” Likewise, although Malella instructed that “[t]echnical violations” such as a failure to hold an annual meeting, pay corporate filing fees, or submit paperwork on time would not establish the defense of fraudulent incorporation (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d at 322), a failure to follow corporate formalities is a relevant factor for the jury to consider, in conjunction with other factors, in determining the ultimate issue of ownership and control and whether the plaintiff was a proper professional corporation or merely a vehicle operated by nonphysicians to funnel profits to themselves”
(2) “Although the plaintiff is correct that certain of the factors enumerated in the non-exhaustive list of factors with which the jury was charged that it might wish to consider, could not, standing alone, support a finding of fraudulent incorporation, these factors were relevant for the jury to consider in determining the ultimate issues of de facto ownership and substantial control, and the jury was properly instructed to consider the totality of the circumstances”
(3) “Good faith compliance with the requirements of a professional corporation at the time of incorporation does not end when the certificate of incorporation is filed and does not defeat a claim of fraudulent incorporation if the evidence demonstrates that at some point after the initial incorporation, the nominal physician owner turned over control of the business to nonphysicians in contravention of state regulations”
(4) “In light of the jury’s determination that the evidence at trial met this more stringent standard of proof than required by the preponderance of the evidence standard, we do not reach the issue of which is the appropriate standard of proof in establishing the defense of fraudulent incorporation”
The Court discussed harmless error, and found the 5th Amendment issue insufficient to overturn the jury verdict.
What did I take out of the case? First, the Court punted on clear and convincing versus preponderance. Second, individual violations of the BCL and Education law are not separately actionable to deny a provider his/her no-fault benefits. We learned this in Allstate v. New Way Massage Therapy, P.C. Third, we have a non-exhaustive list of factors that could be cited to discern whether a cause of action or triable issue of fact exists as to a Mallela defense.
On a side note, you have to wonder how any of this can be used to shape or reshape Rico actions. The predicate acts are usually mail/wire fraud and based upon Mallela issues. Can the smart provider attorney reshape the central inquiry? Contrariwise, can an insurance carrier attorney reformulate the Mallela factors to fit a pattern act from Federal criminal law? There is a lot to digest here – the intuitive practitioner can play with this case and draft a crafty memorandum of law.
Of course, most cases are just not this egregious.
Liberty Mut. Ins. Co. v Branch Med., P.C., 2016 NY Slip Op 31706(U)(Sup. Ct. NY Co. 2016)
(1) In connection with one such claim, at an examination under oath (EUO) held on March 31, 2014, Nicholas testified that he and his brother, Scott, solely owned and controlled Branch, that their compensation was tied to company profits, and that defendant Mark Levitan served as Branch’s “administrative executive,” overseeing company staff, marketing, bookkeeping, and internal HIPAA procedures, with online access to Branch’s bank account. He was not a physician. When questioned further about Levitan, Nicholas was instructed by counsel not to answer questions about Levitan’s compensation relative to his and Scott’s, nor whether Levitan had been involved in any business owned by Nicholas before Branch.
(2) “Nothing in Nicholas’s testimony evidences fraud, nor do the unanswered verification requests. Moreover, the requests were improper. (See Is. Chiropractic Testing, P. C. v Nationwide Ins. Co., 35 Misc 3d 1235[A], 2012 NY Slip Op 51001[U], *2 [Dist Ct, 3d Dist, Suffolk County 2012] [request for documents pertinent to fraudulent incorporation defense inappropriate for verification request]”
(3) “Even if the alleged gaps in Nicholas’s testimony support an inference that Levitan earned more than him and Scott, it is consistent with Levitan, as staff, earning a salary, whereas Nicholas and Scott, as owners/shareholders, earned compensation based on the corporation’s profits. And even if Levitan was affiliated with a prior business owned by Nicholas, it proves nothing absent evidence he owned or controlled it.”
(4) Plaintiffs’ remaining allegations are unsubstantiated and based on speculation, and to the extent that plaintiffs rely on Springer’s EUO, they fail to provide or point to the pertinent portions of his testimony. Plaintiffs thus fail to establish, by clear and convincing evidence, the likelihood of success on the merits of their claim that Branch and Windsor were fraudulently incorporated and ineligible to receive no-fault benefits”
This one is interesting. I never liked the whole directing not to answer thing. The questions were relevant regarding compensation of the administrator of the practice. Ultimately, the amount of his compensation relative to his bona-fide verifiable job duties would lead to legitimate verification requests for financial documents. The Court got that wrong, simple.
As to the Court applying District Court decisions disallowing verification of financial documentation, the regulations prefer that these document exchanges take place pre-suit. Remember the case where Supreme Court was reversed when the Court granted discovery in the form of financials during arbitration? The Court cited 65-3.5 and 65-3.6.
I think the decision is wrong and should be appealed. Unless, I am missing something?
By the way, I do not disagree that a practice manager could or maybe should make more than the principals. But, the insurance carrier should have been entitled to ask more questions at the EUO and, only if the answers to the questions raise legitimate concerns, should further documentary discovery be required.
Hu-Nam-Nam v New York Cent. Mut. Fire Ins. Co., 2016 NY Slip Op 26237 (App. Term 2d Dept. 2016)
A billing provider seeking to recover no-fault benefits for services rendered to an assignor must provide, at the bottom of the claim form, a taxpayer identification number either in the form of a social security number or an employer identification number. Social security numbers are used to identify individual persons, while employer identification numbers are used to identify employers (see 26 CFR 301.6109-1 [a]  [ii]). “An individual … who is an employer or who is engaged in a trade or business as a sole proprietor should use an employer identification number” (26 CFR 301.6109-1 [a]  [ii] [b]), since an employer identification number is required if the taxpayer “[p]ay[s] wages to one or more employees” (IRS Publication No. 334 [Tax Guide for Small Business]). Thus, it is permissible for a billing provider operating as a sole proprietor to use his or her own social security number on the claim form if it is the billing provider who rendered the services in question. However, where, as here, a doctor bills for services rendered by a treating provider in that doctor’s employ, it is impermissible for the doctor to bill using his or her own social security number.
Nothing better than putting your social security number on documents to be distributed to the world. That is the vehicle for classic fraud. Legally, this is the type of “technical issue” that the Court of Appeals warned against in Malella. Yet, this is not a Malella defense since and is deemed an improper billing defense. The Court held as follows: “As defendant demonstrated that the claim form submitted by plaintiff was for services performed by plaintiff’s employee, that the claim form was submitted under plaintiff’s social security number, and that the denial of claim form based upon improper billing was mailed within 30 days of defendant’s receipt of the claim form, defendant established its entitlement to summary judgment.”
I am not sold this is a defense, but you do not have to sell me on it. I am not the court.
Country-Wide Ins. Co. v TC Acupuncture, P.C., 2016 NY Slip Op 05104 (1st Dept. 2016)
Respondent commenced an arbitration against petitioner insurance company for reimbursement of bills for alleged health care services rendered by respondent to Alexander Oneal. Petitioner, relying on State Farm Mut. Auto Ins. Co. v Mallela (4 NY3d 313), asserted that it could withhold payment because respondent was fraudulently incorporated. After a hearing, an arbitrator awarded respondent full reimbursement, and found that petitioner failed to meet its burden of providing clear and convincing evidence showing that respondent was fraudulently incorporated. On appeal, the master arbitrator affirmed the arbitration award and rejected petitioner’s argument that its burden of proof on its Mallela defense should have been preponderance of the evidence.
Supreme Court erred in vacating the master arbitrator’s award on the ground that the master arbitrator mistakenly applied the wrong burden of proof to petitioner’s Mallela defense. Even assuming, without deciding, that the master arbitrator applied the wrong burden of proof, the award is not subject to vacatur on that ground (Matter of New York State Correctional Officers & Police Benevolent Assn. v State of New York, 94 NY2d 321, 326 ). Nor is there any other basis for vacating the award
The problem here as I see it as that the arbitrator made a factual finding. As with all factual findings, if they have some record support, the Courts will not disturb the award. I am not completely sold on the Court’s reasoning that it did not matter if the arbitrator applied the wrong burden of proof. My belief is that if the correct fact pattern came before the Court, this could have been dispositive.
The problem for Countrywide – besides Article 75’ing and appealing the wrong cases because the hate to pay anything- is that the underlying award had factual support. Since the analysis began and ended there, everything else is “dichta”. My words would be wasted verbiage.
Matter of Allstate Prop. & Cas. Ins. Co. v New Way Massage Therapy P.C., 2015 NY Slip Op 09184 (1st Dept. 2015)
“Whether or not the fee-sharing arrangement at issue constitutes unprofessional conduct (see 8 NYCRR 29.1[b]), it does not constitute a defense to a no-fault action (compare State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d 313  [“insurance carriers may withhold payment for medical services provided by fraudulently incorporated enterprises to which patients have assigned their claims”]). It is solely a matter for the appropriate state licensing board (see e.g. Necula v Glass, 231 AD2d 457 [1st Dept 1996]; see also H & H Chiropractic Servs., P.C. v Metropolitan Prop. & Cas. Ins. Co., 47 Misc 3d 1075, 1078 [Civ Ct, Queens County 2015]).”
This would probably be characterized as one of the largest cases of the year on the Mallela side of the equation. Aside from what could be characterized as the true doctor in the box scheme, the following defenses or perhaps even reasons to conduct EUOs or provider discovery viz verification include: (1) Self referrals, (2) Use of runners [this one was always a stretch], (3) Improper ownership, i.e., MD not certified in acupuncture owning an LAC clinic, (4) Improper Fee splitting (among other grounds). These reasons don’t exist anymore.
This is what I have to say: an overzealous defendant stripped Mallela of all its adornments. Thank you Allstate and to the people who told you to appeal this. The real benefactors of this decision will be the medical practices who do all of the above, refuse EUOS in writing because the above “[are] solely a matter for the appropriate state licensing board” and beat out the insurance carriers in arbitration.
By the way, I invite you all to read Master Arbitrator Dachs decision in this case. Go to the electronic filed cases; it is an exhibit on the Petition. After I read that decision, I thought it was lunacy on this record to seek judicial and appellate intervention. Norman Dachs made sense. Many know that some of his decisions prior to his death were akin to lunacy. This one made a lot of sense, and there was no way a Supreme Court or an Appellate Division was going to reverse him.
Anyway, I made a bet with two regular readers of this blog (an attorney and a claims manager somewhere) that this appeal would result in a disaster for us. I was sadly correct. Also, my bet (and I cannot bet on this now) is that C&C Chiropractic (the cited to case) would have been reversed by the Appellate Term because the Appellate Term would have followed precedent re: self-referrals and found a violation of the Education law would be sufficient to deny compensation to a medical provider. I cannot make this bet because under stare decisis, this issue is done. I hope Metropolitan in the Civil Court action concedes the issue and moves on, as opposed to perfecting a wasteful appeal.
As always, it is the other players on the block that endure the wrath of a less than intelligent appeal.
Matter of New Century Acupuncture P.C. v Country Wide Ins. Co., 2015 NY Slip Op 50919(U)(App. Term 2d Dept. 2015)
“The Court specifically rejects petitioner’s argument that the arbitrator improperly applied the “preponderance” standard of proof to the respondent’s defense of improper licensing/control. Petitioner argues that the higher “clear and convincing” standard of proof should have been applied. “The essence of this defense (is that ) petitioner is ineligible to recover no-fault benefits due to petitioner’s failure to comply with New York State’s licensing requirements) . . . based on (petitioner’s) failure as a professional corporation to be owned and controlled only by licensed professionals . . .” Carothers v. Progressive Ins. Co., 42 Misc 3d 30 (App. Term, 2d, 11th & 13th Jud. Dists., 2013). The fact finder focuses on factors which determine whether the provider’s company is actually owned, co-owned or controlled by unlicensed individuals. 11 NYCRR 65 3.16(a)(12) provides that a health care provider is not eligible for reimbursement under section 1507 of the BCL if it fails to meet any applicable licensing requirement, whether at the time of its incorporation or thereafter. Although this defense is called “fraudulent incorporation”, it “truly poses [*3]an issue of the provider’s “ineligibility” to receive reimbursement, rather than fraud”. Tahir v. Progressive Cas. Ins. Co., 12 Misc 3d 657, 663, (NY City Civ. Ct. 2006). “While the word fraud is commonly used todescribe a Mallela defense, Mallela has nothing to do with common law fraud . . . In reality Mallela is akin to piercing the corporate veil”. Concourse Chiropractic, PLLC v. Sate Farm Ins. Co., 35 Misc 3d 1213 (Dist. Ct., Nassau, 2012).”
H & H Chiropractic Servs., P.C. v Metropolitan Prop. & Cas. Ins. Co., 2015 NY Slip Op 25132 (Civ. Ct. Queens Co. 2015)
“Defendant also submits the deposition transcript of Dr. Lucas Bottcher, DC, a member of the plaintiff’s practice. Therein, Dr. Bottcher admitted that plaintiff employs SMG and they are paid a fixed fee of five percent of collections. Defendant argues that since plaintiff allegedly pays six (or five) percent of its fees to its billing company, that its billing company owns six percent of plaintiff’s practice.”
Plaintiff owned by a management conclusion
Carrier is probably overreaching. Was this an arms length transaction? Was it commercially reasonable? Was the PC being operated by people who were unauthorized to operate a medical practice? Many people pay payroll companies a percentage of their payrolls to do process the payroll. Franchisees pay franchisors a percentage of net proceedings for the ability to carry the company’s name. The franchisee is usually guaranteed distributos, advertising, a customer base and marketting support. A medical practice needs a practice manager to perform various tasks. Thus, is a percentage of net or gross of intake to a practice manager who handles the business end inappropriate? I am not sure I would agree to that set up, but it does not make it wrong.
If one can tell me that the practice manager is not telling (explicitly or implicitly) the doctor/healthcare practitioner to perform 25 EMG/s a day, 30 SSEPs a day and bill 200 hours of PT per date of operation, then this might be reasonable. But that is the rub: many times there are people who are not duly licensed and credentialed healthcare practitioners calling the shots as to the medical treatment. Thus, while a 6% percent spread on the net or gross might be an indicia of the latter, this allegation in and of itself should not allow a carrier to issue a blanket disclaimed to the provider.
I think it is an invitation for more disclosure as to financials, but if that does not yield anything, then the end of the line has appeared.
South Shore Neurologic Assoc., P.C. v Mobile Health Mgt. Servs., Inc., 2014 NY Slip Op 06963 (2d Dept. 2014)
Self-referrals and fee splitting can garner attention whenever any payor wishes to avoid a contractual or quasi-contractual obligation. It transcends no-fault. This one looks interesting:
“South Shore established its prima facie entitlement to judgment as a matter of law declaring that the commercial relationship constituted an unlawful fee-splitting arrangement in violation of Education Law § 6530(19) and 8 NYCRR 29.1(b)(4) by submitting documents and deposition testimony showing that certain contracts were a pretext to justify the appellants’ receipt of one third of the profits of South Shore’s MRI practice ”
The net effect of this fee sharing arrangement was left undecided according to the Appellate Division.
Andrew Carothers, M.D., P.C. v Progressive Ins. Co., 2013 NY Slip Op 23232 (App. Term 2d Dept. 2013)
This was the affirmance of the Carothers case from two weeks ago. I have presented the readers digest version of this opinion, since I think it is in excess of 20 pages long.
“The defense asserted was that ACMDPC was not entitled to reimbursement of the claims because of ACMDPC’s failure to comply with Insurance Department Regulations (11 NYCRR) § 65-3.16 (a) (2), which renders a provider ineligible to recover no-fault benefits under Insurance Law § 5102 (a) (1) if the provider fails to meet “any applicable” state or local licensing requirement necessary to perform its services in New York. On July 17, 2008, after a joint trial, the jury returned a verdict in favor of all 53 defendants.”
“The theory underlying this defense was that Dr. Carothers was not the true owner, or at least not the sole owner, and operator of ACMDPC, which allegedly was actually owned or co-owned and controlled by nonparties Hillel Sher and Irina Vayman, two individuals who were not physicians, but who had received the bulk of ACMDPC’s profits. Thus, in order to find that plaintiff was not entitled to reimbursement, the jury had to find that plaintiff was actually owned, co-owned or controlled by unlicensed individuals”
“Although the parties agreed that neither Sher nor Vayman was available to testify at the trial, within the meaning of CPLR 3117 (a) (3), plaintiff’s counsel asked the Civil Court to direct the defense not to read the deposition transcripts to the jury, claiming that the deposition testimony was of no probative value and only served to prejudice plaintiff. The Civil Court, finding that the testimony was relevant to the issues at trial, permitted the defense to read the deposition transcripts to the jury, and ultimately charged the jury that an adverse inference could be drawn against plaintiff based upon Sher’s and Vayman’s invocation of their Fifth Amendment privilege.”
“At trial, the defense contended that even though Dr. Carothers was ACMDPC’s nominal owner, and was listed as its only shareholder, officer and director, it was actually Sher and Vayman who were the de facto owners of ACMDPC.”
“Plaintiff claimed that, at all relevant times, Sher and Vayman had merely assisted ACMDPC: Sher in his role as the lessor of the premises in which the MRI facilities were located and of the equipment therein, and Vayman as ACMDPC’s office manager”
Jury was instructed on thirteen factors to consider…
“Regarding Sher and Vayman’s invocation of their Fifth Amendment privilege at their depositions, the Civil Court told the jury that it could, but was not required to, infer, by their refusal to answer questions regarding de facto ownership and control over ACMDPC, that their answers would have been adverse to ACMDPC’s interest.”
“On appeal, plaintiff asks this court to reverse the judgment, to set aside the jury verdict, and either to enter judgment in its favor or to grant a new trial, claiming, with respect to the “fraudulent incorporation” defense, that the Civil Court’s erroneous and prejudicial orders and various trial rulings deprived it of a full and fair opportunity to refute that defense. Among the trial rulings highlighted by plaintiff are those involving the Civil Court’s decision to permit the reading of the depositions of nonparties Sher and Vayman, in which they, respectively, had invoked their Fifth Amendment privilege, coupled with the court’s later decision to instruct the jury that it could draw a negative inference against plaintiff based upon Sher’s and Vayman’s invocation of their Fifth Amendment privilege.”
“The most egregious errors warranting reversal, contends plaintiff, were in the Civil Court’s instructions to the jury regarding the “fraudulent incorporation” defense, particularly because the Civil Court, among other things: (1) failed to recognize that such defense requires a finding of fraud and fraudulent intent at the time of incorporation and did not instruct the jury thereon; and (2) developed a novel 13-factor test to be applied in this situation, which test was inappropriate and misleading, instead of providing instructions on common-law fraud, sham transactions, and [*6]the business-judgment rule.”
“Although both the United States Court of Appeals for the Second Circuit and New York’s Court of Appeals employed the term “fraudulent incorporation” in the Mallela case, which was the term used in the certified question, the essence of the defense in that case, as here, was the provider’s “lack of eligibility,” which does not require a finding of fraud or fraudulent intent, but rather, addresses the actual operation and control of a medical professional corporation by unlicensed individuals.”
“The Mallela decision thereby clearly indicated that a professional corporation would be ineligible for no-fault reimbursement if it was in violation of licensing requirements regardless of whether the nominal physician-owner had intended to yield control to unlicensed parties at the time the professional corporation had been formed or had done so at some later time.”
“We agree with the dissent that it was error for the Civil Court to permit the defense to read to the jury the deposition transcripts of nonparties Sher and Vayman, especially where each of the more than 100 questions asked yielded a response invoking the Fifth Amendment. The error was compounded by the repeated references to the nonparties’ depositions in the defense summation to the jury, and in the decision of the court to charge an adverse inference.”
“Considering the ample evidence of Sher and Vayman’s control over the hiring of office employees, management of the offices, administration of the billing, demonstrated manipulation [*10]of the financial accounts of ACMDPC, and excessive charges for various rentals, including the medical imaging machines, the jury had more than enough evidence to conclude that plaintiff was in violation of the requirement of Business Corporation Law § 1507 that it be owned and controlled solely by licensed professionals. Accordingly, any error committed by the Civil Court may be considered harmless.”
Physical Performance Testing of NY v New York Cent. Mut. Fire Ins. Co., 2013 NY Slip Op 50581(U)(App. Term 1st Dept. 2013)
The Court was clear: “It is well-settled that a provider of healthcare services is not eligible for reimbursement of assigned first-party no-fault benefits “under section 5102(a)(1) of the Insurance Law if the provider fails to meet any applicable New York State or local licensing requirement necessary to perform such service in New York”
“Applying these principles to the matter at bar, Mutual has made a prima facie showing of entitlement to summary judgment dismissing the complaints by demonstrating that the services rendered by Physical are not reimbursable expenses under the No-Fault Law. In opposition, Physical failed to raise a triable issue of fact with respect to its claims because they were not performed by a medical professional corporation, or a licensed health provider.”