Reversal of Supreme Court’s vacatur on a First Department 75

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[2005]), 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 [1999]). 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.

Mallela limited to Mallela

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][4]), it does not constitute a defense to a no-fault action (compare State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d 313 [2005] [“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.

Preponderance on a Mallela case

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).”


Tenuous Mallela claim denied

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

Court’s conclusion

No sir.

My thought

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.

Looking beyond the face of the agreement

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.

Dr. Andrew Carothers, we salute you.

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.”

Judgment affirmed



Summary judgment granted on Mallela case

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.”

Article 28 of the PHL is not a bar for the recovery of no-fault benefits for office based surgeries

GEICO v. Ananguard (Index #: 16313/11)(Sup. Ct. Nassau Co. 2012)

At the end of the day, a Nassau County Supreme Court justice (Sher, J.S.C.), following the reasoning of Judge Murphy in Upper East Side Surgical v. State Farm Ins. Co., found that PHL 230-d, 2998-3 and Ed. Law 6530(48), granted an OBS  facility the right to perform office based surgical services.  Based upon this factual predicate, the Court then found, that this type of facility may collect no-fault benefits (65-3.16[a][12]), and may bill for medical necessary treatment.  Ins Law 5102(a)(1).

As such,Justice Sher 0concluded that an office based OBS does not need to possess an Article 28 license.   (10 NYCRR 86-4.40).

As to reimbursement, the Court held that 11 NYCRR 68.5(b) was the barometer of reimbursement.  In my mind, that would be the PAS code of an Article 28 in the same or adjacent geographical region.

Personally, I like the allure of Plaintiff’s arguments.  The problem, however, is that 5102(a)(1) is so broad as to who could be compensated for rendered services.

The attorneys were:  Plaintiff: Spina’s office.  Defendant: John Belesi, Esq of Abrams Festerman

Notice of Trial vacated based upon a "detailed" Mallela showing

VE Med. Care, P.C. v Auto One Ins. Co., 2012 NY Slip Op 50571(U)(App. Term 2d Dept. 2012)

“Because the notice of trial and certificate of readiness filed by plaintiff contained the erroneous statement that discovery had been completed, the Civil Court properly granted the branch of defendant’s motion seeking to vacate the notice of trial”

“Defendant’s moving papers set forth detailed and specific reasons for believing that plaintiff is ineligible to recover no-fault benefits because plaintiff fails to meet applicable state and local licensing requirements”

A Mallela defense does not have to be pleaded

Lexington Acupuncture, P.C. v General Assur. Co., 2012 NY Slip Op 22047 (App. Term 2d Dept. 2012)

“Here, although defendant never moved to amend its answer to assert a defense based on fraudulent incorporation, it asserted sufficient allegations of fraudulent incorporation. Defendant cited to several cases against a different insurer involving corporations purportedly owned by Ms. Anikeyeva. In some of those cases, the defendant insurer had submitted an affidavit from its investigator which was sufficient to entitle the insurer to discovery on the issue of fraudulent incorporation (see e.g. Lexington Acupuncture, P.C. v State Farm Ins. Co., 12 Misc 3d 90). Defendant included, as part of its motion papers, copies of the investigator affidavits from those cases, which set forth Ms. Anikeyeva’s close connection with individuals and corporations charged with insurance fraud. Since defendant presented adequate allegations of fraudulent incorporation, the Civil Court did not abuse its discretion in granting those branches of defendant’s motion seeking to compel disclosure on that issue and in denying plaintiff’s cross motion for a protective order and the imposition of sanctions (see Kipor Medicine, P.C. v GEICO, 28 Misc 3d 129[A], 2010 NY Slip Op 51247[U]).”

The concurrence is brutal as were most of Golia’s concurrences this week:

“Similarly, plaintiff cannot reasonably plead surprise in response to the raising of the Mallela defense. As with prejudice, surprise presents no logical or material issue. There exists a rich history of litigation, involving a multitude of cases before the Appellate Term, in which health care facilities allegedly owned by Ms. Anikeyeva have been asked to supply Mallela discovery (e.g. First Help Acupuncture, P.C. v State Farm Mut. Auto. Ins. Co., 24 Misc 3d 131[A], 2009 NY Slip Op 51354[U] [App Term, 2d, 11th & 13th Jud Dists 2009]; Great Wall Acupuncture v State Farm Mut. Auto. Ins. Co., 20 Misc 3d 136[A], 2008 NY Slip Op 51529[U] [App Term, 2d & 11th Jud Dists 2008]; AVA Acupuncture, P.C. v State Farm Mut. Auto. Ins. Co., 16 Misc 3d 138[A], 2007 NY Slip Op 51756[U] [App Term, 2d & 11th Jud Dists 2007]). Indeed, in the cross motion papers submitted in the Civil Court, plaintiff made specific note of an extended history of attempts by defendant herein to discern who the true owner of plaintiff corporation is. As detailed above, several affirmative defenses included in defendant’s answer and interrogatories attached thereto put plaintiff on sufficient notice from the very beginning that Mallela discovery will be sought by defendant. Clearly, “if there is any doubt as to the availability of a defense, the defendant is entitled to every reasonable intendment of its pleading” (Youssef, 24 AD3d at 661).”

My first thought is that a carrier’s copying and pasting prior affidavits and citations to appellate term cases is sufficient to make a Mallela defense showing.  This makes sense.

My second thought is something that I just discussed the other day with someone.  Indeed, many people have commented that it is inappropriate to allege a torrent of affirmative defenses in an answer.  My response is always a citation to cases like this.  This case shows the potential death trap and perhaps malpractice issues that surround the defendant that selectively pleads its affirmative defenses.

This Court could have, and I think should have, denied the motion since the Mallela defense was not pleaded.

The same issue occurred in:

Astoria Wellness Med., P.C. v Autoone Ins. Co., 2012 NY Slip Op 50340(U)(App. Term 2d Dept. 2012)

“Leave to amend pleadings should be freely granted absent prejudice or surprise resulting from the delay (see CPLR 3025 [b]; Lucido v Mancuso, 49 AD3d 220, 225 [2008]; see also Worthen-Caldwell v Special Touch Home Care Servs., Inc., 78 AD3d 822 [2010]). As plaintiff was neither prejudiced nor surprised by defendant’s delay in asserting the foregoing affirmative [*2]defense, the Civil Court did not improvidently exercise its discretion in granting the branch of defendant’s amended cross motion seeking leave to amend its answer”

And again:

Medical Polis, P.C. v Progressive Specialty Ins. Co., 2012 NY Slip Op 50342(U)(App. Term 2d Dept. 2012)

“Here, although defendant never moved to amend its answer to assert a defense based on fraudulent incorporation…”    In this case, Defendant did not even bother to amend his answer.

But this was a good end to the opinion:

“Defendant included an affidavit from its Senior Special Investigator, who set forth, in detail, plaintiff’s close connection with another medical provider whose owner was convicted of, among other things, fraud and falsifying business records. Since defendant made adequate allegations of fraudulent incorporation, the Civil Court did not abuse its discretion in granting those branches of defendant’s motion seeking to compel disclosure on that issue, and in denying plaintiff’s cross motion for a protective order (see Kipor Medicine, P.C. v GEICO, 28 Misc 3d 129[A], 2010 NY Slip Op 51247[U]).”