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]).”

Mallela defense must be arbitrated upon demand of Applicant

Matter of Countrywide Ins. Co. v DHD Med., P.C., 2011 NY Slip Op 05864 (1st Dept. 2011)

“Petitioner argues that respondent is a fraudulently incorporated medical services provider and therefore is not only ineligible for reimbursement of no-fault payments (see State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d 313 [2005]) but is also precluded from demanding arbitration pursuant to Insurance Law § 5106(b) (and the no-fault policy issued by petitioner). Contrary to this argument, the defense of fraudulent incorporation is “for the arbitrator and not for the courts” (see Matter of Nassau Ins. Co. v McMorris, 41 NY2d 701 [1977]; Matter of MVAIC v Interboro Med. Care & Diagnostic PC, 73 AD3d 667, 667 [2010]).”

I take it this was a Special proceeding commenced through an Article 75, seeking injunctive relief.  I think this decision would have been different had an affirmative lawsuit been commenced seeking Mallela based relief prior to the filing of an arbitration.

I would also note that this decision should not impact IME non-coop and EUO non-coop based DJ’s since those are “coverage” cases.  Mallela is a standing based issue.

Appellate Term delves deeper into Mallela – and the plaintiff bar is plunging into ever so deeper water

Radiology Today, P.C. v GEICO Gen. Ins. Co., 2011 NY Slip Op 21161 (App. Term 2d Dept. 2011)

Holding #1: “Plaintiff contends that the discovery order was improper because, in the answer and in support of its motion to compel discovery, defendant failed to “state[] in detail” the “circumstances constituting the wrong,” citing CPLR 3016 (b). There is no requirement that a defense predicated upon the failure to comply with “New York State or local licensing requirement[s]” (Insurance Department Regulations [11 NYCRR] 65-3.16 [a] [12]) be pleaded with particularity pursuant to CPLR 3016 (b) (see generally V.S. Med. Servs., P.C. v Allstate Ins. Co., 25 Misc 3d 39 [App Term, 2d, 11th & 13th Dists 2009]). In addition, while mere conclusory allegations are never sufficient to obtain discovery with respect to a Mallela-based defense, defendant’s motion papers were sufficient to demonstrate that a Mallela-based defense [*3]was potentially meritorious.”

Holding #2: “The defense that plaintiff is ineligible to receive no-fault benefits because it failed to comply with state or local licensing requirements “is not waived by the failure to assert it in a denial of claim form . . . nor is it precluded as a result of an untimely denial” (Multiquest, P.L.L.C. v Allstate Ins. Co., 17 Misc 3d 37, 39 [App Term, 2d & 11th Jud Dists 2007] [citations omitted]). No-fault benefits may not be paid to medical service corporations which submit “materially false filings with state regulators” (Mallela, 4 NY3d at 321)”

So we all got the answer we have waited for: Mallela based “fraud” need only be proved through a preponderance of the evidence.  As a corollary, the evidence needed to obtain Mallela based discovery is sufficiently less than what could possibly be sought under a clear and convincing fraud standard.  This is quite interesting to say the least.

Also, the Appellate Term seems to hold that a PHL 238 violation standard separate and apart from a true “Mallela” violation.  The door has opened that much further.  The better question, however, is why the heck can’t all of this information be obtained in EUO-verification, under penalty of the policy being void ab initio