Malella and Attorneys fees

Fraudulent Incorporation Defense and Preclusion

The Malella defense, named after Mallela v Westchester Medical Center, permits insurance carriers to deny no-fault claims when healthcare providers operated as professional corporations without proper licensing. This defense typically arises when unlicensed individuals form professional corporations to bill for medical services, violating Business Corporation Law requirements that professional corporations be owned and controlled by licensed practitioners in the relevant profession.

A critical question involves whether arbitrators can preclude carriers from raising Malella defenses when carriers fail to assert them during initial arbitration proceedings. Some courts have suggested that coverage defenses must be raised promptly or risk preclusion. Others have held that fundamental defenses like fraudulent incorporation can never be waived or precluded because they challenge the provider’s basic right to payment under no-fault law.

Case Background

In Country-Wide Insurance Co. v Valdan Acupuncture, P.C., the insurance carrier sought to vacate an arbitration award in favor of the healthcare provider. Country-Wide argued that the arbitrator erred by confirming the award despite evidence that a man married to the provider’s owner had pleaded guilty to no-fault insurance fraud. The carrier submitted hundreds of pages of documents relating to the fraud conviction, arguing that this evidence established fraudulent incorporation justifying denial of all claims.

The arbitrator reviewed Country-Wide’s submissions and found that the provider itself was never mentioned in the extensive documentation. The arbitrator rejected Country-Wide’s attempt to hold the owner “responsible by association” based on her husband’s criminal conduct. The master arbitrator confirmed the award, and Country-Wide brought an Article 75 proceeding to vacate it.

The First Department considered whether the evidence of the husband’s fraud conviction supported vacating the arbitration award, and separately addressed what attorney fees the prevailing provider could recover for the Article 75 proceeding.

Country-Wide Ins. Co. v Valdan Acupuncture, P.C., 2017 NY Slip Op 04068 (1st Dept. 2017)

(1) Assuming without deciding that an insurer’s defense of fraudulent incorporation cannot be precluded (see AVA Acupuncture, P.C. v AutoOne Ins. Co., 28 Misc 3d 134, 2010 NY Slip Op 51350 ; Bath Med. Supply, Inc. v Allstate Indem. Co., 27 Misc 3d 92, 95 ), we conclude that the master arbitrator properly confirmed the award of the arbitrator, who reviewed petitioner’s submissions relating to the plea of guilty to no-fault insurance fraud by a man married to the owner of respondent, found that respondent was not mentioned once in the “hundreds of pages” submitted, and rejected petitioner’s attempt to hold the owner “responsible by association.”

(2) “Respondent is entitled to attorneys’ fees for this appeal (11 NYCRR 65-4.10(j)(4)), calculated, in accordance with 11 NYCRR 65-4.6(b), as 20% of the no-fault benefits awarded.”

This decision goes against Geico v. AAMG, which seems to imply an hourly fee for work in relation to an article 75. This decision does not touch upon a de-novo action, which may or may not be subjection to an attorney fee in accordance with 4.6(b) viz 4.10(j)(4).

Also, precludable Mallela? So much in a small case.

Legal Significance

The Country-Wide Insurance decision leaves unresolved the question of whether Malella fraudulent incorporation defenses can be precluded when carriers fail to timely raise them. The First Department explicitly stated it was “assuming without deciding” that such defenses cannot be precluded, declining to establish binding precedent on this issue. This preserves the question for future litigation while signaling judicial skepticism about allowing preclusion of fundamental coverage defenses.

The substantive holding that guilt by association does not support Malella defenses clarifies evidentiary standards for fraudulent incorporation claims. Carriers must demonstrate that the provider entity itself engaged in improper corporate formation or operation, not merely that individuals associated with the provider committed fraud. A spouse’s criminal conviction, standing alone, does not establish that the provider corporation was fraudulently formed or operated.

Jason identifies a critical conflict regarding attorney fee calculations in Article 75 proceedings. The Country-Wide decision awards fees calculated as 20% of no-fault benefits under 11 NYCRR 65-4.6(b), treating Article 75 appeals like arbitration proceedings. This conflicts with Geico v. AAMG, which suggested hourly fee awards for Article 75 work. The practical difference is substantial—20% of a small arbitration award might be $200, while hourly fees for Article 75 litigation could exceed $5,000.

Practical Implications

Insurance carriers asserting Malella defenses must present specific evidence connecting challenged providers to fraudulent incorporation practices. Evidence of fraud by individuals associated with providers, without direct connection to the provider entity, will not suffice. Carriers should obtain corporate formation documents, ownership records, and licensing information demonstrating that unlicensed individuals owned or controlled the professional corporation.

Healthcare providers defending against Malella claims benefit from demanding specific proof of corporate improprieties. Carriers relying on guilt by association theories, or attempting to impute fraud based on relationships between providers and convicted individuals, face uphill battles absent direct evidence of provider involvement. Providers should also preserve Malella preclusion arguments when carriers fail to raise these defenses during initial arbitration.

Related Articles

• Attorney Fee Requirements in New York No-Fault Insurance Cases
• Master Arbitrator Review Standards NY – When Decisions Can Be Vacated
• LMK Attorney Fee Calculation Problems in NY No-Fault Cases
• Understanding Article 75 Proceedings: You Cannot Backdoor Master Awards Through Declaratory Judgment

Legal Update (February 2026): The attorney fee provisions cited in this 2017 decision (11 NYCRR 65-4.6 and 65-4.10) have been subject to multiple regulatory amendments since publication, including revisions to fee calculation methodologies and procedural requirements. Given the ongoing evolution of no-fault attorney fee regulations and potential changes to Article 75 practice standards, practitioners should verify current provisions before relying on the fee award calculations discussed in this post.