Wind it up

Understanding Professional Service Corporation Status After License Revocation

When professional licensees lose their credentials through disciplinary action or voluntary surrender, complex questions arise regarding the continuing viability of professional service corporations they owned and operated. New York’s Business Corporation Law establishes specific requirements for professional corporations, mandating that only licensed professionals can own shares and control these entities. When the sole shareholder loses professional licensure, the corporation faces potential dissolution, but the path from license revocation to corporate termination involves multiple procedural steps.

The Mallela defense has evolved into one of the most frequently asserted grounds for denying no-fault benefits to healthcare providers. Insurance companies argue that when unlicensed individuals control professional corporations, those entities become ineligible for payment regardless of whether legitimate services were actually provided. However, courts have refined this defense over time, distinguishing between corporations actively operating with unlicensed control and corporations winding up their affairs after shareholder disqualification.

The BR Clinton Chiropractic decision addresses the critical question of whether professional corporations can recover for services rendered before license revocation even when the corporation continues to exist with the now-unlicensed professional as shareholder. This scenario arises frequently in no-fault litigation because license revocations often occur months or years after services were provided and billed.

Case Background

BR Clinton Chiropractic, P.C. provided chiropractic services to automobile accident victims and submitted claims for no-fault benefits. The chiropractor who owned and controlled the corporation subsequently had his professional license revoked. GEICO Insurance Company denied claims for services rendered before the license revocation, arguing that the corporation’s continued existence with an unlicensed shareholder rendered all claims unenforceable.

The insurance company’s position rested on Business Corporation Law sections 1509 and 1510, which require professionals who lose licensure to sever ties with their professional corporations. Section 1509 gives corporations authority to force disqualified professionals to sell their shares, while section 1510 requires corporations to repurchase shares within six months of disqualification. GEICO argued that BR Clinton Chiropractic’s failure to comply with these requirements invalidated the corporation’s right to collect on pre-revocation claims.

The trial court denied GEICO’s summary judgment motion, and GEICO appealed. The Appellate Term needed to determine whether statutory violations related to post-revocation corporate structure could invalidate claims for services performed when the professional held valid licensure.

Jason Tenenbaum’s Analysis:

BR Clinton Chiropractic, P.C. v GEICO Ins. Co.., 2020 NY Slip Op 20291 (App. Term 2d Dept. 2020)

(1) “Pursuant to Business Corporation Law §§ 1509 and 1510, when professionals lose their license, they are required to sever 70 Misc 3d at 28} their ties with the professional service corporation. If the professional does not sever those ties, section 1509 grants the professional service corporation the authority to force the professional to do so, and failure to enforce this requirement constitutes a ground for forfeiture of the professional service corporation’s certificate of incorporation and its dissolution. Section 1510, among other things, directs the professional service corporation to repurchase the professional’s shares within six months of his disqualification. None of these requirements is self-executing.”

(2) “Here, the professional has not complied with section 1509 and the professional service corporation has not repurchased his shares pursuant to section 1510, so the professional remains the corporation’s sole shareholder. No one has moved for forfeiture of plaintiff’s certificate of incorporation or its dissolution. Despite revocation of its shareholder’s professional license, plaintiff continued to exist and is entitled to wind up its affairs and seek to recover no-fault benefits for the services it rendered to its assignor prior to June 28, 2010”

(3) “Section 1510 directs plaintiff to take actions that it concededly failed to do. It does not hold, however, that such a violation makes otherwise valid contracts unenforceable or that the{**70 Misc 3d at 29} corporation’s debtor should be entitled to withhold payment for services legally rendered”

Legal Significance of Winding Up Provisions

The court’s analysis distinguishes between corporations actively operating in violation of licensing requirements and corporations winding up affairs after a disqualifying event. New York law recognizes that even when corporate charters face potential forfeiture, entities retain limited authority to conclude existing business and collect outstanding receivables. This principle serves important policy interests by preventing complete loss of value when technical violations occur.

The non-self-executing nature of Business Corporation Law sections 1509 and 1510 proves crucial to the outcome. These statutes create procedural requirements and potential penalties, but they do not automatically void corporate existence or nullify past transactions. Until the Attorney General or another interested party moves for corporate dissolution, the professional service corporation continues to exist as a legal entity. During this interim period, the corporation retains authority to wind up its affairs, including collecting payment for services previously rendered.

The court also rejects the notion that corporate shareholders’ statutory violations should benefit third-party debtors. Insurance companies essentially receive a windfall when they can avoid paying for legitimate services based on post-service corporate compliance failures. This outcome would create perverse incentives for carriers to investigate corporate structure issues not because those issues affect service quality, but purely to identify technical grounds for denying payment obligations.

Practical Implications for Healthcare Providers and Insurers

Professional service corporations facing shareholder license revocations should take immediate steps to comply with Business Corporation Law requirements. This includes initiating share repurchase procedures, identifying qualified replacement shareholders, or commencing orderly dissolution. However, pending compliance with these technical requirements, corporations retain the right to collect payment for services rendered while properly licensed.

Healthcare providers should segregate claims for services rendered before license revocation from any services provided afterward. Pre-revocation claims remain collectible under the winding-up doctrine, while post-revocation services may face legitimate Mallela-based defenses. Careful claim dating and documentation becomes essential for proving services occurred while the professional held valid licensure.

Insurance companies must evaluate Mallela defenses carefully, distinguishing between violations that genuinely affected service provision and technical corporate compliance issues arising after services were performed. Blanket denials based on post-service license revocations face substantial litigation risk, particularly when carriers cannot demonstrate that the violations affected service quality or legitimacy.

The decision also suggests that carriers should investigate corporate compliance issues contemporaneously rather than waiting until litigation. If an insurance company pays claims without investigating corporate structure, later attempts to recoup payments based on discovered violations may fail. Contemporaneous investigation allows carriers to raise valid defenses before payment, avoiding waiver or estoppel arguments.

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