The Rogak Report: 01 Mar 2006 ** No Fault - Fraud **
- NO-FAULT CLAIMS STILL UNPAID UNDER OLD REGULATIONS CAN BE CHALLENGED
BASED ON FRAUDULENT PROVIDER INCORPORATION
Allstate Ins. Co. v. Belt Parkway Imaging P.C., NYLJ 2/28/06 (Supreme
Court, New York County) (MOSKOWITZ, j)
The plaintiffs in this lawsuit are no-fault insurance companies.
Plaintiffs claim they owe nothing to defendant medical providers
because of defendants' violation of various statutes pertaining to
the organization of medical corporations and because of defendants'
fraudulent billing. Plaintiffs seek to recover from defendants no-
fault payments that plaintiffs made to them for medical services that
defendants rendered to persons covered under automobile insurance
policies that plaintiffs issued. Plaintiffs also seek a declaratory
judgment that they have no obligation to pay defendants for claims
defendants have submitted, but which plaintiffs have not yet paid.
Among the defendants are the "PC Defendants," each of which purport
to be a New York medical professional corporation providing
diagnostic testing and other patient services. The certificates of
incorporation of the PC Defendants each state that the owner is
defendant Dr. Herbert Rabiner, a New York State-licensed physician,
but the real owner and principal shareholder is a layperson:
defendant Jay Katz.
Plaintiffs allege that, in violation of Section 1507 of the Business
Corporation Law, Rabiner has sold or lent the use of his name and
medical license, to Katz to form medical corporations in Rabiner's
name so that Katz could own or control medical practices, profit from
them, bill no-fault insurers for medical services and, in so doing,
facilitate fraudulent billing practices. Allegedly, once Rabiner
fraudulently formed the PC Defendants with Katz, he did not have the
type of involvement in those entities that a real owner would.
Plaintiffs also allege that the PC Defendants regularly submitted no-
fault claims to plaintiffs, falsely representing that the PC
Defendants were valid medical professional corporations. Plaintiffs
allege further that they paid substantial amounts of money to the PC
Defendants based upon their justifiable reliance that the PC
Defendants comported with applicable statutes and administrative
regulations governing the provision of health services. In addition,
defendants' fraudulent conduct allegedly encompassed improper
multiple billings and the provision of improper, unwarranted or
medically unreliable testing.
In a prior decision, this judge dismissed the complaint against
defendants Parkway Magnetic Resonance Imaging, Inc., Metroscan
Resonance Imaging, Inc., Katz, and Vladimir Shtrakhman. In that same
decision this judge also dismissed several causes of action, and
dismissed the complaint as against Rabiner. The judge had declined to
dismiss the cause of action seeking a declaration that plaintiffs
have no obligation to pay pending claims, claims they previously
denied or any future no-fault claims.
In a second prior decision, this judge granted leave to amend the
complaint regarding the billing fraud component of the first cause of
action. As amended, the complaint contained sufficient particularity
regarding the allegations of billing fraud, including the performance
of unnecessary services, as part of an alleged scheme among the PC
Defendants and other nonparty entities.
Plaintiffs moved to reargue those prior decisions based on a change
in the case law.
"The change in law that is the subject of this motion results from
State Farm Mut. Auto. Ins. Co. v. Mallela (4 NY3d 313  [Mallela
III]). That action began with State Farm Mut. Auto. Ins. Co. v.
Mallela (175 F Supp 2d 401 [ED NY 2001, Sifton, J.] [Mallela I]),
that involved similar claims to those presented here. In Mallela I,
Judge Sifton concluded that the insurer plaintiff could not recover
damages for fraud and misrepresentation, because it had no right of
action to enforce the relevant provisions of the Business Corporation
Law and because the alleged violations did not relieve the insurer of
the obligation to reimburse the insureds or the insureds' assignees.
Judge Sifton found that the Business Corporation Law did not
explicitly create a private right of action and that plaintiff did
not belong to the class of legislatively intended beneficiaries, so
that a right of action would be clearly in furtherance of the
legislative purpose (Mallela I, 175 F Supp 2d at 416). Judge Sifton
granted plaintiff leave to amend its complaint to state valid claims
describing actionable frauds, but subsequently dismissed the amended
complaint with prejudice (Mallela I, 2002 WL 31946762). I followed
the reasoning of Judge Sifton in Mallela I when I dismissed
plaintiffs' claims for fraud and unjust enrichment in Prior Decision
"The insurance carrier appealed Mallela I to the United States Court
of Appeals for the Second Circuit (Mallela II) that concluded that
the action involved important, determinative and unsettled questions
of state law that were likely to recur and important public policy
implications (Mallela II, 372 F3d 500 [2d Cir 2004]). Thus, in
Mallela II, the Second Circuit deemed it appropriate to certify the
following question to the New York Court of Appeals:
"Is a medical corporation that was fraudulently incorporated under
N.Y. Business Corporation Law §§1507, 1508, and N.Y. Education Law
§6507(4)(c) entitled to be reimbursed by insurers, under New York
Insurance Law §§5101 et seq. and its implementing regulations, for
medical services rendered by licensed medical practitioners?"
"In answering the certified question, in Mallela III, the Court of
Appeals concluded that these medical corporations could not receive
reimbursement, reasoning that Insurance Law §§5101 et seq. requires
no-fault carriers to reimburse patients (or their medical provider
assignees) for basic economic loss, but that in promulgating 11 NYCRR
65-3.16 (a) (12)1 (effective April 4, 2002), the Superintendent of
Insurance excluded from the meaning of 'basic economic loss' payments
made to unlicensed or fraudulently licensed providers. This renders
these entities 'not eligible' for reimbursement (4 NY3d at 320)."
"Moreover, the Court of Appeals upheld the Superintendent's
interpretation as not irrational or unreasonable in deference to his
special competence and expertise regarding the insurance industry and
not counter to the clear wording of the statutory provision. The
Court of Appeals held that 'on the strength of this regulation,
carriers may look beyond the face of licensing documents to identify
willful and material failure to abide by state and local law'."
"The Court of Appeals also held that, as a matter of law, the
insurance carriers could not sue for fraud or unjust enrichment (as
opposed to a requirement to reimburse) for any payments that the
insurance carriers had already made prior to the regulation's
effective date of April 4, 2002. However, because State Farm's
complaint did not clearly indicate when it had paid defendants, the
Court declined to determine whether State Farm had alleged sufficient
facts to support its causes of action for fraud or unjust enrichment."
With this background, the Court now turned to the motion at issue.
First, the Court granted the motion to add GEICO as a plaintiff.
"I grant the motion for renewal upon the intervening clarification of
the law. As a result of Mallela III, I reinstate plaintiffs' claims
for fraud and unjust enrichment to the extent that plaintiffs made
the payments to defendants on or after the regulation's effective
date (April 4, 2002)."
"As discussed above, in Malella III, the Court of Appeals held that:
(1) the insurance companies could withhold payment for medical
services that fraudulently incorporated enterprises provided and to
which patients have assigned their claims; (2) the insurance
companies could bring actions for fraud and unjust enrichment to
recover payments made on or after the regulation's effective date of
April 4, 2002, by implication; and (3) no cause of action for fraud
or unjust enrichment would lie for any payments that the insurance
carriers made prior to the regulation's effective date of April 4,
2002. Mallela III left open, however, the issue of whether the
insurers could withhold payment (as opposed to recover payments
already made) for unpaid claims that accrued prior to April 4, 2002."
"Several Civil Court decisions have recently addressed this issue. In
Metroscan Imaging PC v. GEICO Ins. Co. (8 Misc 3d 829 [Civ Ct, Queens
County 2005, Siegal, J.]), the court held that insurers could
withhold payment for unpaid claims accruing prior to April 4, 2002,
because the Court of Appeals held that the 'Superintendent's
regulation allowing carriers to withhold reimbursement from
fraudulently licensed medical corporations governs this case'."
"However, several other Civil Court decisions have arrived at a
contrary conclusion (see Multiquest, PLLC v. Allstate Ins. Co., 2005
WL 3274885 [Civ Ct, Queens County 2005, Esposito, J.]; Multiquest,
PLLC v. Allstate Ins. Co., 10 Misc 3d 1061 (A) [Civ Ct, Queens County
2005, Kerrigan, J.]; Multiquest, PLLC v. Allstate Ins. Co., 10 Misc
3d 1061 (A) [Civ Ct, Queens County 2005, Markey, J.]; Multiquest PLLC
v. Allstate Ins. Co., 2005 WL 3626771 [Civ Ct, Queens County 2005,
"This second group of cases hold that insurers cannot withhold
payment for unpaid claims accruing prior to April 4, 2002, because
the law disfavors retroactivity. These cases also interpret Mallela
III as indirectly answering the retroactivity question by holding
that the insurers could not assert a cause of action for unjust
enrichment and fraud for claims that matured before the effective
date of the regulation."
"I agree with the former group of decisions. As Judge Seigel noted in
Metroscan, 8 Misc.2d 829, 834, Mallela I involved claims that had
matured prior to the effective date of the regulation. Hence, the
Court of Appeals, in Mallella III, necessarily incorporated claims
for reimbursement that matured prior to the effective date of the
regulation. Also, a retroactive application is appropriate here
because the regulation at issue merely clarified existing law.
Further, this holding comports with the policy choice the Court of
Appeals made in Mallela III of protecting insurers from fraud as
outweighing speedy resolution of claims."
"In addition, just because the Court of Appeals precluded the
insurers from recouping payments they already made for claims that
matured prior to the effective date of the regulation does not mean
that the Court of Appeals precluded the insurers from denying
reimbursement for unpaid claims whenever those claims occurred. This
interpretation comports with the language of the regulation that
applies to all unpaid claims regardless of the effective date. The
regulation does not address the situation where insurers had paid an
illegal entity before April 4, 2002."
"Previously, I dismissed the unjust enrichment claim because, as
stated in Prior Decision I, plaintiffs paid compensation for medical
services that licensed practitioners rendered to covered persons
under the no-fault laws and because there were insufficient
allegations that defendants had been unjustly enriched by receiving
compensation for medical services rendered without regard to medical
necessity and in excess of those dictated by the patients'
conditions. As stated in Prior Decision II, however, I found that the
amended complaint contained sufficient particularity in its
allegations of billing fraud, including the performance of
unnecessary services, as part of an alleged scheme among the PC
Defendants and other nonparty entities. Hence, the unjust enrichment
claim contained in the seventh cause of action is viable."
Accordingly, "(1) plaintiffs are granted leave to serve a second
amended complaint, and the second amended complaint is deemed served
upon defendants, and defendants are directed to answer the second
amended complaint within 20 days after service of a copy of this
order with notice of entry; (2) plaintiffs' motion to renew the
court's March 15, 2004 decision and order is granted, and, upon
renewal, plaintiffs' claims of fraud and unjust enrichment based upon
a lack of standing to obtain no-fault benefits are reinstated to the
extent that plaintiffs made payments to defendants on or after April
4, 2002; and (3) the Court's December 22, 2004 decision and order is
clarified to confirm the reinstatement of plaintiffs' seventh cause
of action for unjust enrichment."
Comment: Thus, the battle over the issue of fraudulent medical
provider licensing continues to turn in favor of no-fault insurers.
Now, insurers can withhold and challenge, based on fraudulent
incorporation, claims for treatment rendered prior to 4/04/02. Also,
payments already made for treatment rendered after 4/04/02 are
subject to unjust enrichment and fraud causes of action for
reimbursement. Let the games begin!