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The Rogak Report: 01 Mar 2006 ** No Fault - Fraud **

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  • Lawrence Rogak
    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.,
    Message 1 of 1 , Feb 28, 2006
      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 [2005] [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
      I."

      "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,
      Pineda-Kirwan, J.])."

      "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!

      Larry Rogak
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