Fierce Litigation Battles Over Range of ‘Mallela’ Issues

In State Farm Mutual Auto. Ins. Co. v. Mallela,[1] the New York Court of Appeals held that an insurer may withhold payment for medical services provided by “fraudulently incorporated” enterprises to which patients had assigned their no fault claims. As indicated in the Insurance Fraud column published here in January,[2] that ruling (in which the authors’ firm represented the insurance carrier) has significantly helped efforts by insurance companies to crack down on fraudulent no fault claims – although not without continuing extensive, and fierce, litigation.

The January column explored a variety of issues that have been litigated since Mallela arising from the so-called “30 day rule.”[3] This column continues that discussion, exploring the impact of Mallela on a range of other pretrial and trial topics.

Discovery

Discovery issues frequently arise in disputes between insurers and health care providers where a Mallela claim or defense is raised because insurers need information that is generally within the sole knowledge of the health care providers or third parties to confirm the suspicions they may have about the bona fides of particular providers. The parties’ arguments on the availability of discovery in these circumstances, and the courts’ reasoning, are reflected in the decision by the Appellate Division, Second Department, in One Beacon Ins. Group v. Midland Medical Care, P.C.[4] 

In this case, the plaintiff insurance carrier commenced an action against numerous professional medical service corporations (PCs), management companies, individuals who owned them, and licensed health care professionals alleging that the PCs had been fraudulently incorporated in the names of licensed health care professionals although, in fact, the PCs were owned, operated, and controlled by unlicensed persons and their management companies in violation of applicable New York statutes and regulations. The insurers sought repayment of no fault claims already paid to the PCs, as well as a judgment declaring they were not obligated to pay outstanding claims.

The court held that the rule permitting insurance carriers to withhold reimbursement from fraudulently licensed medical corporations to which patients had assigned their claims allowed the carriers to look beyond the face of the licensing documents to identify material failures to abide by the governing laws. The court then granted the insurers’ cross-motion for the production of certain financial documents to allow them to determine if the medical providers were actually controlled by management companies owned by unlicensed individuals in violation of the N.Y. Business Corporations Law.

The Second Department affirmed the lower court’s ruling, finding that the insurers were not required to make a showing of “good cause” for such disclosure as the documents were “material and necessary”[5] in the prosecution of the action.

In another case, Corona Heights Medical, P.C. v. State Farm Mut. Auto. Ins. Co.,[6] the insurance company set forth detailed and specific reasons for believing that the plaintiff might be ineligible to recover no fault benefits as a fraudulently incorporated professional service corporation. The insurer sought the production of, among other things, the plaintiff’s certificate of incorporation, management documents, and medical licenses of the plaintiff’s shareholders. Citing to CPLR 3101(a), the court found that such discovery was “material and necessary” to the insurance carrier’s contention that the plaintiff was ineligible for reimbursement of no fault benefits. Accordingly, the Appellate Term ruled that the insurer was entitled to production of such documents.

Courts in other cases have reached similar conclusions in favor of allowing broad discovery. They have ruled, for example, that insurance carriers were entitled to depose a corporate health care provider’s owner,[7] obtain a health care provider’s corporate tax returns,[8] and discover a wide range of other information, such as a contract between the health care provider and a management company to the lease agreement pursuant to which the provider leased space.[9]

The issue of discovery to establish a Mallela violation arose recently in a rather unusual context:  in connection with malpractice allegations against a law firm by a number of health care providers.[10] In this dispute, the law firm essentially argued that it should be permitted to demonstrate that the providers had never been entitled to no fault payments because of their fraudulent corporate structure and that, as a result, there was no basis for a legal malpractice claim against the firm. Toward that end, the firm sought six categories of documents: general ledgers; corporate, federal and state tax returns; bank statements; 1099s and/or W2s; lease agreements; and all management agreements.

The Supreme Court, Nassau County, granted the firm’s request, finding that the information it sought was “material and necessary” because if it could prove that the defendants had been fraudulently incorporated (or that the medical services had been provided by independent contractors), the firm could have a defense to the claim of legal malpractice.

Summary Judgment

It probably should not be a surprise, given the fact intensive nature of a Mallela defense, and the willingness of courts to allow broad discovery, that summary judgment is difficult to obtain by health care providers facing a Mallela claim or defense. Thus, for example, where insurance carriers raise the defense of fraudulent incorporation, courts have denied motions for summary judgment by providers, despite the insurer’s failure to present an affidavit based upon personal knowledge, where the opposition papers set forth that facts essential to justify opposition may exist but cannot then be stated. Courts have reasoned that a provider’s motion for summary judgment is premature pending the completion of discovery.[11]

In another case, entitled AIU Ins. Co. v. Deajess Medical Imaging, P.C.,[12] a number of insurance companies, including an insurance company represented by the authors’ firm, sought a judgment declaring that the defendant health care providers were ineligible for no fault reimbursement because of their failure to comply with state licensing requirements. One of the defendants was a radiologist whose practice was devoted primarily to patients injured in automobile accidents; the radiologist practiced through a group of professional service corporations that had submitted a large number of no fault claims to the plaintiff insurance companies.

Following discovery, the radiologist moved for partial summary judgment, arguing, among other things, that a professional service corporation was ineligible for no fault reimbursement only if it was “fraudulently incorporated” at the time of its actual incorporation. The radiologist argued that an ineligible provider was limited to the situation where the professional corporation was formed by a licensed professional who intended to turn control of the corporation over to an unlicensed party, and asserted that his professional corporations had not been fraudulently incorporated because he had intended to retain control when he had formed the professional corporations. 

The court denied that motion, pointing out that a health care provider was ineligible for reimbursement if it failed to meet “any applicable” licensing requirement. It then declared that if the radiologist’s professional corporations were under the control of an unlicensed individual, the insurers were entitled to a declaration that they may deny them reimbursement, regardless of whether they had been “fraudulently incorporated” at the time of incorporation.

It should be noted that the court reached the opposite conclusion on the insurers’ argument that the providers lacked standing because they had assigned their no fault claims to finance companies pursuant to accounts receivable financing agreements. The providers contended that they had assigned only the proceeds of those claims, recognizing that medical providers are not permitted to assign no fault claims.

The court found that where no fault claims are financed, it was “particularly appropriate” for assignors to retain standing because assigness are not permitted to seek no fault arbitration. It then ruled that professional corporations are not ineligible for no fault reimbursement by reason of having assigned the claims pursuant to an accounts receivable financing agreement.

Preliminary Injunctions

It should be noted, moreover, that several courts have granted preliminary relief to insurers that prohibited health care providers from the further prosecution of pending lawsuits and arbitration proceedings brought by them against the insurers to recover no fault medical benefits.[13] For example, in Autoone Ins. Co. v. Manhattan Heights Medical, P.C.,[14] a number of insurance companies filed suit and moved for a preliminary injunction prohibiting defendant health care providers from the further prosecution of pending lawsuits and arbitration proceedings brought by them against the plaintiffs to recover no fault medical benefits. The insurers alleged that the defendants had defrauded the insurers by submitting bills for medical services rendered by corporations not truly owned by holders of medical licenses.

The court explained that to obtain a preliminary injunction, the plaintiffs had to show a likelihood of ultimate success on the merits, irreparable injury if provisional relief were withheld, and a weight of the equities in their favor. The court found that the plaintiffs carried this burden. It explained, first, that they established a likelihood of ultimate success on the merits by making a prima facie showing that they could prove their causes of action based on fraudulent incorporation. As the court observed, the plaintiffs’ verified complaint, the affidavit of an investigator, and deposition and examination transcripts from other cases showed prima facie that certain of the licensed defendants did not truly own and operate the provider defendants against whom injunctive relief was sought.

With respect to the requirement of irreparable injury, the court found that the plaintiff insurers had “adequately demonstrated” that equitable relief was a more efficient remedy than monetary damages. In the court’s view, the insurers had shown that the issuance of a preliminary injunction was necessary to prevent the repetitive litigation and arbitration of numerous no fault claims for reimbursement by medical providers where the insurers raised the same defense of fraudulent incorporation.

Finally, with respect to the weight of the equities, the court found that the issuance of a preliminary injunction would not unduly cause hardship to any of the defendants, but, to the contrary, “all parties will benefit from having the issue of fraudulent incorporation determined in one action.”

In another case, New York Central Mut. Ins. Co. v. McGee,[15] an insurance carrier sought a declaratory judgment that it was under no obligation “to pay any insurance claims submitted by” any of 13 named defendant professional corporations on Mallela grounds. The plaintiff insurer moved by Order to Show Cause for, among other relief, “an immediate stay of all lawsuits and arbitrations pending against [Plaintiff], filed by Defendants.”

The court denied the plaintiff’s motion for a stay, treating it as a motion for a preliminary injunction. Citing to Autoone Ins. (and to St. Paul Travelers),[16] the court noted that in actions similar to this case, i.e., seeking a declaration as to “fraudulent incorporation,” trial judges had granted the injunction based upon evidentiary showings by the respective plaintiffs.  Here, however, the court found that there “may be a question” as to whether, even as a pleading, the complaint sufficiently alleged “fraudulent incorporation;” it added that, even if it did, there was “no evidentiary support for injunctive relief.”

Trial

Finally, there are a host of issues that need to be resolved upon a full trial of a Mallela claim or defense, including the appropriate jury charge and evidentiary rulings that need to be made. To date, only one Mallela case has gone to trial before a jury, which resulted in a verdict for the defendant insurance companies on their defense that the plaintiff health care provider had been fraudulently incorporated within the meaning of Mallela. Richmond County Civil Court Judge Peter P. Sweeney subsequently rejected the plaintiff’s motion to set aside the verdict.[17] That decision is now on appeal, which may help to further clarify the trial issues raised in the case.  The authors’ firm represented an insurance carrier in the case.

Certainly, the practical importance of Mallela ­to both providers and no fault insurers makes it highly likely that all elements of a Mallela claim or defense, as well as almost every (if not every) pretrial and trial issue that can arise will be the subject of a full-fledged battle by the parties. It would not be surprising if some of these issues ultimately reach the Court of Appeals, which could help to resolve them and expedite Mallela litigation by setting forth clear standards and guidelines.

[1] 4 N.Y.3d 313 (2005). The authors’ firm represented the insurance carrier in this case. Evan H. Krinick argued the case in the Court of Appeals.

[2] Evan H. Krinick and Barry I. Levy, “Five Years Later, Issues From Mallela Continue to Be Litigated,” NYLJ, Jan. 8, 2010.

[3] Insurance Law §5106(a).

[4] 54 A.D.3d 738 (2d Dep’t 2008).

[5] See CPLR 3101(a).

[6] 21 Misc.3d 134(A) (Sup. Ct. App. Term 2008).

[7] See, e.g., Sharma Medical Services, P.C. v. Progressive Cas. Ins. Co., 24 Misc.3d 139(A) (Sup. Ct. App. Term, 2009).

[8] See, e.g., Midwood Acupuncture, P.C. v. State Farm Fire and Cas. Co., 21 Misc.3d 144(A) (Sup. Ct. App. Term. 2008). The personal tax returns of a health care provider’s owner may be another story. See, e.g., New Era Acupuncture, P.C. v. State Farm Mut. Auto. Ins. Co., 24 Misc.3d 134(A) (Sup. Ct. App. Term 2009).

[9] See, e.g., New Era Acupuncture, P.C. v. State Farm Mut. Auto. Ins. Co., supra.

[10] Baker, Sanders, Barshay, Grossman, Fass, Muhlstock & Neuwirth, LLC v. Comprehensive Mental Assessment & Med. Care, P.C., 2010 N.Y. Slip Op. 20007 (Sup. Ct. Nassau Co. Jan. 8, 2010).

[11] See, e.g., Midwood Acupuncture, P.C. v. State Farm Fire and Cas. Co., supra.

[12] No. 01 1935/05 (Sup. Ct. Nassau Co. Feb. 10, 2009). The authors’ firm represented the insurance company in this case.

[13] See, e.g., St. Paul Travelers Ins. Co. v. Nandi, 5 Misc. 3d 1145A (Sup. Ct. Queens Co. 2007).

[14] 24 Misc. 3d 1229A (Sup. Ct. Queens Co. 2009).

[15] No. 15550/08 (Sup. Ct. Kings Co., Nov. 25, 2009).

[16] St. Paul Travelers Ins. Co., supra.

[17] See, e.g., Matter of Carothers v. Insurance Companies, No. 002217/06 (N.Y. Civ. Ct. Richmond Co. Oct. 14, 2009) (denying plaintiff’s motion to set aside jury verdict), appeal pending. The authors’ firm represented an insurance carrier in this case.

This article is reprinted with permission from the March 5, 2010 issue of the New York Law Journal. Copyright ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.