Forman v Guardian Life Ins. Co. of Am.
Annotate this CaseDecided on September 25, 2009
Supreme Court, New York County
Berton Forman, M.D. and ROCKVILLE RECOVERY ASSOCIATES, LTD. d/b/a FORENSIC HEALTH CARE AUDITORS, INC., Plaintiffs,
against
guardian Life Insurance Company of America, Defendant.
603709/08
Eileen Bransten, J.
In this action for breach of contract or, in the alternative, for
quasi-contractual relief, defendant Guardian Life Insurance Company of America ("Guardian")
moves, pursuant to CPLR 3211 (a) (1) and (7), to dismiss the complaint.
BACKGROUND
Plaintiff Berton Forman, M.D. ("Dr. Forman"), is a licensed anesthesiologist and is the sole officer, director, and shareholder of plaintiff Rockville Recovery Associates, Ltd. ("Rockville") (collectively, "Plaintiffs"). Dr. Forman allegedly developed expertise in detecting over-billing by health-care providers. He is the owner of a United States patent for Health Care Fraud Software Systems, which identifies health-care billing fraud (see Kutner Aff., exhibit C). Rockville offers services in auditing claims and records of anesthesiologists. Guardian allegedly "is a health service corporation and one of the largest mutual life insurance companies in the United States" (Complaint, ¶ 7).
In 2002, on a trial basis, Guardian began to use Plaintiffs' services to audit claims that
health-care providers had submitted to it for reimbursement for anesthesia services (the Claims).
Plaintiffs identified specific instances of over-billing (Forman Aff., ¶ 12). Since 2003,
Guardian allegedly entered into a number of agreements with Plaintiffs, pursuant to which they
provided claim auditing services. Specifically, in August 2004, Rockville and Guardian entered
into a contractthe Master Recovery Services Agreement (the "2004
Contract")pursuant to which Rockville agreed to audit the Claims, contact physicians
who were determined to have over-billed Guardian, negotiate the return of the amounts owed,
and submit to Guardian reports detailing specific findings (2004 Contract, § II [A]). The
2004 Contract set forth that health-care providers that over-billed Guardian would send their
refund checks, payable to Guardian, directly to Rockville, and that Rockville was entitled to 25%
of the funds that it recovered (id., § IV [A], [B]). If physicians forwarded recovered
[*2]funds directly to Guardian, Guardian was then required to
pay Rockville its 25% fee (id., § IV [D]).In September 2005, Guardian and
Rockville executed a so-called Service Agreement (the "2005 Contract"), pursuant to which
Rockville was entitled to 25% of "amounts actually recovered by" it (2005 Contract, Exhibit A,
§ IV [A]). The 2005 Contract further provides that Rockville is
"entitled to its Fee if, and only if, through its sole efforts in auditing and
investigating a Claim and in contacting Health Care Provider, funds are received from such
Health Care Provider on a Recovery Claim. In no event will Vendor be entitled to a Fee where,
as a result of information supplied by Vendor to Guardian, Guardian makes a change in its
systems or claims processing resulting in savings to Guardian on claims on a go forward basis"
(id., § IV [E]). The 2005 Contract's duration was 12 months (2005
Contract, § 9.1). Plaintiffs allege that this and other contracts "continued to be in effect by
virtue of The Guardian's actions and conduct throughout the period of 2003 through 2008 ..."
(Complaint, ¶ 17).
Plaintiffs allege that during this period, they audited and investigated hundreds of thousands of the Claims, contacted suspect health-care providers, presented them with evidence of over-billing, discussed the so-called recovery claims, negotiated return of amounts owed, and submitted reports to Guardian detailing specific findings. Plaintiffs used their software, hardware, office, and employees to accomplish these tasks and took measures to protect patient personal information.
Plaintiffs allegedly uncovered significant over-billing, totaling tens of millions of dollars (Forman Aff.,¶¶ 18-19; Complaint, ¶¶ 22-23), especially on the part of a network of California hospitals, called California Pacific Hospitals, whose parent company is Sutter Health Care, Inc. ("Sutter Health") (Forman Aff., ¶ 22). Guardian allegedly discharged Plaintiffs' counsel and hired its own to pursue a claim, and commence an action, against Sutter Health. A complaint, alleging overcharging for anesthesia procedures for over four years, was drafted based on Plaintiffs' findings (id., ¶¶ 22-24, exhibit H). Plaintiffs allege, however, that Guardian failed to file the complaint or pursue its claim against Sutter Health.
Guardian allegedly failed to pursue claims against other health-care providers as well, which, as Rockville determined, improperly billed Guardian (Complaint, ¶ 1). Guardian allegedly entered into contracts with third parties, pursuant to which Guardian was precluded from pursuing recovery of fraudulently billed claims after Guardian reimbursed health-care providers (id.). Specifically, Guardian allegedly entered into an agreement with a nonparty Multiplan ("Multiplan"), pursuant to which Guardian "waived [its] right to conduct a post payment claims audits" (the "Multiplan Agreement") (Complaint, ¶ 64). As a result, Plaintiffs were allegedly precluded "from having the opportunity to recover contractually agreed upon fees for their assigned tasks" (id., ¶ 64). The Multiplan Agreement allegedly violates the California Insurance Frauds Prevention Act (id., ¶ 65). In November 2008, Guardian allegedly disclosed to Plaintiffs "that approximately 90% of all claims have some PPO component ... . [and] Guardian could not conduct post payment claims audits as to said claims" (id., ¶ 66).
According to the complaint, after Guardian acknowledged the existence of other contractual obligations that precluded it from conducting a post-payment audit, it offered to enter into a new agreement with Plaintiffs. In the new agreement, proposed in or about May 2008, Guardian allegedly attempted to lower Rockville's fee from 25% to 15% and to limit the scope of auditing to the claims of Sutter Health (id., ¶¶ 20, 67). [*3]
In their complaint, Plaintiffs plead five causes of action: (1) for breach of various agreements, pursuant to which they audited the Claims, uncovered specific instances of billing fraud, and reported them to Guardian, which, in turn, wrongfully failed to pursue them and damaged Plaintiffs' business by having them dedicate all of their time and resources to auditing Guardian's claims, and seeking compensatory and consequential damages, as well as costs and attorneys' fees, (2) for breach of implied covenant of good faith and fair dealing, based on Guardian's entering into agreements with third parties that precluded recovery of fraudulently billed claims, (3) for promissory and equitable estoppel, based on Guardian's allegedly unfulfilled promise to pursue fraudulently billed claims, on which Plaintiffs relied to their detriment, (4) for unjust enrichment, based on Guardian's allegedly changing its fraud prevention policies, with resulting savings to it, and (5) for quantum meruit for the value of their services.
Guardian moves to dismiss the complaint.
ANALYSIS
A motion to dismiss, pursuant to CPLR 3211 (a) (1), "may be appropriately granted only where the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law" (Goshen v Mutual Life Ins. Co. of NY, 98 NY2d 314, 326 [2002]).
On a motion to dismiss, pursuant to CPLR 3211 (a) (7), the court "assumes the truth of the complaint's material allegations and whatever can be reasonably inferred therefrom. ... The motion should be denied if from [the pleading's] four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law'" (McGill v Parker, 179 AD2d 98, 105 [1st Dept 1992]) (quoting Guggenheimer v Ginzburg, 43 NY2d 268, 275 [1977]). "In assessing a motion under CPLR 3211 (a) (7), ... the criterion is whether the proponent of the pleading has a cause of action, not whether he has stated one" (Leon v Martinez, 84 NY2d 83, 88 [1994] [citations omitted]).
Breach of Contract
A pleading alleging a breach of contract should specify "the terms of the agreement, the consideration, the performance by plaintiffs and the basis of the alleged breach of the agreement by defendant" (Furia v Furia, 116 AD2d 694, 695 [2d Dept 1986]; see also Sebro Packaging Corp. v S.T.S. Indus., 93 AD2d 785, 785 [1st Dept 1983]).
The parties do not dispute the validity of the 2004 Contract. It governed their relationship from about August 27, 2004, when it was executed, to September 1, 2005, when the 2005 Contract was executed (Tiffany Aff., exhibits 1, 3). The parties also agree that the 2005 Contract was the last one that they entered into, that it superseded the 2004 Contract, and that it expired pursuant to its own terms (Tiffany Aff., exhibit 1, the 2005 Contract, § 9.1). Specifically, the 2005 Contract provides that it "shall commence on [September 1, 2005] and shall continue in full force and effect thereafter for twelve (12) months, unless earlier terminated ... ." (id.). There is no allegation that the contract was prematurely terminated. Accordingly, it expired on or about September 1, 2006 (id.).
Plaintiffs allege (Complaint, ¶ 17), and Guardian argues, that since the conduct of the parties did not change after the expiration of the 2005 contract, its terms continue to be in effect.
If, after expiration of a contract, the parties continue to conduct business in the same manner as they did before, they impliedly assent to a new contract on the same terms as the prior one (see [*4]e.g. North Am. Hyperbaric Ctr. v City of New York, 198 AD2d 148, 149 [1st Dept 1993]; see also Curreri v Heritage Prop. Inv. Trust, Inc., 48 AD3d 505, 506-507 [2d Dept 2008]).
It is unclear whether the parties changed the conduct of their business following the expiration of the 2005 Contract. On the one hand, Plaintiffs allege that until the spring of 2008, Guardian continued to submit to them claims for auditing (see e.g. Forman Aff., ¶ 30). At the same time, it appears that, in 2008, Guardian attempted to lower Rockville's commission and narrow its auditing scope to only one entity (see e.g. id., ¶ 17; Complaint ¶ 20). For purposes of this motion, however, it is sufficiently alleged that between 2004 and 2008, the parties had valid contracts governing their relationship.
Plaintiffs allege, and both contracts provide, that Plaintiffs were entitled to 25% of all recoveries, in consideration for their services to Guardian (Complaint, ¶ 16; the 2004 Contract, § IV [A]; the 2005 Contract, exhibit A, § IV [A]). Plaintiffs further allege, in detail, that they fully performed under both contracts, including auditing the Claims and contacting health care providers whose claims they found to be questionable (see e.g. Complaint, ¶¶ 22-24, 30, 45-46, 48).
Plaintiffs allege that Guardian's refusal to pursue recovery in connection with the
fraudulently billed claims that they identified, constitutes a breach of the contracts (id.,
¶ 51). Guardian contends that it had no contractual obligation to pursue recovery on the
claims. However, Guardian did have an explicit contractual obligation not to prevent Plaintiffs'
performance under the contracts. Specifically, in the 2005 Contract, Guardian represented that it
"is under no obligation or restriction, nor will it assume any such obligation or
restriction that does or would in any way interfere or conflict with its obligation under this
Agreement; and [] there are no ... restrictions, agreements, or understandings that might conflict
or interfere with, limit, or be inconsistent with ... any of the provisions of this Agreement"
(2005 Contract, § 8.2). Plaintiffs allege that Guardian entered into contracts
with health-care providers, pursuant to which Guardian was precluded from conducting claim
auditing (see e.g. Complaint, ¶¶ 64, 66). Plaintiffs allege that Guardian did
not inform them about these contracts (id., ¶¶ 66, 68) and continued to
submit the Claims of these health care providers to them for auditing (id., ¶ 67).
Accordingly, Plaintiffs allege that Guardian made their pursuit of recovery on most of the Claims
impossible (id., ¶¶ 64, 66-67). This is a clear allegation of a breach of the
contracts by Guardian (see e.g. Greenspan v Amsterdam, 145 AD2d 535, 536 [2d Dept
1988]). Accordingly, this cause of action survives.
Breach of Implied Covenant of Good Faith and Fair Dealing
"In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance" (511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 153 [2002]). "This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract'" (id., quoting Dalton v Educational Testing Serv., 87 NY2d 384, 389 [1995]).
The fact that Guardian entered into particular contracts with health-care providers, pursuant to which it was precluded from conducting claim auditing after claims were paid, interfered with Plaintiffs' contractual right to recover fraudulently billed funds. Additionally, Plaintiffs allege that they, with Guardian's permission, hired an attorney to pursue recovery of over-billed funds from [*5]Sutter Health (Complaint, ¶ 25). Plaintiffs allege that Guardian would not permit their attorney to pursue recovery and replaced him with its own attorney (Forman Aff., ¶ 21; exhibit G). Plaintiffs allegedly worked closely with Guardian's attorney in drafting a complaint against Sutter Health, which was supposed to be filed in a California federal court (Complaint, ¶¶ 27-30). Guardian, however, did not permit its own counsel to file a complaint, based on an alleged contract that precluded Guardian from doing so (Forman Aff., ¶¶ 22-27; Kutner Aff., exhibit H; Complaint, ¶¶ 32-33, 64-70). Guardian, in its reply memorandum of law, alleges that it is currently pursuing a claim against Sutter Health. However, it does not provide any evidence to that effect. Accordingly, Plaintiffs have offered sufficient evidence to go forward on their assertion that Guardian's alleged conduct was in bad faith. At this stage, the cause of action does not appear to be duplicative of the breach of contract claim and the cause of action survives.
Promissory and Equitable Estoppel
Plaintiffs plead in the alternative a cause of action for promissory and equitable estoppel.
"The elements of a cause of action based upon promissory estoppel are a clear and unambiguous promise, reasonable and foreseeable reliance by the party to whom the promise is made, and an injury sustained in reliance on that promise" (Williams v Eason, 49 AD3d 866, 868 [2d Dept 2008]).
The elements of equitable estoppel are: (1) conduct amounting to false representation or concealment of material facts, (2) intention or expectation that the other party will act upon such conduct, and (3) actual or constructive knowledge of the true facts (see e.g. BWA Corp. v Alltrans Express U.S.A., 112 AD2d 850, 853 [1st Dept 1985]. "The party asserting estoppel must show with respect to himself: (1) lack of knowledge of the true facts; (2) reliance upon the conduct of the party estopped; and (3) a prejudicial change in his position'" (id., quoting Airco Alloys Div. v Niagara Mohawk Power Corp., 76 AD2d 68, 81-82 [4th Dept 1980]).
Since an issue of fact exists as to whether the parties' conduct resulted in their being bound by a new contract following the expiration of the 2005 Contract, Plaintiffs may plead this cause of action. As previously discussed, Plaintiffs sufficiently alleged that Guardian, by its words and actions, represented to Plaintiffs that they might, at the very least, be able to recover on over-billed claims. Plaintiffs further allege that Guardian made a "promise to pursue claims which Plaintiffs had identified as being fraudulent" (Complaint, ¶ 80). Guardian allegedly provided hundreds of thousands of the Claims for Plaintiffs to audit (id., ¶ 42) and sought Dr. Forman's advice (id., ¶ 81). Guardian clearly knew about the contracts with health-care providers, pursuant to which it was precluded from pursuing recovery on most of the Claims that it provided to Plaintiffs for auditing. It is sufficiently alleged that Guardian expected that Plaintiffs would rely on its representations and actions, which Plaintiffs reasonably did to their detriment (id., ¶¶ 42, 81, 83-84, 86). Accordingly, this cause of action survives as well (see e.g. Arfa v Zamir,55 AD3d 508, 509 [1st Dept 2008]).
Quantum Meruit and Unjust Enrichment
Plaintiffs' quasi-contractual causes of action also survive because it is unclear on this record whether a new contract was created following the expiration of the 2005 Contract. [*6]
"To state a cause of action for unjust enrichment, a plaintiff must allege that it conferred a benefit upon the defendant, and that the defendant will obtain such benefit without adequately compensating plaintiff therefor" (Nakamura v Fujii, 253 AD2d 387, 390 [1st Dept 1998]).
To state a cause of action for quantum meruit, "plaintiff must allege (1) the performance of services in good faith, (2) the acceptance of the services by the person to whom they are rendered, (3) an expectation of compensation therefor, and (4) the reasonable value of the services" (Soumayah v Minnelli, 41 AD3d 390, 391 [1st Dept 2007]).
Here, Plaintiffs allege that Guardian was unjustly enriched in that it allegedly changed its fraud prevention policies, as a result of their auditing services, which saved it millions of dollars (Complaint, ¶¶ 92, 49; Forman Aff., ¶ 48). Although this claim would be precluded by the terms of the 2005 Contract (see 2005 Contract, § IV [E]). In the event that the terms of the 2005 Contract are not deemed to have been carried forward after its expiration, recovery for unjust enrichment may be available.
Indisputably, Plaintiffs provided services to Guardian in good faith, and it accepted their services. Plaintiffs allege that they expected to be compensated for their services and estimate that their reasonable value is 25% "of the value of the fraudulent claims identified by" them (Complaint, ¶ 98). Accordingly, these two causes of action survive as well.
Dr. Forman
Guardian posits that Dr. Forman lacks standing to bring this action, because there was no contractual relationship between him and Guardian. Indeed, both the 2004 and 2005 Contracts are only between Rockville and Guardian. However, at this juncture, it is unclear whether the terms of the 2005 Contract remained in effect following its expiration. The complaint alleges that Dr. Forman developed expertise, and patented the software, in auditing claims of health-care providers (Complaint, ¶ 5; Forman Aff., ¶ 51). Clearly, Guardian engaged Plaintiffs' services on the basis of Dr. Forman's alleged expertise. The complaint alleges that Dr. Forman was personally involved in investigating specific claims (see e.g. id., ¶ 81), including the one against Sutter Health (Forman Aff., ¶ 45). Guardian allegedly asked him "not to bring his forensic intelligence to others in the health care industry" (id., ¶ 52 [a]), and he allegedly dedicated his own money and resources to audit and investigate the claims (id.; Forman Aff., ¶¶ 45, 51). Accordingly, at this stage of the proceedings, it does not appear that Dr. Forman lacks standing to assert any and all claims.
Accordingly, it is
ORDERED that the motion of defendant Guardian Life Insurance Company of America to
dismiss the complaint is denied; and it is further
ORDEREDthat defendant Guardian Life Insurance Company of America is directed
to serve an answer to the complaint within 10 days after service of a copy of this order with
notice of entry.
This constitutes the Decision and Order of the Court.
Dated: September 25, 2009
New York, NY
ENTER:
______________________________ [*7]
Hon. Eileen Bransten
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