St. Paul Travelers Ins. Co. v Nandi

[*1] St. Paul Travelers Ins. Co. v Nandi 2007 NY Slip Op 51154(U) [15 Misc 3d 1145(A)] Decided on May 25, 2007 Supreme Court, Queens County Dollard, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on May 25, 2007
Supreme Court, Queens County

St. Paul Travelers Insurance Company,

against

Dipak Nandi, et al.



24107/06

James P. Dollard, J.

In this action for declaratory judgment and to recover damages for fraud and unjust enrichment, plaintiff St. Paul Travelers Insurance Company (Travelers) seeks an order (1) staying all no-fault collection lawsuits presently being prosecuted by defendant Dipak Nandi and co-defendants professional corporations against Travelers, pursuant to CPLR 2201; (2) granting a preliminary injunction enjoining the defendants from commencing future lawsuits against Travelers seeking reimbursement of no-fault benefits for acupuncture services pursuant to Insurance Law § 5101 et. seq. and the regulations promulgated thereunder, pending the determination of this action. Defendants cross-move in opposition and seek an order lifting any previously imposed stays affecting Civil Court lawsuits and dismissing the complaint pursuant to CPLR 3211(a)(4),(5) and (7).

Travelers issues automobile insurance policies and has either compensated, or refused to compensate the professional corporation defendants for acupuncture services rendered to plaintiff's policyholders, under the state's No-Fault Insurance laws and regulations.

Travelers alleges in its complaint is that defendants Triborough Medical Diagnostics PC, Sterling Medical Diagnostics PC, Millennium Diagnostics PC and Urban Medical Diagnostics PC are medical professional corporations that were fraudulently incorporated, were never licensed to provide acupuncture services and that all the services that were billed to it were performed by independent contractors. The complaint alleges that defendant Universal Acupuncture Pain Services PC (Universal) is an acupuncture professional corporation that billed Travelers for acupuncture services but was not entitled to payment because it was (a) fraudulently incorporated and (b) all or some of the services that were billed to Travelers were performed by independent contractors. It is alleged that defendants Optimum Medical Services PC and Statewide Medical Services PC are medical professional corporations that billed Travelers for acupuncture services but were not entitled to payment because (a) they were fraudulently incorporated, (b) were never licensed to provide acupuncture services and (c) all or some of the services billed to Travelers were performed by independent contractors.

Travelers alleges that defendants Delta Medical Acupuncture PC, Cosmopolitan Medical Acupuncture Services PC, Rose Medical Acupuncture PC, Continental Medical Acupuncture PC, [*2]Maple Medical Acupuncture PC are medical professional corporations that billed it for acupuncture services but were not entitled to payment because (a) they were never licensed to provide acupuncture services and (b) all or some of the services billed to Travelers were performed by independent contractors.

The complaint alleges that defendants Akita Medical Acupuncture PC, Bonsai Medical Acupuncture PC, Koi Medical Acupuncture PC, Maguro Medical Acupuncture PC and Miso Medical Acupuncture PC are medical professional corporations that billed Travelers for acupuncture services but were not entitled to payment because (a) they were not licensed to provide acupuncture services and (b) all or some of the services that were billed to Travelers were performed by independent contractors.

Travelers alleges that Triborough Healthcare Management Inc. is a management company which was created as a tool for Nandi to exercise control over some of the professional corporations and Universal, and to siphon off insurance proceeds that were paid to the professional corporations.

Defendant Dipak Nandi is a physician licensed to practice medicine in New York, and he was not certified as an acupuncturist until April 24, 2001. It is alleged that Nandi falsely represented to the Department of State and the Department Education that Dr. Robert Mallela, Dr. Swapnadip Lahiri and Dr. William Battaile would be the owners of Triborough; that Drs. Mallela and Lahiri would be the owners of Sterling, Millennium and Urban; that Dongxing Sun a licensed acupuncturist would be the owner of Universal; and that Dr. Hea Rean Lew would be the owner of Stateside; and that in fact all of these PCs were owned and controlled by Nandi. Dr. Mallela, in an affidavit submitted herein, that was provided in connection with a federal court action, admitted the following facts: (1) he had no true ownership interest in or control over Urban Medical, or any of the other three other PCs; (2) he never paid for the shares in Urban Medical or the other PCs he was given, (3) he was paid a fee to allow Nandi to use his name to obtain a certificate of authority from the DOE; (4) he did not manage or supervise the medical practice at Urban Medical or the other PCs, and (5) he never saw or treated patients for Urban Medical or the other PCs. Mr. Sun states in an affidavit submitted herein, which was prepared for another action, that he admittedly did not operate Universal or control the corporation in any way. He states that he "permitted Nandi to handle the affairs of' Universal and accepted his word for everything,'" and had " no idea what the business activity' of Universal was before his dispute erupted with Nandi over ownership and control."

In the first cause of action for declaratory judgment Travelers seek a declaration that Universal and all of the PCs are not entitled to collect No-Fault benefits for any unpaid charges for acupuncture services that they have submitted to Travelers. In the second cause of action for common law fraud, seeks to recover the sums it paid to the defendants as No-Fault benefits, which totals more than $5 million dollars, as well as punitive damages. In the third cause of action for unjust enrichment, Travelers seeks to recover the sums it paid to the defendants as No-Fault benefits, which totals more than $5 million dollars.

Travelers now seeks an order (1) staying all no-fault collection lawsuits presently being prosecuted by defendant Dipak Nandi and co-defendants professional corporations against Travelers, pursuant to CPLR 2201; and (2) granting a preliminary injunction enjoining the defendants from commencing future lawsuits against Travelers seeking reimbursement of no-fault benefits for acupuncture services pursuant to Insurance Law § 5101 et. seq. and the regulations promulgated thereunder, pending the determination of this action. Defendants cross-move in opposition and seek [*3]an order lifting any previously imposed stays affecting Civil Court lawsuits and dismissing the complaint pursuant to CPLR 3211(a)(4),(5) and (7).

New York permits licensed professionals to incorporate if they are the sole organizers, owners and operators of the corporation. (Business Corporation Law §§ 1503(a),(b), 1508.) To incorporate, the licensed individual(s) must obtain a "certificate ... issued by the [DOE] certifying that each of the proposed shareholders, directors and officers is authorized by law to practice a profession which the corporation is being organized to practice." (Id. at § 1503[b]). The DOE may not issue a certificate of authority to a professional service corporation that does not meet these qualifications. (Education Law § 6507[4][c][i]). Once the PC is formed, shareholders may not transfer their voting power to any person who is not a licensed professional in the field. (See BCL § 1507). New York law prohibits non-physicians from sharing ownership in medical service corporations. (Business Corporation Law §§ 1507, 1508, and Education Law § 6507[4][c].) In order to provide acupuncture services, a professional corporation must be owned, organized and operated by persons who are licensed or certified to practice acupuncture. (See generally New York Business Corporation Law § 1503.) A physician who is licensed to practice medicine in New York need only obtain a certificate in order to practice acupuncture. (See Education Law §§ 8211, 8216[3]; 8 NYCRR § 60.9)

Under New York's No-Fault system, the insured party is permitted to recover from insurers for "basic economic loss," including medical expenses, that arise out of the use or operation of an insured vehicle. (Insurance Law § 5102.) The New York State Department of Insurance has stated that medically necessary acupuncture services rendered by a licensed acupuncturist are covered expenses, and are eligible for reimbursement under Insurance Law § 5102 (a)(1). (See Ops Gen Counsel NY Ins Dept 04-01-01.) Insurance Law § 5106(a) and 11 NYCRR § 65-3.8 require insurers to pay or deny a claim within thirty days after the claimant supplies proof of the fact and amount of loss sustained. Under a line of cases commencing with Presbyterian Hospital in the City of New York v Maryland Casualty Company (90 NY2d 274, [1997]) and Cent. Gen. Hosp. v Chubb Group of Ins. Cos. (90 NY2d 195 [1997]), the Court of Appeals has held that the failure of an insurer to comply with the thirty-day rule will result in the insurer being precluded from raising any defense to a claim for payment, other than defenses premised on lack of coverage. Applying Presbyterian Hospital and Central General, the courts have held that claims of fraud based upon fraudulent incorporation or staged accidents are not subject to preclusion. (See Metro Med. Diagnostics, P.C. v Eagle Ins. Co., 293 AD2d 751, [2002]; Midborough Acupuncture P.C. v State Farm Ins. Co., 13 Misc 3d 58, [2006]; A.B. Med. Servs. PLLC v Utica Mut. Ins. Co., 11 Misc 3d 71, 73 [2006]; Montgomery Med. v State Farm Ins., 12 Misc 3d 1169A [2006]; SK Med. Services, P.C. v NY Cent. Mut. Fire Ins. Co., 11 Misc 3d 1086A [2006]).

The regulations governing No-Fault claims presently provide that "[a] provider of health care services is not eligible for reimbursement under section 5102(a)(1) of the Insurance Law if the provider fails to meet any applicable New York State or local licensing requirement necessary to perform such service in New York." (11 NYCRR § 65-3.16[a][12].) This regulation was initially promulgated to take effect on September 1, 2001, but implementation was stayed by court order until April 4, 2002. Relying on this regulation, the Court of Appeals in State Farm Mut. Auto Ins. Co. v Mallela (4 NY3d 313,[2005]) held that fraudulently incorporated medical corporations were not entitled to reimbursement of no-fault benefits. The Court noted that 11 NYCRR § 65-3.16(a)(12), [*4]specifically "excluded from the meaning of basic economic loss payments made to unlicensed or fraudulently licensed providers, thus rendering them ineligible for reimbursement (Mallela, 4 NY3d at 320). The Court determined that "no cause of action for fraud or unjust enrichment would lie for any payments made by the carriers before ... April 4, 2002." (Id. at 322.) In an action by a medical provider for reimbursement, the defense that a provider is fraudulently licensed is a nonwaivable defense. (See First Help Acupuncture P.C. v State Farm Ins. Co., 12 Misc 3d 129[A] [2006]; see also Allstate Ins. Co. v Belt Parkway Imaging, P.C., 33 AD3d 407 [2006]; see generally Metroscan Imaging P.C. v GEICO Ins. Co., 13 Misc 3d 35 [2006].)

At present there are at least 868 lawsuits pending in the Civil Court of the City of New York, primarily in Bronx and Queens County, in which individual medical providers, named as defendants herein, seek to recover from Travelers assigned first party No-Fault benefits. In addition, Travelers' has settled some 300 cases involving the named medical providers.

Defendants in their cross motion to dismiss the complaint assert that as there are hundreds of pending actions between the medical providers and Travelers, the within complaint should be dismissed. It is asserted that declaratory judgment is inapplicable and unnecessary, as Travelers has raised the defenses of fraudulent incorporation, failure to comply with licensing requirements and the performance of services by independent contractors in the lower courts, and may continue to do so, and that as any such determination in the lower court would be subject to the doctrine of res judicata and collateral estoppel. Defendants thus assert that these issues should be litigated in the lower court actions.

Travelers, in opposition, asserts that this court is the appropriate forum for the resolution of all common issues of law and fact between itself and the 17 separate professional corporations that are alleged to be owned and controlled by Dipak Nandi. It is asserted if Travelers prevails in this action, then it would have no obligation to pay any of the defendant professional corporations for claims presently pending in the Civil Court or District Court, and that a single determination in this court would resolve hundreds of current actions and foreclose future actions involving these professional corporations. Travelers asserts that declaratory judgment is not available in the lower courts, and that it is in the interest of judicial economy to have the issues determined here, rather than litigating hundreds of claims in the lower courts. In addition it is asserted that a single determination of the matter would avoid the possibility of inconsistent results in the lower courts.

CPLR 3001 provides: "The supreme court may render a declaratory judgment having the effect of a final judgment as to the rights and other legal relations of the parties to a justiciable controversy whether or not further relief is or could be claimed. If the court declines to render such a judgment it shall state its grounds." An action is justiciable when the controversy presented touches the legal relations of the parties having adverse interests from which harm is presently flowing or could flow in the future in the absence of a court determination of the parties' rights. The controversy must be capable of disposition and be presented in an adversarial context with a set of concrete facts. (Goodwill Adv. Co. v State Liq. Auth., 14 AD2d 658 [1961].) While a court may dismiss a declaratory judgment action in a proper exercise of discretion, the mere existence of other adequate remedies does not mandate dismissal. (See CPLR 3001; Lehigh Portland Cement Co. v New York State Dept. of Envtl. Conservation, 87 NY2d 136, 140 [1995]; Hudson Valley Oil Heat Council, Inc. v Town of Warwick, 7 AD3d 572, 574 [2004].) In addition, "[t]he fact that the court may be required to determine the rights of the parties upon the happening of a future event does not [*5]mean that the declaratory judgment will be merely advisory. In the typical case where the future event is an act contemplated by one of the parties, it is assumed that the parties will act in accordance with the law and thus the court's determination will have the immediate and practical effect of influencing their conduct..." (New York Pub. Interest Research Group v Carey, 42 NY2d 527, 530-531 [1977].)

The court finds that a justiciable controversy exists here between the parties. Defendants assertion that a fair determination cannot be had simply because there are 17 PC defendants, the issues are complex and varied, will require extensive discovery and perhaps multiple hearings, is rejected. Furthermore, the fact that the PCs have instituted actions against Travelers in the Civil Courts does not warrant the dismissal of this action. An action for declaratory judgment can only be prosecuted in the Supreme Court and a determination here will obviate the need for future litigation between the parties as to claims for unpaid acupuncture services. Contrary to defendants assertions, a determination of the declaratory judgment action would not result in a return to the Civil Courts for a "trial on the merits." Once a judgment and declaration is entered in the Supreme Court, whether in favor of the plaintiff or the defendant, there will be no need for the lower courts to conduct trials on the claims of fraudulent incorporation, licensure or the status of the acupuncturist. Furthermore, declaratory judgment will be dispositive of future claims by the defendant PCs for unpaid claims for acupuncture services against Traveler. It is in the interests of judicial economy to resolve the controversy in a single action, rather than require the parties and the lower courts to engage in piecemeal and repetitive litigation.

The court further notes that the issues raised by Travelers regarding fraudulent incorporation, lack of licenses, and the use of independent contractors, are also pertinent to the causes of action for fraud and unjust enrichment.

Defendants' assertion that the issues raised by Travelers pertaining to Universal's fraudulent incorporation were previously raised and decided by the Civil Court, Bronx County in an action entitled Universal Acupuncture Pain Services, P.C., a/a/o Jose Alpizar v State Farm Insurance Company (Index No. 58595/2003, [Rodriquez,J.]) is misplaced. The court therein found that State Farm had failed to submit evidence in admissible form to sustain its allegations and thus denied the cross motion to dismiss the complaint, or to compel Dr. Nandi's deposition. Contrary to defendants' assertions the court therein made no determination on the merits as to whether Universal was fraudulently incorporated. It is noted that Travelers was not a party to that action. However, in several Civil Court, Bronx County actions in which Travelers is a defendant, it has asserted that the medical provider is not entitled to payment and has been granted the right to conduct discovery, including the deposition of Dipak Nandi, pertaining to its defense of fraudulent incorporation. (See Statewide Medical Services, P.C., a/a/o Luis Rodriguez v Travelers Insurance Company,13 Misc 3d 134A [2006]; Maple Med. Acupuncture Servs., P.C. v Travelers Ins. Co., 13 Misc 3d 134A [2006]; Delta Med. Acupuncture Servs., P.C. v Travelers Ins. Co., 13 Misc 3d 134A, [2006]; Continental Med. Acupuncture Servs., P.C. v Travelers Ins. Co., 14 Misc 3d 131A [2007].)

Accepting the plaintiff's factual allegations as true and according them the benefit of every favorable inference, as required on a motion to dismiss for failure to state a cause of action (see Leon v Martinez, 84 NY2d 83, 87-88 [1994]), the court finds that plaintiff has stated a cause of action for fraud and unjust enrichment. The essential elements of such a cause of action are "representation [*6]of a material existing fact, falsity, scienter, deception and injury." (Channel Master Corp. v Aluminium Ltd. Sales Corp., 4 NY2d 403, 406-407 [1954].) Here, plaintiff alleges that, in violation of Section 1507 of the Business Corporation Law , Nandi used or bought the use of the names and medical licenses of others to form medical corporations so that he could own or control medical practices, profit from them, bill no-fault insurers for medical services and, in so doing, facilitate fraudulent billing practices. Plaintiff also alleges that Nandi used the name of a licensed acupuncturist in order to form an acupuncture practice which he owned and controlled at a time when he was not certified to practice acupuncture, and formed other PCs which were not licensed to perform acupuncture, and that acupuncture services were performed by independent contractors, and not employees of the PCs. It is alleged that the PC defendants regularly submitted no-fault claims to plaintiffs, falsely representing that the PC defendants were valid medical professional corporations, and that the services provided were provided by their employees. Plaintiff further alleges that it 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.To prevail on a claim of unjust enrichment, "a party must show that (1) the other party was enriched, (2) at that party's expense, and (3) that it is against equity and good conscience to permit [the other party] to retain what is sought to be recovered'." (Citibank, N.A. v Walker, 12 AD3d 480, 481, [2004], quoting Paramount Film Distrib. Corp. v State of New York, 30 NY2d 415, 421 [1972], cert denied 41 US 829 [1973].) "Unjust enrichment, however, does not require the performance of any wrongful act by the one enriched." (Ptachewich v Ptachewich, 96 AD2d 582, [1983].) "Innocent parties may frequently be unjustly enriched." (Id.; see Simonds v Simonds, 45 NY2d 233, 242 [1978]; Cruz v McAneney, 31 AD3d 54 [2006].) Contrary to defendants' assertions, plaintiffs are not required to allege the defendants engaged in fraudulent conduct or justifiably relied upon fraudulent statements in order to state a cause of action for unjust enrichment.

In Mallela the Court of Appeals held that no cause of action for fraud or unjust enrichment would lie for payments made to fraudulently incorporated providers before the revised regulations went into effect. By disallowing such claims for payments made before April 4, 2002, the Mallela Court recognized that the law as it existed prior to that date did not recognize claims to recoup payments from entities because they were fraudulently incorporated.

Under the common law of New York, compensation has been denied to unlicensed providers of services for which a regulatory license is required. (See Metroscan Imaging, P.C. v Geico Ins. Co., 13 Misc 3d 35, 38-39 [2006] [citing Spivak v Sachs, 16 NY2d 163 [1965]; Bendell v De Dominicis, 251 NY 305 [1929]; Mavco Realty Corp. v M. Slayton Real Estate, Inc., 12 AD3d 575, [2004]; Price v Close, 302 AD2d 374 [2003]; Gordon v Adenbaum, 171 AD2d 841 [1991].) However, the courts have distinguished between denying an unlicensed entity compensation and permitting the recovery of a fee after it has been paid. The lack of a license does not permit the recovery of a fee from the unlicensed provider after it has been paid. To the extent that Travelers seeks to recover payments that it made to the defendants on the grounds that the acupuncturists were independent contractors and not employees of the PCs, the court finds that no basis exists for carving out such an exception. Although the question certified to the court in Mallela was limited to fraudulent incorporation, prior to Mallela no private right of action existed which permitted an insurer to seek enforcement of the governing statutory provisions and regulations or to recover [*7]damages based upon the breach of the same. Therefore, Travelers' causes of action for fraud and unjust enrichment to recover no-fault payments, whether based on the fraudulent incorporation, failure to obtain a license to perform acupuncture, or the use of independent contractors to perform the acupuncture services is limited to payments made after April 2, 2004. Travelers may not seek to recover no-fault payments it made the defendants prior to that date. (See Allstate Ins. Co. v Belt Parkway Imaging P.C., 33 AD3d 407 [2006]; Metroscan Imaging, P.C. v Geico Ins. Co., supra).

Finally, contrary to defendants' assertions, the statute of limitations for the fraud and unjust enrichment causes of action have not expired. The statute of limitations for fraud is the greater of six years from when the cause of action accrued or two years from the time the plaintiff discovers the fraud. (CPLR 213[8].) The statute of limitations for unjust enrichment is six years. (CPLR 213[1].) Prior April 4, 2002 when the revised regulation became effective, an insurer did not have a right to recoup payments made to fraudulently incorporated or improperly licensed medical providers. Since these claims are limited to payments Travelers made on or after April 4, 2002, the commencement of the within action on November 2, 2006 is timely as to all of the defendants. Defendants' request to dismiss the claims against Mr. Nandi on the grounds of statute of limitations, therefore, is rejected.

Turning now to plaintiff's motion, CPLR 2201 provides that "[e]xcept where otherwise prescribed by law, the court in which an action is pending may grant a stay of proceedings in a proper case, upon such terms as may be just." Thus, while this court may issue a stay of an action pending before it in the Supreme Court, it lacks statutory authority to stay actions pending in the Civil Court or District Court. Plaintiff's motion for a "stay" of the pending lower court actions is in fact one for a preliminary injunction. (See Siegel, NY Prac § 255 [4th ed].) Plaintiff also seeks a preliminary injunction enjoining the defendants from commencing future lawsuits against it for reimbursement of no-fault benefits for acupuncture services pending the determination of this action. A preliminary injunction may issue only if the moving party can demonstrate (1) the likelihood of success on the merits; (2) irreparable injury if the preliminary injunction is not granted, and (3) a balancing of the equities in its favor. (Doe v Axelrod, 73 NY2d 748 [1988]; Preston Corp. v Fabrication Enters., 68 NY2d 397 [1986]; W.T. Grant Co. v Srogi, 52 NY2d 496 [1981].) "Preliminary injunctive relief is a drastic remedy that will not be granted unless a clear right to it is established under the law ... and the burden of showing an undisputed right rests upon the movant." (Zanghi v State of New York, 204 AD2d 313, 314 [1994].) Here, plaintiff has submitted depositions of Mr. Nandi, and other individuals who were involved in the formation of some of the defendant PCs, which were prepared for actions involving some of the same defendants. It is noted that some of the PCs and Nandi were defendants in the Mallela action. Plaintiff has also submitted affidavits, certificate of incorporation and other documentary evidence which supports its claim that at least some of the PCs were fraudulently incorporated or were not authorized to perform acupuncture at the time the PCs were incorporated. In addition, it is undisputed that Travelers made payments to the defendants after April 4, 2002, and it has also withheld payments to the PCs for acupuncture services. Plaintiff's evidence is sufficient to establish the likelihood of success on the merits of at least a portion of its claims. In addition, in view of the multiplicity of lawsuits and the possible inconsistent outcomes in the absence of an injunction, plaintiff has established the elements of irreparable injury and the balancing of the equities in its favor.

Accordingly, defendants' cross motion to dismiss the complaint is granted to the extent that [*8]plaintiff's causes of action to recover damages for fraud and unjust enrichment is limited to payments it made to the defendant on or after April 4, 2002. The request for punitive damages is dismissed. The remainder of defendant's cross motion is denied. Plaintiff's motion for a preliminary injunction enjoining all No-Fault collection actions for acupuncture services presently pending between the parties in the New York City Civil Courts and in the Nassau and Suffolk County District Courts, pending the determination of this action, is granted. That branch of plaintiff's motion which seeks a preliminary injunction enjoining the defendants from commencing future lawsuits against Travelers seeking reimbursement of no-fault benefits for acupuncture services pursuant to Insurance Law § 5101 et. seq. and the regulations promulgated thereunder, pending the determination of this action, is granted. Plaintiffs are directed to post a bond in an amount to be set forth in the order to be entered hereon. The parties are to submit affidavits to the court as to the amount of the bond, along with the proposed order.

Settle order.

J.S.C.