New York Cent. Mut. Ins. v McGee

[*1] New York Cent. Mut. Ins. v McGee 2009 NY Slip Op 52385(U) [25 Misc 3d 1232(A)] Decided on November 25, 2009 Supreme Court, Kings County Battaglia, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 November 25, 2009
Supreme Court, Kings County

New York Central Mutual Insurance Company, Plaintiff,

against

John McGee, D.O., JOHN J. McGEE, D.O., FAAPMR, P.C., QUEENS-BROOKLYN MEDICAL REHABILITATION, P.C., ADVANCED MEDICAL, P.C., YELLOWSTONE MEDICAL REHABILITATION P.C., QUEENS-ROOSEVELT MEDICAL REHABILITATION, P.C., WEXFORD MEDICAL, P.C., QUEENS BROOKLYN JEWISH MEDICAL REHABILITATION, P.C., BEACH MEDICAL REHABILITATION, P.C., INTEGRATED MEDICAL REHABILITATION AND DIAGNOSTICS, P.C., TREMONT MEDICAL REHABILITATION, P.C., OSTIA MEDICAL, P.C., and WOODWARD MEDICAL REHABILITATION, P.C., Defendants.



15550/08



Plaintiff was represented by Jonathan Stein, Esq. of McDonnell & Adels, PLLC. Defendants were represented by Bruce Rosenberg, Esq. of Rosenberg Law, PC.

Jack M. Battaglia, J.

The Complaint of plaintiff New York Central Mutual Insurance Company seeks a declaratory judgment pursuant to CPLR 3001 that it "is under no obligation to pay any insurance claims submitted by" any of the 13 named defendants. The named defendants are John McGee, D.O., and 12 professional corporations, referred to collectively in the Complaint as the "PC Defendants", each of which is alleged to be a "professional medical testing and treatment corporation . . . owned by Dr. John McGee, a licensed medical doctor" (Complaint, ¶ ¶ 6-17.)

Specifically, Plaintiff seeks a declaration that it

"is not legally obligated to pay any claims, outstanding or otherwise, because of Defendants' wrongful conduct, which includes, but is not limited to, plaintiff's assertions that:

(a) the PC DEFENDANTS are not wholly owned, and/or controlled, and/or operated by licensed physicians, as required by New York State statues [sic], regulations, and judicial precedent;

(b) the PC DEFENDANTS submitted bills seeking payment of no-fault benefits for services that were not provided;

( c) the PC DEFENDANTS have failed to provide verification requested by the plaintiffs [sic]; and

(d) the PC DEFENDANTS have failed to attend EUOs as requested by the plaintiffs [sic]." (Complaint, ¶ 13.)

The Complaint does not indicate the total "outstanding" claims or bills, either by number or total amount. There is attached, however, an Exhibit A, that is described as a chart of bills submitted to Plaintiff in 2007 that were "subject to EUO requests," i.e., examination under oath, and perhaps other requests for bill verification, "totaling no less than $155,000 dollars." (Id., ¶ ¶ 70-71.) The Exhibit lists 195 bills submitted by four of the 12 named PC Defendants for services purportedly rendered to 13 insureds.

In an Answer and Affirmative Defenses & Counterclaims, Defendants allege 23 "Affirmative Defenses" and 10 "Counterclaims."

Plaintiff moved initially by Notice of Motion for an order, among other things, pursuant [*2]to CPLR 3211 (a) and (b), dismissing the Affirmative Defenses and Counterclaims. Before that motion was heard, Plaintiff 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 Order to Show Cause, which is dated July 22, 2009 and signed by Hon. Ellen M. Spodek, includes an interim "stay," specifically "that all no-fault lawsuits and arbitrations including, but not limited to, those set forth in Exhibit A', annexed hereto, filed by Defendants and pending against Plaintiff, are hereby stayed pending the hearing of this motion." This Exhibit lists 85 claims totaling $382,871.13, representing services purportedly provided to 38 insureds during the period 2005-2009 by seven of the PC Defendants, only three of which are providers named in the Exhibit A attached to the Complaint.

On the return date for the two motions, this Court refused to extend the "stay" contained in the Order to Show Cause, and the Court sua sponte raised the issue of severance, at least insofar as relief is sought against each of the 12 PC Defendants. (See CPLR 603.) "Because CPLR 603, unlike CPLR 602, does not use the words upon motion,' it is widely assumed that the court can order a severance or separate trial sua sponte." (Vincent C. Alexander, Practice Commentaries to CPLR 603 [McKinney's 2006]; see also Valery A. Berger, M.D. v Liberty Mut. Ins. Co., 10 Misc 3d 139 [A], 2005 NY Slip Op 52204 [U] [App Term, 9th & 10th Jud Dists 2005]; St. Vincent's Hosp. of Richmond v State Farm Mut. Auto. Ins. Co., 18 Misc 3d 1127 [A], 2007 NY Slip Op 52534 [U], * 3 [Sup Ct, Nassau County 2007].) The parties were requested to submit supplemental memoranda on the issue, which they did.

Generally, "[s]everance is inappropriate where . . . there are common factual and legal issues involved in the . . . causes of action, and the interests of judicial economy and consistency of verdicts will be served by having a single trial." (See Naylor v Knoll Farms of Suffolk County, Inc., 31 AD3d 726, 727 [2d Dept 2006]; see also Curreri v Heritage Prop. Invt. Trust, Inc., 48 AD3d 505, 507-08 [2d Dept 2008].) Appellate courts in the Second Department have had several occasions to apply these general standards to first-party no-fault claims of the type that are the subject of the instant action, although almost always on a defendant/insurer's motion to sever.

The Second Department has upheld severance of claims for first-party no-fault benefits where the claims were for services rendered to as few as five insureds. (See Mount Sinai Hosp. v Motor Veh. Acc. Indem. Corp., 291 AD2d 536, 536-37 [2d Dept 2002]; see also Sunshine Imaging Association/wny MRI v Government Employees Ins. Co., 2009 NY Slip Op 6984, * 1- * 2 [4th Dept Oct. 2, 2009] [severance upheld/14 insureds]; compare Hempstead Gen. Hosp., 134 AD2d 569, 569-70 [2d Dept 1987] [denial of severance upheld/29 "claims"].) The Second Department has required severance of no-fault claims for 47 insureds. (See Poole v Allstate Ins. Co., 20 AD3d 518, 519 [2d Dept 2006].) "[I]t was an improvident exercise of discretion to deny the motion to sever, since a single trial of all the claims would prove unwieldy and confuse the trier of fact." (Id.) [*3]

Appellate Term for the Second and Eleventh Judicial Districts has both upheld and required severance of no-fault claims for as few as three insureds. (See Astoria Quality Med. Supply v State Farm Mut. Auto. Ins. Co., 20 Misc 3d 144, 144 [App Term, 2d & 11th Jud Dists 2008] [severance upheld]; Metro Med. Diagnostics, P.C. v Motor Veh. Acc. Indem. Corp., 6 Misc 3d 136 [A], 2005 NY Slip Op 50238 [U], * 1 [App Term, 2d & 11th Jud Dists 2005] [severance required]; see also Ladim DME, Inc. v GEICO Gen. Ins. Co., 15 Misc 3d 139 [A], 2007 NY Slip Op 50997 [U], * 1- * 2 [App Term, 2d & 11th Jud Dists 2007] [severance required/5 insureds]; Valery A. Berger, M.D. v Liberty Mut. Ins. Co., 2005 NY Slip Op 52204 [U], * 1- * 2 [severance upheld/14 insureds].) "In light of the recent trend in cases involving the severance of no-fault causes of action under similar circumstances, . . . the particular facts herein relating to each claim are likely to raise few, if any, common issues of law or fact, even if the . . . insurance policies are identical." (Metro Med. Diagnostics, P.C. v Motor Veh. Acc. Indem. Corp., 2005 NY Slip Op 50238 [U], at *1.)

In Civil Court of the City of New York, which has seen most of the first-party no-fault actions that have buried the trial courts of limited jurisdiction, a directive was issued by the Administrative Judge, Hon. Fern A. Fisher, directing the clerk "to reject any no-fault summons and complaint filed in the court which contains either multiple plaintiffs or multiple assigned claims unless an affirmation is filed with the papers signed by the attorney for the plaintiff, . . . outlining the reason for the joinder"; and directing Civil Court judges "to review the reasons for joinder of multiple plaintiffs or assigned claims whenever a case appears before them." (Directives and Procedures, Severance of No-fault Plaintiffs or Assigned Claims, August 3, 2006.)

Here, again, the list of pending actions and arbitrations names 38 insureds who assigned 85 claims for first-party no-fault benefits to one or more of seven PC Defendants. This Court has little doubt that, were those 85 claims the subject of a single action by the providers against Plaintiff for payment, severance would be required. The only difference here is that Plaintiff is seeking a declaratory judgment that payment need not be made, asserting defenses to payment that it could assert, and undoubtedly has asserted, in the pending proceedings. To the extent, therefore, that Plaintiff's contentions here as grounds for relief require the same type of individualized factual determinations, as would be required in a provider's action for payment, severance would be required.

Three of the four grounds for relief asserted by Plaintiff - - that the PC Defendants "submitted bills seeking payment of no-fault benefits for services that were not provided," "failed to provide verification requested," and "failed to attend EUOs as requested" - - are defenses routinely asserted in provider actions for payment, and, most importantly, will require determination in accordance with the facts and attendant legal consequences particular to each insured, if not each bill for services. At the least, therefore, unless these grounds for relief are discontinued in this action, there must be severance. Because there are multiple providers as well as multiple insureds, no resulting action should include more than five insureds. [*4]

The remaining ground for relief asserted by Plaintiff, i.e., that the PC Defendants "are not wholly owned, and/or controlled, and/or operated by licensed physicians, as required by New York State statues [sic], regulations, and judicial precedent," is different, because the focus is on the provider itself, and not the insured or any claim for benefits. As to this ground as to each PC Defendant, therefore, severance might not be required, or even warranted, notwithstanding that the number of insureds would require or justify severance as to other grounds for non-payment. (See Midwood Acupuncture, P.C. v State Farm Mut. Auto. Ins. Co., 14 Misc 3d 131 [A], 2007 NY Slip Op 50052 [U], * 2 [App Term, 2d & 11th Jud Dists 2007].)

This ground, which has come to be known as the "fraudulent incorporation" defense (see id.), is founded on the Court of Appeals opinion in State Farm Mutual Automobile Insurance Co. v Mallela (4 NY3d 313 [2005].) Answering a certified question from the Second Circuit, the Court held that "insurance carriers may withhold payment for medical services provided by fraudulently incorporated enterprises to which patients have assigned their claims." (Id. at 319.) The Court relied on a regulation of the Superintendent of Insurance stating, "A provider of health care services is not eligible for reimbursement [of first-party no-fault benefits] if the provider fails to meet any applicable New York State licensing requirement." (See id. at 320-22; 11 NYCRR § 65-3.16 [a] [12].) The Business Corporation Law "prohibit[s] non-physicians from sharing ownership in medical service corporations." (See id. at 320 [footnote omitted]; Business Corporation Law § 1507.)

"State law mandates that professional service corporations be owned and controlled by licensed professionals . . . , and that licensed professionals render the services provided by such corporations." (One Beacon Ins. Group, LLC v Midland Med. Care, P.C., 54 AD3d 738, 740 [2d Dept 2008 [citing Business Corporation Law § § 1503 [a], 1504 [a], 1507, 1508].) In an action by insurers of automobile insurance policies alleging that professional medical service corporations "were fraudulently incorporated in the names of licensed healthcare professionals while, in fact, the PCs were owned, operated, and controlled by unlicensed persons and their management companies in violation of applicable statutes and regulations" (see id. at 739], the plaintiffs successfully opposed a motion for summary judgment by a licensed physician and one of the PCs by submitting "sufficient evidentiary proof to raise an issue of fact as to whether [the PC] was actually controlled by a management company owned by unlicensed individuals in violation of the Business Corporation Law" (see id. at 740 [emphasis added].) The physician and PC had made a prima facie showing on their motion with evidence that the physician was the sole shareholder of the PC, "performed or oversaw all medical services provided by" the PC, and was the sole signatory on the PC's bank account. (See id.)

No appellate court has given further meaning to the "actual control" requirement, or has otherwise elaborated on the concept of "fraudulent incorporation," in the four-plus years since Mallela was decided. Which is not to say that the courts have not been dealing with issues raised by the decision; as of this writing, Mallela has been cited in approximately 100 published opinions of New York trial and appellate courts, the latter mostly from Appellate Term for the Second and Eleventh Judicial Districts, and in 13 published decisions of federal courts in the [*5]Southern and Eastern Districts. An appellate opinion might recite that an insurer "set forth detailed and specific reasons for believing that plaintiff may be ineligible to recover no-fault benefits as a fraudulently incorporated professional service corporation" (see Sharma Med. Servs., P.C. v Progressive Cas. Ins. Co., 24 Misc 3d 139 [A], 2009 NY Slip Op 51591 [U] [App Term, 2d & 11th Jud Dists 2009]), but not repeat or summarize those reasons for the benefit of trial judges.

Trial judges, nonetheless, struggle with fundamental questions raised by Mallela, such as whether a finding of "fraudulent incorporation" requires a finding of "fraud." (See Andrew Carothers, M.D., P.C. v Bruno, Gerbino & Soriano, LLP, 2009 NY Slip Op 29413, * 6- * 8 [Civ Ct, Richmond County 2009] [Sweeney, J.].) Several published trial court opinions provide insight into the court's identification and assessment of various factors, such as the ultimate disposition of the profits of the professional practice, without offering, probably wisely, any standard or threshold, quantitative or qualitative, of "actual control." (See id. at * 1- * 6; AIU Ins. Co. v Deajess Med. Imaging, P.C., 2009 NY Slip Op 29079, * 3- * 8 [Sup Ct, Nassau County 2009] [Bucaria, J.]; Lenox Neurophychiatry Med., P.C. v State Farm Ins. Co., 22 Misc 3d 1118 [A], 2009 NY Slip Op 50178 [U], * 2- * 4 [Civ Ct, Richmond County 2009] [Levine, J.]; Utica Natl. Ins. Group v Luban, 22 Misc 3d 1107 [A], 2008 NY Slip Op 52610 [U], * 3- * 4 [Sup Ct, Queens County 2008] [Kitzes, J.]; A.B. Med. Servs. PLLC v Travelers Ind. Co., 20 Misc 3d 509, 510-14 [Dist Ct, Nassau County 2008] [Goodsell, J.]; Montgomery Med., P.C. v State Farm Ins. Co., 12 Misc 3d 1169 [A], 2006 NY Slip Op 51116 [U], * 4- * 5 [Dist Ct, Nassau County 2006] [Marber, J.]; Devonshire Surgical Facility v GEICO, 14 Misc 3d 1208 [A], 2006 NY Slip Op 52450 [U], * 2- * 3 [Civ Ct, NY County 2006] [Jaffe, J.]; see also Matter of Total MRI Mgt. LLC v Greenfield Imaging Assoc. Imaging, LLP, 11 Misc 3d 1062 [A], 2006 NY Slip Op 50367 [U], * 7 [Sup Ct, Nassau County 2006] [Austin, J.].)

Without a specific factual context, this Court will not offer more. It is clear from a review of the published opinions, particularly the only one that follows a trial on the issue ( see Andrew Carothers, M.D., P.C. v Bruno, Gerbino & Soriano, LLP, 2009 NY Slip Op 29413), that the inquiry is highly fact-intensive. Here, except for the respective places of business and respective dates of incorporation of the PC Defendants, the Complaint is absent of individualized or particularized allegations; rather, the Complaint speaks conclusorily throughout of the "PC Defendants." Of substantial importance for the present motions, except for the allegations that each of the PC Defendants is "owned by Dr. John McGee, a licensed medical doctor" (Complaint, ¶ 6-17), there is virtually nothing to connect any one of the PC Defendants to any one or more of the others. Each of the practices operate at a different location, and except for two of the PCs that were incorporated on May 11, 1998, the other 10 were incorporated at different dates from March 1, 2001 through May 2, 2007. (Id.) There is nothing to suggest, moreover, that Dr. McGee's relationship with each of the PC Defendants is the same, other than that he "owns" each of them.

In an action instituted by over 20 insurance companies against "three groups of defendants each comprised of some licensed defendants, provider defendants, and management [*6]defendants," in which the insurers seek, in part, "a declaratory judgment concerning fraudulent incorporation," Supreme Court granted a defense motion to the extent of severing "the causes of action against each group of defendants." (See Autoone Ins. Co. v Manhattan Hgts. Med., P.C., 24 Misc 3d 1228 [A], 2009 NY Slip Op 51662 [U], * 7- * 8 [Sup Ct, Queens County 2009] [Markey, J.].) The court determined that "each group of defendants operated separately from other groups , . . . [that] the plaintiffs did not demonstrate that there is a logical connection between the activities of each," and that "combining the multitude of claims by the numerous plaintiffs against three groups of defendants is likely to cause juror confusion." (See id. at * 8.)

Here, again, there is nothing to link any one of the PC Defendants to any one or more of the others, except for the common ownership by Dr. McGee, which in and of itself does not establish "fraudulent incorporation" (see Great Wall Acupuncture v State Farm Mut. Auto. Ins. Co., 20 Misc 3d 136 [A], 2008 NY Slip Op 51529 [U] [App Term, 2d & 11th Jud Dists 2008] [plaintiff's owner was sole shareholder of not less than 20 professional service corporations].) The potential for juror confusion remains a factor in a declaratory judgment action (see State Farm Mut. Auto. Ins. Co., 25 AD3d 777, 778-779 [2d Dept 2006].) In the absence of evidence that Dr. McGee's relationship with two or more of the PC Defendants is the same, there is no possibility of inconsistent verdicts. There should be at least sufficient factual allegations to meet the requirement for permissive joinder that the claims for relief "aris[e] out of the same transaction, occurrence, or series of transactions or occurrences" (see CPLR 1002 [a].)

Indeed, here, there is not sufficient information available for the Court to determine whether the action may continue against more than one of the PC Defendants in a single action. For the present, the Court will allow the action to proceed under this index number against Dr. McGee and three of the PC Defendants, of Plaintiff's choosing, provided that an amended complaint contain sufficient allegations to permit joinder. If, moreover, in addition to "fraudulent incorporation," Plaintiff seeks relief on any of the other grounds alleged in the Complaint, the separate action(s) may seek that relief with respect to the claims made by no more than five insureds.

As to Plaintiff's motion for a "stay," it must be treated as a motion for preliminary injunction. (See St. Paul Travelers Ins. Co. v Nandi, 15 Misc 3d 1145 [A], 2007 NY Slip Op 51154 [U], * 7 [Sup Ct, Queens County 2007].) "The party seeking a preliminary injunction must demonstrate a probability of success on the merits, danger of irreparable injury in the absence of an injunction and a balance of equities in its favor." (Nobu Next Door, LLC v Fine Arts Hous., Inc., 4 NY3d 839, 840 [2005].) In actions similar to this one, i.e., seeking a declaration as to "fraudulent incorporation," trial judges have granted the injunction based upon evidentiary showings by the respective plaintiffs. (See Autoone Ins. Co. v Manhattan Hgts. Med., P.C., 2009 NY Slip Op 51663 [U], at * 3); St. Paul Travelers Ins. Co. v Nandi, 2007 NY Slip Op 51154 [U], at * 7.)

Here, there may be a question as to whether, even as a pleading, the Complaint sufficiently alleges "fraudulent incorporation" (see Autoone Ins. Co. v Manhattan Hgts. Med., [*7]P.C., 2009 NY Slip Op 51662 [U], at * 4; CPLR 3013; CPLR 3016 [b]; CPLR 3211 [a] [7]); and, even if it does, there is no evidentiary support for injunctive relief.

The Court sua sponte orders severance of the causes of action alleged in the Complaint; within sixty (60) days from the date of this Decision and Order, Plaintiff shall serve an amended complaint that complies with this Decision and Order, particularly as to number of defendants and insureds.

Plaintiff's motions are denied, with leave to renew after joinder of issue on an amended complaint, and otherwise in accordance with this Decision and Order.

November 25, 2009___________________

Jack M. Battaglia

Justice, Supreme Court