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 Rabiners 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.

Previous Decisions

In a prior decision, this judge dismissed the complaint against defendants Parkway Magnetic Resonance Imaging, Inc., Metro-scan 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]), which 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. Judge Sifton granted plaintiff leave to amend its complaint to state valid claims describing actionable frauds, but subsequently dismissed the amended complaint with prejudice. I followed the reasoning of Judge Sifton in Mallela I when I dismissed plaintiffs claims for fraud and unjust enrichment in Prior Decision I.

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).

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 regulations effective date of April 4, 2002. However, because State Farms 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.

Decision Favors Insurers

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 regulations effective date (April 4, 2002).

The court then determined, 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 courts 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 Courts 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!

Allstate Ins. Co. v. Belt Parkway Imaging P.C., NYLJ 2/28/06 (Supreme Court, New York County) (MOSKOWITZ, j)