In this no-fault benefits suit, defendant insurer moved to renew and reargue a prior order granting summary judgment to plaintiffs. In granting plaintiffs summary judgment, the court had held that they had established, prima facie, that their office manager had personally mailed the pertinent no-fault claim forms to defendant and that defendant had failed to deny plaintiffs claims timely. Defendant raised no objection to plaintiffs prima facie case.

In holding that defendant had failed to establish good cause for seeking discovery relating to its defenses and plaintiffs corporate structure, the court found that:

In light of plaintiffs counsels affirmation that plaintiff Devonshire was officially converted from a general partnership into a limited liability corporation, and notwithstanding the absence of its name from lists maintained on the websites of the New York State Education Departments Office of Professions and the New York Department of State Division of Corporations, defendant failed to demonstrate sufficiently that at the time the health care services were rendered, Devonshire was fraudulently incorporated;

Defendant failed to demonstrate sufficiently that the revocation of Allen Chamberlins license to practice medicine based on conduct he engaged in during 1998 constitutes good cause to believe that his facility, defendant Carnegie Hill Orthopedic Services (Carnegie Hill), was fraudulently incorporated in 2001 when the services in issue were rendered;

Because the revocation of Chamberlins license was based on his excessive and unnecessary treatments and fraudulent billing for services never provided, which are forms of provider fraud, and absent any indication that defendant had interposed a timely denial based on those defenses, plaintiffs are not precluded from seeking reimbursement;

Defendant failed to interpose in its answer any contention that an independent contractor had provided the services at issue and that Chamberlin had violated the prohibition against self-referral.

Defense: License Revocation Is Retroactive

Defendant argued that good cause existed for discovery relating to Carnegie Hills corporate structure, again relying solely on the 2005 administrative finding that Chamberlin engaged in fraudulent billing and fraudulent and excessive medical practices in 1998 as evidence that he engaged in those practices in 2001. As Chamberlins license was revoked based on conduct he engaged in during 1998, defendant argues, his license must be deemed revoked as of 2001, and if Chamberlin was not authorized to practice medicine in 2001, then Carnegie Hill had issued him shares in violation of Business Corporation Law (BCL) 1507(a) and was thus fraudulently incorporated in 2001. Defendant thus attempts to avoid preclusion of a defense based on provider fraud by characterizing it as one sounding in fraudulent incorporation.

Carnegie Hill Not Fraudulently Incorporated

Pursuant to 11 NYCRR 65-3.16 (a) (12), effective April 4, 2002, unlicensed or fraudulently licensed health care providers are ineligible to receive reimbursement for no-fault medical services provided by them. In affirming the dismissal of an insurers causes of action for fraud and unjust enrichment, the Court of Appeals held in State Farm Mut. Auto. Ins. Co. v Mallela that no such causes of action lie for payments made by insurers before April 4, 2002.

The court also observed that insurers may withhold payment for medical services provided by enterprises incorporated in violation of BCL 1507 and 1508 and Education Law 6507(4)(c). Pursuant to BCL 1507, a professional service corporation may issue shares only to those individuals who are authorized by law to practice the profession which the corporation is authorized to practice.

Here, it is undisputed that Chamberlin was authorized by law to practice medicine when Carnegie Hill was organized. And although Chamberlins license has now been revoked and he must now disassociate himself from Carnegie Hill, absent any indication that the revocation is retroactive or that any of the governing statutes, regulations, or case law requires that lawfully issued shares be invalidated retroactively, there is no basis for finding that Carnegie Hill was fraudulently incorporated when formed merely because Chamberlins license was revoked thereafter. (See CKC Chiro. v Republic Western Inc. Co., 5 Misc 3d 492 [Civ Ct, Kings County 2004] [provider may be reimbursed for services rendered when she was properly licensed or registered, even if she subsequently became unlicensed or unregistered]).

Medical Providers Prior Conduct Does Not Apply

I also observe that the conduct underlying the revocation of Chamberlins license relates to defenses which, if this action arose in the Second Department, are precluded if not timely denied. (Fair Price Med. Supply Corp. v Travelers Indemn. Co., 9 Misc 3d 76 [App Term, 2d Dept 2005] [defense based on fraudulent scheme to obtain no-fault benefits precluded due to untimely denial], among others).

Although no appellate court in the First Department has addressed the issue of whether a defense based on services billed but never rendered is subject to preclusion for untimely denial, and a judge in the Eastern District of New York disagrees with the Appellate Terms decision in Fair Price, that a defense based on services billed but not rendered is subject to preclusion (Allstate Ins. Co. v Valley Physical Med. & Rehab., P.C., 475 F Supp2d 213 [US Dist Ct, EDNY 2007]), here, defendant did not even allege that plaintiffs billed for services that were not rendered.

In any event, evidence that Chamberlin fraudulently or excessively billed or unnecessarily treated patients in 1998 is inadmissible to prove that he engaged in such conduct in 2001. If Carnegie Hill excessively billed for its services, or billed for services never rendered, defendant would have had the means of proving it without relying on inadmissible evidence of a disposition to engage in fraud. Rather, it seeks to rely solely on inadmissible evidence of prior misconduct.

Defense Claims on Devonshire Corporate Structure Deconstructed

Defendant claims that discovery relating to Devonshires corporate structure is warranted as it may reveal that Devonshire was not a properly-licensed entity when the services at issue were rendered. It relies, as it did in its opposition to plaintiffs motion for summary judgment, on the results of two website searches which do not list Devonshire as a professional medical corporation prior to 2006. Devonshire denies that defendants allegations against it, even if true, constitute a defense of fraudulent incorporation, and claims that a violation of the business corporation law is curable and that Devonshire was, and continues to be, a properly-licensed entity.

As Devonshire was not incorporated at the time the services at issue were rendered [Malella is] inapposite absent any requirement that an entity offering professional services be incorporated. I observe that BCL 1503(a) merely permits one or more individuals authorized by law to render the same professional service to organize a professional service corporation.

I also observe that only business and not-for-profit corporations, limited partnerships, limited liability companies and limited liability partnerships, as well as other miscellaneous businesses, are listed on the New York Department of States Division of Corporations website. General partnerships, sole proprietorships, and limited liability partnerships are expressly excluded from it. Consequently, as the absence of Devonshires name from the website list prior to 2006 reflects only that Devonshire was not incorporated as a business or not-for-profit corporation, limited partnership, limited liability company, or limited liability partnership before that time, it is immaterial.

I also find that defendants conclusory allegations that an independent contractor provided the services at issue and that Chamberlin violated the prohibition against self-referral form no basis for discovery, as defendant did not plead such defenses and did deny the claims based thereon.

Defendant has thus failed to demonstrate good cause to assert, nor has it even argued, that at the time that Devonshire rendered the services at issue, it was owned, operated, controlled or otherwise involved with unlicensed individuals or entities.

Mallela Inappropriately Applied Retroactively in Prior Case

In moving to renew, defendant relies on Allstate Ins. Co. v Belt Parkway Imaging, P.C., 33 AD3d 407 (1st Dept 2006), for the proposition that a providers prior fraudulent conduct may be used to prove that the provider conducted itself similarly on a subsequent occasion. Counsel maintains that the First Department held that a providers fraudulent conduct can be applied retroactively.

[The defendant] maintains that the decision constitutes a change in law which would change my prior determination, and that the regulation applies to the period during which plaintiffs rendered the services in issue. [The defendant] thus argues that as there is reason to believe, based on the subsequent revocation of Chamberlins license, that plaintiffs were fraudulently licensed or had engaged in fraudulent conduct when the services were rendered, plaintiffs may not be entitled to reimbursement for those services.

The First Department recently applied Mallela to claims for services rendered prior to April 4, 2002, rejecting a providers argument that it was entitled to be reimbursed for claims relating to services rendered prior to the effective date of the regulation, reasoning that [t]he very word reimbursement, used in the regulation, implies that the services had already been provided[and that] it would be illogical to read [Mallela] as applying only to claims submitted on or after April 4, 2002. (Belt Parkway, 33 AD3d 407).

Thus, unlicensed and fraudulently licensed health care providers and those that are incorporated in violation of BCL 1507 and 1508, and Education Law 6507(4)(c) are ineligible to be reimbursed even if their services were rendered prior to April 4, 2002.

While the court applied the regulation retroactively, it did not even address the issue raised by defendant, namely, whether a providers fraudulent conduct on one occasion may be utilized to prove that it engaged in fraudulent conduct on another occasion.

As notedevidence of prior misconduct is generally inadmissible to prove later alleged misconduct.

I thus find that defendant failed to establish that I overlooked or misapprehended any of its evidence or relevant decisions in granting plaintiffs summary judgment on their claims. For all of these reasons, I adhere to my prior decision and deny defendants motion to reargue.

Comment: Reasonable minds could come to the conclusion that a medical provider found guilty of fraudulent conduct as to other transactions is not entitled to the benefit of the doubt as to any subsequent case, but according to this decision, theres no reason to mistrust a medical provider previously convicted of fraud. Using that logic, convicted child molesters who have completed their jail sentences should be hired as nannies. Oh well.

Devonshire Surgical Facility and Carnegic Hall Orthopedic Services a/a/o Nawaalat Shaibu v. AIU Ins. Co. 2007 NY Slip Op 51034(U) (Civil Court Of The City Of New York, New York County)