Finally the attorney should be mindful that a non-party deposition of the layman in actual control of the professional corporation may prove extremely fruitful. There is little direct authority on this point, however an excellent authority is Universal Acupuncture Pain Services, P.C. v. State Farm Mut. Auto. Ins. Co. Not Reported in F.Supp.2d, 2002 WL 31309232 (S.D.N.Y.) In Universal, J. Sheindlin, dealing directly with a case alleging illegal corporate structure decided several corporate No-Fault discovery issues. In the course of his decision J. Sheindlin directed the continuation of deposition of a third-party enity, ordered the plaintiff and third-party defendant entities to tax documents and a witness who could testify about them, and ordered a non-party witness to produce federal income tax returns and forms, and check ledgers.
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Discovery of Tax Records
The disclosure of tax returns is generally disfavored due to their private and confidential nature.Walter Karl, Inc. v. Wood, 161 A.D.2d 704, 705, 555 N.Y.S.2d 840, 841 (2d Dep't 1990 ). "A party will not be required to produce income tax returns in a particular action unless the record presents a strong necessity for such disclosure in order for the party to prove its cause of action or defense." Niagara Falls Urban Renewal Agency v. Friedman, 55 A.D.2d 830, 830, 390 N.Y.S.2d 310, 311 (4th Dep't 1976 ). Not only must a showing of necessity be made, but the applicant for such an order must demonstrate that the information is not available from any other source. Leinoff v. 208 West 29th Street Associates, 243 A.D.2d 418, 419, 662 N.Y.S.2d 554, 556 (1st Dep't 1997), Gordon v. Grossman, 183 A.D.2d 669, 670, 584 N.Y.S.2d 54, 55 (1st Dep't 1992); V-Mart v. Gaetano, 204 A.D.2d 1038, 1039, 614 N.Y.S.2d 92, 92 (4th Dept.1994) Even if the alternative methods attempted by parties may seem burdensome compared to the release of the non-moving party's tax returns, no discovery is allowed "absent showing an inability to obtain information from other sources." Penn York Construction v. State of New York, 92 A.D.2d 1086, 1087, 462 N.Y.S.2d 82, 83 (3d Dep't 1983) Courts have also denied discovery of a plaintiff's tax returns if a party's intent and "tax motives [can] be obtained through deposition or trial testimony." BRS & W Associates v. W.R. Grace & Co., 156 A.D.2d 249, 249, 548 N.Y.S.2d 511, 512 (1st Dept.1989).
Courts have frequently recognized, however, that where a claim of fraud is central to a defense or action, special circumstances exist which may warrant production. Where, for example, an insurance fraud scheme has been alleged, and circumstances give riste to the inference of insurance fraud, courts have been willing to order the production of tax returns. Four Aces Jewelry Corp. v. Smith, 256 A.D.2d 42, 680 N.Y.S.2d 539, 540 (1st Dep't 1998 ),. (See also, David Leinoff, Inc. v. 208 W. 29th St. Assocs, 243 A.D.2d 418, 663 N.Y.S.2d 554, 556 (App. Div. 1st Dept. 1997). holding that personal income tax returns of sole shareholder of insured were discoverable "because they may contain vital information tending to prove or disprove the existence of an [insurance fraud]); Leon Sylvester, Inc. v. Aetna Cas. & Sur. Co., 189 A.D.2d 730, 592 N.Y.S.2d 741, 742 (1st Dep't 1993) (holding that where plaintiff, a closely held corporation, was suspected of insurance fraud, disclosure of personal income tax returns of its two principals was warranted).
For the insurer, there is one case which applies these considerations directly to a case involving allegations of illegal corporate structure. In Universal Acupuncture Pain Services, P.C. v. State Farm Mut. Auto. Ins. Co. Not Reported in F.Supp.2d, 2002 WL 31309232 (S.D.N.Y.) J. Sheindlin, dealing directly with a case alleging illegal corporate structure, handled a number of discovery issues relevant to the discussions outlined heretofore. Specifically on the question of tax returns he wrote; “There is no question that Nandi and Universal are required to file tax returns. Further, the returns are clearly relevant to State Farm's claim that Nandi was the true owner of Universal during the relevant time.”
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Discovery of Banking Records
Banking records, generally statements and copies of cancelled checks, tending to show where and in what amounts money was coming from, and where and in what amounts it was going are frequently obtained from banks by subpoena.
Counter-intuitively, bank records are not afforded the same protection as tax records. In United States v. Miller, 425 U.S. 435, 96 S.Ct. 1619, 48 L.E.2d 712 (1976) the Supreme Court ruled that information contained in bank records, deposit slips, cancelled checks and financial statements is neither confidential or private. The Court ruled that such documents are “negotiable instruments” used in commercial transactions, exempt from claims for privacy or confidentiality. Similarly, the Court ruled that deposit slips, canceled checks and signature cards contain information which is voluntarily conveyed by the customer to the banks and exposed to the bank’s employees in the ordinary course of business thereby stripping it of confidentiality or privacy protection.
Indeed it has been held that when a bank customer chooses to open and maintain an account at a financial institution, he inherently assumes the risk that the information contained in his financial records will be conveyed to a third party. This proposition has been extended so far so as to say that such records “are the business records of the banks and appellant can assert neither ownership nor possession." Shapiro v. Chase Manhattan Bank 53 A.D.2d 542 (1st Dept. 1976 ). [22]
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[1] "[a] professional service corporation may issue shares only to individuals who are authorized by law to practice in this state a profession which such corporation is authorized to practice" and prohibits shareholders of professional service corporations from transferring the voting power of their shares to any person who is not authorized by law to practice the profession that the professional service corporation is authorized to practice. N.Y.Bus.Corp.Law § 1507.
"[n]o individual may be a director or officer of a professional service corporation unless he is authorized by law to practice in this state a profession which such corporation is authorized to practice and is either a shareholder of such corporation or engaged in the practice of his profession in such corporation."N.Y.Bus.Corp.Law § 1508.
4. The department shall:c. (i) Issue a certificate of authority to a qualified professional service corporation being organized under section fifteen hundred three of the business corporation law or to a university faculty practice corporation being organized under section fourteen hundred twelve of the not-for-profit corporation law on payment of a fee of ninety dollars, (ii) require such corporations to file a certified copy of each certificate of incorporation and amendment thereto within thirty days after the filing of such certificate or amendment on payment of a fee of twenty dollars, (iii) require such corporations to file a triennial statement required by section fifteen hundred fourteen of the business corporation law on payment of a fee of one hundred five dollars. N.Y. Education Law § 6507(4)(c).[1]
[2] "[p]rofessionals are subject to stricter State supervision and licensing requirements, in order to maintain standards of responsibility for the protection of the public." (Manganaro v. Tully 88 A.D.2d 206, 209, 453 N.Y.S.2d 889 [3rd Dept 1982] ).
[3] The Superintendent also gave its arbitrators power to pursue this issue in all events, providing that they may unilaterally issue subpoenas and consider “any issue the arbitrator deems relevant”. 11 NYCRRR 65-4.4(e).
[4] Arbitrator Mellis’ decision was affirmed by a Master Arbitrator and ultimately affirmed in Supreme Court New York County in an Article 75 proceeding. In the Matter of JRWB Diagnostic Imaging P.C. a/a/o Nadian Peterson against American Transit Insurance Company, et al. No. 108679/04 (Sup. Ct. N.Y. Cty., J. Bransten, December 17th, 2004).
[5] Arbitrator Nathan Ritzer in the case of North Bronx Medical, P.C. a/a/o Paulette Cleckley and Allstate Insurance Company, NF2988, N.Y. No-Fault/Sum Arb. Rep. Vol 26, No. 3, 2000 stated: “Section 65.15(o)(1)(vi) of the No-Fault Regulation…does as a matter of law mandate that No-Fault arbitrators deny payment to an unlicensed provider-be it corporate or individual…Payment to only duly certified medical corporations is clearly inferred from the terminology of the entire section…To find otherwise would serve to condone and reward a practice that the legislature has condemned. It would permit non-professionals to organize a medical corporation, employ licensed physicians and profit by the sharing of fees. This obligation would often result in the lowering of the quality of medical care, overcharging, and the rendering of unnecessary services, which Judge Sifton himself recognized as possibilities in his decision.”
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[6] Subcutaneous Novocain injections billed as if they were epidural procedures is a common example, as is the practice of providing 1 to 15 minutes of psychotherapy but billing for 50. (See for example the New York State Attorney General press release at http://www.oag.state.ny.us/press/2003/dec/dec12a_03.html.
[7] By the Worker’s Compensation Fee Schedule ground rules Range of Motion testing is considered a integral aspect of a comprehensive evaluation but is frequently billed separately.
[8] See for example the New York State Insurance Department press release concerning the Queens District Attorney Office “Operation Crash Course” indictments. http://www.ins.state.ny.us/p0409221.htm
[9] See for example the Statement by August D'Aureli, Supervising Investigator, Insurance Frauds Bureau, New York State Insurance Department, before the Senate Standing Committee on Insurancehttp://www.ins.state.ny.us/spch0209.htm
[10] See for example the Queens District Attorney “Fraud Factory” indictment press release. http://www.queensda.org/Press%20Releases/2004%20Press%20Releases/04-April/04-15-2004.htm
[11] For a discussion of this prohibition against self referral in any setting, see Stand-Up MRI of the Bronx v. General Assur. Ins. --- N.Y.S.2d ----, 2005 WL 2779919 (N.Y.Dist.Ct.), 2005 N.Y. Slip Op. 25453
[12] The entities shut down by the Brooklyn DA’s “Wellcare” investigation were styled in this fashion. Besides the typical multidiscipline provider, the brothers running the scheme also owned the radiological technical company “Ocean Diagnostics” which was alleged to controlled the professional radiological entity.
[13] NYPD’s Operation Gateway (Operation) was a large scale, long-term investigation that involved a Brooklyn-based organization known as Parallel Management Group (Parallel). A detailed account of this investigation is provide by the Statement by August D'Aureli, Supervising Investigator, Insurance Frauds Bureau, New York State Insurance Department, before the Senate Standing Committee on Insurancehttp://www.ins.state.ny.us/spch0209.htm
[14] Necula v Glass 231 A.D.2d 457, 647 N.Y.S.2d 501, 1 AD 1996. [C]ontracts petitioner entered into with management companies, under which the companies were to provide petitioner with facilities, supplies, equipment and nonphysician staff necessary to operate his radiology practice, and petitioner was to pay the companies a fixed percentage of his receipts for billing services and fixed dollar amount for each procedure performed. This was illegal fee splitting under 8 NYCRR 29.1(b)(4) since petitioner’s payments to the companies were a percentage of or otherwise dependent upon his income or receipts.
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[15] abrogating Ohio v. Roberts, 448 U.S. 56, 100 S.Ct. 2531, 65 L.Ed.2d 597,
[16] See also In re M/B Child, 2005 WL 1388846, *3, 8 Misc.3d 1001(A), 1001(A), 2005 N.Y. Slip Op. 50884(U), 50884(U) (N.Y.Fam.Ct. Apr 13, 2005)
[17] See also, Fortune Medical v Allstate Ins. Co No. 3176/04 (Dist. Ct., Nassau County, April 6, 2005);Caprice Medial P.C. v Allstate Ins. Co. No. 045532/03 (N.Y. City Civ. Ct. May 26, 2005).
[18] Arbitrator Mellis made a strong link between fee splitting and illegal corporate structure, expressing a bright line rule; “where an unlicensed individual has more of an interest than the professional in the profitability and success of the medical practice, the arrangement is clearly illegal. In Hartman v. Bell,137 AD2d 585, 524 NYS2d 477 (2nd Dept., 1988), the Court found that an agreement to pay 40% of the gross income, or a minimum of $140,000 from the practice of medicine constituted fee-splitting, and denied recovery on that basis. In Sachs v. Saloshin, 138 AD2d 586, 526 NYS2d 168 (2nd Dept. 1988), the Court held that a dentist violated the Education Law by remitting 20% of his gross revenues to plaintiff in consideration for his use and occupancy of a fully-equipped dental facility, and also denied any recovery for that reason.”
[19] Arbitrator Mellis’ decision was affirmed by a Master Arbitrator and ultimately affirmed in Supreme Court New York County in an Article 75 proceeding. In the Matter of JRWB Diagnostic Imaging P.C. a/a/o Nadian Peterson against American Transit Insurance Company, et al. No. 108679/04 (Sup. Ct. N.Y. Cty., J. Bransten, December 17th, 2004).
[20] The Allen case makes clear that disclosure extends to all relevant information calculated to lead to relevant evidence, not just information that can be used as evidence in chief. See CPLR 3101, Siegel, Practice Commentaries McKinney's Cons. Laws of NY, Book 7B, CPLR c3101:7, at 18, citing West v. Aetna Casualty and Surety Co., 49 Misc.2d 28, 266 N.Y.S.2d 600 (1965) mod'd. 28 A.D.2d 745, 280 N.Y.S.2d 795 ( App. Div. 3d Dept 1967 ).
[21] Ocean Diagnostic vs. Utica 7 Misc.3d 133(A), 2005 WL 948998 (N.Y.Sup.App.Term), 2005 N.Y. Slip Op. 50611(U), GPM Chiropractice vs. State Farm 7 Misc.3d 138(A), 2005 WL 1356451 (N.Y.Sup.App.Term), 2005 N.Y. Slip Op. 50861(U).
[22] See also Dore v Allstate Indem. Co. 264 A.D.2d 804, 695 N.Y.S.2d 422 (App. Div. 2nd Dept. 1999) Defendant Insurance companies effort to discover bank records to prove fraud granted.
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