Proving the unlawful corporate structure of a professional corporation

PROVING THE UNLAWFUL CORPORATE STRUCTURE OF A PROFESSIONAL CORPORATION 

A principal cause of this “concededly rampant abuse” (Medical Society of the State of New York v. Serio, 100 N.Y.2d 854 [2003]) was the proliferation of layman controlled professional corporations that flouted the prohibitions  against  laymen ownership and control of professional corporations found in  N.Y. Business Corporation Law' §§ 1507, 1508 and N.Y. Education Law § 6507(4)(c).[1][2] These entities, passing facially as legitimately licensed professional corporations, were known derisively as “Doc-in-the-box” operations.

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LEGAL AND LEGISLATIVE HISTORY

In 1973, the Legislature enacted the Comprehensive Automobile Insurance Reparations Act (see L. 1973, ch. 13), which supplanted common-law tort actions for most victims of automobile accidents with a system of no-fault insurance. Under the no-fault system, payments of benefits "shall be made as the loss is incurred" (Insurance Law § 5106[a] ). The primary aims of this new system were to ensure prompt compensation for losses incurred by accident victims without regard to fault or negligence, to reduce the burden on the courts and to provide substantial premium savings to New York motorists (see Governor's Mem. approving L. 1973, ch. 13, 1973 McKinney's Session Laws of N.Y., at 2335).

Between 1992 and 2001, reports of suspected automobile insurance fraud increased by 275%, the bulk of the increase occurring in no-fault insurance fraud. Reports of no-fault fraud rose from 489 cases in 1992 to 9,191 in 2000, a rise of more than 1700%. In 1999, the Superintendent established a No-Fault Unit within the Frauds Bureau to focus specifically on no-fault fraud and abuse. By one estimate, the combined effect of no-fault insurance fraud has been an increase of over $100 per year in annual insurance premium costs for the average New York motorist.

A principal cause of this “concededly rampant abuse” (Medical Society of the State of New York v. Serio, 100 N.Y.2d 854 [2003]) was the proliferation of layman controlled  professional corporations that flouted the prohibitions  against  laymen ownership and control of professional corporations found in  N.Y. Business Corporation Law' §§ 1507, 1508 and N.Y. Education Law § 6507(4)(c).[1][2]

These entities, passing facially as legitimately licensed professional corporations, were known derisively as “Doc-in-the-box” operations. The professionals whose names appeared on the corporate licenses were in truth, at best, nothing more than salaried employees. These schemes enabled unscrupulous laymen to reap enormous profits from the operation of “Medical Mills” which “treated” patients pursuant to predetermined scripts, without regard to their medical condition, and which churned out blizzards of bills for unnecessary treatments, goods and services.

This second promulgation by the Superintendent in turn gave rise to Medical Society II. (Medical Society of the State of New York v. Serio, 100 N.Y.2d 854 (2003)) Therein the Court of Appealsunanimously held that Regulation 68, although manifestly altering the way claims are processed, was well within the lawful authority of the Superintendent of Insurance to issue and affirmed the retroactive implementation of these regulations to April of 2002.

These new Regulations, dealing directly with the problem of laymen controlled professional corporations provided  at 11 NYCRR § 65- 3.16(a)(12). 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....", a reference of course to to N.Y. Business Corporation Law' §§ 1507, 1508 and N.Y. Education Law § 6507(4)(c).  [3]

During the course of these events, while the old regulations were still in control, a sweeping claim by State Farm that numerous entities ostensibly owned by Mallela were in fact fraudulently owned and operated laymen entities was dismissed by J. Sifton in Federal Court. State Farm Mutual Automobile Insurance Company v. Mallela, 175 F. Supp2d 401 (EDNY 2001) ). As it proved this case would not rest and eventually provided the Court of Appeals of the State of New York the platform necessary to put the issue to rest.

Following the re-promulgation of the new regulations a second Mallela case was commenced,. (State Farm Mutual Automobile Insurance Company v. Mallela, (Not Reported in F.Supp.2d, 2002 WL 31946762 (E.D.N.Y.) (Mallela II)).

 Even though the new regulations now clearly provided at 11 NYCRR § 65- 3.16(a)(12) 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....", Judge Sifton still declined to alter his previous ruling significantly. He noted "I am reluctant to undermine the legislative goal of speedy payment in order to permit insurers such as plaintiff to avoid paying licensed medical service providers for medically necessary services provided to insured individuals by licensed physicians."

At this point the state of the law in Federal Courts was largely at odds with State Court and Arbitration decisions. For instance in In the Matter of JRWB Diagnostic against The Travelers Insurance Company, Arbitrator Mellis determined that JRWB, a large radiological entity, was in fact controlled by a unlicensed laymen and inelligible to recover No-Fault payments,[4], citing North Bronx Medical, P.C. a/a/o Paulette Cleckley and Allstate Insurance Company,  NF2988 [5].

The Court of Appeals of the State of New York had no such reluctance however when responding affirmatively to the certified question posited by the Second Circuit, that is "whether 'A medical corporation that was fraudulently incorporated under N.Y. Business Corporation Law' §§ 1507, 1508 and N.Y. Education Law § 6507(4)(c) [is] 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.'

The Court wrote “We accepted the certification and now answer that such corporations are not entitled to reimbursement." State Farm Automobile Ins. Co. v. Robert Mallela 4 N.Y.3d 313, 320, 794 N.Y.S.2d 700, 827 N.E.2d 758.

It is important to note at this point that the crucial issue under consideration all along was not merely whether a professional corporation was facially in compliance  with its licensing requirements, but whether in fact it was truly controlled by a professional.  

Thus, the legislature requires professional health service corporations to be owned and controlled only by those who are licensed to practice medicine, and, in order to obtain the requisite certificate of authority to practice medicine, a professional service corporation must certify that each of its directors, officers, and shareholders is licensed to practice medicine.See N.Y.Bus.Corp.Law §§ 1503, 1507, 1508; Educ.Law § 6507(4)(c). State Farm Mutual Automobile Insurance Company v. Mallela, 175 F. Supp2d 401 [EDNY 2001] )

THE NATURE OF THE LAYMAN SCRIPTED ENTITY

Purported professional corporations that are in fact owned and controlled by laymen for the purpose of lining their own pockets  at the expense of their “patients” wellbeing,  are commonly referred to as “Doc in the Box” operations and “Medical Mills”. The term Layman Scripted Entity is perhaps a more accurate label, recognizing the eminence of the layman in control of the entity, and the principal money making scheme by which all patients are subjected to a regimen of expensive treatment determined by a pre-existing plan or “script” without regard to the patients condition.

A typical “script” that patients are subjected to consists of initial examinations by a physician followed by extensive and concurrent physical therapy, acupuncture and chiropractic treatment. Overpriced durable medical equipment is prescribed immediately and may include steep bills for “custom fitted” orthotics and inflated TENS units. Psychological treatment is arranged, frequently through a fictitious “self referral” process. The psychological treatment commences billing with an evaluation, coupled with many hours of specious “testing”, followed by psychotherapy sessions or biofeedback.  Dental services are common with an emphasis on exotic “TMJ” treatments, billing  for multiple x-rays and expensive custom fitted orthotics. Multiple MRIs are prescribed either immediately or after several weeks and usually held on separate days to maximize billing. In addition electrodiagnostic testing consisting of NCV and needle EMG procedures generally occur at about the four week mark and  are generally the most expensive procedures billed  for.

Other common abuses are “upcoding” wherein a service is billed as if it were much more expensive procedure, [6] and “unbundling” wherein components of a single procedure are impermissibly  broken out and billed separately. [7] It is additionally common for layman scripted entities to bill for services that were never rendered and for patients to sign their name to sign-in sheets many times at once resulting in so called “shadow patients”. [8]  It is typical for some $20,000 in billing to be submitted for each patient obtained by a layman scripted entity.

Indispensable to the revenue streams at the heart of these schemes are payments made to obtain patients. These payments may be made to the patients themselves, but are most commonly made to  runners or cappers who obtain, present or refer the patients along with a police report (thereby establishing there is viable insurance coverage) and who themselves may stage or cause accidents. Runners, cappers and steerer typically receive $1,500 to $2,500 per patient referred. [9]

Rounding out the picture is the synergy between the illegal corporation and the motor vehicle liability system. Working hand in hand with unscrupulous attorneys, layman controlled entities accept payments that are ostensibly for patient ‘records’ but which are in fact received for the benefit of referring patients to the attorneys. The motor vehicle liability system is also, at the end of the day, the principal reason for the continued participation of patients in the scripted medical treatment. The expectation is that if they continue to treat they will eventually receive a profitable settlement of their liability case. [10]

The exact manner in which layman scripted entities are configured and the associated schemes devised vary in nature and scope, limited only by the ingenuity, industry or intelligence of the criminals involved. All schemes, however, share two common purposes;  maximizing the number and size of the revenue streams flowing into the entity, and sweeping all entity profits to the controlling layman. Indeed it may be said that the bright line test of whether an entity is illegally operated in contravention of Business Corporation Law § 1507, § 1508 is whether the professional benefits from the profits of the corporation.

The prototypical layman scripted entity  is the stand-alone “multi-disciplined provider” operating on the license of a single physician and in co-habitation with physical therapy, chiropractic and acupuncture practices. A small billing company handling all the bills may be owned by the laymen in true control of the operation, or it may be that the chiropractor himself is in fact the one pulling the strings.  At the end of the day the revenue from all of the operations under the common roof are pocketed by the layman in charge.

An entity of this sort will typically employ the services of various medical service vendors that ostensibly provide dental, radiological, psychological and nerve testing services. These vendors themselves are typically laymen controlled entities and may be quite small, or in the case of the radiological entities enormous.  

There are four common financial inducements for using these vendors. There may be a direct cash kickback or the vendor may pay “rent” for a room at the layman scripted entity to conduct its services. In certain instances the vendor may strike an arrangement which permits an entity professional to bill for the technical component the vendor services. Finally there may in fact be an ownership interest in the vendor by the layman scripted entity and its controller.[11]

A larger scaled layman scripted entity may control both the multi-disciplined provider and the associated vendor services[12], and there have been instances of jumbo enterprises where scores of professional corporations managed by dozen of billing companies fed into a single entity at the pinnacle. [13]

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There are common telltales of the laymen scripted entity are found in the medical records, the documents describing with the relationship between the professional corporation and management or billing companies, and the associated financial records.

Whether a treatment script is being used by an entity, and if so its precise nature, will invariably be quickly revealed by an examination of several claimant files.  The nature of the treatment provided, the timing of the diagnostic tests prescribed, the template and boilerplate reports, diagnosis, prognosis and symptomology will be unique from provider to provider, but nearly identical from patient to patient within a given provider. Examinations Under Oath of a number of claimants from the same provider will often yield similar results, but can be inexact for these purposes given the variations in the witnesses ability to recall and relate what occurred to them.

The identification of such a script is a near conclusory indication of a laymen scripted entity since it demonstrates the complete lack of any meaningful medical analysis or decision making occurring in connection with patient care at the facility.

 

Contractual Agreements

As part of the process of insuring that the laymen is in complete control of the professional corporation, elaborate and exorbitant management and leasing agreements typically exist between the professional corporation and the management or billing company.  These may be wildly disproportionate to fair market values and contain clauses, like liquidated damages clauses that handcuff the professional and grant unfettered control, especially over financial matters, to the layman. Certain crucial terms of the contract, including the purported compensation to be paid to the “management company” may be left blank. If the terms are provided for, upon discovery of the entity finances, it is typically found that what is in fact occurring at the entity is inconsistent with what the agreements ostensibly called for.

 

Financial Necessities

Sharp variances between what contracts may calls for and what is actually happening will necessarily occur because of the true nature of the core financial scheme. Since the entities exist for the express purpose of sweeping all profits to the controlling layman, the professional involved is in fact nothing more than a salaried employee receiving a monthly stipend, or an independent contractor paid a per-procedure fee. When the entity thrives the stipend or fee to the professional will not increase, but increasingly large amounts of money will be pocketed by the laymen. If the tax returns of the professional corporation are inspected, or credible testimony of a principal is obtained, it should be expected that these will show all of the businesses profit being swept away to the management company, and amounts claimed to have been paid as management and leasing fees increasing or decreasing in direct proportion to the gross revenues of the professional corporation.

The professional corporation will change “owners” repeatedly, but since the professional figurehead of the professional corporation has no financial interest in the entity, the transfer of ownership will occur for no consideration.

 The professional will typically have no knowledge of how much money the corporation is grossing or netting, and  have no involvement in the financial process other than collect his check and possible endorse checks out of the professional corporation account into the management company account.

The use of name stamps will typically be rampant and unfettered, the physician may not know how many exist, who possesses them, what purposes they are put to use for or how they came into existence.

In an effort to disrupt facially obvious fee splitting, the laymen will seek to divert revenues before they reach the professional corporation checking accounts. An inspection of cancelled checks returned to the insurer may show that they have been cashed at casinos and check cashing stores.

FOLLOWING ON MALLELA: PROVING ILLEGAL CORPORATE STRUCTURE.

The decision of Mallela III sets the stage for insurers to prove the illegality of laymen scripted entities in an unprecedented fashion. Several cases have been decided in insurer’s favor on the heels of Mallela, and an examination of these cases demonstrates the different methods by which a favorable Mallela decision may be obtained.

Briefly, and as outlined in more detail below, an insurer may expect to prove the illegality of a Professional Corporation by leveraging SIU intelligence, by following up on law enforcement activities and by using their own attorneys discovery and subpoena powers in conjunction with  declaratory judgment actions.

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FOLLOWING ON LAW ENFORCEMENT

As evident from the number of press releases annotated in the foot notes of this document, law enforcement arrests and prosecutions of fraudulent no-fault providers occur at a steady clip. Prosecutions are routinely brought by the State Attorney Generals Office, the United States Attorney’s Office and local District Attorneys offices in conjunction with local, state and federal police forces.

In case where the prosecution ends in a plea or conviction, the fact of the conviction, in conjunction with the allocutions of the defendants, may provide irrefutable proof of the fraudulent scheme of the professional corporation sufficient to resolve the issue in associated civil cases.

A leading example of a case where litigation  along these lines currently is currently being contested is Metroscan Imaging PC v. Geico Ins. Co. 2005 WL 1384369 (N.Y.City Civ.Ct.), 2005 N.Y. Slip Op. 25228. In Metroscan the insurer consolidated 60 pending actions and sought to follow on the plea allocutions of a layman in control of this large radiological entity. Noting that the insurer had “articulated a "founded belief" that the health providers, all incorporated by [the same Doctor] and all subject to a management agreement with non-licensed professionals, have violated both New York's business corporation and education laws” the court consolidated the cases for purposes of hearing to determine whether in fact the professional corporations were in violation of the New York Business Corporation and Education Laws.

 

Evidentiary Considerations

Several evidentiary considerations attend this approach since it relies on out of court statements from different actions to establish the desired result in the current litigation. Complications are injected by this fact, and by the fact that there will necessarily be at least two principal criminal actors, the Doctor and the true owner. As the state of the law currently stands, the statements of one will not necessarily  be admissible against the other.

If, in his criminal allocution, the Doctor admits that he was not in control of the enterprise his statements will be admissible against himself and, by extension, the entity on at least two grounds, and should be dispositive on the question of the entities standing to recover reimburstment under the No-Fault law.

If the Doctor has admitted the illegal structure of the corporation, for instance by acknowledging that medical treatment and services were routinely performed without his knowledge or direction, or that the profits of the company were going to someone other than himself, the statements will not merely be admissible but should also be directly dispositive on the question of the entity’s corporate structure on collaterall estopell grounds. Under this construct; the Doctor will be barred in the civil action from relitigating an issue he has admitted to in the criminal proceeding.  (Fisch on NY Evidence [2 ed] Sec. 803; Ando v. Woodberry, 8 N.Y.2d 165, 167 [203 N.Y.S.2d 74, 168 N.E.2d 520] ). “While defendant may not relitigate the issue of his guilt, he may offer proof relevant to character of crime committed”. (Matter of Levy, 37 N.Y.2d 279 [372 N.Y.S.2d 41, 333 N.E.2d 350] ).

If however, the Doctor has merely plead or allocated to crimes which do not directly implicate the corporate structure of the entity, (perhaps simple larceny or insurance fraud, depending on the circumstances of his allocution), the situation may be different. His statements, while still admissible, might now prove irrelevant to the question of the entities corporate structure. In such a circumstance, the attorney should be prepared to prove the illegal structure by other means.

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Layman’s Guilty Plea

If it is the layman who has plead guilty to criminal activities concerning the entity, a different set of legal considerations arise. As noted, the declaration against penal interest exception to the hearsay rule has been accepted in New York since 1970 [See, People v. Brown, 26 N.Y.2d 88 [1970], cert. denied 480 U.S. 948].

In USDNY Indictment 02-Cr-1586/89, a case involving a MRI facilities "manager" who was convicted of tax evasion and bribery, the government wrote the following instructive paragrah in support of its application to use the "managers" plea allocution against a co-conspirator.

“[The Defendant's] allocution was given in open court, under oath, with the assistance of counsel and it subjected [the Defendant] to the risk of a substantial prison term. The portions of the statements that the Government seeks to introduce are inculpatory of the declarant, and no not minimize the declarant’s conduct or shift blame to the defendants. (See Williamson v United States 512 US 594, 605 (1994)(“the very fact that a statement is genuinely self-inculpatory is itself one of the ‘particularized guarantees of trustworthiness’ that makes a statement admissible under the confrontation Clause”). In addition, [the Judge], who accepted [the Defendant's] plea, had the opportunity to question the Defendant  and to judge his demeanor and credibility. See, e.g. Willimas 927 F.2d at 98-99 (noting that district judge, who conducted the allocution had “intimate knowledge of the allocutions’ trustworthiness and their lack of susceptibility to challenge”). Accordingly, [the Defendant's statements] are trustworthy and should be admitted as statements against penal interest.”

The most straightforward rationale for admissibility of a laymen's statement against a Professional Corporation is that the laymen, in fact,  is the Professional Corporation.  Since the purpose of using a layman's admission is to prove that he  unlawfully controlled the corporation, the self same statement should simultaneously demonstrate that he is the alter-ego of the corporation, making the statement admissible against the corporation. In other words, the statement is admissable against the Professional Corporation because the declarant is the Professional Corporation. 

The most instructive discussion of this argument is found in In re Adler, Coleman Clearing Corp.
399 F.Supp.2d 486 S.D.N.Y.,2005. Adler specifically addresses a situation case where an indictment and plea allocution were used to establish  alter-ego status of a declarant. The court wrote:

"A reading of the Indictment, the Plea Agreement, the Guilty Plea, the Gurian Deposition and various other documents on the record before it on the instant motion persuades the Court that the Trustee has sufficiently demonstrated circumstances satisfying the Babitt standards to establish Gurian's exercise of domination and control over the Bahamian Entities. "

The New York common law rule concerning alter ego status is similar, and was set out by the Appellate Division of the Second Department in 1959 in Geletucha v. 222 Delaware Corp. 7 A.D.2d 315, 182 N.Y.S.2d 893.

  A statement of the general rule is contained in Fletcher's Cyclopedia Corporations, Vol. 1, Sec. 43, pp. 157-160, as follows:  'Whether one is a mere agency or instrumentality or they are identical, is a question of fact to be proved by competent evidence * * *. This question of fact depends on many circumstances overcoming or failing to overcome the indicia of separate entities, sameness of members, officers and objects, and the absence of distinct interests, being indicia of agency or identity, while differences in officers, objects or conduct are indicia of separate recognizable entities * * *. Operating departmental or branch corporations, and sales corporations, afford illustrations of corporations disregarded on the facts.'

A further argument may be made that where, as is commonly the case, the layman has set himself up as president of the culpable management company,  that an  admission made by a party's agent will be admissible against that party if it is made within the scope of his agent's or servant's authority. Brusca v. El Al Israel Airlines,  75 A.D.2d 798, 427 N.Y.S.2d 505 (App. Div. 2nd Dept. 1980). Spett v. President Monroe Building and Manufacturing Corp., 19 N.Y.2d 203, 278 N.Y.S.2d 826 (1967).  As the Court of Appeals noted in Spett , “Where an agent's responsibilities include making statements on his principal's behalf, the agent's statements within scope of his authority are receivable against the principal”.

“As defendant's president, treasurer and the only person apparently vested with complete managerial responsibility to run defendant's day-to-day operations, Hallam possessed the requisite authority to speak on behalf of the corporation (see, Spett v President Monro Bldg. & Mfg. Corp., 19 N.Y.2d 203, 206, 278 N.Y.S.2d 826; Geletucha v. 222 Delaware Corp., 7 A.D.2d 315, 317, 182 N.Y.S.2d 893) and therefore his declaration of liability was properly received as an admission binding upon it under this State's current "speaking agent" exception to the hearsay rule (see, Loschiavo v. Port Auth. of N.Y. & N.J., 58 N.Y.2d 1040, 462 N.Y.S.2d 440, 448 N.E.2d 1351; Nordhauser v. New York City Health & Hosps. Corp., 176 A.D.2d 787, 791, 575 N.Y.S.2d 117).”

LEVERAGING INTELLIGENCE

In at least two recent instances Courts have made determinations of illegal corporate structures based upon pre-suit examinations under oath. In Multiquest, PLLC v. Allstate Ins. Co. --- N.Y.S.2d ----, 2005 WL 2085966 (Civ. Ct., Queens Cty.), 2005 N.Y. Slip Op. 25356, Judge Butler credited the EUO testimony of a psychologist who was listed as a corporate owner in Multiquest’s incorporation papers, but denied at her EUO ever having consented to participate in the Multiquest venture. Of particular note was the “non-response” raised by Plaintiff to these allegations by the defendant.

Plaintiff, in reply to defendant’s cross-motion, merely asserts that defendant’s denials were untimely. With respect to defendant’s allegations of fraud and misconduct, plaintiff merely alleges that Ms. Clarke’s testimony is not credible as it was provided pursuant to an agreement wherein defendant agreed not to commence an action against Ms. Clarke in exchange for such testimony. Plaintiff, however, fails to submit any documentary proof rebutting defendant’s assertions of fraud or misconduct. Additionally, plaintiff fails to submit an affidavit from someone with personal knowledge of the facts disputing such allegations by defendant.

Clearly, the Mallela III Court strongly concurs with the findings of the Superintendent of Insurance that services provided by fraudulently licensed No-Fault “regimes” should not be reimbursed.

Similar results were reached by Judge Arlen Bluth in New York Civil Court , Kings County in the cases of AT Medial P.C. v State Farm Mut. Ins. Co., No. 64692/04 and AT Medical P.C. v State Farm Mut. Ins. Co., No 64696/04 wherein the Defendant submitted incorporation papers, tax returns, a management agreement and an examination under oath. Again there was no substantive opposition from plaintiff, and again the Court granted the defendant summary judgment premised on Malella grounds specifically finding AT to be a “Doc in the Box”. [17]

AUGMENTING LAW ENFORCEMENT AND PRE SUIT INTELLIGENCE DURINGLITIGATION

It is likely that in many instances an attorney may be required to combine law enforcement and pre suit intelligence with court ordered discovery obtained during the course of litigation for the best result. A good example of a litigation which fit this bill, occurring in the AAA setting, is In the Matter of the Arbitration between JRWB Diagnostic Imaging PC / Catherine Voley and The Travelers Insurance Company et al, AAA Assessment 17 991 26640 02

This case followed the Kings County District Attorney “Wellcare” investigation that shut down a number of inter-related fraudulent entities During the course of the summer of 2003 a number of lower arbitrator decisions found an associated radiological entitry, JRWB Diagnostices, to be inelligible for reimbursement premised upon statements to SIU investigators, and a guilty plea to insurance fraud by the management company owner. Ultimately twelve separate arbitrations were combined and the principal of JRWB was obligated to testify and to produce banking records and the management agreement for JRWB. The testimony demonstrated that the Doctor appeared to be fee splitting with the layman owners, receiving a nominal $50 fee per scan that was read. The banking records and management agreement appeared to indicate that JRWB served as a conduit to sweep monies received from insurers to the layman controlled management company. Arbitrator Melis determined that JRWB was inelligible to for reimbursement underNew York State ’s No-Fault Law.[18] [19]

Even before the Mallela III Court clearly made the corporate structure of an entity a potentially dispositive issue in No-Fault litigation, the relevancy of the question had been affirmed by the Appellate Terms. In  Valley Physical Medicine and Rehabilitation P.C. v. New York Cent. 193 Misc.2d 675, 753 N.Y.S.2d 289 (N.Y.Sup.App.Term,2002) the Court wrote that “In light of the Insurance Law's requirement that insurers enact fraud prevention plans (Insurance Law § 409), and the New York State Department of Insurance's Opinion Letters urging insurers to be more vigilant about potential fraud, discovery requests pertaining to Plaintiff's license status and corporate structure, which are related to allegations of fraudulent billing, are proper discovery subjects”.

 

Depositions and Provider EUOs

            The road for the insurer will likely be easiest when it pursues a  provider EUO, specifically authorized by 11 N.Y.C.R.R 65-3 et seq., to verify whether a provider is properly licensed and accordingly eligible for reimbursement under the No-Fault law. As there has not yet been any denial, the insurer will not barrel into the frequent crimping of the discovery process imposed by Civil Court Judges who have settled into the practice of limiting the scope of depositions to the substance of the denial. Examples of these sorts of rulings are found in Socrates Psychological Services, P.C. v. Progressive Cas. Ins. Co., 7 Misc.3d 642, 791 N.Y.S.2d 394 N.Y.City Civ.Ct.,2005 and  All-County Medical & Diagnostic P.C. v. Progressive Cas. Ins. Co.  8 Misc.3d 616, 795 N.Y.S.2d 434 N.Y.Dist.Ct.,2005. There is already one bad Civil Court decision which denied a defendant’s application to depose a Doctor in an effort to develop a Mallela defense. The Court imposed a predicate showing of a factually founded belief of impropriety, noting that defendant herein does not identify one non-licensed individual who either owns, controls or operates the medical corporationseven though defendant has been provided with management agreements and income tax information for certain employees. Statewide Medical Acupuncture Services, PC v. Travelers Ins. Co. Slip Copy, 2005 WL 2866916 (Table) N.Y.City Civ.Ct.,2005.

Another typical telltale in the possession of the insurer are its own cancelled checks. If it can be shown that they are being diverted out of the revenue stream immediately, for example by being cashed at Casino’s or Check Cashing stores, that fact is strong proof of fraudulent behavior.

All this is not to say that all Judges will ignore the normal precepts of Allen v. Crowell-Collier Publishing Co. and Valley Physical Medicine and Rehabilitation P.C. v. New York Cent. (supra). Where a defense of fraudulent incorporation has been raised in a defendant’s answer, and given the clear import of Malella, the better proposition is the discovery on all relevant issues consistent with Article 31 of the CPLR should occur.