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STATE FARM MUT. AUTO. INS. CO. v. MALLELA

September 20, 2001

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, PLAINTIFF,
V.
ROBERT MALLELA ET ALIA, DEFENDANTS.



The opinion of the court was delivered by: Sifton, Senior District Judge.

  MEMORANDUM AND ORDER

Plaintiff State Farm Mutual Automobile Insurance Company ("State Farm") brings this diversity action against defendants Robert Mallela and Swapnadip Lahiri (collectively, the "Licensed Defendants"), Tatiana Rybuk and Paul Schneider (collectively, the "Unlicensed Defendants"), Advanced Physical Medicine and Rehabilitation d/b/a Mill Basin Physical Medicine ("Advanced"), Ridgewood Medical Specialists and Hempstead Village Medical ("Ridgewood"), Allied Medical Healthcare, P.C. ("Allied"), Astoria Physical Medicine and Rehabilitation, P.C. ("Astoria"), Atlantic Medical Practice, P.C. ("Atlantic"), Avenue U Medical Services, P.C. ("Avenue U"), Bay Medical Health Care & Diagnostic, P.C. ("Bay Medical"), Bettercare Health Care Pain Management and Rehab, P.C., sued herein as Bettercare Healthcare Pain and Management, P.C. d/b/a Firstcare of Bettercare Healthcare ("Bettercare"), Canarsie Medical Services, P.C. ("Canarsie"), Central Medical Rehabilitation, P.C. ("Central Medical"), Central Suffolk Medical Services, P.C. ("Central Suffolk"), Citywide Medical Practice, P.C. ("Citywide"), DAKA Medical, P.C. d/b/a Island Health Professionals ("DAKA"), Farragut Medical Care, P.C. ("Farragut"), First Queens Physical Medical and Rehabilitation, P.C. ("First Queens"), Flatbush Medical Services, P.C. ("Flatbush"), Fordham Medical Pain and Treatment, P.C. ("Fordham"), Franklin Medical Rehabilitation, P.C. ("Franklin"), Grand Central Healthcare and Physical Medicine, P.C. ("Grand Central"), Health First Medical Practice, P.C. ("Health First"), Mallela Medical Services, P.C. ("Mallela Medical"), Medical Services of Bayside, P.C ("Bayside"), Mid-Island Medical Healthcare, P.C. ("Mid-Island"), Mid-Queens Medical Services, P.C. ("Mid-Queens"), Millennium Medical Diagnostics, P.C. ("Millennium"), N.Y. Alea Medical, P.C. ("Alea"), N.Y. Pro Care Medical & Rehabilitation, P.C. ("Pro Care"), Oceanview Medical Care, P.C. ("Oceanview"), Patient's Choice Medical Services, P.C. ("Patient's Choice"), Pelham Physical Medicine and Rehabilitation, P.C. ("Pelham"), Sterling Medical Diagnostic, P.C. ("Sterling"), Triborough Medical Diagnostic, P.C. ("Triborough"), Urban Medical Diagnostics, P.C. ("Urban"), Valley Physical Medicine & Rehabilitation, P.C. ("Valley Physical"), Valley Rehabilitation and Medical Offices, P.C. ("Valley Rehabilitation"), Victory Medical, P.C. ("Victory"), and Yonkers Medical Services, P.C. d/b/a Injury Relief Medical Care ("Yonkers") (collectively, the "PC Defendants"), stating claims of fraud, unfair trade practices, and unjust enrichment. The gravamen of plaintiffs complaint is that the defendants engaged in a fraudulent scheme pursuant to which the PC Defendants and the Unlicensed Defendants falsely used the names of the Licensed Defendants on certificates of incorporation filed with New York State to obtain certificates of authority to practice medicine. Plaintiff, which issues automobile insurance policies and has compensated the PC Defendants for services rendered to plaintiffs policyholders, seeks monetary, declaratory, and injunctive relief.

Defendants Fordham, Sterling, Millennium, Triborough, Central Medical, and Urban (the "Counterclaimants") counterclaim for breach of contract, unjust enrichment, and deceptive practices in violation of N.Y. General Business Law § 349. Counterclaimants also seek attorney's fees, costs, and interest, relying in part on § 349.*fn1

Defendants Mallela Medical, Mid-Queens, Bettercare, Alea, Yonkers, and Valley Physical (the "Moving Defendants") now move to dismiss plaintiffs complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.*fn2 Plaintiff cross-moves to dismiss those of the Counterclaimants' claims that are based on General Business Law § 349. For the reasons set forth below, the Moving Defendants' motions to dismiss are granted, as is plaintiff's motion to dismiss.

BACKGROUND

Unless otherwise noted, the following facts are drawn from plaintiffs complaint and are assumed to be true for the purposes of these motions.

Plaintiff State Farm is an Illinois corporation with its principal place of business in Illinois. State Farm engages in the business of selling automobile insurance in New York.

Defendant Robert Mallela, M.D. is a New Jersey resident who has been licensed to practice medicine and has engaged in the practice of medicine in New York since 1994. Defendant Swapnadip Lahiri is a New Jersey resident who is also licensed to practice medicine in New York and has engaged in the practice of medicine in New York since 1993. Defendant Tatiana Rybuk is a New York resident who has never been licensed to practice medicine in New York. On October 27, 1999, Rybuk pled guilty in New York State court to the felonies of attempted enterprise corruption, a scheme to defraud, and twelve counts of insurance fraud and admitted that she owned and controlled several unlawfully licensed professional service corporations, including defendants Avenue U, Canarsie, and Flatbush. Defendant Paul Schneider is a New York resident who has never been licensed to practice medicine in New York. On October 27, 1999, Schneider pled guilty in New York State court to the felonies of attempted enterprise corruption, a scheme to defraud, and twelve counts of insurance fraud and admitted that he owned and controlled several unlawfully licensed professional service corporations, including defendants Avenue U, Canarsie, and Flatbush.

The PC Defendants are all New York professional service corporations with principal places of business in New York. Each certificate of incorporation of the PC Defendants falsely states that one or both of the Licensed Defendants has been, at varying points in time, the PC Defendants' sole shareholder(s), director(s), and officer(s). According to the complaint, the Licensed Defendants were in fact sham shareholders, directors, and officers, who were paid a fee to allow the true owner or owners of each PC Defendant to obtain unlawfully a certificate of authority for the PC Defendant to practice medicine.

The Statutory Scheme

Under New York's Comprehensive Motor Vehicle Insurance Reparation Act (the "No-fault Law"), New York Insurance Law §§ 5101 et seq., State Farm, as an automobile insurer, is obligated to indemnify its insureds for, inter alia, reasonable and necessary medical services for injuries sustained by occupants of its insureds' covered motor vehicles that arise from the use or operation of those vehicles. Specifically, plaintiff is required "to reimburse a [covered] person for basic economic loss on account of personal injury arising out of the use or operation of a [covered] motor vehicle," § 5102(b), where "basic economic loss" is defined to include:

[a]ll necessary expenses incurred for: (i) medical, hospital (including services rendered in compliance with article forty-one of the public health law, whether or not such services are rendered directly by a hospital), surgical, nursing, dental, ambulance, x-ray, prescription drug and prosthetic services; (ii) psychiatric, physical and occupational therapy and rehabilitation; (iii) any non-medical remedial care and treatment rendered in accordance with a religious method of healing recognized by the laws of this state; and (iv) any other professional health services.

N.Y.Ins.Law § 5102(a)(1). Under 11 N.Y.C.R.R. § 65.15(o)(1)(vi), one of the regulations implementing the No-fault Law, "[t]he term any other professional health services, as used in section 5102(a)(1)(iv) . . ., shall be limited to those services that are required or would be required to be licensed by the State of New York if performed within the State of New York. Such professional health services should be necessary for the treatment of the injuries sustained and within the lawful scope of the licensee's practice." A health care provider may receive an assignment of benefits from a covered person who is treated by that provider. If a provider receives such an assignment, the covered person's insurer "shall pay the provider[] of services . . . directly." 11 N.Y.C.R.R. § 65.15(j)(1).

Section 5106 of the No-fault law and the regulations pursuant thereto provide thirty days within which an insurer must either pay or deny a claim for benefits. See N.Y.Ins.Law § 5106; 11 N.Y.C.R.R. § 65.15(g)(3). No-fault benefits are deemed "overdue" if not paid within that period, and overdue payments bear interest at a rate of 2% per month. § 5106; 11 N.Y.C.R.R. § 65.15(h). In the alternative, an insurer may, within ten days of receiving a claim, request "verification" of the claim by "forward[ing] . . . those prescribed verification forms it will require prior to payment of the initial claim." § 65.15(d)(1).

New York's Business Corporation Law regulates the incorporation of entities under New York law. Under § 1508, "[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. Section 1507 states that "[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.

New York Education Law § 6507(4)(c) directs the New York State Department of Education to issue a certificate of authority to practice medicine to any qualified professional service corporation. In order to obtain such a certificate, a professional service corporation must file with the Department of Education a copy of its certificate of incorporation. Section 1503 of the Business Corporation Law requires the certificate of incorporation for any professional service corporation to

N.Y.Bus.Corp.Law § 1503(b). Under § 1503(d),

[a] professional service corporation, . . . shall be under the supervision of the regents of the university of the state of New York and be subject to disciplinary proceedings and penalties, and its certificate of incorporation shall be subject to suspension, revocation or annulment for cause, in the same manner and to the same extent as is provided with respect to individuals and their licenses, certificates, and registrations in title eight of the education law.

N.Y.Bus.Corp.Law § 1503(d). In addition, Section 1101 grants the attorney general the authority to bring a judicial action "for the dissolution of a corporation upon one or more of the following grounds: (1) That the corporation procured its formation through fraudulent misrepresentation or concealment of a material fact." N.Y.Bus. Corp.Law § 1503(d). The No-fault Law requires "[e]very insurer [to] report to the commissioner of health any patterns of overcharging, excessive treatment or other improper actions by a health provider within thirty days after such insurer has knowledge of such pattern." N.Y.Ins.Law. § 5108(c).

The Claims

According to plaintiffs complaint, the j certificate of incorporation of each of the PC Defendants that was filed with the Department of Education indicates that the profession to be practiced by the corporation is medicine and falsely states that the corporation's shareholder, director, and officer is one or both of the Licensed Defendants. In fact, defendants Mallela and Lahiri, the Licensed Defendants, were "sham" shareholders, directors, and officers of the PC Defendants who, when the certificates of incorporation were filed, had no real ownership or control over the PC Defendants, did not invest any money, make any capital contributions, pay consideration for any shares, or have any authority for any bank account of any of the PC Defendants. The Licensed Defendants were paid a fee to allow their names to be used on the PC Defendants' certificates of incorporation. The Unlicensed Defendants "and other individuals whose identities have been concealed from the State of New York, State Farm and the public" were the "true" shareholders, directors, and officers of the PC Defendants. (Compl. ¶ 56.) Relying on Business Corporation Law §§ 1507 and 1508, plaintiff contends that the Unlicensed Defendants, as well as "any other individual[s] who w[ere] ...


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