Farm Ins. Co. v. North Bronx Medical
P.C., Index No. 117539/01, at *2 (Sup.Ct. N.Y. Co. Jan. 17, 2002)
(Wetzel, J.), Ex. C-39 to Appendix to Defendant's Opposition to
Plaintiff's Motion to Dismiss ("Def. Opp."); Millennium Med. Diagnostics
v. Nat'l Grange Mut. Ins. Co., Index No. 44600/00 (Sup.Ct. Queens Co.
Sept. 14, 2001), Ex. C-34 to Appendix to Def. Opp.; see also Fordham
Med. Pain & Treatment, P.C. v. State Farm, Index No. 600403/00, at *3
(Sup.Ct. N.Y. Co. Jan. 4, 2001), Ex. C-33 to Appendix to Def. Opp.
(upholding use of standing or eligibility defense against unlicensed
professional corporation's suit for assigned no fault benefits against an
insurer); Advanced Care of New York, Inc. v. John Friscia et al., Index
No. 32528/99, at *8 (Sup.Ct. Kings Co. Feb. 22, 2000) (dismissing action
brought by professional corporation for no fault benefits because PC did
not refute defendants' allegation that it was not licensed under Educ.
Law § 6509-a to provide physical therapy services, and therefore "is
not entitled to recover payments under the no-fault law"). Many
arbitrators have held the same. See Exs. C-1 to C-36 to App. to Def.
Opp.; Exs. 1-22 to Supp. App. to Def. Opp.
A recent decision from the Eastern District of New York, however, held
that a PC's unlawful incorporation is irrelevant to its eligibility to
sue for no fault benefits assigned to it by an insured. See State Farm
v. Mallela, 175 F. Supp.2d 401 (E.D.N.Y. 2001).*fn8 In that case, State
Farm sued several professional corporations including Urban Medical for a
declaratory judgment that "a professional corporation that is unlawfully
licensed has no standing to bring a claim for benefits under the No-Fault
law." Id. at 407-08. In reaching its holding, the court reasoned that
"the alleged fraudulent ownership of the PC Defendants does not affect
the question whether plaintiff's insureds incurred and incur basic
economic loss that plaintiff is required to compensate" and the
regulation regarding assignment is "without any requirement that the
provider have a certificate of authority or a validly obtained certificate
of authority." Id. at 414-15.*fn9
Subsequently, a New York state court explicitly rejected Mallela,
stating that "[t]his Court chooses not to follow the decision of Judge
Sifton in the [Eastern District], State Farm v. Mallela, [because] it is
in conflict with the established law in the New York State Courts." North
Bronx, Index No. 117539/01, at *2. Because Mallela's holding regarding
eligibility is now in conflict with several state court rulings and a
growing number of arbitral decisions, declaratory judgment would help
clarify the rights and obligations of insurers and professional
corporations. Therefore, defendant has stated a cause of action for
2. Injunctive Relief
An injunction may be granted where the party seeking the injunction can
show that "1) absent injunctive relief, it will suffer irreparable harm,
and 2) either a) that it is likely to succeed on the merits, or b) that
there are sufficiently serious questions going to the merits to make them
a fair ground for litigation, and that the balance of hardships tips
decidedly in favor of the moving party." Wright v. Giuliani, 230 F.3d 543,
547 (2d Cir. 2001) (citation and quotation marks omitted). It is
well-settled that injunctive relief is generally not available in a claim
solely for money damages. See, e.g., Twentieth Century Fox Film Corp. v.
Marvel Enter., 277 F.3d 253, 258 (2d Cir. 2002). State Farm is seeking to
enjoin Universal from suing for treatment rendered prior to April 24,
2001. Because State Farm has only pled that it will suffer monetary
damages if plaintiff prevails, defendant's claim for a preliminary
injunction is dismissed.
C. Counterclaim II — Fraud in the Corporate Form
In Counterclaim II, State Farm seeks damages based on Universal's
violation of N.Y. BCL § 1503, which requires professional
corporations to be licensed.*fn10 Plaintiff argues that State Farm has
no right of action to enforce section 1503 because none is implied by the
legislative history of the statute and because insurers do not belong to
the legislatively protected class.
Section 1503 does not expressly grant a private cause of action to
enforce its requirements. However, a private cause of action may be
implied if (1) plaintiff belongs to the class of legislatively intended
beneficiaries and (2) a right of action would clearly promote the
legislative purpose of section 1503. See Mallela, 175 F. Supp. 2d at 416
(citing CPC Int'l, Inc. v. McKesson Corp., 70 N.Y.2d 268, 276 (1987)).
The ban on the corporate practice of medicine was intended to "protect
consumers of health care services, not insurers who pay for those
services." Id. at 416. See also supra note 2. Section 1503 of the
Business Corporation Law was therefore not intended to serve as "a cause
of action for an [insurer] injured by its violation," but rather "as a
general police regulation, with its violation made punishable solely as a
public offense." Burns Jackson Miller Summit & Spitzer v. Lindner,
59 N.Y.2d 314, 324 (1983) (citation, quotation marks omitted). Thus, a
cause of action is not implied and State Farm cannot sue for damages
based upon Universal's violations of section 1503 of the BCL.*fn11
State Farm argues that, even if there is no private right of action
under section 1503, it may sue Universal for common law fraud based on
Universal's violation of the statute. See Def. Opp. at 5 n. 6.
out a prima facie case of fraud in New York, a plaintiff must allege (1)
a representation of material fact; (2) falsity; (3) scienter; (4)
reliance; and (5) injury. See Small v. Lorillard Tobacco Co., 94 N.Y.2d 43,
Where courts have permitted a common law fraud claim premised on the
same set of facts to which a statute applies, despite the fact that there
is no private cause of action in the statute, the claim was premised on a
substantive injury or loss independent of the statutory violation. See
McKesson, 70 N.Y.2d at 284-85 (despite holding that section 17(a) of the
Securities Act of 1933 does not contain an express or implied right of
action, plaintiffs had nonetheless stated a claim for common law fraud);
see also Lehman Bros. Commercial Corp. v. Minmetals Int'l Non-Ferrous
Metals Trading Co., No. 94 Civ. 8301, 2001 WL 1646101, at *1, *4-*5
(S.D.N.Y. Dec. 21, 2001) (holding that plaintiff could bring common law
fraud claim despite fact that New York statute, which prohibits fraud and
deception in the sale of securities, does not imply a private cause of
action for its violation); Burns, 59 N.Y.2d at 330-32 (holding that
plaintiff had common law right to sue for illegal strikes despite lack of
a private cause of action under New York statute prohibiting illegal
Here, State Farm has lost no benefit, nor suffered an injury, that
exists independently of Universal's violation of section 1503. State Farm
claims that it suffered injury in the amount of $190,000 of payments to
Universal that it was not legally required to make. Thus, State Farm's
only injury resulted from Universal's noncompliance with section 1503.
Accordingly, Counterclaim II is dismissed.
D. Counterclaim III — Unjust Enrichment Premised on Fraud in the
Counterclaim III alleges that Universal was unjustly enriched in
receiving $190,000 in no fault benefits to which it was not entitled
under either the no fault law or New York common law. A party is unjustly
enriched where a plaintiff has shown that "(1) defendant was enriched,
(2) the enrichment was at plaintiff's expense, and (3) the circumstances
were such that equity and good conscience require defendant to make
restitution." Louros v. Cyr, 175 F. Supp.2d 497, 514 (S.D.N Y 2001). In
general, New York courts are reluctant to require the return of sums
previously paid, or even to void one party's duty to perform under a
contract, for lack of a statutorily required license. See Lloyd Capital
Corp. v. Pat Henchar, Inc., 80 N.Y.2d 124, 128 (1992); Charlesbois v.
Weller Assocs., 72 N.Y.2d 587, 595 (1988). That premise is particularly
relevant here, where State Farm's insureds received the benefits of
acupuncture services rendered by Universal's duly qualified
acupuncturists.*fn12 As Justice Cardozo explained, while:
[t]he law may at times refuse to aid a wrongdoer in
getting that which good conscience permits him to
receive[,] it will not for that reason aid another
taking away from him that which good conscience
entitles him to retain.
Schank v. Schuchman, 212 N.Y. 352, 359 (1914). Universal may not have
been eligible for the benefits in the first place, but good conscience
entitles it to retain the money paid for services rendered. Plaintiff's
motion to dismiss Counterclaim III is granted.
E. Counterclaim IV — Traditional Billing Fraud and Invalid
Universal also moves to dismiss Counterclaim IV, in which State Farm
alleges that Universal committed traditional insurance fraud and invalid
assignment by billing State Farm for services not rendered or not
medically necessary. The elements of a fraud claim were set forth earlier
at Part III.C. Pursuant to Rule 9(b) of the Federal Rules of Civil
Procedure, all claims of fraud must be pleaded with particularity. Fed.
R. Civ. P. 9(b). To comply with Rule 9(b), the complaint must: "`(1)
specify the statements that the plaintiff contends were fraudulent, (2)
identify the speaker, (3) state where and when the statements were made,
and (4) explain why the statements were fraudulent.'" Louros, 175 F.
Supp. 2d at 510 (quoting Acito v. IMCERA Group, Inc., 47 F.3d 47, 51 (2d
Cir. 1995)). Rule 9(b)'s specificity requirement "is intended to provide
a defendant with fair notice of plaintiff's claim, to safeguard a
defendant's reputation from improvident charges of wrongdoing, and to
protect a defendant against the institution of a strike suit." Id.
(citing Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.
State Farm alleges that plaintiff lied on patient sign-in sheets about
the number of patients treated by Universal with one or more needles on
various days. See Counterclaim ¶ 38 (referencing Patient Sign-in
Sheets, Ex. F to App. to Def. Opp.). State Farm alleges that statements
were made concerning the number of patients treated per day, that Nandi
and Universal made the statements, that they were made between January
2000 and April 2001. State Farm claims that they were fraudulent because
it would be impossible for any one acupuncturist to treat upwards of
sixty patients a day — whereas the patient sign-in sheets indicate
that, in many cases, over one hundred patients were treated per
acupuncturist, per day. See id. It further alleges that Universal
intended to deceive, and that State Farm justifiably relied on the
misrepresentation in paying benefits. See id. ¶¶ 36, 41.
Because State Farm alleges facts supporting every element of a fraud
claim and satisfies the specificity requirement, plaintiff's motion to
dismiss Counterclaim IV is denied. Counterclaim IV also alleges that
certain assignments of rights by insureds to Universal are invalid
because they are dated prior to January 27, 2000, when Universal was
formed. See id. ¶ 39. Because plaintiff's motion to dismiss this
Counterclaim is denied, there is no need to address this contention.
F. Counterclaim V — Unjust Enrichment Premised on Traditional
Counterclaim V alleges that Universal was unjustly enriched by
receiving $190,000 in no fault benefits for services that were never
actually rendered. Accepting, as I must, the truthfulness of State Farm's
allegations regarding Universal's falsified claims, State Farm has
alleged facts supporting a claim for unjust enrichment. Here, good
conscience dictates against allowing Universal to retain money if, in
fact, Universal did not provide services to State Farms's insureds.
Plaintiff's motion to dismiss Counterclaim V is denied.
For the foregoing reasons, Counterclaims II and III, and the portion of
Counterclaim I seeking an injunction, are dismissed. Plaintiff's motion
to dismiss Counterclaims IV and V, and the part of Counterclaim I seeking
declaratory judgment, is denied.