The opinion of the court was delivered by: Wexler, District Judge.
This is a diversity case brought by Plaintiff, Great South Bay
Medical Care, P.C. ("GSB" or Plaintiff) against Defendant,
Allstate Insurance Company ("Allstate" or "Defendant").
The dispute between the parties arises out of Allstate's
refusal to pay no-fault insurance benefits to GSB for services
allegedly rendered to individuals covered by policies of
insurance issued by Allstate. GSB alleges, not only a right to
payment for all services rendered but, in addition, that it has
been defamed by Allstate. The defamation claim arises out of
letters sent by Allstate, to its insureds, explaining Allstate's
reasons for refusing payment to GSB. Those letters refer to
GSB's billing practices as "misleading."
Allstate denies the allegations of the complaint and defends
the defamation claim on the ground that all statements made were
truthful. Additionally, Allstate claims, by way of an
affirmative defense, that the court should abstain from
exercising jurisdiction over this matter because the same issues
raised in this lawsuit are the subject of pending state court
litigation involving the same parties. Allstate also asserts a
counterclaim for unjust enrichment, seeking repayment of
approximately $8,000 in benefits it alleges were wrongfully paid
Allstate denies the allegations set forth in the complaint. Of
the several affirmative defenses alleged, the one that is
relevant to the motions here is the first, which seeks to have
this court abstain from asserting jurisdiction this action.
Additionally, Allstate asserts a counterclaim seeking repayment
of benefits already paid to GSB to which Allstate alleges there
is no entitlement.
Allstate's abstention argument is based upon an action that is
currently pending in the Supreme Court of the State of New York,
County of New York, entitled Progressive Northeastern Ins. Co.,
et al., v. Advanced Diagnostic and Treatment Medical, P.C., et
al., No. 601112/00 (the "State Court Action"). According to
Allstate's affirmative defense, GSB has "engaged in the very
same pattern and practice of deceptive and misleading conduct as
alleged by the Defendants in the State Court Action." The
allegations and progress of that action are detailed below.
IV. State Court Action
The State Court Action was commenced in March of 2000, by
seventeen insurance companies, including Allstate. Named as
defendants therein are over one hundred medical providers,
including GSB.*fn1 The plaintiff insurance companies'
complaint in the State Court Action (the "State Court
Plaintiffs") is in excess of 350 pages long and contains 164
separate claims for relief. It alleges a broad scheme to
defraud, the specifics of which are strikingly similar to the
allegations set forth in Allstate's affirmative defenses.
Specifically, the State Court Plaintiffs allege that several
medical doctors have sold the right to use their names in the
formation of professional corporations under New York State law.
These doctors are alleged to have had no real involvement in the
corporations formed under their names. The corporations are,
instead, alleged to be controlled by chiropractors and other
individuals who would not, under New York law, be allowed to
practice in the corporate form of a P.C. It is alleged that
practice as a P.C., and the association of medical doctors,
allows the state court defendants to carry out a fraudulent
The complaint in the State Court Action details the fraudulent
billing scheme in the following manner. It is alleged that
chiropractors and other non-medical personnel have billed the
insurance companies as if treatment provided by a non-physician
was provided by a physician, thus fraudulently allowing
defendants to bill at a higher rate. In addition to practicing
under a fraudulent corporate form, the defendants in the State
Court Action are alleged to have rendered unnecessary treatment
and to have billed insurance companies for care not actually
With respect to GSB, the State Court Action alleges that the
company "regularly billed for medical services not provided by
medical doctors." It is also alleged that GSB inflated its
billing by seeking payment under a surgery fee schedule when no
surgery was performed and by billing for "temperature gradient
studies" that were either unnecessary or not performed.
The factual allegations set forth in the State Court Action
are stated in support of several state law claims, including
common law fraud, unjust enrichment, restitution, Section 349,
and the New York Public Health Law. Additionally, the State
Court Action sets forth several civil RICO claims against
various combinations of defendants, pursuant to
18 U.S.C. § 1962.
V. Progress and Rulings in the State Court Action
Discovery in the State Court Action is ongoing, as are
settlement discussions. Although no trial date appears to have
been set, the court has ruled upon certain motions. Important to
this litigation is the state court's ruling regarding the
perpetration of a fraud by way of the corporate structure of the
medical provider defendants — the precise issue raised by
Allstate here by way of an affirmative defense.
Principals set forth by the Supreme Court in Colorado River
Water Cons.Dist. v. United States, 424 U.S. 800, 96 S.Ct. 1236,
47 L.Ed.2d 483 (1976), allow a federal court to abstain from
exercising jurisdiction over a case where there is pending a
parallel state court proceeding and certain other factors weigh
in favor of abstention. See Colorado River Water Cons.Dist. v.
United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483
(1976); General Reinsurance Corp. v. CIBA-Geigy Corp.,
853 F.2d 78, 81 (2d Cir. 1988). Lawsuits are considered "parallel"
if "substantially the same parties are contemporaneously
litigating substantially the same issues in different forums."
Dittmer v. County of Suffolk, 146 F.3d 113, 118 (2d Cir.
1998), quoting, Day v. Union Mines, Inc., 862 F.2d 652, 655
(7th Cir. 1988). A finding that proceedings are parallel is a
necessary prerequisite to the exercise of Colorado River
abstention. Dittmer, 146 F.3d at 118.
Where parallel proceedings exist, a court determines whether
to exercise its power to abstain by consideration of the factors
set forth by the Supreme Court in Colorado River and its
progeny. These factors are:
No single factor is determinative and the decision of whether
to abstain is left to the sound discretion of the trial court.
See Moses H. Cone Memorial Hospital v. Mercury Constr. Co.,
, 21, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983); Colorado
River, 424 U.S. at 818-19, 96 S.Ct. 1236; Woodford v.
Community Action Agency of Greene Cty., Inc.,
(2d Cir. 2001).
The parties are in agreement as to the factors to be
considered by the court in determining whether to exercise the
discretion to abstain. It is the application of those factors
here where Plaintiff and Defendant part company, and to which
the court now turns.
II. The Propriety of Abstention
A. The Actions Are Parallel Proceedings
At the outset, the parties disagree as to whether this action
is properly considered as an action that is parallel to the
State Court Action. As noted, actions are parallel if
substantially the same parties are litigating substantially the
same issues in different forums. Dittmer, 146 F.3d at 118.
GSB and Allstate are both parties to the State Court Action.
The claims raised against GSB here and in the State Court Action
are the same. Importantly, the core of most of the insurers'
claims in the State Court Action are identical — fraudulent
incorporation facilitated fraudulent billing. It is this precise
claim raised here by Allstate. These facts indicate that the
State Court Action is a parallel proceeding to the action
Arguing against such a finding, GSB makes much of the fact
that the State Court Action names multiple defendants (not named
here) against whom several different insurers (other than
Allstate) make various claims. While the State Court Action
names numerous defendants in addition to GSB, this factor alone
does not render the proceedings non-parallel. See Bernstein v.
Hosiery Mfg. Corp. of Morganton, Inc., 850 F. Supp. 176, 184
(E.D.N.Y. 1994) (Colorado River abstention does not require
identical parties in federal and state proceedings).
Nor is the court persuaded by GSB's argument that the presence
of additional legal theories in both actions destroys the
parallel nature of the proceedings. Neither GSB's raising of a
defamation claim nor the naming of certain defendants in RICO
causes of action alters the conclusion that the cases are
factually identical as they relate to the parties to this
lawsuit. See Garcia v. Tamir, 1999 WL 587902 *3 (S.D.N.Y.
August 4, 1999) (presence of different theories or causes of
action does not destroy finding that claims are parallel, so
long as the causes of action are "comprised of the same
In view of the foregoing, the court holds that the State Court
Action is a parallel proceeding to the action herein.
Accordingly, the requisite for the exercise of Colorado River
abstention has been met.
B. Factors Favoring the Retention of Federal Jurisdiction
1. Exercise of In Rem Jurisdiction
There is no res over which either court has exercised
jurisdiction. The absence of this factor has been held to favor
the retention of federal jurisdiction. Woodford v. Community
Action Agency of Greene Cty., Inc., 239 F.3d 517, 521-22 (2d
2. Convenience of the Fora
The State Court Action is pending in New York County and this
case in the Eastern District of New York. While one venue may be
more convenient to a party, neither is significantly
inconvenient. Attorneys practicing in the New York metropolitan
area routinely practice in both venues. The Second Circuit has
held that where both courts are convenient, the factor is
facially neutral and therefore weighs in favor of the retention
of jurisdiction. See Village of Westfield, N.Y. v. Welch's,
170 F.3d 116, 122 (2d Cir. 1999).
C. Factors Favoring Abstention
1. The Order in Which Jurisdiction Was Obtained
The case here was commenced by GSB shortly before Allstate
added GSB as a defendant to the State Court Action. Allstate
would have earlier named GSB, but a stay imposed by Justice
Gammerman pending a decision on motions to dismiss, prevented
that action. GSB has since been named in the State Court
proceeding, a fact that surely came as no surprise to GSB.
Consideration of the order in which jurisdiction was obtained,
however, depends not on the dates when the two actions were
filed, but on the progress of the cases. Arkwright-Boston
Manufacturers Mut. Ins. Co. v. City of New York, 762 F.2d 205,
211 (2d Cir. 1985). Both cases are in the discovery phase of the
litigation, although greater progress appears to have been made
in the State Court Action. Importantly, Justice Gammerman has
ruled on several motions to dismiss and has thereby narrowed the
issues for trial. Dispositive motions for summary judgment have
been briefed and are awaiting disposition. Comparing the
progress of the two actions leads the court to conclude that
this factor weighs in favor of abstention.
2. Avoidance of Piecemeal Litigation
This factor weighs heavily in favor of abstention. The State
Court Action involves numerous insurance companies and health
care providers. Justice Gammerman's ultimate decision will
dispose of a great deal of the litigation involving the right to
payment by improperly incorporated professional corporations.
This is preferable to allowing GSB (and possibly other
plaintiffs) to separately assert claims pursuant to this court's
diversity jurisdiction and receive piecemeal rulings on a case
by case basis. The factor of uniformity thus weighs heavily in
favor of abstention. Cf. General Reinsurance, 853 F.2d at 81
("classic example" of undesirable piecemeal litigation exists
where all potentially liable defendants are parties in one
lawsuit but one party in another lawsuit seeks a declaration of
non-liability and other potentially liable defendants are not
3. Whether State or Federal Law Provides the Rule of
Decision on the Merits
As to whether State or Federal issues predominate, the answer
is clear. Not only is there a complete absence of any federal
law in this case, the state law at issue is novel, unsettled,
and currently winding its way through the lower courts of the
State of New York.
The issue of how corporate formation relates to the right to
receive payment is one that is particular to the law of the
State of New York. The decision involves interpretation of the
public policy underlying a state licensing statute. A decision
by the state courts in this unsettled matter is preferable to
this court exercising its "best bet" as to how New York law
should be interpreted. Because this is not a "garden variety"
diversity case involving the application of well-settled
principals of state law, this factor weighs against the
retention of federal jurisdiction and in favor of abstention.
See Arkwright-Boston, 762 F.2d at 211.
It bears noting that it is no secret to the court or the
parties that GSB relies on the decision in State Farm Mut. Aut.
Ins. Co. v. Mallela, 175 F. Supp.2d 401 (E.D.N.Y. 2001), in
support of its asserted right to payment. In Mallela, Judge
Sifton of this district held that improper corporate formation,
standing alone, could not be relied upon as a basis for denying
the payment of insurance benefits for services rendered.
Not only is this court not bound by Mallela, the facts
therein are distinguishable from those asserted here. Here, as
in the State Court Action, it is alleged that the fraudulent
incorporation "facilitated" fraudulent billing practices.
Denying the particular defense asserted in Mallela, Judge
Sifton commented that nowhere in that action did the insurer
allege that services were provided by non-professionals.
Mallela, 175 F. Supp.2d at 407. Thus, Mallela, stands for the
narrow proposition that corporate formation, standing alone, is
not be a proper basis for denial of payment. While this may or
may not be the ultimate interpretation of state law by the
courts of that state, its application here would not be
Allstate's allegations of improper and fraudulent billing here
(and in the State Court Action) are broader than the allegations
of impropriety set forth in Mallela. In both actions it is
alleged that GSB billed at higher medical rates for non-medical
services and that unnecessary procedures were performed. Thus,
even if this case remained in this forum, Mallela, would in no
way mandate the result sought by GSB.
Moreover, in view of the fact that forum shopping is not to be
encouraged, the presence of an arguably favorable federal court
decision on a matter of state law has little or no bearing on
the abstention decision. Indeed, it is arguable that the filing
of this lawsuit by GSB, for the specific purpose of taking
advantage of a favorable federal interpretation of state law,
rather than being subject to a possibly disadvantageous state
court interpretation, counsels against the exercise of
jurisdiction. See Telesco v. Telesco Fuel and Masons'
Materials, Inc., 765 F.2d 356, 363 (2d Cir. 1985) ("reactive"
nature of federal litigation may properly influence abstention
decision) (quoting Moses H. Cone, 460 U.S. at 17 n. 20, 103
4. The Ability of the State Court to Protect the Rights of
There is no question but that the rights of GSB can be
adequately protected by the state court. The claim raised by GSB
that is particular to this proceeding, defamation, is a state
law claim. That claim can be raised by way of a counterclaim in
the State Court Action and is one that can be easily and
accurately analyzed by the state court.
The court is mindful that abstention under Colorado River
requires a finding that "exceptional circumstances" exist to
justify the surrender of federal court jurisdiction. See
Village of Westfield, 170 F.3d at 124. Consideration of all
factors here leads the court to conclude that this is a case
where abstention is, indeed, appropriate. The court therefore
grants Allstate's motion to abstain and dismisses this matter.
All other motions made in connection with this case are denied
as moot and can be raised in the context of the State Court
proceeding as appropriate.
The court grants Defendant's motion to dismiss in its
entirety. In light of this disposition, the remaining motions
are denied as moot. The Clerk of the Court is directed to close