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May 23, 2002


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 to GSB.

Presently before the court are motions of both parties. GSB moves, pursuant to Rule 12(c) of the Federal Rules of Civil Procedure, to strike the affirmative defense supporting Allstate's abstention argument. GSB also seeks to dismiss Allstate's unjust enrichment counterclaim. Allstate opposes these motions and seeks to have this court abstain from deciding this case in favor of the pending state court proceeding. Finally, Allstate seeks to amend its answer to set forth a claim for declaratory relief.

For the reasons set forth below, GSB's motions are denied. Allstate's motion to abstain in favor of the pending state court proceeding is granted and the motion to amend the answer is denied as moot.


I. Great South Bay and its Business

GSB alleges that it is a professional corporation ("P.C."), with its principal place of business in Patchogue, New York, that is engaged in the business of providing medical services. Many of GSB's patients are individuals who suffered injury as a result of their involvement in automobile accidents. Certain of these patients have been insured by Allstate. Rather than requiring payment in full for services rendered, GSB accepts the assignment of its patients' rights to collect benefits from Allstate. This assignment of rights allows GSB to collect payment directly from Allstate.

II. Allstate's Refusal to Pay

Beginning sometime in 1998, Allstate began to refuse payment for services rendered to its insureds by GSB. Allstate's refusal to pay stems from allegations regarding the corporate structure of GSB. Allstate alleges that GSB is improperly incorporated as a professional corporation under the laws of the State of New York. According to Allstate, GSB, which holds itself out as a professional medical corporation (which can be properly incorporated only if controlled by medical doctors), is, in fact, controlled by two individuals who are chiropractors. Allstate alleges that this "fraudulent incorporation" allows GSB to bill for its services at a higher "medical" rate, rather than the non-medical rate to which it is entitled.

Allstate explained its reason for denial of payment to GSB in letters sent to insureds. The pertinent language in those letters are set forth in the complaint. They describe the billing practice of GSB as "misleading."

III. Plaintiffs Complaint and Defendant's Affirmative Defenses and Counterclaim

It is Allstate's use of the word "misleading" in letters to insureds that forms the basis of GSB's first cause of action — libel per se. In addition to this defamation claim, GSB sets forth causes of action in breach of contract, unjust enrichment and pursuant to the New York State consumer fraud statute, Section 349 of the New York General Business Law ("Section 349").

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 billing scheme.

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 rendered.

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 ...

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