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Allstate Insurance Co. v. Valley Physical Medicine & Rehabilitation

February 21, 2007


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


Presently before the Court are two motions: a motion to dismiss the complaint and a motion for Rule 11 sanctions. Both motions are brought by defendants Valley Physical Medicine & Rehabilitation, P.C. ("Valley"), Elite Physical Medicine & Rehabilitation, P.C. ("Elite"), Universal Express, Inc. ("Universal"), Dr. Joseph Mills ("Mills") and Dr. Pavani Tipirneni ("Tipirneni") (collectively "Defendants").*fn1 For the reasons set forth below, the motion to dismiss is GRANTED in part and DENIED in part. The motion for Rule 11 sanctions is DENIED.


Plaintiffs Allstate Insurance Company, Allstate Indemnity Company and Deerbrook Insurance Company (collectively "Allstate"or "Plaintiffs") commenced this action on December 20, 2005 asserting causes of action for fraud (first claim for relief), for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") (second through seventh claims for relief), unjust enrichment/restitution (eighth claim for relief) and a declaratory judgment (ninth claim for relief). Allstate's claims arise out of payments it made from 1996 to 2002 totaling in excess of one million dollars to Valley and Elite for services allegedly rendered to Allstate's insureds under New York State's no-fault insurance system. (Compl. ¶¶ 58 & 66.) Allstate seeks damages and, in its ninth cause of action, a declaratory judgment that Valley and Elite are fraudulently incorporated enterprises and, therefore, barred from receiving payment for no-fault claims (Compl. ¶¶ 95-101).

In New York, only doctors of medicine and of osteopathy are physicians and are authorized to practice medicine. See N.Y. Educ. Law §§ 6522, 6524. New York law also prohibits non-physicians from sharing ownership in medical service corporations. See N.Y. Bus. Corp. Law §§ 1507, 1508, and N.Y. Educ. Law § 6507(4)(c). As alleged in the complaint, the Defendants engaged in a scheme to evade the State's prohibition on non-physicians from sharing ownership in medical service corporations in order to facilitate fraudulent no-fault billing. (Compl. ¶¶ 7- 45.) Mills, a chiropractor, paid Drs. Tipirneni, Quereshy, and Lahiri to use their names on paperwork filed with the State to establish medical service corporations, to wit: Valley and then Elite.*fn2 (Compl. ¶¶ 7, 31-32.) Once Valley and Elite were established under the facially valid cover of the nominal physician owners, Mills actually operated the companies. (Compl. ¶¶ 11, 25.) To maintain the appearance that physicians owned Valley and Elite, Mills caused Valley and Elite to hire Universal, a company owned by him, as a management company, which billed Valley and Elite at inflated rates so that the actual profits did not go to the physicians, but were channeled to Mills as owner of Universal. (Compl. ¶¶ 11, 12, 35.)

Enabled by the doctor defendants, Valley, Elite, Universal, and Mills proceeded to bill Allstate for medical services that were not provided by medical doctors, for medically unnecessary and/or medically useless services, and engaged in other fraudulent billing. (Compl. ¶¶ 12-14, 31-36.)

The instant action is neither the first nor the only action between these parties. In 1999, Valley, as assignee of 10 patients allegedly entitled to no-fault benefits, commenced an action against Allstate in this Court alleging it was entitled to payment of its bills because Allstate failed to pay the bills within 30 days of submission as mandated by the statutes and regulations governing no-fault. See Valley Physical Med. and Rehab. v. Allstate Ins. Co., 99 CV 5657 (E.D.N.Y.) (the "1999 Action"); Ex. A, attached to Declaration of Martha S. Henley ("Henley Decl."). Allstate defended the action by raising affirmative defenses, including that Valley was not properly licensed and incorporated and was, therefore, not entitled to receive no-fault benefits, and that the bills were for medically unwarranted testing and/or treatment. Allstate did not, however, assert any counterclaims. See Ex. C, attached to Declaration of Steven J. Harfenist ("Harfenist Decl."). At trial and during its direct case, Valley voluntarily withdrew the action with prejudice. See Ex. F, attached to Henley Decl.

At the time the instant motion was filed, there were approximately ten actions pending in Nassau County District Court between the parties. In each of these cases, Valley is suing Allstate to recover for no-fault bills it submitted to Allstate that were not paid. See Exs. F & G, attached to Harfenist Decl. The issue of Valley's corporate structure has been raised by Allstate as a defense in each of these actions. Harfenist Decl. at ¶ 3 & Ex. G.

In this action, Defendants have moved to dismiss the complaint. Defendants argue that 1) the RICO causes of action are barred by the statute of limitations; 2) the causes of action for fraud and for unjust enrichment to recover those benefits paid prior to April 4, 2002 are barred under State Farm Automobile Insurance Company v. Mallela, 4 N.Y.3d 313, 794 N.Y.S.2d 700 (2005); 3) the cause of action for fraud is not plead with particularity, is precluded under New York's no-fault law, and fails as a matter of law for lack of reasonable reliance; and 4) this Court should abstain from determining Allstate's claim for declaratory relief because of the pendency of state cases involving the issue of Valley's corporate status.


I. Standard for a Motion to Dismiss

The Court may not dismiss a complaint under Rule 12(b)(6) unless it appears beyond doubt that the plaintiff can prove no set of facts in support of its claim which would entitle it to relief. King v. Simpson, 189 F.3d 284, 286 (2d Cir. 1999); Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996). The complaint need only provide "a short and plain statement of the claim showing that the pleader is entitled to relief." Swierkiewicz v. Sorema, 534 U.S. 506, 512 (2002) (quoting Fed. R. Civ. P. 8(a)(2)). Thus, "a plaintiff is required only to give a defendant fair notice of what the claim is and the grounds upon which it rests." Leibowitz v. Cornell Univ., 445 F.3d 586, 591 (2d Cir. 2006). Nonetheless, "a plaintiff's allegations, accepted as true, must be sufficient to establish liability." Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338, 344 (2d Cir. 2006).

In construing a complaint on a Rule 12(b)(6) motion, the Court must accept all factual allegations in the proposed complaint as true and draw all reasonable inferences in favor of the plaintiff. King, 189 F.3d at 287; Jaghory v. New York State Dept. of Educ., 131 F.3d 326, 329 (2d Cir. 1997). The Court must confine its consideration "to facts stated on the face of the complaint, in documents appended to the complaint or incorporated in the complaint by reference, and to matters of which judicial notice may be taken." Leonard F. v. Israel Disc. Bank, 199 F.3d 99, 107 (2d Cir. 1999) (quoting Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991)); Hayden v. County of Nassau, 180 F.3d 42, 54 (2d Cir. 1999).

II. Overview of New York's No-Fault Insurance System

Inasmuch as this case revolves around New York State's no-fault automobile insurance system, a brief overview of that system is in order.

In 1973, the New York State Legislature enacted the Comprehensive Automobile Insurance Reparations Act (the "Act"). SeeN.Y. Ins. Law §§ 5101 et seq. (formerly N.Y. Ins. Law §§ 670 et seq.). The Act instituted a system of no-fault insurance that supplanted common-law tort actions for most victims of automobile accidents. Medical Soc'y v. Serio, 100 N.Y.2d 854, 860, 768 N.Y.S.2d 423 (2003). "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." Id.

Under New York's no-fault system, the insured party is permitted to recover from insurers for "basic economic loss," including medical expenses, that arise out of the use or operation of an insured vehicle. N.Y. Ins. Law § 5102. Medical expenses are reimbursed based upon a fee schedule which specifies the charges permitted for specific services rendered by particular kinds of providers. Id. at § 5108; 11 N.Y.C.R.R. § 65-3.16. A "provider of health care services" is not eligible for reimbursement "if the provider fails to meet any applicable New York State or local licensing requirement necessary to perform such services in New York or meet any applicable licensing requirement necessary to perform such services in any other state in which such service is performed." Id. at § 65-3.16(a)(12).

The regulations implementing the Insurance Law allow covered parties to assign their benefits to health care providers. The health care providers then submit the claims to the insurers for reimbursement for treatment and services given to the injured party. See 11 N.Y.C.R.R. § 65-3.11. The regulations establish strict and short time periods for claim submission and processing. See generally Medical Soc'y, 100 N.Y.2d at 860-63. Under the regulations, an insurer must request any necessary verification of claims by sending the claimant certain prescribed forms within ten days of receiving a completed claim. 11 N.Y.C.R.R. § 65-3.5(a). Upon receipt of verification, the insurer has thirty days to pay or deny a benefits claim. Id. at § 65-3.8; see also Presbyterian Hosp. v. Maryland Cas. Co., 90 N.Y.2d 274, 278, 660 N.Y.S.2d 536 (1997).*fn3 If benefits are not paid within the thirty-day requirement, they become overdue and overdue payments bear interest of 2% per month. 11 N.Y.C.R.R. § 65-3.9(a). A claimant is entitled to attorneys' fees for valid claims that are denied or overdue. Id. at §65-3.10(a).

III. The Claims for Fraud and Unjust Enrichment

With that background in mind, the Court turns to Plaintiffs' causes of action for fraud and unjust enrichment. Defendants move to dismiss these causes of action to the extent the claims seek reimbursement for no-fault benefits paid prior to April 4, 2002, relying on the New York Court of Appeals decision in State Farm Mutual Automobile Insurance Company v. Mallela, 4 N.Y.3d 313, 794 N.Y.S.2d 700 (2005). In addition, they argue that the fraud claims predicated on lack of medical necessity and nature of the services must be dismissed because Allstate failed to allege fraud with particularity, there is no reasonable reliance, Allstate is precluded from raising fraud because it failed to raise it in the denial of benefits, and any claims for fraud through December 20, 1999, are barred by the statute of limitations.

A. Ascertaining State Law

Allstate's fraud and unjust enrichment claims are governed by New York law. In ascertaining the law of New York, this Court "looks to the decisional law of [New York] as well as to the state's constitution and statutes." Travelers Ins. Co. v. 633 Third Assoc., 14 F.3d 114, 119 (2d Cir. 1994). Where the state law is ambiguous or uncertain or there is an absence of authoritative law from the state's highest court, "the job of the federal courts is carefully to predict how the highest court of the forum state would resolve the uncertainty or ambiguity." Phansalkar v. Andersen Weinroth & Co., 344 F.3d 184, 199 (2d Cir. 2003) (quoting Travelers, 14 F.3d at 119); accord DiBella v. Hopkins, 403 F.3d 102, 111 (2d Cir. 2005). In doing so, the federal court "must give 'fullest weight' to the decisions of a state's highest court and 'proper regard' to the decisions of a state's lower courts." Phansalkar, 344 F.3d at 199 (quoting Travelers, 14 F.3d at 119). Decisions of a state's intermediate and lower courts are not binding on the federal courts. "[W]e consider the language of the state courts to be helpful indicators of how the state's highest court would rule. Although we are not strictly bound by state intermediate appellate courts, rulings from such courts are a basis for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise." DiBella, 403 F.3d at 112 (internal quotations and citations omitted).

B. The New York Court of Appeals' Decision in Mallela

In Mallela, the New York Court of Appeals accepted the following certified question from the Second Circuit: "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." 4 N.Y.3d at 320. The Court of Appeals concluded that such corporations are not entitled to reimbursement. Id. The Court based its ruling on the Superintendent of Insurance's revised regulation, 11 N.Y.C.R.R. § 65-3.16(a)(12), which allows carriers to withhold reimbursement from fraudulently licensed medical corporations. It found the revised regulation valid and held that "on the strength of this regulation, carriers may look beyond the face of licensing documents to identify willful and material failure to abide by state and local law." 4 N.Y.3dat 321.

The Court went on to address whether, if the fraudulent corporations were not entitled to reimbursement, a carrier could recover money already paid out under theories of fraud or unjust enrichment. The New York Court of Appeals stated that, because its holding rested on the Superintendent's revised regulation declaring fraudulently licensed corporations ineligible for no-fault reimbursement, "no cause of action for fraud or unjust enrichment would lie for any payment made by the carriers before that regulation's effective date of April 4, 2002." Id. at 322. As the Court could not determine from the complaint whether or not any payments were made after the revised regulation took effect, it declined to consider whether the subject carrier had alleged sufficient facts to support causes of action for fraud or unjust enrichment. Id.

Based on the New York Court of Appeals decision in Mallela, Defendants argue that Allstate's claims for payments made from 1996 through 2001 must be dismissed. Moreover, as to the payments made in 2002 (which total $30, 372.01), only those made after April 4, 2002 survive under Mallela. Plaintiffs counter that Mallela does not bar their claims because they do not rely solely on the fraud in licensure, but also allege the Defendants' improper licensure and incorporation were used to facilitate billing fraud, a claim not made in Mallela. Plaintiffs argue that Mallela held only that no claim for fraud and unjust enrichment lies upon the amended regulation prior to its effective date. According to Plaintiffs, Mallela did not answer the question whether fraudulent corporations were entitled to reimbursement under the prior law.

C. Recovery for Payments made Prior to April 4, 2002, on the Theories of Fraud and Unjust Enrichment Claims based on Fraudulent Licensure

Notwithstanding Plaintiffs' argument to the contrary, this Court does read Mallela as precluding Plaintiffs' causes of action for fraud and unjust enrichment to recover payments made prior to the effective date of the revised regulation and arising from Defendants' allegedly fraudulent incorporation. The Mallela Court held that no cause of action for fraud or unjust enrichment would lie for payments made to fraudulently incorporated providers before the revised regulations went into effect. By disallowing such claims for payments made before April 4, 2002, the Mallela Court recognized that the law as it existed prior to that date did not recognize claims to recoup payments from entities because they lacked a required license.

Under the common law of New York, compensation has been denied to unlicensed providers of services for which a regulatory license is required. See Metroscan Imaging, P.C. v. Geico Ins. Co., 13 Misc. 3d 35, 38-39, 823 N.Y.S.2d 818, 821 (App. Term, 2d & 11th Jud. Dist. 2006) (citing Spivak v. Sachs, 16 N.Y.2d 163, 263 N.Y.S.2d 953 (1965); Bendell v. De Dominicis, 251 N.Y. 305 (1929); Mavco Realty Corp. v. M. Slayton Real Estate, Inc., 12 A.D. 3d 575, 786 N.Y.S.2d 63 (2004); Price v. Close, 302 A.D. 2d 374, 754 N.Y.S.2d 660 (2003); Gordon v. Adenbaum, 171 A.D.2d 841, 567 N.Y.S.2d 777 (1991); P.C. Chipouras & Assoc. v. 21 Realty Corp., 156 A.D.2d 549, 549 N.Y.S.2d 555 (1989); Unger v. Travel Arrangements, 25 A.D.2d 40, 266 N.Y.S.2d 715 (1966)). The New York Courts have distinguished between denying an unlicensed entity compensation and permitting the recovery of a fee after it has been paid. The lack of a license does not permit the recovery of a fee from the unlicensed provider after it has been paid. Metroscan, 823 N.Y.S.2d at 821 (citing Johnston v. Dahlgren, 166 NY 354 (1901); Goldman v. Garofalo, 71 A.D.2d 650 (1979)).

In a well-reasoned decision with which this Court agrees, the Appellate Term has read Mallela as holding that the revised regulation "altered the common law prospectively such that an insurance carrier may maintain a cause of action against a fraudulently incorporated medical service corporation to recover assigned first-party no-fault benefits which were paid by the insurer to such medical service corporation after the regulation's effective date." Metroscan, 823 N.Y.S.2d at 821-22 (emphasis added).

Allstate's argument that Mallela does not preclude the recovery of no-fault payments made prior to April 2, 2004, has also been rejected by the Appellate Division, First Department.

See Allstate Ins. Co. v. Belt Parkway Imaging P.C., 33 A.D.3d 407 (1st Dept. 2006). In Belt Parkway, the First Department upheld the dismissal of Allstate's causes of action for fraud and unjust enrichment to recover for payments made before April 4, 2002 based on the fraudulent licensure of the defendants therein. The Belt Parkway Court found Mallela dispositive. Further, it rejected Allstate's attempt to distinguish Mallela on the ground that its claims rested on the common law, stating such claims are not cognizable under the common law. Id. at 408.

Following suit, this Court rejects Allstate's fraud and unjust enrichment causes of action, based on Defendants' alleged fraudulent incorporation and seeking to recover for no-fault payments made to Defendants prior to April ...

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