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AIU Insurance Co. v. Deajess Medical Imaging

February 10, 2009

AIU INSURANCE COMPANY, AMERICAN HOME ASSURANCE COMPANY, NEW HAMPSHIRE INSURANCE COMPANY, EAGLE INSURANCE COMPANY, NEWARK INSURANCE COMPANY AND LION INSURANCE COMPANY, PLAINTIFFS,
v.
DEAJESS MEDICAL IMAGING, P.C., BOSTON POST ROAD MEDICAL IMAGING, P.C., PREFERRED MEDICAL IMAGING, P.C., MRI GLOBAL IMAGING SERVICES, INC., A/K/A AND/OR D/B/A MRI FORUMS, ROBERT SCOTT SCHEPP, M.D., HILLEL SHER, ABC CORPORATIONS 1 THROUGH 20 AND JOHN DOES 1 THROUGH 20, DEFENDANTS.
THE PROGRESSIVE GROUP OF INSURERS, ET AL, CONSOLIDATED PLAINTIFFS,
ROBERT SCOTT SCHEPP, M.D., ET AL CONSOLIDATED DEFENDANTS.
DEAJESS MEDICAL IMAGING, P.C., ET AL, DECLARATORY JUDGMENT PLAINTIFFS,
ALLSTATE INSURANCE COMPANY, ET AL DECLARATORY JUDGMENT DEFENDANTS.,



The opinion of the court was delivered by: Stephen A. Bucaria, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the printed Official Reports.

This motion, by defendant [in the initial action] Dr. Robert Schepp and related parties [as plaintiffs in the declaratory judgment action], for summary judgment is granted in part and denied in part.

This is an action for a declaratory judgment that the defendant health care providers are ineligible for no fault reimbursement because of failure to comply with state licensing requirements. In addition to declaratory relief, plaintiffs seek to recover previously paid no fault claims, asserting causes of action for fraud and unjust enrichment.

Dr. Robert Schepp is a radiologist whose practice is devoted primarily to patients injured in automobile accidents. He practices through a group of professional service corporations which have submitted a large number of no fault claims to the plaintiff insurance companies. The insurers have paid many of these claims but have denied many others on the ground that the professional corporations are ineligible for no fault reimbursement. The insurers assert that the professional corporations are in violation of state licensing requirements because they are controlled by an individual not licensed to practice medicine. The insurers further argue that the corporations are ineligible for reimbursement because the radiology services were performed by independent contractors. Finally, the insurers argue that the corporations lack standing because they assigned the no fault claims to finance companies pursuant to accounts receivable financing agreements.

Prior to this declaratory judgment action, the corporations had commenced a large number of civil court actions and demanded a large number of arbitrations, seeking to recover no fault claims. Some of the actions and arbitrations have been resolved, but many are still pending. Pursuant to a series of orders dated January 19, February 2, and March 27, 2006, the court stayed 344 actions and 44 proceedings to stay arbitration and consolidated them with the present declaratory judgment action.

The Schepp parties move for partial summary judgment, asserting that a professional corporation is ineligible for no fault reimbursement only if the professional who formed the corporation intended to turn control over to an unlicensed individual. They additionally request partial summary judgment as to their standing and independent contractor defenses. Finally, they request partial summary judgment on the grounds that the insurers are raising a "collateral attack" on judgments and arbitration awards previously rendered in the Schepp parties' favor. Before proceeding to the merits of the parties' claims, the court will consider whether declaratory relief is appropriate. While declaratory judgment is discretionary, it is not an extraordinary remedy (Church of St. Andrew and St. Paul v. Barwick, 67 NY2d 510, 518, 1986; Morgenthau v. Erlbaum, 59 NY2d 143, 147 1983). Declaratory judgment may be an appropriate vehicle for settling disputes as to contract rights and obligations, where a mandatory mechanism is not provided in the agreement (Kalisch-Jarcho, Inc. v. New York, 72 NY2d 727, 731-32 1988). Although the claimant has the option of submitting a no fault dispute to arbitration, declaratory judgment may be an appropriate vehicle for settling disputes concerning no fault benefits (See Bennett v. State Farm Ins. Co., 147 AD2d 779, 3rd Dept., 1989).

Declaratory judgment is not an exception to the principle of res judicata and does not permit a trial court to review another court's judgment (Goldstein v. Mass. Mutual Life Ins., 32 AD3d 821, 2nd Dept., 2006). Therefore, the concern that the court will "undo thousands of no fault claims" is misplaced. "[D]eclaratory judgment does not entail coercive relief, but only provides a declaration of rights between parties that, it is hoped, will forestall later litigation" (Morgenthau, 59 NY2d at 148). Thus, declaratory relief by this court will not, of itself, result in the vacating of any other court's judgment. To the extent that this court's decision is inconsistent with any previously granted arbitration award, it is not intended to provide grounds for vacatur (See CPLR § 7511[a]). To the extent that the court's decision is inconsistent with the judgment of any other court, whether to grant relief from that judgment, is within the discretion of that court(See Ruggiero v. LIRR, 161 AD2d 622, 2nd Dept., 1990). The court notes that plaintiffs are not requesting this court to take any action with respect to any judgment or arbitration award. Furthermore, the insurers themselves have requested declaratory relief in one of the consolidated declaratory judgment actions. Because of the large number of actions and arbitrations involving the common question of the Schepp entities' eligibility for no fault reimbursement, the court concludes that declaratory relief is appropriate.

Pursuant to Insurance Law § 5103, every automobile insurance policy must provide for payment of so-called "no fault," or "first party benefits," to occupants of a covered vehicle who sustain loss through the use or operation of the vehicle. Section 5102(b) of the Insurance Law defines "first party benefits" as payment to reimburse the injured person for "basic economic loss," less certain deductions. Under Insurance Law § 5102(a), "basic economic loss" means necessary medical expenses and lost earnings up to $50,000. Thus, in accordance with the statutory scheme, expenses for necessary x-rays and MRI's are ordinarily reimbursable no fault benefits.

However, Insurance Department regulation 11 NYCRR § 65-3.16(a)(12) provides A provider of health care services is not eligible for reimbursement under § 5102(a) of the Insurance Law if the provider fails to meet any applicable New York State or local licensing requirement necessary to perform such service in New York or ...any other state in which such service is performed.

If the health care provider is a professional service corporation, section 1507 of the Business Corporation Law requires that any individual who holds shares in the professional corporation be licensed to practice the profession. Section 1508 of the Business Corporation Law provides that an individual must be licensed to be a director or officer of a professional service corporation. The insurers assert that Dr. Schepp's professional corporations fail to meet state licensing requirements because they are owned and controlled by management companies, which are controlled by an unlicensed individual.

In State Farm v. Mallela, 4 NY3d 313 (2005), known to the no fault bar as "Mallela III," the Court of Appeals held that an insurer may withhold payment for medical services provided by "fraudulently incorporated" enterprises to which patients have assigned their no fault claims. In Mallela, unlicensed individuals paid physicians to use their names on certificates of incorporation and other documents filed with the Department of State to establish medical service corporations (4 NY3d at 319). Once the medical service corporations were established under the cover of the nominal physician-owners, the non-physicians actually operated the companies (Id). The non-physicians caused the corporations to hire management companies owned by the non-physicians, which billed the medical corporations at inflated rates for routine services(Id at 319-20). Thus, the corporations' profits did not go to the nominal owners but were channeled to the non-physicians who owned the management companies. The court held that although the patients received appropriate care from licensed professionals, the insurers could withhold payment for no fault benefits.

In moving for partial summary judgment, the Schepp parties argue that a professional service corporation is ineligible for no fault reimbursement only if it was "fraudulently incorporated." Movants construe this term as meaning that the professional corporation was formed by a licensed professional who intended to turn control of the corporation over to an unlicensed party. They assert that Dr. Schepp's professional corporations were not fraudulently incorporated because Dr. Schepp intended to retain control when he formed the professional corporations.

In Mallela III, the question of whether an "unlawfully incorporated" medical corporation was eligible for no fault law reimbursement had been certified to the Court of Appeals by the United States Court of Appeals for the Second Circuit (State Farm Mutual Auto Ins. Co. v. Mallela, 372 F.3d 500, 2d Cir. 2004). In certifying this question, the Second Circuit noted our state's longstanding concern that the "corporate practice of medicine" would create ethical conflicts and undermine the quality of care afforded to patients (372 F.3d at 503). Additionally, the court noted that the corporate practice of medicine was associated with more traditional forms ...


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