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Allstate Insurance Company, Allstate Indemnity Company v. John S. Lyons

February 16, 2012


The opinion of the court was delivered by: John Gleeson, United States District Judge:


This is a civil action brought by insurance companies who allege that defendants have engaged in sophisticated and related schemes to fraudulently obtain insurance proceeds that were supposed to pay for medical services for people injured in automobile accidents. Plaintiffs Allstate Insurance Company, Allstate Indemnity Company, Allstate Property and Casualty Insurance Company, Allstate Fire and Casualty Insurance Company, Allstate New Jersey Insurance Company, and Allstate New Jersey Property and Casualty Insurance Company (collectively, "Allstate") bring multiple causes of action against John S. Lyons, M.D., Sanna Kalika, M.D., Ilya Burshteyn, M.D., Harvey Stern, M.D., Joseph McCarthy, M.D., Right Aid Diagnostic Medicine, P.C. ("Right Aid"), A Plus Medical P.C. ("A Plus"), Omega Medical Diagnostic, P.C. ("Omega"), Shore Medical Diagnostic, P.C. ("Shore"), Oracle Radiology of NY P.C. ("Oracle"), Atlantic Radiology Imaging P.C. ("Atlantic Imaging"), Atlantic Radiology, P.C. ("Atlantic Radiology"), Aurora Radiology P.C. ("Aurora"), David Golub, Arthur Bogoraz, Simon Korenblit, Edward Atbayshan, Alexander Zharov, and Alma Building, LLC ("Alma").*fn1

Allstate asserts claims for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c)-(d) (Counts I-XVI), common law fraud (Count XVII), violations of § 349 of the New York General Business Law (Count XVIII), and unjust enrichment (Count XIX). In addition to making demands for damages and injunctive relief, Allstate requests a declaration that defendants have no right to receive payment for any previously denied, pending, or future no-fault claims, and that Right Aid, A Plus, Omega, Shore, Oracle, Atlantic Imaging, Atlantic Radiology, and Aurora are operating in violation of law and have engaged in unlawful activities (Count XX). Kalika, Lyons, and Right Aid (collectively, the "Right Aid defendants") and, separately, Stern, McCarthy, Atlantic Imaging, Atlantic Radiology, Korenblit, Atbayshan, and Zharov (collectively, the "Atlantic defendants") move to dismiss. The Atlantic defendants also move, in the alternative, to compel arbitration. For the reasons set forth below, I deny the motions to dismiss in their entirety. I also deny the motion to compel arbitration with respect to all claims except those that Allstate has not yet paid. For this residual category of claims, the motion to compel arbitration is granted.


New York's no-fault insurance law was passed "to create a simple, efficient system that would provide prompt compensation to accident victims without regard to fault, and in that way reduce costs for both courts and insureds." State Farm Mut. Auto. Ins. Co. v. Mallela, 372 F.3d 500, 502 (2d Cir. 2004). Under the law, automobile insurance providers are required to include in their policies coverage for injuries arising from car accidents, irrespective of who is to blame for the accident. The no-fault scheme thus "supplant[s] the state's common law tort remedies for most injuries associated with automobile accidents." Id. The law requires car insurance providers to reimburse injured persons for "basic economic loss," including medical expenses, and it sets forth a schedule of permissible charges for specific services. Id. (citing N.Y. Ins. Law §§ 5102, 5108). An injured person who seeks medical treatment may assign her right to no-fault benefits to her medical provider, and such assignment is typical.

According to the well-pleaded allegations in the Complaint,*fn3 defendants were involved in a massive conspiracy to defraud Allstate for benefits under the no-fault law. The conspiracy consisted of several discrete clusters of actors linked together by Lyons. Id. ¶¶ 93-137, 505-516. The central entity within each cluster was a professional corporation ("PC") that purported to provide health care services for individuals injured in car accidents. Id. ¶¶ 37-65. All of the PCs involved were owned on paper by licensed medical doctors ("paper owners"), as required by New York law. Id. ¶¶ 6-9, 37-65. However, the PCs were in fact controlled by other individuals or entities that were not doctors ("actual owners"). Id. ¶¶ 394-504.

Lyons served as a radiologist for each of the PCs and purported to analyze Magnetic Resonance Imaging ("MRIs") they performed for their injured patients. Id. ¶¶ 505-16.However, the reports he produced were fabricated. Id. ¶¶ 93-137. Some were based on MRIs of such poor quality that they could not serve any legitimate diagnostic purpose, id. ¶ 98; some were falsely duplicated for multiple patients, id. ¶ 95; some identified conditions that did not appear on the corresponding MRIs, id. ¶ 96; some otherwise diagnosed conditions that did not exist, id. ¶ 97; and some ignored conditions that were apparent from the MRIs, id. ¶ 135.

The PCs provided these worthless MRIs and fake MRI reports, as well as other medically unnecessary services purportedly recommended or justified by the fake MRI reports, to individuals eligible for no-fault benefits. Id. ¶¶ 93-137, 126, 137. After receiving assignment of their patients' no-fault benefits, the PCs then billed Allstate by mail for these medically unnecessary services under the no-fault law. Id. ¶¶ 517-524. In such billings, the PCs misrepresented that they were organized in accordance with New York law and that the medical treatment for which they sought payment was medically necessary and compensable under the no-fault law. Id. Allstate remitted payment as demanded to the PCs in sums totaling more than $4 million. Id. ¶ 16.

The clusters involved in this lawsuit include the following: (1) the PC Right Aid and its paper owner Kalika (the "Right Aid cluster"); (2) the PC Atlantic Imaging, its paper owner Stern, and its actual owners Korenblit, Atbayshan, and Zharov (the "Atlantic Imaging cluster"); (3) the PC Atlantic Radiology, its paper owner McCarthy, and its actual owners Korenblit, Atbayshan, and Zharov (the "Atlantic Radiology cluster"); (4) the PC A Plus and its paper owner Burshteyn; (5) the PC Omega and its paper owner Burshteyn; (6) the PC Shore and its paper owner Burshteyn; (7) the PC Oracle and its actual owner Alma, a management company owned and operated by Golub and Bogoraz; and (8) the PC Aurora and its paper owner Denise, who has been terminated from this lawsuit. Allegations specific to any particular defendant or cluster are set forth where relevant in the discussion that follows.

A. Motion to Dismiss

1. Standard of Review


The Right Aid defendants and the Atlantic defendants (the "moving defendants" or "defendants") move to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief may be granted. In reviewing such a motion, I must assume the truth of all well-pleaded factual allegations, draw all inferences in the light most favorable to the plaintiffs, and grant the motion only if the complaint so viewed fails "to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

2. RICO Claims

Passed in 1970 as part of the fight against organized crime, see United States v. Turkette, 452 U.S. 576, 588-89 (1981),RICO prohibits "person[s]" from engaging in four kinds of actions that relate to "enterprise[s]" involved in interstate commerce. See 18 U.S.C. § 1962. Subsection 1962(a) makes it illegal "to use or invest . . . any part" of "any income derived . . . from a pattern of racketeering activity" in the "acquisition of any interest in, or the establishment or operation of, any enterprise"; subsection 1962(b) bars "acquir[ing] or maintain[ing] . . . any interest in or control of any enterprise" "through a pattern of racketeering activity"; subsection 1962(c) makes it unlawful "to conduct or participate . . . in the conduct of [an] enterprise's affairs through a pattern of racketeering activity" when "employed or associated with" that enterprise; and subsection 1962(d) prohibits "conspir[ing] to violate" any of these substantive provisions.

RICO creates both criminal and civil liability for those who violate any of the subsections of § 1962. Section 1964 provides a private right of action for damages for RICO violations and confers jurisdiction upon federal district courts to hear such suits: "Any person injured in his business or property by reason of a violation of section 1962 . . . may sue therefor in any appropriate United States district court . . . ." 18 U.S.C. § 1964(c); see also § 1964(a). A successful civil RICO plaintiff "shall recover" treble damages for his injuries, as well as the cost of the suit, including attorney's fees. § 1964(c).

Allstate brings this action under § 1964(c), alleging injury caused by the defendants' violations of § 1962(c) and § 1962(d). In order to state a claim under § 1962(c), a plaintiff must plead three principal elements: "(1) the conduct (2) of an enterprise (3) through a pattern of racketeering activity." See Salinas v. United States, 522 U.S. 52, 62 (1997). To state a claim under § 1962(d), a plaintiff must plead that the defendant made an agreement to further or facilitate a violation of § 1962(a), (b), or (c). Id. at 65. The moving defendants cite multiple purported defects with Allstate's § 1962(c) and § 1962(d) claims, which I address in turn.

a. Allegations of Enterprise

The Act defines "enterprise" to "include[] any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). Although the statute does not define the outer boundaries of what constitutes an enterprise, it is clear that partnerships, corporations, and "other legal entit[ies]," as well as associations-in-fact, may be RICO enterprises. In this case, Allstate alleges that, in each cluster, the PC, a legal entity, constituted the relevant enterprise under RICO. Compl. ¶¶ 550, 575, 600, 625, 650, 675, 700, 725.

The moving defendants argue that Allstate has failed to adequately plead an "enterprise" for three reasons. First, defendants charge that an entity whose sole function is fraud may not be an enterprise under RICO, and defendants argue that the PCs' only alleged function was fraud. They appear to suggest that when the sole function of an enterprise is fraud, the "enterprise" element and "pattern of racketeering activity" element impermissibly merge. This objection is easily dispensed with; the Supreme Court has made clear that a wholly illegitimate enterprise, just like a legitimate enterprise, may constitute an enterprise under RICO. Turkette, 452 U.S. 576. The elements of "enterprise" and "pattern of racketeering activity" remain distinct elements under RICO, even when the allegations and proof of those elements overlap. Id. at 583.

Second, defendants contend that the Complaint fails to appropriately plead an association-in-fact enterprise.*fn4 However, Allstate has not alleged an association-in-fact enterprise. The alleged enterprises are the PCs, and corporations are expressly included in the definition of enterprise. See 18 U.S.C. § 1961(4); see also First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 173 (2d Cir. 2004) ("[A]ny legal entity may qualify as a RICO enterprise.").

Finally, defendants maintain that the Complaint runs afoul of the rule that a RICO enterprise be distinct from the person(s) charged with conducting the affairs of the enterprise under § 1962(c). See Satinwood, 385 F.3d at 173. They suggest because the defendants charged with the RICO violations (i.e., the paper owners, the actual owners, and Lyons) are all employees of the charged RICO enterprises (i.e., the PCs), the defendants are not distinct from the enterprises.

This argument misapprehends either the state of the law or the allegations of the Complaint. For each of the RICO claims, the Complaint alleges that, within each cluster, the PC constitutes the relevant enterprise. The paper owners, the actual owners, and Lyons are the named defendants; in other words, they are alleged to be the persons who conducted the affairs of the enterprises. That a RICO defendant is employed by the alleged corporate enterprise does not violate the distinctness rule because an employee of a corporation and the corporation are not the same entity. Rather, a "corporate owner/employee, a natural person, is distinct from the corporation itself, a legally different entity with different rights and responsibilities due to its different legal status." Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 163 (2001). RICO's distinctness rule is thus satisfied "when a corporate employee [the RICO defendant] unlawfully conducts the affairs of the corporation" alleged to constitute the RICO enterprise. Id. at 166.

It is true that the situation might be different if the Complaint named a corporation as the RICO defendant and then alleged that the corporation together with its own employees constituted an association-in-fact enterprise. See id. at 164; Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 343-45 (2d Cir. 1994). However, such is not the case here. In this case, Allstate expressly alleges that the corporate entity in each cluster, the PC, alone constitutes the enterprise. Furthermore, the PCs are not included as RICO defendants; ...

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