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Carothers v. Progressive Insurance Co.

Supreme Court of New York, Second Department

July 5, 2013

Andrew Carothers, M.D., P.C. as Assignee of AUDREY WHITE, Appellant,
v.
Progressive Insurance Company, Respondent.

PRESENT: RIOS, J.P., ALIOTTA and SOLOMON, JJ

Appeal from a judgment of the Civil Court of the City of New York, Richmond County (Peter Paul Sweeney, J.), entered December 7, 2010. The judgment, upon a jury verdict, dismissed the complaint.

ORDERED that the judgment is affirmed, without costs.

Plaintiff Andrew Carothers, M.D., P.C. (ACMDPC) is a professional corporation which performed MRIs for patients allegedly injured in motor vehicle accidents. ACMDPC operated out of three facilities — one in Brooklyn, one in Queens and one in the Bronx. At the time the MRI services in question were rendered, Dr. Andrew Carothers was a board-certified, licensed radiologist, who had been listed on ACMDPC's corporate filings as its sole shareholder, officer and director.

ACMDPC's patients assigned to ACMDPC their right to reimbursement of first-party no-fault benefits. ACMDPC submitted the assigned claims for reimbursement to the various responsible insurers and self-insurers, including defendant Progressive Insurance Company (Progressive). After the insurers and self-insurers failed to pay the claims in question, ACMDPC commenced thousands of actions against them.

A joint trial was held of actions pending in Richmond County and Kings County between ACMDPC and 53 insurers and self-insurers, including the instant action. The total amount sought for the claims in all of these actions was approximately $18 million. The defense asserted was that ACMDPC was not entitled to reimbursement of the claims because of ACMDPC's failure to comply with Insurance Department Regulations (11 NYCRR) § 65-3.16 (a) (2), which renders a provider ineligible to recover no-fault benefits under Insurance Law § 5102 (a) (1) if the provider fails to meet "any applicable" state or local licensing requirement necessary to perform its services in New York. On July 17, 2008, after a joint trial, the jury returned a verdict in favor of all 53 defendants. By order entered October 14, 2009 (26 Misc.3d 448), the Civil Court (Peter Paul Sweeney, J.) denied plaintiff's motion, pursuant to CPLR 4404 (a), to set aside the jury verdict. Thereafter, it was agreed, by so-ordered stipulation, that, with the exception of the instant action, judgments would not be entered pending the disposition of this appeal. A judgment in this action, dismissing the complaint, was entered on December 7, 2010, from which this appeal is taken.

We note at the outset that there is no merit to plaintiff's contention that the Civil Court, as a court of limited monetary jurisdiction (see CCA 202), lacked jurisdiction to adjudicate this case because the aggregate amount in controversy was approximately $18 million. This was a joint trial where the Civil Court had before it separate causes of action, each of which was within the monetary jurisdiction of the Civil Court (see generally Board of Mgrs. of Mews at N. Hills Condominium v Farajzadeh, 189 Misc.2d 38 [App Term, 9th & 10th Jud Dists 2001]).

Plaintiff argues that the defense that plaintiff was ineligible to recover no-fault benefits was barred by the doctrine of res judicata because some of the defendants, including Progressive, had been involved in litigation with plaintiff in prior actions in which plaintiff had prevailed, and had failed to raise or litigate that defense in those prior actions. Responding to the same argument, the Civil Court (Peter Paul Sweeney, J.), in its April 27, 2009 order denying plaintiff's motion for summary judgment (23 Misc.3d 1118[A], 2009 NY Slip Op 50831[U], *4), stated that the fact that the ineligibility defense could have been litigated in the prior actions was not determinative, as "the inquiry must always be as to the point or question actually litigated and determined in the original action, not what might have been thus litigated and determined" (quoting Cromwell v County of Sac, 94 U.S. 351, 353 [1876]). The Civil Court noted that the claims for first-party no-fault benefits at issue in this joint trial differed from the claims for first-party no-fault benefits that had been litigated in the prior actions, and that plaintiff had presented the court with no proof that the ineligibility defense had been "actually and necessarily" determined in any of the prior actions (Smith v Kirkpatrick, 305 NY 66, 70 [1953]). In our view, the Civil Court's determination was proper. "While a valid final judgment bars future actions between the same parties on the same cause of action, a subsequent action will not be barred by res judicata where the nature or object of the second action is distinct from that in a prior action in which a judgment was rendered. Where a second action is upon a different claim, demand, or cause of action, the established rule is that the judgment in the first action operates as an estoppel only as to the points or questions actually litigated and determined. Thus, where the two causes of action are different, not in form only but also in the rights and interests affected, the estoppel is limited to the point actually determined" (9 Carmody-Wait 2d § 63:474).

As noted, the essence of the defense in this case was plaintiff's ineligibility to recover no-fault benefits due to plaintiff's failure to comply with New York State's licensing requirements, based firstly on ACMDPC's alleged failure, as a professional corporation, to be owned and controlled only by licensed professionals engaged in the practice of such profession in such corporations (see Business Corporation Law §§ 1503 [a]; 1507, 1508). The theory underlying this defense was that Dr. Carothers was not the true owner, or at least not the sole owner, and operator of ACMDPC, which allegedly was actually owned or co-owned and controlled by nonparties Hillel Sher and Irina Vayman, two individuals who were not physicians, but who had received the bulk of ACMDPC's profits. Thus, in order to find that plaintiff was not entitled to reimbursement, the jury had to find that plaintiff was actually owned, co-owned or controlled by unlicensed individuals (see e.g. One Beacon Ins. Group, LLC v Midland Med. Care, P.C., 54 A.D.3d 738 [2008]). A second theory of the defense was that Dr. Carothers had violated Business Corporation Law § 1507 because, as sole shareholder, he had not been personally "engaged in the practice" of medicine in ACMDPC during the time ACMDPC had been in business.

Prior to the commencement of the trial, Sher, who had leased the premises in which the MRI facilities were located, and the equipment therein, to Dr. Carothers, and Vayman, who had served as ACMDPC's office manager, had been deposed. Both had invoked their Fifth Amendment privilege in response to virtually all the questions posed of them during their respective depositions. Although the parties agreed that neither Sher nor Vayman was available to testify at the trial, within the meaning of CPLR 3117 (a) (3), plaintiff's counsel asked the Civil Court to direct the defense not to read the deposition transcripts to the jury, claiming that the deposition testimony was of no probative value and only served to prejudice plaintiff. The Civil Court, finding that the testimony was relevant to the issues at trial, permitted the defense to read the deposition transcripts to the jury, and ultimately charged the jury that an adverse inference could be drawn against plaintiff based upon Sher's and Vayman's invocation of their Fifth Amendment privilege.

The Civil Court had also granted the defense's motion in limine to preclude plaintiff from referring to the approximately $18 million in accounts receivable which, plaintiff contended, it might have generated had the claims at issue in the various pending actions been paid.

At trial, the defense contended that even though Dr. Carothers was ACMDPC's nominal owner, and was listed as its only shareholder, officer and director, it was actually Sher and Vayman who were the de facto owners of ACMDPC. Among the primary defense witnesses were a seller of used MRI and CT scan equipment, who testified about the valuation and market for MRI equipment, and whose testimony indicated that the MRI equipment at the ACMDPC facilities was outdated and that ACMDPC's monthly payments for that equipment were significantly above market value; a board-certified neuroradiologist, who testified about the poor radiological quality of the MRI scans, many of which could not be read, as indicative of Dr. Carothers' lack of quality control, direction and supervision of ACMDPC; and a forensic accountant and certified valuation analyst, who analyzed the flow of money into and out of ACMDPC, most of which ultimately went into accounts controlled by Sher or Vayman. Defendant also called as a witness Dr. Carothers, who was questioned about, among other things, his relationship with Sher and Vayman, as well as about his actual practice of medicine within ACMDPC.

Plaintiff claimed that, at all relevant times, Sher and Vayman had merely assisted ACMDPC: Sher in his role as the lessor of the premises in which the MRI facilities were located and of the equipment therein, and Vayman as ACMDPC's office manager. Among plaintiff's witnesses at trial were Wayne Hickey, a licensed accountant and the chief financial officer of Medtrx, a company which served both as plaintiff's billing agent and as plaintiff's lender, who testified about Medtrx's billing and collection practices vis-a-vis ACMDPC, as well as its role as a secured lender of ACMDPC; an attorney specializing in structuring and incorporating medical practices, who testified about custom and usage in MRI practices; and an expert in the business valuation aspects of MRI practices. (A more in-depth summary of the trial may be found in the Civil Court's order denying plaintiff's motion to set aside the jury verdict [26 Misc.3d 448]).

The Civil Court instructed the jury that, in order to find that ACMDPC was "fraudulently incorporated, " it had to find that the business relationships of Sher and Vayman were, in effect, partnerships or arrangements in which Sher and Vayman were so entangled with the affairs of ACMDPC that reasonable people would say that they were the de facto owners of ACMDPC or that they exercised substantial dominion and control over ACMDPC and its assets, and that they shared risks, expenses and interest in ACMDPC's profits and losses. The jury was instructed that it could look beyond the certificate of incorporation but that, in order to find that Sher and Vayman had exercised substantial control over ACMDPC, it must find that they had a significant role in the guidance, management and direction of the business of ACMDPC. The jury was told to look at the totality of the circumstances, and the court enumerated 13 different factors which the jury might consider relevant in order to determine whether Sher and Vayman were de facto owners of ACMDPC or whether they had exercised substantial control over ACMDPC. Those factors were: (1) whether the agreements between ACMDPC and the entities owned by Sher, which leased the facilities and the equipment to ACMDPC, were the product of arm's-length transactions or whether the terms of those agreements were designed to give Sher and those entities substantial control over ACMDPC and to channel its profits to Sher; (2) whether and to what extent Sher and Vayman had exercised dominion and control over ACMDPC's assets, including its bank accounts; (3) whether and to what extent Dr. Carothers, Sher and Vayman had made capital investments in ACMDPC; (4) whether and to what extent Sher and Vayman had used ACMDPC funds for personal rather than for corporate purposes; (5) whether and to what extent Sher and Vayman had the ability to bind ACMDPC to legal obligations with third parties; (6) whether and to what extent Sher and Vayman had been responsible for hiring, firing and/or payment of ACMDPC salaries, and the extent to which they had dictated policy decisions; (7) whether and to what extent the day-to-day formalities that are part and parcel of the corporate existence (including the issuance of stock, election of directors, holding of corporate meetings, keeping of books and records and filing of corporate tax returns) had been followed; (8) whether and to what extent ACMDPC and Sher's companies shared common office space, addresses, employees and telephone numbers; (9) whether and to what extent Dr. Carothers had played a substantial role in the day-to-day operation of ACMDPC; (10) whether and to what extent Sher and/or Vayman had assumed the financial obligations of ACMDPC as if they were their own; (11) whether and to what extent ACMDPC funds had been commingled with those of the other entities owned by Sher; (12) whether and to what extent Dr. Carothers, Sher and Vayman had shared the risks, expenses and interest in the profits and losses of the corporation; and (13) whether and to what extent Sher and Vayman had been involved in making professional medical decisions regarding the practice of ACMDPC.

The Civil Court then asked the jury to decide whether Dr. Carothers was engaged in the practice of medicine in ACMDPC, within the meaning of Business Corporation Law § 1507, during the time ACMDPC was in business. It instructed the jury that the practice of medicine included "diagnosis by way of MRI scans" and that a physician is engaged in the practice of medicine "if he either directly or indirectly is involved with the making of professional medical decisions concerning individual clients or patients."

Regarding Sher and Vayman's invocation of their Fifth Amendment privilege at their depositions, the Civil Court told the jury that it could, but was not required to, infer, by their refusal to answer questions regarding de facto ownership and control over ACMDPC, that their answers would have been adverse to ACMDPC's interest. The jury could not, however, rely on such an adverse inference, should it choose to ...


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