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Carothers v. Progressive Insurance Co.

Supreme Court of New York, Second Department

April 5, 2017

Andrew Carothers, M.D., P.C., etc., appellant,
v.
Progressive Insurance Company, respondent. Index No. 2217/06

         APPEAL by the plaintiff, by permission of the Appellate Division of the Supreme Court in the Second Judicial Department, in an action to recover assigned first-party no-fault benefits for medical services rendered, from an order of the Appellate Term of the Supreme Court for the Second, Eleventh, and Thirteenth Judicial Districts, dated July 5, 2013. The order, insofar as appealed from, affirmed a judgment of the Civil Court of the City of New York, Richmond County (Sweeney, J.), entered December 7, 2010, which, upon a jury verdict, and upon the denial of the plaintiff's motion pursuant to CPLR 4404(a) to set aside the verdict and for judgment as a matter of law, or, in the alternative, to set aside the verdict as contrary to the evidence or in the interest of justice and for a new trial, is in favor of the defendant and against the plaintiff, dismissing the complaint.

          Smith Valliere PLLC, New York, NY (Mark W. Smith and Gregory Zimmer of counsel), for appellant.

          McCormack & Mattel, P.C., Garden City, NY (John E. McCormack of counsel), for respondent.

          JOHN M. LEVENTHAL, J.P. ROBERT J. MILLER JOSEPH J. MALTESE COLLEEN D. DUFFY, JJ.

          OPINION & ORDER

          DUFFY, J.

         New York State law mandates that professional service corporations be owned and controlled only by licensed professionals. In State Farm Mut. Auto. Ins. Co. v Mallela (4 N.Y.3d 313), the Court of Appeals held that under the no-fault insurance law (Insurance Law § 5101, et seq.), an insurance carrier may withhold payment for medical services provided by a professional corporation which has been "fraudulently incorporated" to allow nonphysicians to share in its ownership and control. The primary issue we are called upon to determine, for the first time, is what elements are necessary to establish the defense of fraudulent incorporation recognized by Mallela. For the reasons which follow, we find that the jury in this case was properly instructed on the elements of a fraudulent incorporation defense.

         Background of the Action

         In July 2004, Andrew Carothers, a radiologist, formed a professional service corporation, the plaintiff, Andrew Carothers, M.D., P.C., to perform MRI scans at three existing MRI facilities in Brooklyn, Queens, and the Bronx. The plaintiff leased the three MRI facilities, and all of the medical and office equipment used at the facilities, from companies owned and controlled by nonparty Hillel Sher. In 2005 and 2006, approximately 38, 000 MRI scans were performed at the three facilities. The majority of the scans performed were for patients allegedly injured in motor vehicle accidents. These patients assigned their right to receive first-party no-fault insurance benefits to the plaintiff, and the plaintiff billed insurance companies to recover payment on the assigned claims. Because payment was not made in many instances, the plaintiff commenced thousands of actions against insurers, including this action against the defendant, Progressive Insurance Company, to recover unpaid claims of assigned first-party no-fault insurance benefits.

         As a defense to nonpayment, the insurers contended that the plaintiff was not entitled to payment of the unpaid claims because, pursuant to Mallela, it was fraudulently incorporated. Specifically, the insurers contended that the plaintiff was not solely owned and controlled by Carothers, who was listed on corporate filings as the plaintiff's only owner, shareholder, director, and officer. Rather, the insurers alleged that Carothers was merely a nominal owner, while the plaintiff was actually owned and controlled by the plaintiff's landlord, Hillel Sher, and the plaintiff's executive secretary, Irina Vayman, both nonphysicians. The insurers additionally contended that the plaintiff was not entitled to payment because Carothers did not personally engage in the practice of medicine within the professional corporation, as required by Business Corporation Law § 1507.

         Sher and Vayman were both deposed prior to trial. However, both invoked their Fifth Amendment (US Const Fifth Amend) privilege against self-incrimination in response to virtually all the questions posed to them during their respective depositions.

         A joint trial was held on actions pending in Kings County and Richmond County between the plaintiff and 53 insurers and self-insurers, including this action. During the course of the lengthy trial, the defendant insurers called several expert witnesses, who provided testimony in support of their claims that the plaintiff's profits were funneled to Sher and Vayman through grossly inflated equipment lease payments made to a company owned and controlled by Sher, and through Vayman's transfers of funds to her own personal accounts. For example, while the plaintiff paid $547, 000 per month for two years to lease old MRI equipment, an expert in the field of selling and leasing of MRI equipment testified that the plaintiff could have purchased the same equipment for a one time payment of $600, 000. In addition, the defendants' expert forensic accountant noted that Sher, through one of his companies, leased one of the machines in 2001 for approximately $9, 800 per month and then charged the plaintiff $75, 000 per month for the same machine. In the forensic accountant's view, the lease agreements between the plaintiff and Sher's companies were not made at arms' length because the terms of those agreements were not mutually beneficial to both parties. To illustrate this point, the forensic accountant noted that the equipment lease permitted Sher to terminate the lease without cause and made no warranties as to the condition of the equipment. The facilities lease also contained the same one-sided termination provision and provided that, if the equipment lease was terminated, the facilities lease would terminate as well.

         The evidence presented by the defendant insurers further showed that Carothers had no real involvement with the management of the plaintiff. Vayman hired all of the personnel and signed all of the checks of the plaintiff's operating account. The only checks that Carothers signed on behalf of the plaintiff were from a new account that was set up around the time that the plaintiff ceased its operation. With respect to that account, Carothers received $52, 000 and Vayman and her company received $75, 000. The forensic accountant also testified that he found a web of eight different accounts associated with the plaintiff and that he could ascertain no business purpose for that number of accounts. He testified that the plaintiff's money went to Sher's companies each month, leaving no money in the accounts, that no tax returns were filed on behalf of the plaintiff, and that no books or records were maintained on behalf of the plaintiff. According to this expert, $8.7 million from one of the accounts, the plaintiff's operating account, went to one of Sher's companies, Forum Medical Group, and Vayman received $882, 600 of those funds, which were immediately transferred from that company's account into Vayman's personal account.

         In the two-year period during which the plaintiff operated the practices, Sher and Vayman received a total of $12.2 million, while Carothers earned $133, 000.

         In contrast, when called to testify, Carothers was unable to account for such transactions. He asserted that the payments to Vayman's personal account were for back wages and payment of corporate expenses and that the only payments for Sher's benefit were to repay a $400, 000 bridge loan, for which he presented no proof. Although Carothers testified that a general ledger compiled by an accounting firm in 2007 accounted for all transactions, no general ledger was admitted into evidence. Carothers' testimony also revealed that he did not ...


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