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Government Employees Insurance Co. v. Wellmart RX, Inc.

United States District Court, E.D. New York

January 16, 2020

GOVERNMENT EMPLOYEES INSURANCE COMPANY, GEICO INDEMNITY COMPANY, GEICO GENERAL INSURANCE COMPANY, Plaintiffs,
v.
WELLMART RX, INC., SIMON DAVYDOV, RUSLAN NEKTALOV A/K/A RUSS NEKTA, MICHAEL JOCOBI, M.D., JOANNE MAGRO, M.D., CONRAD CEAN, M.D., DENNY RODRIGUEZ, M.D., ANDREW PATRICK, M.D., RAFAEL DELACRUZ-GOMEZ, M.D., RADHA GARA, M.D., VIVIANE ETIENNE, M.D., MIHAELA DAJDEA, P.A., CLAUDIA GERIS, P.A., CARLINE BOUBERT, P.A., AND JOHN DOES NOS. “1” THROUGH “5, ” Defendants.

          MEMORANDUM & ORDER

          Kiyo A. Matsumoto United States District Judge

         Plaintiffs, Government Employees Insurance Company, GEICO Indemnity Company, GEICO General Insurance Company, and GEICO Casualty Co. (together, “plaintiffs” or “GEICO”), commenced this litigation against defendants on July 31, 2019. (ECF No. 1, Compl.) The instant motion seeks two forms of relief. First, GEICO seeks to stay all collection arbitrations arising under New York's No-Fault Insurance law, and pending before the American Arbitration Association (“AAA”), between defendant Wellmart RX, Inc. (“Wellmart”) and GEICO, until resolution of the instant federal action. (ECF No. 68-2, Memorandum of Law in Support of Plaintiffs' Motion (“Mot.”), 1.) Second, GEICO moves to enjoin Wellmart, along with its record owners, Ruslan Nektalov and Simon Davydov (collectively, the “Pharmacy Defendants”), from commencing any new No-Fault collection arbitrations or civil collection lawsuits against GEICO on behalf of Wellmart, until this action is resolved. (Id.)

         For the reasons stated below, plaintiffs' motion is granted.

         BACKGROUND

         I. New York's No-Fault Insurance Laws

         New York enacted the Comprehensive Automobile Insurance Reparations Act, New York Insurance Law (“N.Y. Ins. Law”) §§ 5101-5109, for the purpose of “ensur[ing] 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.” Med. Soc'y of State of N.Y. v. Serio, 800 N.E.2d 728, 731 (N.Y. 2003) (citing Governor's Mem. approving L. 1973, ch. 13, 1973 McKinney's Session Laws of N.Y., at 2335). No-Fault insurers, like GEICO, may reimburse patients up to $50, 000 without proof of the other driver's fault; reimbursements may include necessary expenses incurred for medical or other professional health services. See N.Y. Ins. Law §§ 5102(a)(1), (b). Insurers are required to verify a claim, and then pay or deny the claim within 30 days. See N.Y. Ins. Law § 5106(a); N.Y. Comp. Codes R. & Regs. (“NYCRR”) tit. 11 §§ 65-3.8(a), (c). Under New York law, an insured may assign his or her benefits “directly to providers of health care services.” 11 NYCRR § 65-3.11(a). The regulations specify the criteria needed for a health care provider to receive direct payment from the insurer. See 11 NYCRR § 65-3.11(b).

         Section 5106 of the New York Insurance Law creates a “[f]air claims settlement” procedure for all No-Fault claims. No-Fault benefits are deemed overdue if they are not paid or denied within 30 calendar days after proof of claim is submitted. See N.Y. Ins. L. § 5106(a); 11 NYCRR § 65-3.8(c). If an insurer fails to comply with this timeframe, it will be precluded from asserting many (but not all) defenses to coverage, including most fraud-based defenses. See Fair Price Med. Supply Corp. v. Travelers Indem. Co., 10 N.Y.3d 556 (N.Y. 2008); Cent. Gen. Hosp. v. Chubb Grp. of Ins. Cos., 90 N.Y.2d 195, 199, 659 N.Y.S.2d 246 (N.Y. 1997). A claimant may bring an action in state court to recover overdue No-Fault benefits, and in any such action the claimant need only show that the prescribed statutory billing forms were mailed and received and that the benefits are overdue. See Viviane Etienne Med. Care, P.C. v. Country-Wide Ins. Co., 25 N.Y.3d 498, 506 (N.Y. 2015). In addition, insurers are required to include a clause in their policies allowing the claimant to seek arbitration of their claims for No-Fault benefits. See N.Y. Ins. L. § 5106(b); 11 NYCRR § 65-1.1(a), (d).

         New York's No-Fault Insurance law establishes the procedures for arbitration of disputed claims. See 11 NYCRR § 65-4.5. By statute, the New York Department of Financial Services Superintendent has designated AAA as the body responsible for administration of the No-Fault arbitration process. Id. § 65-4.2(a)(2). Insurers generally bear the costs associated with the arbitration process in direct proportion to the frequency with which they are named as respondents. Id. § 65-4.2(c)(1). The Second Circuit has commented that the “arbitration process for No-Fault coverage is an expedited, simplified affair meant to work as quickly and efficiently as possible. Discovery is limited or non-existent. Complex fraud and RICO claims, maturing years after the initial claimants were fully reimbursed, cannot be shoehorned into this system.” Allstate Ins. Co. v. Mun, 751 F.3d 94, 99 (2d Cir. 2014) (citing 11 NYCRR § 65-4.5)).

         An insurer who pays No-Fault benefits and subsequently discovers fraud may bring an action for damages. See State Farm Mut. Auto. Ins. Co. v. James M. Liguori, M.D., P.C., 589 F.Supp.2d 221, 229-235 (E.D.N.Y. 2008); State Farm Mut. Auto. Ins. Co. v. CPT Med. Servs., P.C., 2008 WL 4146190, at *6-7 (E.D.N.Y. Sept. 5, 2008). The insurer may also bring an action for a declaratory judgment that it is not liable for any unpaid claims where the provider has committed fraud or breached applicable No-Fault regulations. See 28 U.S.C. § 2201; Gov't Emps. Ins. Co. v. Jacques, 2017 WL 9487191, at *9-*11 (E.D.N.Y. Feb. 13, 2017), report and recommendation adopted, 2017 WL 1214460 (E.D.N.Y. Mar. 31, 2017); State Farm Mut. Auto. Ins. Co. v. Cohan, 2009 WL 10449036, at *4 (E.D.N.Y. Dec. 30, 2009), report and recommendation adopted, 2010 WL 890975 (E.D.N.Y. Mar. 8, 2010). However, if an insurer is precluded from asserting a defense to coverage (such as provider fraud) due to its noncompliance with the 30-day rule, it will also be precluded from obtaining a declaratory judgment on those same grounds. See Allstate Ins. Co. v. Williams, 2015 WL 5560543, at *7 (E.D.N.Y. Aug. 28, 2015), report and recommendation adopted, 2015 WL 5560546 (E.D.N.Y. 2015); Gov't Emps. Ins. Co. v. AMD Chiropractic, P.C., 2013 WL 5131057, at *8 (E.D.N.Y. Sept. 12, 2013).

         II. GEICO's Allegations

         GEICO alleges that, since 2015, the Pharmacy Defendants have submitted more $7.3 million in fraudulent billing to GEICO for medically unnecessary pharmaceutical products as part of a scheme designed to exploit New York's No-Fault Insurance law. (Compl. ¶ 2.) The scheme allegedly operated as follows. The Pharmacy Defendants entered into illegal, collusive agreements with various prescribing healthcare providers, including eight New York-licensed physicians and three physician assistants (collectively, “Prescribing Defendants”). (Id.) In exchange for kickbacks, the Prescribing Defendants generated boilerplate and medically unnecessary prescriptions for “pain-relieving” pharmaceuticals using template prescription forms supplied by the Pharmacy Defendants. (Id. ¶ 1.) The prescriptions were dispensed to individuals involved in automobile accidents and eligible for No-Fault coverage under GEICO insurance policies. (Id.) The Prescribing Defendants would also produce generic, pre-printed examination reports to justify the continued dispensation of excessive/unnecessary pharmaceutical products to patients. (Id. ¶ 70.) As part of the scheme, Wellmart also mass-produced and dispensed topical compound pain creams (“Fraudulent Compounded Pain Creams”), in pre-set formulations that were neither FDA-approved nor tailored to the individual needs of patients, and thus, violative of federal and state regulations. (Id. ¶ 4.)[1]

         GEICO's complaint seeks a declaration by the court, pursuant to 28 U.S.C. §§ 2201, 2202, that GEICO is not legally obligated to reimburse Wellmart for over $5, 700, 100 in pending No-Fault claims that defendants either submitted or caused to be submitted through Wellmart. (Compl. ¶ 6.) GEICO also seeks recovery of approximately $1, 190, 700 in fraudulent bills paid to Wellmart, and asserts causes of action under the Racketeering Influenced and Corrupt Organizations Act (“RICO”), conspiracy to violate RICO, common law fraud, aiding and abetting fraud, and unjust enrichment. (Id. ¶¶ 215-62.)

         III. Collection Proceedings

         According to a declaration submitted by GEICO Claims Manager Robert Weir, Wellmart is currently prosecuting more than 1, 500 collection arbitrations against GEICO before AAA. (ECF No. 68-4, Declaration of Robert Weir (“Weir Decl.”), ¶ 5.) In addition, Wellmart is prosecuting 45 civil court suits in New York City Civil Court, Kings County. (Id.) These arbitrations and civil suits seek to collect on charges that are the subject of GEICO's declaratory judgment claim before this court. (Id.) Notably, Wellmart commenced almost 1, 200 of the pending 1, 500 collection arbitrations after the commencement of this suit, including 644 arbitrations in November 2019 alone. (Id. ¶ 6.) In all, the arbitrations seek to recover more than $4, 144, 000 in No-Fault claims, and Wellmart's civil court lawsuits seek more than $112, 000 in claims against GEICO. (Id. ¶¶ 6, 7.)

         In support of plaintiffs' requested relief, Weir asserts the procedures and practices in No-Fault arbitration proceedings impose critical handicaps on insurers like GEICO. Insurers generally are not permitted to seek or obtain pre-hearing discovery beyond the discrete bill and claim at issue, which, for practical purposes, obviates an insurer's ability to demonstrate a pattern of medically unnecessary treatment or fraudulent billing practices across multiple patients and claims. (Id. ¶ 15.) During the pendency of this case, the Pharmacy Defendants have continued to pursue collection of individual bills through arbitration and state court proceedings. (Mot. 9.) GEICO avers that defendants are well aware that the statutorily expedited No-Fault arbitration procedures and civil court proceedings cannot accommodate the time or resources needed for GEICO to demonstrate the complex fraudulent scheme that generates each individual bill, and are therefore trying to litigate Wellmart's individual bills on a piecemeal basis. (Id.)

         IV. Dissipation of Wellmart's Assets

         In their pre-motion letter, the Pharmacy Defendants represented that Wellmart had recently sold its assets and terminated its business operations “more than three months before the filing of the [instant] lawsuit.” (ECF No. 66, Defs.' Pre-Mot. Ltr., p.3.) The Pharmacy Defendants, however, have not identified the buyer of Wellmart's assets. Further, GEICO claims that, according to bank records obtained through a non-party subpoena, Wellmart has transferred over $1.2 million out of its bank account in the 12-month period from June 2018 to May 2019. (ECF No. 68-3, Declaration of Michael A. Sirignano (“Sirignano Decl.”) ¶ 20.) These withdrawals have taken the form of myriad small MoneyGram transfers, usually for less than $10, 000 each. (Id; Mot. 7.) GEICO's claims are substantiated by Wellmart's bank statements, which are appended as an exhibit to the motion. (ECF No. 68-12, Wellmart Bank Statements.) The court will discuss Wellmart's financial records below in connection with the irreparable harm prong of plaintiffs' motion.

         LEGAL STANDARD

         GEICO moves to stay and enjoin defendants' No-Fault collection proceedings. GEICO's dual requests are considered in tandem as a motion to stay and a motion for a preliminary injunction to prevent additional actions from being filed. Courts look to the preliminary injunction standard under such circumstances. See Gov't Emps. Ins. Co. v. Cean, No. 19CV2363PKCSMG, 2019 WL 6253804, at *4 (E.D.N.Y. Nov. 22, 2019) (citing Allstate Ins. Co. v. Elzanaty, 929 F.Supp.2d 199, 217 (E.D.N.Y. 2013)); see also Moore v. Consol. Edison Co. of N.Y., 409 F.3d 506, 510 (2d Cir. 2005). “In order to justify a preliminary injunction, a movant must demonstrate (1) irreparable harm absent injunctive relief; and (2) ‘either a likelihood of success on the merits, or a serious question going to the merits to make them a fair ground for trial, with a balance of hardships tipping decidedly in the plaintiff's favor.'” Metro. Taxicab Bd. of Trade v. City of New York,615 F.3d 152, 156 (2d Cir. 2010) (quoting Almontaser v. New York City Dept. of Educ., 519 F.3d 505, 508 (2d Cir. 2008)). “The showing of irreparable harm is [p]erhaps the single ...


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