Maple Med., LLP v. Scott

• Decision Date: 09 December 2020
• Docket Number: 2019–09157,Index No. 51103/19
• Citation: 138 N.Y.S.3d 61,191 A.D.3d 81
• Parties: MAPLE MEDICAL, LLP, respondent, v. Joseph SCOTT, etc., appellant, et al., defendant.
• Court: New York Supreme Court — Appellate Division

191 A.D.3d 81

138 N.Y.S.3d 61

MAPLE MEDICAL, LLP, respondent,

v.Joseph SCOTT, etc., appellant, et al., defendant.

2019–09157

Index No. 51103/19

Supreme Court, Appellate Division, Second Department, New York.

Argued—October 13, 2020

December 09, 2020

Nolan Heller Kauffman, LLP, Albany, N.Y. (Justin A. Heller and Brendan J. Carosi of counsel), for appellant.

Finger & Finger, White Plains, N.Y. (Carl L. Finger of counsel), for respondent.

ALAN D. SCHEINKMAN, P.J., MARK C. DILLON, COLLEEN D. DUFFY, FRANCESCA E. CONNOLLY, JJ.

OPINION & ORDER

SCHEINKMAN, P.J.

In 2018, the defendant Medical Liability Mutual Insurance Company (hereinafter MLMIC) was converted from a mutual insurance company to a stock insurance company. The question presented on this appeal is whether the cash consideration paid as part of the conversion belongs to a physician who was a policyholder of a medical malpractice insurance policy issued by MLMIC or to the medical practice that employed the physician and paid the premiums on the policy. The Departments of the Appellate Division have divided on this question. We agree with our colleagues in the Third and Fourth Departments that the funds belong to the physician-policyholder and respectfully do not agree with our colleagues in the First Department that the funds should be paid over to the medical practice-employer.

RELEVANT FACTS

Prior to the conversion which precipitated this dispute, MLMIC was a mutual insurance company. Pursuant to Insurance Law § 1211(a), mutual insurance companies are organized, maintained, and operated for the benefit of their members and "[e]very policyholder [in a mutual insurance company] shall be a member of such corporation." As members, policyholders "receive both membership interests (e.g., the right to elect directors and the right to receive a proportionate share of the company if it liquidates) and contract rights (i.e., the obligations of the insurance company under the policy)" ( Bank of New York v. Janowick, 470 F.3d 264, 267 [6th Cir.] ).

The defendant Joseph Scott was a physician employed by the plaintiff, Maple Medical, LLP (hereinafter Maple Medical), a medical practice in White Plains, pursuant to the provisions of an employment agreement dated February 29, 2012. In exchange for Scott's services, Maple Medical agreed to pay him a base salary and additional compensation and also agreed to pay certain expenses and fringe benefits on his behalf. Among these expenses and fringe benefits were payment of medical insurance premiums for Scott and his family, and Scott's medical license and registration fees, his continuing professional education expenses, his cellular telephone and pager costs, and the premiums on an occurrence type professional liability insurance policy with specified coverage minimums.

Maple Medical also employed five other physicians, Lisa H. Youkeles, Diana Arevalo, Diana Goldenberg, Nina Sundaram, and Mario Mutic. The employment agreements for these physicians also required Maple Medical to pay the premiums for their professional liability insurance policies.

Scott and the other five physicians each obtained medical malpractice insurance policies from MLMIC. Under these policies, each of the physicians was the sole insured and the sole policyholder. Scott, as well as Arevalo, Goldenberg, and Sundaram, executed a form designating Maple Medical as "Policy Administrator," making Maple Medical the "agent" "for the paying of Premium, requesting changes in the policy, including cancellation thereof, and for receiving dividends and any return Premiums when due." Youkeles and Mutic did not designate Maple Medical as Policy Administrator for their policies.

In 2015, the Berkshire Hathaway Group (hereinafter Berkshire Hathaway) approached MLMIC about a possible acquisition of MLMIC by the Medical Protective Company (hereinafter MPC), an affiliate of Berkshire Hathaway. MLMIC's executive committee chose not to pursue that acquisition, but Berkshire Hathaway revised its expression of interest to propose National Indemnity Company (hereinafter NICO) as the purchaser instead of MPC, among other concessions. MLMIC's executive committee voted to pursue the revised expression of interest, and subsequently, its board of directors also voted to pursue the revised expression of interest "as being in the best long-term interest of MLMIC's Policyholders."

On July 15, 2016, MLMIC announced the proposed transaction publicly, and on July 16, 2016, it applied to the Superintendent of the New York Department of Financial Services (hereinafter DFS) for permission to convert MLMIC to a stock insurance company. In its initial email announcement of the proposed conversion and subsequent newsletter, MLMIC stated that, "[o]nce the transaction is finalized, each owner of an eligible policy will be entitled to receive in cash a proportionate share of all of the cash consideration paid by [NICO]. In most cases, the person or entity that paid the premium will be considered as the owner of the eligible policy."

Insurance Law § 7307 governs the conversion process from a mutual insurance company into a stock insurance company. The statute requires the insurer to apply to the Superintendent of DFS, pursuant to a corporate resolution, for permission to convert (see Insurance Law § 7307[b] ). Once such permission is obtained, the parties to the proposed transaction must prepare a plan of conversion for approval by the Superintendent (see Insurance Law § 7307[d], [e] ). The conversion plan must provide for the exchange of the equitable share of each eligible mutual policyholder for securities or other consideration provided by the stock corporation into which the mutual insurer is to be converted. The statute states that "each person who had a policy of insurance in effect at any time during the three year period" immediately preceding the adoption of the resolution "shall be entitled to receive" the consideration ( Insurance Law § 7307[e][3] ). The equitable share of each policyholder in the mutual insurer is determined by the ratio which the net premiums (gross premiums less return premiums and dividends paid) properly and timely paid by the policyholder over the three-year period bear to the total net premiums received by the mutual insurer from all eligible policyholders (see id. ).

In conformity with the statute, the plan of conversion for MLMIC provided that, as a result of MLMIC's demutualization, "the Eligible Policyholders, or their Designees, will receive Cash Consideration in consideration for the extinguishment of their Policyholder Membership Interests." The Policyholder Information Statement defined "Eligible Policyholder" as the holder of "[a]ny Policy that was In Effect at any time from July 15, 2013 ... through the Record Date (July 14, 2016)." It defined "designees" as "Policy Administrators ... to the extent designated by Eligible Policyholders to receive the portion of the Cash Consideration allocated to such Eligible Policyholders." Scott, as well as the other five physicians, declined Maple Medical's requests to be designated to receive the cash consideration.

DFS held a public hearing on the proposed plan of conversion on August 23, 2018. Richard B. Frimer, Maple Medical's managing partner, attended the hearing and expressed opposition to the concept of distributing the payout to employees who never directly contributed any funds toward their premiums. Frimer argued that many third parties, such as medical groups and hospitals, paid medical malpractice premiums attributable to employees and it was illogical to refund premiums to individual policyholders who themselves had not paid the premiums. According to Frimer, "the equities lie with the payments upon demutualization going to the party or parties that pay the premium." In response to questions from the Superintendent of DFS, Frimer acknowledged that Maple Medical had paid the premiums for employees who had not designated Maple Medical as policy administrator. Frimer expounded that Maple Medical would receive a renewal bill and pay it promptly regardless of whether the form indicated that Maple Medical was the policy administrator. Frimer conceded that the policyholders are the individual physicians. He also stated that dividends paid by MLMIC would be used to reduce the amount of the premiums.

On September 6, 2018, DFS issued a decision approving the demutualization and plan of conversion (Matter of Medical Liab. Mut. Ins. Co. [National Indem. Co.] , https://www.dfs.ny.gov/system/files/documents/2019/01/mlmic_decision_20180906.pdf [NY St Dept of Fin Servs, Sept. 6, 2018, Vullo, Supt.] [hereinafter DFS Op]). In its decision, DFS noted that there was a dispute as to whether the cash consideration should be paid to policyholders or to the medical groups and hospitals who paid premiums on behalf of policyholders. DFS stated that section 7307(e) of the Insurance Law refers to "policyholder," who might or might not be the person who paid the premium (DFS Op at 23). DFS also observed that section 7307(e) recognizes the possibility that policyholders may have assigned their legal rights to others. Rather than deny or delay demutualization because of this dispute, the plan set forth an objection procedure for the resolution of disputes related to which party is entitled to the cash consideration. Under this procedure, the cash consideration attributable to each claim in dispute would be held in escrow until the claim is resolved by agreement or by a nonappealable order of an arbitration panel or court with proper jurisdiction. DFS determined that this objection procedure was a "reasonable framework" for resolving disputes between policyholders and entities claiming to be policy administrators (DFS Op at 23).

Maple Medical challenged the DFS decision by commencing a hybrid proceeding pursuant to CPLR article 78 and declaratory judgment action. On December 28, 2018, the Supreme Court dismissed the petition, determining that it...