State Farm Ins. v. Mallela

Citation827 N.E.2d 758,794 N.Y.S.2d 700,4 N.Y.3d 313
PartiesSTATE FARM MUTUAL AUTOMOBILE INSURANCE Co., Appellant, v. ROBERT MALLELA et al., Respondents.
Decision Date29 March 2005
CourtNew York Court of Appeals

Rivkin Radler LLP, Uniondale (Evan H. Krinick, Cheryl F. Korman and Stuart M. Bodoff of counsel), and KMZ Rosenman LLP, Chicago, Illinois (Ross O. Silverman and Gil M. Soffer of counsel), for appellant.

Law Office of Joseph J. LaBarbera, P.C., Brooklyn (Joseph J. LaBarbera of counsel), for Astoria Physical Medicine and Rehabilitation, P.C. and another, respondents.

Friedman Harfenist Langer & Kraut, Lake Success (Steven J. Harfenist and Neil Torczyner of counsel), for Valley Physical Medicine and Rehabilitation, P.C. and others, respondents.

Hoffman, Einiger & Polland, PLLC, New York City (Mark L. Furman of counsel), and Israel, Israel & Purdy, LLP, Great Neck (Veronica Renta Irwin, Stuart M. Israel and William M. Purdy of counsel), for Yonkers Medical Services, P.C. and others, respondents. Goodwin Proctor LLP, New York City (Jeffrey A. Simes and Richard M. Strassberg of counsel), and La Sorsa & Beneventano, White Plains (Gregory M. La Sorsa of counsel), for Dr. Dipak Nandi and others, respondents.

Eliot Spitzer, Attorney General, New York City (Daniel Smirlock and Robert H. Easton of counsel), for Gregory V. Serio, amicus curiae. Locks Law Firm, PLLC, New York City (Seth R. Lesser and Andrew P. Bell of counsel), Thomas W. Alfano and Belesi & Donovan, P.C., Garden City (John Belesi of counsel), for Meridian Acupuncture Care, amicus curiae.

Cadwalader, Wickersham & Taft LLP, New York City (Francis J. Serbaroli and William J. Natbony of counsel), and Short & Billy, P.C. (Skip Short of counsel), for Allstate Insurance Company and others, amici curiae.

Pastel & Rosen, LLP, Albany (Robert Pastel of counsel), for New York Insurance Association, Inc., amicus curiae. perintendent of Insurance's prohibition against reimbursing fraudulently incorporated medical providers is not unreasonable.

Chief Judge KAYE and Judges G.B. SMITH, CIPARICK, GRAFFEO, READ and R.S. SMITH concur.

OPINION OF THE COURT

ROSENBLATT, J.

On this certified question from the United States Court of Appeals for the Second Circuit, we are asked whether, under our "no-fault" insurance laws (see Insurance Law § 5101 et seq. and implementing regulations), insurance carriers may withhold payment for medical services provided by fraudulently incorporated enterprises to which patients have assigned their claims. We conclude that they may.

Patients covered by no-fault insurance often assign their claims to their health care providers rather than seek reimbursement from insurance carriers directly (see 11 NYCRR 65-3.11). Regulations require the carriers to make prompt decisions on claims once the provider has furnished adequate factual support (see 11 NYCRR 65.15).

This case began when State Farm filed a complaint in the United States District Court for the Eastern District of New York seeking a judgment declaring that it need not reimburse defendants — fraudulently incorporated medical corporations — for assigned claims submitted under no-fault. The complaint also sought equitable relief and damages against defendant companies and individuals for unjust enrichment and fraud. State Farm alleged, in essence, that to obtain payments from the carriers under the requirements of no-fault insurance, defendants willfully evaded New York law prohibiting nonphysicians from sharing ownership in medical service corporations.1

According to the complaint, the unlicensed defendants paid physicians to use their names on paperwork filed with the State to establish medical service corporations. Once the medical service corporations were established under the facially valid cover of the nominal physician-owners, the nonphysicians actually operated the companies. To maintain the appearance that the physicians owned the entities, the nonphysicians caused the corporations to hire management companies (owned by the nonphysicians), which billed the medical corporations inflated rates for routine services. In this manner, the actual profits did not go to the nominal owners but were channeled to the nonphysicians who owned the management companies.

Notably, State Farm never alleged that the actual care received by patients was unnecessary or improper. The patients insured by State Farm presumably received appropriate care from a health professional qualified to give that care. State Farm's complaint centers on fraud in the corporate form rather than on the quality of care provided.

The Federal District Court dismissed State Farm's complaint, holding that defendants' noncompliance with the licensing and incorporation statutes did not extinguish State Farm's duty to pay, so long as the actual providers acted within the scope of their licenses in rendering care. The Second Circuit then certified to this Court the question whether

"a medical corporation that was fraudulently incorporated under N.Y. Business Corporation Law §§ 1507, 1508, and N.Y. Education Law § 6507(4)(c) [is] entitled to be reimbursed by insurers, under New York Insurance Law §§ 5101 et seq., and its implementing regulations, for medical services rendered by licensed medical practitioners" (372 F3d 500, 510 [2004]).

We accepted the certification and now answer that such corporations are not entitled to reimbursement.

Insurance Law § 5102 et seq. requires no-fault carriers to reimburse patients (or, as in this case, their medical provider assignees) for "basic economic loss." Interpreting the statute, the Superintendent of Insurance promulgated 11 NYCRR 65-3.16 (a) (12) (effective April 4, 2002) and excluded from the meaning of "basic economic loss" payments made to unlicensed or fraudulently licensed providers, thus rendering them ineligible for reimbursement.2

If State Farm's allegations are true, as we must construe them to be at this stage, the defendant companies undisputedly fail to meet the applicable state licensing requirements, which prohibit nonphysicians from owning or controlling medical service corporations. Furthermore, a fraudulently incorporated medical company is "[a] provider of health care services" within the meaning of the regulation.

Defendants contend they are entitled to reimbursement even if fraudulently licensed. They first argue that the actual care that patients received was within the scope of the licenses of those who treated the patients. Defendants posit that this licensing compliance brings them within the regulatory framework for reimbursement. We disagree. The fact remains that the reimbursement goes to the medical service corporation that exists to receive payment only because of its willfully and materially false filings with state regulators.

Defendants also argue that the quoted regulation conflicts with the prompt payment goals of the no-fault statutes. The Second Circuit treated this issue as a difficult policy balance: on the one hand, there is our State's prohibition against lay ownership of shares in medical corporations (and the accompanying potential for fraud), and on the other, our encouragement of prompt payment of insurance claims, as...

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