New York Cent. Mut. Fire Ins. Co. v 563 Grand Med., P.C. (2004 NY Slip Op 50979(U))

Supreme Court, Otsego County

9744-03

William F. O’Brien, J.

Several motions were presented at the Court’s May 14, 2004, motion term for resolution in this dispute between a no-fault insurance provider and ninety-nine (99) professional medical corporations. A number of defendants move pursuant to CPLR 3211 to dismiss the Complaint for failure to state a cause of action, while other defendants cross-move pursuant to CPLR 3212 for summary judgment dismissing the Complaint. Plaintiff opposes these motions and filed a cross-motion seeking dismissal of defendant Eastern Comprehensive Medical, P.C.’s counterclaim. June 1, 2004, was set as the date for final submissions by the parties on the motions.

FACTUAL BACKGROUND

Plaintiff is a provider of no-fault automobile liability insurance policies in New York State and defendants are professional corporations (hereinafter “PCs”) which were owned and operated by medical doctors. According to the pleadings, from 1998 until mid-2001, defendants rendered treatment to persons covered under no-fault policies issued by plaintiff. The covered insured patients were treated by licensed acupuncturists who were employees of defendant medical corporations. The covered insured patients executed facially-valid assignments of their no-fault benefits to defendant corporations. Defendant corporations submitted bills for the treatment provided by these licensed acupuncturists to plaintiff. Plaintiff paid the bills submitted by defendant corporations.

Plaintiff filed this action on July 10, 2003, alleging that defendants had improperly employed acupuncturists and that, based upon this organizational flaw, were operating illegally and were not entitled to the payments that plaintiffs made during the time period cited in the Complaint. The Complaint demands that defendant corporations refund all payments made by plaintiff for services provided by the licensed acupuncturists. Plaintiffs allege that these payments amount to a total of $1,367,272.00. Defendant Eastern Comprehensive Medical Services, P.C., filed a counterclaim with its Answer alleging that it is owed an additional $10, 581.50.

RELEVANT LAW/ANALYSIS

This case presents two questions which are currently unsettled in New York law: (1) Whether a medical corporation owned and operated by doctors who do not possess a certificate [*2]to practice acupuncture may lawfully employ an acupuncturist and (2) whether a medical corporation which illegally employs a licensed acupuncturist is entitled to reimbursement by insurers for medical services provided to covered persons pursuant to no-fault policies issued by the insurer? There is no precedent directly addressing the first question and, while several lower courts have addressed the second issue, the results are diverging and in need of clarification.^[FN1]

Analysis of these motions begins by examining the claims stated in the Complaint, which lists two causes of action against each named defendant: (1) fraud, alleging that defendants knowingly made false representations to plaintiff to induce plaintiff to pay bills for services which defendants were not authorized to provide; and (2) unjust enrichment, alleging that defendants accepted payments from plaintiff that they knew were illegal and yet still retained the proceeds of said payments. The parties agree that there are no disputed facts present in this case and that the issues here may be settled as matters of law.

Corporate Structure Violations

Before analyzing the causes of action stated in the Complaint it is necessary to review the statutory basis for plaintiff’s theory of recovery. Section 1503(a) of the Business Corporation Law provides that “one or more individuals duly authorized to render the same professional service within the state may organize, or cause to be organized, a professional service corporation for pecuniary profit under this article for the purpose of rendering the same professional service.” Under this statute, only professionals licensed to render the same professional services may organize as a corporation and multi-disciplinary professional practices are disallowed.

Plaintiff contends that defendant PCs have violated this prohibition against multi-disciplinary practices by employing acupuncturists. All of the defendant PCs are organized for the practice of medicine. Acupuncture, according to plaintiff, is a separate discipline that is not subsumed within the practice of medicine. Thus, according to plaintiff, unless at least one shareholder/owner of each of the defendant PCs was certified to practice acupuncture along with being a licensed medical doctor, the defendant PCs could not properly employ an acupuncturist because acupuncture was beyond the scope of the corporation’s expertise.

Plaintiff’s Cause of Action for Fraud

In order to establish a cause of action for fraud, a plaintiff must allege (1) a misrepresentation of a material fact, (2) falsity, (3) scienter (knowledge of the falsity), (4) reliance upon the false statement and (5) injury. See Small v. Lorillard Tobacco Co., 94 NY2d 43, 56 (1999). In addition, the Complaint must state with specificity the acts which constituted the fraud. See Kovach v. Hinchey, 276 AD2d 942 (3d Dept. 2000); CPLR §3016(b).

Defendants contend that the Complaint here does not plead the fraud cause of action with sufficient specificity. The Complaint states that “defendants intentionally and knowingly made false and fraudulent statements of material facts to (plaintiff), namely that each was lawfully [*3]entitled to payment from (plaintiff) for the acupuncture services provided to each said eligible injured person.” It goes on to allege that these “fraudulent and false statements” were made “to induce (plaintiff) to pay for the acupuncture services they were not entitled to claim or receive.” The Complaint recites that defendants “knowingly concealed material facts from (plaintiff), namely that each defendant wrongfully and illegally employed an acupuncturist . . . in order to bill and receive payment for acupuncture services to which they were not entitled.” Finally, the Complaint states that plaintiff justifiably relied upon the misrepresentations of defendant PCs in rendering payment for the acupuncture services performed.

Such allegations contain sufficient detail to place defendants on notice of the acts which are alleged to have constituted the fraud. See Black v. Chittenden, 69 NY2d 665 (1986). Even without further elaboration, defendant PCs would know from these pleadings that plaintiff is alleging that defendant PCs knowingly misled plaintiff to believe they were entitled to be paid for acupuncture services when such payments were, according to plaintiff, illegal and wrongful. Keeping in mind that the statute is not to be interpreted so strictly as to defeat what might otherwise be a valid claim where some knowledge might be peculiarly within the knowledge of the defendant PCs, the present claim is stated in sufficient detail to satisfy CPLR §3016(b)’s specificity requirement. See Oxford Health Plans (N.Y.), Inc. V. Bettercare Health Care Pain Management & Rehab PC, 305 AD2d 223 (1st Dept. 2003).

The theory underlying plaintiff’s fraud claim relies upon the premise that defendants were violating BCL §1503 by employing acupuncturists. Assuming without deciding that plaintiff is correct in this assertion, plaintiff’s claim further asserts that it may recover the payments made to defendant PCs based upon this violation of the Business Corporation Law. Such a right of recovery is not explicit in the statute and defendants contend that no private right of action exists for any purported violation of BCL §1503(a). Several reported and unreported decisions support this position. Allstate Insurance Co. v. Belt Parkway Imaging, P.C., Sup. Ct. New York County, March 19, 2004, Moskowitz, J., Index No. 600509/2003; Oxford Health Plans (N.Y.) Inc. v. Bettercare Health Care Pain Management & Rehab, P.C., supra; State Farm Mut. Auto Insurance Co. v. Malella, 175 F.Supp.2d 401 (E.D.N.Y. 2001), issue certified to Ct. Of Appeals, 372 F.3d 500 (2nd Cir. 2004); Universal Acupuncture Pain Services, P.C. v. State Farm Mut. Auto Insurance Co., 196 F.Supp.2d 378, (S.D.N.Y. 2002).

Plaintiffs, meanwhile, rely upon several unpublished New York State Supreme Court decisions in asserting that a private right of action does exist. See, e.g. State Farm Insurance Co. v. North Bronx Medical, P.C., Sup. Ct. New York County, January 17, 2002, Wetzel, J., Index No. 117539/01; Fordham Med. Pain & Treatment. P.C. v. State Farm, Sup. Ct. New York County, January 4, 2001, Shafer, J., Index No. 600403; Advanced Care of New York, Inc. V. Friscia, Sup. Ct. Kings County, Feb. 22, 2002, Hall, J., Index No. 32528/99; GEICO v. Southern Medical Services, Inc., Sup. Ct. New York County Nov. 5, 1993, Ciparick, J., Index No. 118101/93; Queens Spinal Testing v. GEICO, Civ. Ct., Queens County, April 4, 1997, Gazzara, J., Index No. 5378/95.^[FN2] [*4]

These decisions, to the extent that they address the issue at hand, are neither controlling nor particularly persuasive. They contain minimal analysis of the issue and, most importantly, are factually distinguishable from the present case. For example, State Farm v. North Bronx Medical involved an insurance company which sought to deny payments for no-fault treatments rendered by a medical PC which was owned by a pathologist and purported to offer physical therapy treatment. That court stated that it chose not to follow Malella, making the uncited assertion that Malella was “in conflict with the established law in New York State Courts”. In Fordham Med. Pain & Treatment, P.C. v. State Farm, the plaintiff sought to receive payment from a no-fault insurer for treatment provided. The insurance company denied the payments, alleging it did not have to pay because plaintiff was violating BCL §1503 because plaintiff’s putative owner/sole shareholder was not actually involved in the management of the corporation. The decision stated that the plaintiff’s reliance upon the principle that a party may not use a regulatory violation such as a violation of BCL §1502 as a sword to be misplaced, but then failed to explain why the rule should not be applied.

By contrast, the Universal Acupuncture court made substantial analysis of New York law in concluding that the insurer in that case could not recover under a theory of common law fraud for a violation of BCL §1503 because the statute provides no private right of action for a violation thereof and because the insurer alleged no substantive injury apart from the statutory violation. Universal Acupuncture Pain Services, P.C. v. State Farm, supra at 387. It is noteworthy that the charges in Universal Acupuncture were more malevolent than those levied in the present case; the PC in that case was owned in name only by an acupuncturist who was all the while splitting fees with a physician who was billing the no-fault insurer for acupuncture services provided. Here, the only dishonesty alleged is plaintiff’s contention that defendants knew that a medical corporation could not lawfully employ an acupuncturist unless one of its principals held a certificate in acupuncture, an allegation of dubious merit as discussed below. As such, the lack of a substantive injury to plaintiff directly – not to the covered insured persons or to the public at large – compels adoption of the Universal Acupuncture analysis.

The Malella court engaged in an equally lengthy discussion of New York law on the subject. That case dealt with allegations of shell ownership of medical corporations and insurance companies seeking reimbursement for payments that they purported to be illegal based upon improper licensing of the defendant PCs. The court noted that the insurer in that case had “done no more than pay claims it was required to pay by law” and determined that a private right of action was not available to the insurance companies because they were not intended beneficiaries of BCL §1503 and that a private right of action would not promote the legislative intent of the statute. State Farm Mut. Auto Insurance Co. v. Malella, supra at 416-17.

The analyses set forth in Universal Acupuncture and Malella were recently adopted by the Supreme Court of New York County in Allstate v. Belt Parkway Imaging, P.C., supra. In that case, insurers sought to recover fees paid to medical PC defendants based upon purported [*5]violations of BCL §1503 involving physicians named as owners of corporations which were, in fact, owned by a layperson without a medical license who owned a medical management company. That court extensively analyzed many of the aforementioned decisions and held the plaintiff insurance companies were not among the class of intended beneficiaries of BCL §1503 and could not use a purported violation of the statute offensively in seeking to recover for payments already made.

Such analysis is directly applicable to the facts of the present case. Here, plaintiff seeks to recoup payments made to the defendant PCs based solely upon a purported violation of the BCL. It is noteworthy that while the Complaint infers that defendant PCs “knew” that hiring acupuncturists without having a physician certified to practice acupuncture as a corporate shareholder constituted a violation of the Education Law and BCL, plaintiff cannot point to any controlling authority that decisively states such a rule. In fact, the only violation alleged against defendants here is a potentially open question of law that is best resolved by the regulatory agencies which govern this area but have yet to speak definitively on the issue. There are no allegations of deceptive corporate structure as set forth in nearly every other case dealing with this issue. Plaintiff further concedes that the services for which they were billed were actually performed and that they were performed by licensed acupuncturists. Plaintiff’s sole basis for relief is to use the alleged violation of BCL §1503 as a sword, which goes against settled New York decisional law. As noted by the Malella court, “(t)he violation at issue here is not evil in itself and plaintiff plainly seeks to use the . . . violations as a sword for personal gain in order to recoup payments that it would, but for the alleged violations of the Business Corporations Law, indisputably have been required to pay.” Id. at 419-420.

Since no private right of action exists to recover for a violation of BCL §1503(a), plaintiff’s fraud claim fails to state a cause of action upon which relief may be granted and the cause of action must be dismissed.

Plaintiff’s unjust enrichment claim is similarly unavailing. In order to recover under an unjust enrichment theory, a party must prove (1) the defendants were enriched, (2) at plaintiff’s expense, and (3) that “it is against equity and good conscience to permit . . . defendant(s) to retain what is sought to be recovered”. Lake Minnewaska Mountain Houses, Inc. v. Rekis, 259 AD2d 797 (3d Dept. 1999). While plaintiff’s submissions likely satisfy the first two elements of the claim, it fails to establish how equity and good conscience require the return of fees paid for services rendered by defendants. Plaintiff advances its public policy concerns in support of this claim as well, but they are no more convincing in the equitable forum. The facts remain that defendants rendered services, billed for those services and were paid for the services rendered. Plaintiff does not allege that the bills submitted did not accurately reflect the services provided, they do not allege that the services provided were substandard or insufficient to meet the needs of the covered insured persons and they do not allege that the amounts sought in the bills were inappropriate for the work performed. Plaintiffs received exactly what they paid for – medical services provided by licensed acupuncturists. Allowing plaintiff to disgorge the fees paid for these services would arguably unjustly enrich plaintiff and, despite plaintiff’s stated concern for the public health problems associated with the alleged improper practice of medical doctors employing acupuncturists, public policy mitigates most strongly in favor of proper compensation for services rendered. Furthermore, the practice of forfeiture of payments already rendered is [*6]disfavored by New York courts “particularly where a . . . party seeks to raise illegality as a sword for personal gain rather than a shield for public good.” State Farm Mut. Auto Insurance Co. v. Malella, supra at 419, quoting Lloyd Capital Corp. v. Pat Henchar, Inc., 80 NY2d 124, 128 (1992). Thus, plaintiff has failed to establish the viability of its unjust enrichment cause of action and that claim must also be dismissed.

Plaintiff’s motion for summary judgment dismissing the counterclaim of defendant Eastern Comprehensive Medical Services must be granted. The counterclaim lacks the required specificity to place the Court and parties on notice of the exact nature of the claim. Willis v. Kepner, 109 AD2d 950 (3d Dept. 1985). The counterclaim set forth in defendant Eastern Comprehensive Medical’s Answer states only that acupuncture services were provided to persons who were covered insureds of plaintiff and that “(t)here remains owing and unpaid for the Services the amount of Ten Thousand Five Hundred Eighty-One Dollars and fifty cents ($10,581.50) which is due and owing from Plaintiff to Defendant”. These allegations are not sufficient to sustain any cause of action as they fail to specify, among other things, the time period in which these services were provided, whether plaintiff was ever billed for said services and the alleged reasonable value of the services.

Accordingly, for the reasons set forth, both the motions of the defendants seeking dismissal of the Complaint for failure to state a claim and the motions of the defendants seeking summary judgment dismissing the Complaint are granted, and the Complaint is dismissed as against all defendants. Plaintiff’s motion for summary judgment seeking dismissal of defendant Eastern Comprehensive Medical Services is granted and the counterclaim is dismissed.

This decision shall also constitute the Order of this Court.

Footnote 1: The recent decision of the Second Circuit Court of Appeals in State Farm Insurance v. Mallela, 372 F.3d 500 (2nd Cir. June 18, 2004) certified the following question to the Court of Appeals: “Is a medical corporation that was fraudulently incorporated under N.Y. Business Corporation Law §§ 1507, 1508, and N.Y. Education Law §6507(4)(c) 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?”

Footnote 2: Plaintiff also cites several arbitration decisions in support of this position, including Medical Office of Stony Brook & State Farm Insurance Co., AAA Case No. 17-970-22848-98 (June 2001) and Kew Forest Medical, P.C. & Allstate Insurance Co., AAA Case No. 17-991-1553-1 (March 1, 2002). These decisions have no precedential value as they are not determinations of law, Banc of America Securities v. Knight, NY Slip Op. 24232 (Sup. Ct. New York County, May 19, 2004), and because an arbitrator is not bound by substantive law or rules of evidence. Silverman v. Benmor Coats, Inc., 61 NY2d 299 (1984).