Nexray Med. Imaging PC v Allstate Ins. Co. (2013 NY Slip Op 50910(U))

District Court of Nassau County, First District

CV-038267-12

REPRESENTATION:

Friedman, Harfenist, Kraut & Perlstein, LLP, Attorneys for Plaintiff, 3000 Marcus Avenue, Suite 2E1, Lake Success, New York 11042, 516-355-9600; Law Offices of Robert Macchia, Attorney for Defendant, 98 Front Street, Mineola, New York 11501, 516-873-6200.

Michael A. Ciaffa, J.

The following papers have been considered by the Court

on this motion: submitted April 29, 2013

_________________________________________________________ _______________

Papers Numbered

_____________________________________________________________ ___________

Order to Show Cause, Affirmation & Exhibits Annexed………………..1 – 2

Affirmation in Opposition…………………………………………………………..3

Reply Affirmation…………………………………………………………………….. 4

In State Farm Mut. Auto Ins. Co. v Mallela, 4 NY3d 313 (2005), the Court of Appeals held that a “fraudulently incorporated” medical provider is not entitled to reimbursement under no-fault law for services rendered to no-fault claimants, and this holds true even when the services were properly rendered by a licenced medical practitioner. The Mallela decision has spawned a wide range of knotty problems for District Court and Civil Court Judges, often prolonging the resolution of routine claims for no-fault benefits and adding to court congestion. Such delays and court calendar congestion effectively undermine the legislature’s basic intent in enacting the no-fault law. See generally Hospital for Joint Diseases v Travelers Prop. Cas. Ins. Co., 9 NY3d 312, 317 (2007), quoting Matter of Medical Society v Serio, 100 NY2d 854, 860 (2003) (“New York’s no-fault automobile insurance system is designed to ensure 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'”).

On the other hand, as recognized in Nyack Hospital v GMAC, 8 NY3d 294, 300 (2007), our state’s no-fault scheme is “designed to promote prompt payment of legitimate claims” (emphasis added) while “reducing rampant abuse.” When an insurer seeks to attack a perceived [*2]“abuse” of the no-fault system by challenging multiple claims in the context of a declaratory judgment action against a given provider, Mallela issues can be best addressed in an economical and comprehensive manner. However, an insurer’s ability to raise Mallela is not limited to such cases. As the instant case illustrates, Mallela defenses are now being raised, frequently, in the defense of otherwise simple and straightforward claims seeking payment for routine medically necessary procedures.

The principal issue presented by this motion for a protective order involves an insurer’s attempt to discover financial documents relevant to its Mallela defense through a subpoena served upon the medical provider’s bank. The subpoena seeks a large number of financial records and documents which the insurer claims are relevant, material, and necessary to its defenses to the claim. While the requested records are “relevant” in a broad sense, the insurer’s subpoena raises policy concerns which require a careful balancing of interests.

Plaintiff, Nexray Medical Imaging, P.C., commenced this no-fault action against defendant, Allstate Insurance Company, in November 2012, after defendant denied a claim seeking payment for a routine MRI that plaintiff performed in February, 2012. Although the amount of plaintiff’s claim is small ($912.00), defendant’s defenses to the claim include wide-ranging allegations that plaintiff “is engaged in the illegal and unlawful corporate practice of medicine,” that plaintiff “materially misrepresented that a licensed physician was the owner of the plaintiff’s practice,” that plaintiff was “controlled, owned, managed and supervised by persons who are not licensed or authorized to own a professional service corporation or authorized to practice medicine,” and that plaintiff “is engaged in the unlawful practice of fee splitting…” (defendant’s answer, nineteenth through twenty-third affirmative defenses).

Defendant’s answer was accompanied by equally far reaching requests for interrogatories and for discovery and inspection of documents. The propriety of those requests is not put in issue by plaintiff on this motion.Rather, plaintiff’s motion raises strenuous objection only to defendant’s attempt to subpoena certain bank records from Citibank, N.A., a non-party. They include a demand for signature cards for the account, together with “[a]ll records indicating withdrawal and deposit activity” and “copies of all checks from which money was drawn from the account, canceled checks, transaction statements, electronic fund transfers, wire transfers, account ledgers, corporate resolutions, power of attorney and all correspondence between Citibank, NA and Nexray Medical Imaging, PC between April 1, 2011 and the present.”

By order to show cause dated March 8, 2013, production of these bank records was stayed pending further Court order. Plaintiff’s motion attacks the subpoena on multiple grounds. At the outset, the Court rejects defendant’s contention that plaintiff lacks standing to contest the subpoena. CPLR 3103(a) not only permits a non-party witness to seek a protective order, “but also permits any party opposing the disclosure to make the motion.” Snedeker v. Schiff Hardin LLP, 2010 NY Slip Op 30151 (Sup Ct Nassau Co., Driscoll, J.); accord, Morano v Slattery Skanska, Inc., 18 Misc 3d 464, 472 (Sup Ct Queens Co 2007); McDaid v Semegran, 2007 NY Slip Op 51227 (Sup Ct Nassau Co); Matter of MacLeman, 2005 NY Slip Op 51675 (Surr Ct Westchester Co). The Court accordingly turns to the merits of plaintiff’s contentions.

To the extent that plaintiff argues that the subpoena is “facially defective,” the Court disagrees. The subpoena, on its face, states that the records and documents at issue “are relevant, material, and necessary to verify the depositor’s entitlement to recover no-fault benefits under [*3]Regulation 68 (11 NYCRR Part 65).” It therefore literally satisfies CPLR 3101(a)(4), by providing “notice stating the circumstances or reasons such disclosure is sought or required.”

Moreover, under current caselaw, a showing of “special circumstances” is no longer needed when discovery is sought from a non-party. See Kooper v Kooper, 74 AD3d 6, 8 (2d Dept 2010). Instead, requests for discovery from a non-party are largely governed by the same general principles that apply to requests directed to a party itself. Subject to a test of “usefulness and reason,” a party is entitled to “full disclosure” of “material and necessary” information bearing upon the controversy at hand. 74 AD3d at 10. Accordingly, the Court rejects plaintiff’s arguments that defendant’s subpoena is “facially defective” or that it is “being impermissibly used” as a pre-trial disclosure device.

These conclusions bring the Court to the most difficult issue. The Court’s rejection of the foregoing arguments does not eliminate the need for careful judicial oversight of the discovery process, in order to protect the plaintiff’s legitimate privacy interests in its bank records and financial affairs, while preserving defendant’s right to reasonable disclosure of material and relevant information and documents. See CPLR 3103, 3104.

In balancing these interests, the Court is guided, in the first instance, by rulings made by other courts. Recent Appellate Term decisions have made plain that Mallela discovery requests must be supported by “case specific allegations.” See Pomona Med. Diagnostic, PC v Adirondack Ins. Co., 2012 NY Slip Op 51165 (App Term 1st Dept); see also Midwood Acupuncture, PC v State Farm Fire & Cas. Co., 2008 NY Slip Op 52468 (App Term 2d Dept) (“the record reveals that the defendant set forth detailed and specific reasons for believing that plaintiff may be ineligible to recover no-fault benefits as a fraudulently incorporated professional service corporation”). Nor may insurers engage in “a fishing expedition” for Mallela evidence “when they cannot set forth a reliable factual basis for what amounts to, at best, mere suspicions.” Pomona Med. Diagnostic, PC v Adirondack Ins. Co., supra; accord, JKM Medical, PC v Progressive Ins. Co., index no. 43109/11, decision dated July 18, 2012 (Dist Ct Nassau Co., Ciaffa, J) (“allowing comprehensive Mallela discovery upon such mere suspicions would be abusive and palpably improper”).

Trial court decisions from Civil Court judges generally follow a similar approach. In a series of well-reasoned opinions, Judge Katherine Levine draws a distinction between cases where the insurer “has articulated a founded belief’ that plaintiff is actually controlled by a non-licenced professional,” and cases where the insurer has submitted nothing more than “unsupported conclusions” and “unsubstantiated hypotheses and suppositions.” Compare Lenox Neuropsychiatry Med., PC v State Farm Ins. Co., 2009 NY Slip Op 50178 (Civ Ct Richmond Co.), with Bay Plaza Chiropractic v State Farm Mut. Auto. Ins. Co., 2008 NY Slip Op 51925 (Civ Ct Richmond Co.).

Moreover, even in cases where some limited Mallela discovery is warranted, trial court judges have emphasized that the scope of discovery into Mallela issues “is not unlimited.” See Cambridge Medical, PC v Nationwide Prop. & Cas. Ins. Co., 2008 NY Slip Op 50629 (Civ Ct Richmond Co., Levine, J), quoting Carothers v Insurance Companies Represented by Bruno, Gerbino & Soriano, LLP, 13 Misc 3d 970, 974 (Civ Ct Richmond Co., Sweeney, J). “Since the amount in dispute in most no-fault matters is small,” a trial court “should not hesitate to exercise its protective powers” under CPLR 3103(a) to curtail “overburdening” requests or “to prevent the [*4]proverbial fishing expedition.” Cambridge Medical, PC v Nationwide Prop. & Cas. Ins. Co., supra; accord, Carothers v Insurance Companies Represented by Bruno, Gerbino & Soriano, LLP, supra (protective orders should “be freely issued to limit discovery in no-fault actions where the amount in dispute is small”).

Finally, in cases, like this one, where Mallela discovery is sought from a non-party, the rules governing non-party discovery provide additional grounds for closely scrutinizing the request. On the latter point, the Second Department’s recent decision in Kooper v Kooper, supra, provides the most appropriate framework for analysis.

As explained in Kooper, discovery requests directed to both parties and non-parties are subject to the same “threshold requirement” — “that the disclosure sought is material and necessary.'” 74 AD3d at 10. The requirement, in general, is easy to satisfy. As construed by the Court of Appeals, see Allen v. Crowell-Collier Publ. Co., 21 NY2d 403, 406 (1968), the phrase “material and necessary” simply “means nothing more or less than relevant.'” Kooper, supra, 74 AD3d at 10, quoting Connors, Practice Commentaries to McKinney’s CPLR, at C3105:5. Applying this threshold test, defendant’s request for plaintiff’s bank records clearly involves information which is “relevant” to defendant’s defenses. See generally Matter of Andrew Carothers, M.D., P.C. v. Insurance Companies Represented by Bruno Gerbino & Soriano, LLP, 26 Misc 3d 448, 452-3 (Civ Ct Richmond Co. 2009) (“That Dr Carothers did not own or control the corporation was further demonstrated by how money flowed into and out of the corporate bank accounts”). Consequently, to the extent plaintiff argues that the subpoena seeks records which are “irrelevant and immaterial” to the instant action, this argument, too, must be rejected.

Nevertheless, disclosure requests directed to non-parties implicate “considerations in addition to those governing discovery from a party.” Kooper, supra, 74 AD3d at 11. These additional considerations go to the heart of plaintiff’s objection to defendant’s subpoena, and put in sharp focus the Court’s statutory authority “to impose, in its discretion, appropriate restrictions on demands which are unduly burdensome’…[or] may cause unreasonable annoyance, expense, embarrassment, disadvantage, or other prejudice to any person’…” Kooper, supra, quoting CPLR 3103(a).

As the Court further explained in Kooper, the Appellate Division’s decisions “have consistently adhered to the principle that more than mere relevance and materiality is necessary to warrant disclosure from a nonparty.'” 74 AD3d at 17-18, quoting Diogardi v St. John’s Riverside Hosp., 144 AD2d 333, 334-5 (2d Dept 1988). Moreover, since “a party’s inability to obtain the requested disclosure from his or her adversary or from independent sources [is] a significant factor in determining the propriety of discovery from a nonparty,” a motion to quash may properly be granted “where the party issuing the subpoena has failed to show that the disclosure sought cannot be obtained from sources other than the nonparty.” Kooper, supra, 74 AD3d at 16-17. “Circumstances necessarily vary from case to case. The supervision of discovery, the setting of reasonable terms and conditions for disclosure, and the determination of whether a particular discovery demand is appropriate, are all matters within the sound discretion of the trial court, which must balance competing interests.”74 AD3d at 17.

In the instant case, plaintiff’s moving papers show that plaintiff’s president and record owner, Dr. William Weiner, was questioned under oath in July 2012, with respect to a large number of claims for no-fault benefits claims that plaintiff had filed with the defendant. The [*5]“Schedule of Claimants” annexed to defendant’s EUO request includes the name of plaintiff’s assignor in this action (Steven Olivares). Dr. Weiner was examined at length respecting potential Mallela issues. He answered each question without hesitation and equivocation.

As part of its compliance with defendant’s EUO request, plaintiff produced more than a dozen documents, including the leases for the premises it occupied, its revolving loan and security agreement, its asset purchasing agreements, UCC financing documents, licences for its professional employees, prior leases for the premises, and W-2s/payroll records for other doctors who worked for plaintiff. Notwithstanding the foregoing, defendant followed up with a second request for production of extensive financial documentation and other records, including tax returns. However, no request was made, at that time, for the bank records that defendant now seeks to obtain through its subpoena.

Thereafter, in the context of its previously served demands for discovery from plaintiff in this action, defendant requested production of many of the very same bank records that it presently requests in its subpoena. Plaintiff objected to the request on the ground that it was “vague, overly broad, unduly burdensome and irrelevant.” In the face of this objection, defendant made no effort to seek court intervention to resolve the dispute. Instead, it served a subpoena upon Citibank, requesting the same records, plus others.

This fact, by itself, reinforces the Court’s suspicion that defendant is improperly using the subpoena in order to obtain leverage in its defense of this matter. If defendant truly believes that plaintiff is a “fraudulently incorporated” medical corporation, it can and should commence a declaratory judgment action against the plaintiff. What it cannot do, in this Court’s opinion, is to seek a financial “proctology exam” of plaintiff’s bank account in the defense of a $912.00 claim, based on mere suspicion that it may uncover evidence of a possible Mallela violation. Cf. Revson v Cinque & Cinque, PC, 221 F3d 71 (2d Cir 2000).

In any event, based upon the extensive testimony given by Dr. Weiner at his EUO, and plaintiff’s production of a panoply of documentation respecting the plaintiff’s financial arrangements with its landlord and others, the Court is not inclined to allow defendant to engage in an overbroad and palpably improper “fishing expedition” into plaintiff’s finances.

For these reasons, the Court grants a protective order in plaintiff’s favor, limiting the subpoena to the signature cards for the subject Citibank account. Insofar as Dr. Weiner’s EUO testimony may have raised additional questions respecting his actual control over plaintiff’s financial affairs, the signature cards should show whether other individuals have been allowed to write checks and make withdrawals from the account. Pending production of the signature cards, and subject to further discovery proceedings between the parties, the Court withholds judgment on whether plaintiff’s bank records may be obtained by the defendant in connection with its defenses to this action. In the event that defendant seeks additional discovery respecting the bank records, however, such requests should be directed to plaintiff, itself, and not to Citibank.

So Ordered:

[*6]

District Court Judge

Dated: June 6, 2013

cc:Friedman Harfenist Kraut & Perlstein, LLP

Law Offices of Robert Macchia

Citibank, N.A.