[*1]

Supreme Court, Appellate Term, Second Department, 2d, 11th and 13th Judicial Districts, July 5, 2013

APPEARANCES OF COUNSEL

Smith Valliere PLLC, New York City (Mark W. Smith and Timothy A. Valliere of counsel), for appellant. McCormack & Mattei, P.C., Garden City (Barry I. Levy and John E. McCormack of counsel), for respondent.

{**42 Misc 3d at 33} OPINION OF THE COURT

Memorandum.

Ordered that the judgment is affirmed, without costs.

Plaintiff Andrew Carothers, M.D., P.C. (ACMDPC) is a professional corporation which performed MRIs for patients allegedly injured in motor vehicle accidents. ACMDPC operated out of three facilities—one in Brooklyn, one in Queens and one in the Bronx. At the time the MRI services in question were rendered, Dr. Andrew Carothers was a board-certified, licensed radiologist, who had been listed on ACMDPC’s corporate filings as its sole shareholder, officer and director.

ACMDPC’s patients assigned to ACMDPC their right to reimbursement of first-party no-fault benefits. ACMDPC submitted the assigned claims for reimbursement to the various responsible insurers and self-insurers, including defendant Progressive Insurance Company (Progressive). After the insurers and self-insurers failed to pay the claims in question, ACMDPC commenced thousands of actions against them.{**42 Misc 3d at 34} [*2]

A joint trial was held of actions pending in Richmond County and Kings County between ACMDPC and 53 insurers and self-insurers, including the instant action. The total amount sought for the claims in all of these actions was approximately $18 million. The defense asserted was that ACMDPC was not entitled to reimbursement of the claims because of ACMDPC’s failure to comply with Insurance Department Regulations (11 NYCRR) § 65-3.16 (a) (12), which renders a provider ineligible to recover no-fault benefits under Insurance Law § 5102 (a) (1) if the provider fails to meet “any applicable” state or local licensing requirement necessary to perform its services in New York. On July 17, 2008, after a joint trial, the jury returned a verdict in favor of all 53 defendants. By order entered October 14, 2009 (26 Misc 3d 448 [2009]), the Civil Court (Peter Paul Sweeney, J.) denied plaintiff’s motion, pursuant to CPLR 4404 (a), to set aside the jury verdict. Thereafter, it was agreed, by so-ordered stipulation, that, with the exception of the instant action, judgments would not be entered pending the disposition of this appeal. A judgment in this action, dismissing the complaint, was entered on December 7, 2010, from which this appeal is taken.

We note at the outset that there is no merit to plaintiff’s contention that the Civil Court, as a court of limited monetary jurisdiction (see CCA 202), lacked jurisdiction to adjudicate this case because the aggregate amount in controversy was approximately $18 million. This was a joint trial where the Civil Court had before it separate causes of action, each of which was within the monetary jurisdiction of the Civil Court (see generally Board of Mgrs. of Mews at N. Hills Condominium v Farajzadeh, 189 Misc 2d 38 [App Term, 2d Dept, 9th & 10th Jud Dists 2001]).

Plaintiff argues that the defense that plaintiff was ineligible to recover no-fault benefits was barred by the doctrine of res judicata because some of the defendants, including Progressive, had been involved in litigation with plaintiff in prior actions in which plaintiff had prevailed, and had failed to raise or litigate that defense in those prior actions. Responding to the same argument, the Civil Court (Peter Paul Sweeney, J.), in its April 27, 2009 order denying plaintiff’s motion for summary judgment (23 Misc 3d 1118[A], 2009 NY Slip Op 50831[U], *4 [2009]), stated that the fact that the ineligibility defense could have been litigated in the prior actions was not determinative, as “the inquiry must always be as to the point or question actually litigated and determined in the original action, not what{**42 Misc 3d at 35} might have been thus litigated and determined” (quoting Cromwell v County of Sac, 94 US 351, 353 [1877]). The Civil Court noted that the claims for first-party no-fault benefits at issue in this joint trial differed from the claims for first-party no-fault benefits that had been litigated in the prior actions, and that plaintiff had presented the court with no proof that the ineligibility defense had been “actually and necessarily” determined in any of the prior actions (Smith v Kirkpatrick, 305 NY 66, 70 [1953]). In our view, the Civil Court’s determination was proper.

“While a valid final judgment bars future actions between the same parties on the same cause of action, a subsequent action will not be barred by res judicata where the nature or object of the second action is distinct from that in a prior action in which a judgment was rendered.

“Where a second action is upon a different claim, demand, or cause of action, the established rule is that the judgment in the first action operates as an estoppel only as to the points or questions actually litigated and determined. Thus, where the two causes of action are different, not in form only but also in the rights and interests affected, the estoppel is limited to the point actually determined” (9 Carmody-Wait 2d § 63:474).

As noted, the essence of the defense in this case was plaintiff’s ineligibility to recover [*3]no-fault benefits due to plaintiff’s failure to comply with New York State’s licensing requirements, based firstly on ACMDPC’s alleged failure, as a professional corporation, to be owned and controlled only by licensed professionals engaged in the practice of such profession in such corporations (see Business Corporation Law §§ 1503 [a]; 1507, 1508). The theory underlying this defense was that Dr. Carothers was not the true owner, or at least not the sole owner, and operator of ACMDPC, which allegedly was actually owned or co-owned and controlled by nonparties Hillel Sher and Irina Vayman, two individuals who were not physicians, but who had received the bulk of ACMDPC’s profits. Thus, in order to find that plaintiff was not entitled to reimbursement, the jury had to find that plaintiff was actually owned, co-owned or controlled by unlicensed individuals (see e.g. One Beacon Ins. Group, LLC v Midland Med. Care, P.C., 54 AD3d 738 [2008]). A second theory of the defense was that Dr. Carothers had violated Business Corporation Law § 1507 because, as sole shareholder, he had not been personally “engaged in the practice” of medicine in ACMDPC during the time ACMDPC had been in business.{**42 Misc 3d at 36}

Prior to the commencement of the trial, Sher, who had leased the premises in which the MRI facilities were located, and the equipment therein, to Dr. Carothers, and Vayman, who had served as ACMDPC’s office manager, had been deposed. Both had invoked their Fifth Amendment privilege in response to virtually all the questions posed of them during their respective depositions. Although the parties agreed that neither Sher nor Vayman was available to testify at the trial, within the meaning of CPLR 3117 (a) (3), plaintiff’s counsel asked the Civil Court to direct the defense not to read the deposition transcripts to the jury, claiming that the deposition testimony was of no probative value and only served to prejudice plaintiff. The Civil Court, finding that the testimony was relevant to the issues at trial, permitted the defense to read the deposition transcripts to the jury, and ultimately charged the jury that an adverse inference could be drawn against plaintiff based upon Sher’s and Vayman’s invocation of their Fifth Amendment privilege.

The Civil Court had also granted the defense’s motion in limine to preclude plaintiff from referring to the approximately $18 million in accounts receivable which, plaintiff contended, it might have generated had the claims at issue in the various pending actions been paid.

At trial, the defense contended that even though Dr. Carothers was ACMDPC’s nominal owner, and was listed as its only shareholder, officer and director, it was actually Sher and Vayman who were the de facto owners of ACMDPC. Among the primary defense witnesses were a seller of used MRI and CT scan equipment, who testified about the valuation and market for MRI equipment, and whose testimony indicated that the MRI equipment at the ACMDPC facilities was outdated and that ACMDPC’s monthly payments for that equipment were significantly above market value; a board-certified neuroradiologist, who testified about the poor radiological quality of the MRI scans, many of which could not be read, as indicative of Dr. Carothers’ lack of quality control, direction and supervision of ACMDPC; and a forensic accountant and certified valuation analyst, who analyzed the flow of money into and out of ACMDPC, most of which ultimately went into accounts controlled by Sher or Vayman. Defendant also called as a witness Dr. Carothers, who was questioned about, among other things, his relationship with Sher and Vayman, as well as about his actual practice of medicine within ACMDPC. [*4]

Plaintiff claimed that, at all relevant times, Sher and Vayman had merely assisted ACMDPC: Sher in his role as the lessor of{**42 Misc 3d at 37} the premises in which the MRI facilities were located and of the equipment therein, and Vayman as ACMDPC’s office manager. Among plaintiff’s witnesses at trial were Wayne Hickey, a licensed accountant and the chief financial officer of Medtrx, a company which served both as plaintiff’s billing agent and as plaintiff’s lender, who testified about Medtrx’s billing and collection practices vis-à-vis ACMDPC, as well as its role as a secured lender of ACMDPC; an attorney specializing in structuring and incorporating medical practices, who testified about custom and usage in MRI practices; and an expert in the business valuation aspects of MRI practices. (A more in-depth summary of the trial may be found in the Civil Court’s order denying plaintiff’s motion to set aside the jury verdict [26 Misc 3d 448].)

The Civil Court instructed the jury that, in order to find that ACMDPC was “fraudulently incorporated,” it had to find that the business relationships of Sher and Vayman were, in effect, partnerships or arrangements in which Sher and Vayman were so entangled with the affairs of ACMDPC that reasonable people would say that they were the de facto owners of ACMDPC or that they exercised substantial dominion and control over ACMDPC and its assets, and that they shared risks, expenses and interest in ACMDPC’s profits and losses. The jury was instructed that it could look beyond the certificate of incorporation but that, in order to find that Sher and Vayman had exercised substantial control over ACMDPC, it must find that they had a significant role in the guidance, management and direction of the business of ACMDPC. The jury was told to look at the totality of the circumstances, and the court enumerated 13 different factors which the jury might consider relevant in order to determine whether Sher and Vayman were de facto owners of ACMDPC or whether they had exercised substantial control over ACMDPC. Those factors were: (1) whether the agreements between ACMDPC and the entities owned by Sher, which leased the facilities and the equipment to ACMDPC, were the product of arm’s-length transactions or whether the terms of those agreements were designed to give Sher and those entities substantial control over ACMDPC and to channel its profits to Sher; (2) whether and to what extent Sher and Vayman{**42 Misc 3d at 38} had exercised dominion and control over ACMDPC’s assets, including its bank accounts; (3) whether and to what extent Dr. Carothers, Sher and Vayman had made capital investments in ACMDPC; (4) whether and to what extent Sher and Vayman had used ACMDPC funds for personal rather than for corporate purposes; (5) whether and to what extent Sher and Vayman had the ability to bind ACMDPC to legal obligations with third parties; (6) whether and to what extent Sher and Vayman had been responsible for hiring, firing and/or payment of ACMDPC salaries, and the extent to which they had dictated policy decisions; (7) whether and to what extent the day-to-day formalities that are part and parcel of the corporate existence (including the issuance of stock, election of directors, holding of corporate meetings, keeping of books and records and filing of corporate tax returns) had been followed; (8) whether and to what extent ACMDPC and Sher’s companies shared common office space, addresses, employees and telephone numbers; (9) whether and to what extent Dr. Carothers had played a substantial role in the day-to-day operation of ACMDPC; (10) whether and to what extent Sher and/or Vayman had assumed the financial obligations of ACMDPC as if they were their own; (11) whether and to what extent ACMDPC funds had been commingled with those of the other entities owned by Sher; (12) whether and to what extent Dr. Carothers, Sher and Vayman had shared the risks, expenses and interest in the profits and losses of the corporation; and (13) [*5]whether and to what extent Sher and Vayman had been involved in making professional medical decisions regarding the practice of ACMDPC.

The Civil Court then asked the jury to decide whether Dr. Carothers was engaged in the practice of medicine in ACMDPC, within the meaning of Business Corporation Law § 1507, during the time ACMDPC was in business. It instructed the jury that the practice of medicine included “diagnosis by way of MRI scans” and that a physician is engaged in the practice of medicine “if he either directly or indirectly is involved with the making of professional medical decisions concerning individual clients or patients.”

Regarding Sher’s and Vayman’s invocation of their Fifth Amendment privilege at their depositions, the Civil Court told the jury that it could, but was not required to, infer, by their refusal to answer questions regarding de facto ownership and control over ACMDPC, that their answers would have been adverse to ACMDPC’s interest. The jury could not, however, rely on such an adverse inference, should it choose to draw one, as the only basis for concluding that ACMDPC was not solely owned or controlled by Dr. Carothers.

The jury found that the defense had proved by clear and convincing evidence both that ACMDPC was “fraudulently {**42 Misc 3d at 39}incorporated” and that Dr. Carothers had not engaged in the practice of medicine in ACMDPC during the time ACMDPC was in business. Plaintiff thereafter moved, pursuant to CPLR 4404 (a), to set aside the verdict and to enter judgment in its favor, or to grant a new trial, contending that the Civil Court had: (1) improperly instructed the jury on “fraudulent incorporation”; (2) erroneously instructed the jury on the “practice of medicine”; (3) erroneously permitted the jury to consider and draw an adverse inference against plaintiff based upon Sher’s and Vayman’s invocation of their Fifth Amendment privilege; and (4) made numerous erroneous evidentiary rulings throughout the course of the trial. The motion was denied by the Civil Court in an October 14, 2009 order (26 Misc 3d 448), and a judgment dismissing the complaint was subsequently entered.

On appeal, plaintiff asks this court to reverse the judgment, to set aside the jury verdict, and either to enter judgment in its favor or to grant a new trial, claiming, with respect to the “fraudulent incorporation” defense, that the Civil Court’s erroneous and prejudicial orders and various trial rulings deprived it of a full and fair opportunity to refute that defense. Among the trial rulings highlighted by plaintiff are those involving the Civil Court’s decision to permit the reading of the depositions of nonparties Sher and Vayman, in which they, respectively, had invoked their Fifth Amendment privilege, coupled with the court’s later decision to instruct the jury that it could draw a negative inference against plaintiff based upon Sher’s and Vayman’s invocation of their Fifth Amendment privilege. Plaintiff also argues that the Civil Court’s decision to preclude evidence of ACMDPC’s financial profile, in particular the approximately $18 million in accounts receivable that was allegedly owed to ACMDPC by the insurance companies, prejudiced plaintiff’s ability to respond to the “fraudulent incorporation” defense. The most egregious errors warranting reversal, contends plaintiff, were in the Civil Court’s instructions to the jury regarding the “fraudulent incorporation” defense, particularly because the Civil Court, among other things: (1) failed to recognize that such defense requires a finding of fraud and fraudulent intent at the time of incorporation and did not instruct the jury thereon; and (2) developed a novel 13-factor test to be applied in this situation, which test was inappropriate and misleading, instead of providing instructions on common-law fraud, sham transactions, and [*6]the business-judgment rule. Plaintiff further contends that it was error for the Civil Court to instruct the jury regarding the “practice of medicine.”

{**42 Misc 3d at 40}The question of whether an “unlawfully incorporated” professional corporation was eligible for no-fault reimbursement was certified to New York’s Court of Appeals by the United States Court of Appeals for the Second Circuit in State Farm Mut. Auto. Ins. Co. v Mallela (372 F3d 500, 501 [2d Cir 2004]), where the Second Circuit noted that New York law forbade nonphysicians from employing physicians or controlling their practices because of New York’s long-standing concern that the “corporate practice of medicine” would create ethical conflicts and undermine the quality of care afforded to patients (372 F3d at 503). In response to the certified question, New York’s Court of Appeals concluded that insurers were entitled to withhold payment of no-fault benefits for medical services provided by “fraudulently incorporated” enterprises to which patients had assigned their claims (4 NY3d 313 [2005]). The Court noted that the complaint therein centered on fraud “in the corporate form rather than on the quality of care provided” (id. at 320), and specifically rejected the providers’ argument that the patients had received appropriate care from licensed professionals, which care was within the scope of the licenses of those who had treated the patients. “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” (id. at 321). The Court also indicated that a professional corporation’s mere failure to observe corporate formalities, such as failing to hold an annual meeting, or failing to pay corporate filing fees or to timely submit paperwork, would not render a provider ineligible, but that carriers could “look beyond the face of licensing documents to identify willful and material failure to abide by state and local law,” and that such conduct, “tantamount to fraud,” would render the provider ineligible for no-fault reimbursement (id. at 321, 322).

We disagree with plaintiff’s contention that the Civil Court erroneously instructed the jury on the essential aspects of the Mallela defense by failing to instruct the jury regarding the elements of fraud and by failing to instruct the jury that defendant must have established that there was a fraudulent intent at the time of the provider’s incorporation. Although both the United States Court of Appeals for the Second Circuit and New York’s Court of Appeals employed the term “fraudulently incorporated” in the Mallela case, which was the term used in the certified question, the essence of the defense in that case, as here,{**42 Misc 3d at 41} was the provider’s “lack of eligibility,” which does not require a finding of fraud or fraudulent intent, but rather, addresses the actual operation and control of a medical professional corporation by unlicensed individuals.

As noted above, a reading of the Mallela case demonstrates that the case involved fraud “in the corporate form” (id. at 320) rather than the more traditional forms of common-law fraud. In fact, the New York Court of Appeals, in Mallela, noted that the Superintendent of Insurance, in an amicus curiae brief, had asserted that Insurance Department Regulations (11 NYCRR) § 65-3.16 (a) (12) had been promulgated in order to combat no-fault fraud which was correlative with the corporate practice of medicine by nonphysicians, and suggested that carriers look beyond the licensing documents in order to identify a provider’s “willful and material failure to abide by state and local law” (4 NY3d at 321), thereby triggering issues of eligibility and coverage.

With respect to plaintiff’s contention that the issue of “fraudulent incorporation” must be [*7]determined by reference to the time that the certificate of incorporation was filed, we initially note that Insurance Department Regulations (11 NYCRR) § 65-3.16 (a) (12) does not, by its terms, limit a provider’s ineligibility to those instances where it fails to meet a licensing requirement at the time of incorporation. Moreover, the Court of Appeals, in Mallela, in analyzing the alleged facts, specifically addressed the allegations made therein regarding the post-incorporation operation of the practice—i.e., the operation of the practice by nonphysicians; the hiring of management companies owned by the nonphysicians which billed the practice at inflated rates; and the channeling of the actual profits of the practice to the management companies—and stated that, if a professional corporation was “fraudulently licensed,” it would not be entitled to reimbursement for no-fault benefits (4 NY3d at 321, 322). The Mallela decision thereby clearly indicated that a professional corporation would be ineligible for no-fault reimbursement if it was in violation of licensing requirements regardless of whether the nominal physician-owner had intended to yield control to unlicensed parties at the time the professional corporation had been formed or had done so at some later time. Finally, the Appellate Division, Second Department, in One Beacon Ins. Group, LLC (54 AD3d 738), after discussing the Mallela case, found that the insurers therein had submitted sufficient evidentiary proof to raise an issue of fact as{**42 Misc 3d at 42} to whether the provider “was actually controlled by a management company owned by unlicensed individuals in violation of the Business Corporation Law” (id. at 740). In short, the inquiry does not end once the certificate of incorporation is filed.

Although plaintiff contends that the list of 13 factors was so overbroad as to be present in virtually every well-managed medical practice, in our opinion, it was not error for the Civil Court to set forth the list of factors to assist the jury in determining the issue of Sher’s and Vayman’s control over ACMDPC, particularly since the court specifically told the jury that it should consider “the totality of the circumstances” (26 Misc 3d at 455). Contrary to plaintiff’s argument, it cannot be said that any single factor weighed more than any other in the jury’s factual determination as to Sher’s and Vayman’s ownership, co-ownership or control of ACMDPC. Moreover, the fact that, of the several enumerated factors, a particular factor may have been considered a “technical violation” (see Mallela, 4 NY3d at 322) and should therefore not have been considered does not require a reversal. The jury was instructed to consider the evidence as a whole, before it even heard the factors, and, presumably, it did so. Furthermore, it is not inappropriate to ask a jury to consider and weigh a number of factors in making its determination of “control” (see e.g. PJI 2:238, PJI 2:255 [which, in the context of vicarious liability, ask the jury to consider various factors in order to determine an entity’s “direction and control”]). Nor, as plaintiff contends, was it necessary for the Civil Court to define terms such as “dominion and control,” “substantial control,” or “arm’s length,” as such terms are common enough to be accorded their everyday meanings. Finally, plaintiff’s proposed charges on “sham transactions” and “the business-judgment rule” were irrelevant and inappropriate, and it was not error for the Civil Court to decline to instruct the jury with respect thereto.

As noted above, there were two theories on which the defense that ACMDPC was not entitled to reimbursement was predicated: the “fraudulent incorporation” defense, i.e., that Dr. Carothers was not the true owner of ACMDPC; and the “practice of medicine” defense, i.e., that Dr. Carothers was not personally engaged in the practice of medicine at ACMDPC.

With regard to the second basis on which the jury found that defendant had proved its [*8]defense that ACMDPC was ineligible to recover assigned first-party no-fault benefits, to wit, that Dr. Carothers, as sole shareholder of ACMDPC, had not engaged in{**42 Misc 3d at 43} the practice of medicine in ACMDPC during the time ACMDPC had been in business (see Business Corporation Law § 1507), plaintiff argues that it was error for the Civil Court to instruct the jury on the “practice of medicine” because that aspect of a plaintiff’s eligibility to recover no-fault benefits was not covered by the Mallela case. Plaintiff further argues that, even if Mallela supported such an instruction, the Civil Court improperly restricted the definition of the term “practice” to instances where the physician-owner personally and actively treats patients through the professional corporation. Plaintiff contends that the portion of the jury’s verdict which found that Dr. Carothers was not engaged in the practice of medicine must be set aside as against the weight of the evidence since the evidence showed that Dr. Carothers was actively engaged in the practice of medicine in ACMDPC.

It is true that the “practice of medicine” requirement of Business Corporation Law § 1507 was not addressed in Mallela, as it was not an issue in that case. Nevertheless, a reading of the statute establishes that the failure of a shareholder physician to actually be engaged in the practice of medicine within the professional corporation renders such professional corporation ineligible to recover assigned first-party no-fault benefits. As noted above, under Business Corporation Law § 1507, it is unlawful for a physician to be a shareholder in a professional corporation authorized to practice medicine unless he or she is engaged in the practice of medicine in that professional corporation. Education Law § 6521 defines the practice of the profession of medicine as “diagnosing, treating, operating or prescribing for any human disease, pain, injury, deformity or physical condition.” The Civil Court’s instruction that the practice of medicine included “diagnosis by way of MRI scans,” was proper and, when read as a whole, the charge adequately conveyed the correct legal principles to the jury (see Casella v City of New York, 69 AD3d 549, 550 [2010]; Manna v Don Diego, 261 AD2d 590, 591 [1999]).

Nevertheless, we agree with plaintiff’s argument that this portion of the jury verdict should be set aside as contrary to the weight of the evidence{**42 Misc 3d at 44}. A jury verdict should not be set aside as contrary to the weight of the evidence unless the jury could not have reached the verdict by any fair interpretation of the evidence (see Lolik v Big V Supermarkets, 86 NY2d 744, 746 [1995]; Nicastro v Park, 113 AD2d 129 [1985]). Whether a jury verdict should be set aside as contrary to the weight of the evidence does not involve a question of law, but rather requires a discretionary balancing of many factors (see Cohen v Hallmark Cards, 45 NY2d 493, 498-499 [1978]; Nicastro v Park, 113 AD2d at 134-135). Upon our review of the record, we conclude that this portion of the jury verdict should be set aside since it is not based upon a fair interpretation of the evidence.

Notwithstanding the foregoing, we conclude that the jury’s determination that ACMDPC was ineligible to receive reimbursement based upon the first theory of the defense, i.e., the “fraudulent incorporation” or Mallela defense, is amply supported by the record, and it is on this basis that we affirm the judgment.

Plaintiff contends that it was error to permit Sher’s and Vayman’s deposition testimony, in which both had invoked their Fifth Amendment privilege, to be read to the jury, because the probative value of reading the depositions was outweighed by its prejudicial effect. Plaintiff argues that such error was further compounded by the Civil Court’s instruction to the jury that it [*9]could draw an adverse inference against plaintiff based upon their invocation of said privilege.

We agree with the dissent that it was error for the Civil Court to permit the defense to read to the jury the deposition transcripts of nonparties Sher and Vayman, especially where each of the more than 100 questions asked yielded a response invoking the Fifth Amendment. The error was compounded by the repeated references to the nonparties’ depositions in the defense summation to the jury, and in the decision of the court to charge an adverse inference. While it is proper for the court to give such an instruction to the jury in a civil action when a party invokes his or her Fifth Amendment privilege (see Marine Midland Bank v Russo Produce Co., 50 NY2d 31 [1980]), generally, the adverse inference is inappropriate when it is based on a nonparty’s decision to remain silent (see Access Capital v DeCicco, 302 AD2d 48, 52 [2002]; State of New York v Markowitz, 273 AD2d 637 [2000]). However, exceptions have been recognized where the nonparty witness is the alter ego of the defendant (see Searle v Cayuga Med. Ctr. at Ithaca, 28 AD3d 834 [2006]) or where other unique circumstances exist involving the conduct of a nonparty (see LiButti v United States, 107 F3d 110 [2d Cir 1997]). In recognizing the Civil Court’s errors, we are cognizant that any trial record will reveal blemishes, for rarely are trials error free (see United States v Birnbaum, 373 F2d 250 [2d Cir 1967]; People v Kingston, 8 NY2d 384 [1960]).{**42 Misc 3d at 45} As such, an appellate court is charged with assessing the prejudicial effect of an error to determine if the verdict should be reversed.

The improper admission of evidence by a trial court will be considered harmless as long as there is no indication that the evidence had a “substantial influence upon the result of the trial” (Walker v State of New York, 111 AD2d 164, 165 [1985]; see CPLR 2002; see also Ewanciw v Atlas, 65 AD3d 1077 [2009]; Rizzuto v Getty Petroleum Corp., 289 AD2d 217 [2001]; Barracato v Camp Bauman Buses, 217 AD2d 677 [1995]; Catalan v Empire Stor. Warehouse, 213 AD2d 366 [1995]). Similarly, harmless error analysis will apply where evidence has been improperly excluded (see Geary v Church of St. Thomas Aquinas, 98 AD3d 646 [2012]; Duke v Town of Riverhead, 77 AD3d 702 [2010]; Parlante v Cavallero, 73 AD3d 1001 [2010]; Division Seven, Inc. v HP Bldrs. Corp., 58 AD3d 796 [2009]). The question then is whether, in applying the foregoing principle to the facts of this case, the Civil Court’s error in admitting into evidence the deposition testimony of Sher and Vayman, coupled with the subsequent errors flowing therefrom—i.e., the references to such testimony in the defense summation and the Civil Court’s instruction to the jury regarding drawing an adverse inference against plaintiff—so prejudiced plaintiff as to warrant a new trial, or whether the outcome of this case would have been the same notwithstanding such errors. In making our determination, we must assess the effect of the errors in relationship to all the evidence offered at trial, in order to decide the extent to which the erroneously admitted evidence, and the errors which directly and indirectly resulted from its admission, may have contributed to the jury’s verdict. Among the factors we may consider is the strength of the properly admitted evidence presented by the defense against plaintiff to prove its defense that Dr. Carothers was not plaintiff’s true owner (see e.g. Sakin v Fryman, 147 AD2d 626, 627 [1989] [improper questioning of defendant’s expert was not so prejudicial as to have denied defendant a fair trial where “(t)he nature of the evidence of the defendant’s liability was extremely convincing”]).

Considering the ample evidence of Sher’s and Vayman’s control over the hiring of office employees, management of the offices, administration of the billing, demonstrated manipulation [*10]of the financial accounts of ACMDPC, and excessive charges for various rentals, including the medical imaging machines, the jury had more than enough evidence to conclude that{**42 Misc 3d at 46} plaintiff was in violation of the requirement of Business Corporation Law § 1507 that it be owned and controlled solely by licensed professionals. Accordingly, any error committed by the Civil Court may be considered harmless.

Turning to plaintiff’s argument that the exclusion of evidence of ACMDPC’s approximately $18 million in accounts receivable for unpaid no-fault claims prevented plaintiff from responding to the defense, we find such contention to lack merit. As the Civil Court noted, plaintiff’s inability to determine the outcome of litigation involving thousands of these pending claims rendered the value of its accounts receivable too speculative and uncertain. Indeed, it would have been too unwieldy to have permitted trials within this trial as to the potential viability of all of the pending claims against the various insurance companies. In any event, the jury was aware that there were pending claims with a value of approximately $18 million, as both Dr. Carothers and Mr. Hickey testified to that effect.

In view of the foregoing, as defendant demonstrated that ACMDPC had failed to comply with New York State’s licensing requirement that professional corporations be owned and controlled solely by licensed professionals, we conclude that there is sufficient evidence in the record to support the jury’s determination regarding the first theory of the defense, based upon the “fraudulent incorporation” or Mallela defense, and it is on this basis that we affirm the judgment.

Accordingly, the judgment is affirmed.

Solomon, J. (dissenting and voting to reverse the judgment and order a new trial in the following memorandum). I must respectfully dissent. I find that the errors in this matter require a new trial.

At the outset, it should be noted that this was a framed-issue trial in which the roles of the plaintiff and defendant were reversed. The joint trial order of September 21, 2006 framed the issue as “solely limited to the issue of whether plaintiff was fraudulently incorporated within the meaning of . . . Mallela.” Thus, this matter was tried solely on the defense that plaintiff professional corporation was not owned or controlled by Dr. Carothers but was de facto owned and controlled by nonparties Sher and Vayman. The roles of the defendant and the plaintiff were reversed throughout the trial, including the initial opening and final summation by defendant.

I agree with the majority that, in limited circumstances, the invocation of a Fifth Amendment privilege by a nonparty witness{**42 Misc 3d at 47} may result in a negative inference being taken against a party (see Searle v Cayuga Med. Ctr. at Ithaca, 28 AD3d 834 [2006]; State of New York v Markowitz, 273 AD2d 637 [2000]; Califano v City of New York, 212 AD2d 146 [1995]).

In this matter, the Civil Court relied on the Second Circuit decision in LiButti v United States (107 F3d 110 [2d Cir 1997]), which delineated factors to be considered in determining whether a negative inference is warranted. The Civil Court found that the evidence submitted in connection with plaintiff’s summary judgment motion was a sufficient foundation to find that the nonparty witnesses, Sher and Vayman, were the alter egos of the corporate plaintiff and that, as a result of these nonparty witnesses’ invocation of their Fifth Amendment rights and refusal to [*11]answer questions, negative inferences could be taken against plaintiff professional corporation.

During the trial, very substantial portions of these depositions were read to the jury. The court permitted defense counsel to read 214 questions put to Sher and his responsive assertion of his Fifth Amendment privilege, and 189 questions put to Vayman and her responsive assertion of the privilege. In both cases, prior to defense counsel’s reading of the deposition “testimony,” the court instructed the jury that the reading can be “considered by you as evidence in this case just as if [the witness] was seated in front of you.” On summation, defense counsel again read 15 of these questions and non-answers to the jury. The court failed to charge, as a preliminary “threshold” issue, that the jury must find the appropriate fact or facts before drawing an inference against a party by the invocation of Fifth Amendment privilege by a nonparty (see NY PJI 1:76, Comment). The negative-inference instruction was charged to the jury as a permissive inference, with the caveat that the jury could not make its findings based solely on the inference.

I agree with the majority that permitting the use of these “transcripts” in this manner was error. It is axiomatic that questions without answers are not evidence. The standard opening charge, as set forth in the Pattern Jury Instructions, includes: “You may not draw any inference or conclusion from an unanswered question” (PJI 1:7). The standard closing charge includes: “Furthermore, you may not draw any inference from an unanswered question” (PJI 1:21). Indeed, I note that the preliminary instructions of the New York Criminal Jury Instructions (see CJI2d[NY] Preliminary Instructions—Presentation of Evidence) use even clearer and firmer language with respect to{**42 Misc 3d at 48} the presentation of evidence, stating: “A question by itself is not evidence. It is the question with the answer that is the evidence.” Identical or similar language is found in Howard G. Leventhal, Charges to the Jury and Requests to Charge in a Criminal Case in New York §§ 3:2, 4:82.50, 5:10, 5:12, 41:37, and 69:7.

There is no actual probative value to such “testimony.” In fact, it is not testimony at all but the failure to produce testimony that one would reasonably expect to be offered in support of a party’s position, which results in the negative inference. The prejudicial impact on the jury of hearing this invocation over 400 times is extremely substantial and was compounded by the erroneous charges and the repetition of the questions without answers on defendant’s summation.

The role of Vayman and Sher in the corporation was the essential issue in the case. Undoubtedly, the fact that, when questioned, they felt the necessity to avail themselves of their privilege against self-incrimination reflects poorly on the strength of plaintiff’s case. Nevertheless, this cannot be considered evidence-in-chief for the defense but only “may be considered by a jury in assessing the strength of evidence offered by the opposite party on the issue which the witness was in a position to controvert” (Marine Midland Bank v Russo Produce Co., 50 NY2d 31, 42 [1980]; see also Stolowski v 234 E. 178th St. LLC, 12 Misc 3d 1159[A], 2006 NY Slip Op 50965[U] [Sup Ct, Bronx County 2006]; cf. Matter of Commissioner of Social Servs. v Philip De G., 59 NY2d 137, 141 [1983]).

The manner in which the Fifth Amendment operates in this context would not be widely known. To avoid the possibility of an inadvertent waiver, a witness who legitimately fears that his or her testimony may be used against him or her in a prosecution would be well advised to decline to answer any questions. In that case, whether the witness is asked one question or hundreds of questions, the answer will be the same invocation of privilege, and there is no meaningful difference between a single invocation and hundreds of invocations.

At their depositions, Sher and Vayman invoked their Fifth Amendment privilege and essentially declined to answer any questions. Upon hearing the invocation some 400 times, the [*12]average juror could well be led to believe that there were a great many independent decisions to invoke, not a blanket determination to invoke as to all questions. The average juror would find this exercise far more meaningful than it actually is.{**42 Misc 3d at 49}

It is very doubtful that the average juror would grasp that a witness may easily and inadvertently waive the privilege by answering any questions.

” ‘A witness who fails to invoke the Fifth Amendment against questions as to which he could have claimed it is deemed to have waived his privilege respecting all questions on the same subject matter’ ([United States v] O’Henry’s Film Works, Inc., 598 F2d [313, 317 (1979)], citing Rogers v United States, 340 US 367 [1951] . . .)” (Matter of East 51st St. Crane Collapse Litig., 30 Misc 3d 521, 534 [Sup Ct, NY County 2010]).

“[A] witness who foregoes the protection of the constitutional privilege against self-incrimination by giving testimony to his advantage or to the advantage of his friends cannot in the same proceeding assert the privilege and refuse to answer questions that are to his disadvantage or the disadvantage of his friends (People v Cassidy, 213 NY 388, 394)” (People v Bagby, 65 NY2d 410, 414 [1985]).

The role of the nonparty witnesses, Vayman and Sher, in the professional corporation was a crucial and essential issue for the jury on questions number one and number two of the verdict sheet regarding whether plaintiff was “fraudulently incorporated.” The central thesis of the defense was that these individuals were the de facto owners and people in control of the professional corporation. The errors in allowing the deposition “transcripts” to be widely read, the charge that these unanswered questions could be considered as evidence, and their re-reading to the jury on summation corrupted the central issue in the case.

Undoubtedly, there is significant evidence that supports the verdict. There was, however, evidence which, if credited, supports plaintiff’s position that Dr. Carothers solely owned and controlled the professional corporation. There is a reasonable view of the evidence that Dr. Carothers had rather bad business judgment, was a poor manager who put far too much trust in, and delegated too much authority to, his office manager, and was a very mediocre administrator, but nevertheless owned and controlled the professional corporation. Had the jury found for plaintiff, I do not believe the evidence is so overwhelming as to warrant a judgment notwithstanding the verdict.

I disagree with the majority on whether the misuse of the deposition “transcripts” and the erroneous charge is reversible error. {**42 Misc 3d at 50}The majority finds that the error is harmless because “there is no indication that the evidence had a ‘substantial influence upon the result of the trial.’ ” I must respectfully disagree.

The Court of Appeals has held that, in determining whether an error was harmless, “[t]he correct rule is that an error is only deemed harmless when there is no view of the evidence under which appellant could have prevailed (2A Weinstein-Korn-Miller, NY Civ Prac, par 2002.03, p 20-12)” (Marine Midland Bank v Russo Produce Co., 50 NY2d at 43). Where erroneously excluded evidence “could have affected the outcome of the trial[, the] exclusion of the evidence . . . [is not] harmless error. Hence, reversal is warranted” (Garricks v City of New York, 1 NY3d 22, 27 [2003] [citations omitted]).

The Appellate Division, Second Department, considers the impact of the error on the proof in the case.

“The error . . . cannot be considered harmless, as it bore on the ultimate issue to be determined by the jury (see Cheul Soo Kang v Violante, 60 AD3d at 992; Noakes v [*13]Rosa, 54 AD3d 317 [2008]; Hatton v Gassler, 219 AD2d 697 [1995]; Gagliano v Vaccaro, 97 AD2d 430 [1983]; Murray v Donlan, 77 AD2d 337 [1980])” (Sanchez v Steenson, 101 AD3d 982, 983 [2012]; see also Conners v Duck’s Cesspool Serv., 144 AD2d 329 [1988]).

The cumulative effect of the errors is an important consideration (see McGloin v Golbi, 49 AD3d 610 [2008]; Bayne v City of New York, 29 AD3d 924 [2006]).

Under this analysis, I am unable to find that the errors were harmless. The errors bore directly on the ultimate issues in the case and the cumulative effect of the errors was not harmless.

Finally, I concur with the majority concerning setting aside the verdict on the third and fourth questions on the verdict sheet, regarding Dr. Carothers’ actual practice of medicine in connection with the professional corporation. In addition to finding this defense lacking adequate support in the evidence to support the verdict, I also find that plaintiff was not given fair notice that this issue would be submitted for the jury’s consideration.

For the reasons stated herein, I would reverse the judgment and order a new trial.

Rios, J.P., and Aliotta J., concur; Solomon, J. dissents in a separate memorandum.

[*1]

Supreme Court, Appellate Term, Second Department, 2d, 11th and 13th Judicial Districts, June 17, 2013

APPEARANCES OF COUNSEL

Joseph Sparacio, P.C., Staten Island (Joseph Sparacio of counsel), for appellant. Law Offices of Karen C. Dodson, New York City (Tricia D. Prettypaul of counsel), for respondent.

{**40 Misc 3d at 78} OPINION OF THE COURT

Memorandum.

Ordered that the order, insofar as appealed from, is affirmed, with $25 costs.

In this action by a provider to recover assigned first-party no-fault benefits, plaintiff mailed to defendant insurer, pursuant to CPLR 312-a, a copy of the summons and verified complaint, dated February 13, 2004. The record contains no signed acknowledgment of receipt, as is required by CPLR 312-a. On March 24, 2004, defendant served a verified answer, in which it asserted the affirmative defense of lack of personal jurisdiction as service of process had not been “perfected.”

There was no further activity in the case until February 13, 2009, when plaintiff purchased an index number and, for the first time, filed with the Civil Court the 2004 summons and complaint, along with defendant’s 2004 answer. There is no proof of service upon defendant of the summons and complaint following the 2009 Civil Court filing (see CCA 411). On [*2]November 30, 2009, plaintiff mailed a notice of trial and certificate of readiness to defense counsel, and filed it with the Civil Court on December 1, 2009.

By notice of motion dated April 23, 2010, defendant moved for, among other things, leave to amend its answer to interpose the affirmative defense that the action had not been commenced within the time prescribed by law and that it was therefore barred by the statute of limitations, and, upon such amendment, for summary judgment dismissing the complaint. Plaintiff appeals from so much of an order of the Civil Court entered July 29, 2010 as implicitly granted the branch of defendant’s motion seeking leave to amend the answer and, upon such amendment, dismissed the complaint. The court held that plaintiff’s action had not been properly commenced within the period of the statute of limitations because defendant had not executed an acknowledgment of receipt, and, therefore, service had not been properly effectuated in accordance with the provisions of CPLR 312-a.

On appeal, plaintiff contends that the action was properly commenced “upon service of the summons and complaint.” Although {**40 Misc 3d at 79}plaintiff admits that defendant did not return the acknowledgment of receipt required by CPLR 312-a, plaintiff claims that by serving its answer on March 24, 2004, defendant made an appearance in the action, which is “equivalent to personal service of the summons” (CPLR 320 [b]), and then waived its defense of improper service by failing to move to dismiss the complaint on this ground within 60 days of service of its answer, as required by CPLR 3211 (e). Plaintiff further argues that any “mistake, omission, defect or irregularity . . . in the filing process” may be disregarded (CPLR 2001).

CPLR 312-a, as an alternative to the other methods of personal service authorized by CPLR 307, 308, 310, 311 or 312, permits personal service to be made by first class mail, by mailing a copy of the summons and complaint, together with two copies of a statement of service by mail and acknowledgment of receipt, with a return envelope, postage prepaid, addressed to the plaintiff (CPLR 312-a [a]). The defendant must complete the acknowledgment of receipt and mail or deliver it within 30 days from the date of receipt. Under CPLR 312-a, service is complete on the date the signed acknowledgment of receipt is mailed or delivered to the plaintiff (but cf. CCA former 410 [b]). The signed acknowledgment of receipt constitutes proof of service (CPLR 312-a [b] [1]; 306 [d]).

In 2004, when plaintiff sought to serve defendant pursuant to CPLR 312-a, the “commencement-by-service” system was still in effect in the Civil Court, i.e., an action in the Civil Court was commenced by service of the summons (CCA former 400). Service of the summons was complete upon filing proof of service (CCA former 410 [b]), or, in the case of service pursuant to CPLR 312-a, by filing the acknowledgment of receipt, which constitutes proof of service (CPLR 312-a [b] [1]; 306 [d]). The filing of the acknowledgment of receipt has the effect of establishing the completion of service for purposes of initiating the time in which a defendant must respond (see Deepdale Gen. Hosp. v American Colonial Ins. Co., 144 Misc 2d 917 [App Term, 2d Dept, 9th & 10th Jud Dists 1989]), but here there was no acknowledgment of receipt, thus, none was filed and, technically, no action had been commenced by virtue of plaintiff’s actions (see Nagy v Heuss House Drop In Shelter for the Homeless, 198 AD2d 115 [1993]). Consequently, defendant’s time to answer did not commence to run. As has been noted, plaintiff, until early 2009, attempted no other means of service (CPLR 312-a [e]) nor otherwise took any further measures. [*3]

{**40 Misc 3d at 80}Although no action had been commenced and, thus, defendant’s time to answer had not yet commenced, on March 24, 2004, defendant nevertheless served plaintiff with an answer, in which it asserted, as an affirmative defense, lack of personal jurisdiction. Thus, having preserved its jurisdictional defense, the answer could not be deemed the “equivalent to personal service of the summons upon” defendant (CPLR 320 [b]). The question remains, however, whether, under the circumstances presented, defendant was required, pursuant to CPLR 3211 (e), to move to dismiss the “action” on that ground within 60 days of serving its answer, or risk waiver of that defense. Defendant failed to make such a motion. However, as there was no viable pending action, defendant cannot be deemed to have waived its defense of lack of personal jurisdiction by failing to make a motion to dismiss this “action.” Therefore, since plaintiff had never served the summons and complaint, the action was never commenced in 2004.

In February 2009 (after the commencement-by-filing system had gone into effect in 2005 in the New York City Civil Court), plaintiff purchased an index number and filed the 2004 summons and complaint, as well as defendant’s 2004 answer, in the Civil Court. In December 2009, plaintiff served and filed its notice of trial and certificate of readiness. Since, under the current version of CCA 400 (1), “[a]n action is commenced . . . by filing a summons and complaint,” plaintiff clearly commenced its action in 2009. Plaintiff did not, however, serve upon defendant a copy of the summons and complaint, and, therefore, plaintiff did not acquire personal jurisdiction over defendant under the new system (see CCA 400 [2]). Since there was no service, there could be no filing of proof of service (CCA 410 [b]), which filing would mark the date when service was complete and from which defendant’s time to answer would commence to run. The fact that plaintiff filed defendant’s 2004 answer with the summons and complaint did not mean that it had acquired jurisdiction over defendant, and did not represent proof of service.

Thereafter, defendant successfully moved to amend its 2004 answer to add the affirmative defense that the action was barred by the statute of limitations and, upon such amendment, to dismiss on that ground. Even if we assume that defendant thereby waived its defense based on lack of personal jurisdiction (see e.g. CPLR 3211 [e]), there was merit to defendant’s statute of limitations defense.{**40 Misc 3d at 81}

The time within which an action must be commenced is computed “from the time the cause of action accrued to the time the claim is interposed” (CPLR 203 [a]). A defendant asserting a statute of limitations defense must establish that the plaintiff commenced the action after the expiration of the statute of limitations. A no-fault cause of action accrues when payment of no-fault benefits becomes “overdue” (see Insurance Law § 5106 [a]; see also Matter of Travelers Indem. Co. of Conn. v Glenwood Med., P.C., 48 AD3d 319, 320 [2008]; Mandarino v Travelers Prop. Cas. Ins. Co., 37 AD3d 775 [2007]; Acupuncture Works, P.C. v MVAIC, 27 Misc 3d 131[A], 2010 NY Slip Op 50646[U] [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2010]). For statute of limitations purposes, plaintiff’s claim accrued on January 14, 2003, the date that defendant issued and mailed its denial of claim form. Since the six-year statute of limitations applies to the claim involved herein (CPLR 213 [2]; see Mandarino v Travelers Prop. Cas. Ins. Co., 37 AD3d 775 [2007]), in order for plaintiff’s action to be timely, it had to have been commenced by January 14, 2009. As we view the action as having first been commenced on February 13, 2009, when plaintiff purchased the index number and filed with the Civil Court the [*4]2004 summons and complaint along with defendant’s answer, the action is, necessarily, time-barred.

Accordingly, the order, insofar as appealed from, is affirmed.

Weston, J.P., Pesce and Rios, JJ., concur.

[*1]

Supreme Court, Kings County, March 29, 2013

APPEARANCES OF COUNSEL

McDonnell & Adels, PLLC, Garden City (Evan W. Klestzick of counsel), for plaintiff. Gary Tsirelman, P.C., Brooklyn (Sarah A. Adam of counsel), for Utopia Equipment, Inc., defendant.

{**40 Misc 3d at 173} OPINION OF THE COURT

Wayne P. Saitta, J.

Plaintiff, Lancer Insurance Company, moves this court for an order pursuant to CPLR 3212 for summary judgment against the insured participant defendants and for a default judgment against defendants Juana Torres and Catherine Duran.

Plaintiff’s motion is denied for the reasons set forth below.

Plaintiff brings this motion seeking a default judgment in its declaratory action against Torres and Duran, stating that a motor vehicle accident of June 5, 2010 (the accident), was staged, and that plaintiff has no obligation to provide no-fault coverage or indemnity or defense to any of the participants named in its declaratory action. The motion also seeks dismissal of the counterclaims of defendant Utopia Equipment for no-fault benefits as assignee of the named defendants and seeking attorneys’ fees for the cost of defending this action.

Plaintiff brought this declaratory action and effectuated service against all of the defendants with the exceptions of Torres and Duran. Plaintiff was granted a default judgment as against each defendant except Torres and Duran.

Plaintiff thereafter obtained an order to serve Torres and Duran by publication on November 15, 2011. Plaintiff served defendants by publication but neither defendant has appeared or answered.

The November 15, 2011 order also granted a judgment against the defaulting defendants declaring that the accident of June 5, 2010 was an intentional and uncovered event, and that Lancer had no duty to afford any insurance coverage to those defendants.

The declaratory judgment was not granted as to defendants Torres and Duran. The [*2]order made no determinations as to Utopia’s rights under the policy by the purported assignments of Torres and Duran.

Plaintiff submits the affidavit of a supervisor for Lancer, Jim Dunn, in support of its motion. Dunn states his opinion is based in part on the depositions of several defendants and the police accident report. However, since Dunn does not reference the{**40 Misc 3d at 174} sources of his information, it is unclear where he obtained certain of his facts as they are not found in the depositions or the police report annexed to the plaintiff’s motion.

Dunn alleges that Marleny Reyes contacted D. Wiltshire Stretch Limo Inc. for a ride to an event. The limo, driven by Leslie Lezea, picked up Reyes and two other female passengers at 141st Street and Cyprus Avenue, Bronx, New York. Dunn states the passengers directed Lezea to take them to a liquor store and then to return to 141st and Cyprus to pick up four more passengers. They then directed Lezea to take a particular route to a location in Manhattan for a birthday party. While en route, at approximately Cyprus and 135th Street, the limo was struck by a minivan. Plaintiff alleges a minivan intentionally sideswiped the limo.

Plaintiff argues that because the passengers in the limo were all intoxicated when they entered the limo, they cannot testify about any fact related to the loss. Plaintiff alleges that although the passengers did not know one another, they all sought the same treatment at the same facilities. The police officer who reported to the scene stated that he “concludes accident is suspicious and injuries questionable.”

Plaintiff argues that evidence gathered in that investigation supports the fact that the accident was staged. Among the facts it argues are indicia of fraud are that Laura Ezequiel purchased the minivan a month prior to the loss for $800, she obtained insurance on it but did not know from whom she purchased the vehicle, that she was out of work and had to borrow money to purchase the vehicle, and that she changed her cell phone number after the accident and did not remember it. Plaintiff also argues that similarities between the passengers in the limo and Ezequiel support its position that the accident was staged, including the fact that they are all Honduranian. Plaintiff also points out that Ezequiel was going drinking that day, and that the passengers in the limo were drunk.

Plaintiff argues that it is entitled to a declaratory judgment that the accident of June 5, 2010 was intentionally staged and therefore an uncovered event and it owes no coverage, indemnification or defense to any party to this action.

Plaintiff argues that Utopia’s counterclaims for no-fault benefits assigned to it by Torres and Duran should be dismissed as the accident was staged and thus an uncovered event. Plaintiff argues that Utopia’s claims for attorneys’ fees should be denied for the additional reasons that it is premature and{**40 Misc 3d at 175} that neither it nor its assignors were named insureds on the policy.

Utopia argues that it is an assignee of the two injured defendants who remain in the case, Torres and Duran, and that Utopia is entitled to their no-fault medical benefits as it provided medical equipment to the defendants in reliance on the understanding that Utopia would be compensated for its services under the terms of the policy issued by Lancer.

Utopia argues that the order granting a declaratory judgment against defaulting defendants does not extinguish Utopia’s claims.

[*3]Default Judgment against Torres and Duran

Plaintiff argues that it is entitled to a default judgment against defendants Torres and Duran as they were served by publication but failed to answer or appear in this action.

Plaintiff’s motion for a default judgment against defendants Torres and Duran must be denied as the order which permitted service by publication did not comply with the provisions of CPLR 316 (a). CPLR 316 (a) specifically requires that the order designate the publications most likely to give notice to the person to be served.

Since the November 15, 2011 order did not specify the publications in which the notice was to be published, it was necessary for plaintiff to obtain a further order of the court designating the publications to be used. The service made without first having the court designate the publications to be used was improper and insufficient to obtain jurisdiction over the defendants. Having failed to obtain jurisdiction over Torres and Duran, plaintiff is not entitled to a default judgment against them.

Declaratory Judgment

That part of plaintiff’s motion seeking a declaratory judgment against the defendants that the accident of June 5, 2010 was intentionally staged must also be denied.

Even accepting all the facts asserted by plaintiff as true, at best they provide some circumstantial evidence that a fraud might have occurred.

The allegations that the defendants were drunk and that they were Hondurans are of no probative value. The allegation that certain of the passengers did not know other passengers in the limousine is open to a variety of different interpretations. The allegation that the passengers all treated at the same facility after the accident is merely some circumstantial evidence that{**40 Misc 3d at 176} could, together with other evidence, support an inference that the accident was staged.

Dunn’s affidavit, submitted by Lancer, is not based on personal knowledge but refers to findings from an investigation allegedly conducted by Esurance, the insurer of the minivan that struck the limousine. However, the report of the investigation by Esurance is not admissible and Lancer does not submit any admissible evidence to support Esurance’s findings. There is no affidavit from any person with knowledge as to any investigation or the findings which resulted.

Dunn states in his affidavit that “CLINTON PLACE MEDICAL, PC referred the insured passengers to their attorneys.” He then cites the depositions of Reyes, Bernardez, Saravia, Guity and Mariano. In fact, only Bernardez and Mariano in their depositions stated that they were referred to their attorneys by Clinton. Reyes testified someone who she did not identify gave her a card for an attorney and Saravia and Guity were not asked, nor did they mention, being referred to an attorney.

Dunn also states that the insured passengers were provided transportation to the clinic for treatment, and cites the depositions of Reyes, Bernardez, Saravia, Guity and Mariano. While Bernardez, Guity and Mariano acknowledged this to be true, neither Reyes nor Saravia was asked or commented about transportation.

Dunn further states that none of the same passengers was ever given the results of their MRIs. Both Reyes and Bernardez state they did not receive MRI results. Saravia’s testimony is unclear, and neither Guity nor Mariano were asked if they received MRI results. [*4]

Circumstantial evidence may permit a finding of negligence, but only when the proof is so convincing and the response to that proof results in an inescapable finding of negligence. (Simmons v Neuman, 50 AD3d 666, 667 [2d Dept 2008].)

At best plaintiff makes out a circumstantial case from which a reasonable jury could infer either that this was or that this was not a staged accident. The circumstantial evidence presented in the moving papers is not sufficient to meet the burden for summary judgment.

Assignment of Torres’ and Duran’s Rights

As passengers in the vehicle insured by Lancer, Torres and Duran have a right to first-party benefits from Lancer, which they also had the right to assign. An accident victim may assign{**40 Misc 3d at 177} his or her no-fault claim to a medical provider who has provided a medical service (see 11 NYCRR 65-3.11). Lancer has not contested the validity of the assignment. In this case it is clear that Lancer was aware of the assignment as it joined Utopia as a defendant.

An assignee “stands in the shoes” of an assignor. (Long Is. Radiology v Allstate Ins. Co., 36 AD3d 763, 765 [2d Dept 2007].) Where there is a valid assignment of a claim, the assignor is divested of all control and right to the cause of action. The assignee is the proper party in interest and has the right to commence and prosecute an action in its own name without joining the assignor as a necessary party. (Cardtronics, LP v St. Nicholas Beverage Discount Ctr., Inc., 8 AD3d 419 [2d Dept 2004].)

An assignee is bound by the acts of the assignor which occur prior to the assignment, but not those which occur after the assignment. (Gramatan Home Invs. Corp. v Lopez, 46 NY2d 481 [1979].)

Utopia was assigned the right to payment from the insureds prior to Lancer’s initiation of the declaratory action and therefore the rights assigned to Utopia would be unaffected in the event that Torres and Duran should default, as any default would be subsequent to the assignment of the rights.

Right to Recover Attorneys’ Fees

An insured is entitled to recover legal expenses incurred in defending a declaratory judgment brought as a result of an insurer’s disclaimer. (Fischer v Michigan Millers Mut. Ins. Co., 103 Misc 2d 508 [1st Dept 1980]; Mighty Midgets v Centennial Ins. Co., 47 NY2d 12 [1979]; see also Glens Falls Ins. Co. v United States Fire Ins. Co., 41 AD2d 869, 870 [1973].)

Utopia is entitled to the same rights that Duran and Torres would have been entitled to if they defended against Lancer’s declaratory judgment and prevailed.

As a preliminary matter, the fact that Lancer denied coverage for what it asserts is fraud does not affect Utopia’s right to attorneys’ fees should it successfully defend against the declaratory judgment action. If the defense were successful, it would necessarily mean there was no finding that the accident was staged.

Also, while Utopia is not entitled to attorneys’ fees unless it is successful in the declaratory judgment action, it is not premature for Utopia to seek attorneys’ fees as a counterclaim in the same action. The counterclaims would only be awarded in the event Utopia defeats the declaratory judgment action.{**40 Misc 3d at 178} [*5]

An insured is entitled to recover the expenses of defending a declaratory judgment action brought as a result of an insurer’s breach of its obligation to defend a tort action. (Johnson v General Mut. Ins. Co., 24 NY2d 42 [1969]; Mighty Midgets v Centennial Ins. Co., 47 NY2d 12 [1979].) The courts have generally related the right to recover to the breach of the insurance contract, specifically, a provision to provide a defense. The Court of Appeals in Mighty Midgets v Centennial, noted that when a party is cast in a defensive posture, “an insurer’s responsibility to defend reaches the defense of any actions arising out of the occurrence,” including declaratory judgments to deny coverage. (47 NY2d at 21.)

The cases dealing with the right to attorneys’ fees for successfully defending a declaratory judgment action by an insurer all involve insureds who were defendants in personal injury actions. There appear to be no reported decisions involving attorneys’ fees for successfully defending against a declaratory judgment action to deny first-party benefits under no fault.

The right to attorneys’ fees when an insured has been cast in a defensive posture by the legal steps taken by the insurer to free itself from its obligations under the policy arise from the provision in the policy to provide defense to the insured. “[T]he right to such recovery is derived exclusively from the contractual relationship between the insured and the insurer.” (Fischer v Michigan Millers Mut. Ins. Co., 103 Misc 2d 508, 511 [1st Dept 1980].)

Insurance Law § 5103 (a) (3) provides that any New York resident who does not otherwise have coverage for first-party benefits “is entitled to first party benefits” through the liability policy of the insured. The statute does not provide that such residents are deemed insureds under the policy.

Since the Insurance Law does not deem passengers insureds, the question is whether the policy, by its terms, makes the passengers insureds, and therefore entitled to defense, including attorneys’ fees under the policy. In some policies, the definition of “persons insured” may include persons in addition to the named insured or policyholder, such as those operating the vehicle with the permission of the named insured. (Fischer v Michigan Millers Mut. Ins. Co., 103 Misc 2d 508 [1st Dept 1980].) Whether passengers are deemed “persons insured” depends on the specific terms of the policy.

Even if the passengers are deemed insureds under the policy, they would only be entitled to attorneys’ fees for defending this{**40 Misc 3d at 179} action if the policy required the insurer to provide them with defense, as well as indemnity. If the policy entitled them to indemnification for losses incurred only, they would not be entitled to attorneys’ fees for defending a declaratory judgment action. If passengers are deemed insureds and if they are entitled to defense and indemnification, the scope of the duty to defend and whether it would extend to the defense of a declaratory judgment would be determined by the terms of the policy, specifically the provision to defend.

A provision that the insurer would provide defense for all actions arising from an occurrence would include defense of declaratory judgment actions. However, a more restrictive defense clause which, for example, limited defense to personal injury actions or third-party actions might not.

Since the policy was not provided to the court, it cannot be determined at this time whether Utopia’s defense of this action would be covered under the terms of the policy. Therefore, that part of the motion to dismiss Utopia’s counterclaims for attorneys’ fees for [*6]defending this action must be denied.

Wherefore, plaintiff’s motion for a default judgment against defendants Torres and Duran, for summary judgment on its claim for a declaratory judgment, and for dismissal of Utopia’s counterclaims is denied.

[*1]

Supreme Court, Appellate Term, Second Department, 2d, 11th and 13th Judicial Districts, March 18, 2013

A-Quality Med. Supply v GEICO Gen. Ins. Co., 30 Misc 3d 485, reversed.

APPEARANCES OF COUNSEL

Law Offices of Teresa M. Spina, Woodbury (Lawrence J. Chanice of counsel), for appellant. Gary Tsirelman, P.C., Brooklyn (Irena Golodkeyer of counsel), for respondent.

{**39 Misc 3d at 25} OPINION OF THE COURT

Memorandum.

Ordered that the judgment is reversed, with $30 costs, and the matter is remitted to the Civil Court for further proceedings consistent herewith.

In this action by a provider to recover assigned first-party no-fault benefits, a nonjury trial was held solely with respect to defendant’s defense of lack of medical necessity. Defendant’s witness identified the peer review reports at issue, all but one of which he had authored. He testified, based upon his review of the documentation upon which all of the peer reviews were based, that the supplies at issue were not medically necessary. The Civil Court declined to consider the peer review reports, on the ground that some of them were not dated, signed or notarized, and held, in its posttrial decision, that the peer review reports could not serve as a valid basis for defendant’s denials. The court awarded judgment to plaintiff without consideration of the testimony of defendant’s witness. Defendant appeals and we reverse.

The Insurance Department Regulations require merely that a “copy” of a peer review report be produced to a provider upon written demand (Insurance Department Regulations [11 NYCRR] § 65-3.8 [b] [4]; A.B. Med. Servs., PLLC v GEICO Cas. Ins. Co., 39 AD3d 778, 779 [2007]; A.B. Med. Servs., PLLC v Liberty Mut. Ins. Co., 39 AD3d 779 [2007]). Moreover, the Insurance{**39 Misc 3d at 26} Department Regulations do not prescribe a format for a peer review report. It is only when a peer review report is being submitted in support of or in opposition to a motion that it must be properly sworn or affirmed (see CPLR 3212 [b]; see e.g. BLR Chiropractic, P.C. v American Tr. Ins. Co., 35 Misc 3d 141[A], 2012 NY Slip Op 50882[U] [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2012]; Points of Health Acupuncture, P.C. v GEICO Ins. Co., 33 Misc 3d 127[A], 2011 NY Slip Op 51843[U] [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2011]). Thus, the Civil Court incorrectly held that the peer review reports involved herein were an insufficient basis for defendant’s denial of the claims.

Since defendant’s expert witness testified regarding the factual basis and medical rationale for his opinion that the supplies furnished lacked medical necessity, such testimony should have been considered by the court (Radiology Today, P.C. v Progressive Ins. Co., 32 Misc 3d 144[A], 2011 NY Slip Op 51724[U] [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2011]; Psychology YM, P.C. v GEICO Gen. Ins. Co., 32 Misc 3d 130[A], 2011 NY Slip Op 51316[U] [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2011]). In light of the foregoing, and the fact that the court never passed upon the credibility of defendant’s witness, a new trial is required. We note that, at trial, the issue of medical necessity is to be resolved based upon the testimony given by medical experts. A peer review report, unlike a witness, is not subject to cross-examination and is not admissible by defendant to prove lack of medical necessity. Indeed, admission of a peer review report into evidence as part of a defendant’s proof of lack of medical necessity may constitute impermissible bolstering of its expert’s testimony (see generally Cohn v Haddad, 244 AD2d 519 [1997]).

Accordingly, the judgment is reversed and the matter is remitted to the Civil Court for a new trial.

Weston, J.P., Aliotta and Solomon, JJ., concur.

[*1]

Supreme Court, Appellate Term, First Department, March 12, 2013

APPEARANCES OF COUNSEL

Picciano & Scahill, P.C., Westbury (Albert J. Galatan of counsel), for appellant. Baker, Sanders, Barshay, Grossman, Fass, Muhlstock & Neuwirth, LLC, Garden City (Steven J. Neuwirth of counsel), for respondent.

{**39 Misc 3d at 16} OPINION OF THE COURT

Per Curiam.

Order, entered April 17, 2012, affirmed, without costs.

A related Supreme Court action brought by the defendant insurer against various medical providers resulted in a declaration that defendant was entitled to deny all no-fault claims arising from injuries allegedly sustained by plaintiff’s assignor (Cuffie) in the underlying July 2, 2008 motor vehicle accident. Since the plaintiff medical supplies provider was not a party to the declaratory judgment action it is not bound by Supreme Court’s determination, as it did not have a full and fair opportunity to contest the issues in that proceeding (see Gilberg v Barbieri, 53 NY2d 285, 291 [1981]). Although plaintiff’s assignor was a named party in the prior action, plaintiff cannot be deemed to be in privity with its assignor, since the declaratory judgment action was commenced after the assignment (see Gramatan Home Invs. Corp. v Lopez, 46 NY2d 481, 486-487 [1979]).

Schoenfeld, J. (concurring). In light of the Court of Appeals’ holding in Gramatan Home Invs. Corp. v Lopez (46 NY2d 481 [1979]), I join my colleagues in voting to affirm the order denying summary judgment to the defendant insurer. Considerations of due process prohibit binding a party to the result of an action in which that party has not been given an opportunity to be heard. I write separately to [*2]acknowledge that the outcome reached today does not serve to promote the purposes of this State’s No-Fault Law to provide a less costly, more efficient automobile accident reparation system and to ease court congestion (see Montgomery v Daniels, 38 NY2d 41, 50-51 [1975]).

As (now retired) Justice Golia properly recognized in closely analogous circumstances, no-fault actions do not fit squarely within the Gramatan rule, given “the unique nature and reality of the assignment of claims for first-party benefits under the Insurance{**39 Misc 3d at 17} Law and the no-fault regulations of this State” (Magic Recovery Med. & Surgical Supply Inc. v State Farm Mut. Auto. Ins. Co., 27 Misc 3d 67, 69 [2010 dissenting op]). That being so, and in view of the prior Supreme Court judgment declaring that plaintiff’s assignor and the assignee providers named as defendants in that action “are not entitled to first-party benefits” stemming from the subject motor vehicle accident due to the assignor’s “material misrepresentations in the procurement of the insurance policy,” it is not unreasonable to say that the denial of summary judgment dismissing this assignee provider’s claim tends to exalt form over substance, delaying the seemingly inevitable dismissal of the claim until after trial. Nonetheless, on balance, I feel compelled to adhere to the rule set forth in Gramatan without a signal to the contrary from a higher appellate authority. Lastly, and parenthetically, it is noted that in the event the plaintiff assignee does not ultimately succeed against defendant on the no-fault claim, plaintiff could seek redress against the assignor under the clear terms of the assignment of benefits form.

Lowe, III, P.J., and Torres, J., concur; Schoenfeld, J., concurs in a separate opinion.

[*1]

Supreme Court, Kings County, March 11, 2013

APPEARANCES OF COUNSEL

Freiberg, Peck & Kang, LLP, Armonk (Jason T. George of counsel), for petitioner. The Geller Law Group, P.C., Brooklyn (Jeffrey Silber of counsel), for respondent.

{**39 Misc 3d at 583} OPINION OF THE COURT

Francois A. Rivera, J.

By order to show cause and petition filed on November 26, 2012, petitioner Infinity Insurance Company sought an order pursuant to CPLR 7503 (b) to temporarily stay an arbitration that was demanded by the respondent, Daily Medical Equipment Distribution Center, Inc., until the court decided Infinity’s request for a permanent stay.

Daily Medical has opposed the petition.

Background

On November 26, 2012, Infinity commenced the instant special proceeding pursuant to CPLR 7503 (b) seeking a permanent stay of an arbitration demanded by Daily Medical by filing an order to show cause and verified petition. Infinity’s petition alleges, among other things, that it issued an automobile insurance policy to Derrick St. Louis which it rescinded pursuant to Pennsylvania law based on a misrepresentation made by St. Louis in the procurement of the subject policy.

Daily Medical, as assignee of St. Louis, filed a request to arbitrate with the American Arbitration Association (AAA) seeking reimbursement of approximately $1,800 for no-fault benefits it provided to St. Louis. AAA set a hearing date of January 15, 2013. Infinity contends that Daily Medical has no right to arbitrate because of the proper rescission of the subject policy ab initio.

Motion Papers

Infinity’s motion papers consist of an order to show cause, a verified petition, two affirmations of its counsel, an affidavit of its claim adjuster and seven exhibits labeled A through G. Exhibit A is a copy of AAA’s notice of arbitration. Exhibit B is described as [*2]the declaration page of the subject policy. Exhibit C is described as the insured’s application for the subject policy. Exhibit D is described as a rescission letter purportedly sent to the insured. Exhibit E is described as correspondence sent to the insured. Exhibit F is described as a check which was purportedly sent to St. Louis to return the premiums he paid on the subject policy. Exhibit G is described as correspondence sent to the Pennsylvania Attorney General’s office.{**39 Misc 3d at 584}

Daily Medical’s opposition papers consist of the affirmation of its counsel and three annexed exhibits labeled A through C. Exhibit A is the respondent’s demand for arbitration. Exhibit B is the answer dated August 10, 2012, which Infinity served upon AAA and upon Daily Medical in response to Daily Medical’s arbitration demand. Exhibit C is described as a document from the website maintained by the New York State Department of Financial Services which lists the petitioner as an entity authorized to do business in the State of New York.

Infinity replied with an affirmation of its counsel.

Law and Application

Infinity claims that under Pennsylvania law, it had the right to rescind St. Louis’ insurance policy based on a misrepresentation he made regarding where the car was garaged when he first applied for insurance. Infinity further claims that its rescission of the subject policy voids the arbitration clause contained therein, such that there is no longer any insurance coverage or any agreement to arbitrate.

Daily Medical contends, among other things, that Infinity’s petition is time-barred and supported by uncertified and inadmissible documents. Daily Medical also contends that Infinity cannot seek a stay because it has already answered and participated in the arbitration proceeding.

By order issued on January 11, 2013, at oral argument of the instant petition, the court denied Infinity’s application for a temporary stay of the subject arbitration and reserved decision on the petition for a permanent stay. For the reasons set forth below Infinity’s application for a permanent stay must be denied.

It is always useful to bear in mind that the announced policy of this State favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties (Matter of Nationwide Gen. Ins. Co. v Investors Ins. Co. of Am., 37 NY2d 91, 95 [1975]; see also McSpedon v Profile Elec., 137 AD2d 669, 670 [2d Dept 1988]).

Pursuant to CPLR 7503 (b), a party may apply to stay an arbitration on the grounds that a valid agreement to arbitrate has not been made or has not been complied with, or that the claim would be barred by the relevant statute of limitations had the claim been asserted in a court of the State (see Matter of County of Rockland [Primiano Constr. Co.], 51 NY2d 1 [1980]). Further, a court may stay arbitration when the particular claim{**39 Misc 3d at 585} to be arbitrated is not within the scope of the arbitration agreement (Matter of New York City Tr. Auth. v Amalgamated Tr. Union of Am., AFL-CIO, Local 1056, 284 AD2d [*3]466, 468 [2d Dept 2001]).

In instances when the existence or validity of an arbitration agreement is timely raised by a party seeking a stay of arbitration or opposing an application to compel arbitration, issues relating to the validity of the contract must be determined by the court (Housekeeper v Lourie, 39 AD2d 280 [1st Dept 1972], appeal dismissed 32 NY2d 832 [1973]).

CPLR 7503 (c) mandates that an application to stay arbitration be made within 20 days after service of the demand for arbitration (see Matter of State Farm Mut. Auto. Ins. Co. v Urban, 78 AD3d 1064, 1065 [2d Dept 2010]). “An insurer which fails to seek a stay of arbitration within 20 days after being served with a notice of intention or demand to arbitrate under CPLR 7503 (c) is generally precluded from objecting to the arbitration thereafter” (Matter of Liberty Mut. Ins. Co. v Argueta, 59 AD3d 446, 447 [2d Dept 2009]).

Infinity’s motion papers contain a copy of the notice it received from AAA dated October 26, 2012. However, Infinity did not state whether it received a demand for arbitration other than the October 26, 2012 notice from AAA. Daily Medical, on the other hand, claimed that it served a demand to arbitrate on August 1, 2012. It is unclear whether the documents submitted by Daily Medical included a complete copy of its demand to arbitrate.

A demand to arbitrate that fails to identify the agreement under which arbitration is sought or omits the 20-day warning specified by CPLR 7503 (c) deprives the party seeking arbitration of the preclusive effect of the statute. In other words, the opponent may raise threshold issues after the expiration of 20 days from receipt of the demand (see Allstate N.J. Ins. Co. v Tse, 102 AD3d 473 [1st Dept 2013]).

Therefore, based on the date the instant petition was commenced, Infinity’s instant petition may be untimely. However, the court cannot definitely determine that issue without a complete copy of the demand notice.

CPLR 7503 (b) specifically states in pertinent part that a party who has not participated in the arbitration and who has not made or been served with an application to compel arbitration may apply to stay arbitration on the ground that a valid{**39 Misc 3d at 586} agreement was not made or has not been complied with or that the claim sought to be arbitrated is barred by limitation under subdivision (b) of section 7502.

“Because arbitrability is a threshold question going to the arbitrator’s power to resolve the dispute, a party can seek judicial intervention to determine whether the dispute is arbitrable before consenting to arbitration. Moreover, the CPLR requires that in order to raise the ‘did-they-agree-to-arbitrate’ prong of arbitrability in a motion to vacate, a party must move to stay before participating in arbitration” (Matter of United Fedn. of Teachers, Local 2, AFT, AFL-CIO v Board of Educ. of City School Dist. of City of N.Y., 1 NY3d 72, 79 [2003]).

Daily Medical annexed a copy of the cover letter and enclosures that Infinity sent [*4]to AAA in support of its contention that Infinity had participated in an arbitration proceeding. Infinity claimed in its reply affirmation sending these documents to AAA did not constitute participation in the arbitration.

The cover letter dated August 10, 2012 acknowledged Infinity’s receipt of Daily Medical’s arbitration request. It stated that the claim was for an accident that occurred in New Jersey under Infinity’s Pennsylvania policy. It opined that New York State no-fault benefits did not apply, and because of that its belief that arbitration through AAA also should not apply. It advised that the claim was being investigated and would be paid if appropriate in accordance with Pennsylvania law. It further requested that Daily Medical consider voluntarily withdrawing its arbitration request. It also stated that there were enclosures without specifying what they were. The enclosed documents included a New Jersey police crash investigation report of St. Louis’ car accident. Also included was a copy of the declaration page of the subject policy and three letters denominated as “explanation of benefits.” Each one of the explanation of benefits letters stated that Infinity received Daily Medical’s request for reimbursement on April 16, 2012. In one letter Daily Medical sought $844.13, in the other it sought $502.63 and in the third it requested $464.44. Infinity stated in each of the letters that it would not pay the claim. Also included was another copy of the cover letter showing a postmark by AAA dated August 20, 2012.

Two months after submitting the August 10, 2012 letter to AAA and Daily Medical, Infinity commenced the instant special{**39 Misc 3d at 587} proceeding by order to show cause seeking a temporary stay pending resolution of its application for a permanent stay of the arbitration. CPLR 7503 (b) entitles only a party who has not participated in the arbitration to apply to stay arbitration on the ground that a valid agreement was not made. (Matter of Commerce & Indus. Ins. Co. v Nester, 90 NY2d 255, 263 [1997].) Therefore, when parties to arbitration of a claim, including parties who never executed an agreement to arbitrate, participate in the arbitration, they waive their right to a judicial determination of the arbitrability of the claim. (Matter of United Fedn. of Teachers, Local 2, AFT, AFL-CIO v Board of Educ. of City School Dist. of City of N.Y., 1 NY3d 72, 78-79 [2003].) Once they have taken part in the arbitration proceeding by serving and filing an answer to an arbitration demand and participated in selecting the arbitrator, they no longer are entitled to stay further progress of the arbitration proceeding, even if they are not subject to any arbitration agreement (Nachmani v By Design, LLC, 74 AD3d 478, 479 [1st Dept 2010]).

Contrary to Infinity’s contention, by sending the aforementioned documents to AAA it did participate in the arbitration proceeding. Infinity’s participation in the subject arbitration effectively bars its application for a stay of arbitration pursuant to CPLR 7503 (b). In light of the foregoing, the court need not and does not address Daily Medical’s contention that Infinity’s instant petition was untimely and supported by uncertified and inadmissible documents.

Therefore, Infinity’s motion for a permanent stay of the subject arbitration is denied and [*5]the instant special proceeding is dismissed.

[*1]

Supreme Court, Appellate Term, Second Department, 2d, 11th and 13th Judicial Districts, February 8, 2013

APPEARANCES OF COUNSEL

Gary Tsirelman, P.C., Brooklyn (Irena Golodkeyer of counsel), for appellant. Abrams, Cohen & Associates, New York City (Barry Cohen of counsel), for respondent.

{**39 Misc 3d at 10} OPINION OF THE COURT

Memorandum.

Ordered that the order is affirmed, with $25 costs.

In this action by a provider to recover assigned first-party no-fault benefits, plaintiff appeals from an order of the Civil Court which denied plaintiff’s motion for summary judgment and granted defendant’s cross motion to compel plaintiff to provide full and complete responses to defendant’s discovery demands and to produce Vladimir Grinberg for an examination before trial (EBT).

Plaintiff was required, but failed, to challenge the propriety of defendant’s discovery demands pursuant to CPLR 3120 within the time prescribed by CPLR 3122. As a result, plaintiff{**39 Misc 3d at 11} is obligated to produce the information sought except as to matters which are palpably improper or privileged (see Fausto v City of New York, 17 AD3d 520 [2005]; Marino v County of Nassau, 16 AD3d 628 [2005]; Midwood Acupuncture, P.C. v State Farm Fire & Cas. Co., 21 Misc 3d 144[A], 2008 NY Slip Op 52468[U] [App Term, 2d Dept, 2d & 11th Jud Dists 2008]). To the extent the discovery demands concern matters relating to defenses which defendant is precluded from raising, they are palpably improper notwithstanding the fact that plaintiff did not specifically object thereto (see Midwood Acupuncture, P.C. v State Farm Fire & Cas. Co., 21 Misc 3d 144[A], 2008 NY Slip Op 52468[U] [2008]; Great Wall Acupuncture v State Farm Mut. Auto. Ins. Co., 20 Misc 3d{**39 Misc 3d at 12} 136[A], 2008 NY Slip Op 51529[U] [App Term, 2d Dept, 2d & 11th Jud Dists 2008]).

Pursuant to CPLR 3124, if a party fails to respond to or comply with any request, notice, interrogatory, demand or order under article 31 of the CPLR, the party seeking disclosure may move to compel compliance (see also CPLR 3126). There is no requirement upon the movant other than to show that no response had been received. Thus, in the case at bar, defendant was not required to demonstrate that its discovery demands were not palpably improper. Rather, in order to successfully oppose defendant’s cross motion to compel, plaintiff would have had to show that defendant’s defense of billing fraud was precluded because it was not asserted in a timely NF-10 denial of claim form, which plaintiff did not do.

Defendant set forth detailed and specific reasons for believing that plaintiff is a professional service corporation which fails to comply with applicable state or local licensing laws and, thus, is ineligible to recover no-fault benefits (see State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d 313 [2005]), a defense which is not precluded. By obtaining discovery of certain documents, such as plaintiff’s financial records, defendant will be able to ascertain whether plaintiff is ineligible for reimbursement of no-fault benefits (see e.g. CPLR 3101 [a]; One Beacon Ins. Group, LLC v Midland Med. Care, P.C., 54 AD3d 738 [2008]). In addition, defendant is entitled to an EBT of Vladimir Grinberg (see CPLR 3101 [a]; Sharma Med. Servs., P.C. v Progressive Cas. Ins. Co., 24 Misc 3d 139[A], 2009 NY Slip Op 51591[U] [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2009]; Midwood Acupuncture, P.C. v State Farm Fire & Cas. Co., 21 Misc 3d 144[A], 2008 NY Slip Op 52468[U] [2008]; Great Wall Acupuncture v State Farm Mut. Auto. Ins. Co., 20 Misc 3d 136[A], 2008 NY Slip Op 51529[U] [2008]). Consequently, the Civil Court properly denied plaintiff’s motion for summary judgment (see CPLR 3212 [f]) and granted defendant’s cross motion to compel plaintiff to provide full and complete responses to defendant’s discovery demands and to produce Vladimir Grinberg for an EBT.

Accordingly, the order is affirmed.

Pesce, P.J., Rios and Solomon, JJ., concur.

[*1]

Supreme Court, Appellate Term, Second Department, 2d, 11th and 13th Judicial Districts, January 14, 2013

APPEARANCES OF COUNSEL

Freiberg, Peck & Kang, LLP, New York City (Yilo J. Kang of counsel), for appellant. Mandell & Santora, Lynbrook (Eitan Nof of counsel), for respondent.

{**38 Misc 3d at 57} OPINION OF THE COURT

Memorandum.

Ordered that the judgment is reversed, without costs, and the complaint is dismissed.

At a nonjury trial of this action by a provider to recover assigned first-party no-fault benefits, the parties’ attorneys stipulated that plaintiff had established a prima facie case regarding the submission of his claim in the amount of $1,310.94; that, some time after the receipt of plaintiff’s claim, defendant, a Florida insurer, had issued letters rescinding plaintiff’s assignor’s insurance policy ab initio on the ground that material misrepresentations had been made during the application process; and that defendant had refunded the assignor’s premiums. The parties’ attorneys further stipulated to the admission into evidence of plaintiff’s claim form, defendant’s rescission letter, the policy application, and the insurance policy. Finally, the parties agreed that the sole issue for the Civil Court to decide was “whether or not Defendant has to establish the reason for rescinding its policy.” After trial, the Civil Court found for plaintiff, holding that New York law applied and that defendant was required, but failed, to present evidence in support of the underlying basis for its rescission of the policy. A judgment was subsequently entered, from which the appeal is deemed to have been taken (see CPLR 5512 [a]).

Contrary to the conclusion of the Civil Court, New York law does not govern this matter. Rather, applying a “grouping of contacts” analysis (see Matter of Eagle Ins. Co. v Singletary, 279 AD2d 56 [2000]), we find that Florida law applied since Florida had the most significant contacts with the contracting party and the contract (see also W.H.O. Acupuncture, P.C. v Infinity Prop. & Cas. Co., 36 Misc 3d 4 [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2012]).

Florida Statutes Annotated § 627.409 permits the retroactive rescission of an insurance policy if there has been a material misrepresentation in an application for insurance. Where, as{**38 Misc 3d at 58} here, an insurer is not seeking a judicial decree of rescission in the action, but, rather, is seeking to establish that the policy had, in fact, been retroactively rescinded to a time prior to the commencement of the action, the insurer must simply demonstrate that it complied with the Florida statute by giving the requisite notice of the rescission to the insured and that it returned or tendered all premiums paid within a reasonable time after the discovery of the grounds for avoiding the policy (see Leonardo v State Farm Fire & Cas. Co., 675 So 2d 176, 179 [Fla Dist Ct App, 4th Dist 1996]; see also W.H.O. Acupuncture, P.C., 36 Misc 3d 4). Given the posture of this case, the insurer, under Florida law, does not have the burden of proving its good faith basis for the termination of the insurance policy (see generally Castellon v American Skyhawk Ins. Co., 785 So 2d 552 [Fla Dist Ct App, 3d Dist 2001] [cancellation of policy]). As the parties stipulated that the sole issue for trial was whether the insurer had to establish the reason for its rescission of the policy, and it was therefore essentially conceded that defendant had given notice of the rescission to the insured and had returned all premiums, defendant is entitled to judgment dismissing the complaint. We reach no other issue.

Accordingly, the judgment is reversed and the complaint is dismissed.

Rios, J. (dissenting and voting to affirm the judgment in the following memorandum). Plaintiff commenced this action to recover assigned first-party no-fault benefits. Plaintiff’s assignor was insured under an automobile insurance policy issued in the State of Florida, which contained a provision allowing for the retroactive cancellation of the policy if the policyholder made a “false, misleading” statement in the application for insurance. Six months following the accident involving plaintiff’s assignor, defendant disclaimed coverage based on its decision to void the policy ab initio. At trial, the insurance company presented no evidence other than its conclusion that the policy had been cancelled.

As the insurance policy was contracted in Florida, that state’s laws regarding cancellation are applicable (see Matter of Eagle Ins. Co. v Singletary, 279 AD2d 56 [2000]). While Florida law allows for the retroactive cancellation of an automobile policy based on a material misrepresentation (see Fla Stat Ann § 627.409), the courts of Florida require the production of evidence that establishes the material misrepresentation.{**38 Misc 3d at 59}

An insurer seeking to rescind a policy pursuant to Florida Statutes Annotated § 627.409 must prove detrimental reliance on the false statement (see Griffin v American Gen. Life & Acc. Ins. Co., 752 So 2d 621 [Fla Dist Ct App, 2d Dist 1999]; Boca Raton Community Hosp., Inc. v Brucker, 695 So 2d 911 [Fla Dist Ct App, 4th Dist 1997]), and it is for the trier of fact to determine if the breach is material (see United Servs. Auto. Assn. v Clarke, 757 So 2d 554 [Fla Dist Ct App, 4th Dist 2000]). In applying Florida law to the issue of cancellation, the Appellate Division held that sufficient evidence was required to demonstrate that the policy would not have been issued but for the misrepresentation (see Varshavskaya v Metropolitan Life Ins. Co., 68 AD3d 855 [2009]).

Here, no competent evidence was presented to establish the claim of misrepresentation other than the conclusion of the insurer (see Matter of Centennial Ins. Co. v Capehart, 220 AD2d 499 [1995]; Matter of Electric Ins. Co. v Woods, 101 AD2d 840 [1984]; Viuker v Allstate Ins. Co., 70 AD2d 295 [1979]; Sanchez v Maryland Cas. Co., 67 AD2d 681 [1979]; see also Penaranda v Progressive Am. Ins. Co., 747 So 2d 953 [Fla Dist Ct App, 2d Dist 1999]). Therefore, I would affirm the judgment in favor of plaintiff on this ground.

Pesce, P.J., and Aliotta, J., concur; Rios, J., dissents in a separate memorandum.

[*1]

Supreme Court, Appellate Term, Second Department, 9th and 10th Judicial Districts, December 18, 2012

APPEARANCES OF COUNSEL

Joseph Henig, P.C., Bellmore (Mark A. Green of counsel), for appellant. Rossillo & Licata, P.C., Westbury (John J. Rossillo of counsel), for respondent.

{**38 Misc 3d at 42} OPINION OF THE COURT

Memorandum.

Ordered that the order, insofar as appealed from, is affirmed, without costs.

In this action by a provider to recover assigned first-party no-fault benefits, we find that the District Court properly denied plaintiff’s motion for summary judgment on the ground that plaintiff had not demonstrated its prima facie entitlement to judgment as a matter of law (see New York Hosp. Med. Ctr. of Queens v Statewide Ins. Co., 33 Misc 3d 130[A], 2011 NY Slip Op 51863[U] [App Term, 2d Dept, 9th & 10th Jud Dists 2011]).

A plaintiff seeking to recover for no-fault benefits must submit proof of the fact and the amount of the loss sustained, i.e., that health care services or supplies were provided and the amount thereof (see Insurance Law § 5106 [a]; Ave T MPC Corp. v Auto One Ins. Co., 32 Misc 3d 128[A], 2011 NY Slip Op 51292[U] [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2011]; King’s Med. Supply, Inc. v Hereford Ins. Co., 5 Misc 3d 55 [App Term, 2d Dept, 9th & 10th Jud Dists 2004]). In this case, plaintiff submitted an NF-5, UB-04 and DRG master output report in support of its motion for summary judgment. However, in order for such documents to constitute prima facie proof of the fact and the amount of the loss sustained, plaintiff would have had to demonstrate that such documents were admissible, pursuant to CPLR 4518 (a), as proof of the acts, transactions, occurrences and/or events recorded therein (see Viviane Etienne Med. Care, P.C. v Country-Wide Ins. Co., 31 Misc 3d 21 [App{**38 Misc 3d at 43} Term, 2d Dept, 2d, 11th & 13th Jud Dists 2011]; see generally Matter of Carothers v GEICO Indem. Co., 79 AD3d 864 [2010]; Art of Healing Medicine, P.C. v Travelers Home & Mar. Ins. Co., 55 AD3d 644 [2008]). Plaintiff failed to do so.

Plaintiff’s argument that hospitals should not be held to the same standards of proof as other healthcare providers, because hospitals are required to use a different claim form (an NF-4 or NF-5 rather than an NF-3), is without merit. The NF-3 (verification of treatment by [*2]attending physician or other provider of health service), NF-4 (verification of hospital treatment) and NF-5 (hospital facility form) are all prescribed by the no-fault regulations (Insurance Department Regulations [11 NYCRR] Appendix 13), and one is not inherently more reliable than the others. The fact that a certain form was used to submit a claim to an insurer is irrelevant to the question of whether the health care provider demonstrated to the court that it is entitled to recover no-fault benefits.

We recognize that CPLR 4518 (b) allows hospital records to be used as prima facie proof of the facts contained in those records. However, CPLR 4518 (b) does not apply to “any action instituted by or on behalf of a hospital to recover payment . . . for services rendered by or in such hospital.” Even assuming, without deciding, that a hospital’s records could be used by the plaintiff hospital in an assigned first-party no-fault case, pursuant to CPLR 4518 (b), under the theory that the hospital is suing as the assignee of a patient seeking to recover benefits from an insurance company, and not on its own behalf, such documents must, in any event, “bear[ ] a certification by the head of the hospital or by a responsible employee in the controller’s or accounting office that the bill is correct, that each of the items was necessarily supplied and that the amount charged is reasonable.” No such certification was provided here, nor did plaintiff submit an affidavit of a hospital employee attesting to the truth of any of the contents of the records submitted by plaintiff. Instead, the only sworn statements submitted by plaintiff were made by plaintiff’s attorney and by an employee of a third-party billing company, neither of whom claimed any knowledge as to the truth of the contents of the records.

Finally, we note that the cases cited by plaintiff (e.g. Hospital for Joint Diseases v Travelers Prop. Cas. Ins. Co., 34 AD3d 532 [2006]), for the proposition that hospitals are not required to submit proof of the fact and the amount of the loss sustained to the court in order to demonstrate their entitlement to no-fault{**38 Misc 3d at 44} benefits, do not impact our decision in this case. In those cases, there is no indication that the defendants had ever objected to the plaintiffs’ prima facie showing on the ground that those plaintiffs had failed to submit such proof. Thus, plaintiff has not demonstrated that any appellate court in New York has been presented with the question of whether a plaintiff hospital is required to offer proof of the fact and the amount of the loss sustained in order to recover no-fault benefits in court and, upon considering that question, held that the hospital is not required to offer such proof. The Appellate Division has specifically held, twice, that a health care provider has not demonstrated its entitlement to recover no-fault benefits after finding that the provider’s claim forms were inadmissible pursuant to CPLR 4518 (a) (see Matter of Carothers, 79 AD3d 864; Art of Healing Medicine, P.C., 55 AD3d 644), and plaintiff has not provided a compelling reason to distinguish the instant case from those cases.

Accordingly, the order, insofar as appealed from, is affirmed.

We decline defendant’s request to search the record and award it summary judgment dismissing the complaint.

Molia, J.P., Iannacci and LaSalle, JJ., concur.

Supreme Court, Kings County

21836/11

Plaintiff Attorney: Lester Herzog, 1729 E. 15th Street, Brooklyn, NY 11229

Defendant Attorney: Smith Mezure Director Wilkins Young & Yagerman, PC, 111 John Street, New York, NY 10038

David Schmidt, J.

The following papers numbered 1 to 11 read on these motions:

Papers Numbered

Notice of Motion/Order to Show Cause/

Petition/Cross Motion and

Affidavits (Affirmations) Annexed1-2, 3-4, 5-6

Opposing Affidavits (Affirmations)7-9

Reply Affidavits (Affirmations)10-11

Affidavit (Affirmation)

Other Papers

Upon the foregoing papers in this action seeking supplementary uninsured/underinsured motorist (SUM) coverage under a policy of insurance issued by defendant Geico General Insurance Company (Geico or defendant), plaintiffs Sarah H. Orman and Gidon Orman (plaintiffs) move, pursuant to CPLR 3211 (b), to dismiss four of Geico’s affirmative defenses. By order to show cause, Geico moves to vacate plaintiffs’ note of issue and [*2]certificate of readiness, and to strike this matter from the trial calendar. Geico separately cross-moves, pursuant to CPLR 3211 (a) (7),

to dismiss plaintiffs’ second cause of action alleging that it breached its implied covenant of good faith and fair dealing.

Background

Plaintiff Sarah Orman (plaintiff) was involved in a car accident which took place on October 23, 2007 in Woodmere, New York. While plaintiff was making a left turn, plaintiffs’ vehicle was struck in the rear by the vehicle owned and operated by Maximino Luna. According to the police report and the deposition testimony of plaintiff in the underlying action (Orman v Luna, Index No. 12108/09), Mr. Luna attempted to stop before the collision but was unable to do so. At the time of the accident, Mr. Luna had an Allstate automobile insurance policy with limits of $25,000 per person and $50,000 per accident. Plaintiffs held a policy with Geico which included SUM coverage with $50,000/$100,000 policy limits. It is not disputed that plaintiff is a “covered person” under the terms of the policy.

In August, 2008, Geico was awarded 100% in arbitration and plaintiffs’ deductible of $500 was refunded to them.

In October, 2009, plaintiffs sent Geico a formal notice of their intention to make a claim, with accompanying correspondence. Geico acknowledged receipt of the claim by letter dated November 5, 2009, and advised plaintiffs to notify it if they received a policy limit settlement offer from Allstate that was less than their “UIM” limit. Plaintiffs’ counsel advised Geico, by letter dated November 13, 2009, that Allstate had not yet tendered its policy and that the underlying action was being litigated, although it had not been placed on the trial calender.

On October 6, 2010, plaintiff was deposed in the underlying action.

In March, 2011, Allstate advised plaintiffs’ counsel that it was offering the $25,000 policy limits for settlement of the bodily injury claim for plaintiff as a result of the accident.

By letter dated June 20, 2011, plaintiffs’ counsel advised Geico that Allstate had tendered its policy of $25,000. In addition, counsel attached a copy of Allstate’s tender, a copy of the declaration pages of the policy and an affidavit of “no excess” coverage, signed by Mr. Luna. Counsel also requested Geico’s permission, in writing, to accept Allstate’s tender.

By letter dated June 21, 2011, plaintiffs’ counsel provided Geico with a package of medicals, photos and other documents, and again requested Geico’s permission to accept Allstate’s tender.

By letter dated June 23, 2011, Geico advised plaintiffs’ counsel that “you have GEICO’s permission to settle your client’s Bodily Injury claim with the adverse tort carrier, Allstate, insurer of Maximino Luna.” Geico also advised plaintiffs’ counsel that in order to evaluate an underinsured motorist bodily injury claim, it required “medical specials” documenting plaintiff’s injuries and a written authorization to obtain a copy of plaintiff’s no-fault file.

By letter dated June 25, 2011, Allstate advised plaintiff and her attorney that a settlement check was issued to plaintiff in the amount of $25,000.

On August 30, 2011, referring to his August 15, 2011 conversation with Geico’s claims examiner, plaintiffs’ counsel advised Geico that plaintiffs would not accept anything less than [*3]the full $25,000 SUM coverage limits; that as of that date, Geico had not contacted him; and that he was in the process of drafting pleadings to commence a direct action against Geico. Counsel also stated that plaintiffs would be including a cause of action for bad faith, “in view of the fact that Geico refused to pay $25,000, where the economic damages alone, exceed one million dollars – without even considering the personal injuries and pain and suffering.”

By letter dated September 15, 2011, Geico advised plaintiffs’ counsel that plaintiffs’ SUM policy limit was $50,000/$100,000; that it was “always willing to negotiate any claim in good faith;” and that, based upon alleged economic damages, it requested all medical authorizations, MRI films, the no-fault file and employment records so that it could properly evaluate plaintiffs’ claim. Geico further stated that it would contact counsel upon completion of its review.

By letter dated September 26, 2011, plaintiffs’ counsel again advised Geico that plaintiffs would not accept anything less than the full $25,000 SUM coverage limits, and that in response, “[the claims examiner] … stated that Geico, at present, is unwilling to tender same.” Plaintiffs’ counsel further stated that in view of the above, he enclosed six authorizations and informed Geico that an action against Geico had been commenced.^[FN1]

On that same date, (September 26, 2011) plaintiff commenced this action, alleging a cause of action for breach of contract, a cause of action alleging bad faith, and a cause of action for loss of consortioum. As relevant here, the second cause of action states:

“That defendant’s refusal and/or neglect to pay its policy limits when requested to do so, was not made in good faith in view of all relevant circumstances.

That in refusing and/or neglecting to pay its policy limits, defendants considered only its own interests, without also taking into consideration the interests of its insured.

That the defendant’s refusal and/or neglect to pay plaintiff amounted to gross disregard for its insured’s interests; by failing to place the interests of its insured on equal footing with its own interests.”

Plaintiffs’ seek $100,000 in damages each for the first and second causes of action, and unspecified damages for the third cause of action.

On October 25, 2011, Geico answered the complaint and asserted various affirmative defenses including, as relevant here, that plaintiff did not sustain serious injury or non-economic loss under Insurance Law §§ 5102 and 5014.

Subsequently, plaintiffs move to dismiss four of Geico’s affirmative defenses, plaintiff cross-moved to dismiss Geico’s serious injury affirmative defense, and Geico moved to vacate the note of issue and certificate of readiness. [*4]

Discussion

Plaintiffs move, pursuant to CPLR 3211 (b), to dismiss four of defendant’s affirmative defenses. “A party may move for judgment dismissing one or more defenses, on the ground that a defense is not stated or has no merit” (Mazzei v Kyriacou, 98 AD3d 1088, 1088-1089 [2012], quoting CPLR 3211 [b]). “When moving to dismiss or strike an affirmative defense, the plaintiff bears the burden of demonstrating that the affirmative defense is without merit as a matter of law” (id., [internal quotation marks and citations omitted]). “In reviewing a motion to dismiss an affirmative defense, the court must liberally construe the pleadings in favor of the party asserting the defense and give that party the benefit of every reasonable inference” (id., [internal quotation marks and citations omitted]). “However, where affirmative defenses merely plead conclusions of law without any supporting facts,’ the affirmative defenses should be dismissed pursuant to CPLR 3211 (b)” (Bank of Am., N.A. v 414 Midland Ave. Assoc., LLC, 78 AD3d 746, 750 [2010], quoting Fireman’s Fund Ins. Co. v Farrell, 57 AD3d 721, 723 [2008]).

Here, with respect to defendant’s second affirmative defense, plaintiffs have established that they obtained personal jurisdiction over defendant through documentary evidence. In this regard, plaintiffs have annexed the proof of service, a fee receipt and an acknowledgment from the New York State Insurance Department, confirming that defendant was served with the plaintiffs’ summons and verified complaint on September 27, 2011 pursuant to Insurance Law § 1212. Further, defendant does not oppose this branch of plaintiffs’ motion.

With respect to defendant’s seventh affirmative defense – that plaintiffs’ failed to properly notify defendant of their intent to make an “UM/UIM claim” – as indicated above, plaintiffs sent a Notice of Intention to Make Claim and accompanying correspondence to defendant by letter dated November 30, 2009. Thus, plaintiffs have sustained their burden of demonstrating that this defense is without merit as a matter law because it does not apply under the factual circumstances of this case (Tenore v Kantrowitz, Goldhamer & Graifman, P.C., 76 AD3d 556, 557-558 [2010]). Moreover, defendant does not oppose this branch of plaintiffs’ motion.

Based upon the foregoing, these branches of plaintiffs’ motion to dismiss defendant’s second and seventh affirmative defenses are granted.

As to that branch of plaintiffs’ motion to dismiss defendant’s sixth affirmative defense – asserting that plaintiffs failed to meet conditions precedent to warrant “UM/UIM” benefits – plaintiffs argue that defendant fails to elaborate which conditions precedent they failed to meet. In particular, plaintiffs contend that they fulfilled the three condition precedents necessary to receive UIM/SUM benefits, namely: (1) they sent defendant a Notice of Intention to Make a Claim, (2) defendant admitted exhaustion of Mr. Luna’s policy limits, and (3) that in its June 23, 2011 letter, defendant granted plaintiffs permission to settle with Allstate for its policy limits, set forth two requirements to pursue the underinsured claim, and never stated that plaintiffs failed to meet any conditions precedent.

In opposition to this branch of plaintiffs’ motion, defendant argues that it did not admit [*5]that Mr. Luna’s policy limits were exhausted, but only conceded that Allstate tendered an insurance policy with limits of $25,000 to the plaintiffs.^[FN2] Specifically, defendant argues that there “may have been other applicable insurance policies that plaintiff did not attempt to reach,” and essentially argues that the “affidavit of excess” signed by Mr. Luna is incompetent because it does not reference the accident date and makes “sweeping statements with nothing to support the claims.” Further, defendant asserts that it should be given the opportunity “to explore whether Mr. Luna had other applicable insurance at the time of the accident [and that] [] [i]f so, plaintiff would have failed to meet a pre-condition of bringing this supplementary underinsured motorist claim.”

As plaintiffs’ state in their reply, defendant’s contention that Mr. Luna may have additional coverage is speculative. Moreover, defendant does not dispute that it had the opportunity to determine whether Mr. Luna had any applicable insurance at the time of the accident. Further, defendant has failed to demonstrate that Mr. Luna’s sworn affidavit of excess is incompetent. As noted above, Mr. Luna affirmed that he was not covered under another applicable insurance policy. Although his affidavit does not contain the date of the accident, it contains his policy number, which corresponds to the policy number on the copy of his policy/declaration pages showing the coverages that were on the policy at the time of loss of “10[-]23[-]2007,” as affirmed by an Allstate Claim Support representative in a notarized statement (Plaintiff’s Notice of Motion, Exh. G).

In addition, Mr. Luna’s affidavit was provided to defendant by plaintiffs’ counsel on June 20, 2011 – before defendant gave plaintiffs permission to settle plaintiff’s bodily injury claim with Allstate – which contains the name of the underlying action as well as the claim number for the accident. Finally, as noted immediately above, defendant gave plaintiffs permission to settle with Allstate, and the record does not indicate that defendant advised plaintiffs at any time that it failed to comply with any conditions precedent. Where, as here, an affirmative defense merely pleads conclusions of law without any supporting facts, it should be dismissed.Based on the foregoing, this branch of plaintiffs’ motion to dismiss defendant’s sixth affirmative defense is granted.

Plaintiffs also move to dismiss defendant’s third affirmative defense that plaintiffs did not sustain a serious injury under Insurance Law § 5102 or sustain economic loss under Insurance Law § 5104. Plaintiffs argue that the serious injury threshold does not apply in this action for two reasons. First, plaintiffs contend that is not an action “against another covered person,” since Geico, the defendant, does not qualify as a “covered person” under Insurance Law § 5012 (j). In this regard, section j of Insurance Law § 5102, entitled “Definitions,” provides that:

” Covered person’ means any pedestrian injured through the use or operation of, or any owner, operator or occupant of, a motor vehicle which has in effect the financial security required by article six or eight of the vehicle and traffic law or which is referred to in subdivision two of section three hundred twenty-one of such law; or any other person entitled to first party benefits.” [*6]

Second, plaintiffs assert that this is not an action for “personal injuries” to which the “serious injury” threshold requirement applies under Insurance Law § 5104 (a); rather it is a breach of contract action in which the serious injury threshold is not applicable. Stated otherwise, plaintiff argues that she is not alleging that defendant was negligent in the use or operation of a motor vehicle; rather she contends that this action relates strictly to defendant’s contractual liability based on its “SUM/UIM endorsements.” In this regard, Insurance Law § 5104 (a), entitled “Causes of action for personal injury,” provides, in pertinent part, that:

“(a) Notwithstanding any other law, in any action by or on behalf of a covered person against another covered person for personal injuries arising out of negligence in the use or operation of a motor vehicle in this state, there shall be no right of recovery for non-economic loss, except in the case of a serious injury, or for basic economic loss…” (emphasis added).

Despite the foregoing arguments, plaintiffs concede that “[f]or the sake of full disclosure . . . in Raffellini (v State Farm Mutual Automobile Insurance, 9 NY3d 196 [2007]), the Court of Appeals sided with the Fourth Department (against the Second Department) and found that the serious injury’ [no] [f]ault threshold does apply in the SUM/UIM context.” Nevertheless, plaintiffs go on to state that Raffellini “was strictly predicated on the proper interpretation of two implicitly contradictory provisions of Insurance Law § 3420, that the court “did not consider [their] legal arguments predicated on §§ 5102 and 5104,” and “[t]herefore, notwithstanding the holding in Raffellini, the courts are not foreclosed from considering the same issue on alternate grounds.”

Plaintiffs also contend that even assuming that they are required to demonstrate that they sustained serious injury in order to obtain their SUM coverage, they have already done so do by demonstrating that they sustained over a million dollars in economic damages,^[FN3] and that plaintiff has a “medically determined injury or impairment” which prevented her from “performing substantially all of the material acts that constituted her usual and customary daily activities for not less than ninety days during the one hundred eighty days immediately following the accident.”

This branch of the plaintiffs’ motion must be denied. In Raffellini (9 NY3d at 205), the Court of Appeals held that in an action by an insured against its insurer for supplementary uninsured/underinsured motorist coverage, the plaintiff must prove that he or she sustained a serious injury. The court held that Insurance Law § 3420 (f) (2), which “addresses additional optional personal injury coverage that can be purchased by a policyholder [i.e. SUM coverage],” is an extension of Insurance Law § 3420 (f) (1), the statute which “mandates that insurers provide uninsured motorist coverage in every New York motor vehicle liability policy,” and which conditions payment of mandatory uninsured motorist benefits on a finding that the insured suffered a serious injury as defined in Insurance Law § 5102 (d) (emphasis added) (id. at 200). Thus, the court ruled that the serious injury exclusion of Insurance Law § 3420 (f) (1) applies to supplementary benefits (Insurance Law [*7]§ 3420 [f] [2]), and that therefore an insured must prove serious injury in order to receive supplementary benefits (id. at 204).

Plaintiffs nevertheless argue that the Court of Appeals in Raffellini did not consider their arguments under Insurance Law § 5104 and 5012 (j), and thus may consider them now. This argument must be rejected. As an initial matter, these arguments were raised before the Supreme Court and the Appellate Division, Second Department. Although these courts granted plaintiffs’ motion to strike the insurance company’s serious injury defense, in part, on these grounds, the Court of Appeals came to the opposite conclusion based upon the same facts.

Moreover, the claim that the Court of Appeals did not consider plaintiffs’ arguments under Insurance Law §§ 5104 (a) and 5102 (d) must be rejected since the court relied upon Insurance Law § 5104 in coming to its conclusion. Specifically, the court was unpersuaded that the placement of the serious injury exclusion in Insurance Law § 3420 (f) (1) but not in 3420 (f) (2) reflected a “legislative determination to restrict the serious injury exclusion to mandatory benefits.” In this regard, the court held that:

“such a distinction would not be consistent with the policy underlying supplementary benefits, which are designed to give insureds the same level of protection that would have been available to others under the policy if the insureds were the tortfeasors who caused personal injuries. When an insured injures someone in a motor vehicle accident, the injured party is subject to the serious injury requirement in the No-Fault Law and cannot sue for noneconomic loss unless the serious injury threshold is met (see Insurance Law § 5104 [a]). Since the purpose of supplementary coverage is to extend to the insured the same level of coverage provided to an injured third party under the policy, the insured must also meet the serious injury requirement before entitlement to supplementary benefits. If this were not the case, the insured would receive coverage more comprehensive than that available to a third party injured by the insured (emphasis added).

It is evident from the facts of this case that the application of the serious injury exclusion is consistent with the policy supporting supplementary benefits. Here, plaintiff received payment for his basic economic loss through no-fault benefits. When he sued the negligent party who caused the collision, he was seeking recovery for noneconomic loss. Having obtained the $ 25,000 limit of coverage from the negligent driver’s insurer, he then sought additional noneconomic loss damages under the SUM endorsement to his State Farm insurance policy. Since a third party injured as a result of plaintiff’s negligence would have had to demonstrate serious injury to obtain noneconomic loss damages under plaintiff’s policy, it follows that plaintiff himself must prove serious injury to recover under his SUM endorsement—as Regulation 35-D requires. State Farm is therefore entitled to pursue its serious injury defense” (Raffellini, 9 NY3d at 205).

In any event, based upon the precedent of Raffellini, this court may not entertain plaintiffs’ arguments since, as indicated above, the Court of Appeals has conclusively held that an insurer is entitled to pursue a serious injury defense when sued by its insured for supplementary underinsured motorist benefits. Accordingly, this branch of plaintiffs’ motion [*8]to dismiss defendant’s third affirmative defense is denied.

Cross Motion of Defendant

Defendant cross-moves to dismiss plaintiffs’ second cause of action alleging a breach of the implied covenant of good faith and fair dealing. Defendant argues that plaintiffs cannot recover damages premised upon this cause of action because they have not pled and cannot prove the necessary allegations for bad faith. Defendant also contends that this cause of action seeks punitive damages, which are not available because breach of the implied covenant of good faith and fair dealing is not an independent tort, and because plaintiffs have not alleged that its conduct was egregious and that it was directed toward the public generally (New York Univ. v Cont’l Ins. Co., 87 NY2d 308, 316 [1995]).

In opposition, plaintiffs argue that although this state has not explicitly recognized a bad faith cause of action against a SUM insurer by its insured, the law with respect to SUM coverage is evolving in this state; that defendant has incorrectly characterized this cause of action as one solely for punitive damages so that it could argue that such a claim is not actionable; and that their complaint explicitly alleges “bad faith” as a separate cause of action.

In reply, defendant argues that plaintiffs rely upon the very case law that it had already distinguished in its cross motion; that, contrary to plaintiffs’ claim, it has cited a case which has rejected the application of general principles relating to a bad faith claim in a SUM context (Grinshpun v Travelers Cas. Co. of Conn., 23 Misc 3d 1111A, 2009 NY Slip Op 50706[U] [2009]); and that plaintiffs have conceded that they are seeking punitive damages because their counsel asserts that it is necessary to warn insurance carriers of the potential for “severe consequences” if they do not immediately tender their full SUM coverage upon request.

“In determining a motion to dismiss a cause of action pursuant to CPLR 3211 (a) (7) . . . the pleading is afforded a liberal construction, the facts alleged are accepted as true, and the proponent of the pleading is accorded the benefit of every favorable inference” (J & D Evans Constr. Corp. v Iannucci, 84 AD3d 1171, 1171 [2011]). However, “bare legal conclusions as well as factual claims flatly contradicted by the record are not entitled to any such consideration” (Lutz v Caracappa, 35 AD3d 673, 674 [2006]). Moreover, “[i]f the facts as alleged do not fit within any cognizable legal theory, the cause of action must be dismissed” (Meltzer v Meltzer, 41 AD3d 558, 558 [2007]).

“Implicit in every contract is a covenant of good faith and fair dealing” (Elmhurst Dairy, Inc. v Bartlett Dairy, Inc., 97 AD3d 781, 784 [2012]). “This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract” (511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 153 [2002] [internal quotation marks and citations omitted]). Further, “[w]hile the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship, they do encompass any promises which a reasonable person in the position of the promisee would be justified in understanding were included” (id.).

“[C]onsequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages were [*9] “within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting'”‘(Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203 [2008], quoting Bi-Econony Mkt., Inc. v Harleysville Ins. Co. of N.Y, 10 NY3d 187, 192 [2008], quoting Kenford Co. v County of Erie, 73 NY2d 312, 319 [1989]; see also Stein, LLC v Lawyers Tit. Ins. Corp.,AD3d, 2012 NY Slip Op 7291, *2 [2d Dept 2012]; Hoffman v Unionmutual Stock Life Ins. Co. of NY, 51 AD3d 633, 634 [2d Dept 2008]; Meegan v Progressive Ins. Co., 43 AD3d 182, 186-187 [4th Dept 2007]; Acquista v NY Life Ins. Co., 285 AD2d 73, 80 [1st Dept 2001]; TADCO Constr. Corp. v Allstate Ins. Co., 2011 NY Slip Op 33621[U], *5 [2011]). “Courts also look at what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made…'” (TADCO Constr. Corp., 2011 NY Slip Op 33621 [U], *5, quoting Kenford Co., Inc., 73 NY2d at 319). In addition, “[t]he nature, purpose and particular circumstances of the contract are some of the factors to be considered in determining what was in the reasonable contemplation of the parties at the time of the execution of the contract” (id., citing Rose Lee Mfg., Inc. v Chemical Bank, 186 AD2d 548, 551 [1992]). Finally, “[p]roof of consequential damages cannot be speculative or conjectural” (id., citing Ashland Mgt. Inc. v Janien, 82 NY2d 395, 403 [1993]).

Here, plaintiffs’ second cause of action seeks damages for defendant’s alleged bad faith in refusing to pay its policy limits when requested to do so, which “amounted to gross disregard for [their] . . . interests.” However, the cause of action fails to state a viable claim for breach of the covenant of good faith and fair dealing. As an initial matter, as indicated above, defendant’s assertion of a serious injury defense does not constitute bad fath. In any event, plaintiffs fail to allege that the damages they allegedly sustained were contemplated by the parties “as the probable result of a breach at the time of or prior to contracting” (Panasia Estates, Inc., 10 NY3d at 203 [internal quotation marks omitted]), nor does the record reflect that such consequential damages were reasonably contemplated by the parties (see Third Equities Corp. v Commonwealth Land Tit. Ins. Co., 2010 NY Slip Op 33462 [U], *15 [2010]). In addition, plaintiffs do not make this claim in their verified bill of particulars nor do they make this argument in opposition to defendant’s cross motion.

Further, extra-contractual damages have been awarded in cases involving insurance contracts different than the type of insurance contract involved here. For example, Bi-Economy involved a policy that included business interruption insurance which was designed to ensure that the insured had the financial support necessary to sustain its business operation in the event disaster occurred. The court held that plaintiff was entitled to extra contractual damages as a result of the defendant’s bad faith handling of plaintiff’s claim (failing to promptly adjust and pay the loss, resulting in the collapse of the business), because “the very purpose of business interruption coverage would have made [the insurer] aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to [the insured] for the loss of its business as a result of the breach” (Bi-Economy, 10 NY3d at 195). Similarly, PanasiaEstates, Inc. involved a commercial property insurance policy covering damage to property while undergoing renovation. Rain had entered into the insured’s building resulting in extensive damage, the insurer did not investigate until several weeks later, and then denied the claim [*10]three months afterward. The court held that the insured’s claim for consequential damages based upon the insurer’s alleged failure to promptly investigate the claim was viable because such a claim could be asserted in an insurance context so long as the damages were contemplated by the parties as a probable result of the breach when they entered into the contract (see also Rodriguez v Allstate Ins. Co., 33 Misc 3d 827, 831 [Sup Ct, Kings County, 2011] [plaintiff-insured’s claim for consequential damages, namely car payments she made on a car that she was unable to use but for the defendant insurer’s alleged breach of contract, was a foreseeable consequenceof defendant’s alleged breach of contract];Carden v Allstate Ins. Co., 30 Misc 3d 479, 482 [2010] [under “Deluxe Homeowner’s Policy,” plaintiffs submitted evidence in admissible form that they suffered damages due to the delay in reconstruction of house because of defendant’s bad faith delay in settling their claim – after fire to house and damage to roof, mold developed, and plaintiffs were forced to remain out of dwelling and incur living expenses]; Handy & Harman v American International Group, Inc., 2008 NY Slip Op 32366 [U], *11 [2008] [plaintiff insured sufficiently alleged a claim for consequential damages for breach of the covenant of good faith based on insurer’s alleged failure to fully investigate its claims where purpose of environmental pollution liability policy was to “protect [the insured] from the calamity of unforseen and monumental environmental clean-up costs, and avert risk with regard to such costs and liabilities”]). Thus, in light of the nature of the contract involved here – an automobile liability insurance policy -it cannot reasonably be argued that plaintiffs contemplated receiving consequential damages as a result of defendant’s breach of its implied covenant of good faith and fair dealing

Finally, plaintiffs do not allege that they suffered any damages as a consequence of defendant’s alleged bad faith refusal to pay their claims (Grinshpun, 2009 NY Slip Op 50706[U],*4). In this regard, plaintiffs do not claim that defendant’s refusal to pay them their SUM benefits required them to incur any extra-contractual damages or prevented them from paying for needed medical and/or other living expenses. Thus, this cause of action merely alleges a denial of benefits promised under a policy of insurance (cf. Acquista, 285 AD2d at 80). As such, it is duplicative of plaintiffs’ first cause of action for breach of contract (see Jackson v AXA Equitable Life Ins. Co., 2011 NY Slip Op 32461[U], *3 [2011] [plaintiff’s third cause of action for breach of the covenant of good faith and fair dealing under a disability insurance policy duplicates plaintiff’s breach of contract claim; both claims arise from a dispute over the policy’s obligations and defendants’ satisfaction of them];Authelet v Nationwide Mutual Insurance Company, 2008 NY Slip Op 32929 [U], *3-4 [2008] [the plaintiff-insured’s cause of action alleging breach of the implied covenant of good faith and fair dealing under a homeowner’s policy pled the same conduct which was the predicate of breach of contract cause of action, i.e. the insurer’s failure to pay the full amount of the insured’s claim, and thus was duplicative of insured’s breach of contract claim]). Based upon the foregoing, plaintiffs’ second cause of action fails to state a claim for breach of the implied covenant of good faith and fair dealing. Accordingly, defendant’s motion to dismiss this cause of action is granted.

Defendant moves by order to show cause to vacate the note of issue and certificate of [*11]readiness and to strike this matter from the trial calendar. In support of its motion, defendant argues, among other things, that this action is in its inception, that only preliminary documentary discovery has been exchanged, that there have been no depositions, court conferences, or an independent medical examination of the plaintiff; and that further discovery with respect to plaintiffs’ claim for lost wages is required.

In opposition, plaintiffs assert, among other things, that discovery has already been conducted in the underlying action by Allstate and that additional discovery would be redundant.

In view of the court’s determination denying plaintiffs’ motion to dismiss defendant’s serious injury affirmative defense – requiring further discovery of plaintiffs’ injuries (alleged to be both continuing and permanent) – and in light of the fact that further discovery is required to address the issues set forth by defendant above, the court grants defendant’s motion only to the extent of directing that discovery will continue and that defendant will be permitted to move for summary judgment within 60 days after discovery is complete.

In sum, plaintiffs’ motion to dismiss defendant’s second, sixth, and seventh affirmative defenses is granted, and the motion is otherwise denied. Defendant’s cross motion to dismiss plaintiffs’ second cause of action is granted. Defendant’s application to vacate the note of issue and certificate of readiness is granted only to the extent of directing discovery to continue and to permit defendant to move for summary judgment within 60 days after discovery is complete.

This constitutes the decision and order of the court.

E N T E R

J. S. C.

Footnotes

Footnote 1:Plaintiffs’ counsel represents that “[a]ccording to the GEICO adjustor, there was a determination’ made by the carrier that the claim did not meet the No Fault threshold, and that the claim was probably not even worth $ 25G, and that ALLSTATE had overpaid” (Aff. in Opposition to Defendant’s Cross Motion to Dismiss Plaintiffs’ Second Cause of Action, ¶ 7).

Footnote 2:As indicated above, defendant advised plaintiffs’ counsel that plaintiffs “have GEICO’s permission to settle your client’s Bodily Injury claim with the adverse tort carrier.”

Footnote 3:Plaintiffs have annexed an “Analysis of Economic Loss” prepared by Leonard R. Freifelder, Ph.D., dated January 11, 2010, indicating that plaintiff’s total loss of earnings for the rest of her work life expectancy is $1,095,454 (Plaintiffs’ Notice of Motion, Exh. F).