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U.S. Court in New York Rejects Insurer's Claims Against Illegally Structured Medical Practices


HLD, v. 29, n. 12 (December 2001)

U.S. Court in New York Rejects Insurer's Claims Against Illegally Structured Medical Practices

Section 1508 of N.Y. Bus. Corp. Law provides that "'[n]o individual may be a director or officer of a professional service corporation unless he is authorized by law to practice in this state a profession which such corporation is authorized to practice and is either a shareholder of such corporation or engaged in the practice of his profession.'" State Farm Mutual Automobile Insurance Company (State Farm) brought an action in federal district court against Robert Mallela and Swapnadip Lahiri (collectively licensed defendants), Tatiana Rybuk and Paul Schneider (collectively unlicensed defendants), and thirty-six named professional service corporations (collectively PC defendants), alleging fraud, unfair trade practices, and unjust enrichment. According to State Farm, the PC and unlicensed defendants violated � 1508 by using the licensed defendants' names on certificates of incorporation in order to obtain certificates of authority to practice medicine. State Farm charged that the licensed defendants were paid a fee to act as "sham" shareholders, directors, and officers of the PC defendants.

State Farm sought declaratory relief to enjoin the PC defendants from submitting payment requests for medical services rendered to State Farm insureds. State Farm also sought compensatory damages, alleging it paid $6 million in no-fault benefits to the illegally structured medical practices. The defendants moved to dismiss, arguing that no private right of action existed for violating the state's corporate form requirements and that they were entitled to payment under the state no-fault insurance law for the medical services rendered to State Farm insureds.

The U.S. District Court for the Eastern District of New York granted the dismissal motion, finding that defendants' corporate structure had no bearing on State Farm's "obligation to pay for reasonable and necessary medical treatments provided by licensed professionals" and that � 1508 did not create a private right of action for enforcing corporate form requirements. In so holding, the court rejected State Farm's argument that unlawfully licensed professional corporations had no standing to bring a claim for benefits under the no-fault law. The court pointed out that State Farm had not alleged that the medical services were unnecessary or that the specific providers did not have lawful licenses to provide the services, noting that "[n]owhere does the No-fault Law or regulations indicate than an insurer only need pay an assignee provider of services if that provider is lawfully licensed pursuant to New York law." According to the court, the only action available to State Farm was to report the alleged violations to the appropriate state authorities. The court also dismissed State Farm's claims of fraud and fraudulent concealment and unjust enrichment, finding that State Farm could not show it had suffered damages by paying claims that it was, in any event, obligated to pay under the state's no-fault insurance law.

State Farm Mut. Auto. Ins. Co. v. Mallela, No. CV-00-4923 (E.D.N.Y. Sept. 18, 2001) (43 pages).

Health Lawyers thanks Robert P. Borsody, of Robert P. Borsody P.C., in New York, New York, for sending us a copy of this decision.

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