HLD, v. 29, n. 12 (December 2001)
Court in New York Rejects Insurer's Claims Against Illegally Structured Medical
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
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.