Insurer’s Claim Over Clinic’s Corporate Structure Denied


In a ruling that contradicts a previous state court decision and may affect several pending lawsuits totaling almost $75 million in alleged damages, an Eastern District judge has dismissed a claim brought by an insurer that says it lost millions in no fault benefits paid to illegally structured medical practices.
Judge Charles P. Sifton, in the Eastern District, rejected a claim brought by State Farm Mutual Automobile Insurance Co., that alleged some 36 multi-disciplinary medical practices were structured illegally under New York’s Business Corporation Law and therefore were required to return $6 million in medical benefits paid by the insurer.

Specifically, Judge Sifton ruled that the law did not absolve State Farm of its duty to pay the claims and did not give State Farm a private right of action to enforce the corporate structure provisions.State Farm v. Mallela, 00-CV-4923 is one of several pending actions in state and federal courts that involve so-called multi-care medical clinics, corporations in which physicians allegedly “sold” their names to set up practices comprised mainly of chiropractors, acupuncturists and unlicenced professionals.
Judge Stifton’s ruling, which dismissed State Farm’s corporate structure claim brought under New York Business Corporation Law, is contrary to a July ruling by Manhattan Supreme Court Justice Ira Gammerman in a much-publicized lawsuit brought by Progressive Auto Insurance and 16 other insurance companies last year.

In that decision, Justice Gammerman denied the defendants’ motion to dismiss the corporate law claims by ruling that the Business Corporation Law does not prevent an insurer from challenging the structure of a corporation.

Justice Gammerman based his decision in part on the fact that the insurers were not trying to dissolve the businesses but were seeking damages. He also noted that the plaintiffs were not seeking to deny claims as a result of the corporate structure, but rather seeking to recover for fraudulent claims.
Under Business Corporation law §1508, individuals may not serve as directors or officers of professional service corporations unless they are licensed to practice in the same profession as the corporation itself and unless they are either a shareholder or engaged in the practice of the corporation.

The insurance companies in each lawsuit allege that the multi-care medical clinics filed certificates of incorporation with the New York State Department of Education indicating that the profession practiced was medicine and that the corporations’ shareholder, director and officer was a licensed physician.In fact, the insurers argue, those physicians were sham shareholders who had no real ownership or control over the practices.

In the case before Judge Sifton, State Farm alleges that Dr. Robert Mallela and Dr. Swapnadip Lahiri served as the licensed physicians to set up some 36 practices in the metropolitan area. The practices, argued State Farm, actually were controlled by Tatiana Rybuk and Paul Schneider, both of whom were not licensed to practice medicine and who pleaded guilty in 1997 to attempted enterprise corruption, a scheme to defraud and 12 counts of insurance fraud.

Dr. Mallela and Dr. Lahiri are also named in a suit pending in the U.S. District Court for the Southern District brought by Allstate, Progressive and Encompass insurance companies. Another suit brought by Oxford Health Plans is pending before Justice Gammerman. In addition to each suit alleging claims under the Business Corporation Law, some include RICO and fraudulent billing claims.

In Judge Sifton’s Sept. 18 decision, he determined that State Farm could not deny a claim on the basis of the claimant’s corporate structure. Instead, States Farm’s recourse under No-Fault Law is to report the alleged violation to the commissioner of the state’s Department of health. Furthermore, he rejected the insurer’s argument that the corporations lack standing to file insurance claims under the No-Fault Law.
“Nowhere does the No-Fault Law or regulations indicate that an insurer only need pay an assignee provider of service if that provider is lawfully licensed pursuant to New York law,” he wrote, adding, “[t]he prohibition on the corporate practice of medicine is designed to protect consumers of health care services not insurers who pay for those services.”

Judge Sifton also rejected State Farm’s claims for fraud and fraudulent concealment and for unjust enrichment. Those claims, in addition to the business Corporate Law claim, were dismissed without prejudice. The judge wrote that State Farm was entitled to amend its complaint to state valid claims describing actionable fraud within 30 days.

However, State Farm’s claim under General Business Law §349, which alleged that the defendants engaged in deceptive trade practices, was dismissed with prejudice. Such a claim requires a plaintiff to make a prima facie showing that the defendant engaged in a practice that was materially deceptive or misleading and was consumer-oriented. State Farm, the judge reasoned, failed to establish that the acts were consumer-oriented.

In addition, the judge dismissed a counterclaim also under General Business Law §349 brought by some of the defendants. State Farm was represented locally by Craig Bruno, of Melville, who directed inquiries to Ross Silverman, an attorney with Katten, Muchin & Zavis, in Chicago. Mr. Silverman was unavailable for comment.

Our firm represented five of the defendant practices and is representing a total of about 45 defendants in the pending actions.

Schwartz, Conroy & Hack is the premier disability insurance law firm in the United States. To see how we can help you, contact us.


Evan S. Schwartz
Founder of Schwartz, Conroy & Hack