(631) 656-9220 firstname.lastname@example.org
PROVING THE UNLAWFUL CORPORATE STRUCTURE OF A PROFESSIONAL CORPORATION
1992 and 2001, reports of suspected automobile insurance fraud increased
by 275%, the bulk of the increase occurring in no-fault insurance fraud.
Reports of no-fault fraud rose from 489 cases in 1992 to 9,191 in
2000, a rise of more than 1700%. . By one estimate, the combined effect of
no-fault insurance fraud has been an
increase of over $100 per year in annual insurance premium costs for the
A principal cause of this “concededly rampant abuse” (Medical Society of the State of New York v. Serio, 100 N.Y.2d 854 ) was the proliferation of layman controlled professional corporations that flouted the prohibitions against laymen ownership and control of professional corporations found in N.Y. Business Corporation Law' §§ 1507, 1508 and N.Y. Education Law § 6507(4)(c). These entities, passing facially as legitimately licensed professional corporations, were known derisively as “Doc-in-the-box” operations.
The Article below examines this problem in detail, and blue prints practical approaches for insurers and their counsel to combat this problem.
and Legislative History
Nature of the Layman Scripted Entity …………………………..
on Law Enforcement ……………………………………….p. 12
In 1973, the Legislature
enacted the Comprehensive Automobile Insurance Reparations Act (see
L. 1973, ch. 13), which supplanted common-law tort actions for most
victims of automobile accidents with a system of no-fault insurance. Under
the no-fault system, payments of benefits "shall be made as the loss
is incurred" (Insurance Law § 5106[a] ). The primary aims of this
new system were to ensure prompt compensation for losses incurred by
accident victims without regard to fault or negligence, to reduce the
burden on the courts and to provide substantial premium savings to New
York motorists (see Governor's Mem. approving L. 1973, ch. 13, 1973
McKinney's Session Laws of N.Y., at 2335).
In 1977, the Superintendent
first adopted regulations establishing time frames in which to submit
forms and notices pertaining to no-fault claims. Those regulations,
adopted as Regulation 68 were codified at 11 NYCRR part 65.
Between 1992 and 2001,
reports of suspected automobile insurance fraud increased by 275%, the
bulk of the increase occurring in no-fault insurance fraud. Reports of
no-fault fraud rose from 489 cases in 1992 to 9,191 in 2000, a rise of
more than 1700%. In 1999, the Superintendent established a No-Fault Unit
within the Frauds Bureau to focus specifically on no-fault fraud and
abuse. By one estimate, the combined effect of no-fault insurance fraud
has been an increase of over $100 per year in annual insurance premium
costs for the average
principal cause of this “concededly rampant abuse” (Medical
Society of the State of New York v. Serio,
100 N.Y.2d 854 ) was the proliferation of layman
corporations that flouted the prohibitions against
laymen ownership and control of professional corporations found in N.Y.
Business Corporation Law' §§ 1507, 1508 and N.Y. Education Law § 6507(4)(c).
entities, passing facially as legitimately licensed professional
corporations, were known derisively as “Doc-in-the-box” operations.
The professionals whose names appeared on the corporate licenses were in
truth, at best, nothing more than salaried employees. These schemes
enabled unscrupulous laymen to reap enormous profits from the operation of
“Medical Mills” which “treated” patients pursuant to predetermined
scripts, without regard to their medical condition, and which churned out
blizzards of bills for unnecessary treatments, goods and services.
1999, in an effort to combat this widespread abuse, the Superintendent
proposed an amended Regulation 68. The Medical Society of the State of
second promulgation by the Superintendent in turn gave rise to Medical
Society II. (Medical Society
of the State of
new Regulations, dealing directly with the problem of laymen controlled
professional corporations provided at
11 NYCRR § 65- 3.16(a)(12). that "a provider of health care
services is not eligible for reimbursement under section 5102(a)(1) of the
Insurance Law if the provider fails to meet any applicable New York State
or local licensing requirement....", a reference of course to to N.Y.
Business Corporation Law' §§ 1507, 1508 and N.Y. Education Law § 6507(4)(c). 
the course of these events, while the old regulations were still in
control, a sweeping claim by State Farm that numerous entities ostensibly
owned by Mallela were in fact fraudulently owned and operated laymen
entities was dismissed by J. Sifton in Federal Court. State
Farm Mutual Automobile Insurance Company v. Mallela, 175
F. Supp2d 401 (EDNY 2001) ). As it proved this case would not rest and
eventually provided the Court of Appeals of the State of
the re-promulgation of the new regulations a second Mallela case was
commenced,. (State Farm Mutual
Automobile Insurance Company v. Mallela, (Not Reported in
F.Supp.2d, 2002 WL 31946762 (E.D.N.Y.) (Mallela II)).
though the new regulations now clearly provided at 11 NYCRR § 65-
3.16(a)(12) that "a provider of health care services is not eligible
for reimbursement under section 5102(a)(1) of the Insurance Law if the
provider fails to meet any applicable New York State or local licensing
requirement....", Judge Sifton still declined to alter his previous
ruling significantly. He noted "I am reluctant to undermine the
legislative goal of speedy payment in order to permit insurers such as
plaintiff to avoid paying licensed medical service providers for medically
necessary services provided to insured individuals by licensed
this point the state of the law in Federal Courts was largely at odds with
State Court and Arbitration decisions. For instance in In the Matter of
JRWB Diagnostic against The Travelers Insurance Company, Arbitrator
Mellis determined that JRWB, a large radiological entity, was in fact
controlled by a unlicensed laymen and inelligible to recover No-Fault
citing North Bronx Medical, P.C. a/a/o Paulette Cleckley and Allstate
Insurance Company, NF2988 .
Court of Appeals of the State of New York had no such reluctance however
when responding affirmatively to the certified question posited by the
Second Circuit, that is "whether 'A medical corporation that was
fraudulently incorporated under N.Y. Business Corporation Law' §§ 1507, 1508 and N.Y. Education Law § 6507(4)(c) [is] entitled to be
reimbursed by insurers, under New York Insurance Law §§ 5101 et seq and
its implementing regulations, for medical services rendered by licensed
Court wrote “We accepted the certification and now answer that such
corporations are not entitled to reimbursement." State Farm
Automobile Ins. Co. v. Robert Mallela 4
N.Y.3d 313, 320, 794 N.Y.S.2d 700, 827 N.E.2d 758.
is important to note at this point that the crucial issue under
consideration all along was not merely whether a professional corporation
was facially in compliance with
its licensing requirements, but whether in fact it was truly
controlled by a professional.
Thus, the legislature
requires professional health service corporations to be owned and
controlled only by those who are licensed to practice medicine, and,
in order to obtain the requisite certificate of authority to practice
medicine, a professional service corporation must certify that each of its
directors, officers, and shareholders is licensed to practice medicine. See
N.Y.Bus.Corp.Law §§ 1503, 1507, 1508; Educ.Law § 6507(4)(c).
Farm Mutual Automobile Insurance Company v. Mallela,
175 F. Supp2d 401 [EDNY 2001] )
discussed below, with the Malella III decision the Court of Appeals set
the stage for the delivery of justice
and reckoning to the countless
layman controlled “professional corporations” whose unscrupulous,
greedy and dangerous activities ravaged and permeated the entirety of the
New York No-fault system.
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professional corporations that are in fact owned and controlled by laymen
for the purpose of lining their own pockets at
the expense of their “patients” wellbeing, are
commonly referred to as “Doc in the Box” operations and “Medical
Mills”. The term Layman Scripted Entity is perhaps a more accurate
label, recognizing the eminence of the layman in control of the entity,
and the principal money making scheme by which all patients are subjected
to a regimen of expensive treatment determined by a pre-existing plan or “script”
without regard to the patients condition.
typical “script” that patients are subjected to consists of initial
examinations by a physician followed by extensive and concurrent physical
therapy, acupuncture and chiropractic treatment. Overpriced durable
medical equipment is prescribed immediately and may include steep bills
for “custom fitted” orthotics and inflated TENS units. Psychological
treatment is arranged, frequently through a fictitious “self referral”
process. The psychological treatment commences billing with an
evaluation, coupled with many hours of specious “testing”, followed by
psychotherapy sessions or biofeedback.
Dental services are common with an emphasis on exotic “TMJ”
treatments, billing for
multiple x-rays and expensive custom fitted orthotics. Multiple MRIs are
prescribed either immediately or after several weeks and usually held on
separate days to maximize billing. In addition electrodiagnostic testing
consisting of NCV and needle EMG procedures generally occur at about the
four week mark and are
generally the most expensive procedures billed
common abuses are “upcoding” wherein a service is billed as if it were
much more expensive procedure, 
and “unbundling” wherein components of a single procedure are
impermissibly broken out and
billed separately. 
It is additionally common for layman scripted entities to bill for
services that were never rendered and for patients to sign their name to
sign-in sheets many times at once resulting in so called “shadow
It is typical for some $20,000
in billing to be submitted for each patient obtained by a layman scripted
to the revenue streams at the heart of these schemes are payments made to
obtain patients. These
payments may be made to the patients themselves, but are most commonly
made to runners or cappers who
obtain, present or refer the patients along with a police report (thereby
establishing there is viable insurance coverage) and who themselves may
stage or cause accidents. Runners, cappers and steerer typically receive
$1,500 to $2,500 per patient referred. 
out the picture is the synergy between the illegal corporation and the
motor vehicle liability system. Working hand in hand with unscrupulous
attorneys, layman controlled entities accept payments that are ostensibly
for patient ‘records’ but which are in fact received for the benefit
of referring patients to the attorneys. The motor vehicle liability system
is also, at the end of the day, the principal reason for the continued
participation of patients in the scripted medical treatment. The
expectation is that if they continue to treat they will eventually receive
a profitable settlement of their liability case. 
exact manner in which layman scripted entities are configured and the
associated schemes devised vary in nature and scope, limited only by the
ingenuity, industry or intelligence of the criminals involved. All
schemes, however, share two common purposes; maximizing
the number and size of the revenue streams flowing into the entity, and
sweeping all entity profits to the controlling layman. Indeed it may be
said that the bright line test of whether an entity is illegally operated
in contravention of Business Corporation Law § 1507, § 1508 is whether
the professional benefits from the profits of the corporation.
prototypical layman scripted entity is
the stand-alone “multi-disciplined provider” operating on the license
of a single physician and in co-habitation with physical therapy,
chiropractic and acupuncture practices. A small billing company handling
all the bills may be owned by the laymen in true control of the operation,
or it may be that the chiropractor himself is in fact the one pulling the
strings. At the end of the day
the revenue from all of the operations under the common roof are pocketed
by the layman in charge.
entity of this sort will typically employ the services of various medical
service vendors that ostensibly provide dental, radiological,
psychological and nerve testing services. These vendors themselves are
typically laymen controlled entities and may be quite small, or in the
case of the radiological entities enormous.
are four common financial inducements for using these vendors. There may
be a direct cash kickback or the vendor may pay “rent” for a room at
the layman scripted entity to conduct its services. In certain instances
the vendor may strike an arrangement which permits an entity professional
to bill for the technical component the vendor services. Finally there may
in fact be an ownership interest in the vendor by the layman scripted
entity and its controller.
A larger scaled layman scripted entity may control both the multi-disciplined provider and the associated vendor services, and there have been instances of jumbo enterprises where scores of professional corporations managed by dozen of billing companies fed into a single entity at the pinnacle. 
are common telltales of the laymen scripted entity are found in the
medical records, the documents describing with the relationship between
the professional corporation and management or billing companies, and the
associated financial records.
a treatment script is being used by an entity, and if so its precise
nature, will invariably be quickly revealed by an examination of several
claimant files. The nature of
the treatment provided, the timing of the diagnostic tests prescribed, the
template and boilerplate reports, diagnosis, prognosis and symptomology
will be unique from provider to provider, but nearly identical from
patient to patient within a given provider. Examinations Under Oath of a
number of claimants from the same provider will often yield similar
results, but can be inexact for these purposes given the variations in the
witnesses ability to recall and relate what occurred to them.
identification of such a script is a near conclusory indication of a
laymen scripted entity since it demonstrates the complete lack of any
meaningful medical analysis or decision making occurring in connection
with patient care at the facility.
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part of the process of insuring that the laymen is in complete control of
the professional corporation, elaborate and exorbitant management and
leasing agreements typically exist between the professional corporation
and the management or billing company.
These may be wildly disproportionate to fair market values and
contain clauses, like liquidated damages clauses that handcuff the
professional and grant unfettered control, especially over financial
matters, to the layman. Certain crucial terms of the contract, including
the purported compensation to be paid to the “management company” may
be left blank. If the terms are provided for, upon discovery of the entity
finances, it is typically found that what is in fact occurring at the
entity is inconsistent with what the agreements ostensibly called for.
variances between what contracts may calls for and what is actually
happening will necessarily occur because of the true nature of the core
financial scheme. Since the entities exist for the express purpose of
sweeping all profits to the controlling layman, the professional involved
is in fact nothing more than a salaried employee receiving a monthly
stipend, or an independent contractor paid a per-procedure fee. When the
entity thrives the stipend or fee to the professional will not increase,
but increasingly large amounts of money will be pocketed by the laymen. If
the tax returns of the professional corporation are inspected, or credible
testimony of a principal is obtained, it should be expected that these
will show all of the businesses profit being swept away to the management
company, and amounts claimed to have been paid as management and leasing
fees increasing or decreasing in direct proportion to the gross revenues
of the professional corporation.
pegging of the management fees to the gross revenues of the professional
corporation is of course of primary importance to the laymen controlling
the professional corporation. As the professional corporation thrives, so
he expects to thrive. Such a direct linkage to gross revenues, however, is
very definition of fee splitting. Accordingly
demonstrating this point is often at the heart of any successful effort to
prove the illegal nature of the professional corporation.
professional corporation will change “owners” repeatedly, but since the
professional figurehead of the professional corporation has no financial
interest in the entity, the transfer of ownership will occur for no
physician will exert little practical control over the professional
corporation, he will not hire or fire employees, the accountants who
prepared “his” corporations tax returns and the attorneys who collect
“his” bills will be retained without any input from him whatsoever.
professional will typically have no knowledge of how much money the
corporation is grossing or netting, and have
no involvement in the financial process other than collect his check and
possible endorse checks out of the professional corporation account into the
management company account.
use of name stamps will typically be rampant and unfettered, the physician
may not know how many exist, who possesses them, what purposes they are put
to use for or how they came into existence.
an effort to disrupt facially obvious fee splitting, the laymen will seek to
divert revenues before they reach the professional corporation checking
accounts. An inspection of cancelled checks returned to the insurer may show
that they have been cashed at casinos and check cashing stores.
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decision of Mallela III sets the stage for insurers to prove the illegality
of laymen scripted entities in an unprecedented fashion. Several cases have
been decided in insurer’s favor on the heels of Mallela, and an
examination of these cases demonstrates the different methods by which a
favorable Mallela decision may be obtained.
Briefly, and as outlined in more detail below, an insurer may expect to prove the illegality of a Professional Corporation by leveraging SIU intelligence, by following up on law enforcement activities and by using their own attorneys discovery and subpoena powers in conjunction with declaratory judgment actions.
evident from the number of press releases annotated in the foot notes of
this document, law enforcement arrests and prosecutions of fraudulent
no-fault providers occur at a steady clip. Prosecutions are routinely
brought by the State Attorney Generals Office, the United States
Attorney’s Office and local District Attorneys offices in conjunction with
local, state and federal police forces.
case where the prosecution ends in a plea or conviction, the fact of the
conviction, in conjunction with the allocutions of the defendants, may
provide irrefutable proof of the fraudulent scheme of the professional
corporation sufficient to resolve the issue in associated civil cases.
A leading example of a case where litigation along these lines currently is currently being contested is Metroscan Imaging PC v. Geico Ins. Co. 2005 WL 1384369 (N.Y.City Civ.Ct.), 2005 N.Y. Slip Op. 25228. In Metroscan the insurer consolidated 60 pending actions and sought to follow on the plea allocutions of a layman in control of this large radiological entity. Noting that the insurer had “articulated a "founded belief" that the health providers, all incorporated by [the same Doctor] and all subject to a management agreement with non-licensed professionals, have violated both New York's business corporation and education laws” the court consolidated the cases for purposes of hearing to determine whether in fact the professional corporations were in violation of the New York Business Corporation and Education Laws.
evidentiary considerations attend this approach since it relies on out of
court statements from different actions to establish the desired result in
the current litigation. Complications are injected by this fact, and by the
fact that there will necessarily be at least two principal criminal actors,
the Doctor and the true owner. As the state of the law currently stands, the
statements of one will not necessarily be
admissible against the other.
Doctor’s Plea of Guilty
in his criminal allocution, the Doctor admits that he was not in control of
the enterprise his statements will be admissible against himself and, by
extension, the entity on at least two grounds, and should be dispositive on
the question of the entities standing to recover reimburstment under the
As a party declarant,
the admissibility of the Doctor’s own statements are subject to a
well settled hearsay exception (People
v. Collins, 301 A.D.2d 452, 755 N.Y.S.2d 365 
(defendant's statement to a third party properly admitted under the party
admission exception to the hearsay rule as
"inconsistent with defendant's position at trial") People
v. Auricchio, 141 A.D.2d 552, 529 N.Y.S.2d 163  ).
Moreover, the declaration against penal interest exception to the hearsay
rule has been accepted in
If the Doctor has admitted
the illegal structure of the corporation, for instance by acknowledging that
medical treatment and services were routinely performed without his
knowledge or direction, or that the profits of the company were going to
someone other than himself, the statements will not merely be admissible but
should also be directly dispositive on the question of the entity’s
corporate structure on collaterall estopell grounds. Under this construct;
the Doctor will be barred in the civil action from relitigating an issue he
has admitted to in the criminal proceeding.
(Fisch on NY Evidence [2 ed] Sec. 803; Ando
v. Woodberry, 8 N.Y.2d 165, 167 [203 N.Y.S.2d 74, 168
N.E.2d 520] ). “While defendant may not relitigate the issue of his guilt,
he may offer proof relevant to character of crime committed”. (Matter
of Levy, 37 N.Y.2d 279 [372 N.Y.S.2d 41, 333 N.E.2d 350]
If however, the Doctor has merely plead or allocated to crimes which do not directly implicate the corporate structure of the entity, (perhaps simple larceny or insurance fraud, depending on the circumstances of his allocution), the situation may be different. His statements, while still admissible, might now prove irrelevant to the question of the entities corporate structure. In such a circumstance, the attorney should be prepared to prove the illegal structure by other means.
Layman’s Guilty Plea
If it is the layman who has plead guilty to criminal activities concerning the entity, a different set of legal considerations arise. As noted, the declaration against penal interest exception to the hearsay rule has been accepted in New York since 1970 [See, People v. Brown, 26 N.Y.2d 88 , cert. denied 480 U.S. 948].
Criminal actions however, the current state of the law generally prohibits out of court statements by one person being used against
another. In Crawford v.
In USDNY Indictment 02-Cr-1586/89, a case involving a MRI facilities "manager" who was convicted of tax evasion and bribery, the government wrote the following instructive paragrah in support of its application to use the "managers" plea allocution against a co-conspirator.
Defendant's] allocution was given in open court, under oath, with the
assistance of counsel and it subjected [the Defendant] to the risk of a
substantial prison term. The portions of the statements that the Government
seeks to introduce are inculpatory of the declarant, and no not minimize the
declarant’s conduct or shift blame to the defendants. (See Williamson v
United States 512 US 594, 605 (1994)(“the very fact that a statement
is genuinely self-inculpatory is itself one of the ‘particularized
guarantees of trustworthiness’ that makes a statement admissible under the
confrontation Clause”). In addition, [the Judge], who accepted [the
Defendant's] plea, had the opportunity to question the Defendant and
to judge his demeanor and credibility. See, e.g. Willimas 927 F.2d at 98-99
(noting that district judge, who conducted the allocution had “intimate
knowledge of the allocutions’ trustworthiness and their lack of
susceptibility to challenge”). Accordingly, [the Defendant's statements]
are trustworthy and should be admitted as statements against penal
If such an argument
is being made the attorney seeking the admission of the statement should be
prepared to demonstrate as a
threshold matter to establish that
If such an argument is being made the attorney seeking the admission of the statement should be prepared to demonstrate as a threshold matter to establish that1) the declarant is unavailable as a witness at trial, 2) when the statement was made the declarant was aware that it was adverse to his penal interest, 3) the declarant had competent knowledge of the facts underlying the statement, and 4) supporting circumstances independent of the statement itself are present to attest to its trustworthiness and reliability. Kelleher v. F.M.E. Auto Leasing Corp. 192 A.D.2d 581, 596 N.Y.S.2d 136 ( App. Div. 2nd Dept 1993 ). Quintanilla v. Harchack 183 Misc.2d 569, 705 N.Y.S.2d 836, 2000 N.Y. Slip Op. 20111  )
The most straightforward rationale for admissibility of a laymen's statement against a Professional Corporation is that the laymen, in fact, is the Professional Corporation. Since the purpose of using a layman's admission is to prove that he unlawfully controlled the corporation, the self same statement should simultaneously demonstrate that he is the alter-ego of the corporation, making the statement admissible against the corporation. In other words, the statement is admissable against the Professional Corporation because the declarant is the Professional Corporation.
most instructive discussion of this argument is found in In
re Adler, Coleman Clearing Corp.
"A reading of the Indictment, the Plea Agreement, the Guilty Plea, the Gurian Deposition and various other documents on the record before it on the instant motion persuades the Court that the Trustee has sufficiently demonstrated circumstances satisfying the Babitt standards to establish Gurian's exercise of domination and control over the Bahamian Entities. "
New York common law rule concerning alter ego status is similar, and was set
out by the Appellate Division of the Second Department in 1959 in Geletucha v. 222 Delaware Corp.
A.D.2d 315, 182 N.Y.S.2d 893.
statement of the general rule is contained in Fletcher's Cyclopedia
Corporations, Vol. 1, Sec. 43, pp. 157-160, as follows:
'Whether one is a mere agency or instrumentality or they are
identical, is a question of fact to be proved by competent evidence * * *.
This question of fact depends on many circumstances
overcoming or failing to overcome the indicia of separate entities, sameness
of members, officers and objects, and the absence of distinct interests,
being indicia of agency or identity, while differences in officers, objects
or conduct are indicia of separate recognizable entities * * *. Operating
departmental or branch corporations, and sales corporations, afford
illustrations of corporations disregarded on the facts.'
may be made that where, as is commonly the case, the layman has set
himself up as president of the culpable management company, that
an admission made by a party's
agent will be admissible against that party if it is made within the scope
of his agent's or servant's authority. Brusca
v. El Al Israel Airlines,
75 A.D.2d 798, 427
N.Y.S.2d 505 (App. Div. 2nd Dept. 1980). Spett
v. President Monroe Building and Manufacturing Corp.,
19 N.Y.2d 203, 278 N.Y.S.2d 826 (1967).
As the Court of Appeals noted in Spett , “Where an agent's
responsibilities include making statements on his principal's behalf, the
agent's statements within scope of his authority are receivable against the
Since the management company
routinely makes statements on behalf of the professional corporation
(submitting NF-3’s, responding to verification requests, initiating suits)
it should be expected that the statements of its principal will be
admissible against the professional corporation pursuant to the ‘speaking agent’ exception to the hearsay rule. A
frequently cited case on this point is Johnson v. Hallam Enterprises Ltd.208 A.D.2d
1110, 617 N.Y.S.2d 405 (App. Div. 3rd Dept. 1994) where the court
“As defendant's president,
treasurer and the only person apparently vested with complete managerial
responsibility to run defendant's day-to-day operations, Hallam possessed
the requisite authority to speak on behalf of the corporation (see, Spett v President Monro Bldg. & Mfg. Corp., 19
N.Y.2d 203, 206, 278 N.Y.S.2d 826; Geletucha
v. 222 Delaware Corp.,
7 A.D.2d 315, 317, 182 N.Y.S.2d 893) and therefore his declaration of
liability was properly received as an admission binding upon it under this
State's current "speaking agent" exception to the hearsay rule (see,
Loschiavo v. Port Auth. of N.Y. & N.J., 58 N.Y.2d
1040, 462 N.Y.S.2d 440, 448 N.E.2d 1351; Nordhauser
In at least two recent
instances Courts have made determinations of illegal corporate structures
based upon pre-suit examinations under oath. In Multiquest, PLLC v. Allstate Ins. Co. ---
N.Y.S.2d ----, 2005 WL 2085966 (Civ. Ct., Queens Cty.), 2005 N.Y. Slip Op.
25356, Judge Butler credited the EUO testimony of a psychologist who was
listed as a corporate owner in Multiquest’s incorporation papers, but
denied at her EUO ever having consented to participate in the Multiquest
venture. Of particular note was the “non-response” raised by Plaintiff
to these allegations by the defendant.
in reply to defendant’s cross-motion, merely asserts that defendant’s
denials were untimely. With respect to defendant’s allegations of fraud
and misconduct, plaintiff merely alleges that Ms. Clarke’s testimony is
not credible as it was provided pursuant to an agreement wherein defendant
agreed not to commence an action against Ms. Clarke in exchange for such
testimony. Plaintiff, however, fails to submit any documentary proof
rebutting defendant’s assertions of fraud or misconduct. Additionally,
plaintiff fails to submit an affidavit from someone with personal knowledge
of the facts disputing such allegations by defendant.
of the attractive aspects of having competent proof of an entities illegal
structure is the anticipation that, where the proof is true, it will be
difficult or impossible to contradict, there being no one to do so. Judge
Butler concluded the following,
results were reached by Judge Arlen Bluth in
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It is likely that in many instances an attorney may be
required to combine law enforcement and pre suit intelligence with court
ordered discovery obtained during the course of litigation for the best
result. A good example of a litigation which fit this bill, occurring in the
AAA setting, is In the Matter of the Arbitration between JRWB Diagnostic
Imaging PC / Catherine Voley and The Travelers Insurance Company et al, AAA
Assessment 17 991 26640 02
case followed the Kings County District Attorney “Wellcare”
investigation that shut down a number of inter-related fraudulent entities
During the course of the summer of 2003 a number of lower arbitrator
decisions found an associated radiological entitry, JRWB Diagnostices, to be
inelligible for reimbursement premised
upon statements to SIU investigators, and a guilty plea to insurance fraud
by the management company owner. Ultimately twelve separate arbitrations
were combined and the principal of JRWB was obligated to testify and to
produce banking records and the management agreement for JRWB. The testimony
demonstrated that the Doctor appeared to be fee splitting with the layman
owners, receiving a nominal $50 fee per scan that was read. The banking
records and management agreement appeared to indicate
that JRWB served as a conduit to sweep monies received from insurers to the
layman controlled management company. Arbitrator Melis determined that JRWB
was inelligible to for reimbursement under
An examination of the all of the foregoing cases indicates that the template for establishing an entities illegal corporate structure combines testimony of the principals along with banking, financial and management and leasing agreements. A discussion of the arguments to obtain those items of discovery, therefore, follows.
Mallela III, clearly the inquiry has acquired a heightened status and sense
of urgency, and should subject itself to the normal inquiry of relevancy
pursuant to CPLR
§3102(a) which provides that there
shall be "full disclosure of all matter material and necessary in the
prosecution or defense of an action, regardless of the burden of
proof." It is well settled
that the words "material and necessary" should be interpreted
liberally to "require disclosure, upon request, of any facts bearing on
the controversy which will assist preparation for trial by sharpening the
issues and reducing delay and prolixity. The test to determine if the
information sought is material and necessary is one of usefulness and
reason." Allen v.
Crowell-Collier Publishing Co., 21 N.Y.2d 403, 406-407 (1969); U.S.
Ice Cream Corp. v. Carvel Corp., 190 A.D.2d 788, 593 N.Y.S.2d 861 (App.
Div. 2d Dep't 1993). "[I]f there is any possibility that the
information was sought in good faith for possible use as evidence-in-chief
or in rebuttal or for cross-examination, it should be considered evidence
material ... in the prosecution or defense.” In re Comstock's Will.,
21 A.D.2d 843, 844, 250 N.Y.S.2d 753, 755 (
App. Div. 4th Dept 1964
Depositions and Provider EUOs
The road for the insurer will likely be easiest when it pursues a
provider EUO, specifically authorized by 11 N.Y.C.R.R 65-3 et seq.,
to verify whether a provider is properly licensed and accordingly eligible
for reimbursement under the No-Fault law. As there has not yet been any
denial, the insurer will not barrel into the frequent crimping of the
discovery process imposed by Civil Court Judges who have settled into the
practice of limiting the scope of depositions to the substance of the
denial. Examples of these sorts of rulings are found in Socrates Psychological Services, P.C. v. Progressive
Cas. Ins. Co.,
7 Misc.3d 642, 791 N.Y.S.2d 394 N.Y.City Civ.Ct.,2005
and All-County Medical & Diagnostic P.C. v.
Progressive Cas. Ins. Co. 8
Misc.3d 616, 795 N.Y.S.2d 434
N.Y.Dist.Ct.,2005. There is already one
upshot of the reality of the mind set of the Judges in
Another typical telltale in the
possession of the insurer are its own cancelled checks. If it can be shown
that they are being diverted out of the revenue stream immediately, for
example by being cashed at Casino’s or Check Cashing stores, that fact is
strong proof of fraudulent behavior.
All this is not to say that all Judges
will ignore the normal precepts of Allen v. Crowell-Collier
and Valley Physical
Medicine and Rehabilitation P.C. v.
Finally the attorney should be
mindful that a non-party deposition of the layman in actual control of the
professional corporation may prove extremely fruitful. There is little
direct authority on this point, however an excellent authority is Universal Acupuncture Pain Services,
P.C. v. State Farm Mut. Auto. Ins. Co. Not Reported in F.Supp.2d, 2002 WL
31309232 (S.D.N.Y.) In Universal, J. Sheindlin, dealing directly with
a case alleging illegal corporate structure decided several
corporate No-Fault discovery issues. In the course of his decision J.
the continuation of deposition
of a third-party enity, ordered the plaintiff and third-party defendant
entities to tax documents and a witness who could testify about them, and
ordered a non-party witness to produce federal income tax returns and forms,
and check ledgers.
Discovery of Tax Records
The disclosure of
tax returns is generally disfavored due to their private and confidential
nature. Walter Karl, Inc. v.
Wood, 161 A.D.2d 704, 705, 555 N.Y.S.2d 840, 841 (2d
frequently recognized, however, that where a claim of fraud is central to a
defense or action, special circumstances exist which may warrant production.
Where, for example, an insurance fraud scheme has been
alleged, and circumstances give riste to the inference of insurance
fraud, courts have been willing to order the production of tax returns. Four
Aces Jewelry Corp. v. Smith, 256 A.D.2d 42, 680 N.Y.S.2d
539, 540 (1st
Discovery of Banking Records
Banking records, generally statements and copies of cancelled checks,
tending to show where and in what amounts money was coming from, and where
and in what amounts it was going are frequently obtained from banks by
bank records are not afforded the same protection as tax records. In United
States v. Miller, 425 U.S. 435, 96 S.Ct. 1619, 48 L.E.2d 712 (1976) the
Supreme Court ruled that information contained in bank records, deposit
slips, cancelled checks and financial statements is neither confidential or
private. The Court ruled that such documents
are “negotiable instruments” used in commercial transactions, exempt
from claims for privacy or confidentiality. Similarly, the Court ruled that
deposit slips, canceled checks and signature cards contain information which
is voluntarily conveyed by the customer to the banks and exposed to the
bank’s employees in the ordinary course of business thereby stripping it
of confidentiality or privacy protection.
it has been held that when a bank customer chooses to open and
maintain an account at a financial institution, he inherently assumes the
risk that the information contained in his financial records will be
conveyed to a third party. This proposition has been extended so far so as
to say that such records
“are the business records of the banks and appellant can assert neither
ownership nor possession." Shapiro v. Chase Manhattan Bank 53
A.D.2d 542 (1st
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professional service corporation may issue shares only to individuals
who are authorized by law to practice in this state a profession which
such corporation is authorized to practice" and prohibits
shareholders of professional service corporations from transferring the
voting power of their shares to any person who is not authorized by law
to practice the profession that the professional service corporation is
authorized to practice. N.Y.Bus.Corp.Law § 1507.
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 in such corporation." N.Y.Bus.Corp.Law § 1508.
The department shall:c.
(i) Issue a certificate of authority to a qualified professional service
corporation being organized under section fifteen hundred three of the
business corporation law or to a university faculty practice corporation
being organized under section fourteen hundred twelve of the
not-for-profit corporation law on payment of a fee of ninety dollars,
(ii) require such corporations to file a certified copy of each
certificate of incorporation and amendment thereto within thirty days
after the filing of such certificate or amendment on payment of a fee of
twenty dollars, (iii) require such corporations to file a triennial
statement required by section fifteen hundred fourteen of the business
corporation law on payment of a fee of one hundred five dollars.
N.Y. Education Law §
"[p]rofessionals are subject to stricter State supervision and
licensing requirements, in order to maintain standards of responsibility
for the protection of the public." (Manganaro
v. Tully 88 A.D.2d 206, 209, 453 N.Y.S.2d 889 [3rd Dept 1982]
The Superintendent also gave its arbitrators power to pursue this issue
in all events, providing that they may unilaterally issue subpoenas and
consider “any issue the arbitrator deems relevant”. 11 NYCRRR
Arbitrator Mellis’ decision was affirmed by a Master Arbitrator and
ultimately affirmed in Supreme Court New York County in an Article 75
proceeding. In the Matter of JRWB Diagnostic Imaging P.C. a/a/o
Nadian Peterson against American Transit Insurance Company, et al.
No. 108679/04 (Sup. Ct. N.Y. Cty., J. Bransten, December 17th,
Arbitrator Nathan Ritzer in the case of North Bronx Medical, P.C.
a/a/o Paulette Cleckley and Allstate Insurance Company, NF2988, N.Y.
No-Fault/Sum Arb. Rep. Vol 26, No. 3, 2000 stated: “Section
65.15(o)(1)(vi) of the No-Fault Regulation…does as a matter of law
mandate that No-Fault arbitrators deny payment to an unlicensed
provider-be it corporate or individual…Payment to only duly certified
medical corporations is clearly inferred from the terminology of the
entire section…To find otherwise would serve to condone and reward a
practice that the legislature has condemned.
It would permit non-professionals to organize a medical
corporation, employ licensed physicians and profit by the sharing of
fees. This obligation would
often result in the lowering of the quality of medical care,
overcharging, and the rendering of unnecessary services, which Judge
Sifton himself recognized as possibilities in his decision.”
Subcutaneous Novocain injections billed as if they were epidural
procedures is a common example, as is the practice of providing 1 to 15
minutes of psychotherapy but billing for 50. (See for example the New
York State Attorney General press release at http://www.oag.state.ny.us/press/2003/dec/dec12a_03.html.
By the Worker’s Compensation Fee Schedule ground rules
See for example the New York State Insurance Department press
release concerning the Queens District Attorney
Crash Course” indictments. http://www.ins.state.ny.us/p0409221.htm
See for example the Statement by August
D'Aureli, Supervising Investigator, Insurance Frauds Bureau, New York
State Insurance Department, before the Senate Standing Committee on
See for example the Queens District Attorney “Fraud Factory”
indictment press release. http://www.queensda.org/Press%20Releases/2004%20Press%20Releases/04-April/04-15-2004.htm
For a discussion of this prohibition against self referral in any
setting, see Stand-Up MRI of the
The entities shut down by the Brooklyn DA’s “Wellcare”
investigation were styled in this fashion. Besides the typical
multidiscipline provider, the brothers running the scheme also owned the
radiological technical company “Ocean Diagnostics” which was alleged
to controlled the professional radiological entity.
NYPD’s Operation Gateway (Operation) was a large scale, long-term
investigation that involved a Brooklyn-based organization known as
Parallel Management Group (Parallel). A detailed account of this
investigation is provide by the
by August D'Aureli, Supervising Investigator, Insurance Frauds Bureau,
New York State Insurance Department, before the Senate Standing
Committee on Insurance http://www.ins.state.ny.us/spch0209.htm
Necula v Glass 231 A.D.2d 457, 647 N.Y.S.2d 501, 1 AD 1996. [C]ontracts
petitioner entered into with management companies, under which the
companies were to provide petitioner with facilities, supplies,
equipment and nonphysician staff necessary to operate his radiology
practice, and petitioner was to pay the companies a fixed percentage of
his receipts for billing services and fixed dollar amount for each
procedure performed. This was illegal fee splitting under 8 NYCRR
29.1(b)(4) since petitioner’s payments to the companies were a
percentage of or otherwise dependent upon his income or receipts.
Ohio v. Roberts,
See also In re M/B Child,
2005 WL 1388846, *3, 8 Misc.3d 1001(A), 1001(A), 2005 N.Y. Slip Op.
50884(U), 50884(U) (N.Y.Fam.Ct. Apr 13, 2005)
See also, Fortune Medical v Allstate Ins. Co No. 3176/04 (Dist.
Ct., Nassau County, April 6, 2005); Caprice Medial P.C. v Allstate
Ins. Co. No. 045532/03 (N.Y. City Civ. Ct. May 26, 2005).
Arbitrator Mellis made a strong link between fee splitting and illegal
corporate structure, expressing a bright line rule; “where
an unlicensed individual has more of an interest than the professional
in the profitability and success of the medical practice, the
arrangement is clearly illegal. In
Hartman v. Bell, 137 AD2d 585, 524 NYS2d 477 (2nd
Dept., 1988), the Court found that an agreement to pay 40% of the gross
income, or a minimum of $140,000 from the practice of medicine
constituted fee-splitting, and denied recovery on that basis.
In Sachs v. Saloshin, 138 AD2d 586, 526 NYS2d 168 (2nd
Dept. 1988), the Court held that a dentist violated the Education Law by
remitting 20% of his gross revenues to plaintiff in consideration for
his use and occupancy of a fully-equipped dental facility, and also
denied any recovery for that reason.”
Arbitrator Mellis’ decision was affirmed by a Master Arbitrator and
ultimately affirmed in Supreme Court New York County in an Article 75
proceeding. In the Matter of JRWB Diagnostic Imaging P.C. a/a/o
Nadian Peterson against American Transit Insurance Company, et al.
No. 108679/04 (Sup. Ct. N.Y. Cty., J. Bransten, December 17th,
The Allen case makes clear that disclosure
extends to all relevant information calculated to lead to relevant
evidence, not just information that can be used as evidence in chief. See
CPLR 3101, Siegel, Practice Commentaries McKinney's Cons. Laws of NY,
Book 7B, CPLR c3101:7, at 18, citing West v.
Ocean Diagnostic vs.
also Dore v Allstate Indem.