PROVING THE UNLAWFUL CORPORATE STRUCTURE OF A PROFESSIONAL CORPORATION
INTRODUCTION 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%. . 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 New York motorist.
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.
Pete Legal and Legislative History …………………………………............ p.3
The Nature of the Layman Scripted Entity ………………………….. p. 7
Telltales ………………………………………………………………… p. 9
Following on Law Enforcement ……………………………………….p. 12
Leveraging Intelligence ………………………………………………...p. 16
LEGAL AND LEGISLATIVE HISTORY
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 New York motorist.
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 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.
In 1999, in an effort to combat this widespread abuse, the Superintendent proposed an amended Regulation 68. The Medical Society of the State of New York successfully challenged these regulations for failure to substantially comply with the State Administrative Procedure Act Matter of Medical Socy. of State of N.Y. v. Levin, 185 Misc.2d 536, 712 N.Y.S.2d 745 [Sup.Ct., N.Y. County 2000 ], affd. 280 A.D.2d 309, 723 N.Y.S.2d 133 (App. Div. 1st Dept., 2001] [Medical Society I] ). While the appeal was pending, the Superintendent re-initiated the rulemaking process and promulgated revised Regulation 68 (repealing and replacing 11 NYCRR part 65).
This second promulgation by the Superintendent in turn gave rise to Medical Society II. (Medical Society of the State of New York v. Serio, 100 N.Y.2d 854 (2003)) Therein the Court of Appeals unanimously held that Regulation 68, although manifestly altering the way claims are processed, was well within the lawful authority of the Superintendent of Insurance to issue and affirmed the retroactive implementation of these regulations to April of 2002.
These 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). 
During 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 New York the platform necessary to put the issue to rest.
Following 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)).
Even 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 physicians."
At 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 payments,, citing North Bronx Medical, P.C. a/a/o Paulette Cleckley and Allstate Insurance Company, NF2988 .
The 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 medical practitioners.'
The 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.
It 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). State Farm Mutual Automobile Insurance Company v. Mallela, 175 F. Supp2d 401 [EDNY 2001] )
As 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.
THE NATURE OF THE LAYMAN SCRIPTED ENTITY
Purported 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.
A 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 for.
Other 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 patients”.  It is typical for some $20,000 in billing to be submitted for each patient obtained by a layman scripted entity.
Indispensable 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. 
Rounding 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. 
The 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.
The 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.
An 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.
There 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. 
There 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.
Whether 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.
The 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.
As 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.
Sharp 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.
This 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 the 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.
The 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 consideration.
The 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.
The 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.
The 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.
In 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.
FOLLOWING ON MALLELA: PROVING ILLEGAL CORPORATE STRUCTURE.
The 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.
FOLLOWING ON LAW ENFORCEMENT
As 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.
In 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.
Several 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
If, 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 No-Fault law.
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 New York since 1970 ( People v. Brown, 26 N.Y.2d 88 , cert. denied 480 U.S. 948]).
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].
In 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. Washington 541 U.S. 36, 124 S.Ct. 1354, 158 L.Ed.2d (U.S.Wash.,2004.) the United States Supreme Court, held that out-of-court statements by witnesses that are “testimonial”, like plea allocutions, are barred, under the Confrontation Clause, unless the witnesses are unavailable and the party opposing the admissibility of the statements had a prior opportunity to cross-examine witnesses, regardless of whether such statements are deemed reliable by court. This position, at least as it attends criminal cases, was adopted by the New York Court of Appeals in People v. Hardy 4 N.Y.3d 192, 791 N.Y.S.2d 513 (2005).
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.
“[The 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 interest.”
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 1) 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.
The most instructive discussion of this argument is found in In re Adler, Coleman Clearing Corp.
399 F.Supp.2d 486 S.D.N.Y.,2005. Adler specifically addresses a situation case where an indictment and plea allocution were used to establish alter-ego status of a declarant. The court wrote:
"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. "
The 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. 7 A.D.2d 315, 182 N.Y.S.2d 893.
A 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.'
A further argument 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 principal”.
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 wrote,
“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 v. New York City Health & Hosps. Corp., 176 A.D.2d 787, 791, 575 N.Y.S.2d 117).”
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.
Plaintiff, 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.
One 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,
Clearly, the Mallela III Court strongly concurs with the findings of the Superintendent of Insurance that services provided by fraudulently licensed No-Fault “regimes” should not be reimbursed.
It is well settled that despite an untimely denial, an insurer is not precluded from raising the issue of coverage such as a breach of a condition precedent of the terms of the insurance contract. Presbyterian Hosp. in the City of New York v. Maryland Cas. Co., 90 N.Y.2d 274, 660 N.Y.S.2d 536, 683 N.E.2d 1.In addition, the court notes that proper licensing of a medical provider is a condition precedent to payment. Valley Physical Med. And Rehab. V. N.Y. Central Mutual Ins., 193 Misc.2d 675, 753 N.Y.S.2d 289 (App.Term 2nd Dept 2002 ).
Similar results were reached by Judge Arlen Bluth in New York Civil Court , Kings County in the cases of AT Medial P.C. v State Farm Mut. Ins. Co., No. 64692/04 and AT Medical P.C. v State Farm Mut. Ins. Co., No 64696/04 wherein the Defendant submitted incorporation papers, tax returns, a management agreement and an examination under oath. Again there was no substantive opposition from plaintiff, and again the Court granted the defendant summary judgment premised on Malella grounds specifically finding AT to be a “Doc in the Box”. 
AUGMENTING LAW ENFORCEMENT AND PRE SUIT INTELLIGENCE DURING LITIGATION
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
This 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 New York State ’s No-Fault Law. 
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.
Even before the Mallela III Court clearly made the corporate structure of an entity a potentially dispositive issue in No-Fault litigation, the relevancy of the question had been affirmed by the Appellate Terms. In Valley Physical Medicine and Rehabilitation P.C. v. New York Cent. 193 Misc.2d 675, 753 N.Y.S.2d 289 (N.Y.Sup.App.Term,2002) the Court wrote that “In light of the Insurance Law's requirement that insurers enact fraud prevention plans (Insurance Law § 409), and the New York State Department of Insurance's Opinion Letters urging insurers to be more vigilant about potential fraud, discovery requests pertaining to Plaintiff's license status and corporate structure, which are related to allegations of fraudulent billing, are proper discovery subjects”.
Since 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 bad Civil Court decision which denied a defendant’s application to depose a Doctor in an effort to develop a Mallela defense. The Court imposed a predicate showing of a factually founded belief of impropriety, noting that defendant herein does not identify one non-licensed individual who either owns, controls or operates the medical corporations even though defendant has been provided with management agreements and income tax information for certain employees. Statewide Medical Acupuncture Services, PC v. Travelers Ins. Co. Slip Copy, 2005 WL 2866916 (Table) N.Y.City Civ.Ct.,2005.
The upshot of the reality of the mind set of the Judges in Civil Court is that they will likely require some predicate showing of fraudulent conduct in order to obtain a deposition of a Doctor on fraudulent incorporation issues. As noted previously, in the absence of pre-existing SIU, NICB or law enforcement intelligence, it is likely that such a showing can made by a physicians’ inspection of a number of claimants files, or a physicians review of the EUO testimony of a number of claimants. When such a review is made, it will probably, in instances involving layman scripted entities, reveal the treatment script, a clear sign of a lack of meaningful medical decision making at the entity. Coupling a detailed affidavit from an expert who did the review, with an affidavit from an SIU or Claim witness who recognizes the significance thereof, will likely be establish a satisfactory “factual founded belief”. Such an approach is similar in all respects to the successes that insurers have experienced in the Civil Courts in combating staged accidents. 
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 Publishing Co. and Valley Physical Medicine and Rehabilitation P.C. v. New York Cent. (supra). Where a defense of fraudulent incorporation has been raised in a defendant’s answer, and given the clear import of Malella, the better proposition is the discovery on all relevant issues consistent with Article 31 of the CPLR should occur.
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. Sheindlin directed 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 Dep't 1990 ). "A party will not be required to produce income tax returns in a particular action unless the record presents a strong necessity for such disclosure in order for the party to prove its cause of action or defense." Niagara Falls Urban Renewal Agency v. Friedman, 55 A.D.2d 830, 830, 390 N.Y.S.2d 310, 311 (4th Dep't 1976 ). Not only must a showing of necessity be made, but the applicant for such an order must demonstrate that the information is not available from any other source. Leinoff v. 208 West 29th Street Associates, 243 A.D.2d 418, 419, 662 N.Y.S.2d 554, 556 (1st Dep't 1997), Gordon v. Grossman, 183 A.D.2d 669, 670, 584 N.Y.S.2d 54, 55 (1st Dep't 1992); V-Mart v. Gaetano, 204 A.D.2d 1038, 1039, 614 N.Y.S.2d 92, 92 (4th Dept.1994) Even if the alternative methods attempted by parties may seem burdensome compared to the release of the non-moving party's tax returns, no discovery is allowed "absent showing an inability to obtain information from other sources." Penn York Construction v. State of New York, 92 A.D.2d 1086, 1087, 462 N.Y.S.2d 82, 83 (3d Dep't 1983) Courts have also denied discovery of a plaintiff's tax returns if a party's intent and "tax motives [can] be obtained through deposition or trial testimony." BRS & W Associates v. W.R. Grace & Co., 156 A.D.2d 249, 249, 548 N.Y.S.2d 511, 512 (1st Dept.1989).
Courts have 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 Dep't 1998 ),. (See also, David Leinoff, Inc. v. 208 W. 29th St. Assocs, 243 A.D.2d 418, 663 N.Y.S.2d 554, 556 (App. Div. 1st Dept. 1997). holding that personal income tax returns of sole shareholder of insured were discoverable "because they may contain vital information tending to prove or disprove the existence of an [insurance fraud]); Leon Sylvester, Inc. v. Aetna Cas. & Sur. Co., 189 A.D.2d 730, 592 N.Y.S.2d 741, 742 (1st Dep't 1993) (holding that where plaintiff, a closely held corporation, was suspected of insurance fraud, disclosure of personal income tax returns of its two principals was warranted).
For the insurer, there is one case which applies these considerations directly to a case involving allegations of illegal corporate structure. In 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.) J. Sheindlin, dealing directly with a case alleging illegal corporate structure, handled a number of discovery issues relevant to the discussions outlined heretofore. Specifically on the question of tax returns he wrote; “There is no question that Nandi and Universal are required to file tax returns. Further, the returns are clearly relevant to State Farm's claim that Nandi was the true owner of Universal during the relevant time.”
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 subpoena.
Counter-intuitively, 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.
Indeed 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 Dept. 1976 ). 
 "[a] 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.
"[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 in such corporation." N.Y.Bus.Corp.Law § 1508.
4. 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 § 6507(4)(c).
 "[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 65-4.4(e).
 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, 2004).
 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
 By the Worker’s Compensation Fee Schedule ground rules Range of Motion testing is considered a integral aspect of a comprehensive evaluation but is frequently billed separately.
 See for example the New York State Insurance Department press release concerning the Queens District Attorney Office “Operation Crash Course” indictments.
 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 Insurance http://www.ins.state.ny.us/spch0209.htm
 See for example the Queens District Attorney “Fraud Factory” indictment press release.
 For a discussion of this prohibition against self referral in any setting, see Stand-Up MRI of the Bronx v. General Assur. Ins. --- N.Y.S.2d ----, 2005 WL 2779919 (N.Y.Dist.Ct.), 2005 N.Y. Slip Op. 25453
 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 Statement 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.
 abrogating Ohio v. Roberts, 448 U.S. 56, 100 S.Ct. 2531, 65 L.Ed.2d 597,
 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, 2004).
 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. Aetna Casualty and Surety Co., 49 Misc.2d 28, 266 N.Y.S.2d 600 (1965) mod'd. 28 A.D.2d 745, 280 N.Y.S.2d 795 ( App. Div. 3d Dept 1967 ).
 Ocean Diagnostic vs. Utica 7 Misc.3d 133(A), 2005 WL 948998 (N.Y.Sup.App.Term), 2005 N.Y. Slip Op. 50611(U), GPM Chiropractice vs. State Farm 7 Misc.3d 138(A), 2005 WL 1356451 (N.Y.Sup.App.Term), 2005 N.Y. Slip Op. 50861(U).
 See also Dore v Allstate Indem. Co. 264 A.D.2d 804, 695 N.Y.S.2d 422 (App. Div. 2nd Dept. 1999) Defendant Insurance companies effort to discover bank records to prove fraud granted.