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APPELLATE TERM APPLIES MALLELA RETROACTIVELY
By: James K. Hogan, Esq.

FOR THE DEFENSE

APPELLATE TERM APPLIES MALLELA RETROACTIVELY

By: James K. Hogan, Esq.
Bruno, Gerbino & Soriano, LLP
Melville, New York



There have been a series of cases dealing with Robert Mallela, et al. and whether an insurer has an obligation to make payments under New York’s No-Fault Insurance system to health care entities that were not properly formed and did not have a properly licensed health care professional as an owner or manager.
In the underlying case, State Farm Mut. Auto. Inc. Co. V. Mallela, 187 F. Supp 2d, 401, U.S. District Court Justice Robert Sifton found that an insurance company did not have a private cause of action and could not deny payment to a medical facility, even if there was fraud in the incorporation of that facility. This decision was appealed to the United States Court of Appeals for the Second Circuit, State Farm Mut. Auto. Inc. Co. V. Mallela, 372 F. 3d, 500 and the Second Circuit certified a question to the New York Court of Appeals.
The New York State Court of Appeals in State Farm Mutual Automobile Insurance Co., Appellant, v. Robert Mallela et al., Respondents (4 NY3d 313, 827 NE2d 758, 794 NYS 2d 700) cited the certified question as “whether, under our [New York’s] ‘no-fault’ insurance laws (see Insurance Law § 5151 et seq. and implementing regulations), insurance carriers may withhold payment for medical services provided by fraudulently incorporated enterprises to which patients have assigned their claims.” Our Court of Appeals answered “We conclude that they may.” However, this decision was often read to restrict this corporate examination to companies that were formed after the implementation of the new Insurance Regulation 68, that is April 4, 2002. It apparently left open the question about the No-fault bills submitted by an improperly formed company that was incorporated prior to the new Regulation 68.
The battleground for this issue turned out to be the Civil Court system. Many cases of medical and other health care providers are litigated in the lower, or civil courts, as opposed to the Supreme Court. The reason is that the extent of the claims of these health care providers was usually under $15,000.00 and therefore, restricted to the lower courts. Many such cases were brought in the Civil Court for Queens County.
There were a number of decisions coming from the Civil/Queens bench. The judges were just about split 50/50 as to whether Mallela could be applied to health care entities that were fraudulently formed prior to the new Insurance Regulation 68. The issue was finally resolved, hopefully, with the Appellate Term’s decision in Metroscan Imaging, P.C. v. GEICO Ins. Co. 2006 NY SlipOp 26319, decided on July 26, 2006.
In Metroscan, the Appellate Term was faced with an appeal of a Civil Court of the City of New York, Queens County, matter wherein GEICO sought to amend its answer to assert fraudulent incorporation as an affirmative defense. GEICO’s motion was granted at the Civil Court level and affirmed by the Appellate Term. The language of the case includes an in-depth discussion of the Court of Appeals decision in Mallela (supra) and its retroactive application.
The Appellate Term reviewed the question of whether, as a result of the Court of Appeals’ decision in Mallela, a medical corporation that was fraudulently incorporated under Business Corporation Law §§ 1507 and 1508, and Education Law § 6507 (4) (c) is entitled to be reimbursed by insurers for medical services rendered by licensed medical practitioners prior to the effective date of 11 NYCRR 65-3.16 (a) (12).
In Metroscan, the bills were incurred prior to the effective date of the new Regulation 68, and the Civil Court held that Mallela did apply and, further, that 11 NYCRR 65-3.16 (a)(12) is applied to unpaid claims for medical services rendered without regard to the date on which such services were rendered (8 Misc 3d 829 [2005]).
The Metroscan court goes on to site many of the prior cases dealing with the retroactive application, both pro and con, of Mallela, but concludes “irrespective of the date on which the medical services were rendered, a provider of medical services may not recover therefore if it is a fraudulently incorporated medical corporation.”
Comparing Mallela to Charlebois v Weller Associates (72 NY 2d 587 [1988]), the court noted that “In Charlebois, the Court of Appeals held that a contract which required payment to an unlicensed business corporation for engineering services performed by an independent licenses professional engineer was valid because the corporation was not engaged in the unauthorized practice of engineering. By contrast, in Mallela although the medical treatments were rendered by apparently licensed medical practitioners, said licensed practitioners were not the “providers” for billing purposes under the No-Fault Law. Instead, the “providers” for no-fault billing purposes were their employees, medical service corporations, which were incorporated in violation of Business Corporation Law §§ 1507 and 1598, and Education Law § 6507 (4) (c). This critical distinction apparently prompted the Court of Appeals, in Mallela, to reject defendants’ position stating, ‘[t]he fact remains that the reimbursement goes to the medical service corporation that exists to receive payment only because of its willfully and materially false filings with state regulators’ (4 NY3d 321)”
The Appellate Term concludes that the Court of Appeals held that medical service corporations which are fraudulently incorporated in violation of Business Corporation Law §§ 1507 and 1598, and Education Law § 6507 (4) (c), i.e., which “failed to meet the licensing requirements” were not entitled to reimbursement since their authority to render professional services was obtained through fraudulent means and possession of such authority was a prerequisite to reimbursement. (Citations omitted)
Therefore, as a condition precedent to reimbursement under New York’s No-Fault Insurance System, the medical entity must be in compliance with all of the licensing requirements, and failure may result in non-payment. Experience has shown that fraud must be part of the carrier’s pleadings and, further, the 30 Day Rule does not apply to this Affirmative Defense.
Editors Note: James K. Hogan is a graduate of Pace University, School of Law and an associate at Bruno, Gerbino & Soriano, LLP, located in Melville, New York.

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