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No-Fault MRI Providers’ Suits Stayed Pending Declaratory Judgment Action
By: Damin J. Toell, Esq.

FOR THE DEFENSE


No-Fault MRI Providers’ Suits Stayed
Pending Declaratory Judgment Action

By: Damin J. Toell, Esq.
Bruno, Gerbino & Soriano, LLP
Melville, New York



In 2005, AIU Insurance Company, and other related carriers, filed suit in Supreme Court, Nassau County against Dr. Robert Scott Schepp, M.D., and three MRI facilities purportedly owned by Dr. Schepp: Deajess Medical Imaging, P.C., Preferred Medical Imaging, P.C., and Boston Post Road Medical Imaging, P.C. Also named in the suit were, among other people and entities, Hillel Sher and management companies owned by him. In sum, AIU alleged that Dr. Schepp’s facilities were owned by him on paper only, and that the control of the facilities actually rested in the hands of Mr. Sher, a layperson. Moreover, AIU alleged that Mr. Sher was the recipient of the actual profits of the facilities, and that this was being accomplished through excessive rates charged to the facilities for management services, as well as rental of MRI equipment and office space.

AIU based their contention on the Court of Appeals decision in State Farm v. Mallela, 4 N.Y.3d 313 (2005), where it was held that fraudulently incorporated medical facilities are not entitled to receive payments for no-fault claims. In Mallela, the Court of Appeals noted that the core of the fraud was that at those facilities, “[t]o maintain the appearance that the physicians owned the entities, the nonphysicians caused the corporations to hire management companies (owned by the nonphysicians), which billed the medical corporations inflated rates for routine services. In this manner, the actual profits did not go to the nominal owners but were channeled to the nonphysicians who owned the management companies.” Id. at 319-320.

On February 1, 2006, Justice Stephen A. Bucaria of the Supreme Court, Nassau County issued an order denying AIU’s request for a preliminary injunction whereby Dr. Schepp’s facilities would be enjoined from commencing arbitrations of no-fault claims before the American Arbitration Association (“AAA”). The Supreme Court denied AIU’s motion, finding, inter alia, a lack of likelihood of success on the merits. Thereafter, on April 5, 2006, the District Court, Nassau County, Hempstead Part, in two no-fault actions defended by Progressive Insurance Company, found Boston Post Road Medical Imaging, P.C. to be fraudulently incorporated within the meaning of Mallela. Around the same time, numerous AAA arbitrators found that Schepp’s facilities were fraudulently incorporated and/or lacked standing to obtain no-fault benefits due to factoring agreements whereby the facilities’ no-fault claims were sold outright.

In order to resolve these disparate results, in 2006 and early 2007, Dr. Schepp filed suit in Supreme Court, Nassau County on behalf of himself and his MRI facilities against numerous automobile insurance carriers, including Allstate, State Farm, Utica Mutual, MetLife Auto & Home, Ameriprise, Response, and others. Those new suits, seeking declarations that Dr. Schepp’s facilities are not fraudulently incorporated and retain standing to pursue no-fault claims, have since been consolidated with the original AIU action. Thus far, the complaints in Dr. Schepp’s declaratory judgment actions have withstood motions to dismiss by the carriers.

The parties to the declaratory judgment action have now stipulated to stay all pending no-fault actions, as well as all no-fault claims that have not yet been put into litigation or arbitration. Furthermore, the parties have agreed to a schedule whereby discovery will be conducted throughout the remainder of 2007 and into 2008. Thus far, the parties expect a trial to be held in Spring, 2008. It should be noted that the declaratory judgment action, inclusive of the scope of the stay, does not apply to claims from Preferred Medical Imaging, P.C. that occurred after December 31, 2004, the date when Dr. Schepp severed his ties with Hillel Sher.

Editors Note: Damin J. Toell is a graduate of Cardozo School of Law and an associate at Bruno, Gerbino & Soriano, LLP, located in Melville, New York.

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