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PROOF OF IMPROPER INCORPORATION OF A NO-FAULT MEDICAL PROVIDER UNDER STATE FARM v. MALLELA
By: Charles W. Benton, Esq.

FOR THE DEFENSE


PROOF OF IMPROPER INCORPORATION OF A NO-FAULT
MEDICAL PROVIDER UNDER STATE FARM v. MALLELA

By: Charles W. Benton, Esq.
Bruno, Gerbino & Soriano, LLP
Melville, New York


The New York Court of Appeals determined in State Farm Mutual Automobile Insurance Co. v. Mallela, 4 N.Y. 3rd 313 (2005), that a medical corporation that is fraudulently incorporated under New York\'s Business Corporation Law and Education Law is not entitled to be reimbursed by no-fault insurers for medical services rendered by licensed medical practitioners on the corporation\'s behalf. The question left open by the court\'s decision in Mallela was what quantum of proof was required to establish the fraudulent incorporation of a medical corporation such that the corporation was not entitled to receive no-fault benefits.

The recent Appellate Term, Second Department decision in Multiquest/Dieng v. Allstate (2007 N.Y. Slip. Op. 27366) is the first appellate court decision to wrestle with this issue. The Appellate Term in Multiquest/Dieng found that the New York No-Fault regulatory scheme specifically states that providers of healthcare services are not eligible for reimbursement if the provider fails to meet applicable New York State or local licensing requirements. See 11 N.Y.C.R.R. 65-3.16(a)(12) This regulation bars reimbursement without regard to when the services were rendered. The defense of improper incorporation, the Appellate Term felt, is not waived by the failure to assert it in a denial of claim form, nor is it precluded as a result of an untimely denial. Even though the defendant in Multiquest/Dieng had imposed an answer with an affirmative defense regarding improper incorporation, the Appellate Term further held that even if such a defense was not in an insurance company defendant\'s answer, a court could grant the insurer summary judgment based on an unpleaded defense, so long as there was no surprise or prejudice to the plaintiff and so long as the plaintiff had an ample opportunity to contest the defense in its opposition to any summary judgment motion.


The Appellate Term in Multiquest/Dieng found that the fact that the plaintiff was a professional service limited liability company rather than a professional service corporation did not matter, since the regulatory requirements of membership, professional licensing and filing were substantially the same with respect to companies formed under these comparable New York incorporation statutes. Limited liability Company Law Section 1203(b) requires that a member of such a company be licensed for any professional services the company is organized to provide. Multiquest\'s Articles of Organization stated that the company was to provide psychological services and listed a licensed psychologist as the provider of those services. However, the psychologist named in Multiquest\'s Articles of Organization testified under oath that she was never an owner or member of Multiquest and that she never received a stock certificate or any compensation based on an ownership interest in Multiquest.

The Multiquest/Dieng court further noted that the defendant insurance company had proved that, although Multiquest had changed hands since its initial organization and while certain other health services were variously added and dropped, the same psychologist who testified that she was never an owner or member of the plaintiff and that she had never received a stock certificate or any compensation based on an ownership interest continued to be listed as a member and manager of Multiquest. The Appellate Term, Second Department found that such proof was not only sufficient to defeat Multiquest\'s summary judgment motion; it also satisfied the defendant insurance company\'s burden of proof on its cross-motion for summary judgment by demonstrating that plaintiff performed psychological services in violation of Limited Liability Company Law Sections 1203 and 1207.

The Appellate Term, Second Department found that Multiquest did not adequately dispute the defendant\'s proof of improper incorporation. In the Appellate Term\'s view, a hearsay affidavit of a person who purported to relate the non-fraudulent intentions of Multiquest\'s original owner was insufficient. Further, the court noted that even if that affidavit had presented a reasonable excuse for the failure to obtain an affidavit from Multiquest\'s original owner, it failed to excuse the initial fraudulent act of listing the psychologist as a member and manager of Multiquest or Multiquest\'s listing of that same psychologist through successive changes of ownership including the period when the services in question were rendered. Thus, the court concluded that the defendant insurance company should be entitled to summary judgment.

Multiquest/Dieng v. Allstate is indicative of the measure of proof that must be established to find that a no-fault medical provider is improperly incorporated under State Farm v. Mallela. Once established, however, such proof of improper incorporation should have collateral estoppel effect with respect to no-fault lawsuits involving those same parties. See, e.g., Multiquest/Brown v. Allstate Insurance Company, 2007 N.Y. Slip. Op. 51776(U) (Nassau Dist. Ct. 2007)

Editors Note: Charles W. Benton is a graduate of Fordham University School of Law and an associate of the Appeals Division at Bruno, Gerbino & Soriano, LLP, located in Melville, New York.

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