Multiquest, P.L.L.C. v Allstate Ins. Co. (2005 NY Slip Op 52069(U))

Civil Court, Queens County

96837/04

Kevin J. Kerrigan, J.

Defendant’s motion for summary judgment dismissing the complaint is denied. Plaintiff’s cross-motion for summary judgment is also denied.

Plaintiff commenced the underlying action pursuant to the Comprehensive Motor Vehicle Reparations Act (Insurance Law §5101, et seq) (the “no-fault” law) seeking payment of its bills for treatment of its assignor for psychological injuries allegedly sustained by her in an automobile accident on May 17, 1998. The psychological services for which plaintiff is seeking payment were performed on July 30, 1998. Plaintiff argues that it is entitled to reimbursement from defendant because it timely submitted a completed proof of claim for no-fault benefits, which defendant neither paid nor denied within 30 days.

An insurer must either pay or deny a claim for first-party no-fault benefits within 30 days after receiving proof of the claim (see Insurance Law §5106 (a); 11 NYCRR §65.15 (g) (3), now 11 NYCRR 65-3.5 [a]). Failure to deny timely renders no-fault benefits overdue, and the insurer is precluded from raising any defenses, other than lack of coverage, to its obligation to pay (see Presbyterian Hosp. v. Maryland Cas. Co., 90 NY2d 274 [1997]; NY Hosp. Med. Center of Queens v. Country-Wide Ins. Co., 295 AD2d 583 [2nd Dept 2002]).

It is undisputed that defendant did not issue a denial of claim (NF-10 form). Defendant [*2]argues that it was not required to issue a denial of claim because the corporate structure of plaintiff was defective in that it did not have a psychologist as an “owner,” the treating psychologist was an independent contractor, its billing was fraudulent and the assignment of benefits form was defective. Therefore, according to defendant, there is no coverage under the insurance policy.

Defendant argues, first and foremost, that plaintiff is not entitled to reimbursement under the no-fault law, notwithstanding defendant’s failure to issue a timely denial of plaintiff’s claim, because plaintiff did not have a psychologist as an “owner” at the time it billed for psychological services and was, thus, defectively, or fraudulently, organized. The arguments that defendant proffers in its motion to establish the relevance of plaintiff’s improper organizational structure to the no-fault law are entirely inapposite.

Defendant argues that plaintiff’s failure to have a psychologist as an “owner” of the “corporation” at the time it provided psychological services to its assignor herein was a violation of §1504 (a) of the Business Corporation Law (“BCL”), which requires a professional service corporation (“PC”) to provide professional services only through individuals authorized to render such services. This violation, reasons defendant, also constituted non-compliance with the provisions of the New York State Workers’ Compensation Fee Schedule for Psychological Services (the “Fee Schedule”) adopted by the no-fault regulations and, therefore, the services provided by plaintiff at the time it did not have a psychologist as an “owner” were not covered under the no-fault law.

In the first instance, BCL §1504 (a) does not concern the organizational structure of a PC. Moreover, plaintiff is not a PC but a professional limited liability company (PLLC) and, thus, all references to the BCL are inapposite.

The Fee Schedule was incorporated into the no-fault law (see Insurance Law §5108; 11 NYCRR §68.0). However, the Fee Schedule has no requirements concerning the corporate or organizational structure of a PC or PLLC. It merely provides, in relevant part, “[P]sychological services will be rendered by or under the active supervision of an authorized psychologist” (see 12 NYCRR Appendix C-7). Defendant offers no proof to establish that the psychological services provided to plaintiff’s assignor were not rendered by a psychologist but, rather, by unlicensed “assistants,” as it alleges. Moreover a defense asserting a violation of the Fee Schedule is precluded since it was not raised in a timely denial of claim (see, e.g. Park Health Center v. Prudential Property & Cas. Ins. Co., 2001 NY Slip Op 40650 [U] [2nd & 11th Jud Dists]).

Thus, defendant, in its motion, cites no provision of the Insurance Law or its implementing regulations relating to the membership requirements of a PLLC. The relevant line of argument bearing upon the issue of whether plaintiff may collect no-fault benefits if it is improperly organized is introduced by plaintiff in its cross-motion (perhaps in anticipation of the Court raising the issue sua sponte). Plaintiff informs the Court of 11 NYCRR §65-3.16 (a) (12), which is the only provision of the no-fault law that keys the right to reimbursement under no-fault to the lawful licensing of the health care provider. That section states:

A provider of health care service 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 [*3]local licensing requirement necessary to perform such service in New York or meet any applicable licensing requirement necessary to perform such service in any other state in which such service is performed.

The Court of Appeals has recently held that, on the basis of this section of the insurance regulations, an insurer may deny payment to a fraudulently incorporated health care provider (see State Farm Mutual Auto. Ins. v. Mallela, 4 NY3d 313 [2005]) (hereinafter referred to as “Mallela III”).

Plaintiff contends that §65-3.16 (a) (12) and the holding in Mallela III do not contemplate the fact pattern of the present case and that even if they did, the claim herein antedates the regulation and, thus, is not subject to it. Furthermore, argues plaintiff, defendant is precluded from raising the regulation as a defense because defendant failed to assert it in a timely denial of claim. Defendant, in its reply, argues that §65-3.16 (a) (12) need not be raised in a timely denial of claim and that on the basis of that section and Mallela III, it is not obligated to reimburse plaintiff for the claims it submitted.

Plaintiff contends that there was no fraud to bring this case within the scope of §65-3.16 (a) (12), as interpreted by the Court of Appeals in Mallela III, because a licensed acupuncturist was an owner and that he acted upon the advice of his attorney that it was legal to practice multiple specialties as long as one of the owners was licensed in one of the specialties. This argument overlooks the uncontroverted facts presented herein that plaintiff was, in fact, in violation of licensing requirements and that it filed false articles of organization by listing therein a licensed individual who was not part of its company.

Pursuant to Limited Liability Company Law §1203 (a), “[O]ne or more professionals each of whom is authorized by law to render a professional service within the state, or one or more professionals, at least one of whom is authorized by law to render a professional service within the state, may form . . . a professional service limited liability company . . . for the purpose of rendering the professional service or services as such professionals are authorized to practice” (emphasis added). Thus, a PLLC may not be formed to render psychological services unless a member thereof is a licensed psychologist. The licensed psychologist who was listed in plaintiff’s articles of organization had no ownership interest, managerial position or employee status with plaintiff.

It is undisputed that plaintiff was formed as a PLLC in 1998 for the purpose of engaging in the business of providing psychological and acupuncture services. Plaintiff also admits that it provided psychological services predominantly, if not exclusively. The articles of organization list Yuegeny Gorbatov and Kathryn Clark as the “original members and the original managers” of the PLLC (see Exhibit “D” to motion). It is also undisputed that of these two individuals, only Clark is a licensed psychologist. However, in her examination under oath (see Exhibit “F” to motion), she states that she was, in fact, never a member of plaintiff, that she never consented to be designated as such on plaintiff’s organization documents and that she was unaware, until it was brought to her attention by defendant, that she was named in plaintiff’s articles of organization. Additionally, she asserts that her only affiliation with plaintiff was as an independent contractor hired by plaintiff to perform psychological services, and was not even an [*4]employee of the company (see EUO transcript at 6, lines 18-21).

Plaintiff’s only explanation of Clark’s EUO testimony is through an inadmissible hearsay affidavit by an individual with no personal knowledge stating that Gorbatov “thought” that Clark was listed only as a manager and not an owner.Thus, at the time it provided psychological services to its assignor and filed its claim in 1998, plaintiff was in violation of the licensing requirements for PLLCs and was fraudulently organized, having filed false articles of organization representing that Clark was an original owner and/or manager, when, in fact, she was neither.

Nevertheless, this Court must agree with plaintiff that §65-3.16 (a) (12) does not apply retroactively to bar recovery of the instant no-fault claim that accrued prior to the effective date of the regulation.

Section 65-3.16 (a) (12) was added as part of the latest revision of the insurance regulations, which became effective April 5, 2002 (see 11 NYCRR §§65-1, et. seq., hereinafter referred to as the “new regulations”), replacing the regulations that had been effective until that date (see 11 NYCRR §§65.1, et. seq.). It is a well-settled principle that legislative rules and revisions of administrative regulations apply prospectively unless their language mandates otherwise (see, e.g. Good Samaritan Hosp. v. Axelrod, 150 AD2d 775 [2nd Dept 1989]). If the new regulations could be construed as applying retroactively to claims antedating their promulgation, then the establishment of an effective date would be meaningless. Indeed, it has been held that the insurance regulations have no retroactive application (see Colonial Life Ins. Co. of America v. Curiale, 205 AD2d 58, 62 [3rd Dept 1994] [“Our review of the regulations reveals that they were not retroactive since they were not made effective as of a date prior to their promulgation”]).

The question of whether §65-3.16 (a) (12) applies retroactively was posed by the Second Circuit in State Farm Mutual Auto. Ins. Co. v. Mallela (372 F 3d 500 [2nd Circuit 2004]) (“Mallela II“) as it considered the central issue presented to it on appeal from the Eastern District (2002 WL 31946762 [E.D.NY]) ( “Mallela I“) of whether a health care provider that is fraudulently incorporated is entitled to reimbursement under no-fault for services rendered by licensed practitioners. This main question was certified to and answered in the negative by the Court of Appeals in Mallela III. But in answering this question, it also addressed the subsidiary issue of retroactivity which was raised by the Mallela II Court.

Proceeding from the standpoint that a cause of action for fraud and unjust enrichment can be maintained against a fraudulently incorporated provider that accepts payments from an insurer in derogation of §65-3.16 (a) (12), the Court of Appeals stated:

Because we rest our holding on the Superintendent’s amended regulation declaring fraudulently licensed corporations ineligible for reimbursement, no cause of action for fraud or unjust enrichment would lie for any payments made by the carriers before that regulation’s effective date of April 4, 2002^[FN1]. State Farm’s complaint does not clearly indicate, one way or the other, whether [*5]it has paid money to defendants after the amended regulation took effect. We therefore answer only the certified question and decline to consider whether State Farm has alleged sufficient facts to support causes of action for fraud or unjust enrichment (Mallela III, 4 NY3d at 322).

Plaintiff, in the Mallela case, sought a judgment declaring that it was not required under no-fault to reimburse a fraudulently incorporated provider and a judgment for restitution for fraud and unjust enrichment seeking recovery of sums already paid to the provider. In answering the certified question, the Court of Appeals made it clear that its holding that the an insurer may deny payment to a fraudulently incorporated provider is based solely on §65-3.16 (a) (12) of the new regulations. Therefore, a cause of action for fraud and unjust enrichment deriving from that section of the new regulations would not lie for payments made upon claims prior to the effective date of that section. In other words, the regulation does not apply retroactively to create a cause of action for fraud or unjust enrichment.

The Court of Appeals answered the retroactivity question in the abstract and did not decide whether the insurer had, in fact, made out a cause of action for fraud or unjust enrichment, since the record was devoid as to whether any claims were paid after the regulation’s effective date.

Thus, this Court finds that Mallela III supports the principle that §65-3.16 (a) (12) does not apply retroactively to claims accruing prior to its effective date of April 5, 2002. Indeed, it has recently been held that this section of the regulations has no retroactive application (see, Multiquest, PLLC v. Allstate Ins. Co. (Jeune), __Misc 3d__, 2005 NY Slip Op 25512 [Civil Court, Queens County, December 1, 2005]). Since the claim in the instant action arose in 1998, §65-3.16 (a) (12) does not apply to this case and, therefore, the defense of defective, or fraudulent, organization is not available to defendant as a basis to deny the instant claim.

This Court does not read the following statement in Mallela III as contradicting the above analysis: “The Superintendent’s regulation allowing carriers to withhold reimbursement from fraudulently licensed medical corporations governs this case” (Mallela III, 4 NY3d at 321). This language has occasioned a contrary interpretation (see Metroscan Imaging P.C. v. GEICO, 8 Misc 3d 829 [Civil Court, Queens County 2005]). However, this Court is of the opinion that Mallela III is merely saying here that §65-3.16 (a) (12) applies to that case’s fact pattern forming the question that was certified, which is whether payment may be withheld from a fraudulently incorporated provider, not that the cause of action was a pre-April 5, 2002 claim and the regulation applies retroactively to bar that claim.

The insurer in Mallela had also argued that the regulation must be viewed as retroactive in effect because it is merely a clarification and not a new rule. The promulgation of §65-3.16 (a) (12) was accompanied by an explanatory notice stating that the section was “added to clarify that a health care provider must be properly licensed to be eligible for reimbursement under no-fault” (NY Reg, May 19, 2001, at 19). Therefore, argued the insurer, the Superintendent of Insurance, in promulgating §65-3.16 (a) (12), was merely articulating a mandate that was “always” in effect (see Mallela II, 372 F 3d at 509). This Court finds said argument unpersuasive. The Superintendent of Insurance is empowered to implement the no-fault law by promulgating [*6]regulations that interpret and clarify the legislative policy (see Ostrer v. Schenck, 41 NY2d 782 [1977]; Insurance Law §301). Hence, every section of the regulations issued by the Superintendent may be considered essentially interpretative or clarifying. The Superintendent’s notice explaining the reason for the addition of §65-3.16 (a) (12) is not to be taken as a pronouncement that the effective date of the regulations is to be ignored with respect to this section.

In light of the determination by this Court that §65-3.16 (a) (12) has no retroactive application and, hence, does not apply to this case, the issue of whether that section is subject to the preclusion rule is academic. However, this Court notes that the holding in Mallela III is dispositive of this issue as well.

Lack of coverage is a defense that survives an untimely denial of claim (see Central General Hosp. V. Chubb Group of Ins. Cos., 90 NY2d 195 [1997]; Presbyterian Hosp. v. Maryland Cas. Co., supra). Plaintiff urges that §65-3.16 (a) (12) does not preclude coverage but merely creates a statutory condition precedent to an insurer’s entitlement to payment, and, therefore, a defense based upon §65-3.16 (a) (12) is subject to the 30-day rule.

An injured party (or his assignor) may only be reimbursed under the no-fault law for “basic economic loss” (see Insurance Law §5102, et seq). The Court of Appeals found that the Superintendent of Insurance, by promulgating §65-3.16 (a) (12), interpreted this statute and “excluded from the meaning of basic economic loss’ payments made to unlicensed or fraudulently licensed providers, thus rendering them ineligible for reimbursement” (Mallela III, 4 NY3d at 320). Thus, the expenses incurred from services rendered by a provider who fails to meet licensing requirements are no longer covered and are, thus, outside the orbit of the no-fault law and its time requirements.

The Mallela III Court does not contradict its holding in Servido v. Superintendent of Insurance (53 NY2d 1041 [1981], revg on dissenting op 77 AD2d 70, 76-86 [1st Dept 1980]) wherein it concluded that the Superintendent’s authority does not extend to creating any new exclusion by regulation. The Superintendent, in promulgating §65-3.16 (a) (12), did not impermissibly add any new category of exclusion to an enumerated list of exclusions circumscribed in the Insurance Law. Rather, the Superintendent interpreted the term “professional health services” in Insurance Law §5102 (a) as no longer encompassing those rendered by health care providers who are in violation of licensing requirements. Therefore, holds the Mallela III Court, this regulation was within the scope of the Superintendent’s authority to promulgate and is, accordingly, valid.

In addition, by holding in Mallela III that §65-3.16 (a) (12) does not apply retroactively to support a cause of action for fraud or unjust enrichment for payments made prior to April 4, 2002, and by stating that it would not reach the question of whether plaintiff had shown sufficient facts to support such a cause of action absent any indication that any payments were made after April 4, 2002, the Court of Appeals is implicitly recognizing the viability of a cause of action for fraud and unjust enrichment pursuant to §65-3.16 (a) (12). Such acknowledgment presupposes the inapplicability of the 30-day rule. Since an insurer who has paid a claim has obviously not denied it, a cause of action for fraud or unjust enrichment could never arise if §65-3.16 (a) (12) were subject to preclusion.

Thus, it is clear that §65-3.16 (a) (12) is not subject to preclusion but may be raised even [*7]if not included in a timely denial of claim.

Defendant also argues that the subject psychological services were provided by an independent contractor and, therefore, plaintiff was not entitled to recover no-fault benefits. Plaintiff denies that any services to its assignor were rendered by an independent contractor and contends that even were they so provided, that defense was waived as it was not raised in a timely denial of claim. Plaintiff, citing the Chubb rule that the only defense that survives an untimely denial of claim is one asserting lack of coverage, argues that the independent contractor defense was waived since it does not relate to a lack of coverage under the policy of insurance. Plaintiff’s argument is without merit.

A billing provider may not recover no-fault benefits for services performed by an independent contractor, since the services billed were not rendered by it or its employees and, therefore, it is not a “provider” of health care services within the meaning of 11 NYCRR 65.15 (j) (1) (now 11 NYCRR 65-3.11 [a]) (see Rockaway Boulevard Medical P.C. v. Progressive Ins., 9 Misc 3d 52 [App Term 2nd & 11th Jud Dists 2005]). Such defense is non-waivable and is not subject to the preclusion rule (id).

Nevertheless, defendant fails to submit any proof that the services provided to plaintiff’s assignor were by an independent contractor. Although Clark, in her EUO, states that she worked as an independent contractor, she does not state that she rendered any services to plaintiff’s assignor herein. Therefore, on this record, defendant has not conclusively established that the treating provider was not an employee of plaintiff but an independent contractor.

Defendant also argues that there was no coverage under the insurance policy because the billing was fraudulent. This argument also lacks merit.

Lack of coverage is a defense “premised on the fact or founded belief that the alleged injury does not arise out of an insured incident” (Chubb, supra at 199). Defendant does not deny that plaintiff’s claim arose out of a legitimate motor vehicle accident. A defense of fraud in billing is not preserved if untimely raised in a proper denial of claim (see Chubb, supra; Melbourne Medical P.C. v. Utica Mutual Ins. Co., 4 Misc 3d 92 [App Term 2nd & 11th Jud Dists 2004]). Defendant’s appeal to the insurance policy that contains a provision declaring that there is no coverage under the policy if the insured conceals, misrepresents or makes any false statements of fact is unavailing. The mandatory no-fault endorsement is an “internally complete and distinct part of the insurance policy [that] . . . cannot be qualified by . . . conditions . . . of the liability portions of the policy” (Melbourne Medical P.C. v. Utica Mutual Ins. Co., supra, quoting Utica Mutual Ins. Co. v. Timms, 293 AD2d 669, 670 [2nd Dept 2002]). An insurer may not alter the mechanism of the no-fault law by adding contrary provisions in its contract of insurance. Since defendant has not issued a denial of claim, its defense asserting fraudulent billing is precluded.

Finally, defendant contends that it is entitled to summary judgment on the ground that the assignment of benefits form is defective. Defendant’s argument is without merit. For the reasons heretofore stated, a defense premised upon a defect in the assignment of benefits form is waived if not preserved in a timely denial of claim.

Plaintiff’s cross-motion for summary judgment is also denied. Plaintiff has failed to establish that it mailed a completed proof of claim to defendant. The affidavit of service of Joseph Indelicato, dated October 12, 2005, is insufficient to establish that the bill was mailed, in that it fails to describe the office procedure for the mailing of bills or the method of mailing. [*8]Thus, plaintiff has failed to establish a prima facie entitlement to summary judgment.

Accordingly, the motion and cross-motion must be denied.

Dated: December 19, 2005___________________________

KEVIN J. KERRIGAN, J.C.C.

Footnotes

Footnote 1:The effective date is actually April 5, 2002. The new regulations were originally filed on August 2, 2001, setting an effective date of September 1, 2001. However, their effectiveness was stayed pending legal challenge. The stay was overruled on April 4, 2002 and the new regulations became effective on April 5, 2002 (see NYCRR T. 11, Ch III, Subch. B, Pt. 65, Refs & Annos).