[*1]

Thuillez, Ford, Gold, Butler & Monroe, LLP, Albany (Daisy Ford Paglia of counsel), for appellant.

Basch & Keegan, Kingston (Derek J. Spada of counsel), for respondent.

McCarthy, J.P. Appeal from an order of the Supreme Court (Gilpatric, J.), entered November 16, 2016 in Ulster County, which denied defendant’s motion for summary judgment dismissing the complaint.

On December 23, 2012, plaintiff allegedly sustained various injuries when the vehicle that he was operating was rear-ended by another vehicle. At the time of the accident, plaintiff, who had worked in the automotive parts and repair industry for a number of years, had been unemployed for approximately seven months. In January 2013, plaintiff submitted an application for no-fault benefits to defendant, his insurance carrier. With respect to the lost wages portion of the application, plaintiff indicated that he “was due to start [a] new job” but had been unable to work since December 23, 2012 as a result of the injuries that he had sustained in the accident. Plaintiff further indicated that details regarding his position, including his salary and the employer’s name and address, would be provided.

Plaintiff thereafter provided defendant with a copy of his employment application dated December 15, 2012, which reflected that plaintiff had been offered a job at VW Parts, Inc. (hereinafter the parts business) commencing on January 1, 2013 and at a salary of $2,000 per week, with benefits. Defendant requested additional documentation in support of plaintiff’s claim and, when such claim remained unpaid, plaintiff commenced this action seeking to recover no-fault benefits for the lost wages allegedly sustained. Defendant answered and raised plaintiff’s failure to provide proper verification of his claim as an affirmative defense. Following discovery, defendant moved for summary judgment dismissing the complaint—citing plaintiff’s [*2]failure to provide proper verification of his claim and asserting that the claim for lost wages was speculative. Supreme Court denied defendant’s motion, prompting this appeal. We reverse.

Insurance Law § 5102 (a) (2) provides that an individual who makes a claim under the no-fault law must be compensated for “[l]oss of earnings from work which the person would have performed had he [or she] not been injured” (see Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451, 458 [1980]). The statutory and regulatory provisions that govern the recovery of lost earnings “contemplate[ ] a degree of certainty in the calculation of lost wages” (Sharpe v Allstate Ins. Co., 14 AD3d 774, 775 [2005]). With respect to the recovery of lost earnings, the Legislature did not intend for plaintiffs to receive windfall recoveries or for insurance carriers to suffer undue financial hardship (see Kurcsics v Merchants Mut. Ins. Co., 49 NY2d at 457). Instead, the Legislature intended “to compensate the accident victim for the earnings he or she would have, in fact, realized” (id.). Consistent with this principle, a plaintiff is entitled to “demonstrated future earnings reasonably projected” (11 NYCRR 65-3.16 [b] [3]).

As an initial matter, we agree with plaintiff and our dissenting colleagues that, on this motion for summary judgment, we must treat as credible plaintiff’s testimony and the testimony of William Hrazanek, who was the sole shareholder of the parts business and who allegedly offered plaintiff employment (see Coyle v Bommarito, 106 AD3d 1324, 1327 [2013]; Tenkate v Tops Mkts., LLC, 38 AD3d 987, 989 [2007]). Thus, we credit Hrazanek’s claims, despite the fact that he admitted, among other things, that (1) he had previously pleaded guilty to the crimes of insurance fraud and offering a false instrument, (2) he had made false sworn statements in regard to the bankruptcy proceeding of a corporation, (3) he had initiated that bankruptcy proceeding as a “ruse” to forestall creditors and (4) he had paid his wife a salary from the parts business while she was a student at Columbia University for her “learning purposes.” Even while crediting Hrazanek’s and plaintiff’s claims, however, the record reveals that their contentions are immaterial to the issue of the reasonableness of plaintiff’s alleged projected future earnings as an employee of the parts business. Regardless of the genuineness of Hrazanek’s offer of employment, uncontested evidence regarding the parts business and its finances during the relevant time period establish as a matter of law that it is unreasonable to project that, but for plaintiff’s accident, the parts business would have actually employed plaintiff at a salary of $2,000 a week.

Here, the uncontested evidence established that the parts business was in physical and financial disrepair after Hurricane Irene struck in 2011 and that it remained in such a state at the time that plaintiff allegedly received a job offer and thereafter. Hrazanek testified that the parts business conducted its operations from three different locations—a warehouse, operating offices that were attached to garage bays and a junkyard. According to Hrazanek, the hurricane severely flooded the warehouse and destroyed $4.8 million of inventory held therein. The parts business never resumed operations at the warehouse. At the operating offices, the hurricane flooded cars that were in the yard, washing some away, and destroyed the inventory in the bays. Hrazanek explained that the actual offices and the parts inventory that were stored therein remained unaffected by the hurricane.

Further, Hrazanek testified that he had hired plaintiff because they had plans to open an automobile repair shop. Defendant made a Freedom of Information Law request to the Town of Middletown, Delaware County—where the parts business was located—in regard to any information indicating that Hrazanek or the parts business had made efforts to open an automobile repair shop. The Town’s response established that, between November 2012 and January 2013—the month that plaintiff was supposed to begin working—neither Hrazanek nor [*3]the parts business had submitted any applications for any relevant licences or certificates in regard to operating an automobile repair shop. Thus, despite Hrazanek’s claim that the parts business was “basing [its] future on [plaintiff]” in regard to their “plans to open up the [automobile] repair shop,” the uncontested evidence established that plaintiff would not have had any automobile repair shop to run in January 2013.^[FN1] Hrazanek further acknowledged that he never opened such a repair shop.

Moreover, as additional evidence of the financial distress of the parts business, Hrazanek acknowledged that it was obligated to pay the lease on the warehouse and the operating offices, and that it ceased to do so after Hurricane Irene. In addition, the parts business’s financial records established that it paid three employees in December 2012, the month before plaintiff was allegedly intended to become an employee; Larissa Guselnikova, Hrazanek’s wife, was paid $1,442.31 per week, Bruce Hoornbeek was paid approximately $500 per week and Eric Preisendorfer was paid $1,325 per week. The records further indicate that as of January 2013, Preisendorfer was the only employee that remained on the payroll, and that the parts business did not pay him or any other employees after that month. A member of defendant’s special investigation unit visited the operating offices of the parts business in October 2013 and found the building padlocked and without any employees present. Finally, Hrazanek acknowledged that he sold the parts business in 2014 for $40,000.^[FN2] Notably, this transaction indicates that the entire value of the parts business was equal to the value of 20 weeks of plaintiff’s projected salary, excluding the costs of plaintiff’s benefits and other employer obligations. Therefore, uncontested proof establishes that the parts business was in financial distress at the time that plaintiff was allegedly offered a job and that it ceased operations, at the latest, shortly after plaintiff’s anticipated start date.

Moreover, defendant provided proof that discounted the possibility that, had plaintiff been able to contribute his efforts to the parts business, it would not have failed and he would have received his alleged proposed salary. Defendant submitted evidence regarding plaintiff’s demonstrated ability to run an automobile repair business by submitting plaintiff’s deposition and certain of his tax returns. According to plaintiff, his most recent employment was owning and operating an automobile repair shop and gas station, which plaintiff explained went out of business due to the “economy.” Plaintiff’s tax returns provided objective evidence of his lack of success in owning and operating such a business; in 2012—the last year in which he owned and operated that business—he reported that it had a net loss of $6,923.

[*4] Considering the foregoing, Hrazanek’s and plaintiff’s subjective beliefs about the financial health of the parts business and/or their subjective beliefs about plaintiff’s skills are immaterial to the resolution of whether it is reasonable to project that the parts business would have employed plaintiff at a salary of $2,000 a week. In contrast, the uncontradicted evidence that the parts business was failing, that it had not made any efforts to acquire or open an automobile repair shop, and that, even if it had, plaintiff had a demonstrated history of being unable to run a profitable automobile repair shop all bear on the reasonableness of such a projection. That material evidence established as a matter of law that the projection that plaintiff would have received $2,000 a week from the parts business is unreasonable (see Sharpe v Allstate Ins. Co., 14 AD3d at 775; see generally Bailey v Jamaica Buses Co., 210 AD2d 192, 192 [1994]). Accordingly, defendant’s motion for summary judgment dismissing the complaint should have been granted. This determination renders academic defendant’s alternative argument for dismissal, that plaintiff failed to provide proper verification of his claim.

Rose and Devine, JJ., concur.

Egan Jr., J. (dissenting). The crux of defendant’s argument upon appeal is that, as of the filing of plaintiff’s application for no-fault benefits, his alleged future employer, VW Parts, Inc. (hereinafter the parts business), “was a defunct business” and, therefore, “there was no actual employment available to plaintiff.” Absent a legitimate job opportunity, defendant’s argument—and the majority’s premise—continues, plaintiff’s claim for lost wages is entirely speculative, thereby warranting dismissal thereof. We disagree and, therefore, respectfully dissent.

To our analysis, the majority has engaged in an unduly narrow reading of the record—seizing upon those facts that would militate in favor of dismissing plaintiff’s claim while discounting any proof that could reasonably be construed as supporting plaintiff’s contention that he had a legitimate job offer and, hence, that his future earnings were in fact reasonably projected. In this regard, it bears repeating that, on a motion for summary judgment, we must view the evidence “in the light most favorable to the nonmoving party, who is afforded the benefit of every reasonable inference” to be drawn therefrom (Hall v Queensbury Union Free Sch. Dist., 147 AD3d 1249, 1250 [2017]; see Giglio v Saratoga Care, Inc., 117 AD3d 1143, 1145 [2014]). Applying that standard to the record before this Court, we find questions of fact as to whether plaintiff indeed had a bona fide position with the parts business effective January 1, 2013 and, further, whether plaintiff would have been able to begin work at the stated salary but for the intervening motor vehicle accident.

As the majority has recounted at length, there indeed is no question that the parts business and its sole shareholder, William Hrazanek, had—in the wake of Hurricane Irene—fallen on hard times. Against this backdrop, however, the record nevertheless reflects that, on or about December 15, 2012, Hrazanek offered plaintiff, whom he had known for approximately 15 years, a position as a parts specialist and warehouse manager; plaintiff’s employment in that capacity was to commence on January 1, 2013, and his salary was slated to be $2,000 per week (including benefits). Although plaintiff’s projected salary exceeded the salaries paid to other employees of the parts business, Hrazanek testified that no one else possessed plaintiff’s qualifications and that he was effectively “basing [the] future” of his business upon plaintiff’s expertise. Hrazanek further testified that plaintiff “had worked at numerous Audi dealers and had been to all of the schools and so forth,” leading Hrazanek to conclude that plaintiff was the [*5]person he needed to “expand the business and get back on track after the flood.”^[FN1] Plaintiff’s affidavit in opposition to defendant’s motion largely echoed Hrazanek’s account of plaintiff’s hiring—with plaintiff averring that he was offered and accepted a position with the parts business eight days before the accident occurred, that he was scheduled to begin work in January 2013 and that, as a result of the accident, he was unable to do so. According to plaintiff, who had more than 25 years of experience in the automotive parts industry, his new position with the parts business would consist of dismantling vehicles and warehousing the individual parts, and he would utilize his extensive knowledge and experience regarding “which parts fit which vehicles and which parts [were] interchangeable” to “facilitate the sale of vehicle parts.” As of December 2012, plaintiff averred, the parts business had “about 1,500 to 2,000 intact cars awaiting to have [their] parts stripped, labeled and warehoused.”^[FN2] In light of such proof, we agree with Supreme Court that, as noted previously, the record as a whole contains questions of fact as to whether plaintiff indeed had a bona fide position with the parts business effective January 1, 2013 and, further, whether plaintiff would have been able to begin work at the stated salary but for the intervening motor vehicle accident.

In reaching a contrary conclusion, the majority relies upon, among other things, the fact that, after plaintiff’s anticipated start date came and went, the parts business ceased operations altogether and ultimately was sold. This salient fact, however, cuts both ways. In other words, while the majority cites the eventual failure of the parts business as support for the proposition that it was a defunct operation from the very beginning, the failure of such business also lends credence to Hrazanek’s claim that the entire future of his overall business hinged upon hiring someone with plaintiff’s particular and demonstrated skill set.

The majority’s reliance upon plaintiff’s purported lack of success in running his own business is, to our analysis, similarly misplaced. Even assuming, without deciding, that the majority’s interpretation of plaintiff’s tax returns indeed leads to the inevitable conclusion that he would be unable to singlehandedly operate a successful automobile repair business, the fact remains that plaintiff was offered a position as a parts specialist and warehouse manager, that—as noted previously—plaintiff had more than 25 years of experience in the automotive parts industry and that, whatever other inventory Hrazanek may have lost in the hurricane or whatever other financial setbacks he may have suffered, the parts business had—as of December 2012—[*6]between 1,500 and 2,000 vehicles waiting to be dismantled and sold for parts. As for the majority’s conclusion that “the actual value of the parts business, which would include those vehicles and their parts, was $40,000,” we do not subscribe to the implicit assumption that the eventual “fire sale” value of the business necessarily was indicative of the value of the underlying inventory as of January 2013. Nor are we persuaded that the ultimate sale price obtained by Hrazanek—once plaintiff was injured—somehow bears upon whether Hrazanek could have met plaintiff’s promised salary had their business relationship gone forward.

Finally, our conclusions in this regard are not, as the majority suggests, predicated upon Hrazanek’s and plaintiff’s subjective beliefs as to either the financial viability of the parts business, the success of the planned repair shop or the breadth of plaintiff’s automotive skills. Rather, the issue distills to—and our analysis is focused upon—whether, based upon a review of the record as a whole and construing all of the proof contained therein in the light most favorable to plaintiff, plaintiff’s future earnings were reasonably projected. In reversing and granting defendant summary judgment, the majority does what is not ours to do—judge the credibility of the witnesses. Given the conflicting proof, we think that Supreme Court was right to let a jury judge plaintiff’s account.

Mulvey, J., concurs. Ordered that the order is reversed, on the law, with costs, motion granted and complaint dismissed.

Footnotes

Footnote 1:When Hrazanek claimed that the future of the business depended on plaintiff, he was referring to his plan to have plaintiff operate an automobile repair shop. Despite being deposed twice, Hrazanek never stated that he had any plans for plaintiff to dismantle vehicles for parts, let alone that plaintiff dismantling vehicles and selling parts—the work that the parts business was already engaged in—was the future of the parts business.

Footnote 2:Plaintiff claimed that the parts business had 1,500 to 2,000 vehicles waiting to be dismantled and sold for parts. Nonetheless, the uncontradicted evidence remains that the actual value of the parts business, which would include those vehicles and their parts, was $40,000.

Footnote 1:According to the majority, “[w]hen Hrazanek claimed that the future of the business depended on plaintiff, he was referring to his plan to have plaintiff operate an automobile repair shop.” While that is one possible interpretation of Hrazanek’s testimony, we read Hrazanek’s testimony in a more neutral fashion—leading to the conclusion that Hrazanek generally viewed plaintiff as an asset to building and/or rebuilding the various components of the business.

Footnote 2:While the majority makes much of the fact that Hrazanek did not expressly state that plaintiff’s job would include dismantling vehicles and selling their parts, plaintiff’s affidavit makes clear that he understood that such tasks would be part of his new position—a fact born out by the employment application that plaintiff completed and Hrazanek signed, which reflects that plaintiff was being hired as a parts specialist and warehouse manager.

[*1]

The Law Office of Jason Tenenbaum, P.C., Garden City, NY, for appellant.

In an action for a judgment declaring that the plaintiff is not obligated to pay certain no-fault insurance benefits on the ground that the services rendered to the defendant’s assignor were not medically necessary, the plaintiff appeals from an order of the Supreme Court, Nassau County (Brown, J.), entered September 22, 2016, which denied its unopposed motion pursuant to CPLR 3215 for leave to enter a default judgment upon the defendant’s failure to appear or answer the complaint.

Ordered that the order is affirmed, without costs or disbursements.

In February 2016, the plaintiff commenced this action pursuant to Insurance Law § 5106 (c) seeking de novo adjudication of a dispute regarding the defendant’s entitlement to receive payment for medical services rendered to its assignor. After the defendant did not appear or answer the complaint, the plaintiff moved pursuant to CPLR 3215 for leave to enter a default judgment. The Supreme Court denied the plaintiff’s unopposed motion on the ground that the plaintiff had not submitted sufficient facts to support its claim. On this appeal, we affirm, but for a different reason.

A plaintiff seeking leave to enter a default judgment must file proof of proper service of the summons and the complaint, the defendant’s default, and the facts constituting the claim (see CPLR 3215 [f]; Fried v Jacob Holding, Inc., 110 AD3d 56, 59 [2013]).

The plaintiff averred that it served the defendant, a foreign limited liability company not authorized to conduct business in New York, pursuant to Limited Liability Company Law § 304. As relevant to the plaintiff’s contentions, that statute requires three things. First, service upon the unauthorized foreign limited liability company may be made by personal delivery of the summons and complaint, with the appropriate fee, to the Secretary of State (see Limited Liability Company Law § 304 [b]). Second, in order for the personal delivery to the Secretary of State to be “sufficient,” the plaintiff must also give the defendant direct notice of its delivery of the process to the Secretary of State, along with a copy of the process. The direct notice may be sent to the defendant by registered mail, return receipt requested, to the defendant’s last known address (see Limited Liability Company Law § 304 [c] [2]). Third, after process has been delivered to the Secretary of State and direct notice of that service has been sent to the defendant, the plaintiff must file proof of service with the clerk of the court. That proof of service must be in the form of an “affidavit of compliance.” The affidavit of compliance must be filed with the return receipt within 30 days after the plaintiff [*2]has received the return receipt from the post office. Service of process shall be complete 10 days after the affidavit of compliance has been filed with the clerk with a copy of the summons and complaint (Limited Liability Company Law § 304 [c] [2]). Strict compliance with Limited Liability Company Law § 304 is required, including as to the filing of an “affidavit of compliance” (see Interboro Ins. Co. v Tahir, 129 AD3d 1687, 1689 [2015]; cf. Flick v Stewart-Warner Corp., 76 NY2d 50, 57 [1990]). Where the plaintiff has failed to demonstrate strict compliance, the plaintiff will not be entitled to a default judgment (see Interboro Ins. Co. v Tahir, 129 AD3d at 1689). Here, the plaintiff failed to submit an affidavit of compliance with the return receipt within 30 days after it received the return receipt from the post office. Accordingly, the plaintiff’s unopposed motion for leave to enter a default judgment was properly denied (see id.).

In light of our determination, we need not address the plaintiff’s remaining contention. Balkin, J.P., Austin, Roman and LaSalle, JJ., concur.

[*1]

Cardillo Law PC, Brooklyn, NY (Harry A. Cardillo of counsel), for appellant.

Freiberg, Peck & Kang LLP, Armonk, NY (Yilo J. Kang of counsel), for respondent.

In an action for a judgment declaring that the plaintiff is not obligated to pay certain no-fault insurance benefits, the defendant appeals from an order of the Supreme Court, Queens County (Dufficy, J.), entered February 29, 2016, which denied its motion to extend its time to answer, or in the alternative, to compel the plaintiff to accept the untimely answer.

Ordered that the order is affirmed, with costs.

The plaintiff insurance company commenced this action against the defendant, seeking a judgment declaring that it was not obligated to pay certain no-fault insurance benefits because the defendant failed to appear for examinations under oath. The defendant filed an answer approximately 31/2 months after the statutory time to file an answer had expired. The plaintiff rejected the answer as untimely, and the defendant moved to extend its time to answer, or in the alternative, to compel the plaintiff to accept the untimely answer. The Supreme Court denied the motion, and the defendant appeals.

To compel the plaintiff to accept an untimely answer as timely or to extend the time for a defendant to answer, a defendant must provide a reasonable excuse for the delay and demonstrate a potentially meritorious defense to the action (see Ryan v Breezy Point Coop., Inc., 76 AD3d 523, 524 [2010]; Juseinoski v Board of Educ. of City of N.Y., 15 AD3d 353 [2005]). Here, the defendant submitted an answer which was verified only by its attorney and an affirmation from its attorney who did not have personal knowledge of the facts. These documents were insufficient to demonstrate that the defendant had a potentially meritorious defense to the action (see Salch v Paratore, 60 NY2d 851 [1983]; Ryan v Breezy Point Coop., Inc., 76 AD3d at 524; Juseinoski v Board of Educ. of City of N.Y., 15 AD3d 353 [2005]).

The parties’ remaining contentions either are without merit or have been rendered academic in light of our determination.

Accordingly, the Supreme Court providently exercised its discretion in denying the defendant’s motion. Dillon, J.P., Austin, Hinds-Radix and LaSalle, JJ., concur.

[*1]

Jaffe & Koumourdas, LLP, New York (Jean H. Kang of counsel), for appellant.

Gary Tsirelman, P.C., Brooklyn (Stefan Belinfanti of counsel), for respondent.

Judgment, Supreme Court, New York County (Geoffrey D. Wright, J.), entered on or about April 7, 2016, in respondent’s favor, unanimously affirmed, with costs.

Petitioner failed to establish any of the grounds for vacating an arbitration award (CPLR 7511 [b], [c]; see generally Azrielant v Azrielant, 301 AD2d 269, 275 [1st Dept 2002], lv denied 99 NY2d 509 [2003]).

Pursuant to Insurance Department Regulations (11 NYCRR) § 65-3.16 (a) (12), “insurance carriers may withhold payment for medical services provided by fraudulently incorporated enterprises to which patients have assigned their claims” (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d 313, 319 [2005]). Assuming without deciding that an insurer’s defense of fraudulent incorporation cannot be precluded (see AVA Acupuncture, P.C. v AutoOne Ins. Co., 28 Misc 3d 134[A], 2010 NY Slip Op 51350[U] [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2010]; Bath Med. Supply, Inc. v Allstate Indem. Co., 27 Misc 3d 92, 95 [App Term, 2d Dept, 9th & 10th Jud Dists 2010]), we conclude that the master arbitrator properly confirmed the award of the arbitrator, who reviewed petitioner’s submissions relating to the plea of guilty to no-fault insurance fraud by a man married to the owner of respondent, found that respondent was not mentioned once in the “hundreds of pages” submitted, and rejected petitioner’s attempt to hold the owner “responsible by association.” Petitioner’s reliance on a subsequent arbitration (in 2014) is also misplaced; among other things, the later arbitration appears to have relied on documentation that was not submitted to the arbitrator in this case.

Contrary to petitioner’s contention, there was no default in this case. In any event, any delay in opposing the petition to vacate the arbitration award was short and quickly corrected, and the explanation given for it—law office failure—was detailed and specific, and, in view of the strong public policy favoring resolution of litigation on the merits, constituted “good cause” for the delay (see Lamar v City of New York, 68 AD3d 449 [1st Dept 2009]).

Respondent is entitled to attorneys’ fees for this appeal (11 NYCRR 65-4.10 [j] [4]), calculated, in accordance with 11 NYCRR 65-4.6 (b), as 20% of the no-fault benefits awarded. Concur—Acosta, P.J., Renwick, Mazzarelli, Andrias and Manzanet-Daniels, JJ.

[*1]

Law Offices of Melissa Betancourt, P.C., Brooklyn, NY (Frank D’Esposito of counsel), for appellants.

McDonnell Adels & Klestzick, PLLC, Garden City, NY (Stuart Flamen of counsel), for respondent.

Appeal from an order of the Supreme Court, Kings County (Jules L. Spodek, J.), dated June 2, 2015. The order, insofar as appealed from, directed that the administrator of the defendant Estate of Ronald L.L. Collins appear for a deposition.

Ordered that on the Court’s own motion, the notice of appeal is deemed to be an application for leave to appeal from so much of the order as directed that the administrator of the defendant Estate of Ronald L.L. Collins appear for a deposition, and leave to appeal is granted (see CPLR 5701 [c]); and it is further,

Ordered that the order is reversed insofar as appealed from, on the law, with costs.

The plaintiff insurance company commenced this action against, among others, the defendant Estate of Ronald L.L. Collins, seeking a judgment declaring, inter alia, that the plaintiff has no obligation to pay no-fault claims for medical services purportedly rendered by Collins. In an order dated June 2, 2015, the Supreme Court, inter alia, directed that the administrator of Collins’s estate (hereinafter the administrator) appear for a deposition. The defendants appeal from that portion of the order.

CPLR 3101 (a) (1) provides that “[t]here shall be full disclosure of all matter material and necessary in the prosecution or defense of an action.” The terms “material and necessary” in this statute “must ‘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’ ” (Matter of Kapon v Koch, 23 NY3d 32, 38 [2014], quoting Allen v Crowell-Collier Publ. Co., 21 NY2d 403, 406 [1968]; see D’Alessandro v Nassau Health Care Corp., 137 AD3d 1195, 1196 [2016]). “At the same time, a party is ‘not entitled to unlimited, uncontrolled, unfettered disclosure’ ” (D’Alessandro v Nassau Health Care Corp., 137 AD3d at 1196, quoting Geffner v Mercy Med. Ctr., 83 AD3d 998, 998 [2011]). “ ’It is incumbent on the party seeking disclosure to demonstrate that the method of discovery sought will result in the disclosure of relevant evidence or is reasonably calculated to lead to the discovery of information bearing on the claims’ ” (D’Alessandro v Nassau Health Care Corp., 137 AD3d at 1196, quoting Crazytown Furniture v Brooklyn Union Gas Co., 150 AD2d 420, [*2]421 [1989]). Here, the plaintiff made no showing that conducting the deposition of the administrator will result in the disclosure of relevant evidence or is reasonably calculated to lead to the discovery of information bearing on the claims (see Black v Budget Rent A Car Corp., 224 AD2d 350 [1996]; Crazytown Furniture v Brooklyn Union Gas Co., 150 AD2d at 421).

The parties’ remaining contentions are without merit.

Accordingly, the Supreme Court improperly directed that the administrator appear for a deposition. Rivera, J.P., Hall, LaSalle and Connolly, JJ., concur.

[*1]

Law Office of Gregory A. Goodman, P.C., Hauppauge (Gregory A. Goodman of counsel), for appellant.

Rubin, Fiorella & Friedman LLP, New York (David F. Boucher, Jr. of counsel), for respondent.

Order and judgment (one paper), Supreme Court, New York County (Shlomo Hagler, J.), entered January 6, 2017, which denied defendant Star of N.Y. Chiropractic Diagnostic, P.C.’s (Star) motion for attorneys fees against plaintiff, unanimously affirmed, with costs.

“It is well settled in New York that a prevailing party may not recover attorneys’ fees from the losing party except where authorized by statute, agreement or court rule” (U.S. Underwriters Ins. Co. v City Club Hotel, LLC, 3 NY3d 592, 597 [2004]; see also Gotham Partners, L.P. v High Riv. Ltd. Partnership, 76 AD3d 203, 205 [1st Dept 2010], lv denied 17 NY3d 713 [2011]). While an insured party may recover attorneys’ fees where it successfully defends against its insurer’s action seeking a declaratory judgment that it has no duty to defend or indemnify its insured (see Underwriters Ins. Co., 3 NY3d at 597; Mighty Midgets v Centennial Ins. Co., 47 NY2d 12, 21 [1979]), “[t]he reasoning behind [the award of such attorneys’ fees] is that an insurer’s duty to defend an insured extends to the defense of any action arising out of the occurrence, including a defense against an insurer’s declaratory judgment action” (Underwriters Ins. Co., 3 NY3d at 597-598). Here, plaintiff owes defendant Star no duty to defend, as Star is merely seeking reimbursement for chiropractic services rendered to the claimant in this no-fault action. While Star was assigned the claimant’s rights for such reimbursement, the claimant was merely the injured party in the taxi at the time of the accident, and plaintiff owed no duty to defend the claimant. Star, as assignee of the claimant’s rights, could acquire no greater rights than its assignor (see New York & Presbyt. Hosp. v Country-Wide Ins. Co., 17 NY3d 586, 592 [2011]), and did not acquire any right to a defense from plaintiff. Thus, the court properly held that Star was not entitled to attorneys’ fees in this case.

[*2] We have examined Star’s remaining arguments, including its public policy argument, and find them to be unavailing. Concur—Sweeny, J.P., Renwick, Andrias, Feinman and Gesmer, JJ.

[*1]

Freiberg, Peck & Kang, LLP, Armonk, NY (Yilo J. Kang of counsel), for appellant.

Catherine M. Charles (Lawrence R. Miles, Long Island City, NY, of counsel), for respondent.

In a proceeding pursuant to CPLR 7511 to vacate two arbitration awards, both dated March 11, 2014, the petitioner appeals from an order and judgment (one paper) of the Supreme Court, Kings County (Silber, J.) entered June 17, 2015, which denied the petition, in effect, dismissed the proceeding, and granted the respondent’s cross petition to confirm the awards.

Ordered that the order and judgment is affirmed, with costs.

Pursuant to Insurance Law § 5105, the respondent, as subrogee of Fatimah Salaam and Kim McCorey, commenced two related loss-transfer arbitration proceedings against the petitioner arising out of payments the respondent made in connection with a collision between two vehicles, one of which had been insured by the petitioner and the other by the respondent. The respondent paid first-party benefits to Salaam and McCorey, who had been passengers in a “for hire” vehicle insured by the respondent that was struck in the rear by the other vehicle, which, at the time of the accident, was insured by the petitioner. The petitioner participated in the arbitration and opposed any payments to the respondent, arguing that, after the accident, it had rescinded its policy retroactively, so that it provided no coverage as of the date of the accident. The arbitrator, rejecting that argument, made two awards in favor of the respondent. The petitioner commenced this proceeding pursuant to CPLR 7511 to vacate the awards, and the respondent cross-petitioned to confirm the awards. In the order and judgment appealed from, the Supreme Court denied the petition and granted the cross petition. The petitioner appeals from the order and judgment, contending, inter alia, that the arbitrator was without jurisdiction to decide the issue and that the arbitrator should have applied Pennsylvania rather than New York law because the subject policy was procured in Pennsylvania. We affirm.

The petitioner’s contention that, pursuant to 11 NYCRR 65-4.11 (a) (6), its “good faith” retroactive denial of insurance coverage divested the arbitrator of jurisdiction is without merit (see State Farm Mut. Auto. Ins. Co. v Nationwide Mut. Ins. Co., 150 AD2d 976, 977-978 [1989]). Insurance Law § 5105 (b) provides that arbitration is the only forum in which a loss-transfer claim may be litigated (see Paxton Natl. Ins. Co. v Merchants Mut. Ins. Co., 74 AD2d 715, 716 [1980]). Moreover, “the contention that a claim proposed to be submitted to arbitration is in excess of the arbitrator’s power is waived unless raised by an application for a stay” (Matter of Silverman [Benmor Coats], 61 NY2d [*2]299, 309 [1984]; see Matter of Allstate Ins. Co. v New York Petroleum Assn. Compensation Trust, 104 AD3d 682 [2013]; Matter of Philadelphia Ins. Co. [Utica Natl. Ins. Group], 97 AD3d 1153 [2012]; Matter of Utica Mut. Ins. Co. v Incorporated Vil. of Floral Park, 262 AD2d 565 [1999]). By failing to apply for a stay of arbitration before arbitration, the petitioner waived its contention that the claim is not arbitrable under Insurance Law § 5105 (see Rochester City School Dist. v Rochester Teachers Assn., 41 NY2d 578, 583 [1977]; Matter of County of Onondaga [Civil Serv. Empls. Assn.], 248 AD2d 1026 [1998]; Matter of Liberty Mut. Ins. Co. [Allstate Ins. Co.], 234 AD2d 901 [1996]; Matter of Arner v Liberty Mut. Ins. Co., 233 AD2d 321 [1996]).

The petitioner also failed to establish any basis under CPLR 7511 (b) (1) to vacate the arbitration awards (see Matter of Domotor v State Farm Mut. Ins. Co., 9 AD3d 367 [2004]). Moreover, any possible error by the arbitrator in applying New York law (see Vehicle and Traffic Law § 313 [1] [a]) rather than Pennsylvania law does not provide a basis for vacatur (see Matter of Yarmak v Penson Fin. Servs. Inc., 146 AD3d 642 [2017]).

The petitioner’s remaining contention is without merit.

Accordingly, we affirm the order and judgment. Rivera, J.P., Roman, Miller and Duffy, JJ., concur.

[*1]

Jaffe & Koumourdas, LLP, New York, NY (Jean H. Kang of counsel), for appellant.

Gary Tsirelman, P.C., Brooklyn, NY (David M. Gottlieb and Stefan Belinfanti of counsel), for respondent.

In a proceeding pursuant to CPLR 7511 to vacate an award of a master arbitrator dated November 27, 2013, which vacated an arbitration award dated August 28, 2013, awarding the petitioner, inter alia, reimbursements totaling $626.81 for acupuncture treatments, Country-Wide Ins. Co. appeals from an order of the Supreme Court, Kings County (Velasquez, J.), dated December 15, 2014, which granted the petition, vacated the award of the master arbitrator, and reinstated and confirmed the award of the arbitrator.

Ordered that the order is reversed, on the law, with costs, the award of the master arbitrator is reinstated and confirmed, and the petition is denied.

“The power of [a] master arbitrator to review factual and procedural issues is limited to ‘whether the arbitrator acted in a manner that was arbitrary and capricious, irrational or without a plausible basis’ ” (Matter of Liberty Mut. Ins. Co. v Spine Americare Med., 294 AD2d 574, 575 [2002], quoting Matter of Petrofsky [Allstate Ins. Co.], 54 NY2d 207, 211 [1981]). “If the determination of the arbitrator is challenged based upon an alleged factual error, the master arbitrator must uphold the determination if it has a rational basis” (Matter of Liberty Mut. Ins. Co. v Spine Americare Med., 294 AD2d at 575-576). “However, pursuant to 11 NYCRR 65.19 (a) (4) [(now 11 NYCRR 65-4.10 [a] [4])], the review powers of the master arbitrator include the power to determine if the arbitrator’s award was ‘incorrect as a matter of law’ ” (id. at 576, quoting Matter of Smith [Firemen’s Ins. Co.], 55 NY2d 224, 231 [1982]; Matter of Petrofsky [Allstate Ins. Co.], 54 NY2d at 211). “If the master arbitrator vacates the arbitrator’s award based upon an alleged error of ‘a rule of substantive law,’ the determination of the master arbitrator must be upheld unless it is irrational” (Matter of Liberty Mut. Ins. Co. v Spine Americare Med., 294 AD2d at 576, quoting Matter of Smith [Firemen’s Ins. Co.], 55 NY2d at 232). Here, the master arbitrator correctly found that the arbitrator had erroneously held that the carrier’s claim of fraudulent incorporation (see State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d 313, 322 [2005]), was precluded because it was not raised in a timely denial (see Lexington Acupuncture, P.C. v General Assur. Co., 35 Misc 3d 42, 44 [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2012]; Multiquest, P.L.L.C. v Allstate Ins. Co., 17 Misc 3d 37, 38-39 [App Term, 2d Dept, 2d & 11th Jud Dists 2007]). The master arbitrator’s [*2]award setting aside the arbitrator’s award based on that erroneous refusal to consider the claim of fraudulent incorporation was not irrational. Accordingly, the Supreme Court erred in granting the petition to vacate the award of the master arbitrator (cf. Matter of Singh v Allstate Ins. Co., 137 AD3d 1046, 1047 [2016]). Rivera, J.P., Balkin, Barros and Brathwaite Nelson, JJ., concur.

[*1]

Andrew Carothers, M.D., P.C. v Progressive Ins. Co., 42 Misc 3d 30, affirmed.

APPEARANCES OF COUNSEL

Smith Valliere PLLC, New York City (Mark W. Smith and Gregory Zimmer of counsel), for appellant.

McCormack & Mattei, P.C., Garden City (John E. McCormack and Barry I. Levy of counsel), for respondent.

New York State law mandates that professional service corporations be owned and controlled only by licensed professionals. In State Farm Mut. Auto. Ins. Co. v Mallela (4 NY3d 313 [2005]), the Court of Appeals held that under the no-fault insurance law (Insurance Law § 5101 et seq.), an insurance carrier may withhold payment for medical services provided by a professional corporation which has been “fraudulently incorporated” to allow nonphysicians to share in its ownership and control. The primary issue we are called upon to determine, for the first time, is what elements are necessary to establish the defense of fraudulent incorporation recognized by Mallela. For the reasons which follow, we find that the jury in this case was properly instructed on the elements of a fraudulent incorporation defense.

Background of the Action

In July 2004, Andrew Carothers, a radiologist, formed a professional service corporation, the plaintiff, Andrew Carothers, M.D., P.C., to perform MRI scans at three existing MRI facilities in Brooklyn, Queens, and the Bronx. The plaintiff leased the three MRI facilities, and all of the medical and office equipment used at the facilities, from companies owned and controlled by nonparty Hillel Sher. In 2005 and 2006, approximately 38,000 MRI scans were performed at the three facilities. The majority of the scans performed were for patients allegedly injured in motor vehicle accidents. These patients assigned their right to receive first-party no-fault insurance benefits to the plaintiff, and the plaintiff billed insurance companies to recover payment on the assigned claims. Because payment was not made in many instances, the plaintiff commenced thousands of [*2]actions against insurers, including this action against the defendant, Progressive Insurance Company, to recover unpaid claims of assigned first-party no-fault insurance benefits.{**150 AD3d at 195}

As a defense to nonpayment, the insurers contended that the plaintiff was not entitled to payment of the unpaid claims because, pursuant to Mallela, it was fraudulently incorporated. Specifically, the insurers contended that the plaintiff was not solely owned and controlled by Carothers, who was listed on corporate filings as the plaintiff’s only owner, shareholder, director, and officer. Rather, the insurers alleged that Carothers was merely a nominal owner, while the plaintiff was actually owned and controlled by the plaintiff’s landlord, Hillel Sher, and the plaintiff’s executive secretary, Irina Vayman, both nonphysicians. The insurers additionally contended that the plaintiff was not entitled to payment because Carothers did not personally engage in the practice of medicine within the professional corporation, as required by Business Corporation Law § 1507.

Sher and Vayman were both deposed prior to trial. However, both invoked their Fifth Amendment (US Const Fifth Amend) privilege against self-incrimination in response to virtually all the questions posed to them during their respective depositions.

A joint trial was held on actions pending in Kings County and Richmond County between the plaintiff and 53 insurers and self-insurers, including this action. During the course of the lengthy trial, the defendant insurers called several expert witnesses, who provided testimony in support of their claims that the plaintiff’s profits were funneled to Sher and Vayman through grossly inflated equipment lease payments made to a company owned and controlled by Sher, and through Vayman’s transfers of funds to her own personal accounts. For example, while the plaintiff paid $547,000 per month for two years to lease old MRI equipment, an expert in the field of selling and leasing of MRI equipment testified that the plaintiff could have purchased the same equipment for a onetime payment of $600,000. In addition, the defendants’ expert forensic accountant noted that Sher, through one of his companies, leased one of the machines in 2001 for approximately $9,800 per month and then charged the plaintiff $75,000 per month for the same machine. In the forensic accountant’s view, the lease agreements between the plaintiff and Sher’s companies were not made at arm’s length because the terms of those agreements were not mutually beneficial to both parties. To illustrate this point, the forensic accountant noted that the equipment lease permitted Sher to terminate the lease without cause and made{**150 AD3d at 196} no warranties as to the condition of the equipment. The facilities lease also contained the same one-sided termination provision and provided that, if the equipment lease was terminated, the facilities lease would terminate as well.

The evidence presented by the defendant insurers further showed that Carothers had no real involvement with the management of the plaintiff. Vayman hired all of the personnel and signed all of the checks of the plaintiff’s operating account. The only checks that Carothers signed on behalf of the plaintiff were from a new account that was set up around the time that the plaintiff ceased its operation. With respect to that account, Carothers received $52,000 and Vayman and her company received $75,000. The forensic accountant also testified that he found a web of eight different accounts associated with the plaintiff and that he could ascertain no business purpose for that number of accounts. He testified that the plaintiff’s money went to Sher’s companies each month, leaving no money in the accounts, that no tax returns were filed on behalf of the plaintiff, and that no books or records were maintained on behalf of the plaintiff. According to this expert, $8.7 million from one of the accounts, the plaintiff’s operating account, went to one of Sher’s companies, Forum Medical Group, and Vayman received $882,600 of those funds, which were immediately transferred from that company’s account into Vayman’s personal account.

In the two-year period during which the plaintiff operated the practices, Sher and Vayman received a total of $12.2 million, while Carothers earned $133,000.

In contrast, when called to testify, Carothers was unable to account for such transactions. He asserted that the payments to Vayman’s personal account were for back wages and payment of corporate expenses and that the only payments for Sher’s benefit were to repay a $400,000 bridge loan, for which he presented no proof. Although Carothers testified that a general ledger compiled by an accounting firm in 2007 accounted for all transactions, no general ledger was admitted into evidence. Carothers’ testimony also revealed that he did not recognize the names of employees, some of whom were Sher’s relatives, and that he lacked knowledge about the operation and finances of the plaintiff.

Although the parties agreed that neither Sher nor Vayman was available to testify at the trial within the meaning of CPLR 3117 (a) (3), the Civil Court, over the plaintiff’s objection,{**150 AD3d at 197} permitted the defense to read the transcripts of their deposition to the jury. The court also [*3]charged the jury that an adverse inference could be drawn against the plaintiff based upon the invocation of the Fifth Amendment by Sher and Vayman.

Before the Civil Court delivered its jury charge, the plaintiff requested that the jury be instructed that in order to prove fraudulent incorporation, the defendants were required to prove, by clear and convincing evidence, the traditional elements of common-law fraud, including the element of fraudulent intent. The plaintiff further requested that the jury be charged that the defendants were required to prove that such fraudulent intent was present at the time it was incorporated in July 2004. In addition, the plaintiff requested that the jury be charged on the business judgment rule and instructed to consider the rule in evaluating whether Carothers’ decisions were reasonable and whether he engaged in sham transactions as that term is defined under federal tax law. The court denied these requests.

In charging the jury on the fraudulent incorporation defense, the Civil Court instructed the jury that the defendants had to establish that Sher and/or Vayman were de facto owners of the plaintiff or that they exercised substantial control over the plaintiff. To find de facto ownership, the jury was told that it must find that Sher and/or Vayman exercised dominion and control over the plaintiff and its assets, and that they shared risks, expenses, and interests in the profits and losses of the plaintiff. However, the court advised the jury that salary and other compensation and rents should not be considered as profits if it found such salary and leases were negotiated in good faith and were not in actuality a means to channel profits to Sher and/or Vayman. To find control, the jury was instructed that it must find that Sher and/or Vayman had a significant role in the guidance, management, and direction of the plaintiff. In determining the issue of whether Sher and/or Vayman were de facto owners or exercised substantial control over the plaintiff, the jury was instructed to consider the totality of the circumstances and any relevant factor. The court also gave the jury a list of 13 factors it might want to consider, including whether Sher’s dealings with the plaintiff were arm’s length or were instead designed to give Sher and his companies substantial control over the plaintiff and channel profits to him; whether Sher and Vayman exercised dominion and control over the plaintiff’s assets, including the plaintiff’s bank accounts;{**150 AD3d at 198} whether and to what extent the plaintiff’s funds were used by Sher and Vayman for personal rather than corporate purposes; whether Sher and Vayman were responsible for the hiring, firing, and payment of salaries of the plaintiff’s employees; whether the day-to-day formalities of corporate existence were followed, including the issuance of stock, election of directors, holding of corporate meetings, keeping books and records, and filing tax returns; whether the plaintiff shared common office space and employees with Sher’s companies; and whether Carothers played a substantial role in the day-to-day and overall operation and management of the plaintiff.

The jury returned a verdict finding, inter alia, that the defendants proved their defense by clear and convincing evidence, i.e., that the plaintiff was fraudulently incorporated. The jury further found that Carothers was not engaged in the practice of medicine during the time the plaintiff was in business as required by Business Corporation Law § 1507 (a).

The Civil Court denied the plaintiff’s motion pursuant to CPLR 4404 (a) to set aside the verdict and for judgment as a matter of law, or, in the alternative, to set aside the verdict as contrary to the weight of the evidence or in the interest of justice and for a new trial, and a judgment was entered in favor of the defendant and against the plaintiff in this action, dismissing the complaint. Upon the plaintiff’s appeal, the Appellate Term set aside as contrary to the weight of the evidence so much of the verdict as determined that Carothers failed to practice medicine, but upheld so much of the verdict as found that the plaintiff was fraudulently incorporated, affirming the judgment on that basis (see Andrew Carothers, M.D., P.C. v Progressive Ins. Co., 42 Misc 3d 30 [2013]). The Appellate Term rejected the plaintiff’s contention that the Civil Court erroneously instructed the jury on the essential elements of a fraudulent incorporation defense as set forth in Mallela, and determined that it was not error for the Civil Court to set forth a list of factors to assist the jury in determining the issue of whether Sher and Vayman were de facto owners or exercised substantial control over the plaintiff. This Court granted the plaintiff leave to appeal. We affirm the Appellate Term’s order insofar as appealed from.

Business Corporation Law

New York State permits licensed professionals to incorporate if they are the sole organizers, owners, and operators of the corporation (see Business Corporation Law §§ 1503 [a], [b]; {**150 AD3d at 199}1508). To incorporate, the licensed individual must obtain a “certificate . . . issued by the [New York State Department of Education (DOE)] certifying that each of the proposed shareholders, [*4]directors and officers is authorized by law to practice a profession which the corporation is being organized to practice” (Business Corporation Law § 1503 [b]). The DOE may not issue a certificate of authority to a professional service corporation that does not meet these qualifications (see Education Law § 6507 [4] [c] [i]). Once the professional corporation is formed, shareholders may not transfer their voting power to any person who is not a licensed professional in the field (see Business Corporation Law § 1507 [a]); only shareholders or the licensed professionals engaged in the practice may be directors and officers (see Business Corporation Law § 1508 [a]). Any agreement by a shareholder transferring the voting power of his/her share to individuals who are not authorized by law to practice the profession is void (see Business Corporation Law § 1507 [a]). Thus, New York State law mandates that professional service corporations be owned and controlled only by licensed professionals (see Business Corporation Law §§ 1503 [a]; 1507 [a]; 1508 [a]) and that licensed professionals render the services provided by such corporations (see Business Corporation Law § 1504 [a]). In short, New York State law prohibits unlicensed individuals from organizing a professional service corporation for profit or exercising control over such corporations.

The parties agree that the plaintiff is a professional corporation in the business of providing MRI scanning services at three locations and is subject to the Business Corporation Law.

Governing Provisions of Insurance Law

Pursuant to New York State’s Comprehensive Motor Vehicle Insurance Reparations Act (no-fault law), insurers such as the defendant are required to indemnify all covered persons for reasonable and necessary medical services (see Insurance Law §§ 5102, 5104). Insureds or their medical provider assignee are entitled to reimbursement for “basic economic loss” (Insurance Law § 5102 [a] [1]). A provider of healthcare services, however, is not eligible for reimbursement if the provider “fails to meet any applicable New York State or local licensing requirement necessary to perform such service” (11 NYCRR 65-3.16 [a] [12]). The purpose of the regulations is to “combat fraud” (Allstate Ins. Co. v Belt Parkway Imaging, P.C., 33 AD3d 407, 409 [2006]).

The Court of Appeals has interpreted 11 NYCRR 65-3.16 (a) (12) to allow insurance carriers to withhold reimbursement for{**150 AD3d at 200} no-fault claims “provided by fraudulently incorporated enterprises to which patients have assigned their claims” (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d at 319) and to “look beyond the face of licensing documents to identify willful and material failure to abide by state and local law” (id. at 321).

In Mallela, the Court of Appeals answered a certified question from the United States Court of Appeals for the Second Circuit as to whether a medical corporation that was fraudulently incorporated under Business Corporation Law §§ 1507 and 1508 and Education Law § 6507 (4) (c) was entitled to be reimbursed for assigned no-fault claims (see id. at 320). The Court of Appeals answered the question in the negative, determining that a provider which was not solely owned and controlled by physicians, as required by Business Corporation Law §§ 1507 (a) and 1508 (a), was ineligible for no-fault reimbursements, and that insurers may look at the actual ownership and operation of the practice, to wit, whether the practice was actually controlled or owned by an unlicensed individual in violation of state and local law (see id. at 321; United States v Gabinskaya, 829 F3d 127, 133 [2d Cir 2016]). In this context, however, the Court of Appeals cautioned that insurance carriers could not delay payments of reimbursement claims to pursue investigations unless they had “good cause” (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d at 322; see 11 NYCRR 65-3.2 [c]; Dynamic Med. Imaging, P.C. v State Farm Mut. Auto. Ins. Co., 29 Misc 3d 278, 285 [Nassau Dist Ct 2010]) and that, in the licensing context, “carriers will be unable to show ‘good cause’ unless they can demonstrate behavior tantamount to fraud” (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d at 322). The Court further cautioned that “[t]echnical violations will not do. For example, a failure to hold an annual meeting, pay corporate filing fees or submit otherwise acceptable paperwork on time will not rise to the level of fraud” (id.).

Jury Charge at Issue

On appeal to this Court, the plaintiff maintains that the Civil Court’s jury charge on fraudulent incorporation was improper because it permitted the jury to make a finding of fraudulent incorporation without a showing that Carothers possessed fraudulent intent at the time he incorporated the plaintiff, or engaged in criminal or fraudulent behavior. The plaintiff also contends that the Civil Court erred in setting{**150 AD3d at 201} forth a list of 13 factors the jury could consider in determining whether Sher and Vayman were de facto owners of the plaintiff or exercised substantial control over it. The plaintiff asserts that the list of factors impermissibly allowed the jury to consider “technical violations” of corporate formalities such as the failure to hold annual meetings, and administrative [*5]activities routinely performed by office managers, such as paying personnel. The plaintiff additionally argues that the Civil Court erred in denying its requests for charges on the business judgment rule and sham transactions.

[1] Contrary to the plaintiff’s contention, the jury charge on fraudulent incorporation, read as a whole, adequately conveyed the correct legal principles articulated by the Court of Appeals in Mallela (see Nestorowich v Ricotta, 97 NY2d 393, 401 [2002]; Hatzis v Buchbinder, 112 AD3d 890, 890 [2013]; Winderman v Brooklyn/McDonald Ave. Shoprite Assoc., Inc., 85 AD3d 1018, 1019 [2011]). As the Appellate Term correctly determined, the charge properly focused the jury on the question of whether Carothers was a mere nominal owner of the plaintiff, and if, in actuality, nonphysicians Sher and Vayman owned or controlled the plaintiff such that the profits were funneled to them. The Civil Court properly instructed the jury to consider whether Sher and/or Vayman shared in the profits of the plaintiff, and that the jury could consider whether the leases entered into between the plaintiff and Sher’s companies were arm’s length or meant to funnel profits to Sher. The Civil Court charged the jury that, in order to succeed on its defense, the defendant was required to establish, by clear and convincing evidence, that Sher and/or Vayman, two nonphysicians, were “de facto owners” of the plaintiff or exercised “substantial control” over the plaintiff; and that to find de facto ownership, the jury must find that either Sher and/or Vayman exercised “dominion and control over” the plaintiff and its assets and that they “shared the risks, expenses, and interest in the profits and losses” of the plaintiff. To find control, the jury was instructed that they must find that Sher and/or Vayman had a “significant role in the guidance, management, and direction of the business.” The court also sufficiently explained the relevant definitions of these terms.

Although the plaintiff is correct that certain of the factors enumerated in the non-exhaustive list of factors with which the jury was charged that it might wish to consider, could not, standing alone, support a finding of fraudulent incorporation,{**150 AD3d at 202} these factors were relevant for the jury to consider in determining the ultimate issues of de facto ownership and substantial control, and the jury was properly instructed to consider the totality of the circumstances (see United States v Gabinskaya, 829 F3d at 132). For example, the fact that Vayman controlled the plaintiff’s bank accounts and was responsible for hiring and paying employees could not, on its own, support a finding that she owned and controlled the plaintiff. However, since the jury was instructed to look to the totality of the circumstances to determine whether Sher and/or Vayman were de facto owners or exercised substantial control over the plaintiff, factors such as Vayman’s control of the bank accounts and Carothers’ limited day-to-day management were relevant to that issue. Likewise, although Mallela instructed that “[t]echnical violations” such as a failure to hold an annual meeting, pay corporate filing fees, or submit paperwork on time would not establish the defense of fraudulent incorporation (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d at 322), a failure to follow corporate formalities is a relevant factor for the jury to consider, in conjunction with other factors, in determining the ultimate issue of ownership and control and whether the plaintiff was a proper professional corporation or merely a vehicle operated by nonphysicians to funnel profits to themselves.

[2] Further, the Civil Court did not err in declining to instruct the jury as to common-law fraud, fraudulent intent at the time of incorporation, and the business judgment rule. Mallela involved fraud “in the corporate form” rather than the more traditional forms of common-law fraud (id. at 320). With respect to fraudulent intent at the time of incorporation, Mallela instructs that even if a professional corporation did not intend to yield control to unlicensed parties at the time of incorporation, it nonetheless would be ineligible for no-fault reimbursement if the nominal physician owner yielded control of the corporation at some later date (see id. at 322). Good faith compliance with the requirements of a professional corporation at the time of incorporation does not end when the certificate of incorporation is filed and does not defeat a claim of fraudulent incorporation if the evidence demonstrates that at some point after the initial incorporation, the nominal physician owner turned over control of the business to nonphysicians in contravention of state regulations (see id.). Similarly, with respect to the plaintiff’s requested charge as to the business judgment rule, which is typically charged in actions alleging a{**150 AD3d at 203} breach of fiduciary duty and bars inquiry into actions of corporate directors taken in good faith in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes (see Auerbach v Bennett, 47 NY2d 619, 629 [1979]; Mobarak v Mowad, 117 AD3d 998, 999-1000 [2014]), the evidence presented at the trial did not support such a charge. Carothers failed to account for the vast majority of funds transferred by Vayman from the plaintiff to her personal account and to Sher’s companies. Further, Carothers provided no proof in support [*6]of his testimony that payments made to Sher were for the purpose of repaying a $400,000 bridge loan. Moreover, Carothers’ testimony displayed his almost complete lack of knowledge about the operation and finances of the plaintiff. In short, there was no evidentiary basis for a business judgment rule charge under the facts elicited at trial (see generally Dotson v City of New York, 296 AD2d 372, 372-373 [2002]; Mejia v Coleman, 168 AD2d 245, 246 [1990]). Accordingly, the Civil Court properly declined to give the plaintiff’s requested charges on common-law fraud, fraudulent intent, and the business judgment rule.

Finally, the Civil Court properly denied the plaintiff’s request to charge the jury, in accordance with federal tax law, that a “sham transaction” is one that has no business purpose or economic substance (see DeMartino v Commissioner of Internal Revenue, 862 F2d 400, 406 [2d Cir 1988]). Nonetheless, the jury was properly instructed that salary and lease payments should not be considered as profits if it found that they were negotiated in good faith and were not in actuality a means to funnel profits to nonphysicians.

In sum, the jury charge, read as a whole, adequately conveyed the correct legal principles on “fraudulent incorporation” as established by Mallela. The instructions asked the jury to consider whether, under the totality of the circumstances, the plaintiff was operating as a proper professional medical corporation in compliance with state regulations or whether, in order to obtain money that insurers were otherwise entitled to deny, the plaintiff was organized under the facially valid cover of Carothers but was, in actuality, operated and controlled by Sher and Vayman to funnel profits to themselves.

Harmless Error

[3] While a party’s invocation of the privilege against self-incrimination can generally be used to draw an adverse inference against that party in a civil action (see Marine Midland {**150 AD3d at 204} Bank v Russo Produce Co., 50 NY2d 31, 42-43 [1980]), no such inference may be drawn where, as here, the privilege is invoked by a nonparty witness (see Access Capital v DeCicco, 302 AD2d 48, 52 [2002]; State of New York v Markowitz, 273 AD2d 637, 646 [2000]). Accordingly, the Appellate Term properly determined that the Civil Court erred in permitting the defendants to read into evidence the transcripts of the depositions of Sher and Vayman, in which they invoked their Fifth Amendment privilege against self-incrimination and declined to answer questions, and in instructing the jury that it could draw an adverse inference against the plaintiff based on their refusal to answer questions (see Access Capital v DeCicco, 302 AD2d at 52; State of New York v Markowitz, 273 AD2d at 646). However, given the evidence adduced at trial, the error could not have affected the outcome of the trial, and thus was harmless (see CPLR 2002; see generally Parris v New York City Tr. Auth., 140 AD3d 938, 940 [2016]; Rizzuto v Getty Petroleum Corp., 289 AD2d 217, 218 [2001]).

In evaluating whether the error in permitting the deposition testimony to be read into evidence affected the outcome of the trial, we note as an initial matter that the jury determined that the defendant established fraudulent incorporation by clear and convincing evidence (see Tahir v Progressive Cas. Ins. Co., 12 Misc 3d 657, 662-663 [Civ Ct, NY County 2006]; cf. Gaidon v Guardian Life Ins. Co. of Am., 94 NY2d 330, 350 [1999]). In light of the jury’s determination that the evidence at trial met this more stringent standard of proof than required by the preponderance of the evidence standard, we do not reach the issue of which is the appropriate standard of proof in establishing the defense of fraudulent incorporation (see e.g. Matter of State of New York v Dennis K., 27 NY3d 718, 742 [2016]). Nonetheless, the evidence clearly favored a verdict in the defendant’s favor. The evidence demonstrated that Carothers was merely the nominal owner of the plaintiff and that the plaintiff was actually owned and controlled by nonphysicians Sher and Vayman, who funneled the plaintiff’s profits to themselves, and that the outcome of the trial would have been the same absent the error arising from the charge relating to the invocation by Sher and Vayman of the right against self-{**150 AD3d at 205}incrimination pursuant to the Fifth Amendment.

In light of the overwhelming evidence establishing fraudulent incorporation, the error arising from the charge pertaining to the invocation by Sher and Vayman of the right against self-incrimination pursuant to the Fifth Amendment was harmless and the judgment was properly affirmed.

The plaintiff’s remaining contention is without merit.

Accordingly, the order is affirmed insofar as appealed from.

Leventhal, J.P., Miller and Maltese, JJ., concur.

Ordered that the order is affirmed insofar as appealed from, with costs.

[*1]

The Law Office of Jason Tenenbaum, P.C., Garden City (Jason Tenenbaum of counsel), for appellant.

Costella & Gordon, LLP, Garden City (Matthew K. Viverito of counsel), for respondent.

Order, Supreme Court, Bronx County (Fernando Tapia, J.), entered October 24, 2016, which denied the petition seeking to vacate the award of a master arbitrator, dated August 12, 2016, to the extent it affirmed a lower arbitrator’s award of no-fault compensation to respondent in the unadjusted amount of $2,679.39, unanimously reversed, on the law, without costs, the petition granted to the extent of vacating that portion of the master arbitration award, and the matter remanded to a different arbitrator for arbitration of the fee schedule defense on the merits.

Respondent sought recovery for physical therapy services provided to its assignor before April 1, 2013, and petitioner insurer disclaimed parts of the claim on the ground that it had already reimbursed a different provider for “eight units” for services on some of the same dates. Respondent checked the box on the prescribed disclaimer form indicating that it was relying on a “fee schedule” defense, specifically the “eight unit rule.” The lower arbitrator held that respondent was precluded from asserting its defense because the disclaimer was insufficiently specific in that the other provider was not named. Respondent appealed to the master arbitrator, arguing that it adequately preserved its defense. The master arbitrator, without addressing the issue of preservation, incorrectly found that the lower arbitrator had “considered the fee schedule defense” and “determined that [r]espondent failed to provide evidence as to the other provider.”

The master arbitrator’s award was arbitrary, because it irrationally ignored the controlling law presented on the preservation issue (Matter of Global Liberty Ins. Co. v Professional Chiropractic Care, P.C., 139 AD3d 645, 646 [1st Dept 2016]; see generally Matter of Smith [Firemen’s Ins. Co.], 55 NY2d 224, 232 [1982])—namely, that an insurer adequately preserves its fee schedule defense “by checking box 18 on the NF-10 denial of claim form to assert that plaintiff’s fees [were] not in accordance with the fee schedule” (Megacure Acupuncture, P.C. v Lancer Ins. Co., 41 Misc 3d 139[A], 2013 NY Slip Op 51994[U] *3 [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 2013] [internal quotation marks omitted]; Surgicare Surgical v National Interstate Ins. Co., 46 Misc 3d 736, 745-746 [Civ Ct, Bronx County 2014], affd 50 Misc 3d 85 [App Term, 1st Dept 2015]). Accordingly, we remand the matter to the extent indicated. Concur—Sweeny, J.P., Renwick, Mazzarelli and Manzanet-Daniels, JJ.