METROSCAN IMAGING v. GEICO INSURANCE COMPANY (2006)

Appeal from an order of the Civil Court of the City of New York, Queens County (Bernice Daun Siegal, J.), entered June 10, 2005.   The order, insofar as appealed from and as limited by the brief, upon consolidating multiple actions commenced by Metroscan Imaging, P.C., against GEICO Insurance Company for the limited purpose of defendant's motion to amend its answer in each action to assert fraudulent incorporation as an affirmative defense, granted defendant's motion (see 8 Misc.3d 829, 797 N.Y.S.2d 737 [2005] ).

Order, insofar as appealed from, affirmed without costs.

This appeal raises the question of whether, as a result of the Court of Appeals' decision in State Farm Mut. Auto. Ins. Co. v. Mallela, 4 N.Y.3d 313, 794 N.Y.S.2d 700, 827 N.E.2d 758 [2005], a medical corporation that was fraudulently incorporated under Business Corporation Law §§ 1507 and 1508, and Education Law § 6507(4)(c) is entitled to be reimbursed by insurers for medical services rendered by licensed medical practitioners prior to the effective date of 11 NYCRR 65-3.16(a)(12) ¹ . In Mallela, the New York Court of Appeals was asked the following certified question by the United States Court of Appeals, Second Circuit:

“Is a medical corporation that was fraudulently incorporated under N.Y. Business Corporation Law §§ 1507, 1508 and N.Y. Education Law § 6507(4)(c) entitled to be reimbursed by insurers, under New York Insurance Law § 5101 et seq. and its implementing regulations, for medical services rendered by licensed medical practitioners” (State Farm Mut. Auto. Ins. Co. v. Mallela, 372 F.3d 500, 509 [2004] )

The New York Court of Appeals stated that such medical corporations were not entitled to reimbursement (see 4 N.Y.3d at 320, 794 N.Y.S.2d 700, 827 N.E.2d 758).   In addition to certifying the preceding question to the New York Court of Appeals, the Second Circuit stated that “defendants raise another issue of New York law that would arise only if the initial question is answered as State Farm wishes.   This is:  would the applicable revised regulation, 11 NYCRR § 65-3.16(a)(12), if it is read to bar reimbursement, be given retroactive effect” (id. at 508).   Consequently, the Second Circuit “welcome[d]” the Court of Appeals' “guidance with respect to any issues that could arise depending on its answer to the question certified” (id. at 509-510).   In Mallela, the Court of Appeals did not explicitly state whether 11 NYCRR 65-3.16(a)(12) was to be given retroactive effect so as to bar reimbursement to a medical corporation that was fraudulently incorporated under Business Corporation Law §§ 1507 and 1508, and Education Law § 6507(4)(c).  Rather, the only portion of the Court of Appeals' decision which expressly dealt with the retroactivity of the regulation concerned an insurer's ability to maintain a cause of action sounding in fraud or unjust enrichment to recoup payments made by the insurer to a fraudulently incorporated medical corporation prior to the effective date of the regulation.   On this question, the Court of Appeals indicated that the regulation was not to be applied retroactively, but rather prospectively (id. at 322, 794 N.Y.S.2d 700, 827 N.E.2d 758).

 The court below concluded that because the claims at issue in Mallela arose prior to the effective date of 11 NYCRR 65-3.16(a)(12), the Court of Appeals held that the regulation applied to unpaid claims for medical services rendered without regard to the date on which such services were rendered (8 Misc.3d 829, 797 N.Y.S.2d 737 [2005] ).   Although the court below was not alone in reaching this conclusion (see Allstate Ins. Co. v. Belt Parkway Imaging, P.C., 11 Misc.3d 810, 813 N.Y.S.2d 867 [2006];  A.T. Med., P.C. v. State Farm Mut. Ins. Co., 10 Misc.3d 568, 809 N.Y.S.2d 392 [2005];  Multiquest PLLC v. Allstate Ins. Co., 9 Misc.3d 1031, 805 N.Y.S.2d 255 [2005] ), other trial courts have reached a contrary determination (see Multiquest PLLC v. Allstate Ins. Co., 10 Misc.3d 1069(A), 2005 N.Y. Slip Op. 52209[U], 2005 WL 3626771;  Multiquest, P.L.L.C. v. Allstate Ins. Co., 10 Misc.3d 1061(A), 2005 N.Y. Slip Op. 52071[U], 2005 WL 3487785;  Multiquest, P.L.L.C. v. Allstate Ins. Co., 10 Misc.3d 1061(A), 2005 N.Y. Slip Op. 52069[U], 2005 WL 3470351;  Multiquest, PLLC v. Allstate Ins. Co., 10 Misc.3d 877, 809 N.Y.S.2d 857 [2005] ).   While the Court of Appeals did not expressly address whether 11 NYCRR 65-3.16(a)(12) was applicable to unpaid claims for assigned first-party no-fault benefits arising from medical services which were rendered prior to the effective date of said regulation, we nevertheless read the Court of Appeals' decision as holding that, irrespective of the date on which the medical services were rendered, a provider of medical services may not recover therefor if it is a fraudulently incorporated medical corporation.

In Mallela, the medical corporation defendants which were allegedly fraudulently incorporated in violation of Business Corporation Law §§ 1507 and 1508, and Education Law § 6507(4)(c) asserted that they were entitled to reimbursement notwithstanding their alleged fraudulent incorporation because the medical care rendered to their assignors was within the scope of the licenses of those who treated the assignors and thus the medical corporation defendants were within the regulatory framework for reimbursement.   In advancing such an argument, some of the defendants' separate briefs to the Court of Appeals relied, in part, upon the Court of Appeals' decision in Charlebois v. Weller Assocs., 72 N.Y.2d 587, 535 N.Y.S.2d 356, 531 N.E.2d 1288 [1988].

In Charlebois, the Court of Appeals held that a contract which required payment to an unlicensed business corporation for engineering services performed by an independent licensed professional engineer was valid because the corporation was not engaged in the unauthorized practice of engineering.   By contrast, in Mallela, although the medical treatments were rendered by apparently licensed medical practitioners, said licensed practitioners were not the “providers” for billing purposes under the No-Fault Law. Instead, the “providers” for no-fault billing purposes were their employers, medical service corporations, which were incorporated in violation of Business Corporation Law §§ 1507 and 1508, and Education Law § 6507(4)(c).  This critical distinction apparently prompted the Court of Appeals, in Mallela, to reject the defendants' position stating, “[t]he fact remains that the reimbursement goes to the medical service corporation that exists to receive payment only because of its willfully and materially false filings with state regulators” (4 N.Y.3d at 321, 794 N.Y.S.2d 700, 827 N.E.2d 758).

In so holding, the Court of Appeals implicitly recognized that medical service corporations which are fraudulently incorporated in violation of Business Corporation Law §§ 1507 and 1508, and Education Law § 6507(4)(c), i.e., which “fail[ed] to meet applicable state licensing requirements” (4 N.Y.3d at 320, 794 N.Y.S.2d 700, 827 N.E.2d 758), were not entitled to reimbursement since their authority to render professional services was obtained through fraudulent means and possession of such authority was a prerequisite to reimbursement (see Education Law § 6507[4][c];  see also Business Corporation Law § 1503;  Valley Physical Medicine and Rehabilitation v. New York Cent. Mut. Ins. Co., 193 Misc.2d 675, 753 N.Y.S.2d 289 [App. Term, 9th & 10th Jud. Dists. 2002] ).   Such a result is in accord with the common law, which has historically denied compensation to unlicensed providers of services for which a regulatory license is required (see Spivak v. Sachs, 16 N.Y.2d 163, 263 N.Y.S.2d 953, 211 N.E.2d 329 [1965];  Bendell v. De Dominicis, 251 N.Y. 305, 167 N.E. 452 [1929];  Mavco Realty Corp. v. M. Slayton Real Estate, Inc., 12 A.D.3d 575, 786 N.Y.S.2d 63 [2004];  Price v. Close, 302 A.D.2d 374, 754 N.Y.S.2d 660 [2003];  Gordon v. Adenbaum, 171 A.D.2d 841, 567 N.Y.S.2d 777 [1991];  P.C. Chipouras & Assocs. v. 212 Realty Corp., 156 A.D.2d 549, 549 N.Y.S.2d 55  [1989];  Unger v. Travel Arrangements, 25 A.D.2d 40, 44, 266 N.Y.S.2d 715 [1966]; 13 N.Y. Jur. 2d Businesses and Occupations § 61), and the regulations, which permit a medical service corporation to recover for medical services provided so long as the treating medical practitioner was an employee of the medical service corporation as opposed to an independent contractor (see 11 NYCRR 65.15[j][1], now 11 NYCRR 65-3.11[a];  Rockaway Blvd. Med. P.C. v. Progressive Ins., 9 Misc.3d 52, 802 N.Y.S.2d 302 [App. Term, 2d & 11th Jud. Dists. 2005] [because a billing provider is not a “provider” of the medical services if the medical services were rendered by an independent contractor rather than by an employee of the billing provider, it is not permitted to recover direct payment of assigned no-fault benefits from an insurer];  A.B. Med. Servs. PLLC v. Liberty Mut. Ins. Co., 9 Misc.3d 36, 801 N.Y.S.2d 690 [App. Term, 2d & 11th Jud. Dists. 2005] ).   Indeed, where an action is based upon a contract which violates public policy or which is being used to circumvent public policy, courts have refused to enforce such a contract and have left the parties where they stand (see Spivak v. Sachs, 16 N.Y.2d at 168, 263 N.Y.S.2d 953, 211 N.E.2d 329;  McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465, 199 N.Y.S.2d 483, 166 N.E.2d 494 [1960];  Veazey v. Allen, 173 N.Y. 359, 66 N.E. 103 [1903];  Matter of Ungar v. Matarazzo Blumberg & Assocs., 260 A.D.2d 485, 688 N.Y.S.2d 588 [1999];  LoMagno v. Koh, 246 A.D.2d 579, 667 N.Y.S.2d 280 [1998];  United Calendar Mfg. Corp. v. Huang, 94 A.D.2d 176, 463 N.Y.S.2d 497 [1983] ). Accordingly, under the common law, prior to the effective date of 11 NYCRR 65-3.16(a)(12), such fraudulently incorporated medical corporations were not entitled to recover a judgment against an insurer for assigned first-party no-fault benefits.   The promulgation of 11 NYCRR 65-3.16(a)(12) by the Superintendent of Insurance merely codified the common law rule to the extent it barred recovery by unincorporated or fraudulently incorporated medical service corporation providers for assigned first-party no-fault benefits.

 Our reading of Mallela is buttressed by the Court of Appeals' holding therein that a cause of action by an insurance carrier sounding in fraud or unjust enrichment would not lie prior to the effective date of 11 NYCRR 65-3.16(a)(12).   This too comports with the common law rule, to wit, the lack of a required license will prevent recovery for services rendered, but the lack of a license does not permit recovery of the fee by the payer after it was paid (see Johnston v. Dahlgren, 166 N.Y. 354, 59 N.E. 987 [1901];  Goldman v. Garofalo, 71 A.D.2d 650, 418 N.Y.S.2d 803 [1979];  see also 13 N.Y. Jur. 2d, Businesses and Occupations § 68).   However, we read Mallela as holding that the promulgation of 11 NYCRR 65-3.16(a)(12) by the Superintendent of Insurance altered the common law prospectively such that an insurance carrier may maintain a cause of action against a fraudulently incorporated medical service corporation to recover assigned first-party no-fault benefits which were paid by the insurer to such medical service corporation after the regulation's effective date (4 N.Y.3d at 322, 794 N.Y.S.2d 700, 827 N.E.2d 758).

In light of the foregoing, the order, insofar as appealed from, is affirmed.

FOOTNOTES

1.   Insofar as is relevant, the regulation provides:  “A provider of health care services 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 local licensing requirement․”

GOLIA, J.P., RIOS and BELEN, JJ., concur.