N.Y. High Court Sides with Carriers in Sham Owner Case

By Jim Sams | June 13, 2019

New York’s highest court ruled Tuesday that an insurer does not need to prove fraudulent intent to refuse payment for a medical bill from a professional corporation with a sham physician owner.

The Coalition Against Insurance Fraud lauded the ruling by the Court of Appeals, which is New York’s highest tribunal. Matthew Smith, government affairs director for the coalition, said the ruling expands on the high court’s 2005 Mallela ruling, which held that insurers can withhold payment provided by “fraudulently incorporated enterprises.”

“One you cross that Rubicon by proving that the real owner is not a licensed physician, then the court said you don’t need to go further to prove fraud because it is an unlicensed medicalprovider under New York law,” Smith said.

The case is Andrew Carothers M.D., P.C. v. Progressive Insurance Co. It was a consolidated action that brought together lawsuits involving 54 insurance carriers. The Coalition Against Insurance Fraud and the state Department of Financial Services both filed amicus briefs in favor of the carriers.

Letting laymen secretly run medical clinics “would undermine the longstanding public policies in New York of combatting fraud … and preventing the corporate practice of medicine,” the Coalition wrote in its brief. The coalition said in a press release that the decision could influence courts in other states to uphold similar laws. It also provides evidence to support passing laws banning the illicit practice of corporate medicine in other states, the coalition said.

Progressive and the other insurers began refusing to pay automotive no-fault claims submitted by Dr. Andrew Carothers’ radiology practice in 2006. Experts testified that “there was absolutely no quality control” to the scans performed by Carothers’ company. Most of them were submitted on behalf of motor vehicle accident victims who had assigned their rights over the clinic.

What’s more, Carothers wasn’t the real owner, the carriers alleged. Carothers incorporated the business in 2004 after meeting Hillel Sher, a nonphysician who owned and controlled two companies that held long-term leases on three fully-equipped magnetic-resonance imaging facilities in New York City. An MRI equipment repair technician had referred Sher to Carothers because he was “looking for a doctor,” according to the court’s opinion. Carothers was in financial distress, the opinion states.

The insurers showed at trial that Carothers didn’t act like a real business owner. He leased the MRI facilities for $577,000 a month, even though some of the machines were more than 10 years old. An expert testified that Carothers could have purchased used equipment outright for less than $600,000.

Sher introduced Carothers to Irina Vayman, also a nonpyhysician, whom Carothers hired as his executive secretary. The business paid Vayman $120,000 annually. Carothers, in contrast, was paid the equivalent of $69,000 a year, according to the court opinion. On the other hand, the court said Carothers reviewed no more than 79 out of 38,000 imaging scans that were billed by the clinic.

Vayman transferred large sums from the business’ account to her own account. She also used money from the business account to make lease payments on her car and pay water bills on a house in Las Vegas owned by Sher. A forensic accountant testified that about $12.2 million was funneled from the radiology practice to Sher and Vayman.

In the meantime, Carothers built up a debt of $7 million by borrowing money from every week from a company called Medtrex. He closed the practice in December 2006 when Medtrix refused to make any further loans.

When the Andrew Carothers M.D., P.C. business filed suit to collect on its bills, Progressive set out to prove that he was only a sham owner and Sher and Vayman were really in charge. Sher and Vayman invoked their Fifth Amendment privileges and refused to answer almost all questions.

After the practice filed suit to collect on its bills, plaintiff’s counsel urged the court to instruct jurors on the “traditional elements of fraud, including fraudulent intent, on the theory that the Mallela decision held that payments can only be withheld in cases where the conduct was fraudulent or “tantamount to fraud.”

The trial court refused and instructed the jury that it can rule in favor of the insurers if it found that reasonable people would say Sher and or Vaymen were the de facto owners of the radiology practice. The jury found that the corporation was “fraudulently incorporated” and that Carothers did not engage in the practice of medicine.

Both the Supreme Court Appellate Division and the Court of Appeals found that this was enough. No specific finding of fraud was necessary.

“Control of a professional corporation by nonprofessionals violates foundational New York licensing requirements and rendered plaintiff ineligible for insurer reimbursement, for exactly the same reason the medical service corporation in Mallela was ineligible for reimbursement,” the court said.

The high court also rejected the plaintiff’s argument that the trial court erred by admitting deposition testimony in which Sher and Vayman repeatedly invoked their Fifth Amendment rights.

“While the Fifth Amendment accords an individual the privilege not to answer questions in a civil proceeding if the answers might incriminate the person in future criminal proceedings (citation), a witness who asserts this Fifth Amendment privilege in a civil trial is not necessarily protected from consequences in the same manner as in a criminal trial,” the court said.

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