Opinion
10-22-2015
DOWNTOWN ACUPUNCTURE PC a/a/o Linnette Thomas, Plaintiff, v. STATE WIDE INS. CO., Defendant.
Gary Tsirelman, P.C., Brooklyn, Attorneys for plaintiff. Law Office of Deirdre Tobin & Associates, Garden City, Attorneys for defendant.
Gary Tsirelman, P.C., Brooklyn, Attorneys for plaintiff.
Law Office of Deirdre Tobin & Associates, Garden City, Attorneys for defendant.
KATHERINE A. LEVINE, J. In 2004, plaintiff Downtown Acupuncture ("Downtown" or " plaintiff"), a medical services provider, filed this action to recover assigned first-party no-fault benefits for acupuncture services in the amount of $914.33 from defendant State Wide Insurance Co. ("State Wide" or "defendant"). Citing to a declaratory judgment by Supreme Court Nassau County involving a different insurance company—State Farm Mutual Ins. Co. ("State Farm")—that found the instant plaintiff and other acupuncture PCs to be unlawfully incorporated, defendant argued that plaintiff was collaterally estopped from arguing that it was eligible to recover assigned no-fault benefits in the instant matter and moved to dismiss the complaint with prejudice. It is salient to note that defendant State Wide did not move to amend its answer to include collateral estoppel as an affirmative defense or raise at any time the defense of fraudulent incorporation. This action therefore raises the issue of whether under this set of facts, a defendant insurance company, who was not a party to a previous declaratory judgment action, may pro actively invoke collateral estoppel to bar a plaintiff medical provider, who was a party to the previous action, from recovering no-fault benefits due to the finding of fraudulent incorporation.
In March 2010, State Farm brought an action in Supreme Court, Nassau County for a declaratory judgment (State Farm Auto. Ins. Co. v. Valentina Anikeyeva, et al. Index No. 4399/10 (DJ action)) that alleged that the instant plaintiff Downtown, as well as a number of other acupuncture PCs, were not owned and controlled by licensed acupuncturists, as required by New York law and regulations, and that the services provided therein were performed by independent contractors, also in violation of the state regulations. Specifically, the complaint alleged that in 2004, defendant received no fault claims from a number of corporations owned by one Valentina Anikeyeva, a licensed acupuncturist. State Farm's investigation revealed that Valentina formed professional corporations for her husband, Andrey, who was not licensed in New York State to operate, own, and control the acupuncture businesses and that Aubrey, in turn, hired independent contractors to perform acupuncture services at the PC defendants' offices. State Farm sought declaratory judgment that it need not reimburse the PC defendants for assigned claims submitted under the no-fault law.
At some point the parties in the DJ action entered into a stipulation, so-ordered on November 20, 2012 which granted plaintiff's motion to compel discovery and conditionally struck defendant PCs answer unless they full complied with all of the discovery demands. In relevant part, Justice Jaegar directed that "... [PC defendants'] answer is conditionally stricken unless Defendants fully comply with all of [State Farm's] discovery demands by [January 7, 2013] ...". Plaintiff State Farm subsequently moved for a default judgment based upon the PCs non-compliance with discovery.
By decision dated April 29, 2013, Justice Jaeger granted State Farm's motion to strike the defendants answer resulting in the non-appearance of the defendants and entitling plaintiff to a judgment of default. In so ruling, the court found that the PC defendants' pattern of noncompliant behavior was "willful and contumacious." (Def. Exh. A 1 at 11). He also noted that defendants had stipulated to the consequences of their conduct and "proffered no adequate excuse for their noncompliance (with discover)" Id. at 13. Moreover, the defendants attempted to avoid the consequences of the conditional order by serving responses about a month late which were "evasive, unresponsive and consisting mostly of objections." Id. at 13.
Despite defendant's default, Justice Jaegar noted that the court still had to reach the legal conclusion that plaintiff's now undisputed factual allegations established a prima facie case. Id. at 14 citing to Walley v. Leatherstocking Healthcare, LLC, 79 A.D.3d 1236, 913 N.Y.S.2d 380 (3rd Dept.2010). After reviewing the voluminous record (see pp. 15–18) Justice Jaeger concluded that plaintiff had established a prima facie case of fraudulent incorporation in that defendants had violated both BCL §§ 1507 and 08 and NYCRR §§ 65–3.16 and 65–3.11(a):
In sum, the overwhelming evidence indicates that the P.C. defendants were not owned and controlled by a licensed acupuncturist, therefore rendering them ineligible to receive reimbursement, and to collect payment on outstanding claims. Additionally, a billing provider which utilizes an independent contractor to provide the services in question, is not a "provider" of the services in question and is not entitled to recover direct payment of assigned no-fault benefits from the defendant insurer. Id. at 18.
Furthermore, on May 31, 2013, Justice Jaeger signed an order granting judgment to State Farm by default against all PC defendants, including Downtown. The Order stated that "[the PC defendants] are unlawfully incorporated and are not entitled to collect No–Fault Benefits for any charges which they have submitted to State Farm" and that "State Farm is not obligated to pay the PC defendant" or their assignors for any health benefits provided. The Order also decreed that "the PC defendants are not entitled to collect, and State Farm is not obligated to pay, No–Fault benefits for any charges that the PC defendants submitted to State Farm as such professional health services were provided by independent contractors or other non-employees of the PC defendants." (Defendant's Exhibit A2). The Order with Notice of Entry was apparently served upon Gary Tsirelman, P.C., the attorney for then defendants Anikeyeva and Downtown and current attorney for plaintiffs herein. The Second Department affirmed this decision finding that defendants had failed to demonstrate reasonable excuse for their default in complying with the terms of the conditional order and a meritorious defense to the complaint. State Farm Mut. Auto. Ins. v. Anikeyeva, 130 A.D.3d 1007, 1008, 14 N.Y.S.3d 458 (2015).
Before the instant trial began in late 2014, the defendant moved to have the case dismissed based on the doctrine of collateral estoppel. Defendant argued that Justice Jaegar's Order and Decision precluded Downtown from arguing that it is eligible to receive no-fault benefits. Although defendant discussed its intention to utilize collateral estoppel in a pre-trial conference, it never sought leave to amend its answer. In its brief, Downtown argued that defendant is barred from raising collateral estoppel because of defendant's failure to amend its answer and the inapplicability of collateral estoppel in this case. Plaintiff also argued that collateral estoppel should not apply because the prior judgement was granted on default.
Collateral Estoppel or Issue Preclusion
It is well settled that a party may invoke the common law doctrine of collateral estoppel to preclude another party from relitigating in a subsequent proceeding an issue clearly raised in a prior action and decided against that party or those in privity, whether or not the causes of action are the same. De Curtis v. Ferrandina, 533 B.R. 11 (Bankr.E.D.N.Y.2015) ; Ryan v. v. N.Y. Telephone Co., 62 N.Y.2d 494, 500, 478 N.Y.S.2d 823, 467 N.E.2d 487 (1984) ; Lavian v. Bleier, 2010 N.Y. Slip. Op. 31542(U), 2010 WL 2573474, 2010 N.Y. Misc. LEXIS 3109 (Sup.Ct., N.Y.Co.2010). See, Abrahams v. Commonwealth Land Tit. Ins. Co., 120 A.D.3d 1165, 992 N.Y.S.2d 537 (2d Dept.2014). The issue must have been essential to the decision rendered in the first action and must be the point to be decided in the second action such that "a different judgment in the second would destroy or impair rights or interests established in the first." Psychology YM P.C. v. Travelers Prop. Cas. Ins. Co., 2011 N.Y. Slip Op. 51744(U), 33 Misc.3d 1201(A), 2011 WL 4447007 (2011) (citing Ryan, supra, at 501, 478 N.Y.S.2d 823, 467 N.E.2d 487 ).
Collateral estoppel bars relitigation of an issue when "(1) the identical issue was decided in the prior action and is decisive in the present action, and (2) the party to be precluded from relitigating the issue had a full and fair opportunity to contest the prior issue." Kaufman v. Eli Lilly & Co., 65 N.Y.2d 449, 455, 492 N.Y.S.2d 584, 482 N.E.2d 63 (1985). See also, Evans v. Ottimo, 469 F.3d 278, 281 (2d Cir.2006) ; Gramatan Home Invs. Corp. v. Lopez, 46 N.Y.2d 481, 485, 414 N.Y.S.2d 308, 386 N.E.2d 1328 (1979). The proponent of collateral estoppel must demonstrate the identity of the issues whereas the party seeking "to defeat its application has the burden of establishing the "absence of a full and fair opportunity to contest the prior determination." Buechel v. Bain, 97 N.Y.2d 295, 304, 740 N.Y.S.2d 252, 766 N.E.2d 914 (2001) ; Kaufman, supra, 65 N.Y.2d at 456, 492 N.Y.S.2d 584, 482 N.E.2d 63. See, Jeffreys v. Griffin, 1 N.Y.3d 34, 39, 769 N.Y.S.2d 184, 801 N.E.2d 404 (2003) ; Morrow v. Gallagher, 113 A.D.3d 827, 828–829, 979 N.Y.S.2d 395 (2d Dept.2014) ; Nappy v. Nappy, 100 A.D.3d 843, 845, 955 N.Y.S.2d 102 (2d Dept.2012) ; Windowizards, Inc. v. S & S Improvements, Inc., 2006 N.Y. Slip Op. 50310(U) at *2, 11 Misc.3d 130(A), 2006 WL 543050 (App.Term 2nd & 11th Jud.Dists.2006)
As to the first prong, preclusive effect will only be given where the particular issue was "actually litigated, squarely addressed and specifically decided". Crystal Clear Development, LLC v. Devon Architects of New York, P.C., 97 A.D.3d 716, 949 N.Y.S.2d 398 (2d Dept.2012). To satisfy the "actually litigated" prong of this test, it "must have been properly raised by the pleadings or otherwise placed in issue and actually determined in the prior proceeding." Evans v. Ottimo, supra, 469 F.3d at 282 citing D'Arata v. N.Y. Cent. Mut. Fire Ins. Co., 76 N.Y.2d 659, 667, 563 N.Y.S.2d 24, 564 N.E.2d 634 (1990) ; Mtr. of Abady, 22 A.D.3d 71, 81, 800 N.Y.S.2d 651 (1st Dept.2005). For an identity of issues to exist, the issues presented must involve substantially identical legal theories and causes of action, and have no significant factual differences. Kaufman, supra, 65 N.Y.2d at 455, 492 N.Y.S.2d 584, 482 N.E.2d 63. See also Restatement (Second) of Judgments § 27 comment c.(1982) (court should consider whether there is substantial overlap between the evidence or argument, whether the new evidence or argument involves application of the same rule of law, whether pretrial preparation and discovery relating to the matter presented in the first action could be reasonably expected to have embraced the matter sought to be presented in the second, and how closely related the claims involved in the two proceedings are). As to the second prong, a determination as to whether a full and fair opportunity was provided requires consideration of the "realities of the prior litigation" including the importance of the claim in the prior litigation, the forum and extent of the litigation, the incentive and initiative to litigate, the competence and expertise of counsel and the foreseeability of future litigation. Psychology YM, supra, at 5–6 citing to Ryan, supra, at 501, 478 N.Y.S.2d 823, 467 N.E.2d 487. Gilberg v. Barbieri, 53 N.Y.2d 285, 292, 441 N.Y.S.2d 49, 423 N.E.2d 807 (1981). See, SZ Medical, P.C., Life Chiropractic, P.C. v. Erie Ins. Co., 2009 N.Y. Slip Op. 51222(U), 24 Misc.3d 126(A), 2009 WL 1676882 (App.Term, 2d, 11th & 13th Jud.Dists., 2009). An issue is not actually litigated if "there has been a default, a confession of liability, a failure to provide discovery, a failure to place a matter in issue by proper pleading or even because of a stipulation". Kaufman, supra, at 456, 457, 492 N.Y.S.2d 584, 482 N.E.2d 63 ; Mtr. of Abady, supra, at 83, 800 N.Y.S.2d 651 (1st Dept.2005), and therefore a dismissal on these grounds will not usually be on the merits so as to bar a subsequent identical action. Choicenet Chiropractic, P.C. v. Clarendon Ins. Co., 2009 N.Y. Slip Op. 51472(U), 24 Misc.3d 1216(A), 2009 WL 2005597 (Civ.Ct. Richmond Co.2009).
A limited exception applies "where the party against whom collateral estoppel is sought to be invoked has appeared in the prior action or proceeding and has, by deliberate action, refused to defend or litigate the charge or allegation that is the subject of the preclusion request." Mtr. Of Abady, supra, at 83–84, 800 N.Y.S.2d 651. See, Kalinka v. St. Francis Hospital, 34 A.D.3d 742, 744, 827 N.Y.S.2d 75 (2d Dept.2006) (res judicata applies where dismissal in prior action was upon the grant of an order of preclusion after court determined that Kalinka willfully and contumaciously failed to comply with disclosure); Kanat v. Ochsner, 301 A.D.2d 456, 755 N.Y.S.2d 371 (1st Dept.2003) (Collateral estoppel applies to judgment obtained upon default where defendants appeared and answered in prior action and engaged in extensive motion practice caused in large part by their "wilful and contumacious pattern of selective, partial responses to pretrial discovery demands." They therefore had a full and fair opportunity to fully litigate the underlying merits of the prior action "but affirmatively chose not to by their own failure to comply with court orders."); Mtr. Of Latimore, 252 A.D.2d 217, 683 N.Y.S.2d 526 (1st Dept.1999) (Collateral estoppel applies where respondent had ample opportunity to contest allegations in prior action yet allowed a default judgment to be entered against her and then failed to persuade the court to vacate said default). To that end, a judgment issued as a result of preclusion after a party has refused to comply with discovery "is in fact a judgment on the merits" and must be given collateral effect. Lavian v. Bleier, supra, at *6. See, Strange v. Montefiore Hosp. and Med. Ctr., 59 N.Y.2d 737, 463 N.Y.S.2d 429, 450 N.E.2d 235 (1983).
Collateral estoppel may be invoked offensively as a sword in subsequent litigation by a non-party to the prior litigation, provided that the party seeking to apply collateral estoppel can show that his opponent participated in the prior litigation and had a full opportunity to litigate the action on its merits. B.R. De Witt v. Hall, 19 N.Y.2d 141, 147–48, 278 N.Y.S.2d 596, 225 N.E.2d 195 (1967). See also, 11 Misc.3d 130(A), 2006 WL 543050 (App.Term 2nd & 11th Jud.Dists.2006) ; Klein v. Gutman 2012 N.Y. Slip Op. 52427(U), 38 Misc.3d 1211(A), 2012 WL 6869797 (Sup.Ct., Kings Co.2012) ; Uptodate Med. Servs., P.C. v. State Farm Mut. Auto. Ins. Co., 23 Misc.3d 42, 879 N.Y.S.2d 695 (App.Term 2d Dept.2009) (where insurer offensively utilized collateral estoppel based on prior declaratory action finding the provider was fraudulently incorporated); Windowizards, Inc., supra, 2006 N.Y. Slip Op. 50310(U) at *6. Again, the proponent of collateral estoppel must show that the decisive issue was necessarily decided in the prior action against the party opposing collateral estoppel must show the absence of a full and fair opportunity to litigate the issue at hand. Windowizards, supra, at *4 citing Buechel v. Bain, supra, 97 N.Y.2d at 304, 740 N.Y.S.2d 252, 766 N.E.2d 914.
Discussion
In the instant proceeding, defendant State Wide seeks to use collateral estoppel against Downtown based upon a declaratory judgment, granted on default, that Downtown and other PC defendants were unlawfully incorporated and therefore not entitled to receive no-fault benefits. The predicate for the Supreme Court finding was that the purported owner of Downtown and other acupuncture PCs, Valentina Anikeyeva, did not actually own and control the PCs which were actually owned and controlled by unlicensed acupuncturists, as required by New York law and regulations, and that the services provided therein were performed by independent contractions, also in violation of the state regulations. As set forth above, State Wide may assert this doctrine even though it was not a party to the previous action brought by a different insurance company—State Farm—because Downtown was a party to the prior action.
In the prior proceeding, Downtown Acupuncture and its purported owner had more than a full and fair opportunity to litigate the issue of fraudulent incorporation. Downtown submitted answers in the DJ action, was represented by the same attorney appearing on behalf of Downtown herein, and had ample opportunity to comply with Justice Jaegar's conditional order of preclusion. Justice Jaeger found that all of the PCs, including Downtown, had engaged in "willful and contumacious" behavior by failing to comply with plaintiff's discovery demands and his conditional order of preclusion. He also found that defendants had stipulated to the consequences of their conduct and proffered "no adequate excuse for their noncompliance." Finally, rather than merely basing his decision on defendants' default, Justice Jaeger searched the record based upon plaintiff's "now undisputed factual allegations" and found that plaintiff had legally made out a prima facie case of fraudulent incorporation.
However, at this juncture, defendant State–Wide cannot meet the first prong of the test for collateral estoppel—that there is "an identity of issues" between the two cases involving the same legal theories and causes of actions. State Wide never amended its answer to include the defense of unlawful incorporation and thus has not met the threshold of even raising the issue of fraudulent incorporation. As it has not raised the issue, it cannot now argue that there is an identity of issues warranting collateral estoppel. It must first amend its answer. The defense of fraudulent incorporation, a/k/a the "Mallela defense " is a "statutory defense" arising from a claimant's failure to comply with the Business and Education Laws, as opposed to a policy exclusion or extent of coverage issue provided by a contract of exclusion. Manhattan Med. Imaging P.C. v. State Farm Mut., 2008 N.Y. Slip Op. 51844(U), 20 Misc.3d 1144(A), 2008 WL 4200317 (Civil Ct., Richmond Co.2008)citing Eastern Medical P.C. v. Allstate Ins. Co., 19 Misc.3d 775, 854 N.Y.S.2d 299 (Dist.Ct., Nassau Co.2008). Healthcare service providers are not eligible to receive no-fault benefits if they are incorporated in violation of the applicable N.Y. licensing requirements contained in BCL §§ 1507, 1508 and Educ. Law § 6507(4)(c)(I). See, Liberty Mut. Ins. Co. v. Excel Imaging, P.C., 879 F.Supp.2d 243, 256 (E.D.N.Y.2012)"The factual foundation of a Mallela defense involves proof that persons not licensed to practice the profession for which the professional corporation ... was formed are the actually owner or are actually controlling the operation of the business. Multiquest, PLLC v. Allstate Ins. Co., 17 Misc.3d 37, 39, 844 N.Y.S.2d 565 (App.Term 2nd and 11th Jud.Dists.). "Nor may a medical services corporation bill for services provided by physicians who are not employees of the corporation such as independent contractors." Liberty Mut. Ins. Co., supra, 879 F.Supp.2d at 257. See 11 NYCRR 65–3.11(a) ).
In State Farm Mut. Aut. Ins. Co. v. Mallela, 4 N.Y.3d 313, 794 N.Y.S.2d 700, 827 N.E.2d 758 (2005), the Court of Appeals held that professional corporations that are improperly incorporated or licensed are ineligible to recover no-fault benefits and that insurance carriers may withhold payment for medical services provided by fraudulently incorporated enterprises to which patients have assigned their claims. Id. At issue in Mallela was the prohibition of "non physicians ... owning or controlling medical services corporations." Id. at 321, 794 N.Y.S.2d 700, 827 N.E.2d 758. See, Lexington Acupuncture P.C., supra, 35 Misc.3d at 45, 944 N.Y.S.2d 686.
The Mallela defense is not subject to preclusion and hence is non-waivable. Lexington Acupuncture P.C. v. General Assur. Co., 35 Misc.3d 42, 48, 944 N.Y.S.2d 686 (App.Term, 2d Dept.2012). See, Lexington Acupuncture, P.C. v. State Farm, 12 Misc.3d 90, 92, 820 N.Y.S.2d 385 (App.Term, 2d & 11th Jud.Dists.2006) ; Concourse Chiropractic, PLLC v. State Farm Mut. Ins. Co., 2012 N.Y. Slip Op. 50676(U) at *5, 35 Misc.3d 1213(A), 2012 WL 1352923 (Nassau Dist.2012) ; Manhattan Med. Imaging, P.C. v. State Farm Mut. Auto. Ins. Co., 2008 N.Y. Slip Op. 51844(U), 20 Misc.3d 1144(A), 2008 WL 4200317 (Civ.Ct. Richmond Co.2008). A defendant may plead this defense at any time since the courts have interpreted 11 NYCRR 65–3.16(a)(12) to bar reimbursement of no-fault benefits without regard to when the services were rendered. Multiquest, PLLC v. Allstate Ins. Co., 17 Misc.3d 37, 39, 844 N.Y.S.2d 565 (App.Term 2nd and 11th Jud.Dists.2007)citing Allstate Ins. Co. v. Belt Parkway Imaging, P.C., 33 A.D.3d 407, 408, 823 N.Y.S.2d 9 (1st Dept.2006) ; Urban Radiology, P.C. v. GEICO Ins. Co., 2010 N.Y. Slip Op. 51554(U) at *1, 28 Misc.3d 1230(A), 2010 WL 3463018 (Civ.Ct. Kings Co.2010). A court may even grant a motion for summary judgment on this unpled defense where a plaintiff has not asserted any surprise or prejudice. Multiquest, PLLC v. Allstate Ins. Co., 17 Misc.3d supra, at 39, 844 N.Y.S.2d 565. See also, Ingordo v. Square Plus Operating Corp., 276 A.D.2d 528, 714 N.Y.S.2d 693 (2d Dept.2000).
Therefore, even if defendants did not include the Mallela defense in their answer they could raise it before the trial. However, defendant is two steps removed from asserting collateral estoppel in the instant matter. The proper way to assert a claim of fraudulent incorporation is to plead it as a defense to an action to obtain reimbursement of assigned no-fault benefits or to bring a declaratory action seeking judgement that the provider is not eligible to obtain no-fault benefit because it has failed to comply with the licensing requirements of NYCRR §§ 65–3.16 and 65–3.11(a). Concourse Chiropractic, PLLC v. State Farm Mut. Ins. Co., 2012 N.Y. Slip Op. 50676(U) at *6, 35 Misc.3d 1213(A), 2012 WL 1352923 (Dist.Ct., Nassau Co.2012). Here, defendant never even sought to amend its answer to include the Mallela defense and must do so prior to even raising collateral estoppel as an affirmative defense.
Similarly, collateral estoppel is an affirmative defense that should generally be pled in the answer or a pre-answer motion to dismiss. CPLR 3018, CPLR 3211(a)(5). See also, Surlak v. Surlak, 95 A.D.2d 371, 383, 466 N.Y.S.2d 461 (2d Dept.1983). While the courts have considerable discretion to permit amendment of pleadings in the absence of a showing of prejudice (CPLR 3025b, See also Aurora Loan Services, LLC v. Dimura, 104 A.D.3d 796, 796, 962 N.Y.S.2d 304 (2d Dept.2013) ; Worthen–Caldwell v. Special Touch Home Care Services, Inc., 78 A.D.3d 822, 823–24, 911 N.Y.S.2d 122 (2d Dept.2010) ). The proponent seeking to amend the pleadings must make a formal motion. See, Laundry v. Bolton, 2014 N.Y. Slip Op. 50498(U), 43 Misc.3d 1205(A), 2014 WL 1282743 (Sup.Ct. Kings Co.2014) ; Fernandez v. The New Happy Nail, Inc., 2014 WL 8735152 (Sup.Ct., Queens Co.2014)CPLR 3025(b).
This Court cannot even entertain defendant's request for collateral estoppel until it seeks to amend its answer to raise Mallela as a defense and hence create an apparent identity of issues between the DJ action and the instant matter. In the same motion to amend it can also assert collateral estoppel. After defendant formally moves to amend, plaintiff will be afforded the opportunity to argue how it would be prejudiced by such a motion. The Court is quite dubious that plaintiff will be able to show any prejudice or surprise since the Appellate Term noted as early as 2012 that "(t)here exists a rich history of litigation, involving a multitude of cases before the Appellate Term, in which health care facilities allegedly owned by Ms. Anikeyeva have been asked to supply Mallela discovery." Lexington Acupuncture P.C., supra, 35 Misc.3d at 49, 944 N.Y.S.2d 686 (Golia, J. concurring). However, sometimes form over substance does matter and plaintiff must be afforded the opportunity to argue prejudice or disclaim the apparent identity of issues.