Court of Appeals Holds that Control of Medical PC by Non-Physicians is Fraud in Itself: Non-Party Witness Pleading the Fifth May Be Used Against PC in Civil Trial: Andrew Carothers, M.D., P.C. v Progressive Insurance Co.

• Author: Rogak, Lawrence N.
• Position: COURTSIDE

Only licensed physicians may practice medicine in New York. The unlicensed are not bound by the ethical rules that govern the quality of care delivered by a physician to a patient. By statute, regulation, and the common law, the corporate form cannot be used as a device to allow nonphysicians to control the practice of medicine.

In State Farm Mut. Auto. Ins. Co. v Mallela (4 NY3d 313 [2005]), we held that, pursuant to 11 NYCRR 65-3.16 (a) (12), an insurer may withhold payment for medical services provided by a professional corporation when there is > licensing and incorporation statutes. Today we clarify that Mallela does not require a finding of fraud for the insurer to withhold payments to a medical service corporation improperly controlled by nonphysicians. The trial court did not err in declining to give a charge requiring the jury to find fraudulent intent or conduct "tantamount to fraud", in order to reach a verdict in favor of the insurers.

I.

The factual background is essential in understanding our legal conclusion. The plaintiff in this case, Andrew Carothers, M.D., P.C., a professional service corporation, was formed by Andrew Carothers, M.D., a radiologist, in 2004. The company provided magnetic resonance imaging (MRI) services. Plaintiff was incorporated after Carothers met Hillel Sher, a nonphysician who owned and controlled two companies that together held long-term leases for three, fully equipped, operational MRI facilities in New York City. They had been introduced by an MRI equipment repair technician who knew that Carothers was in financial distress and that Sher was "looking for a doctor." In 2005-2006, plaintiff subleased the facilities and associated equipment from Sher's companies.

Specifically, plaintiff agreed in January 2005 to lease the premises and MRI equipment for a fee comprised of $547,000 per month for the equipment [FN1] and $30,000 per month for the three premises. Sher had the right to terminate each lease without cause, regardless of payment, on 30 days> notice. No similar provision allowed plaintiff to terminate the leases without cause. Indeed, the leases contained clauses whereby they automatically renewed unless terminated by Sher, giving plaintiff no exit.

The rental fees charged to plaintiff for the MRI equipment were exorbitant. For example, a piece of equipment that one of Sher's companies leased from a third party for a monthly payment of $5,950 was leased to plaintiff for $75,000 per month. Indeed, Sher's companies charged plaintiff far more per year to rent the MRI machines, which were about 10 or 11 years old, than it would have cost to buy them outright. There was trial testimony that for two months' rent charged by Sher in one of the equipment leases, a company could have owned a similar used MRI unit. As of December 2004, plaintiff could have bought used equipment to replace all the MRI equipment in the leases for less than $600,000. This amount is not significantly more than plaintiff paid each month to lease the equipment. All in all, the difference between the fair market value of six MRI scanners and what Sher charged plaintiff in one year to rent them was $4,680,000. Similarly, plaintiff paid $60,000 per year to lease nine used fax machines, even though the company could have purchased scores of new machines every year for that price.

Carothers opened a bank account on behalf of plaintiff. It was at the bank that Sher introduced Carothers to Irina Vayman, another nonphysician, whom Carothers hired as plaintiff's executive secretary. Carothers never wrote a check from the bank account; Vayman would write the checks.

At the MRI facilities, Carothers's over-sight of the provision of medical services was practically nonexistent. Prior to signing the leases, Carothers did not seek out the referring physicians who generated patient traffic to the practices, and it was Vayman, not Carothers, who subsequently had contact with those physicians. Patient care protocols had already been set up by Carothers's predecessor. Carothers was not involved in evaluating or disciplining employees. Carothers rehired a second radiologist, who had worked for Carothers's predecessor, to interpret scans, and Carothers himself reviewed at most 79 reports out of a total of some 38,000.

At trial, an expert on radiology practice testified that "there was absolutely no quality control; there was no supervision; ... the reports did not reflect the reality of what the films showed", and "the quality of what was being produced ... was abysmal." The expert opined that "what was being done here was not being done with an eye towards producing any kind of a quality product. This was ... being done to sort of get an image on the film. And those images are not the images that would lend themselves towards being highly diagnostic types of examinations.... A lot of the images are replete with a tremendous amount of artifacts that reflect ... inadequate equipment performance."

Most of the scans performed at plaintiff's facilities were of patients allegedly injured in motor vehicle accidents. The patients assigned their rights to receive first-party no-fault insurance benefits to plaintiff, which billed insurance companies to recover payment on the assigned claims. Sher introduced Carothers to an entity named Medtrex, with which plaintiff entered into a loan and security agreement. Vayman, not Carothers, was the authorized borrower's representative on the Medtrex agreement. Medtrex advanced loans to plaintiff on a weekly basis. Payments from the insurance companies were then used to pay back Medtrex's loans and pay its fees.

Carothers's salary, at $133,000 from January 2005 through December 2006, was lower than that of plaintiff's executive secretary, Vayman, who earned $120,000 a year. Throughout her employment, Vayman transferred large sums of money from plaintiff's bank account to her own personal bank account and used plaintiff's account to cover expenses such as lease payments on her car and water bills on a house in Las Vegas owned by Sher. Even larger sums were transferred from plaintiff's account to an account of Sher's. Carothers eventually opened two more accounts in plaintiff's name to facilitate payments made by Vayman and Sher, including wire transfers to overseas accounts totaling $2,900,000. A certified public accountant who had conducted a "forensic investigation" of plaintiff testified at trial that some $12,200,000 was tunneled through plaintiff to Sher and Vayman.

Vayman introduced Carothers to a tax preparer, whom Carothers hired to file tax returns for plaintiff. Sher's telephone number, not Carothers's, was listed on plaintiff's tax return. The filed return...