Opinion
21281/07.
Decided September 22, 2008.
Defendant, State Farm Mutual Inc. Co., ("State Farm" or "defendant") moves to dismiss plaintiff Bay Plaza Chiropractic's ("Bay Plaza" or "plaintiff") complaint, with prejudice, pursuant to CPLR 3126, for plaintiff's failure to appear for an examination before trial ("EBT") or to provide verified, complete and meaningful responses to defendant's discovery demands. In the alternative, defendant moves to vacate plaintiffs's Notice of Trial and compel plaintiff to fully comply with plaintiff's discovery demands and to then produce plaintiff's purported owner, Dr. Geraldine McGowan for an EBT. In support of its motion, defendant presents an affirmation from its attorney as well as an affidavit from an investigator in its Special Investigative Unit ("SIU") and documentary evidence.
Defendant claims that plaintiff may be a fraudulently incorporated facility that is actually owned, operated, and controlled by unlicensed persons. It alleges it first became suspicious about plaintiff when it consistently submitted bills for chiropractic services purportedly rendered to patients who were receiving physical therapy treatments for the same condition, at the same location, and during the same time period. Defendant avers that because the plaintiff s bills are often submitted c/o HIJ Management ("HIJ"), using that entity's address, and because HIJ management's owner, Jesse Haber, often submits affidavits of mailing for Bay Plaza as the "biller of Bay Plaza," in support of its motions for summary judgment, that the plaintiff is actually owned by Jesse Haber in violation of 11 NYCRR § 65.15 and Insurance Law sec. 5108. Defendant then asserts that since payments from insurance companies will not go to the purported owner of plaintiff — Dr. McGowan — but to Haber, there is a "clear issue as to who is actually receiving the plaintiff's profits, and who is truly controlling the plaintiff's finances" (Affirmation of Stuart Flamen, Esq., ¶ 9.)
Defendant further alleges that an EBT of the purported owner McGowan is warranted
since she is listed as the executive not only of Sue Ellen Ginsberg, DO, PC, but of several other facilities connected to improper licensors. For example, defendant claims McGowan is affiliated with several entities owned or formerly owned by one Stanley Sonn who is being sued in federal court by another insurance company. Thus, an EBT is "the only way to uncover who really owns and controls the plaintiff provider" (Flamen affirmation, ¶ 16).
Defendant surmises that plaintiff can very well be engaging in the "doc-in-the-box" scheme whereby the plaintiff is actually owned and controlled by non-professionals which would negate plaintiff's standing to collect non-fault benefits. In this scheme, the nominal owner — the physician-does not receive the profits which go to the lay persons who own the management company that actually runs facility (¶¶ 17). As such, defendant contends that it has set forth a reasonable basis of suspicion for fraud .
Plaintiff responds that it provided responses to the discovery requests and that the remaining requests are patently oppressive and should be stricken. Plaintiff also notes that the courts normally do not allow a secondary disclosure device (such as depositions) unless the first chosen devise does not adequately disclose all evidence material and is necessary to the prosecution or defense of the action. Plaintiff further counters that the discovery demands are not proper because defendant has not shown either "good cause" or a "founded belief" that the plaintiff is fraudulently incorporated and moves for a protective order. Plaintiff also alleges that the defendant's motion is defective since it failed to submit an affidavit from an investigator with defendant's Special Investigations Unit ("SIU") and is based upon an affidavit made without personal knowledge, and thus is based only on conjecture, speculation and exaggeration.
This court has previously addressed the issue of whether the language contained in State Farm Insurance v. Mallela , 4 NY3d 313 (2005) requiring that a defendant insurer show "good cause" by demonstrating behavior on the plaintiff 's part "tantamount to fraud," applies to
discovery requests and or verification requests. See Cambridge Medical P.C. v. Nationwide Property Casualty Ins. Co., 2008 NY Slip. Op. 50629U, 19 Misc 3d 1110A, 859 NYS2d 901 (Civil Ct. Richmond Co. 2008). There, this court adopted Judge Sweeney's reasoning in Carothers v. Insurance Companies et al, 13 Misc 3d 970 (Civil Ct., Richmond Co. 2006) that "good cause" is not a mandatory requisite to ordering discovery, but only applies to"investigations conducted by insurers during the claims process in accordance with their entitlement under the regulatory scheme to seek verification of claims ( 11 NYCRR part 65) and not those conducted by litigants during the discovery process." 13 Misc 3d at 972.
Article 31 of the CPLR governs discovery actions before the civil court, and its disclosure provisions simply do not condition discovery upon a showing of "good cause". The guiding principle behind article 31 of the CPLR is that there should be "full disclosure of all matter material and necessary in the prosecution and defense of an action" (CPLR § 3101 (a)). The words "material and necessary" are to be interpreted liberally and the test is "one of usefulness and reason" to assist in the preparation for trial by sharpening the issues. Cambridge Medical. Slip op. At 3 at citing Carothers, supra, 13 Misc 3d at 973.
Furthermore, since the "defense of fraudulent incorporation is a complete defense to a claim for no-fault benefits, one that is not subject to the rules of preclusion," it appears that the bar against which to measure whether a defendant has shown that its discovery requests on the issue of fraudulent incorporation are "material and necessary" is quite low. Carothers, supra at 975. See, Lexington Acupuncture P.C., v. State Farm Insurance Co., 12 Misc 3d 90, (App Term 2d Dept. 2006). In fact, in Mallela, the Court of Appeals specifically permitted insurers to "look
beyond the face of licensing documents to identify willful and material failure to abide by state and local law," 4 NY3d at 321, in assessing whether to withhold reimbursement of no-fault claims to medical corporations they believe to be fraudulently incorporated. See, One Beacon Ins. Co. V. Midland Medical Care, 2008 NY Slip. Op. 06813, 2008 WL 4166851 (App.Div., 2d Dept. 2008).
This court first finds that defendant has articulated a"founded belief" that plaintiff is actually controlled by a non-licensed professional. Defendant has therefore made allegations sufficient to raise an issue of fact as to whether plaintiff is fraudulently incorporated. See, Tahir v. Progressive Casualty Ins. Co. , 12 Misc 3d 657, 664 (Civil Ct., NY Co. 2006)("fraudulent intent is rarely established by direct proof, but we nevertheless conclude that there are sufficient badges of fraud' in this case from which such intention can be inferred") "citing Spires v. Mihou ,13 AD3d 1056, 57 (4th Dept. 2007)). In support of its founded belief, and contrary to plaintiff's allegation, defendant did submit an affidavit from its SIU investigator who had personal knowledge of the investigation. In numerous cases, defendant insurers have been permitted to proceed to trial based upon affidavits of investigators employed by the insurance company's Special Investigations Unit ("SIU") who allege personal knowledge of the alleged fraud. See, American Honda Finance Corp. V Progressive Casualty Ins. Co., 290 AD2d 850 (3d Dept. 2002) ("at this preliminary stage of the proceeding, a question of fact is lurking as to whether Perez committed fraud or made other material representations such that policy exclusion would preclude recovery); Northern Medical v. State Farm Mutual Automobile I ns. Co., 2008 NY Slip Op. 50753U, 19 Misc 3d 1117A (Civil Ct., Queens Co., 2008).
It should also be noted that even if defendant had not submitted an affidavit from its SIU investigator, the affirmation from defendant's attorney, along with the attached documentation, would have been sufficient for this court to order further discovery. Where defendants raise the defense of fraudulent incorporation, the courts have denied motions for summary judgment by plaintiffs, despite the defendant's failure to present an affidavit based upon personal knowledge, where the opposition papers set forth that facts essential to justify opposition may exist but cannot then be stated." Midwood Acupuncture P.C. v. State Farm Mutual Auto Ins., 14 Misc 3d 131A, 836 NYS2d 486 (App. Term, 2d Dept. 2007); Lexington Acupuncture, P.C., v. State Farm Ins. Co. ,12 Misc 3d 90, 92 (App. Term, 2d Dept. 2006). The courts have reasoned that plaintiff's motion for summary judgment are premature pending the completion of discovery. Id.,
However, in the end, "the scope of discovery is not unlimited" and is left to the broad discretion of the trial court, which must assess the request on a case by case basis taking into consideration the "intrusiveness of the discovery device and the merits, or lack thereof, of the claim" Carothers, supra 13 Misc 3d at 974 citing Greater NY Mutual Ins. Co. v. Lancer Ins. Co., 203 AD2d 515, 517 (2d Dept. 1994). To this end, Judge Sweeney found that the primary tool to be used by the court to control and supervise the scope of discovery was the protective order pursuant to CPLR § 3103(a). Id at 974. . See Cambridge Medical, supra .
In light of the above, defendant has shown that it is material and necessary to compel further discovery and to depose Dr. McGowan with regard to the issue of fraudulent incorporation, a defense which is not precluded. As such, the court directs plaintiff to produce Dr. McGowan for an EBT within 30 days after the completion of discovery upon renotice by defendant. The Court also directs plaintiff to comply with all discovery requests that deal with corporate structure or that directly pertain to the issue of fraudulent incorporation including, but not limited to certificates of incorporation, management agreements, and the names of plaintiff's shareholders and that it specifically answer Interrogatories 6,7,8, 23, 25, 26, and combined demands 4, 5, 9.29, 30.
The court is not convinced, at this juncture, that defendant has made a strong showing that the production of McGowan's personal income taxes are "indispensable to the claim and cannot be obtained from other sources" and therefore will not order disclosure of McGowan's personal income taxes. See, Benfeld v. Fleming Properties , 44 AD3d 599, 600 (2d Dept. 2007); Altidor v. State-wide Ins. Co. , 22 AD3d 435 (2d Dept. 2005); Great Wall Acupuncture v. State Farm Mutual Ins. 2008 NY Slip Op. 51529U, 20 Misc 3d 136A (Sup.Ct., App. Term, Sept. Dept. 2008). The court also finds that many of the other interrogatories or combined demands requests information are already in defendant's possession or that are irrelevant or unduly burdensome. Since this court has repeatedly indicated that the parties are to work out discovery disputes between themselves, it will not at this juncture strike any protective order as to the irrelevant discovery requests.
The court will not dismiss the complaint since plaintiff has responded to some of the discovery requests and has not engaged in conduct that is willful, contumacious or in bad faith, as required by CPLR 3126. See, AVA Acupuncture P.C. v. State Farm Mutual Ins. Co. , 16 Misc 3d 138 A, (App. Term 2d and 11th Jud. Dist. 2007).
The court directs plaintiff to respond to the applicable defendant's discovery request within 45 days of this decision and that defendant renotice Dr. McGowan for an EBT within 30 days after it receives plaintiff's responses to its discovery requests. Plaintiffs must produce Dr. McGowan for the EBT.
The foregoing constitutes the Decision and Order of the Court.