No-Fault Insurers May Obtain Non-Party Discovery in Fraud Cases

Fifteen years ago, the New York Court of Appeals ruled that a violation of a licensing requirement by a medical provider rendered the provider ineligible to be reimbursed by an insurance company for no-fault claims that had been assigned to the provider by an individual allegedly involved in an automobile accident. The court recognized that one such kind of licensing violation was the lack of ownership and/or control over a medical professional corporation by a licensed medical doctor, and it made clear that insurance carriers may look beyond the face of a medical professional corporation’s licensing documents to identify a failure to abide by state law in this regard.

Since the court’s decision in that case, State Farm Mutual Auto. Ins. Co. v. Mallela, 4 N.Y.3d 313 (2005) (in which the author and his firm represented the insurer)—the continuing strength of which the court confirmed last year in Andrew Carothers, M.D., P.C. v. Progressive Ins. Co., 33 N.Y.3d 389 (2019) (in which the author’s firm was among several counsel for the insurers)—no-fault insurance carriers have brought numerous actions against medical providers alleging fraud and related causes of action. In these lawsuits, typically filed in federal court, insurers have sought to claw back and recover payments they previously made to those providers and to bar their claims for additional payments.

Discovery plays an important role in an insurer’s ability to successfully prosecute a Mallela fraud case. This column discusses the standard that insurers bringing a Mallela action generally must meet to be able to obtain discovery from third parties and reviews two recent court decisions applying that standard.

The Standard

Pursuant to Federal Rule of Civil Procedure 26(b)(1), parties may obtain discovery regarding “any non-privileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case,” whether or not admissible in evidence. Courts have made clear that relevance is construed broadly to encompass any matter that bears on, or that reasonably could lead to other matter that could bear on, a party’s claim or defense.

Rule 45 permits a party to serve a subpoena to depose a third party or for the production of documents and electronically stored information. The broad definition of relevance is applicable to discovery through a subpoena served on a third party pursuant to Rule 45. See, e.g., Jalayer v. Stigliano, No. 10-CV-2285 (LDH)(AKT) (E.D.N.Y. Sept. 29, 2016). A Rule 45 subpoena, like all discovery, must fit within the scope of discovery permitted in a civil case.

A court may issue a protective order prohibiting discovery that exceeds the permitted limits. As provided in Rule 26(c)(1), a court “may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense, including … forbidding inquiry into certain matters, or limiting the scope of disclosure or discovery to certain matters.”

Whether a subpoena imposes an undue burden depends on such factors as relevance, the need of the party for the documents, the breadth of the document, the time period covered by it, the particularity with which the documents are described, and the burden imposed. See, e.g., Wultz v. Bank of China Ltd., 298 F.R.D. 91, 98 (S.D.N.Y. 2014). The party moving to quash a subpoena or to obtain a protective order on the basis of undue burden must set forth “the manner and extent of the burden and the probable negative consequences of insisting on compliance.” Kirschner v. Klemons, No. 99 Civ. 4828 (RCC) (S.D.N.Y. May 19, 2005).

Subpoena Enforced

The recent decision by the U.S. District Court for the Eastern District of New York in Government Employees Ins. Co. v. Mayzenberg, No. 17 CV 2802 (ILG)(LB) (E.D.N.Y. June 29, 2018) (in which the author’s firm represented the insurers), is an example of a decision in which a court denied a motion to quash a subpoena for a non-party deposition and documents in a case involving alleged no-fault fraud.

The lawsuit arose when insurers that provide personal injury and automobile insurance coverage to many insured New York motorists pursuant to New York’s no-fault insurance law filed suit alleging that Mingmen Acupuncture, P.C., Sanli Acupuncture, P.C., and Igor Mayzenberg took advantage of the state’s no-fault law by operating “medical mills” and systematically submitting thousands of fraudulent no-fault claims to the insurers. The insurers sought to recover $622,000 in claims previously paid to Mingmen and Sanli (together, the Acupuncture Defendants) that the insurers maintained were fraudulent claims.

In an amended complaint naming Igor Dovman, Tamilla Dovman, and Laogong Acupuncture, P.C., as additional defendants, the insurers alleged that these defendants owned and operated a number of shell corporations created to assist the Acupuncture Defendants in their practice of filing fraudulent no-fault claims and to perpetuate an illegal referral and kickback payments arrangement. The insurers asserted that they learned through the course of discovery that the Acupuncture Defendants made numerous payments to more than a dozen corporations owned and operated by Igor Dovman and/or Tamilla Dovman. The insurers further alleged that the Dovmans paid two personal injury attorneys to refer their clients to the Acupuncture Defendants who, in turn, paid the Dovmans for those referrals.

In connection with the litigation, the insurers served non-party subpoenas on Gold Findings Co., Inc. (GFC) and Alex Slomovits requiring that they appear for depositions and produce any and all communications and documents relating to correspondence, agreements, contracts, orders, payments, etc. between GFC and Slomovits and various corporations belonging to Igor Dovman.

GFC and Slomovits moved to quash the subpoenas, contending that the information the insurers sought was neither relevant nor proportional to the needs of the case, and that compliance with the subpoenas would cause them an undue hardship. The insurers opposed the motion to quash.

The court, in an opinion by U.S. Magistrate Judge Lois Bloom, denied the motion to quash.

The court disagreed with GFC and Slomovits’ contention that the subpoenas sought “every scrap of paper in GFC’s possession relative to 29 separate persons and companies for the last seven-and-a-half years, but without any explanation of the relationship of movants to any of them.” The court found that, contrary to that assertion, the insurers provided facts and evidence to demonstrate a nexus between Dovman’s corporations and the non-party movants, including by providing copies of checks written to GFC from various entities owned by Igor Dovman and documents showing that Igor Dovman was the incorporator and/or president of the entities that issued checks to GFC. The court added that the insurers also demonstrated that another non-party who had been deposed had received checks from Sanli and had issued checks to GFC, “further suggesting some relationship between the non-party movants [GFC and Slomovits], the corporate defendants, Igor Dovman, and other non-parties deposed in this matter.”

GFC and Slomovits asserted that the checks did not prove that they were engaged in any improper conduct. The court responded that, for purposes of the subpoenas, the insurers did not have to prove that GFC and Slomovits actually engaged in misconduct. Rather, the court said, the insurers only needed to show that there was a “nexus” between the information they sought and the claims in this action.

The court concluded by modifying the subpoenas to limit the information and documents requested to the period beginning from the point the insurers alleged that the Acupuncture Defendants began paying Dovman. It explained that this modification reduced the burden on GFC and Slomovits while still meeting the insurers’ needs.

Protective Order

The recent decision in Allstate Ins. Co. v. All County, No. 19-CV-7121-WFK-SJB (E.D.N.Y. Sept. 22, 2020), illustrates things that insurers should not do when seeking financial disclosure from third parties in a Mallela case.

In this case, the insurers alleged that All County, which provided diagnostic radiology services under New York’s no-fault insurance law, made misrepresentations to the New York State Department of Health when it applied for Article 28 licensure, including about its true ownership. Relying on Mallela, the insurers contended that they were entitled to recover all payments they had made to All County.

The insurers served subpoenas on JPMorgan Chase Bank N.A., First Central Savings Bank, Israel Discount Bank of New York, and a certified public accountant that sought, in essence, all of the defendants’ financial information, including all books and records for the past decade from All County’s banks and its accountant. The defendants moved to quash.

The court, in an opinion by U.S. Magistrate Judge Sanket J. Bulsara, treated the requested relief as a motion for a protective order, and granted the motion.

First, the court rejected the insurers’ attempt to justify the subpoenas by arguing that the information was relevant on the theory that the defendants’ records were necessary to establish the illegal ownership and operation of All County through a “money trail.” The court conceded that financial information can be helpful to show a relationship between entities, which, although not dispositive to ownership, is “indicative of a common linkage.” The court found, however, that the insurers’ relevance argument was “made in a vacuum” and that it “more or less” ignored the “proportionality and overbreadth” objections to the subpoenas.

The court said that, in addition to being relevant, document requests “must be proportional,” even when directed to a third party. It then pointed to the parameters for reviewing proportionality contained in Rule 26(b)(1) and found that the insurers’ requests were “disproportionate under these standards.”

The court explained that, instead of asking for financial information about transactions between All County and MDHB or other non-licensed corporations, the subpoenas took a “blunderbuss approach.” In particular, the court found that although the insurers’ motion papers stated that the subpoenas were “narrowly-tailored” to seek specific documents related to transactions between the defendants and others, the subpoenas “belie[d] the assertion.” As an example, the court noted that the subpoena to JPMorgan identified a single All County account and asked for all “documents,” including account application documents, accounting opening documents, all statements, cancelled checks, wire transfers (regardless of source) in and out of the account, and “[a]ny and all related correspondence.”

Moreover, the court pointed out that each of the other bank subpoenas operated in the same way: They sought “all documents any way related to an account for a ten-year period.”

Similarly, the court added, the subpoena to All County’s accountant was “breathtaking in its scope” in that it sought all of the documents, for a six-year period, reflecting “any accounting services” provided to the defendants, including but not limited to those related to tax-preparation services; all ledgers, journals, and profit and loss statements; all documents relied on to calculate the defendants’ income or reported tax deductions, including officer compensation, as well as repairs, advertising, marketing, and office expenses; all communications with any defendant; and all bills for any accounting services.

In the court’s opinion, there was no document related to All County that would escape production, and the insurers did little to explain or justify such a subpoena. The court said that asking an accountant to turn over “every document” related to a client was nothing more than a fishing expedition into the financial affairs of the target.

The court also decided that the insurers had not answered the objection to the temporal scope of the subpoenas. Given the theory of the insurers’ complaint—that at the time All County applied for Article 28 licensure it made a false statement—it was not “at all obvious that information for that entire period” was pertinent and relevant, the court said. Put differently, the court found that the breadth of the subpoenas was “not commensurate” with the needs of the case.

The court concluded that the insurers had ignored “virtually all of the proportionality factors” of Rule 26(b), and that the “overbroad nature of the subpoenas” warranted a protective order.

Conclusion

Despite the breadth and scope of discovery permitted of third parties, there are limits that insurers must follow. When they comply with the Federal Rules of Civil Procedure and case law applying those rules, they will be able to obtain all the discovery they need to use in an effort to prove their case and to limit the impact of no-fault insurance fraud throughout the state.

Reprinted with permission from the November 6, 2020 issue of the New York Law Journal. © ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.