Ruling Boosts Fight Against Criminal and Civil No-Fault Fraud

In a civil case involving claims of insurance fraud, the fact-finder is properly instructed to consider factors beyond the formal indicia of ownership in determining the actual ownership of a medical services professional corporation (PC) for purposes of examining the PC’s entitlement to payment from an insurance carrier of claims assigned to the PC by a patient under New York’s no-fault insurance law.¹ Now, that principle applies in the criminal context. The U.S. Court of Appeals for the Second Circuit, in United States v. Gabinskaya,² ruled in mid-July that a fact-finder in a criminal case may also go beyond the formal indicia of ownership. Going forward, the decision will make it easier for the government to criminally prosecute cases of no-fault insurance fraud in this state and also will serve as an important precedent in civil cases brought by insurance carriers to recover monies paid to ineligible medical providers.

Background

To be eligible to receive reimbursement from an insurance company under a no-fault insurance policy, a medical services PC must, among other things, comply with all applicable licensing requirements, including that it must be owned and controlled by a licensed physician.³ For over the past decade, New York law has been clear that, in civil cases, ownership of a PC means more than merely formal ownership of stock certificates.

In 2005, in State Farm Mutual Automobile Ins. v. Mallela,⁴ the New York Court of Appeals answered a question certified by the Second Circuit in a case in which this author and his firm represented the insurance company. In Mallela, the court held that insurers may properly refuse to pay no-fault insurance claims assigned by patients and submitted by medical services PCs that do not comply with New York’s licensing requirements.

In determining what constitutes “ownership” of a PC for purposes of determining whether insurance companies are obliged to reimburse a PC for medical services, the court held that where “unlicensed defendants paid physicians to use their names on paperwork filed with the state to establish medical service corporations,” and where non-physicians “actually operated the companies,” the physicians were not the true owners of the PC, and the arrangement constituted fraud.

The court in Mallela further held that it was appropriate to “look beyond the face of licensing documents” to combat fraud in the “corporate practice of medicine” by non-physicians. Thus, nominal or “paper” ownership is not enough for compliance with the no-fault insurance regulatory scheme, according to the court.

Since Mallela, other federal and state courts in New York have reaffirmed the understanding that “ownership” of a PC within the meaning of the no-fault law looks to the realities of actual control of the PC, including the economic risks and benefits of the enterprise, as well as the formal indicia of ownership, and that misrepresenting ownership status for purposes of securing insurance reimbursement constitutes fraud.⁵

This is the legal framework in which the Second Circuit decided Gabinskaya.

The Gabinskaya Case

Federal prosecutors charged that non-physicians Mikhail Zemlyansky and Michael Danilovich operated a large-scale scheme to defraud insurance companies by submitting false no-fault claims for medical services allegedly provided by various PCs under their control. According to the government, as part of their scheme, Zemlyansky and Danilovich recruited and paid licensed physicians to open PCs specializing in providing medical services that car accident victims might need.

The government contended that Tatyana Gabinskaya, a licensed physician, was one such physician. Gabinskaya signed incorporation paperwork forming Clearview of Brooklyn Medical P.C. and documents to open Clearview’s bank accounts. She held herself out as the owner of Clearview, and she represented herself as such on no-fault claims Clearview submitted to insurance companies.

According to prosecutors, however, Gabinskaya was actually only a front whose medical license permitted Clearview to submit insurance claims. The government asserted that Zemlyansky and Danilovich controlled and operated the clinic, with no actual oversight by Gabinskaya.

The evidence at the two-week jury trial in the U.S. District Court for the Southern District of New York before District Judge J. Paul Oetken demonstrated that, in fact, Gabinskaya played no role at Clearview, did not see patients or supervise employees, and rarely was present at the clinic. Three Clearview employees testified that they were unaware of Gabinskaya’s having any role with respect to Clearview and that they understood that Zemlyansky and Danilovich were the clinic’s owners.

Moreover, according to the evidence, Gabinskaya did not bear the financial risk of the success or failure of the scheme. Instead, she was paid a flat fee of $1,500 per week.

Notably, at an examination under oath (EUO) regarding insurance claims that had been submitted by Clearview, Gabinskaya had stated that she worked at Clearview “three hours per day,” “two, three times a week” during which times she approved days off and conducted a “five, ten minute interview” of all new patients “to determine which MRI comes first.” This testimony, however, was contradicted at trial by the three Clearview employees as well as one patient whom Gabinskaya had specifically named as a patient she personally had interviewed prior to her receiving care. The patient testified that she came to Clearview for an MRI and had never been interviewed or otherwise seen by any doctor at the clinic, much less Gabinskaya.

The jury found Gabinskaya guilty of conspiracy to commit health care fraud, health care fraud, conspiracy to commit mail fraud, and mail fraud, and she was sentenced to one year and one day in prison. The jury found that although Gabinskaya was the owner of Clearview on paper, the true owners of the clinic were Zemlyansky and Danilovich.

Gabinskaya appealed to the Second Circuit, contending that the jury should have been instructed, in determining the question of ownership, to consider only the formal indicia of ownership of Clearview and not the economic realities.

The Second Circuit’s Decision

The Second Circuit affirmed the judgment of the district court, in a decision by Circuit Judge Gerard E. Lynch on behalf of Circuit Judge Robert D. Sack and Vermont District Court Judge J. Garvan Murtha, sitting by designation. The circuit court ruled that New York law was “clear” that ownership of a PC for purposes of New York’s no-fault insurance law was “based on actual economic ownership.”

In its decision, the circuit court rejected Gabinskaya’s contention that the evidence was insufficient to establish her role either as a fraudulent straw owner of Clearview or as a knowing and willful co-conspirator. It ruled that prosecutors had sufficiently proved Gabinskaya’s knowledge of the fraudulent nature of the scheme. The court emphasized that Gabinskaya, in an attempt to portray herself as involved in or controlling Clearview’s operations, as was necessary under the no-fault law, had falsely stated during her EUO that she had worked at the clinic two to three times per week, had supervised employees, and had interviewed patients—and that her testimony had been directly contradicted by other evidence admitted at trial. Gabinskaya’s “perjurious statements” permitted a reasonable jury to infer consciousness of wrongdoing, the Second Circuit found.

Finally, the Second Circuit rejected Gabinskaya’s contention that, as a matter of New York law, ownership of a PC was solely a matter of corporate formality and that the jury should have been instructed that “If you find from the evidence that the doctors were the shareholders of the PCs, then you must conclude that they were the owners of the PCs.” The circuit court concluded that “ownership” of a PC within the meaning of New York’s no-fault insurance laws looks to the realities of actual control of the PC, including the economic risks and benefits of the enterprise, as well as the formal indicia of ownership, and that misrepresenting ownership status for purposes of securing insurance reimbursement constitutes fraud.

Conclusion

Future criminal and civil cases alleging no-fault insurance fraud as a result of the failure of a medical services PC to meet the licensing requirements of New York law undoubtedly will rely on the kind of evidence that doomed Gabinskaya: She had signed the necessary paperwork for her co-conspirators to open and operate Clearview but she had not exercised any control over its operations, had not participated in its business or medical decisions, had not seen patients or supervised employees, had not funded its operations, and had not shared in the profits or risk of loss. Gabinskaya, as was clear to the jury, the Southern District, and the Second Circuit, was a straw owner. Physicians invited to participate in these kinds of “ventures” would do well to appreciate that—as both civil and criminal cases now make clear—New York has a strong interest in preventing non-physicians from owning medical practices and practicing medicine.

Endnotes:

1. N.Y. Ins. Law §5102 et seq.

2. United States v. Gabinskaya, No. 15-776-cr (2d Cir. July 12, 2016).

3. See, N.Y. Bus. Corp. Law §1507(a); N.Y. Comp. Codes R. & Regs. tit. 11, §65-3.16(a)(12).

4. State Farm Mutual Automobile Ins. Co. v. Mallela, 4 N.Y.3d 313, 320-21, 827 N.E.2d 758, 794 N.Y.S.2d 700 (2005).

5. See, e.g., Allstate Ins. Co. v. Lyons, 843 F.Supp.2d 358 (EDNY 2012); Andrew Carothers, M.D., P.C., v. Progressive Ins. Co., 42 Misc.3d 30 (App. Term 2d Dept. 2013) (the author and his firm represented some of the insurers in this case).

Reprinted with permission from the September 1, 2016 issue of the New York Law Journal. © ALM Media Properties, LLC.  Further duplication without permission is prohibited.  All rights reserved.