Second Circuit Affirms Default Judgment In A Multi-Million Dollar RICO Action Stemming From Fraudulent Dental Practices

State Farm Mutual Automobile Insurance Company v. Barry Cohan, D.D.S. et al
                        United States Court of Appeals For The Second Circuit

A decision issued by the United States Court of Appeals for The Second Circuit on February 8, 2011 affirmed an order of the District Court, which denied defendants’ motion to set aside an entry of default in an action brought by State Farm to recover fraudulently obtained insurance reimbursements. Rivkin Radler attorneys Cheryl Korman, Evan Krinick and Barry Levy represented State Farm.

State Farm brought this action against Barry Cohan, D.D.S. and three Dental PCs organized by Dr. Cohan to recover sums of money that defendants wrongfully obtained by submitting hundreds of fraudulent bills for medically useless dental services, orthotic devices and physical therapy services purportedly provided to individuals claiming to have suffered temporomandibular joint dysfunction (“TMJ”) as a result of an automobile accident, which would make them eligible to recover no-fault benefits. Investigation revealed that these Dental PCs were created for the sole purpose of facilitating a fraudulent treatment and billing scheme against State Farm, the purpose of which was to maximize charges for first-party no-fault benefits.

Though properly served with the complaint, the defendants failed to answer and State Farm moved for certificates of default, which were entered. District Court Judge Joanna Seybert referred the matter to Magistrate Judge William D. Wall to determine whether the default should be granted and the appropriate amount of damages to be awarded. It was determined that a default judgment be entered and State Farm recover more than $1,000,000 from each of the defendants and treble RICO damages in excess of $3,000,000 against Dr. Cohan.

The District Court denied the defendants’ motion to vacate, finding their default was willful, that defendants failed to present a meritorious defense, and that State Farm would be prejudiced if defendants’ default was excused.

The Second Circuit affirmed the judgment of the District Court, finding there was ample basis to conclude that defendants’ failure to answer was deliberate. The Court noted that the defendants, despite receiving timely notice of the suit, failed to enter an appearance until four months later and failed to oppose the motion for a default judgment before the Magistrate.

Additionally, the Second Circuit was persuaded by arguments advanced by State Farm relating to defendants’ failure to establish the existence of a meritorious defense. The Court agreed that defendants’ motion papers contained nothing but the most perfunctory denial of wrongdoing, and failed to rebut in any meaningful way the detailed factual allegations relating to the fraudulent scheme. The Second Circuit also accepted State Farm’s argument that defendants’ half-hearted reliance on the statute of limitations did not amount to a complete and meritorious defense.

Lastly, the Second Circuit acknowledged that, in certain contexts, court costs and counsel fees incurred by a party seeking a default judgment may not be sufficient to constitute prejudice. Nevertheless, the Second Circuit accepted State Farm’s argument that given the length of the delay and presence of other factors that weighed against defendants’ Rule 55 motion, it was well within the District Court’s discretion to uphold the default.