The Practical Import of the Carothers Decision on New York Practice Management Arrangements

by McDermott Will & Emery
Contact

McDermott Will & Emery

In Depth

On April 5, 2017, the Appellate Division of the New York Supreme Court (Court) issued a decision in Andrew Carothers, M.D., P.C. v. Progressive Insurance Co., No. 2013-10969, 2017 WL 1240262 (N.Y. App. Div. Apr. 5, 2017), affirming a verdict by the lower court which allowed a defendant insurance company to withhold no-fault insurance payments from a professional service corporation that was unlawfully controlled by unlicensed persons. Of particular note, the Court upheld the lower court’s jury instructions including a list of 13 factors to consider in determining whether the unlicensed persons were de facto owners of, or exercised undue control over, the professional corporation. Though the import of this case beyond the no-fault insurance space is unclear, the decision (and the jury instructions in particular) serves as helpful guidance in shaping the contours of New York professional practice management arrangements.

Background of the Case

Beginning in 2004, Dr. Andrew Carothers, a radiologist, owned a New York professional service corporation (PC) providing professional services at three MRI facilities in New York City. The PC operated pursuant to an arrangement with two unlicensed individuals. Among other things, the PC leased the MRI facilities and all of the equipment used at the facilities from the unlicensed individuals, with rent amounts significantly above market value. Further, the unlicensed individuals were given authority over the hiring and firing of all PC personnel, and maintained control (including signatory authority) over the PC’s operating bank accounts. Each month, all of the PC’s revenue was paid or transferred, in some form, to the unlicensed individuals. Though he owned the shares of the PC, Dr. Carothers had very little involvement in the day-to-day management and operations of the business. Overall, during the two years in which Dr. Carothers owned the PC, he earned a total of $133,000; over that same time period, approximately $12.2 million was paid or transferred to the unlicensed individuals.

From 2005 to 2006, the PC performed approximately 38,000 MRI scans at the facilities, most of which were performed for patients allegedly injured in motor vehicle accidents eligible to receive no-fault insurance benefits. These patients assigned their right to receive the no-fault insurance benefits to the PC, and the PC billed applicable insurance companies to recover payment on the assigned claims. When various no-fault insurers failed to make payments on these claims, the PC commenced several actions, including the action described herein against the defendant, Progressive Insurance Company (Progressive).

As a defense to its non-payment of the PC’s claims, Progressive contended that the PC was not entitled to reimbursement because the PC was “fraudulently incorporated.” As articulated in State Farm Mutual Automobile Insurance Co. v. Robert Mallela, 4 N.Y.3d 313, 827 N.E.2d 758 (2005), a New York professional corporation will be considered to have been “fraudulently incorporated” where unlicensed persons exercise rights of de facto ownership and/or control over the professional corporation.

Following the trial, the lower court instructed the jury that it should consider the totality of the circumstances in determining whether the unlicensed individuals were de facto owners of the PC and/or whether the unlicensed individuals exercised substantial dominion and control over the operations of the PC. The lower court’s jury instructions included a non-exhaustive list of 13 factors to consider, including:

  • Whether the unlicensed persons’ dealings with the PC were arm’s-length or were designed to give the unlicensed persons substantial control over the PC and channel profits to them;
  • Whether the unlicensed persons exercised dominion and control over the PC assets, including bank accounts;
  • Whether and to what extent the PC funds were used by the unlicensed persons for personal rather than corporate purposes;
  • Whether the unlicensed persons were responsible for the hiring, firing and payment of salaries of the PC employees;
  • Whether the day-to-day formalities of corporate existence were followed, including the issuance of stock, election of directors, holding of corporate meetings, keeping books and records, and filing tax returns;
  • Whether the PC shared common office space and employees with companies owned by the unlicensed persons; and
  • Whether the professional shareholder of the PC (Dr. Carothers) played a substantial role in the day-to-day and overall operation and management of the plaintiff.

On appeal, the Court upheld the lower court’s instructions but notably indicated that none of the factors enumerated in the instructions, standing alone, could support a finding of fraudulent incorporation.

Practical Import

While the application of the Carothers decision beyond the no-fault insurance space is unclear, the facts of the case (as well as the Court’s affirmation of the lower court’s jury instructions) can be instructive for unlicensed management services organizations (MSOs) providing practice management services to New York professional entities.

In light of the factors listed in the Carothers jury instructions, as well as other applicable sub-regulatory guidance such as the New York Attorney General’s settlement with Aspen Dental Management, MSOs should ensure that practice management arrangements with New York professional entities are arm’s-length and do not create any undue rights of dominion or control by an unlicensed person. Among other things, MSOs should ensure that any fees charged to a New York professional entity in exchange for management and/or administrative services are fixed, fair market value and are consistent with an arm’s-length transaction. As a further example, MSOs should also ensure that any equipment or facility leases to a New York professional entity are in writing and are consistent with fair market value. Any loans from an MSO to a professional practice should be bona fide loans as evidenced by a written agreement and subject to fair market repayment terms. It should also be made clear that the owner of the professional entity should maintain control over the operations of the practice, including without limitation control over practice bank accounts and authority to make personnel decisions.

Of note, (as the Court indicates) no single factor listed in the Carothers jury instructions standing alone can substantiate a finding that a New York professional entity impermissibly delegated control or authority to an unlicensed person; however, if a practice management arrangement involves several of the circumstances listed therein, such arrangement may be subject to legal challenge. Accordingly, MSOs and New York professional practices should take care in developing practice management arrangements, using the Carothers decision as helpful input, to ensure that the appropriate level of control over practice operations remains with the practice.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McDermott Will & Emery | Attorney Advertising

Written by:

McDermott Will & Emery
Contact
more
less

McDermott Will & Emery on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.