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State of New York

Court of Appeals

OPINION

This opinion is uncorrected and subject to revision 

before publication in the New York Reports.

No. 39 

Andrew Carothers, M.D., P.C., &c.,

 Appellant,

 v.

Progressive Insurance Company,

 Respondent.

Bruce H. Lederman, for appellant.

Barry I. Levy, for respondent. 

Coalition Against Insurance Fraud; New York State Department of Financial Services, 

amici curiae.

FAHEY, J.:

Only licensed physicians may practice medicine in New York. The unlicensed are 

not bound by the ethical rules that govern the quality of care delivered by a physician to a 
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patient. By statute, regulation, and the common law, the corporate form cannot be used as 

a device to allow nonphysicians to control the practice of medicine.

In State Farm Mut. Auto. Ins. Co. v Mallela (4 NY3d 313 [2005]), we held that, 

pursuant to 11 NYCRR 65-3.16 (a) (12), an insurer may withhold payment for medical 

services provided by a professional corporation when there is “willful and material failure 

to abide by” licensing and incorporation statutes (Mallela, 4 NY3d at 321). Today we 

clarify that Mallela does not require a finding of fraud for the insurer to withhold payments 

to a medical service corporation improperly controlled by nonphysicians. The trial court 

did not err in declining to give a charge requiring the jury to find fraudulent intent or 

conduct “tantamount to fraud” (id. at 322), in order to reach a verdict in favor of the 

insurers.

I.

The factual background is essential in understanding our legal conclusion. The

plaintiff in this case, Andrew Carothers, M.D., P.C., a professional service corporation, 

was formed by Andrew Carothers, M.D., a radiologist, in 2004. The company provided 

magnetic resonance imaging (MRI) services. Plaintiff was incorporated after Carothers 

met Hillel Sher, a nonphysician who owned and controlled two companies that together 

held long-term leases for three, fully equipped, operational MRI facilities in New York 

City. They had been introduced by an MRI equipment repair technician who knew that 

Carothers was in financial distress and that Sher was “looking for a doctor.” In 2005-2006, 

plaintiff subleased the facilities and associated equipment from Sher’s companies.
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Specifically, plaintiff agreed in January 2005 to lease the premises and MRI 

equipment for a fee comprised of $547,000 per month for the equipment1and $30,000 per 

month for the three premises. Sher had the right to terminate each lease without cause, 

regardless of payment, on 30 days’ notice. No similar provision allowed plaintiff to 

terminate the leases without cause. Indeed, the leases contained clauses whereby they 

automatically renewed unless terminated by Sher, giving plaintiff no exit.

The rental fees charged to plaintiff for the MRI equipment were exorbitant. For 

example, a piece of equipment that one of Sher’s companies leased from a third party for 

a monthly payment of $5,950 was leased to plaintiff for $75,000 per month. Indeed, Sher’s 

companies charged plaintiff far more per year to rent the MRI machines, which were about 

10 or 11 years old, than it would have cost to buy them outright. There was trial testimony 

that for two months’ rent charged by Sher in one of the equipment leases, a company could 

have owned a similar used MRI unit. As of December 2004, plaintiff could have bought 

used equipment to replace all the MRI equipment in the leases for less than $600,000. This 

amount is not significantly more than plaintiff paid each month to lease the equipment. All 

in all, the difference between the fair market value of six MRI scanners and what Sher 

charged plaintiff in one year to rent them was $4,680,000. Similarly, plaintiff paid $60,000 

per year to lease nine used fax machines, even though the company could have purchased 

scores of new machines every year for that price.

 

1

In this opinion, we use the figures given by the Appellate Division.
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Carothers opened a bank account on behalf of plaintiff. It was at the bank that Sher 

introduced Carothers to Irina Vayman, another nonphysician, whom Carothers hired as 

plaintiff’s executive secretary. Carothers never wrote a check from the bank account; 

Vayman would write the checks.

At the MRI facilities, Carothers’s oversight of the provision of medical services was 

practically nonexistent. Prior to signing the leases, Carothers did not seek out the referring 

physicians who generated patient traffic to the practices, and it was Vayman, not Carothers, 

who subsequently had contact with those physicians. Patient care protocols had already 

been set up by Carothers’s predecessor. Carothers was not involved in evaluating or 

disciplining employees. Carothers rehired a second radiologist, who had worked for 

Carothers’s predecessor, to interpret scans, and Carothers himself reviewed at most 79 

reports out of a total of some 38,000.

At trial, an expert on radiology practice testified that “there was absolutely no 

quality control; there was no supervision; . . . the reports did not reflect [the] reality [of] 

what the films showed” (R743), and “the quality of what was being produced . . . was 

abysmal.” The expert opined that “what was being done here was not being done with an 

eye towards producing any kind of a quality product. This was . . . being done to sort of 

get an image on the film. And those images are not the images that would lend themselves 

towards being highly diagnostic types of examinations. . . . [A] lot of the images are replete 

with a tremendous amount of artifacts that reflect . . . inadequate equipment performance.”

Most of the scans performed at plaintiff’s facilities were of patients allegedly injured 

in motor vehicle accidents. The patients assigned their rights to receive first-party no-fault 
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insurance benefits to plaintiff, which billed insurance companies to recover payment on the 

assigned claims. Sher introduced Carothers to an entity named Medtrex, with which 

plaintiff entered into a loan and security agreement. Vayman, not Carothers, was the 

authorized borrower’s representative on the Medtrex agreement. Medtrex advanced loans 

to plaintiff on a weekly basis. Payments from the insurance companies were then used to 

pay back Medtrex’s loans and pay its fees.

Carothers’s salary, at $133,000 from January 2005 through December 2006, was 

lower than that of plaintiff’s executive secretary, Vayman, who earned $120,000 a year. 

Throughout her employment, Vayman transferred large sums of money from plaintiff’s 

bank account to her own personal bank account and used plaintiff’s account to cover

expenses such as lease payments on her car and water bills on a house in Las Vegas owned 

by Sher. Even larger sums were transferred from plaintiff’s account to an account of 

Sher’s. Carothers eventually opened two more accounts in plaintiff’s name to facilitate 

payments made by Vayman and Sher, including wire transfers to overseas accounts totaling 

$2,900,000. A certified public accountant who had conducted a “forensic investigation” 

of plaintiff testified at trial that some $12,200,000 was funneled through plaintiff to Sher 

and Vayman.

Vayman introduced Carothers to a tax preparer, whom Carothers hired to file tax 

returns for plaintiff. Sher’s telephone number, not Carothers’s, was listed on plaintiff’s tax 

return. The filed return contained egregious errors, such as a deduction taken for fictitious 

management fees in excess of $1,000,000. At trial, the accountant who had conducted the 
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forensic investigation of plaintiff testified that it had “no books and records,” such as 

financial statements, ledgers, and invoices.

Insurance companies stopped paying plaintiff’s no-fault claims in 2006. Although 

Carothers had not personally guaranteed the leases, he did personally guarantee the 

Medtrex loans and he ended up owing that company over $7,000,000. Plaintiff closed in 

December 2006 after Medtrex refused to make any more advances.

II.

The procedural history begins with multiple collection actions filed by plaintiff 

against the insurance carriers, in the Civil Court of the City of New York, seeking to 

recover unpaid claims of assigned first-party no-fault insurance benefits. The carriers’ 

defense is that plaintiff was not eligible to seek reimbursement of the insurance benefits 

under 11 NYCRR 65-3.16 (a) (12) (stating that “[a] provider of health care services is not 

eligible for reimbursement . . . if the provider fails to meet any applicable New York State 

or local licensing requirement necessary to perform such service in New York”), because 

it was controlled by unlicensed nonphysicians (see Business Corporation Law §§ 1507 & 

1508 [requiring all shareholders, officers, and directors of a professional service 

corporation to be “individuals who are authorized by law to practice in this state a 

profession which such corporation is authorized to practice and who are or have been 

engaged in the practice of such profession in such corporation or a predecessor entity, or 

who will engage in the practice of such profession in such corporation within thirty days 

of the date such shares are issued”]). The defendants also relied on our decision in State 

Farm Mut. Auto. Ins. Co. v Mallela, which held, in light of the above-cited provisions, that 
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insurance carriers may withhold payment for medical services provided by “fraudulently 

incorporated” enterprises to which patients have assigned their claims, regardless of the 

quality of care such entities have provided.

The defendants contended that Carothers was merely a nominal owner of plaintiff, 

and that the professional corporation was actually owned and controlled by Sher and 

Vayman, who were not physicians. They also maintained that plaintiff was not entitled to 

payment because Carothers, the shareholder with a medical license, did not personally 

engage in the practice of medicine through the professional corporation.

At their depositions, Sher and Vayman invoked their Fifth Amendment privileges 

against self-incrimination and refused to answer almost all the questions, numbering in the 

hundreds, posed to them by the defendants. Specifically, in response to each question 

(other than identifying themselves), Sher and Vayman answered, simply, “Fifth.” By way 

of examples, Sher and Vayman responded in that manner to the following questions: “Are 

you [Sher] the owner of [plaintiff]?”; “Did you [Sher] pay Dr. Carothers money in 

exchange for the use of his professional license in order to operate [plaintiff]?”; “Did you 

[Sher] ever charge [plaintiff] fair market value for the use of MRI machines at the facilities 

where [plaintiff] conducted its business?” “Mr. Sher, did you exercise any control over the 

entity known as [plaintiff]?”; “Are you [Vayman] a part owner of [plaintiff]?”; “Is Hillel 

Sher a part owner of [plaintiff]?”

The cases, involving 54 insurance carriers, were consolidated and a joint trial was 

held in Civil Court. The parties stipulated that Sher and Vayman were not available to 
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testify at trial within the meaning of CPLR 3117 (a) (3).2 Plaintiff moved to preclude the 

insurance companies from reading into evidence the depositions of Sher and Vayman in 

which they had serially invoked their Fifth Amendment privileges, on the ground that the 

invocation of the Fifth Amendment by a nonparty could not be used against a party. Civil 

Court denied the motion.

In opening remarks, the lead defense counsel told the jury that it would not hear 

from Sher and Vayman “because both of those witnesses chose to take the [F]ifth 

[A]mendment privilege against self-incrimination.” As the first piece of evidence 

presented, Sher’s entire deposition testimony was read to the jury, including his repeated 

invocations of the Fifth Amendment. The same approach was taken with Vayman’s 

deposition testimony. Plaintiff’s counsel objected.

During the trial, the jury heard from multiple witnesses whose testimony supported

the defendants’ assertions that plaintiff’s profits were funneled to Sher and Vayman, 

through grossly inflated equipment lease payments to Sher’s companies and through the 

transfer of plaintiff’s funds to personal accounts. The accountant who had conducted a 

forensic investigation of plaintiff opined that “Dr. Carothers was not in control of [plaintiff] 

as a true business owner would be. . . . [H]e was not actively involved in the operations or 

the financial aspects of the company. . . . [T]he core business assets . . . were owned and 

controlled by Hillel Sher. . . . Hillel Sher not only controlled the company, but profited 

from the monies that were in [plaintiff] . . . . Dr. Carothers, based on everything that I read, 

 

2 CPLR 3117 (a) (3) states conditions under which “the deposition of any person may be 

used” at a trial due to the witness’s unavailability.
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did no due diligence that a true business owner would before he signed leases for millions 

of dollars. . . . [S]ince a medical practice is the only way you can bill an insurance 

company, [plaintiff] was used as a vehicle to siphon money to Sher and Vayman . . .” In 

the expert’s view, the lease agreements between plaintiff and Sher’s companies were not 

made at arm’s length, because the terms of those agreements were not mutually beneficial 

to both parties.

Carothers himself testified, but he was not able to account for the transactions 

described by the other witnesses called by the insurance carriers. He suggested that the 

payments to Vayman’s personal account were for back wages and payment of corporate 

expenses and that the only payments for Sher’s benefit were to repay a $400,000 bridge 

loan, for which he presented no proof. Although he testified that a general ledger compiled 

by an accounting firm in 2007 accounted for all transactions, no such ledger was admitted 

into evidence.

During summation, the insurance carriers’ counsel repeatedly mentioned that Sher 

and Vayman had invoked their Fifth Amendment privileges.

Plaintiff’s counsel requested that the court give a jury instruction on “the traditional 

elements of fraud,” including fraudulent intent, on the theory that Mallela allows insurers 

to withhold payments, under 11 NYCRR 65-3.16 (a) (12), only in situations where the 

professional corporation’s ostensible or real managers engaged in conduct “tantamount to 

fraud” (Mallela, 4 NY3d at 322). The trial court denied the request and the jury charge 

contained no instruction on fraudulent intent or the elements of fraud. The court told the 

jury that it could “find that [plaintiff] was fraudulently incorporated” if it concluded “that 
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reasonable people would say that Mr. Sher and/or Miss Vayman were de facto . . . owners 

of the corporation or that they exercised substantial control over the corporation.” The jury 

could “look beyond the certificate of incorporation.” The trial court further instructed the 

jury that “[t]o find that Mr. Sher and or Miss Vayman were de facto owners of [plaintiff], 

[the jury] must find that they exhibited the attributes of ownership particularly that they 

exercised dominion and control over the corporation and its assets and that they shared 

risks, expenses, and interest in the profits and losses of the corporation.” The jury was 

instructed that, in order to find that Sher and Vayman “exercised substantial control over 

the corporation,” it “must find that they had a significant role in the guidance, management 

and direction of the business of the corporation.” The trial court then enumerated 13 factors 

that the jury might consider relevant in deciding whether Sher and Vayman were de facto 

owners of or exercised substantial control over plaintiff. The court also required the jury 

to decide whether Carothers was engaged in the practice of medicine through plaintiff, 

within the meaning of Business Corporation Law § 1507.

In the course of its instructions, Civil Court charged the jury that it could, but was 

not obliged to, draw an adverse inference against plaintiff on the basis of the invocations 

by Sher and Vayman of their Fifth Amendment rights, but could not rely on such an adverse

inference as the only basis for concluding that plaintiff was not solely owned or controlled 

by Carothers.

The jury found that the defendants had proved that plaintiff was “fraudulently 

incorporated” and that Carothers did not engage in the practice of medicine through 

plaintiff in 2005-2006.
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Plaintiff moved under CPLR 4404 (a) to set aside the verdict and for judgment as a 

matter of law or in the alternative to set aside the verdict as against the weight of the 

evidence or in the interest of justice and for a new trial. Plaintiff contended that the trial 

court erred by failing to instruct the jury regarding the elements of fraud and in particular

by failing to instruct the jury that the defendants must have established that there was a 

fraudulent intent at the time of plaintiff’s incorporation. Plaintiff also argued that it was 

error for Civil Court to set forth the particular list of factors it gave to assist the jury in 

determining whether Sher and Vayman were de facto owners of or exercised substantial 

control over the plaintiff. Additionally, plaintiff contended that it was error to permit 

Sher’s and Vayman’s deposition testimony to be read to the jury, because any probative 

value of reading the depositions was outweighed by its prejudicial effect, and that this error 

was further compounded by the court’s instruction that the jury could draw an adverse 

inference against plaintiff based upon the invocations of Fifth Amendment privileges. 

Finally, plaintiff challenged the verdict that Carothers had not practiced medicine through 

plaintiff, as contrary to the weight of the evidence.3

The trial court denied plaintiff’s motion (26 Misc 3d 448 [Civ Ct, Richmond Co 

2009]). It was then agreed, by a so-ordered stipulation, that, with the exception of one

action against defendant Progressive Insurance Company (Progressive), judgments would 

 

3 Plaintiff also maintained that a decision by the trial court to preclude evidence of some

$18 million in accounts receivable allegedly owed to plaintiff by the insurance companies 

prejudiced plaintiff’s ability to respond to the fraudulent incorporation defense. That 

argument was properly rejected by the lower courts.
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not be entered, pending the disposition of the appeal. Accordingly, Civil Court entered a 

single judgment in favor of Progressive and against plaintiff, dismissing the complaint.

The Appellate Term affirmed Civil Court’s judgment dismissing the complaint, 

insofar as appealed from (42 Misc 3d 30 [App Term, 2d Dept, 2d, 11th & 13th Jud Dists 

2013]). The appellate court set aside, as contrary to the weight of the evidence, so much 

of the verdict as determined that Carothers failed to practice medicine, but upheld so much 

of the verdict as found that the plaintiff was fraudulently incorporated, affirming the 

judgment on that basis.

The Appellate Term held that Civil Court erred in permitting the defense to read the 

deposition transcripts of Sher and Vayman to the jury, in which those witnesses repeatedly 

invoked the Fifth Amendment.

“The error was compounded by the repeated references to the nonparties’ 

depositions in the defense summation to the jury, and in the decision of the 

court to charge an adverse inference. While it is proper for the court to give 

such an instruction to the jury in a civil action when a party invokes his or 

her Fifth Amendment privilege, generally, the adverse inference is 

inappropriate when it is based on a nonparty’s decision to remain silent.” (Id.

at 44-45 [citations omitted].)

The Appellate Term reasoned, however, that the errors were harmless under CPLR 

2002, on the basis that the outcome of the trial, on the question whether plaintiff was in 

violation of the requirement that it be owned and controlled solely by licensed 

professionals, “would have been the same notwithstanding [the] errors” (id. at 45-46).

The Appellate Term upheld Civil Court’s jury charge.

“Although both the United States Court of Appeals for the Second Circuit 

and New York’s Court of Appeals employed the term ‘fraudulently 

incorporated’ in the Mallela case, which was the term used in the certified 
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question, the essence of the defense in that case, as here, was the provider’s 

‘lack of eligibility,’ which does not require a finding of fraud or fraudulent 

intent, but rather, addresses the actual operation and control of a medical 

professional corporation by unlicensed individuals.

“[A] reading of the Mallela case demonstrates that the case involved fraud 

‘in the corporate form,’ rather than the more traditional forms of commonlaw fraud.” (Id. at 40-41 [citation omitted].)

Plaintiff appealed to the Appellate Division, pursuant to permission granted by that 

court. Progressive did not appeal.

The Appellate Division affirmed the Appellate Term’s order insofar as appealed 

from (150 AD3d 192 [2d Dept 2017]).

The Appellate Division upheld the Appellate Term’s holding that Civil Court erred 

in permitting the defendants to read the transcripts into evidence and in instructing the jury 

that it could draw an adverse inference, and agreed with the Appellate Term majority that 

the error could not have affected the outcome of the trial and therefore was harmless. The 

Appellate Division reasoned that there was “overwhelming evidence” that “Carothers was 

merely the nominal owner of the plaintiff and that the plaintiff was actually owned and 

controlled by nonphysicians Sher and Vayman, who funneled the plaintiff’s profits to 

themselves, and . . . the outcome of the trial would have been the same absent the error”

(id. at 204).

In addition, the Appellate Division held that Civil Court properly declined to give 

plaintiff’s requested charges on common-law fraud and fraudulent intent.

“Mallela involved fraud ‘in the corporate form’ rather than the more 

traditional forms of common-law fraud. With respect to fraudulent intent at 

the time of incorporation, Mallela instructs that even if a professional 

corporation did not intend to yield control to unlicensed parties at the time of 

incorporation, it nonetheless would be ineligible for no-fault reimbursement 
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if the nominal physician owner yielded control of the corporation at some 

later date. Good faith compliance with the requirements of a professional 

corporation at the time of incorporation does not end when the certificate of 

incorporation is filed and does not defeat a claim of fraudulent incorporation 

if the evidence demonstrates that at some point after the initial incorporation, 

the nominal physician owner turned over control of the business to 

nonphysicians in contravention of state regulations.” (Id. at 202.)

The Appellate Division rejected plaintiff’s challenge to Civil Court’s list of 13 

factors and its remaining contentions.

Plaintiff moved at the Court of Appeals for leave to appeal. We dismissed the 

motion on the basis that the Court of Appeals does not have jurisdiction to entertain a 

motion for leave to appeal from an order commenced in Civil Court (29 NY3d 1047

[2017]). Plaintiff then moved at the Appellate Division for leave to appeal to this Court. 

The Appellate Division granted plaintiff’s motion, certifying the question whether its 

opinion and order was properly made (2017 NY Slip Op 90794[U]). We subsequently 

denied a motion by Progressive to dismiss the appeal (32 NY3d 1073 [2018]).

III.

In New York, a professional service corporation may be owned and controlled only 

by licensed professionals (see Business Corporation Law § 1507). Moreover, licensed 

professionals are permitted to incorporate only if they are the sole organizers, owners, and 

operators of the professional corporation (see Business Corporation Law §§ 1503 [a], [b]; 

1508). To incorporate, the licensed individual must obtain a “certificate . . . issued by the 

[New York State Department of Education] certifying that each of the proposed 

shareholders, directors and officers is authorized by law to practice a profession which the 

corporation is being organized to practice” (Business Corporation Law § 1503 [b]), and the 
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Department of Education may not issue a certificate of authority to a professional service 

corporation unless it meets these qualifications (see Education Law § 6507 [4] [c] [i]). 

Once the professional corporation is formed, shareholders may not transfer their voting 

power to any person who is not a licensed professional in the field (see Business 

Corporation Law § 1507 [a]); only shareholders or licensed professionals engaged in the 

practice may be directors and officers (see Business Corporation Law § 1508 [a]).

New York law prohibits unlicensed individuals from organizing a professional 

service corporation for profit or exercising control over such entities. In the medical 

context, the underlying policy concern is “that the so-called ‘corporate practice of 

medicine’ could create ethical conflicts and undermine the quality of care afforded to 

patients” (State Farm Mut. Auto. Ins. Co. v Mallela, 372 F3d 500, 503 [2d Cir 2004]). 

Control of medical service corporations by unlicensed individuals leads to higher costs, 

less effective medical treatment, and mistrust of the no-fault insurance system. More 

generally, the common law in New York has long recognized the need to ensure that 

providers of professional services are not unduly influenced by unlicensed third parties 

who are free of professional responsibility requirements and may disregard patient care in 

operating a “corporation . . . organized simply to make money” (Matter of Co-operative 

Law Co., 198 NY 479, 484 [1910]).

In State Farm Mut. Auto. Ins. Co. v Mallela, this Court held that, under 11 NYCRR 

65-3.16 (a), a regulation adopted by the Commissioner of Insurance pursuant to New 

York’s “no-fault” insurance laws (see Insurance Law § 5101 et seq.), insurance carriers 

may withhold payment for medical services provided by a professional corporation that 
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has been “fraudulently incorporated.” There, we considered a certified question from the 

United States Court of Appeals for the Second Circuit: whether “a medical corporation that 

was fraudulently incorporated under [] Business Corporation Law §§ 1507, 1508, and [] 

Education Law § 6507 (4) (c) [is] entitled to be reimbursed by insurers, under [] Insurance 

Law §§ 5101 et seq., and its implementing regulations, for medical services rendered by 

licensed medical practitioners” (Mallela, 372 F3d at 510). We answered the question in 

the negative, determining that a provider that was not solely owned and controlled by 

physicians was not eligible for no-fault insurance reimbursements.

The Mallela decision interpreted 11 NYCRR 65-3.16 (a) (12) to allow insurance 

carriers to withhold reimbursement for no-fault claims that are “provided by fraudulently 

incorporated enterprises to which patients have assigned their claims” (Mallela, 4 NY3d at 

319). In Mallela, nonphysicians paid physicians to use their names on paperwork to 

establish medical service corporations, and the nonphysicians then operated the companies, 

while billing the physicians inflated rates so that profits were channeled to them. The

nonphysicians contended that the professional corporations were “entitled to 

reimbursement even if fraudulently licensed” (id. at 321). The Mallela Court rejected the 

argument, reasoning that if this were so, reimbursement would go “to the medical service 

corporation that exists to receive payment only because of its willfully and materially false 

filings with state regulators” (id.). In our holding, this Court clarified that insurers may 

“look beyond the face of licensing documents to identify willful and material failure to 

abide by state and local law,” such as actual ownership or operation of the practice by an 

unlicensed individual (id.).
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The Mallela Court warned insurance carriers, however, that insurers could not delay 

payments of reimbursement claims to pursue investigations unless they had “good cause”

(id. at 322; see 11 NYCRR 65-3.2 [c]) and that “[i]n the licensing context, carriers will be 

unable to show ‘good cause’ unless they can demonstrate behavior tantamount to fraud”

(Mallela, 4 NY3d at 322). The Court further cautioned that “[t]echnical violations will not 

do. For example, a failure to hold an annual meeting, pay corporate filing fees or submit 

otherwise acceptable paperwork on time will not rise to the level of fraud” (id.).

Plaintiff, citing our language in Mallela, contends that the trial court erred in 

denying its request to instruct the jury that it had to find fraudulent intent or, at least, 

conduct “tantamount to fraud.” We conclude that there was no error. Neither 11 NYCRR 

65-3.16 (a) (12) nor our interpretation of that regulation in Mallela requires that an 

insurance carrier, seeking to demonstrate that a professional service corporation engaged 

in corporate practices that violate Business Corporation Law § 1507, Business Corporation 

Law § 1508, or Education Law § 6507 (4) (c), show that the professional service 

corporation or its managers engaged in common-law fraud. We drew the term 

“fraudulently incorporated” from the Second Circuit’s certified question, but the term may 

be misleading. A corporate practice that shows “willful and material failure to abide by” 

licensing and incorporation statutes (Mallela, 4 NY3d at 321) may support a finding that 

the provider is not an eligible recipient of reimbursement under 11 NYCRR 65-3.16 (a) 

(12) without meeting the traditional elements of common-law fraud.

Nor is a jury required to evaluate the extent to which corporate misconduct 

approximates fraud. The no-fault insurance regulations make providers ineligible for 
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reimbursement when their violations of the cited statutes are more than merely technical 

and “rise to the level of” a grave violation such as fraud (id. at 322). Insurance carriers do 

not have good cause to delay or deny payments of reimbursement claims on the basis of a 

provider’s slight divergence from licensing requirements. Here, the jury’s finding that 

plaintiff was in material breach of the foundational rule for professional corporation 

licensure – namely that it be controlled by licensed professionals – was enough to render 

plaintiff ineligible for reimbursement under 11 NYCRR 65-3.16 (a) (2). The trial court 

committed no error in refusing to issue a charge requiring a “tantamount to fraud” finding 

by the jury.4

Plaintiff also suggests that in Mallela the corporate misconduct was more egregious 

than here, in that Mallela’s company had pleaded guilty to billing fraud and Mallela had 

surrendered his license. We can discern no salient factual difference between Mallela and 

this appeal that would justify a distinct analysis. The allegations in Mallela were very 

similar to the evidence presented at trial here; both cases involve alleged funneling of 

profits to nonphysicians who owned companies that billed the professional corporation 

inflated rates. Our decision in Mallela was not based on fraudulent billing. In fact, we did 

not mention in our opinion that Mallela had pleaded guilty to that charge.

 

4 We reject plaintiff’s argument that it was error for Civil Court to set forth the particular 

list of factors it gave to assist the jury in determining whether Sher and Vayman were de 

facto owners of or exercised substantial control over plaintiff. Although we do not endorse 

the trial court’s specific list of factors, in this case the trial court’s charge satisfactorily 

directed the jury to the ultimate inquiry of control over a professional corporation.
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Finally, plaintiff is incorrect to characterize the improper control of plaintiff by 

unlicensed persons as simply an instance of improper fee splitting of the professional 

corporation’s profits with a nonphysician in violation of 8 NYCRR 29.1 (b) (4). Although 

the Appellate Division held in Matter of Allstate Prop. & Cas. Ins. Co. v New Way Massage 

Therapy P.C. (134 AD3d 495, 495 [1st Dept 2015], lv denied 28 NY3d 909 [2016]) that a 

“fee-sharing arrangement . . . does not constitute a defense to a no-fault action,” the jury in 

this case determined that plaintiff was controlled by unlicensed persons, rather than merely 

splitting fees with them. Control of a professional corporation by nonprofessionals violates 

foundational New York licensing requirements and rendered plaintiff ineligible for insurer 

reimbursement, for exactly the same reason the medical service corporation in Mallela was 

ineligible for reimbursement.

IV.

Plaintiff’s other principal contention is that the trial court erred in admitting the 

deposition testimony in which Sher and Vayman repeatedly invoked the Fifth Amendment

and in giving the jury an adverse inference instruction.

While the Fifth Amendment accords an individual the privilege not to answer 

questions in a civil proceeding if the answers might incriminate the person in future 

criminal proceedings (see Baxter v Palmigiano, 425 US 308, 316 [1976]), a witness who 

asserts this Fifth Amendment privilege in a civil trial is not necessarily protected from 

consequences in the same manner as in a criminal trial. This Court has held that, in a civil 

case, failure to answer questions by a witness who is a party “may be considered by a jury 

in assessing the strength of evidence offered by the opposite party on the issue which the 
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witness was in a position to controvert” (Marine Midland Bank v Russo Produce Co., 50 

NY2d 31, 42 [1980]). In a civil trial, “an unfavorable inference may be drawn against a 

party from the exercise of the privilege against self-incrimination” (Prince, Richardson on 

Evidence § 5-710). We have not previously decided whether a nonparty’s invocation of 

the Fifth Amendment may trigger an adverse inference instruction against a party in a civil 

case, and we have no occasion to do so here because any error by the trial court was 

harmless (see CPLR 2002). There is no reasonable view of the evidence under which 

plaintiff could have prevailed (see Marine Midland Bank, 50 NY2d at 43). We agree with 

the Appellate Division that, based on the trial evidence, the jury could rationally infer only 

one conclusion: plaintiff was in violation of the requirement of Business Corporation Law 

§ 1507 that a professional service corporation be owned and controlled solely by licensed 

professionals.

Accordingly, the order of the Appellate Division should be affirmed, with costs, and 

the certified question not answered as unnecessary.

* * * * * * * * * * * * * * * * *

Order affirmed, with costs, and certified question not answered as unnecessary. Opinion 

by Judge Fahey. Chief Judge DiFiore and Judges Rivera, Stein, Garcia, Wilson and 

Feinman concur. 

Decided June 11, 2019