Court Opinion

ID: 4405427
Source: CourtListenerOpinion
Date Created: 2019-06-11 13:47:45.184945+00
Date Added: 2024-06-11T14:24:24.843329
License: Public Domain

State of New York                                                        OPINION
Court of Appeals                                          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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                                            -2-                                      No. 39

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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                                              -3-                                    No. 39

         Specifically, plaintiff agreed in January 2005 to lease the premises and MRI

equipment for a fee comprised of $547,000 per month for the equipment1 and $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.
                                              -3-
                                             -4-                                       No. 39

       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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                                             -5-                                      No. 39

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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                                               -6-                                   No. 39

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

                                               -6-
                                            -7-                                       No. 39

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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                                             -8-                                        No. 39

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.
                                             -8-
                                             -9-                                       No. 39

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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                                           - 10 -                                    No. 39

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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                                            - 11 -                                     No. 39

       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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                                           - 12 -                                        No. 39

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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                                            - 13 -                                        No. 39

       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 common-
       law 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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                                            - 14 -                                        No. 39

       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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                                          - 15 -                                    No. 39

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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                                           - 16 -                                    No. 39

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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                                           - 17 -                                    No. 39

       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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                                             - 18 -                                     No. 39

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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                                            - 19 -                                     No. 39

       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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                                             - 20 -                                   No. 39

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

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