Antitrust Law Daily Wrap Up, RICO—E.D. N.Y.: Allstate granted default judgment on its RICO and fraud-based claims, (Nov 10, 2015)

By Michael Menzhuber, J.D., LL.M.

The federal district court in Brooklyn, New York, granted Allstate Insurance Company’s request for a default judgment on its Racketeer Influenced and Corrupt Organizations Act (RICO) and fraud-based claims against a medical services corporation and its owner, who had engaged in scheme of no-fault insurance fraud. The court evaluated Allstate’s complaint and request for damages under a more relaxed standard because the defendants had chosen to default (Allstate Insurance Company v. Tapper, November 9. 2015, Cogan, B.).

Background. AllState alleged that, over a five-year period, D&H Rehabilitation Medical, P.C. and its owner, Jean Claude Demetrius, M.D., submitted phony bills to Allstate for reimbursement. The bills were phony for a variety of reasons, including: (1) overstating the complexity of the examination; (2) billing for tests not performed; (3) cutting and pasting data from prior tests and representing that it was data from more recent tests; (4) performing medically unnecessary tests; (5) misrepresenting that medical tests performed by independent contractors were performed by defendants’ employees; and (6) misrepresenting that the defendants were in compliance with state and local licensing laws entitling them to receive no-fault insurance reimbursement when, in fact, they were not in compliance because they were paying kickbacks to their patients.

AllState brought claims under RICO against Demetrius and claims of common law fraud and unjust enrichment against both the defendants. After a default was entered against the defendants, Allstate sought a default judgment for: (1) recovery of monetary damages; (2) trebling that amount under RICO; (3) interest on the principle amount; and (4) a declaratory judgment that it did not have to pay bills that D&H had submitted but Allstate had not yet paid.

Default Judgment. The court determined that it was not the role of the court to act as lawyer for a defendant that has chosen to default. Consequently, it determined that Allstate’s complaint should be evaluated under a standard of plain inadequacy, rather than strict scrutiny to ascertain the existence of any possible defenses.

Complaint. The court determined that AllState’s submissions adequately established liability. It determined that elements of RICO were satisfied because: (1) there was a five-year, closed-end scheme of fraudulent bills that were sent through the mail; (2) D&H was alleged to have constituted an enterprise and there was no plain inadequacy about this legal conclusion; and (3) Demetrius was alleged to have directed the enterprise and, thus, obviously participated in it.

The court noted that Allstate’s RICO and fraud claims each could have contained greater particularity. However, it determined that it was the defendants’ responsibility to raise any issues in that regard.

Damages. The court found some difficulty with Allstate’s calculation of damages because it effectively required the court to find that not a single bill submitted by the defendants was a proper amount for a necessary service actually performed by a D&H employee. Nevertheless, the court accepted this theory for several reasons. First, all of the bills were improper, whether they were for fraudulent tests or not, because: (1) the defendants classified all of their employees as independent contractors and, thus, had no right under state or local law to obtain reimbursement for their services; and (2) D&H was disqualified from participating as a state no-fault provider because, in some instances, it paid kickbacks to its patients.

Second, the 17 patients tested and found to have received fraudulent results was sufficient to establish a prima facie case that they all were fraudulent.

Finally, the court was willing to relax Allstate’s burden of proof because the defendants had the opportunity to reduce their damage exposure but chose not to do so.

The court did find that Allstate’s calculation of interest was cumbersome. Therefore, it directed AllState to recalculate the amounts owed as of the mid-date of the fraudulent scheme since the scheme was ongoing.

The case is No. 14-cv-5410.

Attorneys: Joshua D. Smith (Rivkin Radler LLP) for Allstate Insurance Co. Charles H. Horn (Russell Friedman & Assoc.s LLP) for Winston Tapper, M.D.

Companies: Allstate Insurance Co.; D&H Rehabilitation Medical, P.C.

Cases: RICO NewYorkNews