Category Archives: Fraud

Insurers Win Battle against Stalled Litigation in Health Insurance Fraud Action (NY)

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In State Farm Mutual Automobile Insurance Company v Mittal, No. 16-CV-4948 (FB) (SMG) (E.D.N.Y. June 25, 2018), State Farm alleged that defendants (various health care providers) engaged in a conspiracy to defraud insurance companies by issuing fraudulent bills and medical records.

After suit was filed, a dispute arose as to the order of depositions and it was ultimately decided that the insurer’s deposition would go first and defendants would follow thereafter. The insurer’s deposition went forward as scheduled but the defendants refused to move forward with their scheduled depositions.

Defendants’ attorneys notified State Farm’s counsel that their clients were under investigation by the New York State Attorney General’s office and sought a stay in the matter until the investigation ran its course, and filed a motion to enforce the stay. The Court initially granted the defendants permission to stay the depositions and then issued a decision on their motion.

U.S Magistrate Judge Steven M. Gold, denied defendant’s motion, finding that the circumstances weighed strongly against the issuance of a stay. The U.S. Court of Appeals for the Second Circuit laid out six factors it uses for district courts to exercise their discretion when deciding whether a related criminal action warrants issuance of a stay: 1) The extent to which the issues in the criminal case overlap with those in the civil case; 2) The status of the case, including whether the defendants have been indicted; 3) The private interests of the plaintiff’s in proceeding expeditiously weighed against the prejudice to the plaintiff’s caused by the delay; 4) The private interests of and burden on the defendants; 5) The interests of the courts; and 6) the public interest.

The court decided that the first factor slightly weighed in favor of the defendants due to the overlapping of issues in the potential criminal case and the civil case. The second factor weighed “heavily against issuing a stay.” In the instant case the investigation cited by the defendants was a search warrant not an indictment and no charges had been brought against the defendants. The court also found that the third factor supported denying the stay as there was no gauging how long the criminal investigation would last and “the potential delay could be years, even before an indictment is returned.” The judge also noted that assets that might be available to satisfy a judgment would be moved or depleted while the case was stayed.

The fourth factor slightly favored the stay as the Court acknowledged that the defendants’ concerns about self-incrimination during the deposition was valid however in this situation there was no activity regarding the criminal investigation for around a year and there was no reason to think that criminal prosecution was inevitable.

The fifth factor supported denying the stay as the court has an interest in advancing the docket and avoiding delay.  Lastly, the sixth factor of public interest strongly favored denying the stay. The court stated that this case could affect “hundreds of thousands of dollars of potentially fraudulent claims.” Moreover, the Court stated that defendants had imposed substantial costs on the insurer that undoubtedly had been passed on to consumers in the form of higher premiums.

Overall, the Court found that the defendant health care providers had not met their collective burden is showing that a stay was necessary and appropriate.  Thus, State Farm is now permitted to depose the defendants.  One expected there may be some invocation of 5th Amendment privilege, is the criminal investigation is ongoing. Stay tuned.  Thanks to Jon Avolia for his contribution to this post.  Please contact Brian Gibbons (on Twitter @bgibbons35) with any questions.

It’s a bird, it’s a plane, it’s… New York’s Statute of Limitations

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In world where each new Marvel motion picture conquers the box office, it’s easy to forget that many of these characters grew out of the imagination of comic book artists and writers from the 1960s. Wally Wood—having the hallmark alliterative name common to many superhero alter-egos—was one of those artists that left his mark on the industry in the likes of Stan Lee and Jack Kirby. Although Wood’s life ended tragically, his style and format for comic books are still used today.

At the time of Wood’s death 1981, his will bequeathed his bank accounts to his ex-wife Tatjana Wood, but all of his published and unpublished artwork was to go to his friend, John Robinson. An aficionado and biographer of Wood, J. David Spurlock, created Wallace Wood Properties, LLC to obtain the rights from Robinson for all of Wood’s work.  In 2006, Spurlock interviewed Tatjana and noticed many pieces of Wood’s artwork in her apartment. In 2009, Spurlock reviewed a copy of Wood’s will, which explicitly bequeathed all of his artwork to Robinson. In 2013, Spurlock demanded that Tatjana return all of the artwork in her apartment, whether published or not. Tatjana refused the demand, and Spurlock commenced an action for conversion and replevin in 2014.

The district court granted Tatjana’s motion to dismiss the complaint because Spurlock’s conversion and replevin action was time-barred by New York’s 3 year statute of limitations. On appeal in the Second Circuit, Spurlock argued the action was timely based on the “demand and refusal” rule—whereby an action against a good faith purchaser of stolen property accrues once the true owner makes a demand and is refused. Because Spurlock demanded and was refused the return of Wood’s artwork from Tatjana in 2013, he argued the statute of limitations did not begin to run until 2013. In addition, Spurlock sought equitable tolling of the statute of limitations because of Tatjana’s alleged fraudulent concealment of Wood’s artwork.

In Wallace Wood Properties, LLC v. Wood, the Second Circuit Court of Appeals affirmed the district court, holding Spurlock’s conversion and replevin action is time-barred by the statute of limitations. The Court applied two important caveats to the “demand and refusal” rule. First, where the sought after property was held in bad faith or unlawfully, the limitations period begins to run immediately from the time of unlawful possession. Thus, if a party possesses property unlawfully, it is of no moment when a demand and refusal are made, only when the party took unlawful possession. Second, if the current possessor deals with the contested property openly, as if it were his/her own, then the “demand and refusal” rule does not apply.

Although Spurlock specifically alleged Tatjana was not a thief, the Second Circuit looked to the allegations in the complaint to determine whether the caveats to the “demand and refusal” rule apply. According to the Court, the complaint was permeated with allegations that Tatjana knew she was not the rightful owner of the artwork, and that she fraudulently concealed the identity and possession of Wood’s artwork. Based on these allegations, the Court held Tatjana was a bad-faith or unlawful possessor, and the statute of limitations began to run when she took possession of the contested property around 2005. Further, Tatjana’s open display of Wood’s work in her apartment indicated she considered the property her own, thereby satisfying the other caveat to the “demand and refusal” rule.

The Court may have applied the “demand and refusal” rule if Spurlock did not include such specific and detailed allegations. Instead, the verbose allegations regarding Tatjana’s bad-faith possession may have had the opposite effect of that intended by Spurlock’s attorney. Perhaps if Spurlock and his attorneys heeded the advice of Wally Wood’s famous “22 Panels That Always Work!!” (pictured below), things could have played out differently. In that work, Wood satirized what comic book artists have to do when “some dumb writer has a bunch of lame characters sitting around and talking for page after page!” Clearly, Wood was partial to more concise writing.

22 Panels That Always Work!!

Thanks to Dan Beatty for his contribution to this post. If you have any questions about this post, please call or email Brian Gibbons at Brian Gibbons for additional information.

Fraudster Loses Coverage Battle In 2nd Circuit

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The former CEO of a vending machine sales company, Multivend LLC d/b/a Vendstar, lost a coverage battle in the Second Circuit Court Appeals this week. The CEO, Weaver, sought coverage under a claims-made directors and officers’ liability policy provided by Axis. Weaver was indicted in 2012 for conspiracy, mail and wire fraud in connection with a multi-state scheme to defraud customers/clients by providing false statements about the success of his company’s vending machines. Such statements included that customers would earn back their investment in one year, would earn substantial profits, and that customers could earn $800 a day by using Vendstar’s equipment.

Before Weaver was indicted on fraud charges, he advised Axis of the potential charges being brought by the Department of Justice. Axis denied coverage under the D&O policy because it excluded coverage for “any claim made against any insured […] in any way involving […] any demand, suit or other proceeding” prior to the policy period. The basis for Axis’ denial was a 2007 letter sent by the Attorney General of Maryland to Vendstar. The letter advised that Vendstar may be selling business opportunities in violation of Maryland’s disclosure and anti-fraud provisions of its Business Opportunities Sales Act. Maryland requested that Vendstar cease operations in the state until its investigation is complete, requested additional information, and advised that failure to respond may result in a formal legal action.

After the disclaimer, Weaver commenced a declaratory judgment action against Axis challenging its refusal to provide coverage in the criminal prosecution. Weaver conceded that the facts pertaining to the criminal indictment and the 2007 Maryland letter are the same, but he argued that the 2007 letter was merely a request for information and not a “demand.” The Eastern District disagreed, finding in favor of Axis. Weaver appealed, and the Second Circuit reviewed.

The Second Circuit affirmed, and rejected Weaver’s argument that the 2007 Maryland letter did not constitute a demand. The court noted that even if a letter uses polite language or requests information, all that is required for a demand is an assertion of a right and a request for compliance with that right. Since the Maryland letter made its request pursuant to its authority under the Maryland Business Opportunity Sales Act, and sought compliance with the law, the 2007 letter was a “demand.”

This case may provide additional problems for multi-state corporations. Such companies may receive regulatory letters from agencies of different states, and if the letters are based on similar facts, the company or individual may face a loss of coverage. Here, the Second Circuit allowed Axis to disclaim based on a letter sent from an unrelated government entity five years before federal charges were filed. Now, when an insurer receives notice of a suit or demand from a state agency, it should investigate to see whether any similar demands have been made by other states, and if so, it may have a solid basis to deny coverage under a claims-made policy.

Although the decision in this case appears straightforward, it provides a word of caution when dealing with correspondence from governmental agencies. Careful attention must be paid as to whether an agency is simply requesting additional information, notifying an insured about an investigation, or making a demand that must be forwarded to an insurer (all of the above in this case). Regardless, the extent of Weaver’s fraud does not make him a sympathetic insured and – like a bag of Lays potato chips hanging from that spiral ring in one of his vending machines – he was denied coverage.

Thanks to Dan Beatty for his contribution to this post. If you have any questions about this post, please email Brian Gibbons for additional information.

Payment of Claim Not Necessary to Establish Insurance Fraud (NJ)

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March Madness will soon be upon us and to borrow a basketball cliche, the New Jersey Supreme Court recently reiterated the proposition that filing a bogus insurance claim isn’t a “no harm, no foul” situation.

In the State of New Jersey v. Robert Goodwin, the criminal defendant drove an SUV belonging to Girlfriend #1 to pick up Girlfriend #2 and they parked it on a Newark Street near Girlfriend #2’s home.  The defendant claims he later found the SUV in the same place burned to a crisp, and told Girlfriend #1 to call the police and report the SUV stolen, which she did.  The police determined that the SUV had been set on fire with gasoline and that the ignition had not been tampered with.

Girlfriend #1 filed an insurance claim, and during the claim investigation, the defendant admitted to the insurance investigator that he had parked the SUV where it had been found but lied about it being stolen because he didn’t want to get in trouble with Girlfriend #1.  Although he denied that torched the SUV, the claim was denied because of the misrepresentation.

The defendant was arrested and tried, and the jury acquitted him of arson and theft charges but found him guilty of an insurance fraud charge and he was sentenced to seven years in jail.  The Appellate Devision reserved his conviction, finding that he couldn’t be convicted of insurance fraud if he was acquitted on the arson and because the insurance company discovery the fraud before paying the claim.

On appeal, the Supreme Court analyzed the relevant statute, which stated one “is guilty of the crime of insurance fraud if [he] knowingly makes, or causes to be made . . . a false . . . statement of material fact . . . as part of . . . a claim for payment . . .pursuant to an insurance policy.”

The Court determined that the legislature did not intend to define the term “false statement of material fact” to only those cases in which an individual succeeded in inducing an insurance company to pay a false claim and that a statement is “material” if it could have reasonably affected the decision by an insurance company to provide insurance coverage to a claimant.  The Court also found that a conviction of arson was not necessary to establish insurance fraud because the defendant’s false statements still had the potential to reasonably impact the insurance claim.  As such, the conviction was reinstated.

Please write to Mike Bono for more information.