‘I was bawn in Williamsboig,’ he says. ‘An’ I can tell you t’ings about dis town you neveh hoid of.’

Thomas Wolfe

The Eastern District of New York, which includes the New York City Boroughs of Brooklyn and Queens, has been home to some of the most colorful no-fault insurance scams in living memory. In March, a Queens attorney entered a guilty plea in what the Government describes as “the largest single no-fault automobile insurance fraud scheme ever charged”—an operation in which phony clinics allegedly collected $279 million for unnecessary or non-existent medical services, and in which more than thirty other individuals (including ten doctors and two other lawyers) have been indicted. In the last two years, auto insurers have also filed at least eight different civil RICO actions in the E.D.N.Y. against allegedly fraudulent medical providers. Early decisions in these cases focus on aspects of New York’s no-fault law that have helped make the state such an inviting jurisdiction for fraud. They also suggest an increased willingness by the courts to clear away procedural obstacles to fraud litigation.

Litigation and Arbitration of No-Fault Claims

New York law requires that every motor vehicle registered in the state carry at least $50,000 in Personal Injury Protection (PIP), which provides benefits for injuries suffered in accidents, regardless of fault. Insured motorists may (and usually do) assign their PIP benefits to medical providers, who can then bill the insurers directly. The providers’ claims are considered “overdue” if not paid within thirty days, and claimants have a statutory right to submit denied, partially-paid or overdue claims to arbitration, under simplified procedures established by the Department of Financial Services.

These arbitrations are not propitious venues for mounting defenses based on allegations of systematic fraud. Providers who routinely treat accident victims (including chiropractors, physical therapists and purveyors of medical devices) typically issue a separate bill for each treatment or date of service, so that there will usually be no more than a few hundred dollars at issue in a single arbitration. Fraudulent providers often operate under multiple names, making it difficult to dispute the validity of one treatment by citing evidence about a different one. Discovery is limited, and the arbitrators are often better qualified to address the merits of different medical procedures than forensic issues about the accuracy of the statements in a patient’s chart.

Arbitration as Refuge

In the recent spate of lawsuits by insurers against no-fault providers, the defendants appear to have concluded that arbitration would also give them advantages (such as limiting the plaintiffs’ discovery) in a RICO case based on multiple incidents of fraud. The defendants in several cases moved (a) to stay the insurers’ proceedings in federal court, and (b) to compel the insurers to arbitrate the individual insurance claims that form the basis for the fraud suits.

For the most part, these motions came rather late in the day. In State Farm Mut. Auto. Ins. Co. v. McGee, No. 10 Civ. 3848 (E.D.N.Y. June 25, 2012), the court held that the defendants’ delay was fatal, and that they had waived their right to compel arbitration, because they had “participated in litigation proceedings for almost two years without ever raising the defense.” See also Liberty Mut. Ins. Co. v. Excel Imaging, P.C., 879 F.Supp.2d 243 (E.D.N.Y. 2012). In Allstate Ins. Co. v. Elzanaty, No. 11-cv-3862 (E.D.N.Y. Mar. 11, 2013), however, the court declined to find a waiver on similar facts, because it held that the insurers had not been prejudiced by the delay. See also Government Employees Ins. Co. v. Grand Medical Supply, Inc., No. 11 Civ. 5339 (E.D.N.Y. July 4, 2012).

Instead, Elzanaty joined a line of similar cases in finding that the No-Fault Insurance Law does not create a right to arbitrate claims to recover benefits that have already been paid. (To be precise, the court found that the providers were not seeking to arbitrate the insurers’ actions for fraud, but that it would have followed those other cases, had the providers tried to do so.)

The statute creates a right to arbitrate “[1] any dispute involving the insurer’s liability to pay first party benefits, . . . [2] the amount thereof or [3] any other matter which may arise pursuant to subsection (a) . . . .” N.Y. Ins. Law § 5106(b). Last year, in Allstate Ins. Co. v. Lyons, 843 F.Supp.2d 358 (E.D.N.Y. 2012), a court interpreted the final phrase (“any other matter which may arise pursuant to subsection (a)”) to mean that all the categories that are listed in the statute are intended as examples of “matters” that “arise” under subsection (a). Therefore, the court held that arbitrations are available for “dispute[s] involving the insurer’s liability,” only to the extent that the disputes “arise” under that provision.

Subsection (a) provides that no-fault claims must generally be paid within 30 days, and New York courts have held that it does not provide a defense to an insurer’s claim to recover benefits it has already paid as a result of fraud. Hence, the Lyons court held that an insurer’s fraud suit does not “arise” under subsection (a), and that it is not eligible for arbitration. The reasoning was quickly adopted in a number of other cases. Allstate Ins. Co. v. Khaimov, No. 11 Civ. 2391 (E.D.N.Y. Feb. 29, 2012); Liberty Mut. Ins. Co. v. Excel Imaging, P.C., supra; Government Employees Ins. Co. v. Grand Medical Supply, supra; Allstate Ins. Co. v. Mun, No. 12-cv-3791 (E.D.N.Y. April 8, 2013); Government Employees Ins. Co. v. Five Boro Psychological Services, No. 12 Civ. 2448 (E.D.N.Y. April 15, 2013).

Arbitration as Diversion

The ruling in Lyons did not end the arbitration dispute. Insurers typically stop paying claims to providers whom they are preparing to sue for fraud; their lawsuits seek both an award of the amounts they have already paid the providers and a declaration that they are not liable for the claims that have not been paid. In the recent series of fraud suits, many of the providers have asserted counterclaims for unpaid or partially-paid claims, some of which were already the subjects of pending lawsuits or arbitrations. Those claims are clearly eligible for arbitration under the No-Fault Law. Courts therefore granted the providers’ motions to compel arbitration for those claims in Lyons and Grand Medical Supply.

These arbitrations could substantially undercut the insurers’ fraud cases. They potentially reduce the number of claims that will be subject to any ruling in the fraud case, they expose the insurers to multiple, inconsistent judgments, and they raise the possibility that the defendants might continue to force insurers to pay fraudulent bills, even after the insurers obtain a judgment against them.

For these reasons, in June 2012, the court in Excel Imaging decided, sua sponte, to stay the arbitration of unpaid claims “[i]n the interest of judicial economy.” Since that decision, the insurers have filed their own motions to stay arbitrations, and it turns out the motions raise a number of difficult issues.

In March 2013, in Allstate Ins. Co. v. Elzanaty, supra, the court found that the Second Circuit has not yet clearly decided the question of whether a federal court has the power to stay an arbitration where (as in the insurers’ fraud cases) the parties have a valid arbitration agreement. The court examined In re American Express Financial Advisors Secs. Litig., 672 F.3d 113 (2d Cir. 2011), and found that it “appears to indicate that a district court . . . may not enjoin a private arbitration unless the circumstances explored in that case are present.”

But the court also considered a footnote in the American Express opinion, pointing out that, under the All Writs Act, federal courts may issue “all writs necessary or appropriate in aid of their respective jurisdictions.” The footnote left open the possibility that the statute gives district courts “authority to enjoin arbitration to prevent re-litigation.” In Elzanaty, the district court held that the All Writs Act authorizes a stay of arbitration “to avoid [a] large volume of arbitrations and inconsistent judgments that are gradually culminating in a procedural and substantive train wreck.”

Having determined that it had the power to stay arbitrations, the court next had to address the merits of the insurers’ particular motion. A motion to stay arbitration, like a motion for a preliminary injunction, requires a showing of irreparable harm, and the court had to acknowledge that “this is not the case where a party ‘would be irreparably harmed by being forced to expend time and resources arbitrating an issue that is not arbitrable.’” Nevertheless, the court found that “wasting [the insurers’] time and resources in an arbitration with awards that might eventually be, at best, inconsistent with this Court’s ruling, and[,] at worst, essentially ineffective” would subject the insurers to irreparable injury.

Finally, there was the question of whether a federal court may stay an arbitration after finding that the party seeking the arbitration has a statutory right to conduct one. See, e.g., J.P. Morgan Secs. Inc. v. Louisiana Citizens Property Ins. Corp., 712 F.Supp.2d 70, 80 (S.DN.Y. 2010) (“Petitions to compel and petitions to enjoin [arbitration] are two sides of the same coin”). The court in Elzanaty found that “[w]hile the granting of a motion to compel means the parties are obligated to arbitrate, the Court sees no reason why the right to an arbitration forum means that this right must be immediate.”

State Court Actions as Diversion

A related set of issues came up in April 2013, in Government Employees Ins. Co. v. Five Boro Psychological Services, supra. In addition to damages for payments it made in the past, GEICO is seeking a declaration that it has no obligation to pay nearly $8 million in pending claims. Those claims are already the subject of hundreds of individual actions that have been filed by the defendant providers in state court. The providers therefore argued that the district court should abstain from exercising jurisdiction over the declaratory judgment claim.

The court considered the motion in light of the factors prescribed in Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976), including “whether the controversy involves a res over which one of the [other] courts has assumed jurisdiction” (it does not) and whether the federal forum is more or less convenient. The court found that “[t]his case provides a rather ordinary example of parallel litigation,” and that “’[a] pending action in a state court does not bar proceedings involving the same matter in a federal court.’”

The providers also moved, in the alternative, to compel arbitration of the unpaid claims that were the subject of the declaratory judgment action. In dealing with that motion, the court relied on the evidence the providers had submitted, in support of their abstention argument, about the advanced state of the pending lawsuits; it held that the providers had waived their right to compel arbitration of the claims they were pursuing in court.

The court also acknowledged, however, that some of the unpaid claims were not yet the subject of any lawsuit. The court held that the plaintiffs had a right to compel arbitration of those claims. In light of Elzanaty, a motion to stay those arbitrations will presumably be forthcoming.

Mr. Wolfe gets the last word: “It’d take a guy a lifetime to know Brooklyn t’roo an’ t’roo. An’ even den, yuh wouldn’t know it all.”