Opinion
03 Civ. 6764 (PKL)(JCF).
June 14, 2005
REPORT AND RECOMMENDATION
TO THE HONORABLE PETER K. LEISURE, U.S.D.J.
In this action the plaintiff, Aetna Life Insurance Company ("Aetna"), alleges that the defendants, David Licht and New York City Pain Relief, submitted fraudulent claims for reimbursement for the performance of medical services. The defendants initially failed to answer the Complaint, and the Clerk of the Court entered a certificate of default. The parties then stipulated to vacate the default in return for the defendants providing certain discovery. When the defendants failed to comply with the stipulation, Aetna filed its first motion for a default judgment, which the Court granted. That judgment was vacated, however, on the defendants' motion. Thereafter, the defendants again failed to respond to Aetna's discovery demands, and the Court granted Aetna's motion to compel. When the defendants then failed to comply with that order, the Court granted Aetna's second motion for a default judgment and referred the case to me to conduct an inquest on damages. A hearing was held on May 3, 2005, and although notice was sent to the defendants, they did not appear. Background
Donald J. Neidhardt, counsel for the defendants, did participate by telephone. He represented that his clients had not been in contact with him for a year and that he had submitted a motion to be relieved as counsel. (Transcript of hearing held on May 3, 2005 ("Tr.") at 11-12, 14). However, counsel for Aetna indicated that the Court had rejected the application as procedurally defective (Tr. at 15), and there is no record of it in the docket.
According to the Complaint, David Licht is a dentist who, at the time that the action was commenced, resided in Manhattan. (Complaint ("Compl."), ¶¶ 10, 12). He owned and controlled New York City Pain Relief, an unincorporated association with a principal place of business in New York City. (Compl., ¶ 11). Aetna is Connecticut corporation with a principal place of business in that state.
Mr. Licht, individually and through New York City Pain Relief, offered "trigger point" injections for relief of chronic head, shoulder, and back pain. (Compl., ¶¶ 12, 13). This therapy involves the injection of a therapeutic agent directly into an affected tendon sheath or ligament, a costly procedure that requires more skill than an ordinary injection. (Compl., ¶ 13).
Mr. Licht billed and received payment from Aetna for hundreds of thousands of dollars in connection with the defendants' administration of trigger point injections. (Compl., ¶ 14). According to Aetna, this constituted a fraud both on the patients and on Aetna itself. First, by presenting himself as "Dr.," Mr. Licht gave patients the false impression that he was a medical doctor licensed and qualified to administer trigger point injections, when in fact, as a dentist, he was not. (Compl., ¶¶ 14, 16). Second, he told patients that the treatments would be covered by insurance when this was not the case because he was not a qualified provider. (Compl., ¶ 17). Moreover, even when the treatment was provided by employees of New York City Pain Relief who may have been licensed physicians, there would often not be insurance coverage because the treatment was not medically indicated at all or was administered with far greater frequency than was consistent with sound medical practice. (Compl., ¶ 18).
Mr. Licht also made false representations in the bills he submitted to Aetna. Those bills identified him as "Dr." Licht without revealing that he was a dentist rather than a physician. (Compl., ¶ 20). Further, they represented that the services provided were medically necessary when they were not. (Compl., ¶¶ 20, 21, 22, 23, 24). And, every one of Mr. Licht's bills reported a diagnosis of craniocervical myofascitis, regardless of whether the patient actually suffered from that condition. (Compl., ¶¶ 23, 24).
In addition to the claims of fraud, the Complaint alleges that, as assignee of each patient's rights under his or her insurance policy, Mr. Licht breached his contractual obligations to Aetna. Aetna also asserts claims for negligent misrepresentation, conversion, and unjust enrichment.
Discussion
A. Jurisdiction and Venue
This Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332(a) because the parties are citizens of different states and the matter in controversy exceeds $75,000 in value. There is personal jurisdiction over the defendants in this forum both because they were doing business in New York and because the plaintiff's claims arise from the defendants' transaction of business here. N.Y.C.P.L.R. §§ 301 and 302. The Southern District of New York is the proper venue because the events giving rise to Aetna's claim occurred here.
B. Liability
All of a plaintiff's factual allegations, except those relating to damages, must be accepted as true where, as here, the defendants default. See Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 108 (2d Cir. 1997);Cotton v. Slone, 4 F.3d 176, 181 (2d Cir. 1993); Time Warner Cable of New York City v. Barnes, 13 F. Supp. 2d 543, 547 (S.D.N.Y. 1998). In this case, the allegations of the Complaint establish Aetna's claims of fraud.
Under New York law, the elements of a fraud claim premised on an intentional misrepresentation are that: (1) the defendant made a false statement of material fact, (2) with knowledge of its falsity, (3) and with intent to defraud the plaintiff, (4) the plaintiff reasonably relied on the misrepresentation, and (5) the plaintiff suffered damages as a result of the misrepresentation.See Kaye v. Grossman, 202 F.3d 611, 614 (2d Cir. 2000). Each of these elements is satisfied here.
The Complaint alleges that the defendants made two types of false representations directly to Aetna: that every patient suffered from craniocervical myofascitis and that the trigger point injections were medically necessary. Further, the Complaint alleges that the defendants knew these statements to be false and intended to mislead Aetna. Aetna reasonably relied on these representations and, as a result, suffered damages when it paid out on false claims.
Because fraud is established on the basis of false representations made to Aetna as to diagnosis and medical necessity, it is unnecessary to determine whether Mr. Licht's identification of himself as "Dr." was also misleading. Further, the Court need not determine whether Aetna has standing to assert fraud claims for representations made to the patients, nor whether Aetna has established its claims for negligent misrepresentation, unjust enrichment, and conversion. In any event, Aetna would not be entitled to additional damages on the basis of these claims.
C. Compensatory Damages
With respect to damages, Aetna has proffered evidence that it paid a total of $911,752.96 to Mr. Licht for the provision of trigger point injections. (Affidavit of Christopher E. Trovato dated Dec. 23, 2003 ("Trovato Aff."), attached to Order to Show Cause dated Jan. 6, 2004, ¶ 3 Exh. A). Further, Aetna paid $1,306,356.95 to New York City Pain Relief for similar treatments. (Trovato Aff., ¶ 4 Exh. B). Accordingly, Aetna seeks damages in these amounts.
There are two potential objections to these calculations. First, defendants' counsel argues that Aetna has failed to demonstrate that the treatments were, in fact, medically unnecessary. (Tr. at 10-11). To the extent that this is a challenge to the finding of liability, it is foreclosed by the defendants' default. To the extent that it is a suggestion that, while some of the claims may have been fraudulent, others were not, it still fails because it was the defendants' own refusal to cooperate in discovery that has prevented Aetna from presenting more precise damage claims. Indeed, even at the inquest, the defendants might have presented evidence that the plaintiff's calculations overstated their damages, but they did not do so.
It can also be argued, based on Rule 54(c) of the Federal Rules of Civil Procedure, that Aetna's damage award should be limited to the amount of the ad damnum clause in its Complaint: $655,443 in actual damages and $500,000 in punitive damages. (Compl. at 18). The rule states in pertinent part that "[a] judgment by default shall not be different in kind from or exceed in amount that prayed for in the demand for judgment." Indeed, some commentators argue for a strict interpretation of that provision:
[T]he first sentence of Rule 54(c) may be thought of as expressing a simple, but important, principle — at any point in a case a defendant is entitled to determine his maximum liability, as fixed by the ad damnum as it stands at that point in the case, and decide whether to proceed further. If defendant chooses not to proceed, liability cannot be increased.
10 Charles Alan Wright et al., Federal Practice and Procedure § 2663 (3d ed. 1998). The Second Circuit, however, takes a more flexible approach, as illustrated by Trans World Airlines, Inc. v. Hughes, 449 F.2d 51 (2d Cir. 1971), rev'd on other grounds, 409 U.S. 363 (1973). There, the court affirmed the award of damages exceeding the ad damnum, reasoning that:
there is no sound basis for restricting [the plaintiff] to the precise damages originally sought in a case where damages alleged were unliquidated, and where defendant did not default by non-appearance, but rather because of non-compliance with discovery procedures, and indeed was granted a full trial on the question of damages actually caused by the allegations established by its default.Id. at 78. Those same factors are present in this case: the damages are unliquidated, the defendants suffered default as a consequence of their discovery abuses, and they were afforded an opportunity to contest any damage award. Moreover, they have long had notice that Aetna's seeks damages in excess of its ad damnum clause because the greater amount was identified in January 2004 in the plaintiff's first application for judgment by default. (Trovato Aff., ¶¶ 3, 4). See Marina B Creation S.A. v. de Maurier, 685 F. Supp. 910, 912 (S.D.N.Y. 1988). Accordingly, Aetna should be awarded compensatory damages of $911,752.96 against Mr. Licht and $1,306,356.95 against New York City Pain Relief.
D. Punitive Damages
Aetna also seeks an award of punitive damages. Under New York law, punitive damages are not available in cases of "ordinary" fraud. See Smith v. Lightning Bolt Productions, Inc., 861 F.2d 363, 371 (2d Cir. 1988); Shanahan v. Vallat, No. 03 Civ. 3496, 2004 WL 2937805, at *11 (S.D.N.Y. Dec. 19, 2004); Trepel v. Abdoulaye, 185 F. Supp. 2d 308, 311 (S.D.N.Y. 2002). However, they may be granted in a case where the fraud is gross and involves a high degree of moral culpability, see Shanahan, 2004 WL 2937805, at *11; Trepel, 185 F. Supp. 2d at 311, or where a professional abuses his status and breaches a duty of trust. See Smith, 861 F.2d at 372; Green v. Leibowitz, 118 A.D.2d 756, 758, 500 N.Y.S.2d 146, 149 (2d Dep't 1986). It is not necessary for the fraud to have been aimed at the general public.See Shanahan, 2004 WL 2937805, at *11; TVT Records v. Island Def Jam Music Group, 262 F. Supp. 2d 188, 198-99 (S.D.N.Y. 2003) (collecting cases); Borkowski v. Borkowski, 39 N.Y.2d 982, 983, 387 N.Y.S.2d 233, 234 (1976).
By these standards, punitive damages are warranted in this case. The defendants' false diagnoses and rendering of medically unnecessary procedures are both morally reprehensible and an abuse of their professional status as providers of medical services. An additional award of $500,000, to be assessed against the defendants jointly and severally, is appropriate.
E. Attorneys' Fees
Finally, Aetna seeks an award of attorneys' fees pursuant to three orders issued by the Honorable Peter K. Leisure, U.S.D.J. The first was the Court's order dated January 21, 2004 that granted the plaintiff's first application for judgment by default (the "1/21/04 Order"). According to Aetna, that order "implicitly" awarded attorneys' fees as a sanction for the defendants' failure to comply with the stipulation concerning discovery. (Affidavit of Alexander D. Tripp dated May 16, 2005 ("Tripp Aff."), ¶ 2). However, no such inference can be drawn from the text of the order. It provides only that a default judgment be entered against the defendants and that the case be referred to me to determine "what damages, if any, and what fees and costs, if any, the plaintiff is entitled to have assessed against defendants on the various causes of action alleged in the complaint." (1/21/04 Order). It says nothing about fees incurred in connection with the motion for default, and, in any event, the first default judgment was subsequently vacated.
Aetna stands on firmer ground with respect to the two subsequent orders. When the Court granted the plaintiff's motion to compel, it ruled that "[p]laintiff is awarded reasonable fees and expenses in connection with the instant motion[.]" (Order dated Jan. 26, 2005). Similarly, in granting Aetna's second motion for judgment by default, Judge Leisure awarded the plaintiff "its reasonable expenses, including attorneys' fees, incurred in connection with this motion[.]" (Order dated March 16, 2005). Aetna has presented evidence that 38.2 hours of attorney time at rates of $230 and $335 per hour and 7.25 hours of paralegal time at $95 per hour were expended on these two motions, for a total of $11,329.25. (Tripp Aff., Exh G). The time spent was reasonable, and the rates charged are commensurate with rates generally charged in this District for similar work. In addition, Aetna expended a total of $360.02 in out-of-pocket expenses consisting of computer-assisted legal research, mail and messenger deliveries, copying of documents, meals, and transportation. (Tripp Aff., Exh. G). These costs were necessary and reasonable. Therefore, Aetna should be awarded its fees and costs as requested in connection with the motion to compel and the second motion for default judgment.
Conclusion
For the reasons set forth above, I recommend that judgment be entered in favor of plaintiff and against defendant David Licht in the amount of $911,752.96 in actual damages, against defendant New York City Pain Relief in the amount of $1,306,356.95 in actual damages, and against both defendants, jointly and severally, for $500,000 in punitive damages and $11,689.27 in attorneys' fees and costs. Pursuant to 28 U.S.C. § 636(b) (1) and Rules 72, 6(a), and 6(e) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from this date to file written objections to this Report and Recommendation. Such objections shall be filed with the Clerk of the Court, with extra copies delivered to the chambers of the Honorable Peter K. Leisure, Room 1910, and to the chambers of the undersigned, Room 1960, 500 Pearl Street, New York, New York 10007. Failure to file timely objections will preclude appellate review.