Man Bites Dog Story - Aetna Sues Fraudsters to Recover What was Stolen
New Jersey’s IFPA Helps Victims of Fraud Sue the Fraudsters
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Aetna Health Inc. and Aetna Life Insurance Co. (collectively, “Aetna”) appeal from trial court orders dismissing for failure to state a claim their second amended complaint, and denying as untimely their motion for leave to file a third amended complaint, against father-daughter defendants Robert W. Kerekes (“Kerekes”) and Susan Nicoll (“Nicoll”). The two were minority owners of Biodiagnostic Laboratory Systems, LLC, (“BLS”) which submitted millions of dollars of fraudulent claims to Aetna. David Nicoll (“David”) – Nicoll’s husband and Kerekes’s son-in-law – was BLS’s majority owner and was convicted of various federal crimes related to the fraud, along with other Nicoll and Kerekes family members and numerous physicians who participated in the scheme.
In Aetna Health Inc. and Aetna Life Insurance Company v. Biodiagnostic Laboratory Services, L.L.C., et. al., No. A-3335-17, Superior Court of New Jersey, Appellate Division (October 7, 2021) the Appellate Division explained that the statutory provisions require less detailed pleadings than a common law fraud case.
FACTS
Aetna seeks to recover over $32 million that BLS distributed to Kerekes and Nicoll. Aetna contends the funds are proceeds of the fraud, and that Nicoll and Kerekes are liable to Aetna under the New Jersey Insurance Fraud Prevention Act (“IFPA”), N.J.S.A. 17:33A-1 to -30, because they knowingly benefitted from BLS’s fraud and they failed to disclose the fraud to Aetna. Aetna also contends that BLS’s payments to Nicoll and Kerekes are voidable under the Uniform Fraudulent Transfer Act (“UFTA”), because BLS made them with the actual intent to hinder, delay, or defraud Aetna, as a BLS creditor.
The principal question here is whether, in its second amended complaint, Aetna adequately pleaded its IFPA and UFTA claims. We conclude it did, and the trial court erred by failing to read the complaint indulgently by misapplying the heightened pleading standard applicable to fraud claims, and by misconstruing the meaning of “knowingly” as used in the IFPA. Because we reinstate the second amended complaint, we remand to the trial court to consider anew Aetna’s motion to file a third amended complaint, which would add claims, among others, for restitution, piercing the “corporate veil,” and imposition of a constructive trust.
Aetna asserts in the second amended complaint claims against Nicoll and Kerekes under the IFPA and UFTA. Aetna also asserts numerous claims against the direct participants in the fraud, including David, Kerekes’s son Kevin Kerekes (“Kevin”) who was a BLS salesperson, physicians who accepted bribes to funnel business to BLS, and other BLS employees who paid the bribes.
Aetna alleged that BLS, through its salespeople and their sham business entities, bribed physicians or paid them kickbacks to refer Aetna’s insureds to BLS for laboratory services. BLS then submitted fraudulent insurance claims to Aetna by billing for services that BLS did not perform, by double-billing, and by waiving patients’ copays and deductibles.
Aetna alleged that Nicoll and Kerekes, as principals and owners of BLS, “orchestrated, directed and/or knew of the bribery scheme,” and “knowingly benefitted from the scheme to defraud.”
Aetna alleged, with supporting documentation, that Nicoll and Kerekes acquired twenty-nine and twenty percent of BLS respectively – and David acquired fifty-one percent – without paying anything out of pocket. In return for an insignificant investment in a company that evidently had little value, Nicoll and Kerekes respectively received disbursements from BLS topping $19 million and $13 million over an eight-year period beginning the year following their acquisition. Aetna alleges that under these circumstances, Nicoll and Kerekes knew that BLS was not operating within the confines of the law and knew of the fraudulent scheme.
In addition, Nicoll and Kerekes were both personally named in a lawsuit that Horizon Blue Cross Blue Shield of New Jersey (Horizon) brought during the fourth year of their ownership, alleging many of the claims Aetna later raised: that BLS paid kickbacks, double-billed, and waived patient responsibility in a fraudulent scheme.
In lieu of an answer, Nicoll and Kerekes moved to dismiss the second amended complaint under Rule 4:6-2(e). And after oral argument, the trial court granted the motion without prejudice.
Although Nicoll and Kerekes were dismissed from the case, Aetna took their depositions as part of discovery in the case remaining against other defendants. Five months later, Aetna sought leave to file a third amended complaint that repeated IFPA and UFTA claims against Nicoll and Kerekes and added claims for a constructive trust, piercing the corporate veil, and restitution against the two.
In its proposed pleading, Aetna bolsters its claims by alleging additional facts regarding BLS’s formation, its operating agreement, Nicoll’s and Kerekes’s respective backgrounds and levels of sophistication, their incomes from BLS, and the Horizon litigation. Aetna alleged that in the years before the Horizon lawsuit, Nicoll received an 8,196 percent return on investment, or about 262 percent annually.
ANALYSIS
The court examined the legal sufficiency of the facts alleged on the face of the complaint, assuming the truth of those facts and granting plaintiffs every reasonable inference. A pleading which sets forth a claim for relief need only contain a statement of the facts on which the claim is based, showing that the pleader is entitled to relief. The dismissal motion must fail if the claim has been made out. Applying this liberal standard, Aetna adequately pleaded facts supporting causes of action under the IFPA and the UFTA.
The IFPA “aggressively” combats insurance fraud in part by authorizing insurers to pursue private claims for statutory violations. Here, Aetna adequately alleged that Nicoll and Kerekes committed two statutory violations.
That Nicoll and Kerekes “conceal[ed] or knowingly fail[ed] to disclose the occurrence of an event which affects any person’s initial or continued right or entitlement to (a) any insurance benefit or payment or (b) the amount of any benefit or payment to which the person is entitled.
Aetna alleged that due to the assistance, conspiracy or urging of any person or practitioner, that is, BLS and its numerous actors – Nicoll and Kerekes knowingly benefitted, directly or indirectly, from the proceeds derived from a violation of the act that violation being BLS’s numerous acts of fraud.
The “events” that Nicoll and Kerekes allegedly concealed or failed to disclose were BLS’s fraudulent acts, including bribes, double-billing, and waiver of patient responsibility. Aetna described them in great detail, and explained they affected BLS’s right to payment. Put another way, Aetna alleged that had it known that BLS bribed doctors, double-billed, and waived patient’s copays and deductibles, it would not have paid the claims.
Aetna was not obliged to allege more. Knowledge is a state of mind that is rarely proved by direct evidence. Knowing is well understood to be an awareness or knowledge of the illegality of one’s act.
In a civil action under the IFPA the defendant’s knowledge of a violation may be proven by circumstantial evidence, including, for example, a defendant’s demeanor and intellect.
Despite its short title, the IFPA is designed to combat insurance fraud by creating causes of action based on less than the elements of common law fraud. The Seventh Circuit held pleading-with-particularity did not apply to “an allegation of unfair conduct, because fraud is not a required element under that branch of the statute.” Benson v. Fannie May Confections Brands, Inc., 944 F.3d 639, 646 (7th Cir. 2019).
Aetna’s claims against Nicoll and Kerekes rest not on the elements of common law fraud, but on their knowing receipt of BLS’s fraud proceeds and their failure to disclose that knowledge. Regarding BLS’s underlying fraud, Aetna pleaded facts with great particularity, explaining who, what, when, where, and how the bribes were paid to corrupt physicians and the claims paid for double-billing. The trial court, therefore, erred in dismissing Aetna’s IFPA claims in its second amended complaint.
Aetna’s UFTA claim also passed pleading muster. However, even assuming that heightened pleading is required, a party may allege intent generally. In order to adequately plead a fraudulent-conveyance claim, a complaint must plead the who, what, where, when, and how of the challenged transactions. Aetna met that test.
Therefore, the trial court erred in dismissing Aetna’s UFTA claims in its second amended complaint and Aetna’s motion to file a third amended complaint deserves consideration from the trial court.
ZALMA OPINION
Since prosecutors seem reluctant to prosecute people who commit insurance fraud and seek restitution for the victims, the insurers, Aetna and other insurers are becoming proactive and seeking to take the profit out of the crime. The defendants made millions by their fraud and Aetna, if it can prove what it alleged will recover the millions stolen from it by insurance fraud, even if the defendants are imprisoned for their crime. It is time for insurers to fight back in a way that will hurt the fraudsters the most – in their bank accounts. New Jersey is only one of many states that have an IFPA that allows insurers to sue or sue under Qui Tam suits. Aetna’s actions should be emulated by all insurer victims.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.
He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.
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