State Farm Mutual Automobile Insurance Company v. Physiomatrix, Inc. et al

Filing 226

OPINION AND ORDER denying 160 Motion to Dismiss; denying 187 Motion to Dismiss. Signed by District Judge John Corbett O'Meara. (WBar)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
STATE FARM MUTUAL
AUTOMOBILE INSURANCE CO.,
Case No. 12-11500
Plaintiff,
Hon. John Corbett O’Meara
v.
PHYSIOMATRIX, INC., et al.,
Defendants.
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OPINION AND ORDER
DENYING MOTIONS TO DISMISS
Before the court are the parties’ motions to dismiss. The court heard oral
argument on February 6, 2014, and took the matter under advisement. For the
reasons explained below, both motions are denied.
BACKGROUND FACTS
Plaintiff/Counter-Defendant State Farm contends that Defendants engaged in
a scheme to defraud State Farm through the submission of fraudulent claims for
physical therapy services that were not medically necessary or not performed. The
services were provided to patients who were involved in motor vehicle accidents
and eligible for Personal Injury Protection (PIP) benefits under State Farm policies.
The physical therapy clinics allegedly involved in the scheme are Defendants
Physiomatrix and Genex, of which Defendants Kallil Kazan and Naim Khanafer

are shareholders and officers. State Farm alleges fraud, unjust enrichment, and
RICO claims against Defendants.
Physiomatrix and Genex (“the Clinics”) have filed a counterclaim against
State Farm, also alleging violations of RICO. The Clinics allege that State Farm,
along with “cut-off” doctors, violated RICO by fraudulently issuing blanket denials
of legitimate PIP claims.
The parties have already filed a round of motions to dismiss, which the court
granted in part and denied in part. See Order dated February 12, 2013 (Docket No.
70). State Farm’s fraud, unjust enrichment, and RICO claims remain, as do the
Clinic’s RICO claims.
The parties have filed their latest motions because the Sixth Circuit recently
decided Jackson v. Sedgwick Claims Mgmt. Serv. Inc., 731 F.3d 556 (6th Cir.
2013). Both parties contend that Jackson is fatal to the other’s RICO claims.
LAW AND ANALYSIS
I.

State Farm’s Motion
In Jackson, the plaintiffs were employees of Coca-Cola who suffered work-

related injuries. Coca-Cola’s claims administrator, Sedgwick Claims Management
Services, denied their workers’ compensation claims. The plaintiffs claimed that
Sedgwick, Coca-Cola, and a “cut-off” doctor “engaged in a fraudulent scheme
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involving the mail . . . to avoid paying benefits to injured employees” in violation
of RICO, 18 U.S.C. § 1962(c). Id. at 558. The plaintiffs sued pursuant to RICO’s
civil-remedy provision, 18 U.S.C. § 1964(c), which provides: “Any person injured
in his business or property by reason of a violation of section 1962 of this chapter
may sue therefor in any appropriate United States district court and shall recover
threefold the damages he sustains and the cost of the suit, including a reasonable
attorney’s fee. . . .” Id. (emphasis added).
Sitting en banc, the Sixth Circuit in Jackson held that the plaintiffs were not
injured in their “business or property” as required by 18 U.S.C. § 1964(c), overruling
Brown v. Cassens Transp. Co., 675 F.3d 946 (6th Cir. 2012). The court noted that
courts have “uniformly recognized that the ordinary meaning of the phrase ‘injured
in his business or property’ excludes personal injuries, including the pecuniary losses
therefrom.” Jackson, 731 F.3d at 564 (citation omitted). The court found that
workers’ compensation benefits “merely reflect the pecuniary losses associated with
the personal injury” and thus do not constitute “business or property.” Id. at 566. To
hold otherwise, as the court did in Brown, would ignore “the underlying reality that
an award of benefits under a workers’ compensation system and any dispute over
those benefits are inextricably intertwined with a personal injury giving rise to the
benefits.” Id. “Accordingly, racketeering activity leading to a loss or diminution of
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benefits the plaintiff expects to receive under a workers’ compensation scheme does
not constitute an injury to ‘business or property’ under RICO.” Id. at 566.
The parties appear to agree that if State Farm’s insureds brought RICO claims
predicated on the fraudulent denial of PIP benefits, such claims would not be viable
under Jackson, because the benefits are compensation for medical expenses arising out
of personal injuries. State Farm argues that Jackson likewise bars the Clinics’ RICO
claims, which are based on State Farm’s allegedly fraudulent denial of medical claims.
The issue is whether the Clinics, in seeking recovery of unpaid medical claims, have
suffered an injury to business or property under RICO.
The Clinics argue that they have not suffered a personal injury for which they
are seeking compensation. Rather, they are seeking compensation for medical
services performed, or “lost income.” State Farm rejoins that, if the court accepts the
Clinics’ argument, it would essentially allow the Clinics to recover no-fault medical
benefits under RICO that their patients (State Farm’s insureds) could not. This may
be true, but State Farm has not cited legal authority that such an outcome is contrary
to law. See Jackson, 731 F.3d at 569-70 (“Long before this case, courts recognized
that the ‘business or property’ limitation in § 1964(c) created a distinction between
compensable and non-compensable injuries that some might consider arbitrary.”).
Although no-fault benefits are at issue, the nature of the Clinic’s injury is
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different from the nature of the insureds’ injuries. The Clinics have provided services
for which they are not being paid; this is more properly characterized as a “business”
rather than a “personal” injury. See Reiter v. Sontone Corp., 442 U.S. 330, 339
(1979) (“When a commercial enterprise suffers a loss of money it suffers an injury in
both its ‘business’ and its ‘property.’”). The court finds that Jackson does not apply
to bar the Clinics’ claims.
II.

The Clinics’ Motion
The Clinics contend that State Farm’s RICO claim should be dismissed under

Jackson because “State Farm’s alleged injuries arise entirely from the personal injuries
of its insureds and are therefore not injuries ‘to business or property’ under RICO.”
Clinics Br. at 4. For the reasons stated above, the court finds this argument
unpersuasive. State Farm’s injuries arise from the payment of allegedly fraudulent
claims submitted by the Clinics. Such an injury is clearly not “personal” and is an
injury to State Farm’s “business or property.” See Reiter, 442 U.S. at 339.
The Clinics also argue that Jackson stands for the proposition that “RICO was
not intended to resolve disputes over no-fault benefits.” The court in Jackson noted
that, to allow the plaintiffs to turn the denial of workers’ compensation benefits into
a RICO claim “creates a form of federal collateral review of the benefits process,
backed up by the threat of treble damages.” Jackson, 731 F.3d at 568. The court
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further noted:
The RICO theory advanced by the plaintiffs in this case
throws the viability of these [workers’ compensation]
schemes into doubt by allowing any employee who believes
an employer denied his workers’ compensation claims
through fraud to recast this dispute as a RICO claim.
Moreover, there is nothing preventing an employer from
turning this theory on its ear and accusing employees of a
pattern of mail or wire fraud designed to support benefits
claims.
Id. From this language, the Clinics make the leap that State Farm is not entitled to use
RICO to recover for insurance fraud, because such a claim would be inconsistent with
Michigan’s no-fault insurance scheme. This argument is not supported by Jackson
and has already been rejected by this court. See Order dated February 12, 2013, at 5-8
(Docket No. 70).
Accordingly, the court will deny the Clinics’ motion.
ORDER
IT IS HEREBY ORDERED that State Farm’s October 22, 2013 motion to
dismiss and the Clinic Defendants’ November 22, 2013 motion to dismiss are
DENIED.
s/John Corbett O’Meara
United States District Judge

Date: February 12, 2014
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I hereby certify that a copy of the foregoing document was served upon counsel
of record on this date, February 12, 2014, using the ECF system.

s/William Barkholz
Case Manager

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