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

Filing 87

ORDER granting 74 Motion for Reconsideration, and to Amend Counter-Complaint, 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.
________________________________/

ORDER GRANTING MOTION FOR RECONSIDERATION
AND TO AMEND COUNTER-COMPLAINT
Before the court is Defendants Physiomatrix, Inc. and Genex Physical Therapy, Inc.’s
motion for reconsideration, filed February 26, 2013. Plaintiff State Farm Mutual Automobile
Insurance Company filed a response on March 1, 2013; Defendants submitted an amended brief
on April 2, 2013.
Defendants seek reconsideration of the court’s order dismissing their RICO claims. The
court determined that Defendants’ “bare allegations of fraud do not satisfy Rule 9(b)
particularity requirement and do not sufficiently allege predicate acts of racketeering to state a
claim under RICO.” Order at 17. The court further noted that Defendants’ claim sounded in
contract rather than tort. The court declined Defendants’ request to amend the counter-complaint
because they had not filed a motion to amend or a proposed amended complaint. Id. at 19.
In connection with their motion for reconsideration, Defendants have submitted a
proposed amended counter-complaint. The amended complaint more specifically describes the

alleged fraudulent statements made by State Farm. See Amended Compl. at ¶¶ 60-66.
Defendants allege that State Farm sends out false “investigation” letters after receiving claims
for payment for their services. Id. at ¶ 55. According to Defendants, State Farm makes the
following material misrepresentations in these letters: that it “has not yet made a determination
of its obligations to pay”; and that the matter “is presently under investigation.” Id. at ¶ 62.
Defendants allege that State Farm “automatically denies claims submitted by [them] . . . without
any inquiry into medical necessity.” Id. at ¶ 51. Defendants further allege that State Farm “has
decided to deny payment on or even before the date the investigation letter is mailed” and that
State Farm does not actually investigate the claims submitted by Defendants, contrary to its
representations in the “investigation” letters. Id. at ¶ 63-64. Defendants also attach examples of
the allegedly false investigation letters to their amended complaint.
The court finds that Defendants’ amended counter-complaint meets the heightened
pleading requirement for fraud and pleads the elements of the predicate acts of mail fraud under
RICO. See Heinrich v. Waiting Angels Adoption Serv. Inc., 668 F.3d 393, 404 (6th Cir. 2012)
(elements of mail fraud). In light of this, the court finds that Defendants have pleaded a
fraudulent scheme beyond a mere breach of contract, distinguishing this matter from Chamberlin
v. Hartford Financial Serv., Inc., 2005 WL 2007894 at *2-3 (S.D.N.Y. Aug., 19, 2005). Under
these circumstances, the court will exercise its discretion in favor of granting Defendants leave
to amend their counter-complaint. See Fed. R. Civ. P. 15(a)(2) (“The court should freely give
leave when justice so requires.”).
State Farm argues that amendment will be futile because Defendants have not alleged the
existence of a distinct enterprise; the existence of a viable RICO enterprise; or that any

-2-

representations made by State Farm proximately harmed Defendants. The court disagrees.
Although State Farm suggests that it and its employees or agents cannot form a distinct
enterprise, Defendants have alleged more: an enterprise consisting of State Farm and
independent medical examiners, including Justin Riutta, M.D. See Amended Compl. at ¶ 38, 79,
82.
For purposes of RICO, “an enterprise includes any union or group of individuals
associated in fact,” elsewhere described as “a group of persons associated together for a common
purpose of engaging in a course of conduct.” Boyle v. United States, 556 U.S. 938, 944 (2009)
(internal quotation marks omitted). Such an association must have “a purpose, relationships
among those associated with the enterprise, and longevity sufficient to permit these associates to
pursue the enterprise’s purpose.” Id. at 2244. Defendants have alleged the enterprise’s purpose
(fraudulent, blanket denial of claims); a relationship between State Farm and independent
medical examiners (State Farm hires the doctors to lend legitimacy to the blanket denial of
claims) and longevity (beginning in 2010). See, e.g., Amended Compl. at ¶¶ 34-42,71-72, 79,
99, 106. See also Brown v. Cassens Transp. Co., 675 F.3d 946, 967-68 (6th Cir. 2012)
(allegations of employer, claims adjuster, and “cutoff doctor” working in concert to fraudulently
deny claims sufficient to state a RICO enterprise).
Defendants have also alleged that they have been directly harmed by State Farm’s
alleged fraudulent scheme to delay or deny claims. See, e.g., Amended Compl. at ¶¶ 37, 66, 68,
76, 89, 127-28. A civil RICO plaintiff must allege he is a person injured “by reason of” a
defendant’s racketeering activity. 18 U.S.C. § 1964(c). This proximate cause requirement
requires “some direct relation between the injury asserted and the injurious conduct alleged.”

-3-

Holmes v. Securities Investor Protection Corp., 503 US. 258, 268 (1992). See also Anza v. Ideal
Steel Supply Corp., 547 U.S. 451 (2006) (the “central question” in analyzing proximate cause is
“whether the alleged violation led directly to the plaintiff’s injuries.”). A link between the injury
asserted and the injurious conduct that is too remote, purely contingent or indirect is insufficient
to establish proximate cause under RICO. Hemi Group, LLC v. City of New York, 130 S.Ct.
983, 989 (2010). Here, Defendants have sufficiently alleged a direct injury as a result of State
Farm’s alleged fraud (e.g. alleging that State Farm uses the “investigation letters,” independent
medical exams, and explanations of benefits to improperly delay or deny payment for medical
services, forcing Defendants to litigate the claims or accept reduced payments). See, e.g.,
Amended Compl. at 54-58, 68, 70. Defendants’ allegations are similar to those found to be
sufficient in Brown v. Cassens Transp. Co., 546 F.3d 347, 355-57 (6th Cir. 2008). In Brown, the
plaintiffs pleaded that they were injured because the defendants’ fraud “deprived the plaintiffs of
worker’s compensation benefits and caused them to incur attorney fees and medical care
expenses.” Id. Defendants’ allegations of injury are not so remote, indirect, or contingent as to
preclude a finding of proximate cause.
Accordingly, IT IS HEREBY ORDERED that Defendants’ motion for reconsideration is
GRANTED. Defendants may file their amended counter-complaint within seven days of the
date of this order.

s/John Corbett O'Meara
United States District Judge

Date: May 22, 2013

-4-

I hereby certify that a copy of the foregoing document was served upon counsel of record
on this date, May 22, 2013, using the ECF system.

s/William Barkholz
Case Manager

-5-