Liberty Mutual Fire Insurance Company et al v. Acute Care Chiropractic Clinic P.A. et al
Filing
29
ORDER denying 8 Motion to Dismiss. As set forth in this Order, Plaintiffs are ordered to amend their Complaint within 14 days to reflect the fact that Count III forms the basis for Count II, and is not a distinct cause of action. (Written Opinion). Signed by Judge Susan Richard Nelson on 02/13/15. (SMD)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Liberty Mutual Fire Insurance Company,
LM Insurance Corporation, LM General
Insurance Corporation, The First Liberty
Insurance Corporation, Safeco Insurance
Company of Indiana, and Safeco Insurance
Company of Illinois,
Case No. 14-cv-2651 (SRN/HB)
Plaintiffs,
MEMORANDUM OPINION
AND ORDER
v.
Acute Care Chiropractic Clinic P.A.,
Arthur Guzhagin D.C., Healthy Living
Chiropractic Clinic P.C., Lake Nicollet
Clinic P.A., Midwest Chiropractic Clinic
P.C., Najah Ibrahim, Southwest
Management LLC, and St. Paul Wellness
Clinic P.A.,
Defendants.
Travis J. Adams and Bryan J. Chant, Law Offices of Thomas P. Stilp, 701 Xenia Avenue
South, Suite 220, Golden Valley, Minnesota 55416, for Plaintiffs.
Adam A. Gillette and Douglas L. Elsass, Fruth, Jamison & Elsass, 3902 IDS Center, 80
South Eighth Street, Minneapolis, Minnesota 55402, for Defendants Acute Care
Chiropractic Clinic P.A., Arthur Guzhagin D.C., Healthy Living Chiropractic Clinic P.C.,
Lake Nicollet Clinic P.A., St. Paul Wellness Clinic P.A., and Midwest Chiropractic
Clinic P.C.
Leny K. Wallen-Friedman, Paul M. Floyd, and Diana Young Morrissey, WallenFriedman & Floyd, P.A., 527 Marquette Ave., Suite 860, Minneapolis, MN 55402, for
Defendants Najah Ibrahim and Southwest Management LLC.
SUSAN RICHARD NELSON, United States District Judge
I.
INTRODUCTION
This matter is before the Court on Defendants Acute Care Chiropractic Clinic P.A.,
Arthur Guzhagin D.C., Healthy Living Chiropractic Clinic P.C., Lake Nicollet Clinic P.A.,
Midwest Chiropractic Clinic P.C., and St. Paul Wellness Clinic P.A.’s (collectively,
“Defendants”) Motion to Dismiss [Doc. No. 8]. For the reasons set forth below, the motion
is denied.
II.
BACKGROUND
In 1974, the State of Minnesota enacted the Minnesota No-Fault Automobile
Insurance Act, or the “No-Fault Act”, in order to facilitate the orderly and efficient
administration of justice within the state, in response to the detrimental impact of
automobile accidents on uncompensated injured persons. See Minn. Stat. § 65B.42 (2014).
The No-Fault Act calls for a minimum payment of $20,000 in medical expense benefits and
$20,000 in income loss, replacement services loss, funeral expense loss, survivor’s
economic loss, and survivor’s replacement services loss benefits to victims of automobile
accidents, without regard to fault for the accident. See Minn. Stat. § 65B.44, subd. 1.
Victims of motor vehicle accidents who are seeking medical treatment for their injuries are
required to submit benefit applications with their primary insurance companies. See Minn.
Stat. § 65B.55, subd. 1.
A. The Parties
Plaintiffs Liberty Mutual Fire Insurance Company, LM Insurance Corporation, LM
2
General Insurance Corporation, The First Liberty Insurance Corporation, Safeco Insurance
Company of Indiana, and Safeco Insurance Company of Illinois are insurance companies
that do business in the State of Minnesota and issue policies that conform to the No-Fault
Act. See Minn. Stat. § 65B et. seq. (Compl. ¶ 4 [Doc. No. 1].)
Defendants Acute Care Chiropractic Clinic P.A., Healthy Living Chiropractic
Clinic P.C., Lake Nicollet Clinic P.A., Midwest Chiropractic Clinic P.C., and St. Paul
Wellness Clinic P.A [hereinafter, “Defendant Clinics”], are health clinics and providers
who provide chiropractic care for car accident victims (id. ¶ 26), and submit patient bills to
Plaintiffs pursuant to the No-Fault Act (id. ¶ 43). Dr. Arthur Guzhagin is a licensed
chiropractor in the State of Minnesota and is the “paper owner” of the Defendant Clinics. 1
(Id. ¶ 16.) Najah Ibrahim is a layperson, who is a citizen of Minnesota, and is not a licensed
medical professional.2 (Id. ¶ 19.) Southwest Management, LLC [hereinafter, “Southwest
Management”] is a lay, limited liability company, whose sole member is Ibrahim. (Id. ¶
1
Pursuant to Minnesota law, “a corporate officer is not liable for the torts of the
corporation’s employees unless he participated in, directed, or was negligent in failing to
learn of and prevent the tort.” Morgan v. Eaton’s Dude Ranch, 239 N.W.2d 761, 762
(Minn. 1976). Since Plaintiffs allege that Dr. Guzhagin directly participated in the
fraudulent scheme (see Compl. ¶¶ 16, 29, 37, 77, 90, 97, 112, 119, 125 [Doc. No. 1]), the
Court need not dismiss Plaintiffs claims against Dr. Guzhagin merely because Dr.
Guzhagin is the “paper owner” of Defendant Clinics.
2
Minnesota courts have applied the same principle that was described in note 1 to
officers of an LLC. See SCA License Corp. v. West Builders, LLC, No. A10-1462, 2011
WL 1642570, at *5 (Minn. Ct. App. May 3, 2011) (holding that the district court did not
abuse its discretion for finding that an officer of an LLC was personally liable for the
LLC’s activity because the LLC was “simply [the officer’s] alter-ego”). Therefore,
Plaintiffs’ claims against Ibrahim also do not require dismissal simply because Ibrahim is
the sole member of Southwest Management, LLC.
3
20.)
B. Defendants are Allegedly “Associated-in-Fact”
This lawsuit arises from Defendant Clinics allegedly fraudulently billing Plaintiffs
for medical treatment provided to car accident victims. Plaintiffs claim that while each
clinic is legally incorporated separately, Defendants are “associated-in-fact.” (Id. ¶ 53.) Or,
in other words, Defendants are allegedly run as a single enterprise. Plaintiffs allege that
Defendants “colluded [in order] to submit illegal and unlawful charges to insurance carriers,
including Plaintiffs.” (Id.)
Specifically, Plaintiffs claim that:
Upon information and belief, Defendant Clinics are operated in a
consolidated fashion . . . [as] Defendant Clinics commingle funds between
their various financial accounts, operate in an underfunded fashion and pay
expenses for one clinic from another clinics operating account, use same or
similar electronic patient care record systems, grant direct and indirect access
to confidential patient care records to chiropractors working at other
Defendant Clinics.
(Id. ¶ 25.)
To support their claim that Defendant Clinics are run in an underfunded fashion,
Plaintiffs allege that the “Defendant Clinics do not pay practice relief physicians for services
rendered.” (Id. ¶ 41.) In fact, Plaintiffs claim that “Defendant Clinics require [] employee
chiropractors [to] pay practice relief physicians from their personal financial accounts.”
(Id.) As an example, Plaintiffs allege that Confidential Informant 4 [hereinafter, “CI-4”], a
practice relief physician employed by Acute Care, was paid by Giles from Giles’ personal
checking account. (Id. ¶ 38.)
4
Plaintiffs support their claim that Defendant Clinics are a single enterprise with
several alleged facts. First, Plaintiffs allege that the interconnected relationship between all
Defendant entities is demonstrated by the fact that a single clinic’s employees receives
payment from a different clinic or entity, for whom the employee does not actually work.
(See id. ¶ 36.) For instance, Confidential Informant 3 [hereinafter, “CI-3”] was hired to
serve as a full-time physician at Healthy Living, Midwest Chiropractic, and St. Paul
Wellness. (Id.) CI-3 was allegedly paid by certain Defendant Clinics for services that he
rendered while working at a completely different Defendant Clinic. Specifically, (1) St.
Paul Wellness, (2) Southwest Management, (3) Healthy Living, and (4) Midwest
Chiropractic, allegedly paid CI-3 for chiropractic services that he actually rendered only at
St. Paul Wellness. (Id.) Moreover, although he was never employed by Southwest
Management, Southwest Management issued an IRS-1099 tax form to CI-3 for his work at
St. Paul Wellness. (Id. ¶ 40.)
To further substantiate their claim that Defendants are associated-in-fact, Plaintiffs
claim that Brooke Giles, a licensed chiropractor and employee of Dr. Guzhagin, provided
deposition testimony on November 22, 2013, in the matter of Ali v. Safeco Insurance
Company, wherein she confirmed that at least three of the Defendant Clinics are “one in the
same.” (Id. ¶ 37.) Giles discussed the singular, overarching ownership structure of Acute
Care, Midwest Chiropractic, and Lake Nicollet, while also explaining that these three
facilities share access to patient health care records. (Id.)
5
C. Defendant Clinics are Allegedly Owned by Layperson
Defendant Ibrahim and/or Lay Company Defendant
Southwest Management
In addition to alleging that Defendant Clinics are associated-in-fact, Plaintiffs claim
that although Defendant Guzhagin incorporated and legally owns each Defendant Clinic,
Defendant Clinics are actually owned by lay person Ibrahim and/or his corporation
Southwest Management. (Id. ¶ 25.)
Plaintiffs bolster their allegation about Ibrahim’s ownership-in-fact by describing
Ibrahim’s relationship with the Defendant Clinics. Specifically, Plaintiffs allege that
“Ibrahim and/or Southwest Management is an established ‘marketer’ or runner having
operated services such as 1-800-PAIN-TEAM and promotes the Defendant Clinics by
bringing new patients to the Defendant Clinics for treatment after motor vehicle accidents.”
(Id. ¶ 26.) In fact, Confidential Informant 1 [hereinafter, “CI-1”] stated that as an employee
of Healthy Living Chiropractic, he was aware that Ibrahim worked as a “marketer” for that
clinic. (Id. ¶ 34.) However, Minnesota law prohibits Defendant Clinics from employing a
“runner”, or someone “who for a pecuniary gain directly procures or solicits prospective
patients . . . at the direction of, or in cooperation with, a health care provider when the
person knows or has reason to know that the provider’s purpose is to perform or obtain
services or benefits under or relating to a contract of motor vehicle insurance.” (Id. ¶ 28
(citing Minn. Stat. § 609.612 (2013).)
Chiropractors who work for the Defendant Clinics are allegedly told that Ibrahim is a
“friend of Guzhagin.” (Id. ¶ 26.) For instance, Giles stated in deposition testimony in
6
another case that Ibrahim was a friend of Guzhagin and would refer patients to the clinics.
(Id. ¶ 37.) Additionally, “Ibrahim is [allegedly] granted access to office space at the
Defendant Clinics and is considered by the Confidential Informants to have influence on the
management and operation of the clinics.” (Id. ¶ 26.)
Plaintiffs further allege that Defendant Guzhagin affirmatively misrepresented that
the Defendant Clinics were operated separately and owned solely by Dr. Guzhagin. (See id.
¶ 61.) They claim that Dr. Guzhagin wrote, in an undated letter to Michael Struebing of
Liberty Mutual Insurance Company, that “I am the sole owner of the clinics. You also
asked whether the facilities work in conjunction with one another or are operated separately.
The clinics are operated separately.” (Id.) Although the letter was undated, Struebing
allegedly received this letter on July 11, 2013. (Id.)
Plaintiffs claim that Ibrahim’s alleged ownership of the clinics violates the Corporate
Practice of Medicine Doctrine (“CPMD”), which prohibits chiropractic clinics from being
owned in whole, or part, by unlicensed laypersons. See, e.g., Isles Wellness, Inc. v.
Progressive N. Ins. Co., 725 N.W.2d 90, 95 (Minn. 2006) [hereinafter, “Isles II”]; Isles
Wellness, Inc. v. Progressive N. Ins. Co., 703 N.W.2d 513, 517 (Minn. 2005) [hereinafter,
“Isles I”]; Granger v. Adson, 250 N.W. 722 (Minn. 1933). Moreover, Plaintiffs argue that
Defendant Guzhagin was aware of the CPMD and knowingly violated it because: (1) the
Minnesota Board of Chiropractic Examiners released a notice in January 1999, explaining
that all owners and decision makers of professional firms must be comprised of persons
licensed to practice those services; and thus, he was likely aware of this notice when he
7
acquired his chiropractic license on February 1, 2006 (see Compl. ¶ 59 [Doc. No. 1]); and
(2) Defendant Guzhagin acknowledged the CPMD in Guzhagin v. State Farm Mut. Auto.
Ins. Co., 566 F. Supp. 2d 962, 970 n.8 (D. Minn. 2008), a previous lawsuit to which he was
a party (see Compl. ¶ 59 [Doc. No 1]).
Defendant Clinics submitted patient bills to Plaintiffs on Health Insurance Claim
Forms or HCFA-1500 forms. (Compl. ¶ 43 [Doc. No. 1].) Plaintiffs allege that Defendants
represented, by submitting HCFA-1500 forms, that: “(1) the services on the form were
medical indicated [sic] and necessary for the health of the patient; (2) the services were
personally furnished by that medical provider or by a qualified employee under the medical
provider’s personal direction; and [most importantly,] (3) the medical provider was
authorized to perform such services.” (See Compl. ¶ 43 [Doc. No. 1].)
In relevant part, the HCFA-1500 form contains two separate notices. One warns
that: “[a] person who knowingly files a statement of claim containing any
misrepresentation or any false, incomplete or misleading information may be guilty of a
criminal act punishable under law and may be subject to civil penalties.” (See Gillette
Aff., Ex. A [Doc. No. 19-1].) The other notice pertains specifically to physicians or
suppliers completing the form and states that “[a]ny one who misrepresents or falsifies
essential information to receive payment from Federal funds requested by this form may
upon conviction be subject to fine and imprisonment under applicable Federal laws.”
(See id.) Plaintiffs contend that by completing the physician or supplier information on
8
the HCFA-1500 forms, Defendants implied that they were eligible for reimbursement,
and that they were not operating in violation of Minnesota law or the CPMD.
According to Plaintiffs, each claim form Defendants submitted was fraudulent
because each form contained misleading information, insofar as it implied that the clinics
were lawfully owned and operated, and therefore, eligible for reimbursement under the
No-Fault Act. (See Compl. ¶ 43 [Doc. No. 1].) In addition to Defendants allegedly
misrepresenting their essential ownership information on federal forms, Defendant
Guzhagin allegedly lied to Plaintiffs more directly. Plaintiffs allege that, on July 11,
2013, Defendant Guzhagin directly stated to Plaintiffs in a letter that he is the sole owner
of the clinics. (See id. ¶ 63 [Doc. No. 1].)
HCFA-1500 forms, as well as supporting documentation, were sent to Plaintiffs via
United States Postal Service, facsimile, and/or wire. (Id. ¶¶ 44, 60–63.) Plaintiffs allege
that Defendants unlawfully billed Plaintiffs over $834,060 because the clinics are owned, at
least in part, by a layperson or lay company. (Id. ¶ 6.) Plaintiffs explain that Defendants’
alleged misrepresentation was “material because the information submitted to Plaintiffs . . .
largely determined whether Plaintiffs would voluntarily issue payment.” (Id. ¶ 114.) In
other words, Plaintiffs would have not issued payment for the bills submitted by Defendants
if they knew of Defendants’ alleged corporate practice of medicine.
D. Additional Facts Alleged
Unrelated to Plaintiffs’ claims of corporate ownership and fraud stemming from
Defendants’ corporate ownership, Plaintiffs allege several other facts. Plaintiffs claim that
9
“Defendant Clinics attempt to treat accident victims regardless of injury status,” and on at
least one occasion, a patient reported that a chiropractor at Midwest Chiropractic
deliberately intended to injure the patient’s neck in order to substantiate an insurance claim.
(Id. ¶ 33.)
Plaintiffs also allege that according to Confidential Informant 2 [hereinafter, “CI-2”],
Dr. Guzhagin “would attempt to influence her treatment recommendations by making
comments to her about the treatment that she had rendered without ever personally treating
the patient.” (Id. ¶ 35.) Similarly, Plaintiffs note that Defendant Clinics treated patients
“unnecessarily and/or without objective evidence of injury.” (Id. ¶ 33.) Thus, Plaintiffs
appear to allege that some unidentified number of claims by unidentified patients at
unidentified clinics were not medically necessary. (See id.)
Finally, Plaintiffs claim that Dr. Guzhagin “has been involved in other schemes to
knowingly and intentionally violate the corporate practice of medicine.” (Id. ¶ 45.)
Plaintiffs’ discussion of Dr. Guzhagin’s former fraud scheme, which was allegedly
perpetrated in 2009 in conjunction with a non-board certified doctor, is not directly relevant
to the facts pertaining to this case. Plaintiffs’ claim about poor or unnecessary treatment
that occurs at Defendant Clinics is also not directly relevant to Plaintiffs’ allegation of
Defendants’ corporate ownership. Rather, it appears that Plaintiffs include these allegations
to demonstrate that it is plausible that Dr. Guzhagin is involved in a fraudulent scheme in
this case, since he allegedly recommended unnecessary medical treatments and was
involved earlier in a similar fraud scheme. (See id.)
10
E. Procedural Posture and Plaintiffs’ Claims
Plaintiffs filed their Complaint on July 2, 2014. (See generally Compl. [Doc. No.
1].) Plaintiffs’ Complaint is based upon eight causes of action. In Count I, Plaintiffs
allege that Defendants engaged in mail fraud and wire fraud in violation of the Racketeer
Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et. seq., by submitting bills
to Plaintiffs by mail and by wire under the false pretense that Defendant Clinics were
properly incorporated, properly owned, and legally authorized to render treatment in the
State of Minnesota. (Id. ¶¶ 46–68.) In Count II, Plaintiffs claim that Defendants violated
the CPMD, which prohibits chiropractic clinics from being owned in whole, or in part, by
unlicensed laypersons. (Id. ¶¶ 69–78.) In Count III, Plaintiffs allege that Defendants
violated the Minnesota Professional Firms Act by issuing and/or authorizing legal, or infact, ownership interests to persons and/or limited liability companies not licensed to
render at least one category of the pertinent professional services. (Id. ¶¶ 79–91.) In
Count IV, Plaintiffs claim that Defendants would be unjustly enriched if the Court
permits them to retain funds received through violations of the CPMD and the Minnesota
Professional Firms Act. (Id. ¶¶ 92–97.)
In Count V, Plaintiffs seek to recover the Minnesota No-Fault benefits they paid as
a result of Defendants’ alleged intentional misrepresentations regarding their lay
ownership. (Id. ¶¶ 98–104.) In Count VI, Plaintiffs allege that Defendants violated the
Minnesota Consumer Protection Act, Minn. Stat. § 325F, by utilizing false information
and/or deceptive practices when they represented that they were properly owned and
11
legitimate. 3 (Id. ¶¶ 105–12.) In Count VII, Plaintiffs contend that Defendants engaged in
common law fraud by falsely representing that the services they performed for Plaintiffs’
insureds were legal and proper, when, in fact, Defendants were aware that their
operations were in violation of Minnesota law. (Id. ¶¶ 113–19.) Finally, in Count VIII,
Plaintiffs allege that Defendants engaged in negligent misrepresentation by failing to use
reasonable care or competence in communicating billing information to Plaintiffs,
because Defendants falsely represented to Plaintiffs that they were not lay-owned and not
operating in violation of Minnesota law. 4 (Id. ¶¶ 120–25.)
Plaintiffs allege that Defendants are jointly and severally liable for Counts II
through VIII because Defendants acted in a common scheme and plan to defraud
Plaintiffs. (See id. ¶¶ 77, 90, 97, 104, 112, 119, 125.) Accordingly, Plaintiffs seek to
enjoin the clinics from operating in violation of law (id. at 34), and they seek to recover an
amount in excess of $75,000 from Defendants for amounts paid or billed (id. ¶ 6).
Defendants filed a Motion to Dismiss Plaintiffs’ Complaint on September 2, 2014
[Doc. No. 8], along with a supporting memorandum [Doc. No. 18], and an affidavit with an
attached exhibit [Doc. No. 19]. Plaintiffs filed an opposition memorandum on October 20,
2014 [Doc. No. 20], with a declaration and an attached exhibit [Doc. No. 21]. Defendants
3
Plaintiffs allege that they have the authority to bring this cause of action pursuant
to the Minnesota Private Attorney General Statute, Minn. Stat. § 8.31, subd. 3a (2013).
(Id. ¶¶ 105–112.)
4
One allegation in the fact section of Plaintiffs’ Complaint describes some
treatments made by practitioners at the Defendant Clinics as medically unnecessary. (Id.
¶ 33.) However, the Court does not read this single allegation as forming the basis of
Plaintiffs’ claims. (See Defs.’ Mem. at 21 [Doc. No. 18].) Rather, Plaintiffs’ claims are
more clearly based upon the legality of the Defendant Clinics’ ownership structure.
12
filed a reply brief on October 27, 2014 [Doc. No. 22], and the matter was heard on
November 10, 2014 [Doc. No. 23]. Plaintiffs filed a supplemental opposition memorandum
on November 13, 2014 [Doc. No. 24].
III.
DISCUSSION
A.
Standard of Review
Defendants move to dismiss Plaintiffs’ Complaint for lack of subject matter
jurisdiction, pursuant to Federal Rule of Civil Procedure 12(b)(1), and for failure to state a
claim upon which relief can be granted, pursuant to Rule 12(b)(6). (See Defs.’ Mot. to
Dismiss [Doc. No. 8].)
Rule 12(b)(1) of the Federal Rules of Civil Procedure provides that a party may
move to dismiss a complaint for lack of subject matter jurisdiction. When considering a
Rule 12(b)(1) motion, a district court may consider matters outside the pleadings. Satz v.
ITT Fin. Corp., 619 F.2d 738, 742 (8th Cir. 1980). “[N]o presumptive truthfulness
attaches to the plaintiff’s allegations, and the existence of disputed material facts will not
preclude the trial court from evaluating for itself the merits of jurisdictional claims.
Moreover, the plaintiff will have the burden of proof that jurisdiction does in fact exist.”
Osborn v. United States, 918 F.2d 724, 730 (8th Cir. 1990). Federal district courts have
subject matter jurisdiction over civil actions that involve a federal question or diversity of
citizenship. See 28 U.S.C. §§ 1331–1332. Federal question jurisdiction exists when the
action arises “under the Constitution, laws, or treaties of the United States.” Id. § 1331.
13
Diversity jurisdiction exists when the case is between citizens of different states and the
amount in controversy exceeds $75,000. Id. § 1332(a).
When evaluating a motion to dismiss under Rule 12(b)(6), the Court assumes the
facts in the Complaint to be true and construes all reasonable inferences from those facts in
the light most favorable to Plaintiff. Morton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986).
However, the Court need not accept as true wholly conclusory allegations, Hanten v. Sch.
Dist. of Riverview Gardens, 183 F.3d 799, 805 (8th Cir. 1999), or legal conclusions Plaintiff
draws from the facts pled, Westcott v. City of Omaha, 901 F.2d 1486, 1488 (8th Cir. 1990).
In addition, the Court ordinarily does not consider matters outside the pleadings on a motion
to dismiss. See Fed. R. Civ. P. 12(d). The Court may, however, consider exhibits attached
to the complaint and documents that are necessarily embraced by the pleadings, Mattes v.
ABC Plastics, Inc., 323 F.3d 695, 697 n.4 (8th Cir. 2003), and may also consider public
records, Levy v. Ohl, 477 F.3d 988, 991 (8th Cir. 2007).5
To survive a motion to dismiss, a complaint must contain “enough facts to state a
claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007). Although a complaint need not contain “detailed factual allegations,” it must
contain facts with enough specificity “to raise a right to relief above the speculative level.”
Id. at 555. “Threadbare recitals of the elements of a cause of action, supported by mere
conclusory statements,” will not pass muster under Twombly. Ashcroft v. Iqbal, 556 U.S.
5
Although Plaintiffs did not attach an HCFA-1500 form to their Complaint,
Plaintiffs discussed the form throughout their Complaint and Defendants submitted a
copy of this federal claim form. (See Gillette Aff., Ex. A [Doc. No. 19-1].) Therefore,
the Court properly considers the entirety of the HCFA-1500 form in this order.
14
662, 678 (2009) (citing Twombly, 550 U.S. at 555). In sum, this standard “calls for enough
fact[s] to raise a reasonable expectation that discovery will reveal evidence of [the claim].”
Twombly, 550 U.S. at 556.
With respect to Plaintiffs’ claims that are based on fraud, Plaintiffs’ pleading
standard is heightened. According to Federal Rule of Civil Procedure 9(b), a plaintiff must
plead claims of fraud with particularity. See Fed. R. Civ. P. 9(b). In order to satisfy Rule
9(b)’s particularity requirement, “the complaint must plead such facts as the time, place,
and content of the defendant’s false representations, as well as the details of the
defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and
what was obtained as a result.” United States ex rel. Thayer v. Planned Parenthood of the
Heartland, 765 F.3d 914, 916 (8th Cir. 2014) (quoting United States ex rel. Joshi v. St.
Luke’s Hospital, Inc., 441 F.3d 552, 556 (8th Cir. 2006)). In other words, “the complaint
must identify the ‘who, what, where, when, and how’ of the alleged fraud.” Id. (quoting
Costner v. URS Consultants, Inc., 153 F.2d 667, 677 (8th Cir. 1998)).
Below, the Court begins by addressing whether each of Plaintiffs’ claims survives
Defendants’ Motion to Dismiss pursuant to Rule 12(b)(6), and then the Court considers
whether jurisdiction is proper under Rule 12(b)(1) in this case, given the plausibility of
each claim.
15
B.
Plausibility
1. Count I: Racketeer Influenced and Corrupt Organizations
Act, 15 U.S.C. § 1961 et. seq.
The Racketeer Influenced and Corrupt Organizations Act (“RICO”) prohibits
persons “employed by or associated with any enterprise engaged in . . . interstate . . .
commerce, to conduct or participate, directly or indirectly, in the conduct of such
enterprise’s affairs through a pattern of racketeering activity.” 18 U.S.C. § 1962(a) (2012).
RICO “defines ‘racketeering activity’ as the commission of any of several predicate
offenses.” Ill. Farmers Ins. Co. v. Mobile Diagnostic Imaging, Inc., No. 13-cv-2820
(PJS/TNL), 2014 WL 4104789, at *6 (D. Minn. Aug. 19, 2014). Mail fraud and wire fraud
are among the possible predicate offenses. Id. (quoting 18 U.S.C. § 1341 (mail fraud
statute), id. § 1343 (wire fraud statute)). RICO “is a unique cause of action that is
concerned with eradicating organized, long-term, habitual criminal activity.” Crest Constr.
II, Inc. v. Doe, 660 F.3d 346, 353 (8th Cir. 2011). Although RICO is a criminal statute, the
law provides a civil remedy for any person injured in his business or property by reason of a
violation of the law’s substantive provisions. See 18 U.S.C. § 1964(c).
In order to plead a viable RICO claim, a plaintiff must allege: “(1) the conduct, (2) of
an enterprise, (3) through a pattern, (4) of racketeering activity.” Wisdom v. First Midwest
Bank of Poplar Bluff, 167 F.3d 402, 406 (8th Cir. 1999). These elements must be pled with
particularity when the alleged racketeering activity involves fraud, Crest Constr. II, 660
F.3d at 35, and must be pled with respect to each defendant individually, Craig Outdoor
Adver., Inc. v. Viacom Outdoor Inc., 528 F.3d 1001, 2027 (8th Cir. 2008).
16
Here, the parties dispute whether (a) Defendants’ activity constituted racketeering
activity, and (b) whether Defendants collectively constitute an enterprise. The Court
discusses these issues below. The Court finds that Plaintiffs adequately plead the
commission of predicate acts, which form the basis of the alleged racketeering activity, and
Plaintiffs plead facts showing that the alleged enterprise had a structure that was separate
and distinct from the alleged racketeering activity. Therefore, Defendants’ Motion to
Dismiss Plaintiffs’ RICO claim is denied.
a. Racketeering Activity
Plaintiffs allege that each Defendant committed mail fraud and wire fraud by
submitting fraudulent insurance claims to Plaintiffs under the No-Fault Act. (See Compl. ¶¶
61, 63 [Doc. No. 1].) As noted above, mail fraud and wire fraud are categorized as
racketeering activity. 18 U.S.C. §§ 1341, 1343. In order to state a prima facie RICO claim
and demonstrate a pattern of racketeering activity, Plaintiffs must plead fraud with
particularity. Illinois Farmer, 2014 WL 4104789, at *6 (citing Wisdom, 167 F.3d at 406).
Here, Plaintiffs claim that Defendants deceived them because they were untruthful about the
Defendant Clinics’ corporate ownership.
In Minnesota, the corporate practice of medicine is not permitted. See Isles I, 703
N.W.2d at 518. This limitation exists to ensure that (1) laypersons may not commercially
exploit the professional judgment of medical providers, and (2) a health care practitioner’s
loyalty to a patient is never in conflict with the practitioner’s loyalty to an employer. See
Isles II, 725 N.W.2d at 93 (quoting Isles I, 703 N.W.2d at 517). Plaintiffs argue that when
17
Defendants filed insurance claims with Plaintiffs, Defendants implicitly represented that
they were operating in accordance with federal and state law, and thus were not lay-owned.
(See Compl. ¶¶ 61, 63 [Doc. No. 1].) However, Plaintiffs allege that Defendants’
representation was fraudulent because layperson Ibrahim and/or his corporation, Southwest
Management, own the Defendant Clinics in violation of Minnesota’s CPMD, and such layownership precludes the Defendant Clinics from being reimbursed for insurance claims
under the No-Fault Act. (Id. ¶¶ 25–26.)
In order to show that an entity commits mail fraud and/or wire fraud amounting to a
RICO violation, Plaintiffs must show: “(1) a plan or scheme to defraud, (2) intent to
defraud, (3) reasonable foreseeability that the mail or wires will be used, and (4) actual use
of the mail or wires to further the scheme.” Wisdom, 167 F.3d at 406 (citing Murr
Plumbing, Inc. v. Scherer Bros. Fin. Servs. Co., 48 F.3d 1066, 1069 & n.6 (8th Cir. 1995)).
Accordingly, in order for a violation of Minnesota’s CPMD to constitute mail fraud and/or
wire fraud amounting to a RICO violation, Plaintiffs must show that (1) the CPMD was
violated, (2) Defendants knew of the violation, see United States v. Redzic, 627 F.3d 683,
689 n.4 (8th Cir. 2010) (explaining that intent to defraud is an element of both mail fraud
and wire fraud), and (3) Defendants committed mail or wire fraud by intentionally
representing to Plaintiffs that they were not violating the CPMD when they submitted their
claims via mail and wire. See Ill. Farmers, 2014 WL 4104789, at *9. The Court discusses
these three elements below.
18
i.
CPMD Violation: Owner-in-Fact Allegation6
Plaintiffs allege that while Defendant Guzhagin, a licensed chiropractor, is the
“paper owner” of the Defendant Clinics, the legal owner, or owner-in-fact of the clinics, is
either Defendant Ibrahim, who is not licensed to practice physical medicine or chiropractic
medicine in any state, or his lay company, Southwest Management. (See Compl. ¶¶ 16, 19,
25 [Doc. No. 1].)
Defendants do not dispute that Defendant Ibrahim is not licensed to practice
medicine. Rather, they argue that Defendant Ibrahim and Southwest Management do not
have any ownership interest in the clinics. (See Defs.’ Mem. at 13–14 [Doc. No. 18].)
Defendants contend that Plaintiffs’ allegation, that Ibrahim or Southwest Management is the
owner-in-fact of the clinics, is a legal conclusion that the Court should disregard. (See id. at
13.) They argue that Plaintiffs’ allegations are “mere conclusory statements,” and therefore
do not suffice under the Federal Rules of Civil Procedure. (See id. at 14 (citing Iqbal, 556
U.S. at 678)).
6
Reading Plaintiffs’ Complaint as a whole, it appears as though the underlying
fraud that forms the basis of Plaintiffs’ RICO claim is the alleged corporate ownership of
the Defendant Clinics. (See generally Compl. [Doc. No. 1].) However, in a portion of
Defendants’ brief, Defendants analyze Plaintiffs’ RICO claim insofar as the underlying
alleged fraud is not the corporate ownership of the clinics, but rather the lack of
medically necessary treatments rendered by professionals at the clinics. (See Defs.’
Mem. at 14 [Doc. No. 18].)
Insofar as Plaintiffs’ RICO claim is based on the alleged fact that the treatment
Defendants provided to patients was not medical necessary, the Court finds that this
claim is not pled with the requisite specificity. Plaintiffs merely allege that some
unidentified number of claims by unidentified patients at unidentified clinics were not
medically necessary. (See Compl. ¶ 33 [Doc. No. 1].) Therefore, the Court’s analysis is
focused primarily on the corporate ownership of the clinics as the basis of the alleged fraud.
19
The Court finds that Plaintiffs’ allegations regarding ownership of Defendant Clinics
amount to more than “mere conclusory statements.” Plaintiffs allege a series of facts that,
read as a whole, plausibly demonstrate that Ibrahim and/or Southwest Management is a lay
owner of Defendant Clinics. These alleged facts include, but are not limited to, the
following: (1) Defendant Clinics are run as a single associated-in-fact enterprise, according
to Giles’ previous deposition testimony, and based upon how Defendants manage their
funds and pay employees (Compl. ¶¶ 25, 36, 37, 40 [Doc. No. 1]); (2) Ibrahim has a stake in
the success of Defendant Clinics because he is an established “marketer” and brings new
patients to the Defendant Clinics for treatment after motor vehicle accidents (id. ¶¶ 26, 34);
(3) Ibrahim and Dr. Guzhagin have a close personal relationship as chiropractors employed
at Defendant Clinics recognize Ibrahim as a “friend” of Dr. Guzhagin (id. ¶¶ 26, 37); (4)
Ibrahim and Dr. Guzhagin have a close business relationship because Ibrahim has office
space at the Defendant Clinics and is considered by the Confidential Informants to have
influence on the management and operation of the clinics (id. ¶ 26); and (5) Southwest
Management and Ibrahim pay licensed chiropractors for services rendered, as evidenced by
the fact that Southwest Management issued payments and an IRS-1099 tax form to CI-3 for
professional services rendered at St. Paul Wellness (id. ¶ 40).
An employer is typically the entity to provide an employee with payment and tax
documents. The fact that such paperwork was provided by an organization claiming to have
no part in the management of the employee’s place of business is sufficient “to raise a right
to relief above the speculative level.” Twombly, 550 U.S. at 555. In opposition,
20
Defendants claim that “nothing in the law says that issuing a payment to one contract
health-care provider makes one an owner.” (See Defs.’ Reply at 2 [Doc. No. 22].) While
Defendants are correct that source of payment does not ipso facto indicate ownership, at this
stage of the proceedings, Plaintiffs’ allegations are sufficient to survive dismissal and nudge
Plaintiffs’ corporate ownership claim “across the line from conceivable to plausible.” Iqbal,
556 U.S. at 680 (quoting Twombly, 550 U.S. at 570).
ii.
Defendants’ Knowledge of the Alleged Fraud
Plaintiffs further allege that Defendants knew, or should have known, that they were
in violation of the CPMD. (See Compl. ¶¶ 56, 58, 59 [Doc. No. 1].) In order to knowingly
violate the CPMD, Defendants must have been aware of the State of Minnesota’s
prohibition of the corporate practice of medicine. Plaintiffs contend that Defendant
Guzhagin had actual or constructive knowledge of the existence of the CPMD as evidenced
by two facts. First, Defendant Guzhagin acknowledged the CPMD in Guzhagin v. State
Farm Mut. Auto. Ins. Co., 566 F. Supp. 2d 962, 970 n.8 (D. Minn. 2008), a previous lawsuit
to which he was a party. (See id. ¶ 59.) Second, Plaintiffs contend that Defendant
Guzhagin knew that the corporate practice of medicine was not permitted in Minnesota
based on a “Minnesota Board of Chiropractic Examiners notice indicating that as of
January 1, 1999, all owners and decision makers of professional firms must be comprised
of persons licensed to practice the professions designated in Minnesota chapter 319B.”
(Id. ¶ 59.) Plaintiffs did not submit a copy of this notice as an exhibit, nor did they
provide a citation for the Court to obtain this document, if the notice was considered
21
public record. Nonetheless, at this stage of the proceedings, the Court finds that Plaintiffs
need not provide such documentation to supplement their claim. Plaintiffs further allege
that because the Defendants knew of the CPMD and allowed Defendant Ibrahim, and/or
Defendant Southwest Management, to maintain ownership over the Defendant Clinics,
Defendants therefore knew or should have known that Defendant Clinics were operating
illegally and in violation of the CPMD in the State of Minnesota. (See id. ¶ 56.)
The Court finds that Plaintiffs’ allegations regarding (1) Defendants’ knowledge of
the existence of the CPMD, and (2) Defendants’ knowledge of their violation of the CPMD,
amount to more than “mere conclusory statements.” If Defendant Guzhagin did in fact
receive notice informing him about the CPMD in Minnesota, then Defendant Guzhagin
likely had constructive knowledge of the CPMD. (See id. ¶ 59.) Moreover, Plaintiffs
contend that Defendants had specific reason to know about the CPMD because of
Defendant Guzhagin’s arguments about the doctrine in 2008, during a different legal
proceeding. (See id. ¶ 59.) The Court agrees that, if taken as true, the fact that Defendant
Guzhagin discussed the CPMD in 2008 sufficiently demonstrates that Defendants knew
about the prohibition of the corporate practice of medicine. Thus, Plaintiffs have plausibly
alleged that Defendants either were aware, or should have been aware, that Ibrahim’s or
Southwest Managements’ ownership of Defendant Clinics violated the CPMD. (See id. ¶¶
56, 58, 59.) These allegations are sufficient to “to raise a right to relief above the
speculative level.” Twombly, 550 U.S. at 555.
22
iii.
Particularity of Alleged Mail and Wire Fraud
Plaintiffs additionally allege that Defendants represented to Plaintiffs, by mail and
wire, that they were not operating in violation of the CPMD. (See Compl. ¶¶ 61, 63 [Doc.
No. 1].) Plaintiffs substantiate their mail fraud allegation by contending that Defendants’
billing representatives submitted HCFA-1500 forms and/or invoices via U.S. Postal Service
to Plaintiffs, for the purpose of obtaining money under the false pretense that Defendants
were properly incorporated, properly owned, and legally authorized to render treatment in
the State of Minnesota. (See id. ¶ 61.) Similarly, Plaintiffs allege that Defendants’ billing
representatives submitted HCFA-1500 forms and/or invoices via wire to Plaintiffs, for the
purpose of obtaining money under the false pretense that Defendants were properly
incorporated, properly owned, and legally authorized to render treatment in the State of
Minnesota. (See id. ¶ 63.)
Pursuant to Federal Rule of Civil Procedure 9(b), alleged fraudulent racketeering
activity must be pled with particularity. See Fed. R. Civ. P. 9(b); Ill. Farmers, 2014 WL
4104789, at *5 (citing Crest Constr. II, 660 F.3d at 353). In United States ex rel. Joshi v.
St. Luke’s Hospital, Inc., the anesthesiologist-plaintiff brought a qui tam action against a
medical provider alleging that the provider submitted false or fraudulent claims for
Medicare reimbursement, in violation of the False Claims Act (“FCA”). See 441 F.3d
552, 553–54 (8th Cir. 2006). Specifically, the plaintiff alleged that the medical provider:
(1) requested and received Medicare reimbursement from the government for services
performed at a higher rate than the provider was entitled to; (2) sought reimbursement for
23
supervised work, when in fact such work was unsupervised, in violation of state law; and
(3) knowingly submitted false claims to the government for services that were not
performed and for supplies that were not provided. Id. at 554. The plaintiff made vague
allegations based on “information and belief” (id. at 558) and based on an “original
source” (id. at 554), but failed to indicate the actual “basis for knowledge concerning the
alleged submission of fraudulent claims” (id. at 558) or the precise activity that violated
the FCA (id.). Moreover, the plaintiff had “no direct connection to the hospital’s billing
or claims department and could only speculate that false claims were submitted.” See
Thayer, 765 F.3d at 917.
In Joshi, the United States Court of Appeals for the Eighth Circuit affirmed the
dismissal of the plaintiff’s fraud claims, explaining that the complaint failed to satisfy
Rule 9(b)’s particularity requirement. See 441 F.3d at 560–61. The plaintiff failed to
provide a factual basis for his fraud claims; and thus, his allegations lacked sufficient
indicia of reliability to satisfy Rule 9(b).
In United States ex rel. Thayer v. Planned Parenthood of the Heartland, the
plaintiff also brought a qui tam action against a medical provider alleging that the
provider submitted false or fraudulent claims for Medicaid reimbursement, in violation of
the FCA. See 765 F.3d 914, 915 (8th Cir. 2014). Specifically, the plaintiff alleged that
the medical provider: (1) filed claims for unnecessary quantities of prescription
medications that were often prescribed but not received by patients; (2) sought
reimbursement for services in violation of federal law and instructed patients to give false
24
information to medical professionals at other hospitals to induce those professionals to
file claims for services; (3) filed claims for the full amount of services that had already
been paid, in whole or in part, by “donations” coerced from patients; and (4) “upcoded,”
or filed claims for more expensive services than were actually performed. See id.
As the medical center’s manager, the plaintiff oversaw the billing and claims
systems. Id. at 917. Therefore, she was able to allege with particularity the details of the
first and third claims, including the names of those involved, the relevant time period,
and the methods used to commit the alleged fraud. Id. at 919. However, she failed to
allege such details for her second and fourth fraud claims. In support of her second
claim, the plaintiff did not allege that she had access to, or knowledge of, other hospitals’
billing practices. Id. In support of her fourth fraud claim, the plaintiff made only
“conclusory or generalized allegations” of upcoding and did not allege any details of who
was involved, when the upcoding occurred, and what type of services were involved. Id.
at 920. Given these allegations, the Eighth Circuit held that only the Plaintiff’s first and
third claims were pled with enough particularity to survive dismissal. Id. at 917–21. The
Thayer Court further stated that “[plaintiffs] whose allegations lack sufficient indicia of
reliability should be required to plead representative examples of the false claims because
their allegations are more likely to be unfounded,” and that, “[i]n contrast, a [plaintiff]
who provides sufficient indicia of reliability to support her allegations that false claims
were submitted, such as by pleading details about the defendant’s billing practices and
25
pleading personal knowledge of the defendant’s submission of false claims, fulfills Rule
9(b)’s objective of protecting the defendant from baseless claims.” Id. at 918.
Here, Plaintiffs provide sufficient indicia of reliability to support their allegations
that fraudulent claims were submitted; and thus, under Thayer, Plaintiffs need not plead
representative examples of fraudulent claims. See id. The indicia of reliability include: the
identities of the entities and individuals involved; statements from confidential informants;
deposition testimony from prior litigation; and the methods used to commit the alleged
fraud. Moreover, Plaintiffs clearly allege the content of the alleged fraud, namely, the
ownership misrepresentation included in each HCFA-1500 form submitted to Plaintiffs.
Because the who, what, where, when, and how of the alleged fraud is sufficiently clear
without representative samples, the fraud alleged in this case is distinguishable from the
non-particular fraud alleged in Joshi and Thayer.
In sum, Plaintiffs plausibly allege that Defendants violated the CPMD, and knew that
they were violating the CPMD. Additionally, Plaintiffs allege, with the requisite
particularity, that Defendants committed mail fraud or wire fraud by representing to the
insurers that they were not violating the CPMD.
b. Enterprise
Plaintiffs not only plausibly allege the predicate acts to support their RICO claim, but
they also plausibly allege that Defendants conducted an enterprise that was distinct from the
alleged pattern of racketeering. As noted above, in order to plead a viable RICO claim, a
26
Plaintiff must allege that “an enterprise” conducted a pattern of racketeering activity. See
Ill. Farmers, 2014 WL 4104789, at *5.
A RICO enterprise “‘includes any individual, partnership, corporation, association,
or other legal entity, and any union or group of individuals associated, in fact, although not a
legal entity.’” Crest Constr. II, 660 F.3d at 354 (quoting 18 U.S.C. § 1961(4)). “An
association-in-fact enterprise must have at least three structural features: a purpose,
relationships among those associated with the enterprise, and longevity sufficient to permit
these associates to pursue the enterprise’s purpose.” Boyle v. United States, 556 U.S. 938,
946 (2009) (finding that a jury instruction containing these three structural features was
correct and adequate). Additionally, the enterprise’s structure must be distinct from the
alleged racketeering activity. “Under longstanding Eighth Circuit precedent, an alleged
RICO enterprise must also have ‘an ascertainable structure distinct from the conduct of a
pattern of racketeering.’” Ill. Farmers, 2014 WL 4104789, *14 (citing Crest Constr. II, 660
F.3d at 354).
Plaintiffs claim that collectively, Defendant Guzhagin, the Defendant Clinics,
Defendant Ibrahim, and Defendant Southwest Management, comprise an association-in-fact
enterprise. (Compl. ¶ 53 [Doc. No. 1].) Specifically, Plaintiffs allege that all of the
Defendant Clinics are connected with one another and were incorporated by, and are legally
owned by, Defendant Guzhagin. (See id. ¶¶ 15, 17, 18, 21.) Plaintiffs contend that
“Defendant Clinics commingle funds between their various financial accounts,” and that
they “operate in an underfunded fashion and pay expenses for one clinic from another
27
clinic’s operating account.” (See id. ¶ 25.) Further, Plaintiffs allege that Defendant Clinics
use the same or similar patient care record systems, “grant direct and indirect access to
confidential patient care records to chiropractors working at other Defendant Clinics, and
recruit staff chiropractors to service other Defendant Clinics besides their primary clinic.”
(See id.) Plaintiffs argue that the Defendant Clinics and Defendant Guzhagin are also
connected to Defendant Ibrahim and Defendant Southwest Management because Ibrahim
and/or Southwest Management are either legal owners, or owners-in-fact, of the Defendant
Clinics, and Defendant Clinics are partially or wholly funded by Defendant Ibrahim and/or
Defendant Southwest Management. (Id. ¶ 25–26).
In sum, Plaintiffs plausibly allege the “existence of an enterprise that extend[s]
beyond the minimal association surrounding the pattern of racketeering activity.” Cf.
Stephens, Inc. v. Geldermann, Inc., 962 F.2d 808, 815–16 (8th Cir. 1992) (holding that the
plaintiff’s complaint insufficiently pled a RICO enterprise because although “each member
of th[e] group carried on other legitimate activities, these activities were not in furtherance
of the common or shared purpose of the enterprise, and thus, were not acts of the
enterprise”). Aside from the alleged wire and mail fraud, Defendants paid one another’s
employees and Defendant Ibrahim referred patients to the clinics in order to achieve the
alleged shared purpose of defrauding Plaintiffs and their insureds. (Compl. ¶ 50 [Doc. No.
1].)
Read as a whole, Plaintiffs’ Complaint also sufficiently alleges that the structure of
Defendants’ enterprise is distinct from Defendants’ alleged racketeering activity. See Crest
28
Constr. II, 660 F.3d at 354. Defendants contend that Plaintiffs failed to allege that the
Defendants conducted an enterprise that was distinct from the alleged pattern of
racketeering activity. (See Defs.’ Mem. at 16 [Doc. No. 18].) Defendants argue that
Plaintiffs allege that “everything about the Clinics was a fraud[, and] [w]ithout this fraud the
entire enterprise would disappear.” (See id. at 17.) The Court disagrees. Defendants
erroneously obscure the distinction between (1) the predicate acts alleged, and (2) fraud,
generally.
“In assessing whether an alleged enterprise has an ascertainable structure distinct
from that inherent in a pattern of racketeering,” the Court must “determine if the
enterprise would still exist were the predicate acts removed from the equation.” Handeen
v. Lemaire, 112 F.3d 1339, 1352 (8th Cir. 1997). Here, the predicate acts alleged are
mail fraud and wire fraud. (See Compl. ¶¶ 60, 62 [Doc. No. 1].) The enterprise, or the
alleged association-in-fact among Defendants, would still exist even if they did not
commit mail or wire fraud. Defendants could simply continue to provide medical
services and treatment for patients, and bill patients directly, but not submit the HCFA1500 form by mail or wire.
Even if Defendants did not submit the forms by mail or wire, Defendant Clinics
would still: (1) have a purpose; (2) maintain a relationship among Defendants; and (3)
have longevity sufficient to permit Defendants to pursue the enterprise’s purpose. See
Boyle, 556 U.S. at 946. Plaintiffs allege that Defendants’ purpose is to “defraud the
Plaintiffs and its insureds.” (See Compl. ¶ 50 [Doc. No. 1].) Defendants could still strive to
29
defraud Plaintiffs’ insureds by treating patients, charging them for treatment, and making a
profit. This purpose would remain unaltered if they did not submit HCFA-1500 forms via
mail or wire.
Similarly, the relationship between Defendants would likely remain the same, as they
would continue to pay one another’s employees, share profits, and share patient records.
And, finally, given the fact that Defendant Clinics employ physicians and chiropractors and
provide treatment for patients, the enterprise has the longevity sufficient to permit
Defendants to continue to make a profit and/or treat patients. Although, under this
hypothetical, Defendant Clinics would still be partaking in the corporate practice of
medicine, a violation of the CPMD does not equate to the predicate acts of mail and/or wire
fraud.
Defendants’ alleged enterprise in this case is similar to the defendants’ enterprise
in United States v. Lemm, 680 F.2d 1193 (8th Cir. 1982), cert. denied, 459 U.S. 1110
(1983). In Lemm, the defendants allegedly comprised an arson ring that acquired and
insured property, burned the property, and then filed fraudulent insurance claims. Id. at
1197. The Eighth Circuit held that the arson ring constituted an enterprise with a
structure distinct from the predicate acts of racketeering, because if the court
“eliminate[d] for purposes of argument the predicate acts of mail fraud, the evidence still
show[ed] an on-going structure which engaged in legitimate purchases and repairs of
property as well as acts of arson.” Id. at 1201. The Lemm Court explained that the
defendants could have accomplished its fraud by hand delivering insurance claims. Id.
30
While in this case, Defendant Clinics are required by law to submit medical expense
benefits via “uniform electronic transaction standards,” and may not submit their claims
by hand, see Minn. Stat. § 65B.54, subd. 1, 7 the alleged facts still demonstrate that
Defendants are part of an on-going structure which engages in fee-for-service care and
treatment for patients, and which could bill patients directly.
In contrast, Defendants’ enterprise is distinguishable from the defendants’
enterprises in Stephens, Inc. v. Geldermann, Inc., 962 F.2d 808 (8th Cir. 1992), and
Illinois Farmers, 2014 WL 4104789. In Stephens, the plaintiff alleged that the defendant, a
commodity futures merchant, failed to follow the Commodity Futures Trading
Commission regulations. 962 F.2d at 810. The plaintiff’s trader made each trade by
placing calls to the defendant on a “dedicated phone line,” and then submitting
confirmation mailings. Id. The regulations required the defendant to ask the plaintiff’s
trader for the number of the account traded and write that number on the order ticket. Id.
Instead of following this requirement, the defendant permitted the plaintiff’s trader to
assign his trades to either the plaintiff’s account or the trader’s mother’s account, “after
[the trader] knew which trades had been profitable.” Id. The Eighth Circuit held that
7
Minn. Stat. § 65B.54 states that, “Claims by a health provider [such as one of
Defendant Clinics] defined in section 62J.03, subdivision 8, for medical expense benefits
covered by this chapter shall be submitted to the reparation obligor pursuant to the
uniform electronic transaction standards required by section 62J.536 and the rules
promulgated under that section.” See Minn. Stat. § 65B.54, subd. 1. In fact, “[p]ayment
of benefits for such claims for medical expense benefits are not due if the claim is not
received by the reparation obligor pursuant to those electronic transaction standards and
rules.” Id.
31
“[a]bsent the predicate acts of wire and mail fraud, the association-in-fact enterprise
which [the plaintiff] alleged had no form or structure.” 962 F.2d at 816.
“Unlike the arson ring in Lemm, which was united and defined by activities
independent of the predicate acts of mail fraud, the enterprise [in Stephens] was linked
and essentially defined by the daily interstate telephone calls and confirmation mailings
between [the plaintiff’s trader and the defendant].” Id. If the court were to “[r]emove
these predicate acts of racketeering,” then, “the alleged association-in-fact [would]
evaporate[].” Id. The defendant’s enterprise in Stephens is distinguishable from the
alleged enterprise in this case for the same reason as it is distinguishable from the
enterprise in Lemm. Absent the predicate acts of mail and wire fraud in this case,
Defendants’ enterprise would still have a form and structure, as Defendants could
continue to provide treatment for patients and bill patients directly, without the use of
mail or wire.
Defendants’ enterprise is also distinguishable from the defendant’s enterprises in
Illinois Farmers. In Illinois Farmers, the plaintiffs alleged that a lay-owned diagnostic
imaging company paid kickbacks to chiropractors and chiropractic clinics for referring
patients to the defendant’s company for imaging scans. See 2014 WL 4104789, *1. A
court in this District held that the plaintiffs “failed to allege that any of the defendants
conducted an enterprise that was distinct from the alleged pattern of racketeering
activity,” primarily for two reasons. Id. at *13. First, the plaintiffs did not allege “that all
of the defendants . . . were involved in a single association-in-fact,” and even if they had
32
alleged this fact, the enterprise “would have taken the form of a rimless hub-and-spokes
organization” since the defendant clinics were not connected to one another, but instead
were only directly connected to the imaging company. Id. at *14. The second basis for
the court’s holding was that the “plaintiffs fail[ed] to allege facts showing that any of the
alleged association-in-fact enterprises [were] distinct from the predicate acts of mail or
wire fraud committed by those enterprises.” Id. The Illinois Farmers Court explained
that the relationship between the imaging company and the chiropractors and clinics was
“made up entirely of fraud [based on the kickback scheme],” and without “that alleged
fraud, then, there would be no enterprise.” Id. at *15.
This case is distinguishable from Illinois Farmers on two grounds. First, here,
Plaintiffs allege that all Defendants are involved in a single association-in-fact. (See
Compl. ¶ 25 [Doc. No. 1].) The alleged enterprise is a rimmed, as opposed to rimless,
hub-and-spokes organization, as each clinic is allegedly directly connected to others, as
evidenced by the profit and patient record sharing that occurs. (See id.) Second, unlike
the plaintiffs in Illinois Farmers, here, Plaintiffs allege facts showing that Defendants’
enterprise is distinct from the predicate acts of mail and wire fraud. The relationship
between Defendant Clinics is not based solely upon a fraud scheme that relies on mail
and wire fraud for execution. Rather, in this case, Defendant Clinics comprise an
enterprise because their purpose is to make a profit from providing services and treatment
for patients. Defendants could continue to run as an enterprise by providing treatment for
33
patients and billing them directly, without the use of mail or wire. For instance, the
clinics could deliver the bills to patients by hand.
While it is true that Plaintiffs’ Complaint states that Defendants “formed an ongoing
association for purposes of defrauding the Plaintiffs,” (see Compl. ¶ 50 [Doc. No. 1])
(emphasis added), under Eighth Circuit law, the purpose of the enterprise need not be
distinct from the overall fraud. Rather, in order to state an actionable RICO claim, the
enterprise need only exist separate from the “predicate acts” alleged. Accordingly,
Plaintiffs sufficiently state an actionable RICO claim to survive Defendants’ Motion to
Dismiss.
2. Count II: Violation of Minnesota’s Corporate Practice of
Medicine Doctrine
In Count II, Plaintiffs allege that Defendants violated the CPMD, which prohibits
chiropractic clinics from being owned by unlicensed laypersons. (Compl. ¶¶ 69–78 [Doc.
No. 1].) At this stage of the proceedings, this Court need only address whether Plaintiffs
sufficiently allege a violation of the CPMD so as to provide “enough fact[s] to raise a
reasonable expectation that discovery will reveal evidence of [the claim].” Twombly, 550
U.S. at 556.
Plaintiffs’ Count II is a direct claim for Defendants’ alleged violation of the CPMD,
as opposed to an indirect claim of Defendants’ alleged violation of the CPMD, which is part
of Plaintiffs’ RICO claim. The Illinois Farmers Court succinctly analyzed the distinction
between a direct and indirect CPMD claim. The court explained that:
34
[A] RICO claim is, at heart, a fraud claim; the allegation is that [the
defendants] lied about their violation of the CPMD. [In contrast,] [a] direct
claim for violation of the CPMD is, at heart, a contract claim; the allegation is
that the enforcement of contracts involving [the defendants] . . . violates
public policy because [the defendants] violated the CPMD.
Ill. Farmers, 2014 WL 4104789, at *20. Therefore, Plaintiffs need not plead their CPMD
claim with heightened particularity under Rule 9(b). 8 Contracts, such as insurance
agreements, made in violation of the CPMD are voidable if “it is established that the
corporation’s actions show a knowing and intentional” violation of the CPMD. Id. (quoting
Isles II, 725 N.W.2d at 95). A court will “not void a contract unless it is established that
the corporation’s actions show a knowing and intentional failure to abide by state and
local law.” Isles II, 725 N.W.2d at 95. “Such a rule is consistent with public policy
jurisprudence that requires the [C]ourt to determine whether the illegality has so tainted
the transaction as to make it void under public policy.” Id.
As discussed in regards to Plaintiffs’ indirect claim of Defendants’ CPMD violation,
Defendants argue that Ibrahim and Southwest Management do not have any ownership
interest in the clinics, and that Defendants, therefore, have not violated the CPMD. (See
Defs.’ Mem. at 13–14 [Doc. No. 18].) Defendants contend that Plaintiffs’ allegations are
“mere conclusory statements,” and do not suffice under the Federal Rules of Civil
Procedure. (See id. at 14 (citing Iqbal, 556 U.S. at 678)). The Court disagrees.
8
The Court notes that Plaintiffs correctly state that they also need not plead intent to
violate the CPMD or the Minnesota Professional Firms Act with particularity, pursuant to
Rule 9(b). (See Pls.’ Mem. at 14 [Doc. No. 20].) According to Rule 9(b), “intent . . . and
other conditions of a person’s mind may be alleged generally.” See Fed. R. Civ. P. 9(b).
35
As the Court found above, Plaintiffs’ allegations regarding lay-ownership of the
Defendant Clinics amount to more than “mere conclusory statements.” Moreover,
Plaintiffs’ allegations regarding Defendants’ knowledge of the CPMD and knowledge of
their violation of the CPMD also amount to more than “mere conclusory statements,” given
Defendant Guzhagin’s legal arguments in Guzhagin, 566 F. Supp. 2d at 970 n.8, and
Defendants’ allegedly knowing misrepresentations on their HCFA-1500 forms. (See
Compl. ¶¶ 58, 61 [Doc. No. 1].) Thus, Plaintiffs’ CPMD claim is sufficient to “to raise a
right to relief above the speculative level.” Twombly, 550 U.S. at 555.
3. Count III: Violation of Minnesota Professional Firms Act
In Count III, Plaintiffs allege that Defendants violated the Minnesota Professional
Firms Act (“MPFA”) by issuing and/or authorizing legal, or in-fact, ownership interests to
persons or companies not licensed to render at least one category of the pertinent
professional services. (Compl. ¶¶ 79–87 [Doc. No. 1].) Accordingly, Plaintiffs seek a
declaratory judgment that Defendants violated the MPFA and a permanent injunction
enjoining Defendants from further violating the MPFA. (See id. at 34.)
The MPFA states that “[o]wnership interests in a professional firm may not be
owned or held, either directly or indirectly, except by . . . professionals who, with respect to
at least one category of the pertinent professional services, are licensed and not
disqualified.” See Minn. Stat. § 319B.07, subd. 1 (emphasis added). Although Defendant
Clinics have record professional ownership, Plaintiffs allege that Defendants’ “indirect”
ownership is lay. See Spine Imaging MRI, L.L.C. v. Liberty Mut. Ins. Co., 818 F. Supp. 2d
36
1133, 1141 (D. Minn. 2011) [hereinafter “Spine Imaging II”] (explaining that because the
MPFA includes the word “indirect,” record ownership may not be dispositive for
determining whether an MPFA violation exists). Those who practice medicine in knowing
violation of the MPFA may also be operating in violation of the CPMD. See id.
Although neither party discusses this issue, the Court finds it necessary to note that
the MPFA does not include an express private cause of action, see Minn. Stat. §§ 319B.01 –
319B.12, or implied private right of action, see Mutual Serv. Casualty Ins. Co v. Midway
Massage, Inc., 695 N.W.2d 138, 142–43 (Minn. Ct. App. 2005). Rather, Defendants’
alleged MPFA violation may only form the basis of a violation of the CPMD. See Spine
Imaging II, 818 F. Supp. 2d at 1141 (explaining that because a CPMD claim is based on a
corporation knowingly and intentionally failing to abide by state and local law, a violation
of the MPFA may be one such state law). Therefore, Plaintiffs’ MPFA claim is actionable
only insofar as it forms the basis of Plaintiffs’ CPMD claim.
Defendants argue that Plaintiffs’ MPFA claim fails because it is a fraud-based claim
that is insufficiently particular under Rule 9(b). (See Defs.’ Mem. at 6–7 [Doc. No. 18].)
Plaintiffs, however, contend that a claim based on an MPFA violation is “not rooted in
theories of fraud and therefore need not be pled with particularity.” (See Pls.’ Mem. at 21
[Doc. No. 20].) The Court agrees. Like a claim based on a direct CPMD violation, the
Court finds that a claim based on an MPFA violation is also, at heart, a contract claim. See
Ill. Farmers, 2014 WL 4104789, at *20; see also Spine Imaging II, 818 F. Supp. 2d at 1141
(analyzing the validity of the plaintiffs’ MPFA claim under a regular Iqbal/Twombly
37
plausibility standard). Thus, Plaintiffs need not plead their MPFA claim with heightened
particularity pursuant to Rule 9(b).
The Court finds that, under the Iqbal/Twombly standard, Plaintiffs’ allegations
plausibly amount to a violation of the MPFA, and therefore constitute a plausible CPMD
claim, as discussed in Part (III)(B)(2). Plaintiffs allege that Defendants made elections to
operate under the MPFA, knew of the CPMD, but disregarded these laws by issuing in-fact
ownership to a lay person and/or lay company. (See Compl. ¶¶ 83, 87, 88 [Doc. No. 1].)
As the Court discussed in regard to Plaintiffs’ Count II, at this stage of the proceedings,
Plaintiffs have plausibly demonstrated a knowing and intentional violation of the MPFA,
which forms the basis of Plaintiffs’ CPMD claim. Read as a whole, Plaintiffs’ allegations
sufficiently “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555.
However, Plaintiffs should amend their Complaint to reflect the fact that this claim is a part
of Count II, and is not a distinct cause of action. Plaintiffs are ordered to amend their
Complaint accordingly, within fourteen days of this order.
4. Count IV: Unjust Enrichment
In Count IV, Plaintiffs claim that Defendants would be unjustly enriched if the Court
permitted them to retain funds received as a result of MPFA and CPMD violations.
(Compl. ¶¶ 92–97 [Doc. No. 1].) According to Minnesota law, “[t]he elements of unjust
enrichment are: (1) a benefit conferred; (2) the defendant’s appreciation and knowing
acceptance of the benefit; and (3) the defendant’s acceptance and retention of the benefit
under such circumstances that it would be inequitable for him to retain it without paying for
38
it.” Dahl v. R.J. Reynolds Tobacco Co., 742 N.W.2d 186, 195 (Minn. Ct. App. 2007).
Plaintiffs contend that Defendants held the Defendant Clinics out as legitimate
providers of chiropractic care and obtained funds to which they were not entitled and which
rightfully belonged to Plaintiffs, in direct violation of the MPFA and CPMD. (See Compl. ¶
93 [Doc. No. 1].) Plaintiffs allege that this illegally obtained money constitutes a benefit
conferred, that the Defendants were aware that this money was conferred upon them, and
that allowing them to retain this benefit would be inequitable because they obtained this
benefit in violation of Minnesota law. (See id. ¶ 92–97.)
Defendants claim that dismissal of Plaintiffs’ Count IV is warranted for two reasons.
First, they argue that Plaintiffs’ unjust enrichment claim must be pled with particularity
because it is grounded in fraud, and that Plaintiffs have failed to adequately do so. (See
Defs.’ Mem. at 28 [Doc. No. 18].) The Court agrees that because allegations of fraud
underlie the unjust enrichment claim, a heightened pleading standard applies. See United
States v. Henderson, 2004 WL 540278, at *2 (D. Minn. Mar. 16, 2004). But, unlike
Defendants, the Court finds that Plaintiffs sufficiently meet this burden. See supra Part
III(B)(1)(a)(iii).
If, after discovery, a factfinder concludes that the funds Plaintiffs paid for the
insurance claims were a result of Defendants’ MPFA and CPMD violations, then the
factfinder would also likely conclude that it would be inequitable for Defendants to retain
these funds. Therefore, this Court finds that Plaintiffs’ allegations regarding the illegal
benefit conferred, the retention of such benefit, and the inequity of allowing Defendants to
39
retain such benefit amount to more than “mere conclusory statements.” See Iqbal, 556 U.S.
at 663.
Defendants’ second argument for dismissing Plaintiffs’ Count IV is that even if
Defendant Clinics’ ownership violated the CPMD, Plaintiffs would still be obligated to pay
for medically necessary treatment under the No-Fault Act; and thus, Defendants’ retention
of the paid benefits is not unjust. (See Defs.’ Mem. at 28 [Doc. No. 18].) The Court
disagrees. While benefits must generally be reimbursed for all reasonable expenses for
necessary “medical, surgical, x-ray, optical, dental, chiropractic, and rehabilitative
services,” see Minn. Stat. § 65B.44, subd. 2, under the No-Fault Act, insurance companies
have a right to deny paying benefits based on grounds other than the necessity and
reasonableness of the medical treatment. According to Minn. Stat. § 65B.54:
A reparation obligor[, or an insurance company,] who rejects a claim for
benefits shall give to the claimant prompt written notice of the rejection,
specifying the reason. If a claim is rejected for a reason other than that the
person is not entitled to the basic economic loss benefits claimed, the
written notice shall inform the claimant that the claimant may file the claim
with the assigned claims bureau and shall give the name and address of the
bureau.
Minn. Stat. Ann. § 65B.54, subd. 5 (emphasis added). The language of this statutory
provision demonstrates that an insurance company may reject a claim for a reason other
than “that the person is not entitled to the basic economic loss benefits claimed.” See id.
Therefore, an insurance company could plausibly reject a health provider’s claim because
that health provider or clinic is illegally owned, and the insurance company could simply
notify the claimant that he or she could file his or her claim with the assigned claims
40
bureau, through an administrative like appeals process. See id. Accordingly, the Court
rejects Defendants’ argument that even if Defendants violated the CPMD, retaining the
bills paid by Plaintiffs is not unjust. In sum, Plaintiffs’ Count IV survives Defendants’
Motion to Dismiss.
5. Count V: Recovery of Minnesota’s No-Fault Benefits, Minn.
Stat. § 65B.54
In Count V, Plaintiffs claim that, pursuant to Minn. Stat. § 65B.54, Defendant
Clinics must return the No-Fault benefits that Plaintiffs paid as a result of Defendants’
alleged intentional misrepresentation. (Compl. ¶¶ 98–104 [Doc. No. 1].) Plaintiffs argue
that Defendant Clinics intentionally misrepresented their ownership and submitted
deceptive invoices to Plaintiffs for patient services performed. (See id. ¶¶ 101, 102.)
Plaintiffs contend that they relied on the accuracy of these invoices and paid the claims.
(See id. ¶ 93.)
According to Minn. Stat. § 65B.54, Plaintiffs “may bring a cause of action to recover
benefits which are not payable, but are in fact paid, because of an intentional
misrepresentation of a material fact.” See Minn. Stat. § 65B.54, subd. 4. Thus, in essence,
Plaintiffs’ Count V constitutes a fraud claim, and must be pled with Rule 9(b) particularity.
See Spine Imagining MRI, L.L.C. v. Liberty Mutual Ins. Co., 743 F. Supp. 2d 1034, 1048
(D. Minn. 2010) [hereinafter, “Spine Imaging I”] (dismissing counterclaim for recovery of
benefits under Minn. Stat. § 65B.54 because the claim was not pled with Rule 9(b)
particularity); Allstate Ins. Co. v. Linea Latina de Accidents, Inc., 781 F. Supp. 2d 837, 847
41
(D. Minn. 2011) (finding that plaintiffs’ claim for recovery of no-fault benefits was pled
with the requisite Rule 9(b) particularity).
As discussed in relation to Plaintiffs’ RICO claim, Plaintiffs have alleged fraud with
the sufficient Rule 9(b) particularity. See supra Part III(B)(1)(a)(iii). According to
Plaintiffs, each claim form submitted was fraudulent because each contained misleading
information, insofar as each form implied that the clinics were lawfully owned and
operated.
In opposition, Defendants claim that Plaintiffs are not entitled to have the paid NoFault benefits returned to them, because payment was required, regardless of the clinics’
ownership, as long as the expenses were reasonable and were for medically necessary
procedures. (See Defs.’ Mem. at 23 [Doc. No. 18].) They contend that the “single,
dispositive question under the law is whether the care the insured received was reasonable
and necessary.” (Id. at 24.) Plaintiffs respond by asserting that the dispositive question, as
it applies to this case, is whether the bills were void from the moment they were submitted
“as a matter of public policy” since the clinics were lay-owned. (See Pls.’ Mem. at 22 [Doc.
No. 20].) Accordingly, the parties disagree about (1) whether insurance companies may
deny payment for reasons other than that the treatment was unreasonable or medically
unnecessary, and (2) whether the clinics’ ownership is a “material fact,” pursuant to Minn.
Stat. § 65B.54.
As to whether an insurance company may deny payment for reasons other than the
reasonableness and necessity of the medical treatment rendered, the Court reiterates its
42
finding that, according to Minn. Stat. § 65B.54, subd. 5, an insurance company could
plausibly reject a health provider’s claim because that health provider or clinic is illegally
owned.
As to the significance of the clinics’ ownership, the Court holds that the Defendant
Clinics’ ownership is a “material fact,” under Minn. Stat. § 65B.54, because if the clinics
were unlawfully owned and operated, then Plaintiffs could conclude that the clinics were
not eligible for reimbursement under the No-Fault Act.
Defendants also contend that this Court lacks jurisdiction to decide whether any
particular treatment by the Clinics was compensable under the No-Fault Act. (See Defs.’
Mem. at 25 [Doc. No. 18].) Defendants argue that because the No-Fault Act provides for
“mandatory submission to binding arbitration” of all No-Fault claims for $10,000 or less,
see Minn. Stat. § 65B.525, subd. 1, and because Plaintiffs have not alleged that each claim
they paid to each Defendant was in excess of $10,000, the present dispute is subject to
mandatory arbitration. (See Defs.’ Mem. at 25 [Doc.No. 18].) Accordingly, they contend
that this Court lacks jurisdiction. (Id.)
The statute in question states, in full:
The Supreme Court and the several courts of general trial jurisdiction of this
state shall by rules of court or other constitutionally allowable device, provide
for the mandatory submission to binding arbitration of all cases at issue where
the claim at the commencement of arbitration is in an amount of $10,000 or
less against any insured’s reparation obligor for no-fault benefits or
comprehensive or collision damage coverage.
Minn. Stat. § 65B.525, subd. 1. The language of the statute indicates that mandatory
arbitration applies to cases involving a claim against an insured’s reparation obligor, or an
43
insurance company. See id.; see also Spine Imaging I, 743 F. Supp. 2d at 1043. Thus,
mandatory arbitration does not apply where, as here, an insurance company has already paid
the claim, and the reparation obligor files suit against a health provider. See Allstate Ins.
Co. v. Linea Latina De Accidentes, Inc., 781 F. Supp. 2d 837, 846 (D. Minn. 2011)
(holding that the plaintiff insurance company sufficiently pled a claim under Minn. Stat. §
65B.54, subd. 4).
In Linea Latina, the plaintiff-insurance company brought a Minn. Stat. § 65B.54,
subd. 4 claim, similar to Plaintiffs’ Count V. See id. However, the court did not discuss
whether or how the mandatory arbitration provision applied to this claim. See id. The court
likely determined that it was unnecessary to discuss the applicability of arbitration because
rather than an insured suing an insurance company for coverage, the case involved an
insurance company suing chiropractic clinics and individuals associated with those clinics.
See id. Because the present dispute does not involve a claim against an insured’s reparation
obligor to compel payment of benefits, this Court properly has jurisdiction over Plaintiffs’
Count V.
6. Count VI: Recovery under Minnesota’s Consumer Protection
Act, Minn. Stat. § 325F
In Count VI, Plaintiffs allege that Defendant Clinics violated the Minnesota
Consumer Protection Act (“CPA”), Minn. Stat. § 325F, by falsely representing the legality
of their ownership to Plaintiffs and to the public. (Compl. ¶¶ 105–12 [Doc. No. 1].)
According to the CPA:
44
The act, use, or employment by any person of any fraud, false pretense, false
promise, misrepresentation, misleading statement or deceptive practice, with
the intent that others rely thereon in connection with the sale of any
merchandise, whether or not any person has in fact been misled, deceived,
or damaged thereby, is enjoinable.
See Minn. Stat. § 325F.69, subd. 1. Although, generally, the Minnesota Attorney General
enforces the CPA, see Minn. Stat. § 8.31, subd. 1, a private party may “bring a civil action”
to recover damages from violations of the CPA. See Minn. Stat. § 8.31, subd. 3(a).
Defendants argue that Plaintiffs’ CPA claim fails for three reasons. First, they
contend that even taking Plaintiffs’ allegations as true, Defendants did not affirmatively
misrepresent their ownership on the HCFA-1500 forms, rather, they merely omitted this
information. (See Defs.’ Mem. at 26 [Doc. No. 18].) Second, Defendants claim that
Plaintiffs only assert legal conclusions about Defendant Clinics’ ownership, and fail to
allege sufficient facts to substantiate their claim. (See id.) Finally, Defendants also assert
that Plaintiffs fail to state an actionable claim under the CPA because the recovery Plaintiffs
seek will not benefit the public, as is required under law. (See id. at 27 [Doc. No. 18].) The
Court addresses each of these arguments in turn.
As to the distinction between an affirmative misrepresentation and an omission of
material facts, the Court finds that Defendants argument fails. First, the Court reads the
notifications on the HCFA-1500 form as requiring health providers to not violate the law
when completing the forms. Thus, assuming Defendants were corporately owned, by
completing and submitting the HCFA-1500 forms, Defendants’ disregard of their ownership
status qualified as an affirmative misrepresentation. Moreover, Defendant Guzhagin
45
affirmatively stated to Plaintiffs in a letter in 2013 that he is the sole owner of the clinics.
(Compl. ¶ 61 [Doc. No. 1].) Thus, even if the Court interprets Defendants’ failure to clarify
their ownership status in the HCFA-1500 forms as an omission rather than a
misrepresentation, Defendants, through their legal owner, Dr. Guzhagin, affirmatively
misrepresented their ownership.
As to the plausibility of Plaintiffs’ claims, the Court finds that similar to Plaintiffs’
RICO claim, unjust enrichment claim, and No-Fault fraud claim, Plaintiffs plead fraud with
the requisite particularity under Rule 9(b). Consistent with the Court’s earlier findings, the
Court finds that Plaintiffs sufficiently demonstrate that Defendants misrepresented the
legality of their ownership to the public.
Finally, in regard to Defendants’ argument that Plaintiffs fail to state an actionable
claim under the CPA because the recovery Plaintiffs seek will not benefit the public, the
Court disagrees with Defendants. Plaintiffs who bring a cause of action under the CPA as a
“private attorney general” must demonstrate that the action is brought for the benefit of the
public. See Ill. Farmers, 2014 WL 4104789, at *19, (quoting Overen v. Hasbro, Inc., No.
07-cv-1430 (RHK/JSM), 2007 WL 2695792, at *2 (D. Minn. Sept. 12, 2007)). In
determining if a lawsuit is brought for the benefit of the public, the Court must look to the
relief sought by the plaintiff in addition to the form of the alleged misrepresentation. See
Illinois Famers, 2014 WL 4104789, at *19 (quoting Zutz v. Case Corp., No. 02-cv-1776
(PAM/RLE), 2003 WL 22848943, at *4 (D. Minn. Nov. 21, 2003)). If the recovery sought
only benefits the plaintiff, the Court will find no public benefit. Id. “Although there exists
46
no hard-and-fast rule, a public benefit typically will be found when the plaintiff seeks
relief primarily aimed at altering the defendant’s conduct (usually, but not always,
through an injunction) rather than seeking remedies for past wrongs (typically through
damages).” Buetow v. A.L.S. Enters., Inc., 888 F. Supp. 2d 956, 961 (D. Minn. 2012).
Plaintiffs seek actual damages in excess of $75,000 in connection with their
consumer-fraud claim. (See Compl. ¶ 111 [Doc. No. 1].) Defendants argue that because
Plaintiffs only seek compensatory damages for Count VI, Plaintiffs do not seek relief that
would benefit the public. (See Defs.’ Mem. at 27 [Doc. No. 18].) The Court disagrees. In
addition to damages for Count VI, Plaintiffs generally seek “a permanent injunction
enjoining [Defendant Clinics] from further violations of the corporate practice of medicine
doctrine and Minnesota Professional Firms Act.” (Compl. at 34 [Doc. No. 1].) Such an
injunction would have the effect of preventing the Defendant Clinics from continuing to
misrepresent to the public that they are lawfully owned and operated, and may potentially
result “in the cessation of the clinics’ operation.” (See Pls.’ Mem. at 23 [Doc. No. 20].) As
this injunction seeks to alter Defendants’ conduct, this relief would benefit the public. See
Buetow, 888 F. Supp. 2d at 961. Accordingly, the Court finds that Plaintiffs have
adequately alleged the existence of consumer fraud in violation of the CPA, and may
properly bring this action as private attorneys general. See Ill. Farmers, 2014 WL 4104789,
at *19.
47
7. Count VII: Common Law Fraud
In Count VII, Plaintiffs contend that Defendants committed common law fraud by
falsely representing the legality of their ownership to Plaintiffs. (Compl. ¶¶ 113–19 [Doc.
No. 1].) Defendants argue that all of Plaintiffs’ fraud based claims, including their common
law fraud claim, should be dismissed because Plaintiffs have not met the requisite pleading
standard under Rule 9(b). (See Defs.’ Reply at 8 [Doc. No. 22].) Specifically, Defendants
claim that Plaintiffs must allege “first-hand knowledge about [Defendants’] ownership
[fraud],” or how the clinics’ ownership was transferred from Dr. Guzhagin, the paper
owner, to Defendant Ibrahim, the alleged owner-in-fact. (See id.) Thus, Defendants assert
that the “Complaint does not have the details that would allow Defendants to respond
specifically and quickly to the allegations.” (See id.) The Court disagrees.
Rule 9(b) does not require Plaintiffs to allege the precise mechanics of the allegedly
fraudulent ownership and transfer of ownership. Rather, Plaintiffs need only plead “such
facts as the time, place, and content of the defendant’s false representations, as well as the
details of the defendant’s fraudulent acts, including when the acts occurred, who engaged
in them, and what was obtained as a result.” Thayer, 765 F.3d at 916. Plaintiffs meet
this burden by alleging facts that, read in the light most favorable to Plaintiffs,
demonstrate that Defendant Clinics were run as a single enterprise, or association-in-fact;
and Ibrahim or his lay company, Southwest Management, was the owner-in-fact of this
enterprise given Ibrahim’s close personal and business relationship with Defendant
Clinics. Plaintiffs’ common law fraud claim is virtually identical to their unjust enrichment
48
claim, their No-Fault fraud claim, and the fraud violation underlying their RICO claim. The
Court previously analyzed the sufficiency of these claims and determined that they were
plausible, and alleged with sufficient particularity under Rule 9(b). Accordingly, the Court
finds that Plaintiffs adequately plead their common law fraud claim.
8. Count VIII: Negligent Misrepresentation
Finally, in Count VIII, Plaintiffs claim that Defendants’ representation regarding the
legality of their ownership amounts to negligent misrepresentation. (Compl. ¶¶ 120–25
[Doc. No. 1].) According to Minnesota law, the definition of negligent misrepresentation
involving pecuniary loss is:
One who, in the course of his business, profession or employment, or in any
other transaction in which he has a pecuniary interest, supplies false
information for the guidance of others in their business transactions, is
subject to liability for pecuniary loss caused to them by their justifiable
reliance upon the information, if he fails to exercise reasonable care or
competence in obtaining or communicating the information.
Florenzano v. Olson, 387 N.W.2d 168, 174 n.3 (Minn. 1986) (citing Bonhiver v. Graff,
248 N.W.2d 291, 298–99 (Minn. 1976)). “[N]egligent misrepresentation involving
damages for pecuniary loss applies primarily to business situations in which false
information is supplied to guide others in business transactions and a pecuniary loss is
suffered.” Smith v. Brutger Cos., 569 N.W.2d 408, 413–14 (Minn. 1997). Plaintiffs
allege that Defendants “failed to use reasonable care or competence in communicating
billing information to Plaintiffs” because Defendants implied that they were legally owned
and operating in accordance with state and federal law and were entitled to reimbursement
under the No-Fault Act. (See Compl. ¶ 122 [Doc. No. 1].)
49
Defendants argue that Plaintiffs’ negligent misrepresentation claim fails for four
reasons: (1) Plaintiffs only allege that Defendants’ omitted true information, as opposed to
submitting false information; (2) Plaintiffs failed to plead that Defendants had a duty to
disclose their true ownership information; (3) even if Defendant Clinics’ ownership was
corporate, Plaintiffs did not have a right to refuse to pay the benefits; and (4) damages did
not result from the alleged negligent misrepresentation because “any sums spent by
Plaintiffs would have been spent regardless of Defendants’ ownership structure.” (See
Defs.’ Mem. at 29–30 [Doc. No. 18].) The Court addresses each of these arguments below.
Defendants’ first and second arguments are intertwined. In order “[f]or an omission
of a fact to constitute negligent misrepresentation, ‘there must first be a duty, either legal or
equitable, to disclose that fact.’” Ill. Farmers, 2014 WL 4104789, at *18 (quoting Hurley v.
TCF Banking & Savings, F.A., 414 N.W.2d 584, 587 (Minn. Ct. App. 1987)). In Illinois
Farmers, one of the reasons that the court dismissed the plaintiffs’ negligent
misrepresentation claim was because it was “far from clear” that the defendants had a duty
to disclose to plaintiffs that they were violating the CPMD or paying kickbacks to
chiropractors. See id. In fact, the court explained that the defendants may have been
“foreclosed” from submitting this additional information on the forms because the forms
“might . . . provide a ceiling” as to what information is relevant. See id. at n.13. The
court noted that “[i]mposing a duty on healthcare providers to submit information in
addition to what is required by the [HCFA-1500] form would arguably undercut” the
rationale that the form is intended to “expedite claims processing by ensuring that
50
claimants provide[,] in a uniform format[,] only the information needed by insurers to
process their claims.” Id.
The Court respectfully disagrees with the Illinois Farmers Court’s analysis. The
defendants in Illinois Farmers, and Defendants in this case, likely had a duty to disclose the
missing information to Plaintiffs. According to longstanding Minnesota precedent, a party
to a transaction does not have a duty to disclose material facts as a general rule, but “special
circumstances may dictate otherwise.” Richfield Bank & Trust Co. v. Sjogren, 244 N.W.2d
648, 650 (Minn. 1976). For example, a party must say enough in order to prevent his words
from misleading the other party. Newell v. Randall, 19 N.W. 972, 972–73 (Minn. 1884).
Additionally, when a party has special knowledge of material facts to which the other party
does not have access, that party may have a duty to disclose those facts to the other party.
See Richfield Bank, 244 N.W.2d at 650 (citing Marsh v. Webber, 13 Minn. 109 (1868)).
Here, by allegedly falsely representing to Plaintiffs, through the submission of
HCFA-1500 forms, that Defendants were eligible for reimbursement under the No-Fault
Act, Defendants surely failed to say enough to prevent their words from misleading
Plaintiffs. In fact, Defendants likely had a duty to not complete and submit the HCFA-1500
forms because two notices on the form expressly warned that health care providers that filed
claims that contained “any misrepresentation or any false, incomplete or misleading
information,” may be subject to fines or imprisonment. (See Gillette Aff., Ex. A [Doc.
No. 19-1]) (emphasis added).
Moreover, reading Plaintiffs’ allegations as true, Defendants had special knowledge
51
of the fact that they were not operating in accordance with the CPMD and the MPFA and
were not eligible for reimbursement by Plaintiffs under the No-Fault Act – information to
which Plaintiffs did not have access. Given these special circumstances, the Court finds that
Defendants’ alleged omission of true information constitutes negligent misrepresentation
because Defendants had a duty to disclose to Plaintiffs that they were not, in fact, legally
owned and operating in accordance with state and federal law.9
Defendants’ third basis for dismissing Plaintiffs’ negligent misrepresentation claim is
that even if Defendant Clinics’ ownership was corporate, Plaintiffs did not have a right to
refuse to pay the benefits. (See Defs.’ Mem. at 29 [Doc. No. 18].) Again, the Court
disagrees. As explained in detail above, according to Minn. Stat. § 65B.54, subd. 5, an
insurance company could plausibly reject a health provider’s claim because that health
provider or clinic is illegally owned. See supra Part III(B)(4), (5). Thus, if Plaintiffs
knew that Defendant Clinics had corporate or lay ownership, Plaintiffs would have had a
right to refuse to pay the benefits requested.
Finally, Defendants contend that Plaintiffs’ negligent misrepresentation claim
requires dismissal because damages did not result from the alleged fraud since “any sums
9
In Defendants’ brief, they argue not only that they did not have a duty to disclose
their ownership to Plaintiffs, but also that Plaintiffs failed to even plead that Defendants
had such a duty. (See Defs.’ Mem. at 29 [Doc. No. 18].) Insofar as Defendants contend
that it is Plaintiffs’ burden to plead that Defendants had such a duty to disclose, the Court
agrees. Plaintiffs’ burden to plead Defendants’ duty is encompassed within the elements
of a prima facie negligent misrepresentation claim. However, insofar as Defendants
argue that Plaintiffs failed to meet this burden, the Court disagrees. The Court reads the
Complaint as a whole as alleging that Defendants had a duty to disclose their corporate
ownership structure given Defendants’ special knowledge and their intent to defraud
Plaintiffs by withholding their special knowledge.
52
spent by Plaintiffs would have been spent regardless of Defendants’ ownership structure.”
(See Defs.’ Mem. at 29–30 [Doc. No. 18].) Pursuant to Minnesota law, Defendants are only
subject to liability for negligent misrepresentation if their misrepresentation causes
“pecuniary loss.” Florenzano, 387 N.W.2d at 174 n.3 (Minn. 1986); Smith, 569 N.W.2d
at 413–14.
In Illinois Farmers, the court’s second ground for dismissing the plaintiffs’ negligent
misrepresentation claim was because the plaintiffs had not “adequately alleged that [they]
detrimentally relied” on the misleading claims forms. See 2014 WL 4104789, at *18. This
case is distinguishable from Illinois Farmers. Here, Plaintiffs adequately allege that they
detrimentally relied on the incomplete and misleading HCFA-1500 forms. Plaintiffs state
that Defendant Clinics’ ownership influenced whether Plaintiffs “voluntarily issue[d]
payment.” (See Compl. ¶ 114 [Doc. No. 1].) Thus, reading the Complaint as a whole,
Plaintiffs allege that they would not have paid the claims had they known that the claims
were void because of Defendants’ corporate ownership. (See id.)
Insofar as Defendants argue that Plaintiffs’ claim fails because Plaintiffs would have
paid the same amount to other health care providers, which are not corporately owned, the
Court finds this argument unavailing. Plaintiffs must only show that they suffered
pecuniary loss caused by their justifiable reliance on Defendants’ false information. See
Florenzano, 387 N.W.2d at 174 n.3 (Minn. 1986). However, Plaintiffs are not required to
demonstrate that the same sum of money would not have been paid to a legally valid health
care provider that would have otherwise provided treatment for their insureds. See id.
53
In sum, all of Defendants’ arguments fail to show that Plaintiffs’ negligent
misrepresentation claim requires dismissal. Additionally, Plaintiffs plausibly allege that
Defendants “fail[ed] to exercise reasonable care or competence in obtaining or
communicating the[ir ownership] information.” See Florenzano, 387 N.W.2d at 174 n.3.
The same facts Plaintiffs allege to demonstrate fraud are adequate to show that, at a
minimum, Defendants failed to use reasonable care when they falsely represented, through
their HCFA-1500 forms, that they were legally owned and were entitled to reimbursement
under the No-Fault Act. Thus, the Court finds that Plaintiffs adequately plead their
negligent misrepresentation claim.
C. Federal Court Jurisdiction for State Law Claims
Defendants argue that Plaintiffs’ claims should be dismissed for lack of subject
matter jurisdiction. (See Defs.’ Mem. at 9 [Doc. No. 18].) They contend that this Court
does not have federal question jurisdiction because Plaintiffs’ RICO claim fails and the
Declaratory Judgment Act is not a basis for federal question jurisdiction for Plaintiffs’
remaining state law claims. (See id. at 8.) Defendants further argue that diversity
jurisdiction does not exist and that supplemental jurisdiction cannot be exercised once the
Court no longer has original jurisdiction. (See id. at 8–9.)
As to federal question jurisdiction based on the Declaratory Judgment Act, Plaintiffs
do not appear to allege that the Declaratory Judgment Act provides this Court with federal
question jurisdiction over their remaining state law claims. In any event, courts have long
understood that the Declaratory Judgment Act is a procedural, not a jurisdictional, statute.
54
Missouri ex. rel. Missouri Highway and Transp. Com’n v. Cuffley, 112 F.3d 1332 (1997),
(citing Franchise Tax Bd. v. Const. Laborers Vacation Trust, 463 U.S. 1, 15–16 (1983)).
In regard to federal question jurisdiction based on Plaintiffs’ RICO claim, the Court
disagrees with Defendants. As the Court found above, Plaintiffs adequately plead a RICO
claim. See supra Part (III)(B)(1)(b)(6). Therefore, the Court has federal question
jurisdiction over Count I.
As to Counts II through VIII, the Court finds that it has supplemental jurisdiction.
Pursuant to 28 U.S.C. § 1367, in a civil action where a court has original jurisdiction, such
as federal question jurisdiction, a district court shall have supplemental jurisdiction “over all
other claims that are so related to claims in the action within such original jurisdiction that
they form part of the same case or controversy under Article III of the United States
Constitution.” See 28 U.S.C. § 1367. However, the Court may decline to exercise
supplemental jurisdiction if, at least, one of four exceptions apply. See id. § 1367(c).
Claims arising from a scheme of fraud allegedly perpetrated by the same overarching enterprise form the same case or controversy. See, e.g., 4 K&D Corp. v. Concierge
Auctions, LLC, 2 F. Supp. 3d 525, 545–46 (S.D.N.Y. 2014) (holding that supplemental
jurisdiction could be exercised over a state law claim where that claim was based on the
same alleged acts that constituted the elements of the federal law claim); U.S. Fire Ins. Co.
v. United Limousine Serv., Inc., 328 F. Supp. 2d 450, 453 (S.D.N.Y. 2004) (holding that §
1367(a) required the court to hear a state law claim because the claim arose from the same
fraud scheme that gave rise to a federal fraud claim that the plaintiffs brought, and over
55
which the court had original jurisdiction). Applying this standard here, Plaintiffs’ Count II
through VIII are all claims that allegedly arise from the fraud that Defendants’ enterprise
perpetrated.
This Court, therefore, may exercise supplemental jurisdiction over all of Plaintiffs’
state law claims, as long as one of the four exceptions in 28 U.S.C. § 1367(c) does not
apply. The most relevant exception, and the one raised by Defendants, states that a court
may decline to exercise supplemental jurisdiction over a claim if “the district court has
dismissed all claims over which it has original jurisdiction.” See 28 U.S.C. § 1367(c)(1).
Defendants argue that this Court cannot exercise supplemental jurisdiction because
all of the federal claims, namely the RICO claim, have been dismissed. (See Defs.’ Mem. at
10 [Doc. No. 18].) In support, Defendants cite to Hervey v. County of Koochiching, 527
F.3d 711, 726–27 (8th Cir. 2008), and Powell v. Johnson, 855 F. Supp. 2d 871, 877 (D.
Minn. 2012). However, the courts’ holdings in Hervey and Powell are inapposite. In both
cases, claims of original jurisdiction had been dismissed and the courts’ discussion was
limited to dismissal of pendent state law claims. See Hervey, 527 F.3d at 726; Powell, 855
F. Supp. 2d at 877. Here, claims of original jurisdiction have not all been dismissed.
Specifically, Plaintiff’s RICO claim, or Count I, was not dismissed. Because a claim of
original jurisdiction exists before the Court, the Court exercises supplemental jurisdiction
over all of Plaintiffs’ remaining state law claims.
56
THEREFORE, IT IS HEREBY ORDERED THAT:
1. Defendants’ Motion to Dismiss [Doc. No. 8] is DENIED.
2. As set forth in this Order, Plaintiffs are ordered to amend their Complaint
within 14 days to reflect the fact that Count III forms the basis for Count
II, and is not a distinct cause of action.
Dated: February 13, 2015
s/Susan Richard Nelson
SUSAN RICHARD NELSON
United States District Judge
57
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?