AT HOME SLEEP SOLUTIONS, LLC et al v. iSLEEP MANAGEMENT, LLC et al
Filing
58
OPINION. Signed by Judge Katharine S. Hayden on 11/27/2018. (sms)
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
AT HOME SLEEP SOLUTIONS, LLC and
MICHAEL DOBLIN, DDS,
Plaintiffs,
v.
Civ. No. 17-4801 (KSH) (CLW)
iSLEEP MANAGEMENT, LLC d/b/a
iSLEEP PROGRAM, DIMITRY
KARGMAN, DR. ABE BUSHANSKY, DR.
CHITOOR GOVINDARAJ, DOES #1-5,
OPINION
Defendants.
Katharine S. Hayden, U.S.D.J.
I.
Introduction
At Home Sleep Solutions, LLC (“At Home”) and Michael Doblin sued iSleep
Management, LLC (“iSleep”) and iSleep employees Dimitry Kargman, Abe
Bushansky (with iSleep, the “iSleep defendants”), and Chitoor Govindaraj in state
court, asserting tort and contract claims based upon a contract for billing services.
A notice of removal was filed on behalf of all defendants on grounds of diversity.
(D.E. 27.) Motions to dismiss were filed by iSleep defendants and Govindaraj (D.E.
13 and 16), which At Home addressed by filing an amended complaint (D.E. 27).
Before the Court now are the iSleep defendants’ and Govindaraj’s motions to
dismiss the amended complaint. (D.E. 36 and 39.)
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II.
Factual Background
The amended complaint recites the following factual allegations. Doblin, a
licensed dentist in New Jersey, owns At Home, a dental practice specializing in
medical services and treatment solutions for patients suffering from sleep apnea.
(Am. Compl. ¶¶ 8, 9.) iSleep provides billing services to medical providers. (Id. ¶ 9.)
At “numerous” New Jersey venues, many of which Doblin attended, the
iSleep defendants and Govindaraj sponsored courses given by well-known dental
sleep medicine professionals. (Id.) During these industry events, iSleep defendants
and Govindaraj solicited At Home’s business for iSleep’s billing services,
representing themselves as “experts in the field of sleep apnea” with the competence
to submit legal, compliant patient claims on behalf of At Home. (Id. ¶¶ 9, 12.) In
reliance on these representations, At Home entered into a service contract with
iSleep under which iSleep agreed “to perform all steps” for submitting Horizon Blue
Cross and Blue Shield of New Jersey (“Horizon”) patient claims and billing. (Id.
¶ 10.)
The service contract should have relieved At Home from burdensome
administrative paperwork and yielded reimbursement payments from Horizon.
Instead, At Home became the subject of an investigation and audit that Horizon
initiated, after which Horizon concluded that the documentation prepared by iSleep
was “erroneous, false, and fraudulent.” (Id. ¶ 14.) Most egregiously, according to
the amended complaint, the claims falsely reported that Govindaraj physically
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examined patients, diagnosed them with sleep apnea, and prescribed oral devices,
when in fact he never examined At Home’s patients. (Id. ¶¶ 18-20, 44-45.)
A flurry of punitive actions ensued: all claims previously paid out to At Home
were ordered to be disgorged; Doblin was assessed penalties exceeding $540,000.00;
and his status as a provider was suspended. (Id. ¶¶ 16, 17.) At Home asserts that
these catastrophic losses and penalties flowed from iSleep’s fraudulent business
practices, which iSleep misrepresented to At Home from the very outset of the
parties’ relationship.
III.
Legal Standard
Defendants’ motions to dismiss are brought pursuant to Fed. R. Civ. P.
12(b)(6) for failure to state a claim upon which relief can be granted. To survive
dismissal, “a complaint must contain sufficient factual matter, accepted as true” to
state a facially plausible claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
A plausible claim is one that permits the court to “draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Fowler v. UPMC
Shadyside, 578 F.3d 203, 210 (3d Cir. 2009) (quoting Iqbal, 556 U.S. at 678). While
“[t]he plausibility standard is not akin to a ‘probability requirement,’” it does “ask[]
for more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556
U.S. at 678 (quoting Twombly, 550 U.S. at 556).
At the pleading stage, the plaintiff does not bear the burden of establishing
all the elements for a prima facie case, “but instead, need only put forth allegations
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that raise a reasonable expectation that discovery will reveal evidence of the
necessary element.” Fowler, 578 F.3d at 213 (internal quotation marks omitted).
Fundamentally, the plausibility determination is a “context-specific task that
requires the reviewing court to draw on its judicial experience and common sense.”
Id. at 211 (quoting Iqbal, 556 U.S. at 679).
IV.
Discussion
A. Tort Claims
The first five counts of the amended complaint sound in tort.
1. Counts 1-3: Fraudulent Misrepresentation
Count 1 asserts a fraudulent misrepresentation claim against iSleep and
Kargman; Count 2 asserts a fraudulent misrepresentation claim against
Bushansky; and Count 3 asserts a fraudulent misrepresentation claim against
Govindaraj. The elements of a fraudulent misrepresentation claim include: “(1) a
material misrepresentation of a presently existing or past fact; (2) knowledge or
belief by the defendant of its falsity; (3) an intention that the other person rely on it;
(4) reasonable reliance thereon by the other person; and (5) resulting damages.”
Konover Constr. Corp. v. E. Coast Constr. Servs. Corp., 420 F. Supp. 2d 366, 370
(D.N.J. 2006) (quoting Gennari v. Weichert Co. Realtors, 148 N.J. 582, 610 (1997)).
iSleep defendants argue that At Home fails to plead facts establishing
element two, defendants’ knowledge of the falsity of the representation. (D.E. 37,
iSleep defendants’ Br. in Support of MTD 19.) Govindaraj more broadly rejects the
claim by arguing that At Home “does not allege any representation or promise to
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Plaintiffs by Dr. Govindaraj, let alone a false representation . . . upon which
Plaintiffs detrimentally relied.” (D.E. 40, Govindaraj’s Br. in Support of MTD 2.)
Govindaraj’s argument relies on an inaccurate premise—that the complaint
never asserts a representation by him. To the contrary, At Home asserts that all
named defendants “represented themselves at numerous venues in New Jersey as
experts in the field of sleep apnea to solicit [At Home’s] business for their billing
services,” and that this representation precipitated At Home’s reasonable reliance
and its ultimate harm. (Am. Compl. ¶ 9.) At Home includes Govindaraj in that
allegation, involving him in the overall fraudulent scheme pleaded in the amended
complaint. The Court therefore analyzes the fraudulent misrepresentation claim as
asserted against all named defendants.
The Court also finds that At Home has adequately pleaded the knowledge
element. According to the amended complaint, defendants occupy the highlyregulated health insurance field. They sponsor industry events where they hold
themselves out as experts in insurance billing services related to sleep apnea
treatment and solicit the business of dentists practicing in this specialized area.
But once hired by At Home and charged with the duty to submit insurance claims,
defendants failed to submit legal, compliant claims, and went to the length of
falsely representing that one of them actually examined At Home’s patients. These
allegations establish incompetent, substandard performance, and easily support the
inference that defendants knew of the falsity of their representation as experts in
this field. At best, the amended complaint demonstrates they were bumblers who
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were reduced to correcting their incompetence with phony information; at worst,
their assurances masked an intent to plump up claim submissions with whatever
was necessary to satisfy the insurer’s requirements. At Home has sufficiently
pleaded the elements of fraudulent misrepresentation under the Rule 12(b)(6)
standard.
Next, defendants argue that At Home fails to satisfy the heightened pleading
standard of Fed. R. Civ. P. 9(b), under which the plaintiff must “state with
particularity the circumstances constituting fraud or mistake.” This standard
serves to “place the defendants on notice of the precise misconduct with which they
are charged, and to safeguard defendants against spurious charges of immoral and
fraudulent behavior.” Lum v. Bank of Am., 361 F.3d 217, 223-24 (3d Cir. 2004)
(citations omitted). The rule has been interpreted to require that plaintiffs “plead
or allege the date, time and place of the alleged fraud or otherwise inject precision
or some measure of substantiation into a fraud allegation.” Frederico v. Home
Depot, 507 F.3d 188, 200 (3d Cir. 2007); see also Alpizar-Fallas v. Favero, __ F.3d __,
2018 WL 5987140, at *6 (3d Cir. Nov. 15, 2018).
The Court finds At Home’s fraudulent misrepresentation claims pass muster
under Rule 9(b). The amended complaint presents a coherent narrative. The
players include Kargman, president and managing partner of iSleep (Am. Compl.
¶ 9); Bushansky, iSleep’s COO, who was tasked with executing the insurance claim
submission process (id. at ¶¶ 9, 31); and Govindaraj, a practicing pulmonologist and
iSleep employee, who was responsible for examining patients and determining
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medical necessity for sleep apnea treatment (id. at ¶¶ 6, 9, 18). At Home alleges
that defendants made representations at “numerous venues in New Jersey” that
iSleep had expertise in sleep apnea treatment billing services, prompting At Home
to enter into a service contract with iSleep. (Id. at ¶¶ 9, 10.) Further, At Home
details how iSleep’s actual business practices led to Horizon’s investigation of At
Home, and ultimately resulted in the damages At Home seeks in this lawsuit. (Id.
at ¶¶ 14-22.) The Court is satisfied that defendants have been put “on notice of the
precise misconduct with which [they are] charged;” thus, At Home has met Rule
9(b)’s heightened pleading requirements.
2. Count 4—Negligent Misrepresentation against all Defendants
At Home asserts a claim for negligent misrepresentation against all
defendants, supported by the same allegations made under its fraudulent
misrepresentation claims. iSleep defendants argue that At Home fails to plead the
reliance element and meet the particularity requirements of Rule 9(b). (iSleep
defendants’ Br. in Support of MTD 18-19.) Govindaraj challenges At Home’s
allegations as “conclusory and fragmented . . . without any basis for asserting such
claims against Dr. Govindaraj as distinct from iSleep Defendants.” (Govindaraj’s
Br. in Support of MTD 6.)
To state a claim for negligent misrepresentation, a “[p]laintiff must allege
that ‘defendant negligently provided false information and that plaintiff incurred
damages proximately caused by its reliance on that information.’” Marrin v.
Capital Health Sys., Inc., No. 14-2558, 2015 WL 404783, at *9 (D.N.J. Jan. 29, 2015)
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(Wolfson, J.) (quoting Highlands Ins. Co. v. Hobbs Grp., LLC., 373 F.3d 347, 351 (3d
Cir. 2004)). Rule 9(b) heightened pleading requirements apply where the negligent
misrepresentation claim “sounds in fraud.” In re Suprema Specialties, Inc. Sec.
Litig., 438 F.3d 256, 272–73 (3d Cir. 2006).
Since the Court found that At Home has sufficiently pleaded fraudulent
misrepresentation against all Defendants, the Court likewise finds that the claim
for negligent misrepresentation is adequately pleaded.
3. Count 5—Fraud in the Inducement against iSleep and Kargman
Count 5 asserts a fraudulent inducement claim against iSleep and Kargman
on the same grounds as the fraudulent misrepresentation claim. At Home explicitly
alleges that it would not have entered into the contract with iSleep but for
defendants’ consistent representations that iSleep could competently handle the
insurance billing services. Further, the Court has determined that At Home has
sufficiently pleaded the elements of common law fraud with the required degree of
particularity. Accordingly, Count 5 survives.
4. Economic Loss Doctrine
Additionally, iSleep defendants challenge the tort claims as barred by the
economic loss doctrine. (iSleep defendants’ Br. in Support of MTD 15.)
Generally, the economic loss doctrine bars recovery in tort for economic losses
arising from a contract. Arcand v. Brother Int’l Corp., 673 F. Supp. 2d 282, 308
(D.N.J. 2009) (Wolfson, J.) (citing Saltiel v. GSI Consultants, Inc., 170 N.J. 297, 310
(2002)). To determine whether tort and contract claims may proceed concurrently,
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courts consider “whether the tortious conduct is extrinsic to the contract between
the parties.” Id. Courts have found the doctrine does not apply where the alleged
misrepresentation occurs prior to the contractual agreement. RNC Sys., Inc. v.
Modern Tech. Grp., Inc., 861 F. Supp. 2d 436, 451 (D.N.J. 2012) (Simandle, J.)
(“Fraud claims can proceed alongside breach of contract claims where there exists
fraud in the inducement of a contract or an analogous situation based on precontractual misrepresentations.”) (internal quotation marks omitted). See also
Metex Mfg. Corp. v. Manson, No. 05-2948, 2008 WL 877870, at *4 (D.N.J. Mar. 28,
2008) (“New Jersey law permits a tort claim to proceed with a breach of contract
claim when the tort claim involves fraudulent inducement on the theory that such a
claim is extraneous to the performance of the related contract.”).
At Home pleads that iSleep represented that it would legally and
competently submit claims for reimbursement to Horizon. According to the
complaint, this representation was fraudulent, occurred prior to the parties’
contractual agreement, and induced At Home to contract with iSleep.
Further, At Home asserts that its catastrophic losses were the result of iSleep’s
fraudulent claim submission scheme, orchestrated and executed by defendants.
Taken as true, these allegations of tortious conduct are extrinsic to an insurance
billing service contract.
At this stage of the litigation, the Court is satisfied that At Home’s tort
claims, premised on allegations of pre-contractual misrepresentations of fact by
iSleep, may be maintained alongside the contract claims.
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B. Contract Claims
Counts 6 through 8 are contract claims solely against iSleep.
1. Count 6 – Breach of Contract
At Home alleges that iSleep breached “by failing to act in conformity with the
laws and regulations of the State of New Jersey and the requirements of Horizon,”
and failing to submit proper legal documentation to Horizon to support At Home’s
patient claims. (Am. Compl. ¶ 58.) To sufficiently plead a breach of contract claim
under New Jersey law, a plaintiff must allege three elements: “(1) the existence of a
valid contract between the parties; (2) failure of the defendant to perform its
obligations under the contract; and (3) a causal relationship between the breach and
the plaintiff's alleged damages.” Sheet Metal Workers Int’l Ass’n Local Union No.
27, AFL-CIO v. E.P. Donnelly, Inc., 737 F.3d 879, 900 (3d Cir. 2013).
iSleep argues for dismissal of this claim because (1) nonparties to a contract
are not liable for its breach and LLC members are nonparties; and (2) the contract
expressly relieves iSleep from liability for errors and omissions relating to its billing
services. (iSleep defendants’ Br. in Support of MTD 26.)
It appears that the first argument does not apply to the amended complaint
and was erroneously carried over from previous briefing. The amended complaint
asserts count 6 against iSleep only, so the Court turns to iSleep’s contention that
the contract expressly immunizes iSleep from liability for errors and omissions
relating to iSleep’s billing services. (Id. at 28.)
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Relying on the contract provision “[iSleep] shall not be liable for errors and/or
omissions relating to the Billing Services provided by [iSleep],” iSleep argues that
since “each and every allegation in Plaintiffs’ Amended Complaint regards an
alleged error or omission related to the billing services [] iSleep provided to At
Home,” the agreement bars the breach of contract claim. (Id.) Without getting into
the weeds of contract interpretation, the Court easily finds that the provision cited
protects iSleep from fallout due to ministerial errors, but certainly does not extend
to the conduct alleged against it in the complaint.
2. Count 7 – Breach of Covenant of Good Faith and Fair Dealing
“The implied covenant of good faith and fair dealing exists in every contract
under New Jersey Law.” Cargill Glob. Trading v. Applied Dev. Co., 706 F. Supp. 2d
563, 579 (D.N.J. 2010) (citing Brunswick Hills Racquet Club, Inc. v. Route 18
Shopping Ctr. Assoc., 182 N.J. 210, 224 (2005)). To establish breach of the implied
covenant of good faith and fair dealing, New Jersey courts require that the plaintiff
“plead facts that would show that [the] defendant[] acted in bad faith . . . ‘with the
effect of destroying or injuring the right of the other party to receive the fruits of the
contract.’” Cedar Holdings, LLC v. Menashe, No. 16-7152, 2017 WL 1349321, at *3
(D.N.J. April 7, 2017) (Thompson, J.) (quoting Wade v. Kessler Inst., 172 N.J. 327,
345 (2002)).
Count 7 incorporates the allegations included in paragraphs 1-59, which
include the facts used to allege fraudulent misrepresentation. (Am. Comp. ¶¶ 60,
61.) These facts plausibly show that iSleep and its employees knowingly submitted
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fraudulent, noncompliant patient claims to Horizon, which included prescriptions
averring that Govindaraj examined and diagnosed the patients with sleep apnea
when he allegedly never even saw them. Such allegations amply satisfy the “bad
faith” requirement of At Home’s breach of the implied covenant of good faith and
fair dealing claim. Accordingly, Count 7 survives.
3. Count 8 – Unjust Enrichment
Defendants claim that New Jersey law bars recovery under a theory of unjust
enrichment “where an express contract covers the same subject matter asserted as
the basis of [the] . . . unjust enrichment claim . . . .” (iSleep defendants’ Br. in
Support of MTD 28 (citing Shapiro v. Solomon, 42 N.J. Super. 377, 385 (App. Div.
1956).) Defendants conclude that because “breach of an express contract is the
basis for all of [At Home’s] claims, and an express agreement exists, [count 8] must
be dismissed.” (Id. at 29.) This characterization of At Home’s claims is inaccurate.
Stressed throughout At Home’s pleading and briefing, “this case is not simply
a breach of contract case, as the facts also support a claim for fraudulent
misrepresentation . . . .” (D.E. 43, Opp. Br. 12.) In paragraph 65 of the amended
complaint, At Home alleges that iSleep “intentionally misrepresented . . . the
services they stated were performed,” “never performed these services,” and
prepared “erroneous, false, and fraudulent” documentation. (Am. Compl. ¶ 65.)
Such conduct sounds in tort. At this early stage it would be premature to dismiss
Count 8, especially when relevant discovery will be about the same facts underlying
the other counts being preserved in this opinion.
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V.
Conclusion
For the reasons indicated above, the Court finds that At Home has
sufficiently pled all eight counts in its amended complaint. An appropriate order
will follow.
/s/ Katharine S. Hayden
Katharine S. Hayden, U.S.D.J
Date: November 27, 2018
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