Justice Colleen Duffy

 

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In 2004 radiologist Carothers formed plaintiff professional service corporation to perform MRI scans at facilities leased from Sher. Plaintiff billed insurers for no-fault benefits assigned by patients. It sued Progressive and other insurers to recover unpaid claims. The insurers claimed plaintiff not entitled to unpaid claims because under State Farm Mut. Auto. Ins. Co. v. Mallela, 4 NY3d 2313, Carothers was only its nominal owner, while plaintiff was owned and controlled by Sher and executive secretary Vayman, nonphysicians. Finding the jury properly instructed on the elements of a fraudulent incorporation defense, Second Department affirmed dismissal of plaintiff’s complaint. The jury found Carothers had not practiced medicine when plaintiff was in business as required by Business Corporation Law §1507(a). The trial court’s charge properly focused the jury on whether Carothers was merely plaintiff’s nominal owner, and whether Sher and/or Vayman owned or controlled plaintiff such that the profits were funneled to them. The jury was also properly charged that to find that they controlled plaintiff, the jury had to find that Sher and/or Vayman had a “significant role in the guidance, management, and direction of [plaintiff's] business.”

Justice Colleen Duffy

 

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In 2004 radiologist Carothers formed plaintiff professional service corporation to perform MRI scans at facilities leased from Sher. Plaintiff billed insurers for no-fault benefits assigned by patients. It sued Progressive and other insurers to recover unpaid claims. The insurers claimed plaintiff not entitled to unpaid claims because under State Farm Mut. Auto. Ins. Co. v. Mallela , 4 NY3d 2313 , Carothers was only its nominal owner, while plaintiff was owned and controlled by Sher and executive secretary Vayman, nonphysicians. Finding the jury properly instructed on the elements of a fraudulent incorporation defense, Second Department affirmed dismissal of plaintiff’s complaint. The jury found Carothers had not practiced medicine when plaintiff was in business as required by Business Corporation Law §1507(a). The trial court’s charge properly focused the jury on whether Carothers was merely plaintiff’s nominal owner, and whether Sher and/or Vayman owned or controlled plaintiff such that the profits were funneled to them. The jury was also properly charged that to find that they controlled plaintiff, the jury had to find that Sher and/or Vayman had a “significant role in the guidance, management, and direction of [plaintiff's] business.”