In recent months, unanimous decisions rendered by 5-judge Appellate Division panels in both the Third and Fourth Departments have shifted the momentum in the battle over who is entitled to the proceeds from the sale and demutualization of New York’s largest medical malpractice carrier, the Medical Liability Mutual Insurance Company (“MLMIC”). Both of these recent appellate decisions determined that the sale proceeds belong to the insured policyholders rather than to their employers who may have paid their malpractice premiums and/or acted as their Policy Administrator. These two rulings rejected the rationale underlying an earlier appellate decision in the First Department (Matter of Schaffer, Schonholz & Drossman, LLP v. Title (171 A.D. 3d 465 [1st Dep’t 2019]) (“Schaffer“) which determined that whichever party paid the malpractice premiums was entitled to the sale proceeds.
Even though the precedential value of the Schaffer decision has been questioned*, many healthcare employers who paid the premiums for their employees’ malpractice policies with MLMIC and/or acted as their employees’ Policy Administrator, have nevertheless cited Schaffer in numerous lawsuits throughout New York State (in an effort to force their employees to assign over to them their MLMIC sale proceeds). A number of courts have ruled against the insured policyholders in reliance on Schaffer because it was the only appellate court decision on the subject at the time. That situation has now changed with these two (2) recent appellate court decisions.
The Appellate Division in the Fourth Department issued its unanimous decision on April 24, 2020 in Maple-Gate Anesthesiologists, P.C. v. Nasrin, 182 A.D.3d 984 [4th Dep’t 2020] (“Maple-Gate“). In its ruling, the Court stated that the documentary evidence established as a matter of law that the plaintiff [employer] “had no legal or equitable right of ownership to the demutualization payments”; that “the MLMIC plan of conversion, in accordance with [Section 7307(e)(3) of] the Insurance Law, provided that cash distributions were required to be made to those policyholders who had coverage during the relevant period prior to demutualization in exchange for the ‘extinguishment of their Policyholder Membership Interests'”; and that “The mere fact that the plaintiff [employer] paid the annual premiums on the policies on the defendant [employee]’s behalf does not entitle it to the demutualization payments (cf. Schaffer).”*
More recently, on June 18, 2020, the Appellate Division in the Third Department issued its unanimous decision in Schoch v. Lake Champlain OB-GYN, P.C., 2020 NY Slip Op 03444, 2020 N.Y. App.Div. LEXIS 3541 [3rd Dep’t 2020] (“Schoch“). It agreed with the Fourth Department’s conclusion that the sale proceeds belong to the insured policyholder, regardless of who paid the malpractice premiums or acted as the Policy Administrator. In so doing, the Court expressly rejected the First Department’s holding in Schaffer. In its decision, the Court stated that “Insurance Law Section 7307 does not confer an ownership interest…to anyone other than the policyholder” and that “pursuant to the language of the statute, [MLMIC’s] conversion plan and the NYS Department of Financial Services’s decision, MLMIC should pay the cash consideration to the plaintiff [employee].” The Court went on to reject the unjust enrichment argument that was the sole basis of the Schaffer decision by stating:
“Defendant [employer] asserts that the cash consideration would be a windfall to plaintiff [employee]. While true, the converse is also true; the consideration would be a windfall to defendant [employer] if defendant were to receive it…The reality is that neither party bargained for the demutualization proceeds. Moreover, neither party actually paid for them, because membership interests in a mutual insurance company are not paid for by policy premiums; such rights are ‘acquired…at no cost … and as an incident of the structure of mutual insurance policies’ through operation of law and the company’s charter and bylaws…Thus, the demutualization proceeds were unexpected and will be a windfall to whichever party receives them.
The fact that one party will receive these benefits does not mean that such party has unjustly enriched itself at the other’s expense…Based on our analysis, we decline to follow Schaffer, which summarily held, without any analysis, that awarding an employee a cash consideration related to MLMIC’s demutualization would constitute unjust enrichment where the employer had paid the policy premiums.”
In light of these unanimous appellate decisions from the Third and Fourth Departments, healthcare attorneys are now watching whether the First Department will reverse its decision in Schaffer when it rules on an appeal of a decision by the Supreme Court, New York County in Mid-Manhattan Physician Services, P.C. v. Dworkin, 2019 WL 4261348 (Sup Ct, New York County 2019) (“Dworkin“). (In that case, the lower Court ruled in favor of a Summary Judgment motion by Dr. Dworkin’s former employer and in doing so, relied on Schaffer).
The appeal in Dworkin is scheduled to be argued during the First Department’s November 2020 term. A successful appeal in this case would eliminate the conflict that currently exists between the Departments of the Appellate Division and firmly establish the rights of insured policyholders throughout New York State to receive the MLMIC sale proceeds.
*The First Department’s decision in Schaffer summarily held, in just four (4) sentences, that the doctor/policyholder would be unjustly enriched by receiving the cash consideration because her employer had paid her policy premiums. The case was brought to the First Department in an unusual manner, bypassing the lower court via an “Action on Submitted Facts” (under CPLR 3222), in which the appellate court’s review is limited to the parties’ submissions. The parties’ submissions in Schaffer did not discuss, and the First Department did not reference, New York’s Insurance Law, the MLMIC Plan of Conversion, the Decision of the New York State Department of Financial Services approving the Plan, or applicable New York unjustment enrichment law, and the Court did not provide any reasoning for its conclusion.