| Forman v Guardian Life Ins. Co. of Am. |
| 2010 NY Slip Op 06606 [76 AD3d 886] |
| September 21, 2010 |
| Appellate Division, First Department |
| Berton Forman, M.D., et al., Respondents, v The GuardianLife Insurance Company of America, Appellant. |
—[*1] Kenneth L. Kutner, New York for respondents.
Order, Supreme Court, New York County (Eileen Bransten, J.), entered October 5, 2009,which denied defendant's motion pursuant to CPLR 3211 to dismiss the complaint, unanimouslyaffirmed, without costs.
Plaintiff Berton Forman is a licensed anesthesiologist and the sole officer, director andshareholder of plaintiff Rockville Recovery Associates, Ltd. Forman and Rockville offer theservice of auditing insurance claims of physicians and hospitals for possible fraud and assistingin the recovery of insurance funds fraudulently received by them. Defendant the Guardian LifeInsurance Company of America is a health insurer.
Commencing in or about May 2003, Rockville and Guardian entered into a series of writtencontracts pursuant to which Rockville provided claim auditing services for Guardian. Under theagreements, Rockville was responsible for investigating claims of health care providers identifiedby Guardian to determine whether the claims were fraudulent. Rockville's services under thecontracts included investigating the claims for fraudulent activity, contacting providers thatRockville determined had engaged in fraud, and negotiating the return of the amounts owed. Thecontracts provided that Rockville was entitled to a fee of 25% of all funds it successfullyrecovered. The parties' most recent contract expired in 2006, but plaintiffs allege that theagreements nevertheless continued to be in effect based on the parties' course of conduct.
According to the complaint, from 2003 to 2008, plaintiffs uncovered significant overbillingby medical providers totaling tens of millions of dollars. Plaintiffs allege that they provided theirfindings to Guardian but Guardian did not commence litigation against the providers to recoverthe funds. The complaint further states that the reason Guardian failed to pursue claims againstcertain health care providers was because, unbeknownst to plaintiffs, Guardian had entered into acontract waiving its right to conduct postpayment claim audits of those providers. The complaintasserts causes of action for breach of contract, breach of the implied covenant of good faith andfair dealing, quantum meruit, unjust enrichment and promissory and equitable estoppel.
Guardian's decision not to pursue litigation to recover on the fraudulent claims does notconstitute a breach of the agreements. The complaint does not allege that Guardian was under[*2]any contractual obligation to commence such litigation. Evenif the complaint could be construed to allege such an obligation, the contracts between the partiesdo not contain any language requiring Guardian to bring suit or to take any other action to collecton the fraudulent billings (Ark Bryant Park Corp. v Bryant Park Restoration Corp., 285AD2d 143, 150 [2001] ["the provisions of the contract delineating the rights of the parties prevailover the allegations set forth in the complaint"]).
Nevertheless, the breach of contract claim was properly sustained based upon a warrantyclause contained in the 2005 agreement. Under that contract, Rockville was entitled to receive afee of 25% of all funds it successfully recovered as a result of its audits. The complaint allegesthat Guardian entered into a separate contract with a certain health care plan not to conductpostpayment audits and that Guardian did not inform plaintiffs of this agreement. Plaintiffsfurther allege that, despite the agreement with the health care plan, Guardian asked Rockville toperform audits of claims from providers in that plan. Plaintiffs contend that this contractualobligation prohibited Guardian from conducting postpayment audits as to approximately 90% ofits claims. These allegations state a breach of the warranty clause in which Guardian representedthat there were no agreements "that might conflict or interfere with, limit, or be inconsistent withor otherwise affect any of the provisions of this Agreement." Because the alleged third-partycontract effectively precluded any possibility of recovery by Rockville for certain claims thatGuardian asked Rockville to audit, plaintiffs have pleaded a breach of the warranty clause.
The complaint also states a cause of action for breach of the implied covenant of good faithand fair dealing. It is axiomatic that all contracts imply a covenant of good faith and fair dealingin the course of performance (511 W. 232nd Owners Corp. v Jennifer Realty Co., 98NY2d 144, 153 [2002]). "This covenant embraces a pledge that 'neither party shall do anythingwhich will have the effect of destroying or injuring the right of the other party to receive thefruits of the contract' " (id., quoting Dalton v Educational Testing Serv., 87 NY2d384, 389 [1995], quoting Kirke La Shelle Co. v Armstrong Co., 263 NY 79, 87 [1933]).In essence, the complaint alleges that Guardian frustrated the basic purpose of the parties'contracts by providing Rockville with claims to audit while at the same time entering into anagreement preventing Rockville from pursuing recovery of funds relating to those claims. Thus,the work given to Rockville to perform would be work for which, from the inception, it couldnever recover. These allegations are sufficient to sustain the claim for breach of the impliedcovenant. No basis exists to dismiss this cause of action as duplicative of the breach of contractclaim because the warranty clause appears in only the 2005 contract and not in all the agreementsat issue here.
Plaintiffs are entitled to proceed in the alternative upon quasi-contractual theories becausethere is a question whether the parties' course of conduct evidenced their assent to continue theterms of the 2005 contract after its expiration (see Halliwell v Gordon, 61 AD3d 932, 934 [2009]; Winick Realty Group LLC v Austin &Assoc., 51 AD3d 408 [2008]). The quantum meruit claim was properly sustainedbecause the complaint alleges the performance of claim auditing services by plaintiffs in goodfaith, the acceptance of such services by Guardian, plaintiffs' expectation of compensation, andthe reasonable value of the services (see Tesser v Allboro Equip. Co., 302 AD2d 589,590 [2003]). The allegation that Guardian changed its fraud prevention policies as a result ofplaintiffs' auditing services resulting in millions of dollars in savings to Guardian states a claimfor unjust enrichment (see Nakamura v Fujii, 253 AD2d 387, 390 [1998]). Although theterms of the 2005 contract might appear to preclude this claim, there is, as indicated, a questionwhether that contract expired or continued based on the parties' [*3]course of conduct.
Reading the complaint in a light most favorable to plaintiffs, the cause of action forpromissory estoppel was correctly sustained. The pleadings allege that defendants made a clearand unambiguous promise to pursue claims plaintiffs identified as fraudulent, that plaintiffsreasonably relied on this promise in performing their work, and that they were injured bydefendant's failure to pursue the claims (see Arfa v Zamir, 55 AD3d 508 [2008]). The allegationsconcerning Guardian's concealment of the third-party contract from plaintiffs also are sufficient,for pleading purposes, to support the claim for equitable estoppel (see De Angelis v AmericanCapital Access, 280 AD2d 409 [2001]).
We have considered the parties' remaining contentions and find them unavailing.Concur—Mazzarelli, J.P., McGuire, DeGrasse, Freedman and Richter, JJ. [Prior CaseHistory: 25 Misc 3d 1224(A), 2009 NY Slip Op 52285(U).]