The self-proclaimed entrepreneur and guiding force behind his soon-to-be ex-wife’s highly successful, multi-office pediatric dental practice known as Kiddsmiles is not smiling after the court in Savel v Savel, Short Form Order, Index No. 006375-15 [Sup Ct Nassau County May 19, 2017], dismissed his claim, among others, to impose a constructive trust upon 50% of his wife’s ownership interest in a series of professional limited liability companies.
The facts of the case, as presented in the husband’s complaint in his civil action, which he filed some months after he filed a separate divorce action against his wife, involve tawdry, self-incriminating allegations of illegal kickbacks for patient referrals from which the husband, who is not a dentist, personally benefitted through his separate consulting company that received the alleged kickbacks under the guise of phony “rental” payments.
Between the governing statute’s ironclad requirement that members of a dental practice organized as a professional service LLC be licensed dentists, and the husband’s admitted receipt of kickbacks for patient referrals in violation of the Public Health Law, it’s no wonder the court dismissed the husband’s claims seeking to enforce illegal arrangements.
According to the complaint, the Savels married in 2004 and two years later, opened the first of five Kiddsmiles offices, each owned by a separate PLLC with the wife as sole member of each in accordance with Sections 1203 and 1207 of New York’s LLC Law which prohibit membership other than by a licensed dentist. The husband alleged that he contributed $500,000 toward the start-up of practice, co-guaranteed third-party financing, and was solely responsible for all aspects of the practice’s development, construction, management, and operations which eventually came to generate $8 million annual gross revenues and $2 million annual profit. The wife’s total contribution, according to the husband, was limited to “infrequently performed garden-variety dental services” working “at most two days per week” and generating less than 5% of practice revenues.
Meanwhile, the husband drew an annual salary of about $400,000 as the practice’s CFO. He also set up a separate consulting business of which he was sole owner that took in about $12,000 monthly for “consulting contracts” with a number of unnamed orthodontists and other professional practices for patient referrals disguised as payments under bogus rental agreements.
According to the complaint, the marital relationship disintegrated in 2014 following which the wife barred her husband from the practice, terminated his position and salary, and caused the referral-payment sources to cancel their “rental agreements” with the husband’s consulting firm. The husband sued for divorce, and subsequently brought a separate civil action asserting a variety of claims of which I’ll only mention the following two.
Dismissal of the Constructive Trust Claim
The complaint’s first claim sought to impose a constructive trust on 50% of the wife’s ownership interests in the PLLCs and their assets based on the confidential and fiduciary relationship between the husband and wife, and on the wife’s alleged promise that her husband would be an “equal partner” in the business with “vested rights” in the practice and its property despite the “formality” of the wife being listed as sole member in accordance with the LLC Law. The husband alleged that in reliance on his wife’s promise, he “transferred time, energy, effort, money, experience, and expertise with incalculable value, including funds of over $500,000” to his wife and the PLLCs.
On motion by the wife and the PLLCs, Justice Robert A. Bruno agreed that the constructive trust claim failed to state a valid cause of action, for two reasons.
First, the wife’s alleged promise of an “equal partnership” is “not the type of promise that can give rise to a constructive trust claim” in that
the alleged promise is illegal because the plaintiff could not be an equal partner in the Dental Practices under New York law. New York permits dentists to form professional corporations [sic] as long as the corporations [sic] are owned, operated, and controlled by licensed dentists. . . . Here, because the plaintiff is not a dentist, an agreement to be an equal partnership [sic] in the Dental Practices with his dentist wife violates public policy and is unenforceable. Any such arrangement is illegal. Therefore, “the law will not extend its aid to either of the parties or listen to their complaints against each other, but will leave them where their own acts have placed them.” [Citations omitted.]
Second, the husband cannot claim that his wife’s alleged promise of equal partnership “was the sole cause for his transfer of ‘time, energy and effort” given his “admission that he was paid an annual salary of nearly $400,000 plus benefits for the alleged ‘time, energy and effort’ he expended as an employee of the Dental Practices.” The plaintiff’s hefty compensation, the court added, precluded the requisite finding that the husband’s alleged contributions were made in reliance upon the wife’s alleged promise, and likewise negated the element of unjust enrichment essential to a constructive trust claim.
Dismissal of Damages Claim Under Public Health Law § 238-a
Another of the complaint’s causes of action sought damages in excess of $2.5 million based on the wife’s alleged violation of Public Health Law § 238-a, New York’s so-called “mini-Stark” law patterned on the federal statute, which outlaws the referral of certain designated health services to an entity (or an immediate family member) with which the practitioner has a financial relationship.
The claim alleged that the dentist-wife participated and benefitted from the payments made to the husband’s consulting firm for patient referrals in violation of § 238-a, and that such violation “will result” in revocation of her professional license and cause closure or forced sale of the practice, resulting in a loss of income to the husband’s consulting firm and exposing him to personal liability as joint guarantor on approximately $2.5 million in loans to the practice.
As with the constructive trust claim, the husband’s admission that the payments for patient referrals were illegal kickbacks in violation of § 238-a doomed his claim under the statute. Justice Bruno held that the agreements to pay kickbacks “are illegal and unenforceable” and “[t]hus, there is no legal theory that permits the plaintiffs to recover for damages for their alleged illegal contracts with John Does Nos. ‘1’ through ‘5.’”
As additional icing on the dismissal cake, Justice Bruno also held that the husband lacks standing to sue under § 238-a, first, because “the plaintiffs are not medical doctors” able to invoke the statute, second, because the plaintiffs are “outside the class of beneficiaries intended by the statute whose purpose . . . is ‘to prevent the provision of health care from being based on financial incentive rather than patient welfare and medical necessity,'” and third, because the plaintiffs’ claimed violation of the statute did not result in any present injury to them but, according to the complaint, “‘will result’ — in the future — if various circumstances come to pass including the ‘[c]losure or forced sale of the [Dental Practices].'”
Post-Decision Proceedings. Subsequent to the court’s decision, the husband filed a motion for reargument and the wife moved to impose costs, fees, and sanctions on the husband for asserting frivolous claims seeking to enforce admittedly illegal contracts. Interestingly, in her motion for sanctions, the wife characterized her husband’s suit as a tactical device to gain negotiating leverage in their matrimonial action in which the wife’s dental practice will be subject to equitable distribution by determining each party’s contributions to the business, and to delay the matrimonial action for the purpose of extending the wife’s support payments to the husband. As of this writing, the court has not posted decisions on either motion. I’ll update this post when that happens.