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THE COMPLAINT STATED CAUSES OF ACTION FOR BREACH OF FIDUCIARY DUTY, FRAUD, CONSTRUCTIVE FRAUD AND MUTUAL MISTAKE; PLAINTIFFS-PHYSICIANS ALLEGED THE FORMS THE EMPLOYER REQUIRED THEM TO SIGN CONSENTING TO THE DISTRIBUTION (TO THE EMPLOYER) OF THE PROCEEDS OF THE DEMUTUALIZATION OF THE MEDICAL MALPRACTICE INSURER WERE INVALID (FIRST DEPT).

The Frist Department, reversing (modifying) Supreme Court, determined the complaint by physicians against their employer/malpractice-insurance-policy-administrator stated causes of action for breach of fiduciary duty, fraud and mutual mistake. The dispute centers on whether the physicians or the employer which paid the malpractice insurance premiums are/is entitled to the proceeds when the insurer (MLMIC) demutualized. The employer had the physicians sign forms consenting to distributing the proceeds to the employer. The physicians allege the consent forms are invalid:

Plaintiffs allege that the forms by which they authorized MLMIC to distribute their demutualization proceeds to defendant are invalid because defendant obtained them in breach of its fiduciary duty, by fraud, or due to mutual mistake. If these forms are invalid, then the demutualization proceeds belong to plaintiffs … .

Transactions between a fiduciary and beneficiary are voidable if the fiduciary acts in its own interest and does not fully disclose all material facts … . Defendant is alleged not only to have withheld the policyholder information statement from plaintiffs, but to have significantly misrepresented their contents for its own gain. These allegations, which are not conclusively refuted by the documentary evidence, are sufficient to survive a motion to dismiss.

Fraud is another basis for rescinding the consent forms … . Plaintiffs also properly allege constructive fraud, because they were owed a fiduciary duty by defendant and so were “warranted to . . . relax the care and vigilance they would ordinarily exercise in the circumstances” … . …

Mutual mistake “may not be invoked by a party to avoid the consequences of its own negligence” … . For the purposes of this motion to dismiss, however, it cannot be said as a matter of law that plaintiffs were negligent … . Cordaro v AdvantageCare Physicians, P.C., 2022 NY Slip Op 05267, First Dept 9-27-22

Practice Point: The complaint adequately alleged the employer, which also served at the medical malpractice insurance policy administrator, breached a fiduciary duty owed to the plaintiffs-physicians by requiring them to consent to the distribution (to the employer) of the proceeds of the demutualization of the medical malpractice insurance carrier. The complaint also sufficiently alleged fraud, constructive fraud and mutual-mistake causes of action.

 

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