Preview
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
PEOPLE OF THE STATE OF NEW YORK by Index No. 451549/2023
LETITIA JAMES, Attorney General of the State of I.A.S. Part 60
New York, (Crane, J.)
Petitioner,
-against-
ABRAHAM OPERATIONS ASSOCIATES LLC
d/b/a BETH ABRAHAM CENTER FOR
REHABILITATION AND NURSING, DELAWARE
OPERATIONS ASSOCIATES LLC d/b/a BUFFALO
CENTER FOR REHABILITATION AND
HEALTHCARE, HOLLIS OPERATING CO., LLC
d/b/a HOLLISWOOD CENTER FOR
REHABILITATION AND HEALTHCARE,
SCHNUR OPERATIONS ASSOCIATES LLC d/b/a
MARTINE CENTER FOR REHABILITATION AND
NURSING, LIGHT PROPERTY HOLDINGS
ASSOCIATES LLC, DELAWARE REAL ESTATE
PROPERTY ASSOCIATES LLC, HOLLIS REAL
ESTATE CO., LLC, LIGHT OPERATIONAL
HOLDINGS ASSOCIATES LLC, LIGHT
PROPERTY HOLDING II ASSOCIATES LLC,
CENTERS FOR CARE LLC d/b/a CENTERS
HEALTH CARE, CFSC DOWNSTATE, LLC, BIS
FUNDING CAPITAL LLC, SKILLED STAFFING,
LLC, KENNETH ROZENBERG, DARYL HAGLER,
BETH ROZENBERG, JEFFREY SICKLICK,
REUVEN KAUFMAN, LEO LERNER, AMIR
ABRAMCHIK, DAVID GREENBERG, ELLIOT
KAHAN, SOL BLUMENFELD, ARON
GITTLESON, AHARON LANTZITSKY,
JONATHAN HAGLER, and MORDECHAI “MOTI”
HELLMAN,
Respondents.
MEMORANDUM OF LAW IN SUPPORT OF RESPONDENTS DARYL HAGLER,
JONATHAN HAGLER, LIGHT PROPERTY HOLDINGS ASSOCIATES LLC,
DELAWARE REAL PROPERTY ASSOCIATES LLC, HOLLIS REAL ESTATE CO.,
LLC, CFSC DOWNSTATE LLC, AND BIS FUNDING CAPITAL LLC’S MOTION TO
DISMISS THE PETITION PURSUANT TO CPLR 3211(a)(1), (7) & (8)
4895-8431-1440
1 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ............................................................................... 1
BACKGROUND & PROCEDURAL HISTORY ..................................................... 3
ARGUMENT……………………………………………………………………….3
I. THE REAL ESTATE RESPONDENTS ADOPT THE
ARGUMENTS MADE IN THE MEMORANDUM OF LAW FILED
BY THE CENTERS RESPONDENTS. .......................................................... 3
II. THE STATE FAILS TO MAKE SPECIFIC ALLEGATIONS
AGAINST THE REAL ESTATE RESPONDENTS CONNECTING
ANY OF THEM TO THE OPERATION OF THE NURSING
HOMES. ..........................................................................................................4
III. THE STATE IS BARRED FROM PROCEEDING IN THIS ACTION
BY MEANS OF THE EXPEDITED, SPECIAL PROCEEDING
PROCESS OUTLINED IN EXECUTIVE LAW § 63(12). ............................ 8
A. Executive Law § 63(12) exceeds the federal government’s
delegation of power and conflicts with federal law, and, thus,
this matter cannot continue in an expedited, special proceeding. ......... 9
1. The use of Executive Law § 63(12) exceeds the grant of
enforcement authority Congress delegated to MFCU and
other state Medicaid fraud control units. ..................................10
2. The lack of a mens rea requirement in Executive Law §
63(12) conflicts with, and violates, federal law requiring
that Medicaid fraud violations have some degree of
scienter attached. .......................................................................12
IV. THE PETITION MUST BE DISMISSED AS TO JONATHAN
HAGLER FOR LACK OF PERSONAL JURISDICTION. ........................14
V. THE SUMMARY PROCEEDING OF EXECUTIVE LAW § 63(12)
DEPRIVES THE REAL ESTATE RESPONDENTS OF THEIR
FEDERAL AND STATE CONSTITUTIONAL RIGHTS TO DUE
PROCESS. .....................................................................................................17
i
4895-8431-1440
2 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
CONCLUSION ........................................................................................................21
ii
4895-8431-1440
3 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
TABLE OF AUTHORITIES
Page(s)
Cases
Atlas Van Lines, Inc. v. Tax Appeals Tribunal of State,
995 N.Y.S.2d 629 (3rd Dep’t 2014) ........................................................................................13
Chen v. Lu,
41 N.Y.S.3d 517 (1st Dep’t 2016) ...........................................................................................15
Chiquita Fresh N. Am., LLC v. Long Island Banana Corp.,
2019 WL 13171161 (E.D.N.Y. Sept. 30, 2019) ......................................................................18
Coast to Coast Energy, Inc. v. Gasarch,
149 A.D.3d 485 (1st Dep’t 2017) ............................................................................................14
DeMartino v. N.Y. DOL,
167 F. Supp. 3d 342 (E.D.N.Y. 2016) .....................................................................................18
Ferrante Equip. Co. v. Lasker-Goldman Corp.,
26 N.Y.2d 280 (1970) ..............................................................................................................16
United States ex rel. Foreman v. AECOM,
19 F.4th 85 (2d Cir. 2021) .........................................................................................................7
Hanson v. Denckla,
357 U.S. 235 (1958) .................................................................................................................16
IMAX Corp. v. The Essel Grp., 62 N.Y.S.3d 107 (2017) …………………………………………….15
Kaprall v. WE: Women’s Ent., LLC,
74 A.D.3d 1151 (2d Dep’t 2010) .............................................................................................17
LaMarca v. Pak–Mor Mfg. Co.,
713 N.Y.S.2d 304 (2000) .........................................................................................................16
Mathews v. Eldridge,
424 U.S. 319 (1976) ...........................................................................................................18, 19
Paterno v. Laser Spine Inst.,
24 N.Y.3d 370 (2014) ..............................................................................................................16
People by Abrams v. Am. Motor Club, Inc.,
582 N.Y.S.2d 688 (1st Dep’t 1992) ...........................................................................................6
People by James v. Exxon Mobil Corp.,
119 N.Y.S.3d 829 (N.Y. Sup. Ct. 2019) ..................................................................................12
iii
4895-8431-1440
4 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
People v. Apple Health & Sports Clubs, Ltd., Inc.,
613 N.Y.S.2d 868 (1st Dep’t 1994) ...........................................................................................6
People v. Ekong,
582 N.E.2d 233 (Ill. App. Ct. 1991) ........................................................................................12
People v. N. Leasing Sys., Inc.,
142 N.Y.S.3d 36 (1st Dep’t 2021) ...................................................................................8, 9, 12
Spinelli v. City of New York,
579 F.3d 160 (2d Cir. 2009)...............................................................................................18, 19
State v. Floyd Y.,
22 N.Y.3d 95 (2013) ................................................................................................................18
State v. Harden,
938 So. 2d 480 (Fla. 2006).......................................................................................................13
State v. Rubio,
967 So. 2d 768 (Fla. 2007).......................................................................................................13
Williams v. Beemiller, Inc.,
33 N.Y.3d 523, 130 N.E.3d 833 (2019) ...................................................................................16
Statutes
42 U.S.C. § 1396b(q) ...............................................................................................................10, 12
Executive Law § 63(8) .......................................................................................................10, 11, 20
Executive Law § 63(12) ......................................................................................................... passim
Perishable Agricultural Commodities Act ...............................................................................18, 19
Other Authorities
42 C.F.R. § 1007.1 ...................................................................................................................12, 14
10 NYCRR § 400.19(1) ...................................................................................................................8
CPLR 301.......................................................................................................................................15
CPLR 302.................................................................................................................................15, 16
CPLR 3211(a)(8) .....................................................................................................................14, 17
CPLR 408.........................................................................................................................................8
N.Y. Const. art. 1, § 6. .................................................................................................................18
iv
4895-8431-1440
5 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
U.S. Const. amend. XIV, § 1 ...................................................................................................17, 18
v
4895-8431-1440
6 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
Respondents Light Property Holdings Associates LLC (“Light Property”), Delaware Real
Property Associates LLC (“Delaware Real Property”), Hollis Real Estate Co., LLC (“Hollis”),
Light Property Holdings II Associates, LLC (individually, “Light Property II” and collectively, the
“Real Estate Entity Respondents”), CFSC Downstate, LLC (“CFSC Downstate”), BIS Funding
Capital LLC (individually, “BIS” and collectively with the Real Estate Entity Respondents and
CFSC Downstate, the “Entity Respondents”), Daryl Hagler, and Jonathan Hagler (collectively
with the “Entity Respondents,” the “Real Estate Respondents”) respectfully submit this
memorandum of law in support of their Motion to Dismiss the Petition filed by the State of New
York Attorney General (the “AG” or “State”).
PRELIMINARY STATEMENT
Although long, winding, and deliberately sensational, the AG’s Petition is really one core,
repetitive claim: the four Nursing Homes, the Nursing Homes’ Owners, and the Nursing Homes’
Operators took taxpayer dollars intended for resident care, used those dollars to enrich themselves
instead of caring for their residents, and some residents were neglected as a result. 1 That claim is
flawed, and the Petition must be partially dismissed for all of the reasons set forth in the motion to
dismiss filed by the Centers Respondents. The Real Estate Respondents join that motion in full
and adopt its arguments. But the Petition must be dismissed in its entirety against the Real Estate
Respondents for a much simpler reason—none of the Real Estate Respondents owns or operates
the Nursing Homes or have anything to do with resident care.
Daryl Hagler and Jonathan Hagler own the Real Estate Entity Respondents (although
Jonathan is just a 1% owner of three of the Real Estate Entity Respondents). Neither is included
among the Nursing Homes’ Owners or Operators. CFSC Downstate is a staffing agency, and BIS
1
Capitalized terms have the same meaning as they do in the Petition.
4895-8431-1440
7 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
provides technology-related services; neither has anything to do with resident care. The Petition
does not allege that any of the Real Estate Respondents are in any way regulated by the New York
Department of Health (“DOH”); ever submitted a claim to be paid by Medicaid; ever directly
received taxpayer dollars; ever had any ability to control how taxpayer dollars were spent; ever
submitted a Medicaid Cost Report; or ever had any responsibility over resident care in any of the
four Nursing Homes. To be clear, the Real Estate Respondents did not. They are landlords and
third-party providers with no ability to commit fraud or persistent illegality in the operation of
Nursing Homes because they are without any ability to operate the Nursing Homes. The Petition
must be dismissed against the Real Estate Respondents.
The Petition must also be dismissed against the Real Estate Respondents because the New
York Medicaid Fraud Control Unit (“MFCU”) cannot bring an expedited, special proceeding under
Executive Law § 63(12). State Medicaid fraud control units are creatures of federal law. They
can only exercise the authority explicitly delegated to them by the federal government. MFCU is
not authorized to pursue violations relating to Medicaid payments through the summary
proceeding mechanism of Executive Law § 63(12). This is not to say that MFCU does not have
other means to investigate and pursue the Nursing Homes and their owners and operators for
Medicaid overpayments; it just means that Executive Law § 63(12) falls outside of the federal
government’s delegation of authority to MFCU.
The Petition must be dismissed against Jonathan Hagler for a standalone reason: the Court
does not have personal jurisdiction over him. Jonathan is not a resident of New York; he is a
resident of New Jersey. In addition, the AG fails to allege personal conduct by Jonathan that
amounts to sufficient minimum contacts with New York. Consequently, there is no justification
to haul Jonathan into New York to defend against the Petition.
2
4895-8431-1440
8 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
Finally, if the Court does not dismiss the Petition against the Real Estate Respondents, the
Court must convert this matter to a plenary proceeding. As far as the Real Estate Respondents can
tell, the AG’s Petition is the latest in a string of cases filed against nursing homes, in a first-of-its-
kind use of Executive Law § 63(12). 2 In each, the AG is alleging that state-licensed nursing homes
committed fraud and persistent illegality by sometimes providing deficient care over a several year
period, including during a once-in-a-century global pandemic. The State did not have to proceed
under Executive Law § 63(12). The DOH has an entire regulatory and enforcement apparatus, and
the AG regularly files actions under the New York False Claims Act. Had the State chosen either
of those paths, the Real Estate Respondents would have been afforded discovery and due process
protections. The AG chose to proceed under Executive Law § 63(12) to avoid those protections.
The AG should not be rewarded for her litigation stratagem, and the Court should convert this
matter to a plenary proceeding.
BACKGROUND & PROCEDURAL HISTORY
The Real Estate Respondents rely upon the facts and procedural history set forth in the
Memorandum of Law in Support of the Motion to Dismiss filed by the Centers Respondents in
this matter, as well as upon the facts discussed and developed below.
ARGUMENT
I. THE REAL ESTATE RESPONDENTS ADOPT THE ARGUMENTS MADE IN
THE MEMORANDUM OF LAW FILED BY THE CENTERS RESPONDENTS.
The Real Estate Respondents adopt and incorporate each argument for dismissal raised by
the Centers Respondents in their Memorandum of Law in Support of the Motion to Dismiss the
Petition. The Real Estate Respondents also make the following additional arguments for dismissal.
2
In 2022, the AG filed three similar petitions pertaining to the Villages of Orleans, Fulton
Commons, and Cold Spring Hills, three other for-profit nursing homes in New York.
3
4895-8431-1440
9 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
II. THE STATE FAILS TO MAKE SPECIFIC ALLEGATIONS AGAINST THE
REAL ESTATE RESPONDENTS CONNECTING ANY OF THEM TO THE
OPERATION OF THE NURSING HOMES.
The Real Estate Respondents are landlords and third-party providers, not owners or
operators of the Nursing Homes. But the Petition does not distinguish between the Real Estate
Respondents, which have no operational control over the Nursing Homes, and the Nursing Homes’
Owners and Operators that do. Nor does the Petition distinguish between Daryl Hagler and
Jonathan Hagler, who never signed or submitted anything to the DOH, and are in no way regulated
by the DOH, from the Centers Respondents who did and are. This is a variation on the Centers
Respondents’ “group pleading” argument. Except the Real Estate Respondents argue that the
AG’s “group pleading” does something much more significant than deliberately obscure who did
what—it lumps together those who operated the Nursing Homes with those who did not and could
not. The AG seeks to impose liability on the Real Estate Respondents for fraud and persistent
illegality in the operation of the Nursing Homes even though the Real Estate Respondents never
operated the Nursing Homes. The Petition’s causes of action make this defect plain: 3
• Count 1 alleges that the Real Estate Respondents “repeatedly and persistently
committed fraud” by converting $83 million in “Government Healthcare reimbursement funds.”
(Pet. at p. 294.) But no Real Estate Respondent ever received “Government Healthcare
reimbursement funds” to convert because no Real Estate Respondent ever filed a claim for
payment with the federal or state governments.
3
The Petition alleges 11 causes of action, but only 9 involve one or more of the Real Estate
Respondents: Count 1 (all Real Estate Respondents); Count 3 (the Real Estate Entity Respondents,
Daryl Hagler, and Jonathan Hagler); Count 4 (Daryl Hagler); Count 6 (Daryl Hagler); Count 7
(Daryl Hagler); Count 8 (all Real Estate Respondents); Count 9 (all Real Estate Respondents);
Count 10 (all Real Estate Respondents); and Count 11 (all Real Estate Respondents).
4
4895-8431-1440
10 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
• Count 4 alleges that Daryl Hagler “repeatedly and persistently committed fraud”
by “failing to disclose to and seek and obtain approval from DOH for withdrawals and transfers
from the Nursing Homes … [and] failing and/or causing to be filed with DOH false cost reports,
on behalf of the Nursing Homes…” (Id. at p. 297.) But Daryl Hagler had no responsibility or role
in filing anything with the DOH on behalf of the Nursing Homes.
• Count 6 alleges that Daryl Hagler “engaged in repeated and persistent illegal acts”
by “failing to seek and obtain approval from DOH for withdrawals and transfers from the Nursing
Homes…” (Id. at p. 302.) But Daryl Hagler did not fail to do anything because he neither owns
nor operates the Nursing Homes and is not regulated by the DOH and has no obligations to it.
• Count 7 alleges that Daryl Hagler “engaged in repeated and persistent illegal acts”
by “filing and/or causing to be filed with DOH false cost reports, on behalf of the Nursing
Homes…” (Id.) But the Petition does not allege that Daryl Hagler ever filed a cost report with
the DOH, let alone a false one. That makes sense, since Daryl Hagler does not own or operate the
Nursing Homes.
• Count 8 alleges that the Real Estate Respondents “engaged in repeated and
persistent illegal acts” by “filing and/or causing to be filed claims to Medicaid for unfurnished
medical care and services; converting Medicaid payments to a use or benefit other than for the
intended use and benefit; and making or causing to be made false statements and/or
misrepresentations of material fact in claiming Medicaid payments.” (Id. at p. 303.) But no Real
Estate Respondent ever filed a claim to Medicaid because no Real Estate Respondent could; the
Real Estate Respondents are not owners or operators of the Nursing Homes and have never
furnished “medical care or services” to any resident.
5
4895-8431-1440
11 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
• Count 11 alleges that the Real Estate Respondents “have been unjustly enriched to
the detriment of Medicaid by diverting Medicaid payments intended for resident care to themselves
and Related Parties…” (Id. at p. 305.) But again, no Real Estate Respondent ever diverted
Medicaid funds because no Real Estate Respondent ever submitted a claim to receive Medicaid
funds.
For liability to attach to an individual under Executive Law § 63(12), the individual must
have “personally participated in or ha[d] actual knowledge of the fraud.” People by Abrams v.
Am. Motor Club, Inc., 582 N.Y.S.2d 688, 692 (1st Dep’t 1992); See, e.g., People v. Apple Health
& Sports Clubs, Ltd., Inc., 613 N.Y.S.2d 868, 869–70 (1st Dep’t 1994) (concluding imposition of
Executive Law § 63(12) liability appropriate where respondent had “actual knowledge” of
company’s “fraudulent activities and unstable financial condition” and “personally” participated
in exacerbating that fraud). The AG does not allege anywhere in the Petition that any Real Estate
Respondent knew, participated in, or had any ability to participate in the fraudulent conversion of
Government Healthcare reimbursement funds (Count 1); the fraudulent failure to make disclosures
and seek approvals from the DOH (Count 4); the persistent illegal act of failing to obtain approvals
from the DOH (Count 6); the persistent illegal act of filing false cost reports with the DOH (Count
7); the persistent illegal act of filing claims to Medicaid for unfurnished medical care (Count 8);
or the diversion of Medicaid payments intended for resident care (Count 11). The AG must prove
that each Real Estate Respondent individually participated in or had knowledge of the persistent
fraud or illegal acts alleged. Those necessary allegations are absent from the Petition for Counts
1, 4, 6, 7, 8, and 11 and could never be included because the Real Estate Respondents are not the
Nursing Homes’ owners or operators. Those counts must be dismissed as to the Real Estate
Respondents.
6
4895-8431-1440
12 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
The Petition does allege that the Real Estate Respondents had knowledge of the fraud
alleged in Count 3, and benefited from it through the indirect receipt of Medicaid funds. Count 9
alleges that the Real Estate Respondents “directly and/or indirectly obtained, received, converted,
or disposed of Medicaid funds to which they were not entitled…”, and Count 10 alleges that the
Real Estate Respondents “engaged in repeated and persistent illegal acts” by “repeatedly and
persistently obtaining, receiving, converting, or disposing of Medicaid funds, directly and/or
indirectly, to which they were not entitled…” (Pet. at p. 304) (emphasis added). Count 3 alleges
that the Real Estate Entity Respondents and the Haglers “enter[ed] into collusive and/or self-
dealing real estate transactions.” (Id. at p. 296.) That was not fraud for two reasons.
First, the transactions described in Count 3—as the AG readily admits—were disclosed to
and approved by the DOH, HUD, or both. For the Martine Center, the AG alleges that in early
2016, the Real Estate Respondents executed a related-party lease agreement with a minimum
annual rent of $1,900,000. (See id. ¶ 487.) But the AG acknowledges that the Real Estate
Respondents disclosed the terms of that lease and the fact that it was not at arm’s length to the
DOH. (See id. ¶ 488.) With respect to Holliswood, the AG alleges that the Real Estate
Respondents caused the facility to enter into a lease with an inflated minimum annual rent. (See
id. ¶ 425.) But the Petition recognizes that this rent amount was disclosed to HUD. (See id. ¶ 426.)
And with respect to Beth Abraham, the AG alleges that the Real Estate Respondents caused the
facility to enter into a lease with a $6 million annual minimum rent. (See id. ¶ 514.) But the
Petition admits this figure was reported to the DOH. (See id.) Thus, for all three facilities, there
was no misrepresentation or omission, and there was no fraud. The State cannot be allowed to
stamp a transaction “approved” and then come back years later to say the same transaction is
evidence of persistent fraud. That is because recovery for fraudulent activity surrounding
7
4895-8431-1440
13 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
Medicare and Medicaid payments is unavailable where the government has actual knowledge of
the activity and allows it to occur. See United States ex rel. Foreman v. AECOM, 19 F.4th 85, 110
(2d Cir. 2021) (“[I]f the Government pays a particular claim in full despite its actual knowledge
that certain requirements were violated, that is very strong evidence that those requirements are
not material. Or, if the Government regularly pays a particular type of claim in full despite actual
knowledge that certain requirements were violated, and has signaled no change in position, that is
strong evidence that the requirements are not material.” (quoting Universal Health Servs., Inc. v.
United States ex rel. Escobar, 579 U.S. 176, 195 (2016), cert. denied, 142 S. Ct. 2679 (2022)).
Second, the AG alleges that the purpose of the real estate transactions was to allow the
Centers Respondents to withdraw more than the regulatorily allowed 3% of a nursing home’s total
revenue without first obtaining DOH approval. (See Pet. ¶ 77) (citing PHL § 2808(5).) Lease
payments, however, are explicitly designated as operating expenses and thus cannot be counted
towards the 3% cap of PHL § 2808(5)(c). See 10 NYCRR § 400.19(1). Meaning there was nothing
at all fraudulent about the real estate transactions or what the AG considers to be inflated lease
payments. They are an allowable operating expense under New York law.
Because the AG fails to allege that the Real Estate Respondents personally engaged in any
fraud or illegal activity, and the one thing the Real Estate Respondents did do was not fraudulent,
the Petition must be dismissed in its entirety as to them.
III. THE STATE IS BARRED FROM PROCEEDING IN THIS ACTION BY MEANS
OF THE EXPEDITED, SPECIAL PROCEEDING PROCESS OUTLINED IN
EXECUTIVE LAW § 63(12).
The AG initiated this action as a “summary proceeding” under Executive Law § 63(12).
(Pet. ¶ 1.) “A special proceeding, as authorized by Executive Law § 63(12), is intended as an
expeditious means for the Attorney General to prevent further injury and seek relief for the victims
of business fraud.” People v. N. Leasing Sys., Inc., 142 N.Y.S.3d 36, 41 (1st Dep’t 2021). These
8
4895-8431-1440
14 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
proceedings are governed by Article IV of the CPLR. See id. (citing CPLR § 408); see also N.Y.
CPLR § 408. A special proceeding is “as plenary as an action, [in that it] culminat[es] in a
judgment, but is brought on with the ease, speed, and economy of a mere motion.” Siegel, N.Y.
Practice § 547 [6th ed.]. “Unlike the complaint in an action, the petition in a special proceeding is
usually accompanied by affidavits.” Id. § 552. As such, when the AG commences a special
proceeding under § 63(12), she attaches to her petition the documentary evidence she intends to
rely on for her claims on the merits. See, e.g., N. Leasing Sys., Inc., 142 N.Y.S.3d at 41 (noting
that the AG attached over 800 affidavits of individuals in support of her petition). Indeed here,
the State demands that this Court “is required” to issue a “summary determination” based solely
upon its Petition. (Pet. ¶ 34.)
There are two problems with the State’s argument that this matter can proceed as a special
Executive Law § 63(12) proceeding—both of which prevent the State from pursuing this matter
in a summary fashion. Either issue provides grounds for this Court to dismiss the Petition. Or,
alternatively, at a minimum, this Court should convert this matter into a plenary proceeding,
affording the Real Estate Respondents with all procedural rights they are entitled to receive.
For the following reasons, the use of Executive Law § 63(12) and its special proceeding is
unjustified, and this Court should not “go[] directly to the merits” and “make a summary
determination upon the pleadings, papers, and admissions.” (See Pet. ¶ 34.) Instead, the AG must
be compelled to litigate this matter outside the friendly structure of Executive Law § 63(12), just
like any other plaintiff seeking tens of millions of dollars in damages for an alleged fraud.
A. Executive Law § 63(12) exceeds the federal government’s delegation of power
and conflicts with federal law, and, thus, this matter cannot continue in an
expedited, special proceeding.
Congress delegated authority to the states to establish Medicaid fraud control units. This
was not an unlimited delegation of power. In so doing, Congress placed specific restrictions on
9
4895-8431-1440
15 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
how Medicaid fraud control units can be organized, as well as how they may investigate and
enforce potential violations.
The State’s decision to utilize a summary proceeding under Executive Law § 63(12)
exceeds this delegation. The Attorney General may have broad power to use Executive Law §
63(12) in other contexts, but not here. This is because the investigation of potential Medicaid
fraud and the enforcement of Medicaid regulations is dependent on federal delegation to the states.
The federal government granted broad—but not limitless—authority to states to manage and
enforce laws surrounding the disbursement of Medicaid dollars. States must follow the strictures
of that federal grant of authority.
1. The use of Executive Law § 63(12) exceeds the grant of enforcement
authority Congress delegated to MFCU and other state Medicaid fraud
control units.
Congress delegated to every state Medicaid fraud control unit the power to “conduct[] a
statewide program for the investigation and prosecution of violations of all applicable State laws
regarding any and all aspects of fraud” relating to Medicaid payments. 42 U.S.C. § 1396b(q). The
State recognizes this statute as the source of its “authorization to recover Medicaid funds.” (Pet.
¶ 72.) Congress made clear that this delegation is to a “single identifiable entity” (the state
Medicaid fraud control unit). 42 U.S.C. § 1396b(q). Thus, the Congressional delegation of power
was not a general delegation to state attorneys general. Rather, that authority reaches only so far
as a state’s Medicaid fraud control unit’s authority reaches. Stated differently, a Medicaid fraud
control unit can rely only on its own designated powers. It cannot piggyback off broader, general
attorney general powers because that would fall outside the grant of authority to a single
identifiable entity from the federal government.
10
4895-8431-1440
16 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
In New York, the state Medicaid fraud control unit (“MFCU”) was created in 1975 by
executive order (then named the Special Nursing Home Prosecutor). The order specifies MFCU’s
scope of authority and identifies the source of power to be Executive Law § 63(8):
WHEREAS, On January 10, 1975 Charles J. Hynes was appointed by you as
Deputy Attorney General to act as Special Prosecutor to inquire into possible
criminal violations in the nursing home industry and related matters; and
WHEREAS, On February 4, 1975 you requested, on behalf of Deputy Attorney
General Charles J. Hynes, authorization to exercise the powers provided for by
Executive Law section 63, subdivision 8, in order that Deputy Attorney General
Hynes might fully exercise his responsibilities in connection with the investigation
of the nursing home industry;
NOW, THEREFORE, pursuant to subdivision 8 of section 63 of the Executive Law,
and in accordance with the statute and law in such case made and provided, I find
it to be in the public interest to require that you inquire into matters concerning the
public peace, public safety and public justice with respect to possible criminal
violations committed in connection with or in any way related to the management,
control, operation or funding of any nursing home, care center, health facility of
related entity located in the State of New York, or any principal, agent, supplier or
other person involved therewith, and I so direct you to do so in person or by your
assistant or deputies and to have the powers and duties specified in such
subdivision 8 for the purpose of this requirement.
[9 CRR-NY 3.4 (Executive Order No. 4: Appointing a special prosecutor to inquire
into possible criminal violations in the nursing home industry and related matters
(Feb. 7, 1975)) (emphasis added); see generally Fink v. Lefkowitz, 47 N.Y.2d 567,
569 (1979).]
There is no reference to or incorporation of Executive Law § 63(12), or any broad
enforcement powers, to suggest that MFCU has the authority to proceed under Section 63(12), let
alone in a summary manner. The Governor could have vested the newly created fraud unit with
the sweeping powers of Executive Law § 63(12)—but the Governor did not do so. Instead, the
authorization unambiguously granted MFCU the ability to exercise the powers of Executive Law
§ 63(8) only. This express grant of authority is to the exclusion of any other grants.
As a result, MFCU has limited and defined authority. While its authority may be very
broad to combat fraud overall, it does not include utilizing Executive Law § 63(12). For example,
11
4895-8431-1440
17 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
Executive Law § 63(8) vests MFCU with subpoena power and other powers, but it clearly does
not grant the power to pursue summary proceedings under Executive Law § 63(12). And while
the Attorney General may have that power overall, the federal regulations only authorize the
specific state Medicaid fraud control unit to recover Medicaid funds fraudulently paid. MFCU has
simply never been authorized to proceed in a summary manner to recover damages from alleged
fraud related to Medicaid payments. And the AG should not be permitted to circumvent this clear
delegation of authority by pursuing this matter under Executive Law § 63(12), let alone as a
summary proceeding under that section.
2. The lack of a mens rea requirement in Executive Law § 63(12) conflicts
with, and violates, federal law requiring that Medicaid fraud violations
have some degree of scienter attached.
Congress granted Medicaid fraud control units the power to “investigat[e] and prosecut[e]”
potential violations “regarding any and all aspects of fraud” relating to Medicaid payments. 42
U.S.C. § 1396b(q). Federal regulations precisely define fraud in this context. “Fraud means any
act that constitutes criminal or civil fraud under applicable State law. Such conduct may include
deception, concealment of material fact, or misrepresentation made intentionally, in deliberate
ignorance of the truth, or in reckless disregard of the truth.” 42 C.F.R. § 1007.1 (emphasis added).
It is evident from Congress’s plain language that Congress intended for there to be some sort of
mens rea or scienter involved before Medicaid fraud could be prosecuted.
The federal government did not authorize states to pursue fraud actions based on strict
liability. When Congress delegated to state attorneys general the power and authority to enforce
and investigate potential fraud surrounding Medicaid payments, Congress intended that the states
follow the normal course of enforcing and investigating civil violations. There was no
consideration of states adopting novel state statutes or mechanisms of procedure that short-
circuited a defendant’s procedural rights. See, e.g., People v. Ekong, 582 N.E.2d 233, 236 (Ill.
12
4895-8431-1440
18 of 28
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023
App. Ct. 1991) (observing that “the federal medicaid laws anticipated the employment of usual
state process and procedure in conducting these investigations”).
Yet this is precisely what the AG demands here, seeking to secure judgment against the
Real Estate Respondents without having to demonstrate that any Real Estate Respondent acted
with any intent whatsoever. A claim under Executive Law § 63(12) does not require evidence of
bad faith, scienter, or the elements of common law fraud such as reliance. See N. Leasing Sys.,
Inc., 142 N.Y.S.3
Preview
FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK PEOPLE OF THE STATE OF NEW YORK by Index No. 451549/2023 LETITIA JAMES, Attorney General of the State of I.A.S. Part 60 New York, (Crane, J.) Petitioner, -against- ABRAHAM OPERATIONS ASSOCIATES LLC d/b/a BETH ABRAHAM CENTER FOR REHABILITATION AND NURSING, DELAWARE OPERATIONS ASSOCIATES LLC d/b/a BUFFALO CENTER FOR REHABILITATION AND HEALTHCARE, HOLLIS OPERATING CO., LLC d/b/a HOLLISWOOD CENTER FOR REHABILITATION AND HEALTHCARE, SCHNUR OPERATIONS ASSOCIATES LLC d/b/a MARTINE CENTER FOR REHABILITATION AND NURSING, LIGHT PROPERTY HOLDINGS ASSOCIATES LLC, DELAWARE REAL ESTATE PROPERTY ASSOCIATES LLC, HOLLIS REAL ESTATE CO., LLC, LIGHT OPERATIONAL HOLDINGS ASSOCIATES LLC, LIGHT PROPERTY HOLDING II ASSOCIATES LLC, CENTERS FOR CARE LLC d/b/a CENTERS HEALTH CARE, CFSC DOWNSTATE, LLC, BIS FUNDING CAPITAL LLC, SKILLED STAFFING, LLC, KENNETH ROZENBERG, DARYL HAGLER, BETH ROZENBERG, JEFFREY SICKLICK, REUVEN KAUFMAN, LEO LERNER, AMIR ABRAMCHIK, DAVID GREENBERG, ELLIOT KAHAN, SOL BLUMENFELD, ARON GITTLESON, AHARON LANTZITSKY, JONATHAN HAGLER, and MORDECHAI “MOTI” HELLMAN, Respondents. MEMORANDUM OF LAW IN SUPPORT OF RESPONDENTS DARYL HAGLER, JONATHAN HAGLER, LIGHT PROPERTY HOLDINGS ASSOCIATES LLC, DELAWARE REAL PROPERTY ASSOCIATES LLC, HOLLIS REAL ESTATE CO., LLC, CFSC DOWNSTATE LLC, AND BIS FUNDING CAPITAL LLC’S MOTION TO DISMISS THE PETITION PURSUANT TO CPLR 3211(a)(1), (7) & (8) 4895-8431-1440 1 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 TABLE OF CONTENTS Page PRELIMINARY STATEMENT ............................................................................... 1 BACKGROUND & PROCEDURAL HISTORY ..................................................... 3 ARGUMENT……………………………………………………………………….3 I. THE REAL ESTATE RESPONDENTS ADOPT THE ARGUMENTS MADE IN THE MEMORANDUM OF LAW FILED BY THE CENTERS RESPONDENTS. .......................................................... 3 II. THE STATE FAILS TO MAKE SPECIFIC ALLEGATIONS AGAINST THE REAL ESTATE RESPONDENTS CONNECTING ANY OF THEM TO THE OPERATION OF THE NURSING HOMES. ..........................................................................................................4 III. THE STATE IS BARRED FROM PROCEEDING IN THIS ACTION BY MEANS OF THE EXPEDITED, SPECIAL PROCEEDING PROCESS OUTLINED IN EXECUTIVE LAW § 63(12). ............................ 8 A. Executive Law § 63(12) exceeds the federal government’s delegation of power and conflicts with federal law, and, thus, this matter cannot continue in an expedited, special proceeding. ......... 9 1. The use of Executive Law § 63(12) exceeds the grant of enforcement authority Congress delegated to MFCU and other state Medicaid fraud control units. ..................................10 2. The lack of a mens rea requirement in Executive Law § 63(12) conflicts with, and violates, federal law requiring that Medicaid fraud violations have some degree of scienter attached. .......................................................................12 IV. THE PETITION MUST BE DISMISSED AS TO JONATHAN HAGLER FOR LACK OF PERSONAL JURISDICTION. ........................14 V. THE SUMMARY PROCEEDING OF EXECUTIVE LAW § 63(12) DEPRIVES THE REAL ESTATE RESPONDENTS OF THEIR FEDERAL AND STATE CONSTITUTIONAL RIGHTS TO DUE PROCESS. .....................................................................................................17 i 4895-8431-1440 2 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 CONCLUSION ........................................................................................................21 ii 4895-8431-1440 3 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 TABLE OF AUTHORITIES Page(s) Cases Atlas Van Lines, Inc. v. Tax Appeals Tribunal of State, 995 N.Y.S.2d 629 (3rd Dep’t 2014) ........................................................................................13 Chen v. Lu, 41 N.Y.S.3d 517 (1st Dep’t 2016) ...........................................................................................15 Chiquita Fresh N. Am., LLC v. Long Island Banana Corp., 2019 WL 13171161 (E.D.N.Y. Sept. 30, 2019) ......................................................................18 Coast to Coast Energy, Inc. v. Gasarch, 149 A.D.3d 485 (1st Dep’t 2017) ............................................................................................14 DeMartino v. N.Y. DOL, 167 F. Supp. 3d 342 (E.D.N.Y. 2016) .....................................................................................18 Ferrante Equip. Co. v. Lasker-Goldman Corp., 26 N.Y.2d 280 (1970) ..............................................................................................................16 United States ex rel. Foreman v. AECOM, 19 F.4th 85 (2d Cir. 2021) .........................................................................................................7 Hanson v. Denckla, 357 U.S. 235 (1958) .................................................................................................................16 IMAX Corp. v. The Essel Grp., 62 N.Y.S.3d 107 (2017) …………………………………………….15 Kaprall v. WE: Women’s Ent., LLC, 74 A.D.3d 1151 (2d Dep’t 2010) .............................................................................................17 LaMarca v. Pak–Mor Mfg. Co., 713 N.Y.S.2d 304 (2000) .........................................................................................................16 Mathews v. Eldridge, 424 U.S. 319 (1976) ...........................................................................................................18, 19 Paterno v. Laser Spine Inst., 24 N.Y.3d 370 (2014) ..............................................................................................................16 People by Abrams v. Am. Motor Club, Inc., 582 N.Y.S.2d 688 (1st Dep’t 1992) ...........................................................................................6 People by James v. Exxon Mobil Corp., 119 N.Y.S.3d 829 (N.Y. Sup. Ct. 2019) ..................................................................................12 iii 4895-8431-1440 4 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 People v. Apple Health & Sports Clubs, Ltd., Inc., 613 N.Y.S.2d 868 (1st Dep’t 1994) ...........................................................................................6 People v. Ekong, 582 N.E.2d 233 (Ill. App. Ct. 1991) ........................................................................................12 People v. N. Leasing Sys., Inc., 142 N.Y.S.3d 36 (1st Dep’t 2021) ...................................................................................8, 9, 12 Spinelli v. City of New York, 579 F.3d 160 (2d Cir. 2009)...............................................................................................18, 19 State v. Floyd Y., 22 N.Y.3d 95 (2013) ................................................................................................................18 State v. Harden, 938 So. 2d 480 (Fla. 2006).......................................................................................................13 State v. Rubio, 967 So. 2d 768 (Fla. 2007).......................................................................................................13 Williams v. Beemiller, Inc., 33 N.Y.3d 523, 130 N.E.3d 833 (2019) ...................................................................................16 Statutes 42 U.S.C. § 1396b(q) ...............................................................................................................10, 12 Executive Law § 63(8) .......................................................................................................10, 11, 20 Executive Law § 63(12) ......................................................................................................... passim Perishable Agricultural Commodities Act ...............................................................................18, 19 Other Authorities 42 C.F.R. § 1007.1 ...................................................................................................................12, 14 10 NYCRR § 400.19(1) ...................................................................................................................8 CPLR 301.......................................................................................................................................15 CPLR 302.................................................................................................................................15, 16 CPLR 3211(a)(8) .....................................................................................................................14, 17 CPLR 408.........................................................................................................................................8 N.Y. Const. art. 1, § 6. .................................................................................................................18 iv 4895-8431-1440 5 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 U.S. Const. amend. XIV, § 1 ...................................................................................................17, 18 v 4895-8431-1440 6 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 Respondents Light Property Holdings Associates LLC (“Light Property”), Delaware Real Property Associates LLC (“Delaware Real Property”), Hollis Real Estate Co., LLC (“Hollis”), Light Property Holdings II Associates, LLC (individually, “Light Property II” and collectively, the “Real Estate Entity Respondents”), CFSC Downstate, LLC (“CFSC Downstate”), BIS Funding Capital LLC (individually, “BIS” and collectively with the Real Estate Entity Respondents and CFSC Downstate, the “Entity Respondents”), Daryl Hagler, and Jonathan Hagler (collectively with the “Entity Respondents,” the “Real Estate Respondents”) respectfully submit this memorandum of law in support of their Motion to Dismiss the Petition filed by the State of New York Attorney General (the “AG” or “State”). PRELIMINARY STATEMENT Although long, winding, and deliberately sensational, the AG’s Petition is really one core, repetitive claim: the four Nursing Homes, the Nursing Homes’ Owners, and the Nursing Homes’ Operators took taxpayer dollars intended for resident care, used those dollars to enrich themselves instead of caring for their residents, and some residents were neglected as a result. 1 That claim is flawed, and the Petition must be partially dismissed for all of the reasons set forth in the motion to dismiss filed by the Centers Respondents. The Real Estate Respondents join that motion in full and adopt its arguments. But the Petition must be dismissed in its entirety against the Real Estate Respondents for a much simpler reason—none of the Real Estate Respondents owns or operates the Nursing Homes or have anything to do with resident care. Daryl Hagler and Jonathan Hagler own the Real Estate Entity Respondents (although Jonathan is just a 1% owner of three of the Real Estate Entity Respondents). Neither is included among the Nursing Homes’ Owners or Operators. CFSC Downstate is a staffing agency, and BIS 1 Capitalized terms have the same meaning as they do in the Petition. 4895-8431-1440 7 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 provides technology-related services; neither has anything to do with resident care. The Petition does not allege that any of the Real Estate Respondents are in any way regulated by the New York Department of Health (“DOH”); ever submitted a claim to be paid by Medicaid; ever directly received taxpayer dollars; ever had any ability to control how taxpayer dollars were spent; ever submitted a Medicaid Cost Report; or ever had any responsibility over resident care in any of the four Nursing Homes. To be clear, the Real Estate Respondents did not. They are landlords and third-party providers with no ability to commit fraud or persistent illegality in the operation of Nursing Homes because they are without any ability to operate the Nursing Homes. The Petition must be dismissed against the Real Estate Respondents. The Petition must also be dismissed against the Real Estate Respondents because the New York Medicaid Fraud Control Unit (“MFCU”) cannot bring an expedited, special proceeding under Executive Law § 63(12). State Medicaid fraud control units are creatures of federal law. They can only exercise the authority explicitly delegated to them by the federal government. MFCU is not authorized to pursue violations relating to Medicaid payments through the summary proceeding mechanism of Executive Law § 63(12). This is not to say that MFCU does not have other means to investigate and pursue the Nursing Homes and their owners and operators for Medicaid overpayments; it just means that Executive Law § 63(12) falls outside of the federal government’s delegation of authority to MFCU. The Petition must be dismissed against Jonathan Hagler for a standalone reason: the Court does not have personal jurisdiction over him. Jonathan is not a resident of New York; he is a resident of New Jersey. In addition, the AG fails to allege personal conduct by Jonathan that amounts to sufficient minimum contacts with New York. Consequently, there is no justification to haul Jonathan into New York to defend against the Petition. 2 4895-8431-1440 8 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 Finally, if the Court does not dismiss the Petition against the Real Estate Respondents, the Court must convert this matter to a plenary proceeding. As far as the Real Estate Respondents can tell, the AG’s Petition is the latest in a string of cases filed against nursing homes, in a first-of-its- kind use of Executive Law § 63(12). 2 In each, the AG is alleging that state-licensed nursing homes committed fraud and persistent illegality by sometimes providing deficient care over a several year period, including during a once-in-a-century global pandemic. The State did not have to proceed under Executive Law § 63(12). The DOH has an entire regulatory and enforcement apparatus, and the AG regularly files actions under the New York False Claims Act. Had the State chosen either of those paths, the Real Estate Respondents would have been afforded discovery and due process protections. The AG chose to proceed under Executive Law § 63(12) to avoid those protections. The AG should not be rewarded for her litigation stratagem, and the Court should convert this matter to a plenary proceeding. BACKGROUND & PROCEDURAL HISTORY The Real Estate Respondents rely upon the facts and procedural history set forth in the Memorandum of Law in Support of the Motion to Dismiss filed by the Centers Respondents in this matter, as well as upon the facts discussed and developed below. ARGUMENT I. THE REAL ESTATE RESPONDENTS ADOPT THE ARGUMENTS MADE IN THE MEMORANDUM OF LAW FILED BY THE CENTERS RESPONDENTS. The Real Estate Respondents adopt and incorporate each argument for dismissal raised by the Centers Respondents in their Memorandum of Law in Support of the Motion to Dismiss the Petition. The Real Estate Respondents also make the following additional arguments for dismissal. 2 In 2022, the AG filed three similar petitions pertaining to the Villages of Orleans, Fulton Commons, and Cold Spring Hills, three other for-profit nursing homes in New York. 3 4895-8431-1440 9 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 II. THE STATE FAILS TO MAKE SPECIFIC ALLEGATIONS AGAINST THE REAL ESTATE RESPONDENTS CONNECTING ANY OF THEM TO THE OPERATION OF THE NURSING HOMES. The Real Estate Respondents are landlords and third-party providers, not owners or operators of the Nursing Homes. But the Petition does not distinguish between the Real Estate Respondents, which have no operational control over the Nursing Homes, and the Nursing Homes’ Owners and Operators that do. Nor does the Petition distinguish between Daryl Hagler and Jonathan Hagler, who never signed or submitted anything to the DOH, and are in no way regulated by the DOH, from the Centers Respondents who did and are. This is a variation on the Centers Respondents’ “group pleading” argument. Except the Real Estate Respondents argue that the AG’s “group pleading” does something much more significant than deliberately obscure who did what—it lumps together those who operated the Nursing Homes with those who did not and could not. The AG seeks to impose liability on the Real Estate Respondents for fraud and persistent illegality in the operation of the Nursing Homes even though the Real Estate Respondents never operated the Nursing Homes. The Petition’s causes of action make this defect plain: 3 • Count 1 alleges that the Real Estate Respondents “repeatedly and persistently committed fraud” by converting $83 million in “Government Healthcare reimbursement funds.” (Pet. at p. 294.) But no Real Estate Respondent ever received “Government Healthcare reimbursement funds” to convert because no Real Estate Respondent ever filed a claim for payment with the federal or state governments. 3 The Petition alleges 11 causes of action, but only 9 involve one or more of the Real Estate Respondents: Count 1 (all Real Estate Respondents); Count 3 (the Real Estate Entity Respondents, Daryl Hagler, and Jonathan Hagler); Count 4 (Daryl Hagler); Count 6 (Daryl Hagler); Count 7 (Daryl Hagler); Count 8 (all Real Estate Respondents); Count 9 (all Real Estate Respondents); Count 10 (all Real Estate Respondents); and Count 11 (all Real Estate Respondents). 4 4895-8431-1440 10 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 • Count 4 alleges that Daryl Hagler “repeatedly and persistently committed fraud” by “failing to disclose to and seek and obtain approval from DOH for withdrawals and transfers from the Nursing Homes … [and] failing and/or causing to be filed with DOH false cost reports, on behalf of the Nursing Homes…” (Id. at p. 297.) But Daryl Hagler had no responsibility or role in filing anything with the DOH on behalf of the Nursing Homes. • Count 6 alleges that Daryl Hagler “engaged in repeated and persistent illegal acts” by “failing to seek and obtain approval from DOH for withdrawals and transfers from the Nursing Homes…” (Id. at p. 302.) But Daryl Hagler did not fail to do anything because he neither owns nor operates the Nursing Homes and is not regulated by the DOH and has no obligations to it. • Count 7 alleges that Daryl Hagler “engaged in repeated and persistent illegal acts” by “filing and/or causing to be filed with DOH false cost reports, on behalf of the Nursing Homes…” (Id.) But the Petition does not allege that Daryl Hagler ever filed a cost report with the DOH, let alone a false one. That makes sense, since Daryl Hagler does not own or operate the Nursing Homes. • Count 8 alleges that the Real Estate Respondents “engaged in repeated and persistent illegal acts” by “filing and/or causing to be filed claims to Medicaid for unfurnished medical care and services; converting Medicaid payments to a use or benefit other than for the intended use and benefit; and making or causing to be made false statements and/or misrepresentations of material fact in claiming Medicaid payments.” (Id. at p. 303.) But no Real Estate Respondent ever filed a claim to Medicaid because no Real Estate Respondent could; the Real Estate Respondents are not owners or operators of the Nursing Homes and have never furnished “medical care or services” to any resident. 5 4895-8431-1440 11 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 • Count 11 alleges that the Real Estate Respondents “have been unjustly enriched to the detriment of Medicaid by diverting Medicaid payments intended for resident care to themselves and Related Parties…” (Id. at p. 305.) But again, no Real Estate Respondent ever diverted Medicaid funds because no Real Estate Respondent ever submitted a claim to receive Medicaid funds. For liability to attach to an individual under Executive Law § 63(12), the individual must have “personally participated in or ha[d] actual knowledge of the fraud.” People by Abrams v. Am. Motor Club, Inc., 582 N.Y.S.2d 688, 692 (1st Dep’t 1992); See, e.g., People v. Apple Health & Sports Clubs, Ltd., Inc., 613 N.Y.S.2d 868, 869–70 (1st Dep’t 1994) (concluding imposition of Executive Law § 63(12) liability appropriate where respondent had “actual knowledge” of company’s “fraudulent activities and unstable financial condition” and “personally” participated in exacerbating that fraud). The AG does not allege anywhere in the Petition that any Real Estate Respondent knew, participated in, or had any ability to participate in the fraudulent conversion of Government Healthcare reimbursement funds (Count 1); the fraudulent failure to make disclosures and seek approvals from the DOH (Count 4); the persistent illegal act of failing to obtain approvals from the DOH (Count 6); the persistent illegal act of filing false cost reports with the DOH (Count 7); the persistent illegal act of filing claims to Medicaid for unfurnished medical care (Count 8); or the diversion of Medicaid payments intended for resident care (Count 11). The AG must prove that each Real Estate Respondent individually participated in or had knowledge of the persistent fraud or illegal acts alleged. Those necessary allegations are absent from the Petition for Counts 1, 4, 6, 7, 8, and 11 and could never be included because the Real Estate Respondents are not the Nursing Homes’ owners or operators. Those counts must be dismissed as to the Real Estate Respondents. 6 4895-8431-1440 12 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 The Petition does allege that the Real Estate Respondents had knowledge of the fraud alleged in Count 3, and benefited from it through the indirect receipt of Medicaid funds. Count 9 alleges that the Real Estate Respondents “directly and/or indirectly obtained, received, converted, or disposed of Medicaid funds to which they were not entitled…”, and Count 10 alleges that the Real Estate Respondents “engaged in repeated and persistent illegal acts” by “repeatedly and persistently obtaining, receiving, converting, or disposing of Medicaid funds, directly and/or indirectly, to which they were not entitled…” (Pet. at p. 304) (emphasis added). Count 3 alleges that the Real Estate Entity Respondents and the Haglers “enter[ed] into collusive and/or self- dealing real estate transactions.” (Id. at p. 296.) That was not fraud for two reasons. First, the transactions described in Count 3—as the AG readily admits—were disclosed to and approved by the DOH, HUD, or both. For the Martine Center, the AG alleges that in early 2016, the Real Estate Respondents executed a related-party lease agreement with a minimum annual rent of $1,900,000. (See id. ¶ 487.) But the AG acknowledges that the Real Estate Respondents disclosed the terms of that lease and the fact that it was not at arm’s length to the DOH. (See id. ¶ 488.) With respect to Holliswood, the AG alleges that the Real Estate Respondents caused the facility to enter into a lease with an inflated minimum annual rent. (See id. ¶ 425.) But the Petition recognizes that this rent amount was disclosed to HUD. (See id. ¶ 426.) And with respect to Beth Abraham, the AG alleges that the Real Estate Respondents caused the facility to enter into a lease with a $6 million annual minimum rent. (See id. ¶ 514.) But the Petition admits this figure was reported to the DOH. (See id.) Thus, for all three facilities, there was no misrepresentation or omission, and there was no fraud. The State cannot be allowed to stamp a transaction “approved” and then come back years later to say the same transaction is evidence of persistent fraud. That is because recovery for fraudulent activity surrounding 7 4895-8431-1440 13 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 Medicare and Medicaid payments is unavailable where the government has actual knowledge of the activity and allows it to occur. See United States ex rel. Foreman v. AECOM, 19 F.4th 85, 110 (2d Cir. 2021) (“[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.” (quoting Universal Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S. 176, 195 (2016), cert. denied, 142 S. Ct. 2679 (2022)). Second, the AG alleges that the purpose of the real estate transactions was to allow the Centers Respondents to withdraw more than the regulatorily allowed 3% of a nursing home’s total revenue without first obtaining DOH approval. (See Pet. ¶ 77) (citing PHL § 2808(5).) Lease payments, however, are explicitly designated as operating expenses and thus cannot be counted towards the 3% cap of PHL § 2808(5)(c). See 10 NYCRR § 400.19(1). Meaning there was nothing at all fraudulent about the real estate transactions or what the AG considers to be inflated lease payments. They are an allowable operating expense under New York law. Because the AG fails to allege that the Real Estate Respondents personally engaged in any fraud or illegal activity, and the one thing the Real Estate Respondents did do was not fraudulent, the Petition must be dismissed in its entirety as to them. III. THE STATE IS BARRED FROM PROCEEDING IN THIS ACTION BY MEANS OF THE EXPEDITED, SPECIAL PROCEEDING PROCESS OUTLINED IN EXECUTIVE LAW § 63(12). The AG initiated this action as a “summary proceeding” under Executive Law § 63(12). (Pet. ¶ 1.) “A special proceeding, as authorized by Executive Law § 63(12), is intended as an expeditious means for the Attorney General to prevent further injury and seek relief for the victims of business fraud.” People v. N. Leasing Sys., Inc., 142 N.Y.S.3d 36, 41 (1st Dep’t 2021). These 8 4895-8431-1440 14 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 proceedings are governed by Article IV of the CPLR. See id. (citing CPLR § 408); see also N.Y. CPLR § 408. A special proceeding is “as plenary as an action, [in that it] culminat[es] in a judgment, but is brought on with the ease, speed, and economy of a mere motion.” Siegel, N.Y. Practice § 547 [6th ed.]. “Unlike the complaint in an action, the petition in a special proceeding is usually accompanied by affidavits.” Id. § 552. As such, when the AG commences a special proceeding under § 63(12), she attaches to her petition the documentary evidence she intends to rely on for her claims on the merits. See, e.g., N. Leasing Sys., Inc., 142 N.Y.S.3d at 41 (noting that the AG attached over 800 affidavits of individuals in support of her petition). Indeed here, the State demands that this Court “is required” to issue a “summary determination” based solely upon its Petition. (Pet. ¶ 34.) There are two problems with the State’s argument that this matter can proceed as a special Executive Law § 63(12) proceeding—both of which prevent the State from pursuing this matter in a summary fashion. Either issue provides grounds for this Court to dismiss the Petition. Or, alternatively, at a minimum, this Court should convert this matter into a plenary proceeding, affording the Real Estate Respondents with all procedural rights they are entitled to receive. For the following reasons, the use of Executive Law § 63(12) and its special proceeding is unjustified, and this Court should not “go[] directly to the merits” and “make a summary determination upon the pleadings, papers, and admissions.” (See Pet. ¶ 34.) Instead, the AG must be compelled to litigate this matter outside the friendly structure of Executive Law § 63(12), just like any other plaintiff seeking tens of millions of dollars in damages for an alleged fraud. A. Executive Law § 63(12) exceeds the federal government’s delegation of power and conflicts with federal law, and, thus, this matter cannot continue in an expedited, special proceeding. Congress delegated authority to the states to establish Medicaid fraud control units. This was not an unlimited delegation of power. In so doing, Congress placed specific restrictions on 9 4895-8431-1440 15 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 how Medicaid fraud control units can be organized, as well as how they may investigate and enforce potential violations. The State’s decision to utilize a summary proceeding under Executive Law § 63(12) exceeds this delegation. The Attorney General may have broad power to use Executive Law § 63(12) in other contexts, but not here. This is because the investigation of potential Medicaid fraud and the enforcement of Medicaid regulations is dependent on federal delegation to the states. The federal government granted broad—but not limitless—authority to states to manage and enforce laws surrounding the disbursement of Medicaid dollars. States must follow the strictures of that federal grant of authority. 1. The use of Executive Law § 63(12) exceeds the grant of enforcement authority Congress delegated to MFCU and other state Medicaid fraud control units. Congress delegated to every state Medicaid fraud control unit the power to “conduct[] a statewide program for the investigation and prosecution of violations of all applicable State laws regarding any and all aspects of fraud” relating to Medicaid payments. 42 U.S.C. § 1396b(q). The State recognizes this statute as the source of its “authorization to recover Medicaid funds.” (Pet. ¶ 72.) Congress made clear that this delegation is to a “single identifiable entity” (the state Medicaid fraud control unit). 42 U.S.C. § 1396b(q). Thus, the Congressional delegation of power was not a general delegation to state attorneys general. Rather, that authority reaches only so far as a state’s Medicaid fraud control unit’s authority reaches. Stated differently, a Medicaid fraud control unit can rely only on its own designated powers. It cannot piggyback off broader, general attorney general powers because that would fall outside the grant of authority to a single identifiable entity from the federal government. 10 4895-8431-1440 16 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 In New York, the state Medicaid fraud control unit (“MFCU”) was created in 1975 by executive order (then named the Special Nursing Home Prosecutor). The order specifies MFCU’s scope of authority and identifies the source of power to be Executive Law § 63(8): WHEREAS, On January 10, 1975 Charles J. Hynes was appointed by you as Deputy Attorney General to act as Special Prosecutor to inquire into possible criminal violations in the nursing home industry and related matters; and WHEREAS, On February 4, 1975 you requested, on behalf of Deputy Attorney General Charles J. Hynes, authorization to exercise the powers provided for by Executive Law section 63, subdivision 8, in order that Deputy Attorney General Hynes might fully exercise his responsibilities in connection with the investigation of the nursing home industry; NOW, THEREFORE, pursuant to subdivision 8 of section 63 of the Executive Law, and in accordance with the statute and law in such case made and provided, I find it to be in the public interest to require that you inquire into matters concerning the public peace, public safety and public justice with respect to possible criminal violations committed in connection with or in any way related to the management, control, operation or funding of any nursing home, care center, health facility of related entity located in the State of New York, or any principal, agent, supplier or other person involved therewith, and I so direct you to do so in person or by your assistant or deputies and to have the powers and duties specified in such subdivision 8 for the purpose of this requirement. [9 CRR-NY 3.4 (Executive Order No. 4: Appointing a special prosecutor to inquire into possible criminal violations in the nursing home industry and related matters (Feb. 7, 1975)) (emphasis added); see generally Fink v. Lefkowitz, 47 N.Y.2d 567, 569 (1979).] There is no reference to or incorporation of Executive Law § 63(12), or any broad enforcement powers, to suggest that MFCU has the authority to proceed under Section 63(12), let alone in a summary manner. The Governor could have vested the newly created fraud unit with the sweeping powers of Executive Law § 63(12)—but the Governor did not do so. Instead, the authorization unambiguously granted MFCU the ability to exercise the powers of Executive Law § 63(8) only. This express grant of authority is to the exclusion of any other grants. As a result, MFCU has limited and defined authority. While its authority may be very broad to combat fraud overall, it does not include utilizing Executive Law § 63(12). For example, 11 4895-8431-1440 17 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 Executive Law § 63(8) vests MFCU with subpoena power and other powers, but it clearly does not grant the power to pursue summary proceedings under Executive Law § 63(12). And while the Attorney General may have that power overall, the federal regulations only authorize the specific state Medicaid fraud control unit to recover Medicaid funds fraudulently paid. MFCU has simply never been authorized to proceed in a summary manner to recover damages from alleged fraud related to Medicaid payments. And the AG should not be permitted to circumvent this clear delegation of authority by pursuing this matter under Executive Law § 63(12), let alone as a summary proceeding under that section. 2. The lack of a mens rea requirement in Executive Law § 63(12) conflicts with, and violates, federal law requiring that Medicaid fraud violations have some degree of scienter attached. Congress granted Medicaid fraud control units the power to “investigat[e] and prosecut[e]” potential violations “regarding any and all aspects of fraud” relating to Medicaid payments. 42 U.S.C. § 1396b(q). Federal regulations precisely define fraud in this context. “Fraud means any act that constitutes criminal or civil fraud under applicable State law. Such conduct may include deception, concealment of material fact, or misrepresentation made intentionally, in deliberate ignorance of the truth, or in reckless disregard of the truth.” 42 C.F.R. § 1007.1 (emphasis added). It is evident from Congress’s plain language that Congress intended for there to be some sort of mens rea or scienter involved before Medicaid fraud could be prosecuted. The federal government did not authorize states to pursue fraud actions based on strict liability. When Congress delegated to state attorneys general the power and authority to enforce and investigate potential fraud surrounding Medicaid payments, Congress intended that the states follow the normal course of enforcing and investigating civil violations. There was no consideration of states adopting novel state statutes or mechanisms of procedure that short- circuited a defendant’s procedural rights. See, e.g., People v. Ekong, 582 N.E.2d 233, 236 (Ill. 12 4895-8431-1440 18 of 28 FILED: NEW YORK COUNTY CLERK 11/13/2023 09:05 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 780 RECEIVED NYSCEF: 11/13/2023 App. Ct. 1991) (observing that “the federal medicaid laws anticipated the employment of usual state process and procedure in conducting these investigations”). Yet this is precisely what the AG demands here, seeking to secure judgment against the Real Estate Respondents without having to demonstrate that any Real Estate Respondent acted with any intent whatsoever. A claim under Executive Law § 63(12) does not require evidence of bad faith, scienter, or the elements of common law fraud such as reliance. See N. Leasing Sys., Inc., 142 N.Y.S.3