Preview
FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023
NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024
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.
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 MEMORANDUM IN REPLY TO THE STATE’S OPPOSITION TO THEIR
MOTION TO DISMISS THE PETITION PURSUANT TO CPLR 3211(a)(1), (7) & (8)
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TABLE OF CONTENTS
ARGUMENT .................................................................................................................................. 1
A. THE REAL ESTATE RESPONDENTS ADOPT THE ARGUMENTS IN
THE REPLY MEMORANDUM OF LAW FILED BY THE CENTERS
RESPONDENTS. ................................................................................................... 1
B. JONATHAN HAGLER MUST BE DISMISSED. ................................................. 1
1. Jonathan Had No Involvement in or Knowledge of the Alleged Wrongful
Conduct……………………………………………………………………1
2. This Court Lacks Personal Jurisdiction over Jonathan……………………3
C. THE PETITION FAILS TO MAKE SPECIFIC, INDIVIDUAL
ALLEGATIONS AGAINST EACH REAL ESTATE RESPONDENT. ............... 6
D. THE ATTORNEY GENERAL LACKS AUTHORITY TO PURSUE
THIS ACTION UNDER EXECUTIVE LAW § 63(12)......................................... 8
1. The Use of Executive Law § 63(12) in This Action Exceeds the
Delegation of Power Extended to the Medicaid Fraud Control Unit under
Federal and State Law…………………………………………………….8
2. Federal Law Preempts the Use of Executive Law § 63(12)………………9
E. THE SUMMARY PROCEEDING OF EXECUTIVE LAW § 63(12)
DEPRIVES THE REAL ESTATE RESPONDENTS OF THEIR
FEDERAL AND STATE CONSTITUTIONAL RIGHTS TO DUE
PROCESS. ............................................................................................................ 11
CONCLUSION ............................................................................................................................. 13
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TABLE OF AUTHORITIES
Page(s)
Cases
Coast to Coast Energy, Inc. v. Gasarch,
53 N.Y.S.3d 16 (2017) ...............................................................................................................5
Craig v. First Web Bill, Inc.,
2004 WL 2700128 (E.D.N.Y. Nov. 29, 2004) ...........................................................................4
People ex rel. Cuomo v. Greenberg,
946 N.Y.S.2d 1 (2012), aff’d, 21 N.Y.3d 439 (2013) ............................................................3, 7
Ivy Mar Co. v. C.R. Seasons, Ltd.,
1997 WL 37082 (E.D.N.Y. Jan. 24, 1997) ................................................................................4
People ex rel. James v. Northern Leasing Systems, Inc.,
193 A.D.3d 67 (1st Dept. 2021).................................................................................................3
Johnson v. Ward,
4 N.Y.3d 516 (2005) ..................................................................................................................4
Lamar v. Am. Basketball Ass’n.,
468 F. Supp. 1198 (S.D.N.Y.1979)............................................................................................4
Lucchese v. Carboni,
22 F. Supp. 2d 256 (S.D.N.Y. 1998)........................................................................................12
Marie v. Altshuler,
30 A.d.3D 271 (1st Dep’t 2006) ................................................................................................5
MediaXposure Ltd. (Cayman) v. Omnireliant Holdings, Inc.,
918 N.Y.S.2d 398 (Sup. Ct. 2010) .............................................................................................3
N. Valley Partners, LLC v. Jenkins,
885 N.Y.S.2d 712 (Sup. Ct. 2009) .............................................................................................5
People by Abrams v. Am. Motor Club, Inc.,
582 N.Y.S.2d 688 (1st Dep’t 1992) ...........................................................................................7
People by Abrams v. Apple Health & Sports Clubs, Ltd., Inc.,
80 N.Y.2d 803 (1992) ………….…………………………………..………………………..11
Serota v. Cooper,
190 N.Y.S.3d 96 (2023) .............................................................................................................4
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Spinelli v. City of New York,
579 F.3d 160 (2d Cir. 2009).....................................................................................................11
State v. Floyd Y.,
22 N.Y.3d 95 (2013) ................................................................................................................12
Statutes
42 U.S.C. § 1396b(a)(6) ...................................................................................................................9
42 U.S.C. § 1396b(b)(3) ..................................................................................................................9
42 U.S.C. § 1396b(q) .......................................................................................................................8
Executive Law § 63(8) .....................................................................................................................8
Executive Law § 63(12) ......................................................................................................... passim
Other Authorities
42 C.F.R. § 1007.1 .....................................................................................................................9, 11
CPLR 302(a)(1) ...........................................................................................................................3, 6
CPLR 302(a)(4) ...............................................................................................................................4
CPLR 408.......................................................................................................................................13
CPLR Art. IV .................................................................................................................................12
CPLR § 301......................................................................................................................................4
CPLR § 302(a) .................................................................................................................................5
CPLR § 401, cmt. 401:1 ................................................................................................................12
Executive Order No. 4 (Feb. 7, 1975) ..............................................................................................8
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The Real Estate Respondents respectfully submit this memorandum of law in reply to the
State’s Memorandum in Opposition to Respondents’ Motions to Dismiss (“Opposition”) and in
further support of their Motion to Dismiss the Petition.
ARGUMENT
A. The Real Estate Respondents Adopt the Arguments in the Reply 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 Reply Memorandum of Law. The Real Estate Respondents also
make the following arguments in reply to the Opposition.
B. Jonathan Hagler Must Be Dismissed.
Jonathan Hagler must be dismissed from the Petition for two reasons.
1. Jonathan Had No Involvement in or Knowledge of the Alleged Wrongful Conduct.
Jonathan is an afterthought. But for his last name, the AG would never have included him
as a respondent. In its 88-page Opposition, the State mentions Jonathan just 26 times, inclusive of
the case caption and table of contents. The only discussion of Jonathan’s role with the Nursing
Homes or involvement with the “repeated and persistent fraud and illegality” alleged by the AG is
found in two lines on page 27 of the Opposition: “Jonathan Hagler is a 1% owner of Delaware
Real Property, Light Property II, and Light Property—the landlords for Buffalo Center, Martine
Center, and Beth Abraham, respectively. He is also a 1% owner of BIS and a 10% owner of CFSC
Downstate.” (Opp’n at 27 (citations omitted).) The State does not allege in its Petition or
Opposition whether Jonathan’s interest in those five entities was active or passive, what his daily
responsibilities were, if any, or whether he ever showed up for work. The absence of such
allegations demonstrates that Jonathan was not involved.
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Jonathan does not even fit within the State’s own definition of who is a proper respondent
under Executive Law § 63(12). According to the State, “individuals are liable for fraudulent and
illegal acts in violation of § 63(12) if those individuals participated in the conduct or had actual
knowledge of such conduct.” (Opp’n at 18 (emphasis in original).) Neither the Petition nor the
Opposition demonstrates that Jonathan participated in any conduct or had actual knowledge of
anything having to do with the Nursing Homes or their operation.
So, before offering the two sentences about Jonathan’s role in the offense conduct, the State
provides a fallback position. According to the State, actual knowledge “can be satisfied where a
party is in a position to be aware of the fraud or illegality but turn[s] a blind eye to it.” (Opp’n at
19 (quotations omitted).) To support its fallback position, the State relies on an unpublished
Supreme Court case addressing the legal sufficiency of an aiding and abetting fraud claim. (Id.
(quoting People v. Coll. Network, Inc., 53 Misc. 3d 1210(A), at *4 (Sup. Ct. Albany Cty. 2016)).)
But in College Network, the evidence demonstrated that the respondent knew of the alleged fraud.
The respondent had received complaints from consumers alleging they were defrauded and
continued to aid and abet the alleged wrongful conduct even after speaking with the State about
its investigation. 53 Misc. 3d 1210(A), at *4. College Network does not support the AG’s willful
blindness theory of prosecution—it makes clear that actual knowledge is required. But even if the
AG were right and willful blindness was sufficient, Jonathan was not willfully blind. There is
nothing in the Petition or Opposition suggesting that Jonathan’s 1% interest in some, but not all,
of the Real Estate Entity Respondents and his collective 11% interest in BIS and CFSC Downstate
put him in a position to be aware of anything.
For the same reasons, Jonathan is not liable for any of the entities’ alleged wrongdoing.
First, the AG does not allege that Jonathan is an officer or director of any of the five entities in
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which he has an interest. Second, corporate officers and directors are liable for a corporation’s
fraud only “if they participated in the fraud or received actual notice of the fraud.” People ex rel.
James v. Northern Leasing Systems, Inc., 193 A.D.3d 67, 76 (1st Dept. 2021) (internal citations
omitted); see also People ex rel. Cuomo v. Greenberg, 946 N.Y.S.2d 1, 9 (2012), aff’d, 21 N.Y.3d
439 (2013) (“Officers and directors are liable for a corporation’s fraud where they either personally
participate in the fraud or have actual notice of its existence.”). Again, neither the Petition nor the
Opposition suggests that Jonathan did or had actual notice of anything. The AG does not allege
Jonathan had any role with Centers; any role with the Real Estate Entity Respondents, BIS, or
CFSC Downstate beyond passive investor; any role in negotiating leases with the Nursing Homes
on behalf of any of the Real Estate Entity Respondents; or any role in negotiating payments made
by the Nursing Homes to BIS or CFSC Downstate. The Petition does not allege anything about
Jonathan—satisfied that his few percentage point interests in a few entities is enough to tag him
with $83 million in liability. 1
Finally, in its Opposition, the State attempts to implicate the Minority Owners, including
Jonathan, through legal theories that nowhere appear in the Petition, specifically through agency
law and an aiding and abetting theory. (Opp’n at 28-29.) The State cannot amend its Petition
through its Opposition. See MediaXposure Ltd. (Cayman) v. Omnireliant Holdings, Inc., 918
N.Y.S.2d 398 (Sup. Ct. 2010). The Court should disregard the State’s new legal theories.
2. This Court Lacks Personal Jurisdiction over Jonathan.
The AG fails to plead facts demonstrating that Jonathan has sufficient minimum contacts
with New York to comport with due process and establish personal jurisdiction pursuant to CPLR
1
The State all but admits Jonathan’s complete non-involvement with the offense conduct
when it writes, “[Daryl] Hagler is not similarly situated to his son.” (Opp’n at 19.)
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302(a)(1). “[T]he mere fact that a non-resident defendant is a shareholder, or even controlling
shareholder, of a corporation which is amenable to personal jurisdiction in New York does not,
without more, subject him or her individually to personal jurisdiction under CPLR § 301.” Craig
v. First Web Bill, Inc., No. CIV.A.04-CV-1012 DGT, 2004 WL 2700128, at *4 (E.D.N.Y. Nov.
29, 2004); see also Lamar v. Am. Basketball Ass’n., 468 F. Supp. 1198, 1203 (S.D.N.Y.1979)
(same); Ivy Mar Co. v. C.R. Seasons, Ltd., No. 95 CV 0508 (FB), 1997 WL 37082, at *7 (E.D.N.Y.
Jan. 24, 1997) (same). Whether an individual purposefully availed himself of the benefits of New
York requires an inquiry into the quality of the defendant’s contacts in the state. Serota v. Cooper,
190 N.Y.S.3d 96, 100 (2023) (internal quotation omitted). For example, in XpresSpa Holdings,
LLC v. Cordial Endeavor Concessions of Atlanta, LLC, the court found sufficient minimum
contacts of a minority owner of an LLC that “was partnered with and had interest in a New York
entity.” 98 N.Y.S.3d 567 (1st Dep’t 2019). But there, the defendant attended several meetings in
New York and personally accepted operational support from the plaintiffs in New York. Here, the
AG relies on Jonathan’s property ownership alone to establish personal jurisdiction. Other than
Jonathan’s (admittedly) passive ownership, the Petition alleges no other intersections between
Jonathan and New York. In the combined nearly 400 pages between Petition and Opposition, the
AG does not allege that Jonathan attended any business meeting in New York, ever visited the
Nursing Homes in New York, or traveled to the offices of BIS or CFSC Downstate in New York.
The only connection between Jonathan and New York alleged in the Petition—that Jonathan lives
in Rockland County—is wrong. Jonathan lives in New Jersey.
The AG’s argument that Jonathan is subject to personal jurisdiction pursuant to CPLR
302(a)(4) likewise fails. To assert jurisdiction pursuant to CPLR 302(a)(4), the action must arise
from ownership, possession or use of property in New York. See Johnson v. Ward, 4 N.Y.3d 516,
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519 (2005) (“We have recognized that a ‘substantial relationship’ must be established between a
defendant’s transactions in New York and a plaintiff’s cause of action in order to satisfy the nexus
requirement of the statute.”); see also Marie v. Altshuler, 30 A.d.3D 271, 272 (1st Dep’t 2006)
(concluding that property that was a “main focus of the dispute” was not a sufficient basis to exert
personal jurisdiction because the matter “does not directly implicate its ownership, possession or
use”). As the State acknowledges, this case is about alleged “repeated and persistent fraud and
illegality in the carrying on, conducting, and transacting of business at four New York nursing
homes,” (Opp’n at 1), not the ownership, possession, or use of the land on which the Nursing
Homes sit.
Finally, the State maintains that this Court has personal jurisdiction over Jonathan through
an agent. (Opp’n at 39.) In limited situations, personal jurisdiction may be established through an
agent’s conduct. See CPLR § 302(a). But where a plaintiff alleges that a defendant’s minimum
contacts arose out of the defendant’s association with an agent, the plaintiff must first convince
the court that the defendant had knowledge of and exercised some control over the agent’s actions
in New York. Coast to Coast Energy, Inc. v. Gasarch, 53 N.Y.S.3d 16, 19 (2017). For a plaintiff
to make a prima facie showing of control, the “allegations must sufficiently detail the defendant’s
conduct so as to persuade a court that the defendant was a primary actor in the specific matter in
question.” N. Valley Partners, LLC v. Jenkins, 885 N.Y.S.2d 712 (Sup. Ct. 2009) (internal
quotation omitted). The AG provides no details to support its newfound agency theory in its
Opposition, and the Petition is devoid of any allegations. The Opposition claims only that
Jonathan, “either personally or through an agent, transacted business in New York…” (Opp’n at
39.) The AG does not identify the purported agent, what the agent did, what Jonathan directed the
agent to do, or explain how Jonathan could even direct any agent as a minority owner of the Entity
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Respondents when he is neither an officer nor director. There is no personal jurisdiction over
Jonathan based on an agency theory.
The Petition does not allege that Jonathan had any contacts or connections with New York
beyond owning minority interests in the Entity Respondents. That is insufficient to establish
personal jurisdiction over Jonathan pursuant to CPLR 302(a)(1) or 302(a)(4).
C. The Petition Fails to Make Specific, Individual Allegations against Each Real Estate
Respondent.
The AG needed to plead each cause of action against each Respondent. The AG did not—
and could not—do that with the Real Estate Respondents.
As real estate owners and landlords, the Real Estate Respondents had nothing to do with
the operation of the Nursing Homes. Neither Daryl Hagler and Jonathan, nor their entities, had
anything to do with the operation of the Nursing Homes. The entirety of the AG’s allegations of
fraud is based on purported deficient conditions at the Nursing Homes and substandard treatment
of residents. The owners of the facility buildings had no role in resident care, nor does the Petition
allege they did. Even setting aside the lack of intent required for Executive Law § 63(12) (which,
as discussed infra, has its own constitutional preemption and due process failings), the Petition
does not allege sufficient acts that any of the Real Estate Respondents took in managing the
facilities or caring for residents.
The AG readily admits its theory is that “the Nursing Homes operate as a chain, all
managed and operated by Centers.” (Opp’n at 22.) The facilities were not—and the AG does not
allege that they were—managed and operated by the Real Estate Respondents. The AG puts forth
a tenuous argument that the Real Estate Respondents are liable “by taking no action to prevent
such conduct.” (Opp’n at 22.) But that is not the standard to state a claim under Executive Law §
63(12). Allegations of affirmative acts are required.
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The Real Estate Respondents did not:
• Receive reimbursement funds to convert, and thus no claim for conversion is stated in
Count 1 against the Real Estate Respondents.
• Have any legal responsibility to disclose to DOH on behalf of the Nursing Homes, and
thus no claim for failing to make disclosures to DOH is stated in Count 4 against the
Real Estate Respondents.
• Have any legal obligation to seek and obtain approval from DOH, and thus no claim
for failing to obtain approvals from DOH is stated in Count 6 against the Real Estate
Respondents.
• File any cost reports with DOH, and thus no claim for filing false cost reports with
DOH is stated in Count 7 against the Real Estate Respondents.
• File any claims with Medicaid, and thus no claim for filing false claims with Medicaid
is stated in Count 8 against the Real Estate Respondents.
• Submit or receive payment on a claim to Medicaid, and thus no claim for diversion of
Medicaid funds is stated in Count 11 against the Real Estate Respondents.
Moreover, the Petition fails to demonstrate, as it must to proceed under Executive Law §
63(12), that each individual Real Estate Respondent “personally participated in or ha[d] actual
knowledge of the fraud.” People by Abrams v. Am. Motor Club, Inc., 80 N.Y.2d 803 (1992), 692
(1st Dep’t 1992). The Real Estate Respondents are too far removed from operation and
management of the facilities—and thus the alleged fraud—to be held liable under the draconian
Executive Law § 63(12). See Greenberg, 946 N.Y.S.2d at 9; N. Leasing Sys., 142 N.Y.S.3d at 74-
75.
As highlighted, the Petition fails to allege each Real Estate Respondents’ individual
participation in the fraud. Moreover, the Petition lacks any allegation that each Real Estate
Respondent had actual knowledge of the fraud. The AG just presumes these landlords had
knowledge of the conditions at the facilities and any fraud alleged to have taken place there. But
no allegations are made beyond the AG’s baseless speculation. Additionally, the Real Estate
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Respondents had reason to believe there was not fraud at the facilities, because the State of New
York was notified of and approved the facility leases. (See Real Estate Respondents’ Br. at 7-8.)
D. The Attorney General Lacks Authority to Pursue This Action under Executive Law
§ 63(12).
1. The Use of Executive Law § 63(12) in This Action Exceeds the Delegation of Power
Extended to the Medicaid Fraud Control Unit under Federal and State Law.
Congress delegated authority to state Medicaid fraud control units (“MFCU”) to combat
fraud related to the payment of Medicaid funds. Relying on the explicit scope of delegation of
authority by the federal government in creating New York’s MFCU, the Real Estate Respondents
demonstrated that the delegation of power did not include authority to bring actions under
Executive Law § 63(12). The AG derides the Real Estate Respondents’ textual argument as
illogical but provides no countervailing statutory or regulatory evidence disputing that point.
Congress granted limited authority to the states, and then New York granted specific
authority (thereby excluding other authority) to its MFCU. This indisputable conclusion is based
on the texts of federal and state law. The Congressional authority was delegation to a “single
identifiable entity” within each state (the Medicaid fraud control unit). 42 U.S.C. § 1396b(q). New
York’s state MFCU originated in a 1975 Executive Order that only delegated to it authority under
Executive Law § 63(8). 9 CRR-NY 3.4 (Executive Order No. 4 (Feb. 7, 1975)). There was no
delegation of authority to the New York MFCU allowing it to exercise the broad powers of
Executive Law § 63(12).
In its Opposition, the AG provides no legal argument to the contrary. The State does not
cite a revised delegation of authority to MFCU that includes powers under Executive Law § 63(12).
The logical conclusion then is that none exists. As stated in the Real Estate Respondents’ opening
brief, the delegation of authority could have been done in the way the AG now wants to use
Executive Law § 63(12) powers, but it simply was not done in that way.
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The New York Attorney General asks this Court to bestow it with the power to exceed the
explicit and precise delegations of authority first set by Congress and then set by the New York
Governor. This Court should reject such a bold demand. The delegation of authority is clear. And
absent any delegation to MFCU of the authority to use Executive Law § 63(12), MFCU cannot
wield that power.
2. Federal Law Preempts the Use of Executive Law § 63(12).
Executive Law § 63(12) conflicts with federal law because federal law requires some level
of scienter to commit Medicaid fraud. Executive Law § 63(12) actions, however, can proceed
absent a showing of any intent. The AG’s arguments to the contrary are without merit. To the
extent federal and state law conflict, state law must give way to federal law. New York’s definition
of fraud cannot conflict with the federal definition of fraud that sets forth minimum mens rea
requirements.
The federal law at issue is not a random or unimportant regulation. This is the federal
regulation that defines “fraud.” Any definition of “fraud” that the AG seeks to enforce through
Executive Law § 63(12) cannot conflict with the federal regulation. Congress did not just set the
standards for the implementation of programs combatting Medicaid fraud. Congress also provides
funding to states to ensure that they run their Medicaid fraud units in a way that follows those
standards. See 42 U.S.C. § 1396b(a)(6), (b)(3).
Federal law defines “fraud” as follows:
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. The clear import is that for there to be fraud involving Medicaid, the fraud
must have been done with some kind of intent. The definition of fraud specifies types of mens rea
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requirements, but there is no indication it envisions the absence of any mens rea. Again, MFCUs
are creatures of the powers delegated to them under federal law. Congress made no delegation to
states to pursue fraud under no mens rea requirement whatsoever.
The AG attempts to parse the language of the statute focusing on the use of the permissive
word “may,” (see Opp’n at 14), but its interpretation of the text is unavailing. Within the statute,
“may” modifies “such conduct,” and the examples that follow are types of conduct (“deception,
concealment of material fact, or misrepresentation”). The “may” does not carry over, past the
description of conduct, to modify the scienter requirement. Whatever the “conduct” is, “includ[ing]
deception, concealment of material fact, or misrepresentation,” that “conduct” must have been
“made intentionally, in deliberate ignorance of the truth, or in reckless disregard of the truth.”
While the type of conduct may be broader than those examples listed, no matter the conduct, those
explicit mens rea requirements attach.
Notably, the AG provides no example in which a Medicaid fraud prosecution, civil or
criminal, was brought with no mens rea requirement whatsoever. This Court should not be the
first. New York would be the only state wherein healthcare providers can violate Medicaid
regulations without any showing of intent. Congress intended for the Medicaid regulations to be
applied uniformly across the states. But, for whatever reason, the AG believes that limitation does
not apply to her.
The Real Estate Respondents recognize they rely upon non-precedential, out-of-state cases
to support their argument. But these cases highlight that were the AG allowed to proceed in this
manner, New York would be standing alone.
While the conflict between the federal and state definitions of fraud warrants dismissal of
the Petition, there are more narrow actions the Court can take to ensure the conflict is eliminated.
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This Court may analyze Executive Law § 63(12) in a way that its application in Medicaid fraud
prosecutions comports with the definition of fraud, including its mens rea requirements, set forth
in federal law—meaning that the AG must demonstrate one of the delineated standards of mens
rea against the Respondents prior to procuring any relief in this matter. See 42 U.S.C. § 1007.1.
E. The Summary Proceeding of Executive Law § 63(12) Deprives the Real Estate
Respondents of Their Federal and State Constitutional Rights to Due Process.
The State treats the Real Estate Respondents’ concerns about a violation of their
fundamental Constitutional rights as an after-thought. The AG devotes just two pages of its 88-
page Opposition to this argument, maintaining that the Court of Appeals rejected all due process
challenges to Executive Law § 63(12) in Apple Health I. 80 N.Y.2d 803, 806-07 (1992); (Opp’n
at 86.) This is simply wrong.
In Apple Health, the Court of Appeals explained that “[u]nder the circumstances,” the trial
court did not violate the respondents’ due process rights when it entered a temporary restraining
order. Id. at 807. Before entering the temporary restraints, the parties were engaged in negotiations,
the respondents knew of the allegations levied against them, and participated in oral argument. Id.
But critically, the Court of Appeals acknowledged that “[t]he concept of due process is flexible,”
and that the opportunity to be meaningfully heard “must be appropriate to the nature of the case.”
Id. at 806. Consequently, Apple Health I does not stand for the broad proposition that Executive
Law § 63(12) proceedings are immune from constitutional challenge. This matter is factually and
procedurally different from Apple Health, and as recognized by the Court of Appeals, requires a
different due process analysis.
“The touchstone of due process” is notice and an opportunity to be heard. Spinelli v. City
of New York, 579 F.3d 160, 169 (2d Cir. 2009). As previously explained, the Supreme Court
requires courts to weigh “(1) the private interest of the litigant; (2) the risk of erroneous deprivation
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in the absence of substitute procedures; and (3) the State’s interest in avoiding additional
procedures” to determine if due process protections are appropriate under the circumstances. State
v. Floyd Y., 22 N.Y.3d 95, 105 (2013). The Real Estate Respondents demonstrated why these
factors weigh towards converting this matter to a plenary proceeding, or at a minimum permitting
discovery. (See Real Estate Respondents’ Br. at 19-20.) The State does not challenge this analysis.
Thus, the State seemingly concedes that continuing with its claims through a summary proceeding
without discovery violates the Real Estate Respondents’ due process rights.
Although the Real Estate Respondents have opportunities to respond, their response is
cabined by the limited rights they are afforded in a summary proceeding, where the State’s version
of events controls. See CPLR Art. IV. Moreover, a summary proceeding is unnecessary here.
Summary proceedings are designed to quickly remedy an ongoing harm. “Speed, economy and
efficiency are the hallmarks of this procedure.” See CPLR § 401, cmt. 401:1; see also Lucchese v.
Carboni, 22 F. Supp. 2d 256, 258 (S.D.N.Y. 1998) (“It is a ‘special proceeding . . . designed to
facilitate a summary disposition of the issues presented, . . . and has been described as a fast and
cheap way to implement a right.”). But this Court already appointed independent health and
financial monitors. This substantially mitigates the risk of any alleged on-going harm to residents
and does away with the State’s need to move quickly.
Given the complexity of the State’s claims and sheer volume of the evidence obtained in
its investigation, the procedural tools of Article IV do not provide the Real Estate Respondents
with a meaningful opportunity to be heard now that any alleged harm to residents has been
mitigated. In fact, this appears to be a first-of-its-kind application of Executive Law § 63(12). The
Petition is more than 300 pages and is the culmination of a 3-year investigation in which the AG
interviewed dozens of witnesses and reviewed millions of pages of documents. Moreover, the AG
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seeks to impose liability and an $83 million fine 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. Notably, the State fails to explain why this matter
must continue as a summary proceeding with no discovery or what harm it would incur if the Real
Estate Respondents were afforded the same due process protections as every other civil litigant.
Given the detrimental impact that the State’s requested relief may have on the Real Estate
Respondents’ livelihoods, due process requires a more fulsome opportunity to respond. 2
The Real Estate Respondents simply seek to ensure that they can meaningfully respond
before the Court determines whether the requested relief is appropriate as to them.
CONCLUSION
For the foregoing reasons, and the reasons set forth in the Real Estate Respondents’ moving
brief, the Court should dismiss all claims against the Real Estate Respondents.
February 2, 2024
New York, New York /s/ Lee Vartan_________
CHIESA SHAHINIAN & GIANTOMASI, PC
Lee Vartan, Esq.
Kathryn Pearson, Esq.
Jeffrey P. Mongiello, Esq.
11 Times Square, 34th Floor
New York, New York 10036
(212) 973-0572
Attorneys for Respondents Light Property Holdings
Associates LLC, Delaware Real Property Associates
LLC, Hollis Real Estate Co., LLC, Light Property
Holdings II Associates, LLC, CFSC Downstate, LLC,
BIS Funding Capital LLC, Daryl Hagler, and
Jonathan Hagler
2
The Real Estate Respondents understand the Court’s January 9, 2024 Scheduling Order
permits Respondents to file a motion for leave to conduct discovery pursuant to CPLR 408 by
February 9, 2024. That motion, and the Court’s decision on it, may further inform the Real Estate
Respondents’ due process arguments.
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CERTIFICATION PURSUANT TO RULE 202.8-b
I, Lee Vartan, an attorney duly admitted to practice law before the Courts of the State of
New York, hereby certify that this reply memorandum complies with the word count limit set
forth in Rule 202.8-b as it contains 4,182 words, excluding the parts of the memorandum
explicitly exempted by Rule.
February 2, 2024
New York, New York /s/ Lee Vartan_________
CHIESA SHAHINIAN & GIANTOMASI, PC
Lee Vartan, Esq.
Kathryn Pearson, Esq.
Jeffrey P. Mongiello, Esq.
11 Times Square, 34th Floor
New York, New York 10036
(212) 973-0572
Attorneys for Respondents Light Property Holdings
Associates LLC, Delaware Real Property Associates
LLC, Hollis Real Estate Co., LLC, Light Property
Holdings II Associates, LLC, CFSC Downstate, LLC,
BIS Funding Capital LLC, Daryl Hagler, and
Jonathan Hagler
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Preview
FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 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. 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 MEMORANDUM IN REPLY TO THE STATE’S OPPOSITION TO THEIR MOTION TO DISMISS THE PETITION PURSUANT TO CPLR 3211(a)(1), (7) & (8) 1 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 TABLE OF CONTENTS ARGUMENT .................................................................................................................................. 1 A. THE REAL ESTATE RESPONDENTS ADOPT THE ARGUMENTS IN THE REPLY MEMORANDUM OF LAW FILED BY THE CENTERS RESPONDENTS. ................................................................................................... 1 B. JONATHAN HAGLER MUST BE DISMISSED. ................................................. 1 1. Jonathan Had No Involvement in or Knowledge of the Alleged Wrongful Conduct……………………………………………………………………1 2. This Court Lacks Personal Jurisdiction over Jonathan……………………3 C. THE PETITION FAILS TO MAKE SPECIFIC, INDIVIDUAL ALLEGATIONS AGAINST EACH REAL ESTATE RESPONDENT. ............... 6 D. THE ATTORNEY GENERAL LACKS AUTHORITY TO PURSUE THIS ACTION UNDER EXECUTIVE LAW § 63(12)......................................... 8 1. The Use of Executive Law § 63(12) in This Action Exceeds the Delegation of Power Extended to the Medicaid Fraud Control Unit under Federal and State Law…………………………………………………….8 2. Federal Law Preempts the Use of Executive Law § 63(12)………………9 E. THE SUMMARY PROCEEDING OF EXECUTIVE LAW § 63(12) DEPRIVES THE REAL ESTATE RESPONDENTS OF THEIR FEDERAL AND STATE CONSTITUTIONAL RIGHTS TO DUE PROCESS. ............................................................................................................ 11 CONCLUSION ............................................................................................................................. 13 i 2 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 TABLE OF AUTHORITIES Page(s) Cases Coast to Coast Energy, Inc. v. Gasarch, 53 N.Y.S.3d 16 (2017) ...............................................................................................................5 Craig v. First Web Bill, Inc., 2004 WL 2700128 (E.D.N.Y. Nov. 29, 2004) ...........................................................................4 People ex rel. Cuomo v. Greenberg, 946 N.Y.S.2d 1 (2012), aff’d, 21 N.Y.3d 439 (2013) ............................................................3, 7 Ivy Mar Co. v. C.R. Seasons, Ltd., 1997 WL 37082 (E.D.N.Y. Jan. 24, 1997) ................................................................................4 People ex rel. James v. Northern Leasing Systems, Inc., 193 A.D.3d 67 (1st Dept. 2021).................................................................................................3 Johnson v. Ward, 4 N.Y.3d 516 (2005) ..................................................................................................................4 Lamar v. Am. Basketball Ass’n., 468 F. Supp. 1198 (S.D.N.Y.1979)............................................................................................4 Lucchese v. Carboni, 22 F. Supp. 2d 256 (S.D.N.Y. 1998)........................................................................................12 Marie v. Altshuler, 30 A.d.3D 271 (1st Dep’t 2006) ................................................................................................5 MediaXposure Ltd. (Cayman) v. Omnireliant Holdings, Inc., 918 N.Y.S.2d 398 (Sup. Ct. 2010) .............................................................................................3 N. Valley Partners, LLC v. Jenkins, 885 N.Y.S.2d 712 (Sup. Ct. 2009) .............................................................................................5 People by Abrams v. Am. Motor Club, Inc., 582 N.Y.S.2d 688 (1st Dep’t 1992) ...........................................................................................7 People by Abrams v. Apple Health & Sports Clubs, Ltd., Inc., 80 N.Y.2d 803 (1992) ………….…………………………………..………………………..11 Serota v. Cooper, 190 N.Y.S.3d 96 (2023) .............................................................................................................4 ii 3 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 Spinelli v. City of New York, 579 F.3d 160 (2d Cir. 2009).....................................................................................................11 State v. Floyd Y., 22 N.Y.3d 95 (2013) ................................................................................................................12 Statutes 42 U.S.C. § 1396b(a)(6) ...................................................................................................................9 42 U.S.C. § 1396b(b)(3) ..................................................................................................................9 42 U.S.C. § 1396b(q) .......................................................................................................................8 Executive Law § 63(8) .....................................................................................................................8 Executive Law § 63(12) ......................................................................................................... passim Other Authorities 42 C.F.R. § 1007.1 .....................................................................................................................9, 11 CPLR 302(a)(1) ...........................................................................................................................3, 6 CPLR 302(a)(4) ...............................................................................................................................4 CPLR 408.......................................................................................................................................13 CPLR Art. IV .................................................................................................................................12 CPLR § 301......................................................................................................................................4 CPLR § 302(a) .................................................................................................................................5 CPLR § 401, cmt. 401:1 ................................................................................................................12 Executive Order No. 4 (Feb. 7, 1975) ..............................................................................................8 iii 4 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 The Real Estate Respondents respectfully submit this memorandum of law in reply to the State’s Memorandum in Opposition to Respondents’ Motions to Dismiss (“Opposition”) and in further support of their Motion to Dismiss the Petition. ARGUMENT A. The Real Estate Respondents Adopt the Arguments in the Reply 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 Reply Memorandum of Law. The Real Estate Respondents also make the following arguments in reply to the Opposition. B. Jonathan Hagler Must Be Dismissed. Jonathan Hagler must be dismissed from the Petition for two reasons. 1. Jonathan Had No Involvement in or Knowledge of the Alleged Wrongful Conduct. Jonathan is an afterthought. But for his last name, the AG would never have included him as a respondent. In its 88-page Opposition, the State mentions Jonathan just 26 times, inclusive of the case caption and table of contents. The only discussion of Jonathan’s role with the Nursing Homes or involvement with the “repeated and persistent fraud and illegality” alleged by the AG is found in two lines on page 27 of the Opposition: “Jonathan Hagler is a 1% owner of Delaware Real Property, Light Property II, and Light Property—the landlords for Buffalo Center, Martine Center, and Beth Abraham, respectively. He is also a 1% owner of BIS and a 10% owner of CFSC Downstate.” (Opp’n at 27 (citations omitted).) The State does not allege in its Petition or Opposition whether Jonathan’s interest in those five entities was active or passive, what his daily responsibilities were, if any, or whether he ever showed up for work. The absence of such allegations demonstrates that Jonathan was not involved. 5 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 Jonathan does not even fit within the State’s own definition of who is a proper respondent under Executive Law § 63(12). According to the State, “individuals are liable for fraudulent and illegal acts in violation of § 63(12) if those individuals participated in the conduct or had actual knowledge of such conduct.” (Opp’n at 18 (emphasis in original).) Neither the Petition nor the Opposition demonstrates that Jonathan participated in any conduct or had actual knowledge of anything having to do with the Nursing Homes or their operation. So, before offering the two sentences about Jonathan’s role in the offense conduct, the State provides a fallback position. According to the State, actual knowledge “can be satisfied where a party is in a position to be aware of the fraud or illegality but turn[s] a blind eye to it.” (Opp’n at 19 (quotations omitted).) To support its fallback position, the State relies on an unpublished Supreme Court case addressing the legal sufficiency of an aiding and abetting fraud claim. (Id. (quoting People v. Coll. Network, Inc., 53 Misc. 3d 1210(A), at *4 (Sup. Ct. Albany Cty. 2016)).) But in College Network, the evidence demonstrated that the respondent knew of the alleged fraud. The respondent had received complaints from consumers alleging they were defrauded and continued to aid and abet the alleged wrongful conduct even after speaking with the State about its investigation. 53 Misc. 3d 1210(A), at *4. College Network does not support the AG’s willful blindness theory of prosecution—it makes clear that actual knowledge is required. But even if the AG were right and willful blindness was sufficient, Jonathan was not willfully blind. There is nothing in the Petition or Opposition suggesting that Jonathan’s 1% interest in some, but not all, of the Real Estate Entity Respondents and his collective 11% interest in BIS and CFSC Downstate put him in a position to be aware of anything. For the same reasons, Jonathan is not liable for any of the entities’ alleged wrongdoing. First, the AG does not allege that Jonathan is an officer or director of any of the five entities in 2 6 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 which he has an interest. Second, corporate officers and directors are liable for a corporation’s fraud only “if they participated in the fraud or received actual notice of the fraud.” People ex rel. James v. Northern Leasing Systems, Inc., 193 A.D.3d 67, 76 (1st Dept. 2021) (internal citations omitted); see also People ex rel. Cuomo v. Greenberg, 946 N.Y.S.2d 1, 9 (2012), aff’d, 21 N.Y.3d 439 (2013) (“Officers and directors are liable for a corporation’s fraud where they either personally participate in the fraud or have actual notice of its existence.”). Again, neither the Petition nor the Opposition suggests that Jonathan did or had actual notice of anything. The AG does not allege Jonathan had any role with Centers; any role with the Real Estate Entity Respondents, BIS, or CFSC Downstate beyond passive investor; any role in negotiating leases with the Nursing Homes on behalf of any of the Real Estate Entity Respondents; or any role in negotiating payments made by the Nursing Homes to BIS or CFSC Downstate. The Petition does not allege anything about Jonathan—satisfied that his few percentage point interests in a few entities is enough to tag him with $83 million in liability. 1 Finally, in its Opposition, the State attempts to implicate the Minority Owners, including Jonathan, through legal theories that nowhere appear in the Petition, specifically through agency law and an aiding and abetting theory. (Opp’n at 28-29.) The State cannot amend its Petition through its Opposition. See MediaXposure Ltd. (Cayman) v. Omnireliant Holdings, Inc., 918 N.Y.S.2d 398 (Sup. Ct. 2010). The Court should disregard the State’s new legal theories. 2. This Court Lacks Personal Jurisdiction over Jonathan. The AG fails to plead facts demonstrating that Jonathan has sufficient minimum contacts with New York to comport with due process and establish personal jurisdiction pursuant to CPLR 1 The State all but admits Jonathan’s complete non-involvement with the offense conduct when it writes, “[Daryl] Hagler is not similarly situated to his son.” (Opp’n at 19.) 3 7 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 302(a)(1). “[T]he mere fact that a non-resident defendant is a shareholder, or even controlling shareholder, of a corporation which is amenable to personal jurisdiction in New York does not, without more, subject him or her individually to personal jurisdiction under CPLR § 301.” Craig v. First Web Bill, Inc., No. CIV.A.04-CV-1012 DGT, 2004 WL 2700128, at *4 (E.D.N.Y. Nov. 29, 2004); see also Lamar v. Am. Basketball Ass’n., 468 F. Supp. 1198, 1203 (S.D.N.Y.1979) (same); Ivy Mar Co. v. C.R. Seasons, Ltd., No. 95 CV 0508 (FB), 1997 WL 37082, at *7 (E.D.N.Y. Jan. 24, 1997) (same). Whether an individual purposefully availed himself of the benefits of New York requires an inquiry into the quality of the defendant’s contacts in the state. Serota v. Cooper, 190 N.Y.S.3d 96, 100 (2023) (internal quotation omitted). For example, in XpresSpa Holdings, LLC v. Cordial Endeavor Concessions of Atlanta, LLC, the court found sufficient minimum contacts of a minority owner of an LLC that “was partnered with and had interest in a New York entity.” 98 N.Y.S.3d 567 (1st Dep’t 2019). But there, the defendant attended several meetings in New York and personally accepted operational support from the plaintiffs in New York. Here, the AG relies on Jonathan’s property ownership alone to establish personal jurisdiction. Other than Jonathan’s (admittedly) passive ownership, the Petition alleges no other intersections between Jonathan and New York. In the combined nearly 400 pages between Petition and Opposition, the AG does not allege that Jonathan attended any business meeting in New York, ever visited the Nursing Homes in New York, or traveled to the offices of BIS or CFSC Downstate in New York. The only connection between Jonathan and New York alleged in the Petition—that Jonathan lives in Rockland County—is wrong. Jonathan lives in New Jersey. The AG’s argument that Jonathan is subject to personal jurisdiction pursuant to CPLR 302(a)(4) likewise fails. To assert jurisdiction pursuant to CPLR 302(a)(4), the action must arise from ownership, possession or use of property in New York. See Johnson v. Ward, 4 N.Y.3d 516, 4 8 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 519 (2005) (“We have recognized that a ‘substantial relationship’ must be established between a defendant’s transactions in New York and a plaintiff’s cause of action in order to satisfy the nexus requirement of the statute.”); see also Marie v. Altshuler, 30 A.d.3D 271, 272 (1st Dep’t 2006) (concluding that property that was a “main focus of the dispute” was not a sufficient basis to exert personal jurisdiction because the matter “does not directly implicate its ownership, possession or use”). As the State acknowledges, this case is about alleged “repeated and persistent fraud and illegality in the carrying on, conducting, and transacting of business at four New York nursing homes,” (Opp’n at 1), not the ownership, possession, or use of the land on which the Nursing Homes sit. Finally, the State maintains that this Court has personal jurisdiction over Jonathan through an agent. (Opp’n at 39.) In limited situations, personal jurisdiction may be established through an agent’s conduct. See CPLR § 302(a). But where a plaintiff alleges that a defendant’s minimum contacts arose out of the defendant’s association with an agent, the plaintiff must first convince the court that the defendant had knowledge of and exercised some control over the agent’s actions in New York. Coast to Coast Energy, Inc. v. Gasarch, 53 N.Y.S.3d 16, 19 (2017). For a plaintiff to make a prima facie showing of control, the “allegations must sufficiently detail the defendant’s conduct so as to persuade a court that the defendant was a primary actor in the specific matter in question.” N. Valley Partners, LLC v. Jenkins, 885 N.Y.S.2d 712 (Sup. Ct. 2009) (internal quotation omitted). The AG provides no details to support its newfound agency theory in its Opposition, and the Petition is devoid of any allegations. The Opposition claims only that Jonathan, “either personally or through an agent, transacted business in New York…” (Opp’n at 39.) The AG does not identify the purported agent, what the agent did, what Jonathan directed the agent to do, or explain how Jonathan could even direct any agent as a minority owner of the Entity 5 9 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 Respondents when he is neither an officer nor director. There is no personal jurisdiction over Jonathan based on an agency theory. The Petition does not allege that Jonathan had any contacts or connections with New York beyond owning minority interests in the Entity Respondents. That is insufficient to establish personal jurisdiction over Jonathan pursuant to CPLR 302(a)(1) or 302(a)(4). C. The Petition Fails to Make Specific, Individual Allegations against Each Real Estate Respondent. The AG needed to plead each cause of action against each Respondent. The AG did not— and could not—do that with the Real Estate Respondents. As real estate owners and landlords, the Real Estate Respondents had nothing to do with the operation of the Nursing Homes. Neither Daryl Hagler and Jonathan, nor their entities, had anything to do with the operation of the Nursing Homes. The entirety of the AG’s allegations of fraud is based on purported deficient conditions at the Nursing Homes and substandard treatment of residents. The owners of the facility buildings had no role in resident care, nor does the Petition allege they did. Even setting aside the lack of intent required for Executive Law § 63(12) (which, as discussed infra, has its own constitutional preemption and due process failings), the Petition does not allege sufficient acts that any of the Real Estate Respondents took in managing the facilities or caring for residents. The AG readily admits its theory is that “the Nursing Homes operate as a chain, all managed and operated by Centers.” (Opp’n at 22.) The facilities were not—and the AG does not allege that they were—managed and operated by the Real Estate Respondents. The AG puts forth a tenuous argument that the Real Estate Respondents are liable “by taking no action to prevent such conduct.” (Opp’n at 22.) But that is not the standard to state a claim under Executive Law § 63(12). Allegations of affirmative acts are required. 6 10 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 The Real Estate Respondents did not: • Receive reimbursement funds to convert, and thus no claim for conversion is stated in Count 1 against the Real Estate Respondents. • Have any legal responsibility to disclose to DOH on behalf of the Nursing Homes, and thus no claim for failing to make disclosures to DOH is stated in Count 4 against the Real Estate Respondents. • Have any legal obligation to seek and obtain approval from DOH, and thus no claim for failing to obtain approvals from DOH is stated in Count 6 against the Real Estate Respondents. • File any cost reports with DOH, and thus no claim for filing false cost reports with DOH is stated in Count 7 against the Real Estate Respondents. • File any claims with Medicaid, and thus no claim for filing false claims with Medicaid is stated in Count 8 against the Real Estate Respondents. • Submit or receive payment on a claim to Medicaid, and thus no claim for diversion of Medicaid funds is stated in Count 11 against the Real Estate Respondents. Moreover, the Petition fails to demonstrate, as it must to proceed under Executive Law § 63(12), that each individual Real Estate Respondent “personally participated in or ha[d] actual knowledge of the fraud.” People by Abrams v. Am. Motor Club, Inc., 80 N.Y.2d 803 (1992), 692 (1st Dep’t 1992). The Real Estate Respondents are too far removed from operation and management of the facilities—and thus the alleged fraud—to be held liable under the draconian Executive Law § 63(12). See Greenberg, 946 N.Y.S.2d at 9; N. Leasing Sys., 142 N.Y.S.3d at 74- 75. As highlighted, the Petition fails to allege each Real Estate Respondents’ individual participation in the fraud. Moreover, the Petition lacks any allegation that each Real Estate Respondent had actual knowledge of the fraud. The AG just presumes these landlords had knowledge of the conditions at the facilities and any fraud alleged to have taken place there. But no allegations are made beyond the AG’s baseless speculation. Additionally, the Real Estate 7 11 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 Respondents had reason to believe there was not fraud at the facilities, because the State of New York was notified of and approved the facility leases. (See Real Estate Respondents’ Br. at 7-8.) D. The Attorney General Lacks Authority to Pursue This Action under Executive Law § 63(12). 1. The Use of Executive Law § 63(12) in This Action Exceeds the Delegation of Power Extended to the Medicaid Fraud Control Unit under Federal and State Law. Congress delegated authority to state Medicaid fraud control units (“MFCU”) to combat fraud related to the payment of Medicaid funds. Relying on the explicit scope of delegation of authority by the federal government in creating New York’s MFCU, the Real Estate Respondents demonstrated that the delegation of power did not include authority to bring actions under Executive Law § 63(12). The AG derides the Real Estate Respondents’ textual argument as illogical but provides no countervailing statutory or regulatory evidence disputing that point. Congress granted limited authority to the states, and then New York granted specific authority (thereby excluding other authority) to its MFCU. This indisputable conclusion is based on the texts of federal and state law. The Congressional authority was delegation to a “single identifiable entity” within each state (the Medicaid fraud control unit). 42 U.S.C. § 1396b(q). New York’s state MFCU originated in a 1975 Executive Order that only delegated to it authority under Executive Law § 63(8). 9 CRR-NY 3.4 (Executive Order No. 4 (Feb. 7, 1975)). There was no delegation of authority to the New York MFCU allowing it to exercise the broad powers of Executive Law § 63(12). In its Opposition, the AG provides no legal argument to the contrary. The State does not cite a revised delegation of authority to MFCU that includes powers under Executive Law § 63(12). The logical conclusion then is that none exists. As stated in the Real Estate Respondents’ opening brief, the delegation of authority could have been done in the way the AG now wants to use Executive Law § 63(12) powers, but it simply was not done in that way. 8 12 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 The New York Attorney General asks this Court to bestow it with the power to exceed the explicit and precise delegations of authority first set by Congress and then set by the New York Governor. This Court should reject such a bold demand. The delegation of authority is clear. And absent any delegation to MFCU of the authority to use Executive Law § 63(12), MFCU cannot wield that power. 2. Federal Law Preempts the Use of Executive Law § 63(12). Executive Law § 63(12) conflicts with federal law because federal law requires some level of scienter to commit Medicaid fraud. Executive Law § 63(12) actions, however, can proceed absent a showing of any intent. The AG’s arguments to the contrary are without merit. To the extent federal and state law conflict, state law must give way to federal law. New York’s definition of fraud cannot conflict with the federal definition of fraud that sets forth minimum mens rea requirements. The federal law at issue is not a random or unimportant regulation. This is the federal regulation that defines “fraud.” Any definition of “fraud” that the AG seeks to enforce through Executive Law § 63(12) cannot conflict with the federal regulation. Congress did not just set the standards for the implementation of programs combatting Medicaid fraud. Congress also provides funding to states to ensure that they run their Medicaid fraud units in a way that follows those standards. See 42 U.S.C. § 1396b(a)(6), (b)(3). Federal law defines “fraud” as follows: 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. The clear import is that for there to be fraud involving Medicaid, the fraud must have been done with some kind of intent. The definition of fraud specifies types of mens rea 9 13 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 requirements, but there is no indication it envisions the absence of any mens rea. Again, MFCUs are creatures of the powers delegated to them under federal law. Congress made no delegation to states to pursue fraud under no mens rea requirement whatsoever. The AG attempts to parse the language of the statute focusing on the use of the permissive word “may,” (see Opp’n at 14), but its interpretation of the text is unavailing. Within the statute, “may” modifies “such conduct,” and the examples that follow are types of conduct (“deception, concealment of material fact, or misrepresentation”). The “may” does not carry over, past the description of conduct, to modify the scienter requirement. Whatever the “conduct” is, “includ[ing] deception, concealment of material fact, or misrepresentation,” that “conduct” must have been “made intentionally, in deliberate ignorance of the truth, or in reckless disregard of the truth.” While the type of conduct may be broader than those examples listed, no matter the conduct, those explicit mens rea requirements attach. Notably, the AG provides no example in which a Medicaid fraud prosecution, civil or criminal, was brought with no mens rea requirement whatsoever. This Court should not be the first. New York would be the only state wherein healthcare providers can violate Medicaid regulations without any showing of intent. Congress intended for the Medicaid regulations to be applied uniformly across the states. But, for whatever reason, the AG believes that limitation does not apply to her. The Real Estate Respondents recognize they rely upon non-precedential, out-of-state cases to support their argument. But these cases highlight that were the AG allowed to proceed in this manner, New York would be standing alone. While the conflict between the federal and state definitions of fraud warrants dismissal of the Petition, there are more narrow actions the Court can take to ensure the conflict is eliminated. 10 14 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 This Court may analyze Executive Law § 63(12) in a way that its application in Medicaid fraud prosecutions comports with the definition of fraud, including its mens rea requirements, set forth in federal law—meaning that the AG must demonstrate one of the delineated standards of mens rea against the Respondents prior to procuring any relief in this matter. See 42 U.S.C. § 1007.1. E. The Summary Proceeding of Executive Law § 63(12) Deprives the Real Estate Respondents of Their Federal and State Constitutional Rights to Due Process. The State treats the Real Estate Respondents’ concerns about a violation of their fundamental Constitutional rights as an after-thought. The AG devotes just two pages of its 88- page Opposition to this argument, maintaining that the Court of Appeals rejected all due process challenges to Executive Law § 63(12) in Apple Health I. 80 N.Y.2d 803, 806-07 (1992); (Opp’n at 86.) This is simply wrong. In Apple Health, the Court of Appeals explained that “[u]nder the circumstances,” the trial court did not violate the respondents’ due process rights when it entered a temporary restraining order. Id. at 807. Before entering the temporary restraints, the parties were engaged in negotiations, the respondents knew of the allegations levied against them, and participated in oral argument. Id. But critically, the Court of Appeals acknowledged that “[t]he concept of due process is flexible,” and that the opportunity to be meaningfully heard “must be appropriate to the nature of the case.” Id. at 806. Consequently, Apple Health I does not stand for the broad proposition that Executive Law § 63(12) proceedings are immune from constitutional challenge. This matter is factually and procedurally different from Apple Health, and as recognized by the Court of Appeals, requires a different due process analysis. “The touchstone of due process” is notice and an opportunity to be heard. Spinelli v. City of New York, 579 F.3d 160, 169 (2d Cir. 2009). As previously explained, the Supreme Court requires courts to weigh “(1) the private interest of the litigant; (2) the risk of erroneous deprivation 11 15 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 in the absence of substitute procedures; and (3) the State’s interest in avoiding additional procedures” to determine if due process protections are appropriate under the circumstances. State v. Floyd Y., 22 N.Y.3d 95, 105 (2013). The Real Estate Respondents demonstrated why these factors weigh towards converting this matter to a plenary proceeding, or at a minimum permitting discovery. (See Real Estate Respondents’ Br. at 19-20.) The State does not challenge this analysis. Thus, the State seemingly concedes that continuing with its claims through a summary proceeding without discovery violates the Real Estate Respondents’ due process rights. Although the Real Estate Respondents have opportunities to respond, their response is cabined by the limited rights they are afforded in a summary proceeding, where the State’s version of events controls. See CPLR Art. IV. Moreover, a summary proceeding is unnecessary here. Summary proceedings are designed to quickly remedy an ongoing harm. “Speed, economy and efficiency are the hallmarks of this procedure.” See CPLR § 401, cmt. 401:1; see also Lucchese v. Carboni, 22 F. Supp. 2d 256, 258 (S.D.N.Y. 1998) (“It is a ‘special proceeding . . . designed to facilitate a summary disposition of the issues presented, . . . and has been described as a fast and cheap way to implement a right.”). But this Court already appointed independent health and financial monitors. This substantially mitigates the risk of any alleged on-going harm to residents and does away with the State’s need to move quickly. Given the complexity of the State’s claims and sheer volume of the evidence obtained in its investigation, the procedural tools of Article IV do not provide the Real Estate Respondents with a meaningful opportunity to be heard now that any alleged harm to residents has been mitigated. In fact, this appears to be a first-of-its-kind application of Executive Law § 63(12). The Petition is more than 300 pages and is the culmination of a 3-year investigation in which the AG interviewed dozens of witnesses and reviewed millions of pages of documents. Moreover, the AG 12 16 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 seeks to impose liability and an $83 million fine 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. Notably, the State fails to explain why this matter must continue as a summary proceeding with no discovery or what harm it would incur if the Real Estate Respondents were afforded the same due process protections as every other civil litigant. Given the detrimental impact that the State’s requested relief may have on the Real Estate Respondents’ livelihoods, due process requires a more fulsome opportunity to respond. 2 The Real Estate Respondents simply seek to ensure that they can meaningfully respond before the Court determines whether the requested relief is appropriate as to them. CONCLUSION For the foregoing reasons, and the reasons set forth in the Real Estate Respondents’ moving brief, the Court should dismiss all claims against the Real Estate Respondents. February 2, 2024 New York, New York /s/ Lee Vartan_________ CHIESA SHAHINIAN & GIANTOMASI, PC Lee Vartan, Esq. Kathryn Pearson, Esq. Jeffrey P. Mongiello, Esq. 11 Times Square, 34th Floor New York, New York 10036 (212) 973-0572 Attorneys for Respondents Light Property Holdings Associates LLC, Delaware Real Property Associates LLC, Hollis Real Estate Co., LLC, Light Property Holdings II Associates, LLC, CFSC Downstate, LLC, BIS Funding Capital LLC, Daryl Hagler, and Jonathan Hagler 2 The Real Estate Respondents understand the Court’s January 9, 2024 Scheduling Order permits Respondents to file a motion for leave to conduct discovery pursuant to CPLR 408 by February 9, 2024. That motion, and the Court’s decision on it, may further inform the Real Estate Respondents’ due process arguments. 13 17 of 18 FILED: NEW YORK COUNTY CLERK 02/02/2024 05:36 PM INDEX NO. 451549/2023 NYSCEF DOC. NO. 810 RECEIVED NYSCEF: 02/02/2024 CERTIFICATION PURSUANT TO RULE 202.8-b I, Lee Vartan, an attorney duly admitted to practice law before the Courts of the State of New York, hereby certify that this reply memorandum complies with the word count limit set forth in Rule 202.8-b as it contains 4,182 words, excluding the parts of the memorandum explicitly exempted by Rule. February 2, 2024 New York, New York /s/ Lee Vartan_________ CHIESA SHAHINIAN & GIANTOMASI, PC Lee Vartan, Esq. Kathryn Pearson, Esq. Jeffrey P. Mongiello, Esq. 11 Times Square, 34th Floor New York, New York 10036 (212) 973-0572 Attorneys for Respondents Light Property Holdings Associates LLC, Delaware Real Property Associates LLC, Hollis Real Estate Co., LLC, Light Property Holdings II Associates, LLC, CFSC Downstate, LLC, BIS Funding Capital LLC, Daryl Hagler, and Jonathan Hagler 14 18 of 18