Preview
) NA AU OUN PK DM INDEX NO. 617709/2022
NYSCEF BOC. NO. 815 RECEIVED NYSCEF 03/20/2024
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NASSAU
PEOPLE OF THE STATE OF NEW
Y ORK by LETITIA
JAMES, Attomey General of the State of New
Y ork,
Petitioner,
Vv. Index No. 617709/2022
COLD SPRING ACQUISITION, LLC D/B/A COLD
SPRING HILLS CENTER FOR NURSING & Hon. Lisa A. Cairo, J.S.C
REHABILITATION; COLD SPRING REALTY
ACQUISITION, LLC; VENTURA SERVICES, LLC TAS Part 25
D/B/A/ PHILOSOPHY CARE CENTERS; GRAPH MGA,
LLC; GRAPH MANAGEMENT, LLC; GRAPH Motion Seg. Nos. 001, 021
INSURANCE COMPANY A RISK RETENTION
GROUP, LLC; HIGHVIEW MANAGEMENT INC.;
COMPREHENSIVE CARE SOLUTIONS, LLC;
PHILIPSON FAMILY, LLC; LIFESTAR FAMILY
HOLDINGS, LLC; ROSS CSH HOLDINGS, LLC;
ROSEWELL ASSOCIATES, LLC; B&L CONSULTING,
LLC; ZBL MANAGEMENT, LLC; BENT PHILIPSON;
AVI PHILIPSON; ESTATE OF DEBORAH PHILIPSON;
JOEL LEIFER; LEAH FRIEDMAN; ROCHEL DAVID;
ESTHER FARKOVITS; BENJAMIN LANDA; DAVID
ZAHLER; CHAYA ZAHLER; CHAIM ZAHLER; JACOB
ZAHLER; CHESKEL BERKOWITZ; and JOEL
ZUPNICK,
Respondents.
NOTICE OF ENTRY
PLEASE TAKE NOTICE that the within is a true and comect copy of the Decision and.
Order on Motion Seg. 001 and 021 (NY SCEF Doc #802) issued in the above-captioned action by
the Hon. Lisa A. Cairo
on March 15, 2024, and duly entered and filed by the Clerk of the Supreme
Court of the State of New
Y ork, Nassau County, on March 20, 2024.
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NYSCEF BOC. NO. 815 RECEIVED NYSCEF: 03/20/2024
Dated: New York, New York DECHERT LLP
March 20, 2024
By: /s/ StevenA. Engel
StevenA. Engel
Three Bryant Park
1095 Avenue of the Americas
New York, NY 10036-6797
steven. |(@dechert.com
Telephone: (212) 698-3500
Facsimile: (212) 698-3599
Attorney for Respondents ZBL Management,
LLC; Ross CSH Holdings, LLC; Cheskel
Berkowitz; and Joel Zupnick
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NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NASSAU
PRESENT: HON. LISA A. CAIRO, J.S.C.
TRIAL/IAS PART 25
PEOPLE OF THE STATE OF NEW YORK by
LETITIA JAMES, ATTORNEY GENERAL OF THE DECISION AND ORDER
STATE OF NEW YORK, ON PETITION
Petitioner, INDEX No. 617709/2022
-against- Motion Seq, Nos. 001,021
COLD SPRING ACQUISITION, LLC D/B/A COLD
SPRING WWLLS CENTER FOR NURSING &
REHABILITATION, COLD SPRING REALTY
ACQUISITION, LLC, VENTURA SERVICES, LLC D/B/A
PHILOSOPHY CARE CENTERS, GRAPH MGA, LLC,
GRAPH MANAGEMENT, LLC, GRAPH INSURANCE
COMPANY A RISK RETENTION GROUP, LLC,
HIGHVIEW MANAGEMENT INC, COMPREHENSIVE
CARE SOLUTIONS, LLC, PHILIPSON FAMILY, LLC,
LIFESTAR FAMILY HOLDINGS, LLC, ROSS CSH
HOLDINGS, LLC, ROSEWELL ASSOCIATES, LLC,
B&L CONSULTING, LLC, ZBL MANAGEMENT, LLC
BENT PHILIPSON, AVI PHILIPSON, ESTATE OF
DEBORAH PHILIPSON, JOEL LEIFER, LEAH
FRIEDMAN, ROCHEL DAVID, ESTHER FARKOVITS,
BENJAMIN LANDA, DAVID. ZAHLER, CHAYA
ZAHLER, CHAIM ZAHLER, JACOB ZAHLER,
CHESKEL BERKOWITZ, and JOEL ZUPNICK,
Respondents.
se -X
sre
The following papers. were read_on this motion DOCS NUMBERED
Petition, Affidavits, Affirmations, Exhibits, Memos. 1-114,682
Answers and Opposition Papers $02-513, 514-529,
530-535, 536-550,
551-357, 558-566,
567-575, 576-587,
588-597. 598-605,
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614, 606-612, 633-
648, 777-783
Reply Papers. 736-739
(MS 21) Notice of Motion, Affidavits, Affirmations, Exhibits, Memos... 613, 615 -632
Opposition Papers...........-..-.eeseeeeeeeeeeeebees
tebe and baeeete sevvetereeres 736-739
The Attorney General of the State of New York on behalf of the State commenced this
special proceeding pursuant to New York Executive Law § 63(12) by verified Petition on
December 16, 2022, against Cold Spring Acquisition, LLC d/b/a Cold: Spring Hills. Center for
Nursing & Rehabilitation (CSH) and Cold Spring Hills Realty Acquisition LLC (Cold Spring
Realty), as well as their respective owners and allegedly related parties’ and entities (MS #1).
Respondents” motions'to dismiss were largely denied by Decision. and Order dated June 26, 2023.
Answers and oppositions to the Petition were filed and oral argument was taken onthe Petition on
December 4 through 8, 2023. Respondents Joel Leifer and Rosewell Associates LIC have
separately moved for summary determination on the pleadings (MS # 21).
BACKGROUND
In 2014, Respondent CSH submitted a Certificate of Need (“CON”) application to. the
Department of Health (“DOH”) requesting approval to purchase and operate-an existing residential
health care facility located in Woodbury, New York (the'“Facility”). As part.of this application,
process, CSH was required to provide information about the proposed owners and operators of the
Facility; The information provided included disclosure of the related party entities, specifically
familial relationships among members.of CSH and Cold Spring Realty, the proposed purchaser of
the real property upon which the Facility is located. In resporise to the CON, the DOH prepared
an Executive Surnmary-dated February 11, 2016, recommending contingent approval of the CON.
‘The Executive Summary refers to the relationship between CSH and.Cold Spring Realty, “in that
the entities havé-several members.in common.” The Executive Summary also. includes a list of.
other rutsing home facilities that members of both CSH and Coid’Spring Realty were involved in
at the time the CON was submitted.
Managing members.of CSH both at the time the. CON. was approved and presently are Joe}
Leifer and Avi Philipson,.who is the son of long-time nursing home operator Bent Philipson. .Avi
Philipson was a student living in Israel with no prior work experience when the CON was
submitted and maintained: an ownership interest in one other New York nursing home facility.
Other members of CSH ate the Estate of Deborah Philipson, Esther Farkovits (daughter’ of
Benjamin Landa), Rochelle David (daughter of David Zahler), and Leah Friedman (daughter of
David Zahler). The members of Cold Spring Realty are the Philipson Family LLC, Benjamin
Landa, Lifestar Family Holdings (owned by members of the Zahler Family), and Cheskel
Berkowitz.
According to the Executive Sumniary, Ms. Farkovits was unemployed and living overseas
at the time the CON was submitted. She maintained an ownership interest in-nine other nursing
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home facilities under the jurisdiction of the Department of Health, Both Rochel David and Leah
Friedman represented over two decades of employment in humian resources at Confidence
Management Systems (“Confidence”) when the CON was submitted, although later deposition
testimony discredited those statements. Specifically; David testified during her: June 2022
investigatory deposition that she had not worked at Confidence since about, 2004, making her
length of employment 13 years rather than the 25 years she sets forth inthe CON. Similarly,
Friedman testified at her deposition that she had. not worked at Confidence since 2004 or 2005
while stating in the CON that she was employed by Confidence in 2016. Neither Friedman or
David explain these discrepancies. in their respective affirmations in opposition to the Petition
(NYSCEF Does. 527 and 528). At the time the CON was:submitted, however, both David and
Friedman had ownership interests in three other nursing home facilities.
The Attorney General asks the court to find that CSH’s CON application presented a
misleading picture to the DOH. However, the CON application, in many regards, sets forth
accurate and complete information concerning the members of CSH and Cold Spring Realty along
with the proposed ownership structure of the Facility and the real property.
Respondents argue that the Attorney General is not satisfied with certain requirements of
ptivate nursing homes in New York, Rather than address these concetns with the. Legislature,
which Respondents argue would be the proper mechanistn, the Attorney General is looking for the
court to make’a ruling that. will in effect drastically change ihe way private nursing, homes, are
approved and regulated throughout the State.
The allegations in the Petition primarily concetn (1) an alleged fraudulent Lease
Agreement between CSH: and Cold Spring Realty, (2) an alleged fraudulent Promissory Note
executed by Cold Spring Realty in favor of Lending Partners, ait alleged corporate alter ego of
Cold Spring Realty, and (3) various payments made by CSH to.other named Respondents as related
entities, all resulting in a lack of care-for residents al the Facility: caused by Respondents’ misuse
of Facility funds.
The Petitioner argues that the various Respondents put personal greed above resident care.
The court is now faced with determining whether this alleged personal greed constitutes a violation.
of Executive Law § 63(12). .As set forth herein, based upon the underlying Petition, together with
all Respondents’ Answers, the-parties’ various Affidavits, Exhibits. and Memoranda of. Law and
the weeklong oral argument held before the Court, the Atiorney General has propertly plead and
proven certain, but not all, of the Causes of Action in the Petition.
DISCUSSION
Pursuant to N¥ Executive Law § 63(12), the Attorney General is permitted to: bring a
special. proceeding against a respondent seeking injunctive relief, restitution, and damages. A
special proceeding is determined by the- court using the same criteria applied: to a motion for
summary judgement. (State v. Northern Leasing Sys., 193.AD3d 67, 73 [1st. Dept 2021]; State. v.
Telehublink Corp., 301 AD2d 1006, 1007 [3d Dept 2003] [“A special proceeding, is governed by
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the same standards that apply to’a motion for summary judgment.”}'). ‘The Attorney General must
establish that there is no issue of fact.as to its allegations, and therealier the burden shifts to the
Respondent who may demonstrate the existence of es of fact requiring a trial. (CPLR 409(d);
See Telehublink, 301AD2d at 1007). Should the Petitioner fail to meet its prima Jacie burden, the
court-need not even. consider Respondents’ arguments in opposition.
Executive Law § 63(12)
Executive Law § 63(12) provides in relevant part:
“Whenever any person shall.engage in repeated fraudulent or illegal
acts or otherwise demonstrate persistent fraud: or illegality in. the
carrying on, conducting or transaction of business, the attorney
general may apply, in the name of the people of the State of New
York, to the supreme court of the state of New York, ot notice of
five days, for an order enjoining the continuance of such business
activity or of'any fraudulent or illegal acts |and] di ing restitution
and damages . . . and the court may award the relief applied for or
so much thereof as it may deem. proper.”
As discussed in the court’s prior orders, this provision. is-a fuitction of the State’s ability to
regulate “businesses within its borders in the interest of securing an honest marketplace.” (State
v. Coventry First, LEC, 52 AD3d 345 [1st Dept'2008])..“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 victim of business fraud.” (State v. Apple Health & Sports
Clubs, 206 AD2d 266, 268 [1st Dept £994]). Continuing:acts need not be-alleged provided they
were “repeated” in nature and fall within the statute of limitations. (Executive Law §:63 (12)).
“Fraud” is.broadly defined by the statute as “any device, schenie or-artifice to defraud and
any deception, misrepresentation, concealment, suppression, false pretense, false promise or
unconscionable contractual provisions.” (Executive Law § 63(12)), This-definition goes beyond
common law. frand and the specific élements of 4 common-law lraud claim need not bi serted
under an Exécutive Law § 63(12) catise of-action. (Srate v. Tramp Entrepreneur Initiative, LLC,
137 AD3d 409, 416-417 [1st Dept 2016] [citing Coventry First, $2.AD3d at 346). Rather, the
question under the Executive. Law is. “whether the targeted act has the capacity ot tendency to
deceive or creates an atmosphere conducive of fraud.” (Northern Leasing Sys, 193 AD3d_at 75
[quotations omitted]). Thus, § 63(12) “defines the fraudulent conduct that it prohibits, authorizes
the Attorney General to. commence .an action or proceeding to foreclose that conduct, and specifies
the rélief, including equitable relief, that the Attorney General may seek.” (Trunip Entrepreneur
Initiative, 137 AD3d at 417).
Cases formally captioned The People of the State of New York. by [Attorney-General] v. Respondent are.
abbreviated throughout this decision as State v. Respondent.
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As explained above, the allegations set forth in the Petition all relate to the Attorney
General's overarching argument that from 2016 through 2021, CSH transterred $42.4 million
dollars to Cold Spring Realty and other associated parties. From this amount, 'the Attorney General
alleges that $22.6 million was illegally converted rather than being properly used for resident care.
Instead, Respondents participated in the three above-identified fraudulent schemes resulting in
personal profit. The Petition asserts seven causes of action as follows:
- The First Cause of Action is asserted pursuant.to the repeated and persistent fraud
clauses of Executive Law §.63(12) related to “services purportedly rendered by. [CSH] that did not
conform with applicable laws and regulation, including reftaining from engaging in unacceptable
practices in violation of 18 NYCRR § 515.2.”
- The Second Cause of Action is asserted putsuant to the repeated and persistent
fraud clauses of Executive Law § 63(12) related to real property transactions, including binding
CSH to ati exorbitant lease agreement and binding Cold Spring Realty to a $16 million promissory
note subject to 13% interest.
- The Third Cause-of Action is asserted pursuant to the repeated. and persistent fraud
clauses of Executive Law § 63(12) related to “withdrawals and transfers fiom [CSH] in excess of
the disclosure thresholds as set forth in PHL § 2808(5)(c),” “[p]teparing, filing, and/or causing to
be filed with DOH false annual financial and statistical reports that failed to properly. disclosure
related parties and submit required financial statements, pursuant 1o 10 NYCRR .§ 86-2.2,” and
“[p]reparing, filing, and/or causing to by filed with DOH false and/or, misleading documents
concerning an application for a.CON, on behalf of [CSH]”.as well as false and misleading annual
billing certifications.
= The Fourth Cause of Action is asserted pursuant.to the repeated and. persistent
illegality clauses of Executive Law § 63(12) related to alleged failures to comply with legal
obligations to provide residents the care required under specified New York and Federal nursing
home regulations.
- The Fifth Cause of Action is asserted pursnant to the repeated and persistent
illegality clause of Executive Law § 63(12) related to violation of controlling statutes and
regulations governing resident care and the collection of Medicare funds.
~ The Sixth Cause of Action is asserted pursuant, to Executive Law § 63-c for the
alleged misappropriation of funds derived from the Medicaid and. Medicare Programs.
= The Seventh Cause of Action is-asserted. pursuant.to-the common law doctrine of
unjust enrichment for “funds unlawfully received from the Medicaid and Medicare Programs.”
First Cause of Action Pursuant to Executive Law §63(12)
Petitioner ¢lainis that all Respondents other than Graph MGA, LLC, Graph Management,
LLC, Graph Insurance Company A Risk: Retention Group (collectively the “Graph Respondents”
or “Graph Entities*) and Comprehensive Care Solutions, LLC (*Compréhensiye”),. were
responsible for the conversion, of millions in Medicaid.and Medicare funds-received by CSH. As.
s
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stated herein, the Attorney General claims that these funds were paid to the Respondents for
services that were not performed rather than being used for resident care and adequate staffing.
The Petitioner also argues that the Respondents mislead the DOH during the CON process
regarding the true managing parties, the experience of those taking an. ownership interest ih the
Facility, and. the operations of the Facility. However, the Petitioner’s repeated arguments
concerning a lack of experience. in nursing home administration by various members of CSH is
somewhat perplexing given the DOH’s approval of these individuals involvement after a two-year
application process and additional approval of their ownership of other facilities. In ‘fact,
Respondent Farkovits was involved in six of the other CON applications that were contingently
approved by the Public. Health and Health Planning Council (PHHPC) when.the underlying CON
was contingently’ approved at the January 28, 2016 meeting. Respondent Avi Philipson was
involved in two other contingently approved CON’s. As noted above, both David-and Friedman
had been approved owners of three other nursing home facilities at-the time ‘that the subject CON
was contingently approved. The court finds no fraud in this regard.
With regard to management agreements, the court notes that although during, the initial
CON application process, it -was presented that “there will be no, consulting and. administrative
services agreements with SentosaCare. or any. other entity contemplated for the. facility after
transfer of ownership” (NYSCEF Doe. 533, Feb. 11, 2016 Executive Summary at 8), by November
19, 2016, the DOH had approved the addition of Cold Spring Hills Center for Nursing and
Rehabilitation to the agreement to: provide consulting setvices by SentosaCare (NYSCEF Doe.
300). The court docs not perceive-that material information concerning management of the Facility
was withheld from the DOH such that ihe Respondents’ actions constituted. a “repeated and
persistent fraud.”
Further, each of the alleged related entities to have.done business with CSH asserts that the
amounts paid were reasonable payment for value received. Although the Petition together with
the accompanying affidavits go into great detail about the amoutits transferred to each telated
party, the Attomey General offers nothing more thai speculation about whether the payments
exceeded fair value. By contrast, the Respondents each present affidavits detailing the payments
and the goods and services provided. In reply, the Attorney General fails to offer any specific
valuations or evidence establishing overpayment for particular services. The: fact that the
paythents were made does.not establish that they were in excess of the value received, As itis, in
the fitst instance, the Attorney General’s burden to establish a prima facie case, the court finds that
Petitioner has failed to make a prima facie showing under the first cause of action.
Second Cause of Action Pursuant to Executive Law §63(12)
Petitioner claims that all Respondents other than Ventura Services LLC-d/b/a Philosophy
Cate Cetiter (“Ventura”), Graph Respondents, Comprehensive and: Rosewell Associates LLC
(Rosewell”), violated Executive Law §63(12) by entering into the Lease Agreement and
Promissory Note. Additionally. it is alleged that. the Respondents engaged in unacceptable
practices in violation of 18 NYCRR § 515.2.
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7
The Lease Agreement
One of the primary fraudulent schemes asserted by the Attorney General relates to the
Lease Agreement between Cold Spring Realty and CSI. The Petition alleges that CSH was
charged exorbitant rent by Cold Spring Realty and CSH paid over $15 million, to the owners of
Cold Spring Realty between 2016 and 2021, exclusive:of the $33 million debt service payments.
However, the DOH Executive Summary acknowledges that a draft lease was submitted
setting forth a 30-year term with annual rent equal to the sum’of the Cold Spring Realty’s debt
service onthe real property mortgage (assessed at.$3,899,477 for.year one) plus:$4 million. ‘The
first year’s rent was disclosed as $7,899,477 or $658,290 per month, The Executive Summary
further references an affidavit submitted on behalf of CSH acknowledging that the landlord and
tenant entities include several members in common. ‘The DOH contingently approved the CON
with this disclosed lease information.
Cold Spring Realty argues that the familial relationships among members of Realty and
CSH were disclosed to DOH. Realty points out that the Attorney General has failed to-advance
evidence establishing that the lease payments were excessive, only that they were in the top 25%
for the region. Thus, Realty argues that the Lease Agreement, approved by DOH, docs not
establish any claim under Executive Law § 63(12) in that there is no repeated fraudulent acts or
illegality.
In support of its argument, Cold Spring Realty submits. the affidavit of Helena Bernstein,
Chief Financial Officer of Respondent Ventura, who provides information concerning the actual
lease payments made by CSI to Realty for the period of 2016-2023. According to.Ms. Bernstein,
detailed information ‘about the annual lease payments was also disclosed in the required annial
reports prepared on behalf of CSH and submitied to DOH. The annual reports. submitted beiween
2017 and 2022 indicate that the “anticipated future anniial rental payments” were between $6.7
million dollars and $9.9 million dollars (the 2017 report refleets-$9.9 million; 2018 report reflects
$8.8 million; 2019 reflects $8.8 million; 2020 reflects $6.7 million and 2021 reflects $6.7 million).
For its part, CSH argues that the DOH approved the Lease Agreement with. indefinite debt
service built in as a portion of the rent. Further, CSIV explains that a non-arms-length lease is
common in the nursing home: industry as evidenced by eleven of the fourteen other CON
applications presented to DOH when CSH’s application was considered-by the PHHPC on January
28, 2016. Upon a review of the record, if is apparent that the DOH regularly entertained and
approved.CON’s involving landlord entities and operator-entities comprised of common or related
owners.
The court finds that the Petitioner thas failed to adequately establish. by competent proof
that the Lease Agreement is a product of fraud. As detailed herein, the Lease Agreement was
provided to the DOH as part of CSH’s CON application. The Executive Summary, prepared by
the DOH, explicitly references the financial terms of the Lease Agreement and the existence of
related parties among the landlord, Cold Spring Realty, and the tenant, CSH. The fact that. the
landlord may have had control of the lease negotiations docs not negate the DOH's approval of
the Lease Agreement. CSH’s decisions related io the Lease Agreement are not for the court's
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determination given. the DOH"’s approval. ‘To that end, Petitioner has failed to set forth in what
ways the approved Lease Agreement establishes a fraud, ‘The terms’of the Lease Agreement, as
provided to the DOH and thereafier approved, is not a “fraud” but rather areal estate transaction
between disclosed related parties. Indeed, the Executive Summary prepared by DOH states in
part, “Cold Spring Realty Acquisition, LLC as landlord, and Cold Spring Acquisition, LLC, as
tenant, have entered into.a proposed lease agreement for site. control of the facility, There.is.a
relationship between Cold Spring Realty Acquisition, LLC and Cold Spring Acquisition, LLC that
is being acknowledged in this application, in that.the individuals have ownership iriterests in both
the operating entity and the real estate entity.” The court again notes that it is undisputed that it-is
not unusual for the DOH to approve CON’s involving real property owned by entities that are
related to the proposed ‘nursing facility operator entity.
The Promissory Note to Lending Partners
‘The alleged fraudulent scheme under the Second Cause of Action concerns a Promissory
Note wherein Lending Partners, an-alleged corporate alter ego of Cold,Spring, Realty, loaned Cold
Spring Realty $16 million at 13% interest. ‘The crux of the argwnent in this regard is that CSI's
CON application referred to the real property purchase being satisfied with $13.5 million of Cold
Spring. Realty member equity and a $54 million dollar loan with. a 30-yeat term at 6% interest,
with any shortfall:to be made up by additional membet equity. In November of 2015, the DOH
advised Andrew Blatt on behalf of CSH that disproportionate equity: provided to both the operating
entity and real property entity “should be provided interest, free.” (NYSCEF Doc. 29).. In
connection with the promise of equity contributions, both Respondent Benjamin Landa and
Respondent Bent Philipson provided affidavits to the DOH setting forth the following:
‘Under penalty-of perjury, this affidavit is being submitted to confirm that I will
provide the needed equity for Cold Spring Realty Acquisition, LLC.in excess of
my membership interest: percentage of the LLC; anid
I will provide the needed equity to Cold Spring Acquisition. [LLC, to the extent
required in the event that there isa need for these resouréés in support ol the Cold
Spring Acquisition, LLC, pending CON 142146-E.
Yunderstand that-the New York-State Department of Health will rely on the truth
of this affidavit when making a decision on the cuttent application.
These affidavits were submitted to DOH in January 2016. and the DOH provided contingent
approval on February 11,2016 noting that “liquid resources may not be available in proportion to
ownership interést” and “[p]roposed realty members Bent Philipson (on behalf-of Philipson Family
LLC) and Benjamin Landa have provided affidavits stating their. willingness to. contribute
resources disproportionate to their membership interest in the realty entity.” (NYSCEF Doe. 533)
The Executive Summary further states that the approval-was.contingent on submission of
an “executed real property loan commitment acceptable to DOH.” CSH was also required ‘to
provide. executed copies of the working capital loan commitrnem, along with the commitment for
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purchase of the operations. Despite all of these representations, a“Subordinated Promissory Note”
in favor of “Lending Partners LLC” made up of the Philipson Family, LLC (Bent Philipson), ZBL
Management (Cheskel Berkowitz and Joel Zupnick), Lifestar (David Zahler), and Benjamin Landa
was executed by Cold Spring Realty on June 1, 2016. with a maturity date of November 30, 2019.
(NYSCEF Doc. 32). By November of 2018, Cold Spring Realty refinanced the mortgage on the
real property and folded the Promissory Note, with. interest, into the new loan. Thereafter, the
payment became part of the-debt service rent charged to CSIH.
CSH’s position that Cold Spring Realty, as a private entity, has the right to. enter into any
loan agreement it deems appropriate is somewhat disingenuous when CSH ultimately. is
responsible for the payment of the loan in accordance with the lease terms, As noted above, by
letter dated November 13, 2015, the DOH required, among ‘wthér items, affidavits from each of the
members of Cold Spring Realty stating “he or she is willing to contribute resources
disproportionate to his or her membership interest inthe operating entity including its working
capital. Please note the money should'be interest free.” ‘The letter goes on to require, “individual
affidavits (related 1o) contributed resources disproportionate to membership interest in the real
property entity.” (NYSCEF Doc. 29). As’sct forth in detail in the Petition, in January of' 2016,
Respondents Landa and B. Philipson affirmatively répresented. 10 the DOH during the. CON
process that they would each invest additional capital to the purchase of the real property as well
as the Facility.
‘The pass-through of the interest payment to,CSH is evidenced by an email sent from Bent
Philipson on. November 2, 2018, indicating that the Promissory Note payoff would. “include
interest.” (NYSCEF Doce. 34). Further, Cold Spring Realty acknowledges that “DOH approved a
lease that ineluded the payment of indefinite ‘debt service’ and taxes, it was clearly contemplated
that the rent could fluctuate-depending on such factors as the principal and interest include: in the.
mortgage-payments, the cost of insurance onthe property and the taxes.”. (NYSCEF Doc, 531 at
24). The Cold Spring Realty Respondents argue that the use of a. promissory note ensuring interest
to. themselves was not. specifically prohibited by the DOH and that upon refinancing, loan
payments went down due-to beneficial loan terms even though “thé total principal owed [Cold
Spring Realty] increased.” Ud).
Unlike the facts’ surrounding the-Lease Agreement, the facts related to the Promissory Note
demonstrate the misleading nature in which ceriain Respondents presented the anticipated
financing of the Facility to the DOH. The Executive Summary and CON documents set forth
representations made to the DOH concerning the purchase financing ofthe real property, Cold
Spring Realty represented that it would acquire the real. properly for $65,750,000 “funded by
$13,550,000 in members’ equity and a loan for $54,200,000 at-6% interes rate for a 30-year term.”
Equally telling are the various conditions to the PHHPC’s February 11,2016, approval of the
CON. These. conditions include, “submission of executed loan commitment for purchase: of
operations, executed working capital loan commitment, éxécuted real property loan commitment”
all acceptable to the DOH.
Upon consideration of the facts and law, the court finds that the Executive Law § 63(12)
cause.of action has been established with respect to the undisclosed Promissory Note and that the
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Respondents’ raise no material facts in opposition. ‘The appropriate remedy is restitution of the
interest amount of approximately $2 million to be'tnadé to CSH collectively by the members of
Lending Partners. (See State v. Leasing Expenses Company, LEC. 199 AD3d.521 [1st Dept 202.1]:
see also State v. Northern Leasing Systems, Inc., 169 AD3d 527 | 1st Dept 2019]; State v.. Orbital
Publishing Group, Inc., 169 AD3d 564 |1st Dept 2019|). Such restitution to CSH shall be
contributed, with the individual entity members being individually liable, as. $503,889.00 each
from Philipson Family, LLC, ZBL Management, Lifestar, and Benjamin Landa for a total of
$2,015,556.00.
‘Third Cause of Action Pursuant to Executive Law §63(12)
Alleged Violation of PHL § 2808(5)(c) and Additional Regulation
The Petition further alleges that Respondents have violated PHL §2808 (5){c), which limits
equity withdrawals to three percent of the Facility’s total prior year annual .reported.revenue. Any
equity withdrawal above three percent must be on notice to the DOH. According-to the Petition,
from 2018 through 2020, Respondents transferred a total of $11 million in “cash Now rental” to
Cold Spring Reaity. in violation of the limit for asset transfers without receiving requisite approval
from the DOH. Together with transfers to other related parties. for “management services,”
Petitiorier alleges that statutory cap was exceeded by $3,930,389.18 for the period covering 2018
through 2020.
CSH argues that transfers of rent payments to Cold Spring Realty, which were approved
during the CON process, cannot be considered equity and nonetheless such payments are. “for
facility purposes” which is-an exception to the limit on.equity withdrawals.as set fortlyin the statute.
As determined by another Justice of this court, “it does not appeat that the challenged ‘rerital
payments ate subject to the three percent threshold addressed in Public Health Law §'2808(5)(c).”
(State ». Fulton Commons Care. Center Inc., ét al.; [Nassau County. Supreme. Court, Index
617687/2022] (Singer, J. August 16,2023]). Fo the contrary, the rental payments made pursuant
tothe DOH-approved lease agreement are, on'their face: approved. legitimate business expenses.
Next, CSH argues that the payment made to Highview fer “repayment of an interest free
loan for litigation costs” is not an equity withdrawal. Further, without including the .rental
payments made to Cold Spring Realty in the equity calculation, the total of those-payments to
Highview in the-amount of $563,438.23 and Rosewell in the amount. of $260,000.02 during the
2018-2020 period do not exceed the three percent cap. On the whole, the court finds that with the
annual. rent removed from the equation, the Petitioner has failed to establish that the remaining
expenses constituted unapproved equity withdrawals in violation of PHL § 2808(5)(c).
The Petition further explains that annual cost reports pursuant to. 10 NYCRR § 86-2:2
requires; in several places, disclosure of “related companies” or “Non-Arm's Length
2 The Fifth Cause of Action is based upon the same allegations but-is brought pursuant: to the
repeated and persistent illegality clauses of Executive Law § 63(12), Both.causes of action are
treated together here.
10.
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Arrangements,” defined as “[aJn arrangement between the operator of a. facility and an
organization related to the operator by common ownership and or control for the furnishing of
services, facilities, or supplies . - . Additional regulations require extensive disclosure and:
reporting. The Petitioner alleges that Avi Philipson, asthe signatory ori these reports, failed to
fully disclose related companies and non-arm’s length transactions, including transactions with,
Highview, the Graph Entities, Comprehensive, and Prudent Consulting. and failed to submit
financial statements. in connection with such parties. Similarly, Petitioner asserts ‘that CSH
submitted false claims to Medicaid for reimbursement based upon the alleged unacceptable
practices, including failing to provide required resident care, free from. abuse and neglect,
operating the nursing home with insufficient staff, and converting public funds.
In response, CSH points out that Highview-and the Graph Lintities were disclosed as related
parties in the notes section of the cost reports.and non-party Prtident Consulting ‘was listed as
related to the facility operatot in that portion related to. Schedule of Fees and Contracted Services.
Concerning Comprehensive, which was not disclosed as a related party, CSH explains that
Respondent Zahler is not “affiliated” with Comprehensive and even. if there was such an affiliation,
it need not be disclosed on a.cost report. CSH points out that rclated entity disclosures relate
strictly to the Facility operator and not the real property owner entity.
Further, CSH argues that not only must the Petitioner establish that the DOH would have
done something: differently if the cost reports were completely accurate. but also that the
inaccuracies in some way affected the amount of Medicaid payments received by CSH. Also,
CSH’s current Medicaid reimbursement rate is determined using the Facility’s 2007 costs, The
2017-2021 Cost Reports are not factored into the reimbursement rate.
On this record, the court finds thatthe Attorney General has failed to adequatély allege that
Comprehensive is a related party to CSH. The remaining related parties were disclosed on the
reports. Accordingly, the court finds that the Attorney ‘General has failed to establish by admissible
evidence non-compliance with the
Preview
) NA AU OUN PK DM INDEX NO. 617709/2022 NYSCEF BOC. NO. 815 RECEIVED NYSCEF 03/20/2024 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NASSAU PEOPLE OF THE STATE OF NEW Y ORK by LETITIA JAMES, Attomey General of the State of New Y ork, Petitioner, Vv. Index No. 617709/2022 COLD SPRING ACQUISITION, LLC D/B/A COLD SPRING HILLS CENTER FOR NURSING & Hon. Lisa A. Cairo, J.S.C REHABILITATION; COLD SPRING REALTY ACQUISITION, LLC; VENTURA SERVICES, LLC TAS Part 25 D/B/A/ PHILOSOPHY CARE CENTERS; GRAPH MGA, LLC; GRAPH MANAGEMENT, LLC; GRAPH Motion Seg. Nos. 001, 021 INSURANCE COMPANY A RISK RETENTION GROUP, LLC; HIGHVIEW MANAGEMENT INC.; COMPREHENSIVE CARE SOLUTIONS, LLC; PHILIPSON FAMILY, LLC; LIFESTAR FAMILY HOLDINGS, LLC; ROSS CSH HOLDINGS, LLC; ROSEWELL ASSOCIATES, LLC; B&L CONSULTING, LLC; ZBL MANAGEMENT, LLC; BENT PHILIPSON; AVI PHILIPSON; ESTATE OF DEBORAH PHILIPSON; JOEL LEIFER; LEAH FRIEDMAN; ROCHEL DAVID; ESTHER FARKOVITS; BENJAMIN LANDA; DAVID ZAHLER; CHAYA ZAHLER; CHAIM ZAHLER; JACOB ZAHLER; CHESKEL BERKOWITZ; and JOEL ZUPNICK, Respondents. NOTICE OF ENTRY PLEASE TAKE NOTICE that the within is a true and comect copy of the Decision and. Order on Motion Seg. 001 and 021 (NY SCEF Doc #802) issued in the above-captioned action by the Hon. Lisa A. Cairo on March 15, 2024, and duly entered and filed by the Clerk of the Supreme Court of the State of New Y ork, Nassau County, on March 20, 2024. 1 of 17 ) NA AU OUN PK DM INDEX NO. 617709/2022 NYSCEF BOC. NO. 815 RECEIVED NYSCEF: 03/20/2024 Dated: New York, New York DECHERT LLP March 20, 2024 By: /s/ StevenA. Engel StevenA. Engel Three Bryant Park 1095 Avenue of the Americas New York, NY 10036-6797 steven. |(@dechert.com Telephone: (212) 698-3500 Facsimile: (212) 698-3599 Attorney for Respondents ZBL Management, LLC; Ross CSH Holdings, LLC; Cheskel Berkowitz; and Joel Zupnick 2 of 17 (FILED: NASSAU COUNTY CLERK 03720/2024 08:0 PM INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NASSAU PRESENT: HON. LISA A. CAIRO, J.S.C. TRIAL/IAS PART 25 PEOPLE OF THE STATE OF NEW YORK by LETITIA JAMES, ATTORNEY GENERAL OF THE DECISION AND ORDER STATE OF NEW YORK, ON PETITION Petitioner, INDEX No. 617709/2022 -against- Motion Seq, Nos. 001,021 COLD SPRING ACQUISITION, LLC D/B/A COLD SPRING WWLLS CENTER FOR NURSING & REHABILITATION, COLD SPRING REALTY ACQUISITION, LLC, VENTURA SERVICES, LLC D/B/A PHILOSOPHY CARE CENTERS, GRAPH MGA, LLC, GRAPH MANAGEMENT, LLC, GRAPH INSURANCE COMPANY A RISK RETENTION GROUP, LLC, HIGHVIEW MANAGEMENT INC, COMPREHENSIVE CARE SOLUTIONS, LLC, PHILIPSON FAMILY, LLC, LIFESTAR FAMILY HOLDINGS, LLC, ROSS CSH HOLDINGS, LLC, ROSEWELL ASSOCIATES, LLC, B&L CONSULTING, LLC, ZBL MANAGEMENT, LLC BENT PHILIPSON, AVI PHILIPSON, ESTATE OF DEBORAH PHILIPSON, JOEL LEIFER, LEAH FRIEDMAN, ROCHEL DAVID, ESTHER FARKOVITS, BENJAMIN LANDA, DAVID. ZAHLER, CHAYA ZAHLER, CHAIM ZAHLER, JACOB ZAHLER, CHESKEL BERKOWITZ, and JOEL ZUPNICK, Respondents. se -X sre The following papers. were read_on this motion DOCS NUMBERED Petition, Affidavits, Affirmations, Exhibits, Memos. 1-114,682 Answers and Opposition Papers $02-513, 514-529, 530-535, 536-550, 551-357, 558-566, 567-575, 576-587, 588-597. 598-605, 3 of 13 (FILED: NASSAU COUNTY CLERK 03720/2024 08:0 PM INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 614, 606-612, 633- 648, 777-783 Reply Papers. 736-739 (MS 21) Notice of Motion, Affidavits, Affirmations, Exhibits, Memos... 613, 615 -632 Opposition Papers...........-..-.eeseeeeeeeeeeeebees tebe and baeeete sevvetereeres 736-739 The Attorney General of the State of New York on behalf of the State commenced this special proceeding pursuant to New York Executive Law § 63(12) by verified Petition on December 16, 2022, against Cold Spring Acquisition, LLC d/b/a Cold: Spring Hills. Center for Nursing & Rehabilitation (CSH) and Cold Spring Hills Realty Acquisition LLC (Cold Spring Realty), as well as their respective owners and allegedly related parties’ and entities (MS #1). Respondents” motions'to dismiss were largely denied by Decision. and Order dated June 26, 2023. Answers and oppositions to the Petition were filed and oral argument was taken onthe Petition on December 4 through 8, 2023. Respondents Joel Leifer and Rosewell Associates LIC have separately moved for summary determination on the pleadings (MS # 21). BACKGROUND In 2014, Respondent CSH submitted a Certificate of Need (“CON”) application to. the Department of Health (“DOH”) requesting approval to purchase and operate-an existing residential health care facility located in Woodbury, New York (the'“Facility”). As part.of this application, process, CSH was required to provide information about the proposed owners and operators of the Facility; The information provided included disclosure of the related party entities, specifically familial relationships among members.of CSH and Cold Spring Realty, the proposed purchaser of the real property upon which the Facility is located. In resporise to the CON, the DOH prepared an Executive Surnmary-dated February 11, 2016, recommending contingent approval of the CON. ‘The Executive Summary refers to the relationship between CSH and.Cold Spring Realty, “in that the entities havé-several members.in common.” The Executive Summary also. includes a list of. other rutsing home facilities that members of both CSH and Coid’Spring Realty were involved in at the time the CON was submitted. Managing members.of CSH both at the time the. CON. was approved and presently are Joe} Leifer and Avi Philipson,.who is the son of long-time nursing home operator Bent Philipson. .Avi Philipson was a student living in Israel with no prior work experience when the CON was submitted and maintained: an ownership interest in one other New York nursing home facility. Other members of CSH ate the Estate of Deborah Philipson, Esther Farkovits (daughter’ of Benjamin Landa), Rochelle David (daughter of David Zahler), and Leah Friedman (daughter of David Zahler). The members of Cold Spring Realty are the Philipson Family LLC, Benjamin Landa, Lifestar Family Holdings (owned by members of the Zahler Family), and Cheskel Berkowitz. According to the Executive Sumniary, Ms. Farkovits was unemployed and living overseas at the time the CON was submitted. She maintained an ownership interest in-nine other nursing £45. INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 home facilities under the jurisdiction of the Department of Health, Both Rochel David and Leah Friedman represented over two decades of employment in humian resources at Confidence Management Systems (“Confidence”) when the CON was submitted, although later deposition testimony discredited those statements. Specifically; David testified during her: June 2022 investigatory deposition that she had not worked at Confidence since about, 2004, making her length of employment 13 years rather than the 25 years she sets forth inthe CON. Similarly, Friedman testified at her deposition that she had. not worked at Confidence since 2004 or 2005 while stating in the CON that she was employed by Confidence in 2016. Neither Friedman or David explain these discrepancies. in their respective affirmations in opposition to the Petition (NYSCEF Does. 527 and 528). At the time the CON was:submitted, however, both David and Friedman had ownership interests in three other nursing home facilities. The Attorney General asks the court to find that CSH’s CON application presented a misleading picture to the DOH. However, the CON application, in many regards, sets forth accurate and complete information concerning the members of CSH and Cold Spring Realty along with the proposed ownership structure of the Facility and the real property. Respondents argue that the Attorney General is not satisfied with certain requirements of ptivate nursing homes in New York, Rather than address these concetns with the. Legislature, which Respondents argue would be the proper mechanistn, the Attorney General is looking for the court to make’a ruling that. will in effect drastically change ihe way private nursing, homes, are approved and regulated throughout the State. The allegations in the Petition primarily concetn (1) an alleged fraudulent Lease Agreement between CSH: and Cold Spring Realty, (2) an alleged fraudulent Promissory Note executed by Cold Spring Realty in favor of Lending Partners, ait alleged corporate alter ego of Cold Spring Realty, and (3) various payments made by CSH to.other named Respondents as related entities, all resulting in a lack of care-for residents al the Facility: caused by Respondents’ misuse of Facility funds. The Petitioner argues that the various Respondents put personal greed above resident care. The court is now faced with determining whether this alleged personal greed constitutes a violation. of Executive Law § 63(12). .As set forth herein, based upon the underlying Petition, together with all Respondents’ Answers, the-parties’ various Affidavits, Exhibits. and Memoranda of. Law and the weeklong oral argument held before the Court, the Atiorney General has propertly plead and proven certain, but not all, of the Causes of Action in the Petition. DISCUSSION Pursuant to N¥ Executive Law § 63(12), the Attorney General is permitted to: bring a special. proceeding against a respondent seeking injunctive relief, restitution, and damages. A special proceeding is determined by the- court using the same criteria applied: to a motion for summary judgement. (State v. Northern Leasing Sys., 193.AD3d 67, 73 [1st. Dept 2021]; State. v. Telehublink Corp., 301 AD2d 1006, 1007 [3d Dept 2003] [“A special proceeding, is governed by 3 of -13-----— INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 the same standards that apply to’a motion for summary judgment.”}'). ‘The Attorney General must establish that there is no issue of fact.as to its allegations, and therealier the burden shifts to the Respondent who may demonstrate the existence of es of fact requiring a trial. (CPLR 409(d); See Telehublink, 301AD2d at 1007). Should the Petitioner fail to meet its prima Jacie burden, the court-need not even. consider Respondents’ arguments in opposition. Executive Law § 63(12) Executive Law § 63(12) provides in relevant part: “Whenever any person shall.engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud: or illegality in. the carrying on, conducting or transaction of business, the attorney general may apply, in the name of the people of the State of New York, to the supreme court of the state of New York, ot notice of five days, for an order enjoining the continuance of such business activity or of'any fraudulent or illegal acts |and] di ing restitution and damages . . . and the court may award the relief applied for or so much thereof as it may deem. proper.” As discussed in the court’s prior orders, this provision. is-a fuitction of the State’s ability to regulate “businesses within its borders in the interest of securing an honest marketplace.” (State v. Coventry First, LEC, 52 AD3d 345 [1st Dept'2008])..“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 victim of business fraud.” (State v. Apple Health & Sports Clubs, 206 AD2d 266, 268 [1st Dept £994]). Continuing:acts need not be-alleged provided they were “repeated” in nature and fall within the statute of limitations. (Executive Law §:63 (12)). “Fraud” is.broadly defined by the statute as “any device, schenie or-artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions.” (Executive Law § 63(12)), This-definition goes beyond common law. frand and the specific élements of 4 common-law lraud claim need not bi serted under an Exécutive Law § 63(12) catise of-action. (Srate v. Tramp Entrepreneur Initiative, LLC, 137 AD3d 409, 416-417 [1st Dept 2016] [citing Coventry First, $2.AD3d at 346). Rather, the question under the Executive. Law is. “whether the targeted act has the capacity ot tendency to deceive or creates an atmosphere conducive of fraud.” (Northern Leasing Sys, 193 AD3d_at 75 [quotations omitted]). Thus, § 63(12) “defines the fraudulent conduct that it prohibits, authorizes the Attorney General to. commence .an action or proceeding to foreclose that conduct, and specifies the rélief, including equitable relief, that the Attorney General may seek.” (Trunip Entrepreneur Initiative, 137 AD3d at 417). Cases formally captioned The People of the State of New York. by [Attorney-General] v. Respondent are. abbreviated throughout this decision as State v. Respondent. 4 4 of 13 (FILED: NASSAU COUNTY CLERK 03720/2024 08:0 PM INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 As explained above, the allegations set forth in the Petition all relate to the Attorney General's overarching argument that from 2016 through 2021, CSH transterred $42.4 million dollars to Cold Spring Realty and other associated parties. From this amount, 'the Attorney General alleges that $22.6 million was illegally converted rather than being properly used for resident care. Instead, Respondents participated in the three above-identified fraudulent schemes resulting in personal profit. The Petition asserts seven causes of action as follows: - The First Cause of Action is asserted pursuant.to the repeated and persistent fraud clauses of Executive Law §.63(12) related to “services purportedly rendered by. [CSH] that did not conform with applicable laws and regulation, including reftaining from engaging in unacceptable practices in violation of 18 NYCRR § 515.2.” - The Second Cause of Action is asserted putsuant to the repeated and persistent fraud clauses of Executive Law § 63(12) related to real property transactions, including binding CSH to ati exorbitant lease agreement and binding Cold Spring Realty to a $16 million promissory note subject to 13% interest. - The Third Cause-of Action is asserted pursuant to the repeated. and persistent fraud clauses of Executive Law § 63(12) related to “withdrawals and transfers fiom [CSH] in excess of the disclosure thresholds as set forth in PHL § 2808(5)(c),” “[p]teparing, filing, and/or causing to be filed with DOH false annual financial and statistical reports that failed to properly. disclosure related parties and submit required financial statements, pursuant 1o 10 NYCRR .§ 86-2.2,” and “[p]reparing, filing, and/or causing to by filed with DOH false and/or, misleading documents concerning an application for a.CON, on behalf of [CSH]”.as well as false and misleading annual billing certifications. = The Fourth Cause of Action is asserted pursuant.to the repeated and. persistent illegality clauses of Executive Law § 63(12) related to alleged failures to comply with legal obligations to provide residents the care required under specified New York and Federal nursing home regulations. - The Fifth Cause of Action is asserted pursnant to the repeated and persistent illegality clause of Executive Law § 63(12) related to violation of controlling statutes and regulations governing resident care and the collection of Medicare funds. ~ The Sixth Cause of Action is asserted pursuant, to Executive Law § 63-c for the alleged misappropriation of funds derived from the Medicaid and. Medicare Programs. = The Seventh Cause of Action is-asserted. pursuant.to-the common law doctrine of unjust enrichment for “funds unlawfully received from the Medicaid and Medicare Programs.” First Cause of Action Pursuant to Executive Law §63(12) Petitioner ¢lainis that all Respondents other than Graph MGA, LLC, Graph Management, LLC, Graph Insurance Company A Risk: Retention Group (collectively the “Graph Respondents” or “Graph Entities*) and Comprehensive Care Solutions, LLC (*Compréhensiye”),. were responsible for the conversion, of millions in Medicaid.and Medicare funds-received by CSH. As. s 5-of-13 INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 stated herein, the Attorney General claims that these funds were paid to the Respondents for services that were not performed rather than being used for resident care and adequate staffing. The Petitioner also argues that the Respondents mislead the DOH during the CON process regarding the true managing parties, the experience of those taking an. ownership interest ih the Facility, and. the operations of the Facility. However, the Petitioner’s repeated arguments concerning a lack of experience. in nursing home administration by various members of CSH is somewhat perplexing given the DOH’s approval of these individuals involvement after a two-year application process and additional approval of their ownership of other facilities. In ‘fact, Respondent Farkovits was involved in six of the other CON applications that were contingently approved by the Public. Health and Health Planning Council (PHHPC) when.the underlying CON was contingently’ approved at the January 28, 2016 meeting. Respondent Avi Philipson was involved in two other contingently approved CON’s. As noted above, both David-and Friedman had been approved owners of three other nursing home facilities at-the time ‘that the subject CON was contingently approved. The court finds no fraud in this regard. With regard to management agreements, the court notes that although during, the initial CON application process, it -was presented that “there will be no, consulting and. administrative services agreements with SentosaCare. or any. other entity contemplated for the. facility after transfer of ownership” (NYSCEF Doe. 533, Feb. 11, 2016 Executive Summary at 8), by November 19, 2016, the DOH had approved the addition of Cold Spring Hills Center for Nursing and Rehabilitation to the agreement to: provide consulting setvices by SentosaCare (NYSCEF Doe. 300). The court docs not perceive-that material information concerning management of the Facility was withheld from the DOH such that ihe Respondents’ actions constituted. a “repeated and persistent fraud.” Further, each of the alleged related entities to have.done business with CSH asserts that the amounts paid were reasonable payment for value received. Although the Petition together with the accompanying affidavits go into great detail about the amoutits transferred to each telated party, the Attomey General offers nothing more thai speculation about whether the payments exceeded fair value. By contrast, the Respondents each present affidavits detailing the payments and the goods and services provided. In reply, the Attorney General fails to offer any specific valuations or evidence establishing overpayment for particular services. The: fact that the paythents were made does.not establish that they were in excess of the value received, As itis, in the fitst instance, the Attorney General’s burden to establish a prima facie case, the court finds that Petitioner has failed to make a prima facie showing under the first cause of action. Second Cause of Action Pursuant to Executive Law §63(12) Petitioner claims that all Respondents other than Ventura Services LLC-d/b/a Philosophy Cate Cetiter (“Ventura”), Graph Respondents, Comprehensive and: Rosewell Associates LLC (Rosewell”), violated Executive Law §63(12) by entering into the Lease Agreement and Promissory Note. Additionally. it is alleged that. the Respondents engaged in unacceptable practices in violation of 18 NYCRR § 515.2. 6 of 13 (FILED: NASSAU COUNTY CLERK 03720/2024 08:0 PM INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 7 The Lease Agreement One of the primary fraudulent schemes asserted by the Attorney General relates to the Lease Agreement between Cold Spring Realty and CSI. The Petition alleges that CSH was charged exorbitant rent by Cold Spring Realty and CSH paid over $15 million, to the owners of Cold Spring Realty between 2016 and 2021, exclusive:of the $33 million debt service payments. However, the DOH Executive Summary acknowledges that a draft lease was submitted setting forth a 30-year term with annual rent equal to the sum’of the Cold Spring Realty’s debt service onthe real property mortgage (assessed at.$3,899,477 for.year one) plus:$4 million. ‘The first year’s rent was disclosed as $7,899,477 or $658,290 per month, The Executive Summary further references an affidavit submitted on behalf of CSH acknowledging that the landlord and tenant entities include several members in common. ‘The DOH contingently approved the CON with this disclosed lease information. Cold Spring Realty argues that the familial relationships among members of Realty and CSH were disclosed to DOH. Realty points out that the Attorney General has failed to-advance evidence establishing that the lease payments were excessive, only that they were in the top 25% for the region. Thus, Realty argues that the Lease Agreement, approved by DOH, docs not establish any claim under Executive Law § 63(12) in that there is no repeated fraudulent acts or illegality. In support of its argument, Cold Spring Realty submits. the affidavit of Helena Bernstein, Chief Financial Officer of Respondent Ventura, who provides information concerning the actual lease payments made by CSI to Realty for the period of 2016-2023. According to.Ms. Bernstein, detailed information ‘about the annual lease payments was also disclosed in the required annial reports prepared on behalf of CSH and submitied to DOH. The annual reports. submitted beiween 2017 and 2022 indicate that the “anticipated future anniial rental payments” were between $6.7 million dollars and $9.9 million dollars (the 2017 report refleets-$9.9 million; 2018 report reflects $8.8 million; 2019 reflects $8.8 million; 2020 reflects $6.7 million and 2021 reflects $6.7 million). For its part, CSH argues that the DOH approved the Lease Agreement with. indefinite debt service built in as a portion of the rent. Further, CSIV explains that a non-arms-length lease is common in the nursing home: industry as evidenced by eleven of the fourteen other CON applications presented to DOH when CSH’s application was considered-by the PHHPC on January 28, 2016. Upon a review of the record, if is apparent that the DOH regularly entertained and approved.CON’s involving landlord entities and operator-entities comprised of common or related owners. The court finds that the Petitioner thas failed to adequately establish. by competent proof that the Lease Agreement is a product of fraud. As detailed herein, the Lease Agreement was provided to the DOH as part of CSH’s CON application. The Executive Summary, prepared by the DOH, explicitly references the financial terms of the Lease Agreement and the existence of related parties among the landlord, Cold Spring Realty, and the tenant, CSH. The fact that. the landlord may have had control of the lease negotiations docs not negate the DOH's approval of the Lease Agreement. CSH’s decisions related io the Lease Agreement are not for the court's 7 co 5 ef 13. INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 determination given. the DOH"’s approval. ‘To that end, Petitioner has failed to set forth in what ways the approved Lease Agreement establishes a fraud, ‘The terms’of the Lease Agreement, as provided to the DOH and thereafier approved, is not a “fraud” but rather areal estate transaction between disclosed related parties. Indeed, the Executive Summary prepared by DOH states in part, “Cold Spring Realty Acquisition, LLC as landlord, and Cold Spring Acquisition, LLC, as tenant, have entered into.a proposed lease agreement for site. control of the facility, There.is.a relationship between Cold Spring Realty Acquisition, LLC and Cold Spring Acquisition, LLC that is being acknowledged in this application, in that.the individuals have ownership iriterests in both the operating entity and the real estate entity.” The court again notes that it is undisputed that it-is not unusual for the DOH to approve CON’s involving real property owned by entities that are related to the proposed ‘nursing facility operator entity. The Promissory Note to Lending Partners ‘The alleged fraudulent scheme under the Second Cause of Action concerns a Promissory Note wherein Lending Partners, an-alleged corporate alter ego of Cold,Spring, Realty, loaned Cold Spring Realty $16 million at 13% interest. ‘The crux of the argwnent in this regard is that CSI's CON application referred to the real property purchase being satisfied with $13.5 million of Cold Spring. Realty member equity and a $54 million dollar loan with. a 30-yeat term at 6% interest, with any shortfall:to be made up by additional membet equity. In November of 2015, the DOH advised Andrew Blatt on behalf of CSH that disproportionate equity: provided to both the operating entity and real property entity “should be provided interest, free.” (NYSCEF Doc. 29).. In connection with the promise of equity contributions, both Respondent Benjamin Landa and Respondent Bent Philipson provided affidavits to the DOH setting forth the following: ‘Under penalty-of perjury, this affidavit is being submitted to confirm that I will provide the needed equity for Cold Spring Realty Acquisition, LLC.in excess of my membership interest: percentage of the LLC; anid I will provide the needed equity to Cold Spring Acquisition. [LLC, to the extent required in the event that there isa need for these resouréés in support ol the Cold Spring Acquisition, LLC, pending CON 142146-E. Yunderstand that-the New York-State Department of Health will rely on the truth of this affidavit when making a decision on the cuttent application. These affidavits were submitted to DOH in January 2016. and the DOH provided contingent approval on February 11,2016 noting that “liquid resources may not be available in proportion to ownership interést” and “[p]roposed realty members Bent Philipson (on behalf-of Philipson Family LLC) and Benjamin Landa have provided affidavits stating their. willingness to. contribute resources disproportionate to their membership interest in the realty entity.” (NYSCEF Doe. 533) The Executive Summary further states that the approval-was.contingent on submission of an “executed real property loan commitment acceptable to DOH.” CSH was also required ‘to provide. executed copies of the working capital loan commitrnem, along with the commitment for 8. -aff-T5 (FILED: NASSAU COUNTY CLERK 03720/2024 08:0 PM INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 purchase of the operations. Despite all of these representations, a“Subordinated Promissory Note” in favor of “Lending Partners LLC” made up of the Philipson Family, LLC (Bent Philipson), ZBL Management (Cheskel Berkowitz and Joel Zupnick), Lifestar (David Zahler), and Benjamin Landa was executed by Cold Spring Realty on June 1, 2016. with a maturity date of November 30, 2019. (NYSCEF Doc. 32). By November of 2018, Cold Spring Realty refinanced the mortgage on the real property and folded the Promissory Note, with. interest, into the new loan. Thereafter, the payment became part of the-debt service rent charged to CSIH. CSH’s position that Cold Spring Realty, as a private entity, has the right to. enter into any loan agreement it deems appropriate is somewhat disingenuous when CSH ultimately. is responsible for the payment of the loan in accordance with the lease terms, As noted above, by letter dated November 13, 2015, the DOH required, among ‘wthér items, affidavits from each of the members of Cold Spring Realty stating “he or she is willing to contribute resources disproportionate to his or her membership interest inthe operating entity including its working capital. Please note the money should'be interest free.” ‘The letter goes on to require, “individual affidavits (related 1o) contributed resources disproportionate to membership interest in the real property entity.” (NYSCEF Doc. 29). As’sct forth in detail in the Petition, in January of' 2016, Respondents Landa and B. Philipson affirmatively répresented. 10 the DOH during the. CON process that they would each invest additional capital to the purchase of the real property as well as the Facility. ‘The pass-through of the interest payment to,CSH is evidenced by an email sent from Bent Philipson on. November 2, 2018, indicating that the Promissory Note payoff would. “include interest.” (NYSCEF Doce. 34). Further, Cold Spring Realty acknowledges that “DOH approved a lease that ineluded the payment of indefinite ‘debt service’ and taxes, it was clearly contemplated that the rent could fluctuate-depending on such factors as the principal and interest include: in the. mortgage-payments, the cost of insurance onthe property and the taxes.”. (NYSCEF Doc, 531 at 24). The Cold Spring Realty Respondents argue that the use of a. promissory note ensuring interest to. themselves was not. specifically prohibited by the DOH and that upon refinancing, loan payments went down due-to beneficial loan terms even though “thé total principal owed [Cold Spring Realty] increased.” Ud). Unlike the facts’ surrounding the-Lease Agreement, the facts related to the Promissory Note demonstrate the misleading nature in which ceriain Respondents presented the anticipated financing of the Facility to the DOH. The Executive Summary and CON documents set forth representations made to the DOH concerning the purchase financing ofthe real property, Cold Spring Realty represented that it would acquire the real. properly for $65,750,000 “funded by $13,550,000 in members’ equity and a loan for $54,200,000 at-6% interes rate for a 30-year term.” Equally telling are the various conditions to the PHHPC’s February 11,2016, approval of the CON. These. conditions include, “submission of executed loan commitment for purchase: of operations, executed working capital loan commitment, éxécuted real property loan commitment” all acceptable to the DOH. Upon consideration of the facts and law, the court finds that the Executive Law § 63(12) cause.of action has been established with respect to the undisclosed Promissory Note and that the 9 Ol off 157 (FILED: NASSAU COUNTY CLERK 03720/2024 08:0 PM INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 Respondents’ raise no material facts in opposition. ‘The appropriate remedy is restitution of the interest amount of approximately $2 million to be'tnadé to CSH collectively by the members of Lending Partners. (See State v. Leasing Expenses Company, LEC. 199 AD3d.521 [1st Dept 202.1]: see also State v. Northern Leasing Systems, Inc., 169 AD3d 527 | 1st Dept 2019]; State v.. Orbital Publishing Group, Inc., 169 AD3d 564 |1st Dept 2019|). Such restitution to CSH shall be contributed, with the individual entity members being individually liable, as. $503,889.00 each from Philipson Family, LLC, ZBL Management, Lifestar, and Benjamin Landa for a total of $2,015,556.00. ‘Third Cause of Action Pursuant to Executive Law §63(12) Alleged Violation of PHL § 2808(5)(c) and Additional Regulation The Petition further alleges that Respondents have violated PHL §2808 (5){c), which limits equity withdrawals to three percent of the Facility’s total prior year annual .reported.revenue. Any equity withdrawal above three percent must be on notice to the DOH. According-to the Petition, from 2018 through 2020, Respondents transferred a total of $11 million in “cash Now rental” to Cold Spring Reaity. in violation of the limit for asset transfers without receiving requisite approval from the DOH. Together with transfers to other related parties. for “management services,” Petitiorier alleges that statutory cap was exceeded by $3,930,389.18 for the period covering 2018 through 2020. CSH argues that transfers of rent payments to Cold Spring Realty, which were approved during the CON process, cannot be considered equity and nonetheless such payments are. “for facility purposes” which is-an exception to the limit on.equity withdrawals.as set fortlyin the statute. As determined by another Justice of this court, “it does not appeat that the challenged ‘rerital payments ate subject to the three percent threshold addressed in Public Health Law §'2808(5)(c).” (State ». Fulton Commons Care. Center Inc., ét al.; [Nassau County. Supreme. Court, Index 617687/2022] (Singer, J. August 16,2023]). Fo the contrary, the rental payments made pursuant tothe DOH-approved lease agreement are, on'their face: approved. legitimate business expenses. Next, CSH argues that the payment made to Highview fer “repayment of an interest free loan for litigation costs” is not an equity withdrawal. Further, without including the .rental payments made to Cold Spring Realty in the equity calculation, the total of those-payments to Highview in the-amount of $563,438.23 and Rosewell in the amount. of $260,000.02 during the 2018-2020 period do not exceed the three percent cap. On the whole, the court finds that with the annual. rent removed from the equation, the Petitioner has failed to establish that the remaining expenses constituted unapproved equity withdrawals in violation of PHL § 2808(5)(c). The Petition further explains that annual cost reports pursuant to. 10 NYCRR § 86-2:2 requires; in several places, disclosure of “related companies” or “Non-Arm's Length 2 The Fifth Cause of Action is based upon the same allegations but-is brought pursuant: to the repeated and persistent illegality clauses of Executive Law § 63(12), Both.causes of action are treated together here. 10. 18 of 18 INDEX NO. 617709/2022 NYSCEF DOC. NO. 802 RECEIVED NYSCEF: 03/28/2024 Arrangements,” defined as “[aJn arrangement between the operator of a. facility and an organization related to the operator by common ownership and or control for the furnishing of services, facilities, or supplies . - . Additional regulations require extensive disclosure and: reporting. The Petitioner alleges that Avi Philipson, asthe signatory ori these reports, failed to fully disclose related companies and non-arm’s length transactions, including transactions with, Highview, the Graph Entities, Comprehensive, and Prudent Consulting. and failed to submit financial statements. in connection with such parties. Similarly, Petitioner asserts ‘that CSH submitted false claims to Medicaid for reimbursement based upon the alleged unacceptable practices, including failing to provide required resident care, free from. abuse and neglect, operating the nursing home with insufficient staff, and converting public funds. In response, CSH points out that Highview-and the Graph Lintities were disclosed as related parties in the notes section of the cost reports.and non-party Prtident Consulting ‘was listed as related to the facility operatot in that portion related to. Schedule of Fees and Contracted Services. Concerning Comprehensive, which was not disclosed as a related party, CSH explains that Respondent Zahler is not “affiliated” with Comprehensive and even. if there was such an affiliation, it need not be disclosed on a.cost report. CSH points out that rclated entity disclosures relate strictly to the Facility operator and not the real property owner entity. Further, CSH argues that not only must the Petitioner establish that the DOH would have done something: differently if the cost reports were completely accurate. but also that the inaccuracies in some way affected the amount of Medicaid payments received by CSH. Also, CSH’s current Medicaid reimbursement rate is determined using the Facility’s 2007 costs, The 2017-2021 Cost Reports are not factored into the reimbursement rate. On this record, the court finds thatthe Attorney General has failed to adequatély allege that Comprehensive is a related party to CSH. The remaining related parties were disclosed on the reports. Accordingly, the court finds that the Attorney ‘General has failed to establish by admissible evidence non-compliance with the