Structural Fraud: Claims Made by “Sham” Law Firms are Fraudulent Under Penal Code Section 550 and Insurance Code Section 1871.7
In June 2019, the Second District Court of Appeal issued an opinion in People ex rel. Allstate Ins. Co. v. Suh (2019) 37 Cal. App 5th 253, which involved the submission of claims by a succession of “sham” law offices that were owned, operated and controlled by unlicensed persons. In doing so, the Court affirmed a jury verdict in favor of Allstate Insurance Company, which was the relator in a qui tam lawsuit filed on behalf of itself and the State of California, and found that Defendants Christine Suh and Christina Chang had violated California Penal Code section 550 by committing insurance fraud through procurement of policy benefits using “sham” law firms under their control.
Neither Suh nor Chang were attorneys and were not otherwise authorized to represent claimants. Yet, they opened and operated eight sham law firms, paying licensed California attorneys $3,000 a month to use their identities – their names and bar numbers. Effectively operating as cappers, they gathered claimants and kept the settlement proceeds for themselves. Suh and Chang made more than 300 claims against policies of insurance issued by Allstate without the knowledge or consent of the attorneys whose identities they had appropriated. Allstate filed a qui tam action under California Insurance Code section 1871.7, alleging that the submission of insurance claims by laypeople posing as licensed attorneys constituted insurance fraud in violation of Penal Code section 550. A Los Angeles County Superior Court jury agreed and so did the Second District Court of Appeals.
At trial, Allstate presented evidence to the jury showing that Suh and Chang sent letters of representation in the names of the attorneys, made demands for settlement, negotiated settlements, deposited settlement checks in the sham firms’ attorney trust accounts (IOLTA – Interest on Lawyer Trust Accounts), and issued checks from those accounts made payable to various individuals and entities, including themselves. The checks were cashed ten at a time at remote check cashing facilities, including liquor stores. Evidence was introduced showing that Suh owned and operated one of the check cashing facilities. Allstate argued that the flow of the money showed that the defendants owned, operated and controlled the sham law firms so that they could convert the settlement proceeds for their own use.
Allstate also showed that Suh and Chang controlled all aspects of the sham law firms to the exclusion of the licensed attorneys who were paid $3,000 per month. Eight attorneys were recruited into the scheme and four testified at trial. In one instance an attorney who had responded to a Craig’s List ad for part-time work actually showed up for work and was told to go home. Another attorney had just received his law license, responded to a Craig’s List ad, interviewed with Suh, who then opened a law office in his name, which remained open even after he accepted employed with house counsel for a major carrier.
Suh invoked the Fifth Amendment at trial, but had previously testified in deposition on certain aspects of her involvement with the firms, essentially describing herself as an employee of the firms, which the attorneys denied. Chang testified at trial in a manner inconsistent with Suh’s testimony in deposition and with other witnesses, describing herself as the mother of Suh who basically volunteered her time to help her daughter.
Allstate called experts on the structure of law firms, on law firm accounting and money laundering, on fee-splitting and kickbacks, and on attorney ethics. Defendants called no experts.
Allstate presented evidence that the claims were submitted for payment by the sham law firms through a compilation of claims showing the submission of false, fraudulent or misleading representation letters, the designation of attorney forms and demand letters. Allstate established that the representations as to the firm were false, fraudulent or misleading and that attorney signatures had been forged on the various documents. The attorneys testified that they were unaware of the making of the claims, that they had not authorized the use of their name and signature on the documents, and that the representation that they owned, operated or controlled the firms was false.
To establish liability under Insurance Code section 1871.7, plaintiff must prove that it is more likely than not that a defendant violated Penal Code section 549 or 550, or Insurance Code section 1871.7(a) to recover civil penalties and assessments. The jury found that Suh had violated section 550 in 313 claims and imposed $2.3 million in civil penalties and $2.8 million in assessments. It found that Suh’s mother, Chang, had violated section 550 in 241 claims, and imposed $1.2 million in civil penalties and nothing in assessments.
The Court imposed a permanent injunction against Suh and Chang pursuant to California Business and Professions Code section 17200, permanently barring them from engaging in any claim-related activities. In addition, Allstate was awarded attorney’s fees, investigative costs and costs of suit. Ultimately, with other default judgments added, the total judgment in the matter was $11.5 million.
On appeal, Suh and Chang argued that Allstate failed to submit evidence of what they called “intrinsic fraud,” suggesting that in addition to showing that Chang and Suh were operating a sham law firm, Allstate was required to prove that other types of fraud occurred, such as clinical or billing fraud. Based on an absence of evidence of “intrinsic fraud,” such as staged accidents, inflated injuries, or billing for treatment that was never rendered, Suh and Chang argued that there could be no finding of fraud, submitting that structural fraud alone was insufficient. Without these additional markers for fraud, Suh claimed, the mere submission of insurance claims did not rise to the level of fraudulent claims within the meaning of Section 550.
The Court of Appeal disagreed with the position taken by Suh and Chang on appeal, holding that their narrow interpretation of the insurance fraud statutes failed to grasp that unlawful conduct under section 550 does not require a misstatement of fact in the insurance claim itself, only that a person knowingly: (1) present a claim that is false or fraudulent in some respect; (2) present, prepare, or make a statement containing false or misleading information about a material fact, or (3) conceal an event that affects a person’s right or entitlement to insurance benefits. Citing State ex rel. Wilson v. Superior Court, the Court found that an insurance claim is fraudulent under Penal Code section 550 and Insurance Code. Section 1871.7(b) when it is “characterized in any way by deceit, dishonesty, or trickery, perpetrated to gain some unfair or dishonest advantage.” State ex rel. Wilson v. Superior Court (2014) 227 Cal.App.4th 579, 601.
The Appellate Court also found that the misrepresentations concerning the law firm making the claim were indeed material to the claim:
“Suh and Chang perpetrated a deceitful insurance scheme designed to acquire insurance proceeds illegally for personal gain. Suh and Chang deceived Allstate into believing the attorneys whose names they were using actually and lawfully represented its insureds. (See Cal. Code Regs. tit. 10, section 2695.2(c) [only attorneys, family members, adjusters, or other persons authorized by law may represent insureds.].) In their communications with Allstate, Suh and Chang misrepresented that attorneys represented the insureds. They concealed the fact they were masquerading as attorneys when they filed the insurance claims. And the misrepresentations were material: Allstate would not have released settlement proceeds to Suh or Chang or their sham law firms had Allstate known the truth. The conduct of Suh and Chang constituted insurance fraud under section 550 and section 1871.7.” Id., at 260.
Suh builds on the Sixth Appellate District opinion in People ex rel. Monterey Mushrooms, Inc. v. Thompson (2006) 136 Cal. App. 4th 24, which addressed a “sham” medical corporation created to facilitate the submission of fraudulent workers’ compensation claims and ushered in the concept of “structural” fraud. (“Contrary to laws governing the structure of medical corporations and medical practice, these physicians exercised ‘absolutely no control, supervision or management’ of the corporations they purported to own and operate.) It also builds on the Second Appellate District opinion in State ex rel. Wilson v. Superior Court (2014) 227 Cal. App. 4th 579, which has given us the broadest definition of fraud possible for purposes of section 1871.7: “California uses the words ‘fraud’ and ‘deceit’ interchangeably. *** A claim is ‘fraudulent’ if it is characterized by deceit, dishonesty, or trickery, perpetrated to gain some unfair or dishonest advantage.” Id, at 601. Applying the facts of Suh to the Wilson definition of fraud, the Second Appellate District effectively disposed of any suggestion that the underlying claim must be in some manner deceitful. Thus, if the claim is presented by a “sham” law firm for the purpose of essentially stealing settlement monies in whole or in part, and is otherwise legitimate, the claim is nonetheless a “fraudulent” claim within the meaning of sections 550 and 1871.7. This case creates a greater recognition of the concept of structural fraud which was introduced fourteen years ago in Monterey Mushroom.
The Suh case was handled by Knox Ricksen LLP, by Thomas E. Fraysse and Maisie C. Sokolove, at the trial and appellate levels. Suh and Chang were represented by Michael V. Severo of the Law Offices of Michael Severo at the trial level and Glen A. Williams in the Court of Appeal.