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Selective Insurance Company of America v. Medical Alliances, LLC

362 N.J. Super. 392, 827 A.2d 1188 (Law Div. 2003)

LIMITED LIABILITY COMPANIES; PROFESSIONAL CORPORATIONS—It isn’t clear that physicians or chiropractors and some other licensed professionals can organize as limited liability companies because they are among the professions entitled to organize to do business as professional service corporations.

An automobile insurer sought to deny coverage to its insured based on the theory that a medical group, organized as a limited liability company, was engaged in the unlawful “corporate” practice of medicine because not all of the owners of the limited liability company were licensed professionals or, in the alternative, the medical group could not operate as a limited liability company. The Court looked at the New Jersey Business Corporation Act and found it clear “that in order to lawfully incorporate as a general business corporation, the entity must not be permitted to incorporate under an alternative statute unless the alternative statute permits the entity to also incorporate as a general business corporation.” New Jersey adopted “the Professional Service Corporation Act which was intended to provide a corporate entity for “professional services,” meaning, “any type of personal service to the public, which requires as a condition precedent to the rendering of such service the obtaining of a license or other legal authorization… .” “The Professional Service Corporation Act states, in essence, that a group of individuals who must be licensed to perform their service must be incorporated as a professional corporation, rather than incorporated as a general business corporation, with certain exceptions.” The Court recognized that the entity in question was a limited liability company, rather than a general business corporation. Nonetheless, it felt the underlying issues to be the same. “Like a general business corporation, the members of the limited liability company do not have to be licensed professionals nor do they have to obtain and maintain malpractice insurance as physicians do.” Further, unlike a general corporation, or a LLC, “a layperson cannot become a member of a professional corporation as The Professional Corporation Act provides that only licensed professionals may hold a shareholder interest in a professional service corporation.” Further, in a professional corporation, if a shareholder loses his license, he would no longer be permitted by law to control or be a member of the professional service corporation. Although there is an exception for attorneys with respect to LLCs, no such exception has been carved out by the Legislature for chiropractors or physicians. Some professional boards have permitted the same, but “The Board of Medical Examiners and Board of Chiropractor Examiners have never adopted a rule permitting or prohibiting LLCs.” Further, there was nothing in the Legislative history of limited liability companies to indicate that the Legislature meant to displace existing statutes governing board licensees. The Court felt that if the legislature wanted to permit the use of an LLC, it certainly would have prescribed many conditions.

Here, the insurance company was seeking to determine the ownership of several LLCs “to learn if they [were] truly owned by medical doctors, chiropractors, “corporations or laypersons and whether they [were] actually practicing medicine in New Jersey.” At this early point in the case, the Court was not prepared to rule that a LLC could or could not be a vehicle for practicing medicine. Therefore, it was not prepared, at this stage, to rule whether the insured had fraudulently applied for automobile coverage. On the other hand, the Court thought that “whether or not licensed medical professionals or entities can practice as a LLC, be they domestic or foreign, is a matter that can only be determined through discovery” and that the insurance company was entitled to uncover the ownership of the LLC.

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