SELECTIVE INSURANCE COMPANY OF AMERICA V. MEDICAL ALLIANCES, LLC

Selective alleges that the practice structure of Medical Alliances, LLC, Prema, LLC, and Neurological Testing Services, LLC is contrary to longstanding jurisprudence in this state, and elsewhere, holding that professional services such as law and medicine may not be practiced in a corporate format, except pursuant to specific, legislative or regulatory exceptions.^FN1

FN1. The Legislature has carved several statutory exceptions from this common law ban against the corporate practice of professional services to permit hospitals, nursing homes and certain other “ambulatory care” facilities to operate as general business corporations. See N.J.S.A. 26:2H2a; see generally, A. Wilcox, Hospitals and the Corporate Practice of Medicine, 45 Cornell L.O. 432, at 466-85. The rationale for this exception is that the adverse influences and countervailing interests peculiar to a business corporation are minimized and overshadowed by their public necessity, by a public need to assure institutional continuity, and by the fact that such entities are regulated and inspected by the State Department of Health and Senior Services, see, e.g. N.J.A.C. 8:43G-1.1 (licensing standards for hospitals), N.J.A.C. 8:43A-1.1 (standards licensing “ambulatory care facilities”), N.J.A.C. 8:43C-1.1 (regulations governing public health centers, health maintenance organizations, ambulatory care facilities and rehabilitation faculties), thus providing similar protections otherwise provided by the regulations of the State Board of Medical Examiners, N.J.A.C. 13:35-6.16(f)(4), which limit the ability of its licensees to be shareholders or employees of a general business corporation to five settings.

In 1968, New Jersey adopted the New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 to -9. Under this act, “[a] corporation may be organized . . . for any lawful business purpose or purposes except to do in this State any business for which organization is permitted under any other statute of this State unless such statute permits organization under this act.” N.J.S.A. 14A:2-1. The foregoing statute makes is clear that in order to lawfully incorporate as a general business corpora tion, 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.

In 1969, New Jersey adopted The Professional Service Corporation Act, N.J.S.A. 14A:17-1 to 18 (the “Act”), which states that “[i]t is the legislative intent to provide for the incorporation of an individual or group of individuals to render the same professional service to the public for which such individuals are required by law to be licensed or to obtain other legal authorization.” N.J.S.A. 14A:17-1. The Legislature defined the term “[p]rofessional service” to mean “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. . . .” N.J.S.A. The Legislature identified chiropractors as individuals rendering a service coming within the definition of “[p]rofessional service,” as defined by the statute. Ibid. Importantly, the Legislature specifically noted that chiropractors could not lawfully render services in the corporate form prior to the passage of The Professional Service Corporation Act. The Legislature stated that “prior to the passage of this act and by reason of law [chiropractic] could not be performed by a corporation.” Ibid.

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. Thus, this Act prohibits chiropractors from incorporating as a general business corporation since they must be licensed by the State to perform chiropractic treatment. See N.J.S.A. 14A:17-3. The Act does not permit alternative incorporation, for example by way of a general business corporation.

Although the present action deals partly with limited liability companies (“LLCs”), rather than general business corporations, the underlying issues are the same. Like a general business corporation, the members of a limited liability company do not have to be licensed professionals nor do they have to obtain and maintain malpractice insurance as physi cians do. N.J.S.A. 45:9-19.17a. Members of a professional corporation, on the other hand, all have to be licensed professionals. Unlike a general corporation, or an LLC, a lay person 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. See N.J.S.A. 14A:17-10. Thus, unlike a general business corporation or an LLC, if a managing member loses his license to perform chiropractic, he would no longer be permitted by law to control or be a member of the professional service corporation.

In fact, whenever a shareholder of a professional service corporation shall cease to hold his or her professional license, the shareholder is then required to sever all ties with the professional service corporation and, if he does not do so, the corporation is automatically “converted into . . . a [general] business corporation. . . .” See N.J.S.A. 14A:17-11 and -13(b). Accordingly, since the Act does not permit alternative incorporation as, for example, a general business corporation, chiropractors are barred from forming a general business corporation even if all members were licensed in New Jersey and complied with various regulations adopted in New Jersey.

Although an exception has been created for attorneys by the New Jersey Supreme Court with regard to LLCs, see R. 1:21-1B, [FN2] no such exception has been carved out by the Legislature for chiropractors or physicians. The Board of Medical Examiners and Board of Chiropractor Examiners have never adopted a rule permitting or prohibiting LLCs.

FN2. Notably, a limited liability company formed for the practice of law must “obtain and maintain in good standing one or more policies of lawyers’ professional liability insurance which shall insure the limited liability company against liability imposed upon it by law for damages resulting from any claim made against the limited liability company by its clients arising out of the performance of professional services by attorneys employed by the limited liability company in their capacities as attorneys.” R. 1:21-1B(a)(4).

There is nothing in the LLC Act or its legislative history to indicate that, when authorizing LLCs, the Legislature meant to displace existing statutes governing board licenses. In the event that the Legislature were to specifically permit licensed medical personnel or entities to form an LLC, they certainly would prescribe many conditions, such as ownership, as the Supreme Court did with lawyers in adopting R. 1:21-1B. Thus, the only legal way to form a corporation of chiropractors is to form a professional service corporation, as detailed in the statute or possibly an LLC with all members being duly licensed. In addition, if an LLC were permitted to be formed by chiropractors and/or physicians or medical facilities and lay persons, then a lay person could have control over the actions of chiropractors, physicians and medical facilities and reap the financial benefits.

These concerns are the basis for the general prohibition of the practice of law by corporations. Although there is no reported decision of a New Jersey court extending the rationale of Unger or In re Co-operative Law Co. to the professions of medicine and chiropractic, our courts have recognized that a similarly confidential relationship exists between a physician and his or her patient. “[T]he relationship between a doctor and his patient is of . . . a confidential and vital nature. . . .” Lopez v. Sawyer, 115 N.J.Super. 237, 251, 279 A.2d 116 (App.Div.1971), aff’d, 62 N.J. 267, 300 A.2d 563 (1973). The New Jersey State Board of Chiropractic Examiners (“Board”) has also recognized that a similar relationship of trust and confidence exists between a chiropractor and his or her patient.

New Jersey’s health care statutes prescribe requirements for obtaining a chiropractic license, which can only be obtained by an individual, as opposed to a general business corporation or an LLC. See N.J.S.A. 45:9-41.1 to -11. These statutes indicate that an applicant for a chiropractic license must be an individual, not a corporate entity. This distinction is significant in light of the fact that a general business corporation or an LLC is an entity which is separate and distinct from its shareholders. Lyon v. Barrett, 89 N.J. 294, 300, 445 A.2d 1153 (1982).

In adopting the statute permitting LLCs, the Legislature never considered whether licensed professionals (or lay persons) could form and practice in that capacity. [The Court ruled that Selective would be entitled to additional discovery to determine if the LLCs were truly owned by medical doctors, chiropractors, corporations, or lay persons and whether they were actually practicing in New Jersey.]