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Sanctions of $10M against Blue Cross reversed

bcbs_mainA bankruptcy judge in North Car­olina wasn’t wrong when he found that a big insurance company creditor had acted in bad faith.

But when he whacked the insurer hard – a claim of more than $10 million was dismissed and he ordered the carrier to pay the debtor’s attorneys’ fees of $1.29M – his “staggering” sanctions were exces­sive, according to the 4th U.S. Circuit Court of Appeals.

The 4th Circuit reversed and remand­ed the case, Blue Cross Blue Shield of North Carolina v. Jemsek Clinic PA (VLW 017-2-055).

Class-action in Florida

The Blue Cross Blue Shield association and its members, including Blue Cross NC, were sued in a nationwide class ac­tion brought by doctors in 2003. The suit, called the Love case, was filed in the Southern District of Florida.

The suit claimed questionable billing and payment practices and other shady dealings by Blue Cross.

Three years later, Blue Cross NC sued Dr. Joseph Jemsek and his clinic in Hunt­ersville. The clinic specialized in the treatment of Lyme disease.

The Blue Cross NC suit accused Jem­sek of overbilling and “upcoding” claims; the company sought repayment of more than $10 million.

Jemsek and the clinic filed for bank­ruptcy and counterclaimed against Blue Cross NC, according to the 4th Circuit opinion written by Judge Diana Gribbon Motz.

In April 2007, a few days before discovery started in the North Carolina suit, the parties in the Love proceeding reached an agreement. Blue Cross agreed to pay $130 million in claims and change its practices. The Florida court enjoined any further actions.

Jemsek was a member of the class in the Love suit and received a notice of the settlement and an opt-out opportu­nity. Jemsek did not inform his lawyer, so he was not opted out.

In March 2008, 10 months after the Love court’s injunction, Blue Cross NC informed the NC court of the injunc­tion. The parties repaired to Florida, where the Love court told Jemsek its injunction applied to his counterclaims.

Move ahead to November 2009. After two years of litigation, Jemsek filed for sanctions against Blue Cross NC. The bankruptcy judge in “a lengthy and strongly worded opinion,” wrote Motz, found that the carrier had avoided tell­ing the court about the settlement and the injunction.

It was a waste of court time and an unnecessary running-up of attorneys’ fees, the judge said.

As a sanction, he dismissed Blue Cross NC’s claims, worth more than $10 million, and ordered the company to pay $1.29 million of Jemsek’s lawyer tab.

After the bankruptcy judge entered his final order, the district judge re­viewed and adopted the bankruptcy court’s findings and conclusions. Blue Cross NC took the case on up .

In the 4th Circuit, Motz and her col­leagues reviewed whether the bank­ruptcy court erred in deciding to sanc­tion Blue Cross NC.

She wrote that Blue Cross NC never explained why it remained silent about the Love proceedings and that the bank­ruptcy judge “could reasonably infer” that the company acted in bad faith in the litigation.

But the judge went too far, the panel found. Dismissal of a claim is the “most extreme sanction available,” and Blue Cross NC did not de serve that.

The bankruptcy court seemed to blame Blue Cross NC for Jemsek’s fail­ure to opt out of the Love settlement, but the only party responsible for the loss of any counterclaims was Jem­sek himself. He failed to understand the import of the notice from the Love court and he failed to notify his lawyer.

“This decision was unwise, of course, and it led Jemsek to commit a critical error in this litigation,” Motz wrote. “But the error is Jemsek’s and Blue Cross NC had no duty to correct it. ”

Blue Cross NC may be on the hook for part of Jemsek’s lawyer fees, but not all.

On remand, presumably, the bank­ruptcy court can determine an appro­priate sanction for Blue Cross NC and the proper amount of attorneys’ fees, con­sistent with the 4th Circuit’s opinion.

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