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In re Jemsek Clinic, P.A.

United States Court of Appeals, Fourth Circuit

March 3, 2017

In Re: JEMSEK CLINIC, P.A.; JOSEPH JEMSEK, Debtors.
v.
JEMSEK CLINIC, P.A.; JOSEPH G. JEMSEK, M.D., an individual, Defendants-Appellees. BLUE CROSS BLUE SHIELD OF NORTH CAROLINA, Plaintiff-Appellant,

          Argued: December 7, 2016

         Appeal from the United States District Court for the Western District of North Carolina, at Charlotte. Robert J. Conrad, Jr., District Judge; J. Craig Whitley, Chief Bankruptcy Judge. (3:14-cv-00417-RJC; 07-03006)

         ARGUED:

          Christopher Grafflin Browning, Jr., TROUTMAN SANDERS LLP, Raleigh, North Carolina, for Appellant.

          William D. Blakely, POLSINELLI PC, Washington, D.C., for Appellees.

         ON BRIEF:

          J. Nick Phillips, TROUTMAN SANDERS LLP, Atlanta, Georgia, for Appellant.

          Lauren P. Desantis-Then, Washington, D.C., Mit S. Winter, POLSINELLI PC, Kansas City, Missouri, for Appellees.

          Before WILKINSON, MOTZ, and FLOYD, Circuit Judges.

         Vacated and remanded by published opinion. Judge Motz wrote the opinion, in which Judge Wilkinson and Judge Floyd joined.

          DIANA GRIBBON MOTZ, Circuit Judge.

         In this case, the bankruptcy court imposed staggering sanctions on a creditor. It dismissed with prejudice claims that the creditor valued at over $10 million, and it ordered the creditor to pay the debtor $1.29 million in attorneys' fees and costs. Although the bankruptcy court did not clearly err in finding that the creditor acted in bad faith, these sanctions were excessive. We therefore vacate the judgment of the district court adopting the bankruptcy court's sanctions order and remand for further proceedings consistent with this opinion.

         I.

         In May 2003, a group of doctors filed a nationwide class action against the Blue Cross and Blue Shield Association and its member entities, including Blue Cross Blue Shield of North Carolina ("Blue Cross NC"). The doctors brought the case - styled Love v. Blue Cross and Blue Shield Ass'n, No. 03-21296-CIV (S.D. Fla. filed May 22, 2003) - in the Southern District of Florida.

         In their complaint, the doctors alleged that the Blue Cross companies used several underhanded business practices to deny, delay, and reduce payments for medical treatments based solely on considerations of cost. The doctors alleged that, as part of the scheme, the Blue Cross companies refused to pay for covered and medically necessary treatments, misrepresented the criteria used to determine payments, and unlawfully terminated provider agreements.

         In September 2006, three years after the initiation of the Love case in Florida, Blue Cross NC sued Dr. Joseph Jemsek and the Jemsek Clinic in North Carolina state court. In its complaint, Blue Cross NC asserted several state-law claims, including breach of contract and fraud. At the time, Jemsek ran a clinic in Huntersville, North Carolina that specialized in the treatment of Lyme disease. According to Blue Cross NC, Jemsek improperly billed it for hundreds of Lyme disease treatments that were medically unnecessary or not covered by the parties' provider agreement. Blue Cross NC also alleged that Jemsek fraudulently "upcoded" many of his treatments, assigning them a billing code corresponding to treatments that were more expensive than those he actually provided. Blue Cross NC estimates that from 2000 to 2005, Jemsek received more than $10 million in improper payments.

         Jemsek responded by filing for Chapter 11 bankruptcy for himself and on behalf of his clinic. He then removed Blue Cross NC's suit to the bankruptcy court, where it continued as an adversary proceeding. On January 24, 2007, Jemsek filed his answer, affirmative defenses, and nine counterclaims.

         Seven of Jemsek's counterclaims alleged essentially the same underhanded practices at issue in Love. Jemsek claimed that Blue Cross NC denied claims for reimbursement; terminated the parties' provider agreement "not based upon medical evidence, but upon a desire to limit its costs"; and misrepresented whether Jemsek's treatments were covered or medically necessary. The remaining two counterclaims, asserting defamation and tortious interference with a business relationship, related to statements Blue Cross NC allegedly made about Jemsek's practice to the North Carolina Medical Board and the Centers for Disease Control and Prevention. In total, Jemsek claimed he suffered at least $20 million in damages.

         On April 27, 2007, a few days before discovery began in the North Carolina bankruptcy proceedings, the Love parties reached a tentative settlement in Florida. Under the terms of the settlement agreement, the Blue Cross companies agreed to pay $130 million and change their business practices. ...


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