Blue Cross Blue Shield of N.C. v. Jemsek Clinic, P.A. (In re Jemsek Clinic, P.A.)

• Citation: 850 F.3d 150
• Decision Date: 03 March 2017
• Docket Number: No. 16-1030,16-1030
• Parties: IN RE: JEMSEK CLINIC, P.A. ; Joseph Jemsek, Debtors. Blue Cross Blue Shield of North Carolina, Plaintiff–Appellant, v. Jemsek Clinic, P.A. ; Joseph G. Jemsek, M.D., an individual, Defendants–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

850 F.3d 150

IN RE: JEMSEK CLINIC, P.A. ; Joseph Jemsek, Debtors.Blue Cross Blue Shield of North Carolina, Plaintiff–Appellant,

v.Jemsek Clinic, P.A. ; Joseph G. Jemsek, M.D., an individual, Defendants–Appellees.

No. 16-1030

United States Court of Appeals, Fourth Circuit.

Argued: December 7, 2016

Decided: March 3, 2017

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. In exchange, the Love plaintiffs released their claims against the Blue Cross companies.

On May 31, 2007, the Love court preliminarily approved the settlement and enjoined the plaintiffs from litigating any released claims pending final approval. Specifically, the Love court enjoined plaintiffs from pursuing "any aspect of any fee for service claim" that

are, were or could have been asserted ... by reason of, arising out of, or in any way related to any of the facts, acts, events, transactions, occurrences, courses of conduct, business practices, representations, omissions, circumstances or other matters referenced in the [a]ction....

It is now undisputed that Jemsek was a putative member of the Love class and that this injunction applied to his first seven counterclaims.

In July 2007, the Love court mailed a notice of the class settlement to putative class members and published the notice in several major news and trade publications. The notice informed putative class members of their right to opt out of the Love settlement. The deadline to opt out was September 14, 2007. Although Jemsek received the notice, he apparently did not understand its significance and never told his counsel about it. As a result, Jemsek never opted out of the Love settlement.

In the meantime, the bankruptcy court in North Carolina continued to referee the parties' "extensive and rancorous discovery efforts." By the bankruptcy court's reckoning, this involved "multiple sets of discovery, motions to compel, several hearings and a lengthy in camera document review" by the court.

On March 31, 2008—ten months after the Love court had issued its May 31 injunction—Blue Cross NC informed the bankruptcy court about the Love injunction. At that point, the bankruptcy court had stayed discovery pending the district court's resolution of yet another discovery dispute. After receiving an adverse ruling, Blue Cross NC moved to amend that stay order. In its motion, Blue Cross NC's local counsel reported that it had just learned that Jemsek's counterclaims had been enjoined by the Love court.

The bankruptcy court granted Blue Cross NC's motion to amend the stay order, and the parties repaired to the Southern District of Florida. Blue Cross NC moved the Love court to enforce its injunction against Jemsek and order Jemsek to withdraw his counterclaims. The Love court agreed that its injunction applied to Jemsek's first seven counterclaims and granted the motion. Love v. Blue Cross & Blue Shield Ass'n , No. 03-21296-CIV, 2008 WL 4097607, at *1 (S.D. Fla. Sept. 4, 2008). Jemsek appealed to the Eleventh Circuit, which affirmed. Thomas v. Blue Cross & Blue Shield Ass'n , 333 Fed.Appx. 414, 415 (11th Cir. 2009) (per curiam). He then withdrew the seven enjoined counterclaims.

In November 2009, after a nearly two-year hiatus in the North Carolina bankruptcy proceedings, Jemsek filed a motion for sanctions against Blue Cross NC. The bankruptcy court granted the motion. In a lengthy and strongly worded opinion, it found that Blue Cross NC purposefully avoided informing the court and Jemsek about the Love settlement and the May 31 injunction. "As a result," the bankruptcy court concluded, "counterclaims worth potentially millions of dollars were lost, this litigation was delayed for more than two years, sizeable attorneys fees and costs were necessitated for [Blue Cross NC's] opponents and an inordinate amount of court time was needlessly consumed."

The bankruptcy court dismissed Blue Cross NC's claims with prejudice and ordered it to pay Jemsek a total of $1.29 million in attorneys' fees and costs. This included nearly all of the attorneys' fees and costs Jemsek incurred in the bankruptcy proceedings and while defending against Blue Cross NC in Florida, including the appellate litigation.

Blue Cross NC sought interlocutory review of the sanctions order, but the district court denied the request. In January 2014, Jemsek amended his remaining counterclaims for defamation and tortious interference. Blue Cross NC filed a motion with the Love court to enjoin these amended counterclaims. The Love court granted the motion and ordered Jemsek to withdraw those remaining counterclaims, which he did.

The bankruptcy court then issued its proposed findings of fact and conclusions of law and recommended entry of final judgment. Blue Cross NC filed a motion with the district court to vacate the bankruptcy court's sanctions order. The district court denied Blue Cross NC's motion and entered final judgment, adopting the bankruptcy court's proposed findings of fact and conclusions of law. Blue Cross NC timely noted this appeal.

II.

We first consider whether the bankruptcy court erred when it decided to sanction Blue Cross NC. We review the bankruptcy court's sanctions order for abuse of discretion. McGahren v. First Citizens Banks & Tr. Co. (In re Weiss) , 111 F.3d 1159, 1169 (4th Cir. 1997). A court abuses its discretion when its conclusion is "guided by erroneous legal principles" or "rests upon a clearly erroneous factual finding." Westberry v. Gislaved Gummi AB , 178 F.3d 257, 261 (4th Cir. 1999).

The bankruptcy court gave several reasons for imposing sanctions. It explained that, in its view, Blue Cross NC violated discovery rules by failing to mention the Love case as part of its initial disclosures, failing to amend its initial disclosures after the Love court issued its May 31 injunction, and failing to disclose the Love case in response to an interrogatory. The court also concluded that Blue Cross NC violated the Love c...