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Summarizing by Paul Stewart

Blue Cross Blue Shield of North Carolina v. Jemsek Clinic, P.A. (In re Jemsek Clinic, P.A.

Case Type:
Business
Case Status:
Reversed and Remanded
Citation:
16-1030 (4th Circuit, Mar 03,2017) Published
Tag(s):
Ruling:
Dismissing with prejudice a creditor’s claims valued at over $10 million and sanctioning that creditor by making it pay debtor’s attorney’s fees in the amount of $1.29 million was an abuse of discretion by the bankruptcy court particularly considering that it was debtor’s fault that it lost its valuable counterclaims.
Procedural context:
Blue Cross Blue Shield of North Carolina (Blue Cross NC) sued debtor, a doctor, in state court. After debtor filed chapter 11, he removed the action to the bankruptcy court. The litigation was contentious and there were extensive and rancorous discovery disputes. Debtor filed a motion for sanctions against Blue Cross, which the bankruptcy court granted, and dismissed Blue Cross’ $10 million in claims with prejudice and ordered it to pay debtor’s $1.29 million in attorney’s fees and costs. The district court affirmed. The 4th Circuit reviewed the bankruptcy court’s sanctions order for abuse of discretion and reversed and remanded for further proceedings.
Facts:
In 2003, a group of doctors brought a class action against Blue Cross and Blue Shield Association including Blue Cross NC. In 2006, Blue Cross NC sued debtor in state court for approximately $10 million asserting several claims including breach of contract and fraud. Debtor filed chapter 11 and removed the action to the bankruptcy court where he asserted counterclaims seeking damages of at least $20 million. In 2007, before discovery commenced in the adversary proceeding, a settlement was reached in the class action. The settlement enjoined plaintiffs from asserting “any aspect of any fee for service claim” that could have been asserted in the class action. Debtor was a member of the class and failed to opt out after receiving notice of the deadline to opt out. Neither Blue Cross NC nor debtor informed the bankruptcy court of the settlement or the injunction. Ten months after the class action settlement, Blue Cross NC informed the bankruptcy court that debtor’s counterclaims were enjoined by the settlement. The issue went to the class action court which found that debtor had violated the injunction. Debtor appealed to the 11th circuit which affirmed and debtor withdrew his claims. Debtor filed a motion for sanctions against Blue Cross NC which bankruptcy court granted finding that Blue Cross NC purposefully avoided informing the bankruptcy court about the injunction and blaming Blue Cross NC for the loss of counterclaims worth potentially millions of dollars, delaying the litigation for more than two years, causing debtor to incur sizeable attorney’s fees and costs, and making the bankruptcy court needlessly consume an inordinate amount of court time. The 4th Circuit agreed that Blue Cross NC acted in bad faith but found that it was debtor’s fault that he lost his valuable counterclaims because he failed to opt out of the class, not Blue Cross NC’s. The 4th Circuit remanded so the bankruptcy court could fashion a more appropriate sanction.
Judge(s):
Wilkinson, Motz, Floyd (Motz)

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