A federal appeals court ruled on Friday that the successor of a bankrupt mental-health and substance-abuse treatment provider can sue Cigna for $8.6 million in unpaid benefits but cannot seek damages for fraud.
The 9th U.S. Circuit Court of Appeals reinstated the majority of a lawsuit brought by Bristol SL Holdings Inc – a company formed with the approval of the bankruptcy court by the principals of Chapter 11 debtor Safe Haven Inc to collect on unpaid claims that Safe Haven blamed for forcing it into bankruptcy in 2017.
According to the panel, a federal judge in Santa Ana, California, improperly resolved factual disputes in favor of Cigna without a trial and misinterpreted a precedential case about rights assignments under ERISA, the federal law that governs employer-provided healthcare plans.
The judge, however, correctly dismissed the fraud claim because, despite two chances to amend its original complaint, Bristol never identified the individuals at Cigna who allegedly conspired to induce Safe Haven to provide treatment without intending to pay for it.
Cigna and its attorney, McDermott Will & Emery’s William Donovan, did not immediately respond to requests for comment.
Dorothy Easley of Easley Appellate Practice, who argued Bristol’s appeal, called the decision “a very important contribution” to the law on ERISA derivative standing and contracts between health plans and providers. Arnall Golden Gregory co-counsel Matt Lavin stated that they “look forward to returning to the district court and trying this case.”
Only the 9th Circuit’s opinion on the ERISA claims was published. The lower court relied on a 2000 decision by the 9th Circuit, which prohibited a collection lawyer from turning ERISA claims into “commodities” by taking assignments from hundreds of healthcare providers solely for litigation purposes.
However, that was never intended to be a blanket prohibition on all ERISA suits brought by providers’ assignees, and prohibiting suits like Bristol’s “would create serious perverse incentives” for a healthcare plan to force treatment providers into bankruptcy, “thereby ensuring that it would likely never have to pay for the services it authorized,” wrote Circuit Judge Lawrence VanDyke, who was joined by Circuit Judges Andrew Kleinfeld and Ryan Nelson.
The panel declined to speculate on who else might have standing to sue if they were assigned.
“Our decision today is modest,” VanDyke wrote. “We hold only that the first assignee in bankruptcy proceedings who owns all of one healthcare provider’s health benefit claims has derivative standing to sue under ERISA.”