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MAO-MSO Recovery II, LLC v. State Farm Mutual Automobile Insurance Co.

United States Court of Appeals, Seventh Circuit

August 15, 2019

MAO-MSO Recovery II, LLC, et al., Plaintiffs-Appellants, Cross-Appellees,
State Farm Mutual Automobile Insurance Company, Defendant-Appellee, Cross-Appellant. Appeal Of: Christopher L. Coffin, et al.

          Argued January 14, 2019

          Appeals from the United States District Court for the Central District of Illinois. No. 17-1541 - Joe Billy McDade, Judge.

          Before Wood, Chief Judge, and Brennan and St. Eve, Circuit Judges.

          WOOD, CHIEF JUDGE.

         When all the dust is cleared away, this case is relatively straightforward: we must review a dismissal for lack of Article III standing and the imposition of sanctions under Rule 11. Only the factual backdrop is complex, as it deals with one aspect of the federal Medicare program. The Plaintiffs assert that they are assignees of certain private insurers called Medicare Advantage Organizations, which provide Medicare benefits. They brought a putative class action against State Farm Mutual Automobile Insurance Company in an effort to recover payments State Farm allegedly should have made to them as reimbursement for certain medical costs. The district court dismissed the action with prejudice, although the basis for the dismissal was lack of standing. In addition, the court imposed sanctions under Rule 11 of the Federal Rules of Civil Procedure against one of the plaintiffs, MSP Recovery Claims, Series LLC, and its attorneys.

         Plaintiffs, MAO-MSO Recovery II, LLC; MSP Recovery, LLC; MSPA Claims 1, LLC; and MSP Recovery Claims, Series LLC MSP ("Recovery Claims"), appealed. They argue that the court erred in its standing analysis, and that in any event it should not have dismissed the case with prejudice. Recovery Claims and the attorneys (Christopher Coffin, David Hundley, and Courtney Stidham) appealed the sanctions order. Finally, State Farm cross-appealed in order to preserve its alternative argument in favor of affirmance-that the case should be dismissed on the merits because plaintiffs failed to state a claim upon which relief can be granted. See Matushkina v. Nielsen, 877 F.3d 289, 297 (7th Cir. 2017) (noting that "[a]s a general rule, where a defendant has won dismissal for lack of standing or some other jurisdictional ground, modifying the judgment to dismissal on the merits" requires a cross-appeal).

         We conclude that the district court erred insofar as it dismissed plaintiffs' case with prejudice, when the problem was a fundamental lack of Article III standing. But this victory gets the plaintiffs only so far. The court acted well within its discretion when it denied plaintiffs a third opportunity to cure the defects in their pleadings. The court's order, in substance, was a jurisdictional dismissal with denial of leave to amend. So understood, we affirm the judgment and correct the record to reflect that the dismissal is without prejudice. We also dismiss State Farm's cross-appeal. Finally, we find that the district court exceeded the bounds of its discretion when it imposed Rule 11 sanctions on Recovery Claims and its attorneys.


         Although the issues before us are ultimately procedural, some background on Medicare is helpful to place them in context. Medicare is "the federal health insurance program for people who are 65 or older," as well as for certain other groups. See While many Americans receive benefits directly from the government through Medicare Parts A and B, others receive their benefits from private entities known as Medicare Advantage Organizations, pursuant to Medicare Part C. 42 U.S.C. § l395w-2l(a). For each Medicare enrollee covered by a Medicare Advantage Organization, the Organization receives a per capita reimbursement from the federal government. The amount of that reimbursement may vary according to the characteristics of the individual enrollees and other factors. See In re Avandia Mktg., Sales Practices & Prods. Liab. Litig., 685 F.3d 353, 364-65 (3d Cir. 2012). The Medical Advantage Organizations assume the financial risk of insuring their enrollees. Id.

         One other piece of Medicare vocabulary is important to this case: the difference between "primary" and "secondary" payments. When an enrollee is covered directly by the government (under Medicare Parts A and B), Medicare is statutorily barred from making payments for medical costs when an enrollee has benefited or is likely to benefit from some other insurance or worker's compensation plan. The statute mentions such alternative sources of benefits as "a workmen's compensation law ... or ... automobile or liability insurance policy or plan (including a self-insured plan) or ... no fault insurance." 42 U.S.C. § l395y(b)(2)(A)(ii). In such situations, Medicare is a secondary form of coverage that applies only to costs not covered by the primary insurance. But if a primary insurer fails to pay, the government does not leave the enrollee and her medical providers in the lurch. Rather, it makes conditional payments to providers and then seeks reimbursement from the primary insurer. Id. § l395y(b)(2)(B)(i). An analogous provision in Medicare Part C makes the private Medicare Advantage Organizations secondary payers where enrollees have some form of primary coverage. Id. § l395w-22(a)(4). When the primary insurers fall down on their responsibilities, Medicare Advantage Organizations are authorized by statute to pay first and seek reimbursement later, just as the government may. Id.

         Sometimes, however, the primary insurer never reimburses the secondary payer (be it the government or a Medicare Advantage Organization) for benefits it should have provided. In that case, the Medicare Secondary Payer provisions establish a private right of action that permits some private plaintiffs to sue for double damages. But the relevant section of the statute does not specify who may take advantage of that provision. All it says, without further elaboration, is that "[t]here is established a private cause of action for damages (which shall be in an amount double the amount otherwise provided) in the case of a primary plan which fails to provide for primary payment (or appropriate reimbursement) in accordance with paragraphs (1) and (2)(A)." Id. § l395y(b)(3)(A).

         The plaintiffs in this case are not themselves Medicare Advantage Organizations; they assert instead that they are assignees of claims that originally belonged to such entities. They argue that Medicare Advantage Organizations are among the proper plaintiffs that can exercise this private right of action, and that through the assignments, they stand in the shoes of those Organizations. The plaintiffs and related entities have pursued this theory not just in this litigation, but in several suits throughout the country. See, e.g., MAO-MSO Recovery II, LLC v. Gov't Employees Ins. Co., No. PWG-17-711, 2018 WL 999920 (D. Md. Feb. 21, 2018); MAO-MSO Recovery II, LLC v. Am. Family Mut. Ins. Co., No. 17-CV-175-JDP, 2018 WL 835160 (W.D. Wis. Feb. 12, 2018). At the same time as it granted State Farm's motion to dismiss the First Amended Complaint for lack of standing in this case, the district court agreed with the plaintiffs that the statute does support a private right of action for Medicare Advantage Organizations. In that respect, it relied on rulings from the Third and Eleventh Circuits. See Humana Med. Plan, Inc. v. W. Heritage Ins. Co., 832 F.3d 1229, 1238 (11th Cir. 2016); In re Avandia Mktg., Sales Practices & Prods. Liab. Litig., 685 F.3d 353, 355 (3d Cir. 2012). Although State Farm did not challenge this point in the district court, it has changed its tune on appeal and now argues that the private right of action does not extend to Medicare Advantage Organizations. Those entities, State Farm contends, must look to contract law for appropriate remedies. This dispute is at the heart of State Farm's cross-appeal.

         Plaintiffs' efforts in the present case foundered, however, when the district court found that they did not have valid assignments from any Medicare Advantage Organization that made unreimbursed payments. Without the link to a proper Organization that possessed claims to reimbursement, the court concluded, plaintiffs had no injury for which they could seek redress on this or any other legal theory. Accordingly, it ruled, no matter the scope of the private right of action, these plaintiffs lacked standing to sue. We come to the same conclusion. We save for another day the question whether a Medicare ...

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