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In a long-awaited opinion, Austin’s 3rd Court of Appeals held on July 30 that Blue Cross Blue Shield of Texas is not a common-law charity whose assets should benefit Texans. “Not only has Blue Cross/Texas never had a public charitable purpose, the evidence is undisputed that with only minor exceptions, all revenues generated by Blue Cross/Texas have been used to benefit its policyholders or for its own corporate purposes,” Justice Lee Yeakel wrote for the three-justice panel, which has been considering the case since hearing arguments in September 1999. Justice Bea Ann Smith and retired Chief Justice Marilyn Aboussie joined Yeakel in the opinion in Abbott v. Blue Cross and Blue Shield of Texas, et al. Because of the panel’s decision affirming a February 1998 ruling by former state District Judge Joe Hart of Austin, Blue Cross/Texas will not have to pay a multimillion-dollar settlement that it negotiated with the state. Asserting his powers to protect charitable trusts, former Attorney General Dan Morales filed the suit in 1996 after Blue Cross/Texas and Blue Cross Blue Shield of Illinois announced plans to merge. Morales alleged in the petition to the trial court that the proposed merger would “siphon hundreds of millions of charitable dollars from Texas.” Will Davis, an attorney for Blue Cross/Texas, says Morales agreed that the merger could move forward in 1998 after negotiating a high-low settlement that would have required the insurance company to pay $350 million, plus interest, to charitable health foundations in Texas if the state had won the case. Under the settlement agreement, Blue Cross paid the state $10 million in installments of $2 million each over five years, with the final payment made last December, says Davis, a partner in Austin’s Heath, Davis & McCalla. Three AGs have handled the case, which the state appealed to the 3rd Court in October 1998. After Morales left office, responsibility for the appeal passed to John Cornyn, who became AG in 1999. Cornyn passed that responsibility to AG Greg Abbott, who took office in December 2002. Tom Kelley, spokesman for the AG’s office, says, “We’re going to review the ruling and decide what the next step will be.” Greg Coleman, a former state solicitor general who argued the case on appeal, calls the decision “extraordinary” and says he would be surprised if the OAG does not appeal to the Texas Supreme Court. “It deprives the citizens of this state of all of the value of [Blue Cross/Texas],” Coleman says. Those who benefit from the ruling, Coleman says, are the policyholders of Blue Cross/Illinois. Davis says there never has been any indication that Blue Cross/Texas was a charity. “It never acted as a charity, never performed as a charity, never was a charity. It’s never been anything but an insurance company from day one,” he says. The merger was essential to the financial well-being of Blue Cross/Texas, Davis says. But Coleman, now a partner in the Austin office of Weil, Gotshal & Manges, says the 1998 ruling by Hart, formerly presiding judge of the 126th District Court, was the first instance nationwide in which a court held that a Blue Cross organization was not a charity. At issue in Texas is whether Blue Cross was incorporated in 1939 as a charity and therefore remains one. In the state’s brief to the 3rd Court, the attorney general argued that H.B. 191, passed by the Legislature in 1939, authorized the creation of “charitable, benevolent and nonprofit corporations” to provide hospital services to a corporation’s members. But Yeakel said the purpose clause of Blue Cross/Texas reflects that it was “formed for the purpose of establishing, maintaining and operating a nonprofit hospital service plan whereby hospital care may be provided to the members by said corporation through an established hospital … with which it has contracted for such care.” The clause reinforces that the activities of Blue Cross/Texas would be devoted solely to the benefit of its members, and its articles of incorporation propose no general charitable purpose directed toward the public as a whole or any undefined segment of the public, the opinion said. “We hold that regardless of how Blue Cross/Texas was incorporated, the purpose of the corporation controls and that purpose is determined from the corporation’s purpose clause, as contained in its articles of incorporation, and its actual operations,” Yeakel wrote. Left unanswered is why it took the 3rd Court so long to decide the one issue presented in this case. “I don’t know of any [case] that’s ever lasted this long,” Davis says. Charles W. “Rocky” Rhodes, a South Texas College of Law professor who teaches civil and appellate law, says he knows of no other cases in the Texas appellate system that have been pending for almost four years after arguments. Aboussie, who was on the panel when the arguments were presented, left the court at the end of last year. She sat by assignment. The panel issued the decision one day before Yeakel resigned to become a U.S. district judge for the Western District of Texas in Austin. Yeakel was sworn in on July 31.

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