I'm not sure if it's a bug - Am I reading it correctly that you have 'remove spacing' AND 'Insert blank lines' enabled? Those sort of conflict with one another... I think blank lines get inserted after heuristics if you want them inserted, but I'm not sure why you would have it enabled.
Also heuristics only deletes blank lines when it detects that every single paragraph is separated by a blank line.
What's the formatting you're trying to achieve?
I usually avoid both the 'insert blank line' and 'remove paragraph spacing' in favor of using extra css:
Code:
p {margin-top:0.3em; margin-bottom:0.3em; text-indent:3%; text-align:justify}
h1+p, h2+p, h3+p, p.whitespace+p, p.softbreak+p {margin-top:0.1em; margin-bottom:0.3em; text-indent:0%; text-align:justify}
The second line only works well if heuristics is enabled and detects chapter headings/scene breaks, but the first one will set up top/bottom margin and indents. Obviously adjust the parameters to whatever you prefer.