Government’s FCA Case Can Proceed Despite Bankruptcy Filing; United States District Court for the District of Nevada No. 2:19-cv-00467-GMN-NJK, U.S. v. LASR Clinic of Summerlin LLC, et al.

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The district court granted the government’s motion seeking a declaration that its claims against the individually named defendants were excepted from the automatic stay triggered by their respective bankruptcy filings and that the case could proceed through the entry of judgment but will not include enforcement of the judgment. While a bankruptcy stay is automatic and broad, the court noted its reach is limited, and that exemptions for government regulatory enforcement could be applied. The Ninth Circuit has applied two alternative tests to determine whether an exception applies to a government action: a pecuniary test, in which the action relates primarily to the protection of the government’s interest in the debtor’s property, and a public policy test, in which courts must determine if an action is intended to effectuate public policy or adjudicate private rights. In this case, the court found the complaint satisfied both tests.

The United States alleged that LASR Clinic of Summerlin LLC and its owners Israel Villasenor and Brian Rogers knowingly submitted false claims to Medicare. According to the complaint, the defendants submitted claims using incorrect billing codes; billed for services performed by someone other than the individual named on the invoice; billed for services not rendered; and submitted or caused the submission of fraudulent statements and records in support of the false claims.

Prior to the filing of the complaint, defendants Villasenor and Rogers separately filed for bankruptcy, and later filed a motion for entry of clerk’s default. In response, the government filed a motion seeking a declaration that (1) the claims against Villasenor and Rogers are excepted from the automatic stay in the their respective bankruptcies; and (2) this case will proceed as against Villasenor and Rogers through the entry of judgment but will not include enforcement of that judgment against Villasenor or Rogers.

The court first considered the defendants motion for a clerk’s entry of default against the government. The court noted that the defendants had not filed any pleading seeking a judgment for affirmative relief against the Government. Therefore, Rule 55(a) does not apply. Because a clerk’s entry of default would be inappropriate under the present circumstances, the court denied the motion.

Next, the court considered the government’s motion, first noting that a bankruptcy stay is both self-executing and broad. However, the court also noted the reach of the stay is limited by various statutory exceptions. A stay does not apply to the government’s ability to commence or continue an action enforcing the government’s police or regulatory power, including the enforcement of any nonmonetary judgments.

In the Ninth Circuit, courts have applied two alternative tests when determining whether a government action falls under the government regulatory exemption: the pecuniary purpose test and the public policy test. Under the pecuniary purpose test, courts determine “whether the government action relates primarily to the protection of the government’s pecuniary interest in the debtor’s property or to matters of public safety and welfare.” Under the public policy test, courts must determine whether the government’s action is intended to either “effectuate public policy” or to “adjudicate private rights.” When a court determines that the government’s action is intended either to protect the government’s pecuniary interest in the debtor’s property or to adjudicate private rights, it will find the exception does not apply and the automatic stay will be imposed.

The court noted that False Claims Act actions brought by the United States have repeatedly been found to satisfy both of those tests, thereby triggering the exemption. In this case, the court was satisfied that the action could properly be characterized as an enforcement of police or regulatory powers under both the pecuniary purpose and public policy test. While the last two counts of the four-count complaint allege payment by mistake and unjust enrichment, the first two counts allege violations of the False Claims Act. The court also found the public policy test satisfied, as the action was brought by the United States, not by a private relator. Thus, the government intended to “effectuate public policy,” not “adjudicate private rights.”