The district court denied the defendants’ motion for summary judgment as to the relator, in which they argued the relator lacked standing and should be judicially estopped from pursuing his claims. The defendants argued that the relator failed to disclose his potential FCA claims during bankruptcy proceedings that occurred after the relator informed the government of his allegations but before he filed his complaint. While this was true, the court found that when the relator learned of this possible mistake, he reopened his bankruptcy case and the trustee relinquished any rights to the FCA claims. The court explained that a dispute over claim assignment implicates non-jurisdictional prudential standing, which may be waived or cured after the lawsuit is filed. The defendants also argued that the relator should be judicially estopped from pursuing his claims, as he asserted in bankruptcy court that he had no such claims. While this also was true, However, the court noted the error had been corrected and that there was no evidence of bad faith concerning the relator’s failure to disclose.
Relator Kipp Fesenmaier filed a qui tam complaint alleging that his former employer, the Cameron-Ehlen Group Inc., doing business as Precision Lens, and its founder and majority owner, Paul Ehlen, provided kickbacks to physicians in violation of the Anti-Kickback Statute, which resulted in the submission of false claims for payment to Medicare. The complaint also alleged common-law claims for unjust enrichment and payment by mistake. The United States intervened.
In these proceedings, the defendants moved for summary judgment as to the relator, arguing that he lacked standing to assert claims under the False Claims Act, because any such claims were assigned to Fesenmaier’s bankruptcy estate before this lawsuit commenced. In the alternative, the defendants argued that Fesenmaier should be judicially estopped from asserting FCA claims in this case.
Fesenmaier reported his allegations to the FBI in 2010 and was interviewed by the government in December 2011. He was soon designated a confidential source and continued to communicate with the agency over several years. In August 2012, Fesenmaier and his wife filed for Chapter 7 bankruptcy. When responding to questions about their assets and liabilities, the Fesenmaiers did not disclose any anticipated FCA claims related to this case. The Fesenmaiers’ bankruptcy case resulted in a discharge of $55,783.40 in medical and credit card debt on November 30, 2012. The bankruptcy case was closed on January 3, 2013, and the trustee was discharged.
Fesenmaier filed his complaint in November 2013, alleging the same misconduct he had reported to the FBI. During the relator’s deposition in the case, the defendants questioned him about his nondisclosure of FCA claims in the bankruptcy proceedings. Afterwards, Fesenmaier applied to reopen the bankruptcy matter and a trustee was appointed. Fesenmaier notified the trustee of this case and entered into a settlement agreement, through which he paid $100,000 to fund the estate fully, including all previously discharged debts, interest on that debt, and the trustee’s administrative expenses. The settlement agreement also provides that the trustee will be deemed to have abandoned any further interest in the Fesenmaiers’ assets, including the ongoing FCA litigation.
The defendants argued that the relator’s FCA claims are an asset of the bankruptcy estate. In the alternative, they argued the relator should be judicially estopped from asserting his claims because he took the position during his bankruptcy proceedings that he had no such legal claims.
First, the court addressed standing. The relator argued that the FCA claims never belonged to the bankruptcy estate and, even if they had, they were reassigned to him when the trustee expressly abandoned those claims in the settlement agreement.
As an initial matter, the court noted the parties disagreed as to whether the defendants’ standing argument implicates constitutional standing or prudential standing. The court explained that under Article III of the United States Constitution, the jurisdiction of federal courts extends only to actual cases or controversies. Article III standing is determined based on the facts as they existed when the complaint was filed. In addition to Article III standing, courts also must consider judicially imposed prudential limits on standing. In such cases, the court must consider whether a claim may rest on the legal rights of third parties.
The court noted the Supreme Court had addressed standing in the context of FCA claims in Vermont Agency of Natural Resources v. United States ex rel. Stevens. In that case, the Supreme Court considered whether a qui tam relator has Article III standing to pursue claims under the FCA and concluded in the affirmative. The court held that the FCA effects a partial assignment of the government’s damages claim and that assignment confers standing.
The district court noted that the defendants did not seek to dismiss the United States as a plaintiff, as there was no disagreement the government satisfies the requirements of Article III standing. They also did not dispute that the conclusion of the Supreme Court in Vermont Agency. Rather, they disputed which party was the actual assignee of the damages claim, or in other words, the real party in interest. The court explained that a dispute as to who possesses a claim that has been reassigned, and whether a plaintiff is improperly asserting claims that belong to a third party, implicates non-jurisdictional prudential standing and the real-party-in-interest requirements of the Federal Rules of Civil Procedure, not constitutional standing. Because such a dispute is non-jurisdictional, it may be waived or cured after the lawsuit has commenced.
Nonetheless, the defendants argued that because Article III standing is implicated, the court was required to limit its analysis to the facts that existed when the complaint was filed, and that Fesenmaier is not permitted to later remedy the alleged defect. However, the court found this argument unsupported and that Fesenmaier was entitled to correct his complaint to ensure the real party in interest prosecuted the claim. The court held the standing defect could have been remedied by substituting the trustee for Fesenmaier or—as was the case—having the trustee relinquish the FCA claims to Fesenmaier.
Further, the court noted that even if Fesenmaier were not the real party in interest, dismissal is not permitted based on a failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time has been allowed for the real party in interest to ratify, join, or be substituted into the action. Even assuming the FCA claims belong to the bankruptcy estate—which the court did not decide—the relator presented unchallenged evidence that the trustee abandoned those claims, at which time they reverted to Fesenmaier.
Still, the defendants argued the relator cannot maintain standing after the relator has assigned an FCA claim to a bankruptcy estate. However, the court noted that Fesenmaier had never expressly assigned his claims to the bankruptcy estate and that the estate had relinquished any rights to the claim. Because Fesenmaier demonstrated he is the real party in interest with respect to his FCA claims, the court denied the motion on this basis.
Next, the defendants argued that Fesenmaier should be judicially estopped from pursuing those claims, because he told the bankruptcy could he had no such legal claims. The court acknowledged that a party may be judicially estopped from asserting a cause of action not disclosed during bankruptcy proceedings, because a failure to list a claim may be interpreted as a representation that no such claim exists. However, the court also noted that judicial estoppel does not apply when a debtor’s prior position was taken because of a good-faith mistake rather than as part of a scheme to mislead the court.
Fesenmaier acknowledged that he failed to disclose the existence of possible FCA claims, which the court noted differed from his position in this case, in which he asserted FCA claims based on conduct that occurred before his bankruptcy proceedings commenced. The court found this factor weighed in favor of judicial estoppel.
However, the court noted that Fesenmaier amended his position in the bankruptcy court by reopening the bankruptcy proceedings and disclosing the FCA claims. By so doing, he repaid the previously discharged debt, with interest, meaning he had relinquished any benefit that he previously derived by not disclosing potential FCA claims in the bankruptcy proceedings. As such, the court found the resolution of the bankruptcy proceedings was no longer premised on the bankruptcy court’s acceptance of Fesenmaier’s representation that no FCA claims existed. Because the court found that neither it nor the bankruptcy court had been misled, it concluded this factor weighed against judicial estoppel.
Third, the court considered whether Fesenmaier would derive an unfair advantage, or impose an unfair detriment on the defendants, if he is not estopped. The court already concluded that any advantage Fesenmaier gained in his bankruptcy proceedings has been relinquished. Notably, the defendants were not involved in the bankruptcy case, as creditors or otherwise, meaning Fesenmaier gained no advantage over them due to those proceedings. The court also found the defendants had not identified any unfair advantage the relator would gain in this case. The court concluded that this factor also weighed against applying judicial estoppel.
Finally, the court found no evidence of bad faith and in fact, found evidence contradicting the defendants’ suggestion that the failure to disclose was intentional. Fesenmaier attested in a signed declaration that he did not know that he was required to disclose potential FCA claims in his bankruptcy proceedings. In his declaration, he provided a detailed explanation as to why he held such a belief, including the diligent steps that he and his wife took when preparing their bankruptcy disclosures. Fesenmaier also maintained that he took steps to rectify the possible mistake as soon as becoming aware of it. Based on those facts, the court found no evidence of bad faith. The court denied the motion on this basis.
