United States of America, ex rel. v. Sightpath Medical, Inc.

Background

The Cameron-Ehlen Group, Inc., doing business as Precision Lens, distributed intraocular lenses and other ophthalmic products. The opinion identifies Sightpath Medical, Inc. as Precision Lens’s corporate partner. Paul Ehlen was identified as Precision Lens’s founder and majority owner. Kipp Fesenmaier worked for Sightpath for approximately 15 years, including several years as a vice president.

In March 2010, Fesenmaier reported allegations to the Federal Bureau of Investigation that the defendants provided kickbacks to physicians. He later continued communicating with the FBI and was designated a confidential human source. Fesenmaier and his wife filed for Chapter 7 bankruptcy on August 23, 2012. They did not list potential False Claims Act claims based on those allegations as bankruptcy assets. Their debts were discharged on November 30, 2012, and the bankruptcy case closed on January 3, 2013.

Fesenmaier retained counsel in April 2013 and filed this False Claims Act lawsuit in November 2013. He alleged that the defendants paid kickbacks to induce the use of their products by Medicare beneficiaries. During a 2019 deposition, the defendants questioned him about the bankruptcy nondisclosure. Fesenmaier then reopened the bankruptcy case, disclosed the lawsuit to the trustee, and entered a December 24, 2019 settlement agreement. Under that agreement, the Fesenmaiers paid $100,000 to fund the estate fully, including previously discharged debts, interest, and trustee expenses. The agreement also stated that the trustee abandoned any further interest in the assets, including the ongoing False Claims Act litigation.

Defendants’ Arguments

The defendants moved for summary judgment as to Fesenmaier. Summary judgment is a decision without a trial when the evidence shows no genuine dispute over a material fact and the moving party is entitled to judgment under the law.

The defendants first argued that Fesenmaier lacked standing because the False Claims Act claims became assets of the bankruptcy estate before the lawsuit began. In the alternative, they argued that judicial estoppel should prevent Fesenmaier from pursuing claims inconsistent with his earlier failure to disclose them in the bankruptcy proceedings.

Standing and Real Party in Interest

The court distinguished constitutional standing from the related question of who owns or may prosecute a claim. Constitutional standing concerns whether a federal court has authority to decide an actual dispute. The defendants did not dispute that the United States suffered an injury or that the False Claims Act partially assigns the government’s damages claim to a private relator. Instead, they disputed whether Fesenmaier or the bankruptcy trustee possessed the right to assert the claims.

The court characterized that dispute as involving nonjurisdictional prudential standing and the “real party in interest” requirement under Rule 17 of the Federal Rules of Civil Procedure. The real party in interest is the person who possesses the legal right being enforced. Because this type of defect is not jurisdictional, the court held that it could be waived or cured after the lawsuit began.

The court relied on Eighth Circuit precedent holding that a real-party-in-interest problem may be remedied through substitution and that the action then proceeds as though it had originally been filed by the proper party. Assuming without deciding that the claims became part of the bankruptcy estate when the lawsuit was filed, the court held that the trustee’s later abandonment of the claims returned ownership to Fesenmaier. The court therefore concluded that Fesenmaier was the real party in interest and denied summary judgment on this ground.

The court found the defendants’ reliance on another Eighth Circuit case unpersuasive because, unlike that case, the trustee here expressly abandoned the claims, and Fesenmaier had not expressly assigned them to the bankruptcy estate through a settlement and release.

Judicial Estoppel

Judicial estoppel is a court-created rule that can prevent a party from taking a position in one proceeding and later taking a clearly inconsistent position after gaining an advantage from the earlier position. Courts consider whether the positions conflict, whether the earlier position was accepted by the court, and whether allowing the later position would create an unfair advantage or unfair harm.

The court assumed that Fesenmaier should have disclosed the potential False Claims Act claims in bankruptcy. It agreed that his failure to disclose them was inconsistent with pursuing them later. But the court found that the other relevant factors weighed against applying judicial estoppel. Fesenmaier reopened the bankruptcy case, disclosed the claims, repaid the previously discharged debts with interest, and relinquished the benefit he had received from the nondisclosure. The trustee also stated that the creditors and bankruptcy estate had not been prejudiced.

The court further found that the defendants had not shown that Fesenmaier acted in bad faith. Fesenmaier stated that he did not know the claims had to be disclosed and described the steps he and his wife took when preparing their bankruptcy filings. After learning of the possible mistake, he hired new bankruptcy counsel, reopened the proceedings, disclosed the claims, and reached the settlement with the trustee. The court concluded that the record showed a good-faith mistake rather than a deliberate scheme to mislead the bankruptcy court.

Disposition

The court denied the defendants’ motion for summary judgment as to Relator Kipp Fesenmaier. It denied the motion both on the argument that Fesenmaier could not pursue claims belonging to the bankruptcy estate and on the alternative judicial-estoppel argument.