Posted by: Scott Stein and Christopher Munsey
In an October 29, 2014 opinion in Malhotra v. Steinberg, the Ninth Circuit affirmed the dismissal of an FCA action under the public disclosure bar, holding that information obtained from a deposition taken by the Office of the United States Trustee in a bankruptcy case was publicly disclosed where the relators learned of key facts on which the complaint was based in the deposition, and the relators were “outsiders” to the Trustee’s Office investigation.
The relators, the Malhotras, are a married couple who sought Chapter 11 bankruptcy protection. After meeting their bankruptcy trustee, they quickly came to suspect, and subsequently gathered evidence, that he was working with a real estate agent in a number of cases to sell bankruptcy estate properties for what the relators believed was less than fair value, and that in a number of cases the properties were sold to associates of the trustee who then resold them for a large profit. Based on their findings, the relators suspected, but could not prove, that the trustee was receiving illicit payments for orchestrating the sales.
Relators shared their evidence and suspicions with the Trustee’s Office, which opened an investigation sometime later only after a former employee of the trustee made similar allegations. In connection with the investigation, the Trustee’s Office deposed the real estate agent. The deposition was noticed in the relators’ bankruptcy case, as theirs was the only open case in which the trustee and real estate agent had worked together. The Malhotras attended the deposition, during which the real estate agent admitted that he was hired by the trustee to sell bankruptcy estate property in return for a percentage of the commissions on the sales.
The Malhotras subsequently filed an FCA case, alleging that claims that the trustee presented to the bankruptcy court to receive payment of trustee’s fees were fraudulent because they failed to disclose his arrangement with the real estate agent and his role in the resale of estate properties. The defendants moved to dismiss the complaint for lack of subject matter jurisdiction under the public disclosure bar, arguing that the transactions at issue were disclosed in the Trustee’s Office’s deposition. The district court found that the deposition constituted a public disclosure and that the relators were not original sources of the information underlying the transactions, and dismissed the case for lack of subject matter jurisdiction.
Analyzing the issue under the pre-FERA public disclosure bar, the Ninth Circuit agreed that disclosure in the deposition constituted disclosure “in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media.” 31 U.S.C. § 3730(e)(4)(A) (2006). Specifically, the court concluded that a deposition taken in connection with a Trustee’s Office’s internal investigation “fits comfortably” within the meaning of “administrative … investigation.” Moreover, the relators did not challenge the district court’s holding that their action was “based upon” transactions disclosed in the deposition, insofar as their allegations were “substantially similar to” (if not actually based upon) facts discovered in the deposition.
As to whether disclosure in the deposition was “public,” the court relied on the framework established in its earlier decision in Seal 1 v. Seal A, 255 F.3d 1154 (9th Cir. 2001). In that case, the court held that the phrase “public disclosure” in the FCA is a term of art, and that disclosure to a single person can constitute “public disclosure” when that person is “an outsider to the investigation.” Disclosure to the public at large is not required, and a public disclosure to one person does not necessarily constitute a public disclosure as to other individuals.
The court found that the Malhotras were outsiders to the Trustee’s Office’s investigation because they were not employed by any of the defendants or by the Trustee’s Office or any related government agency. The court rejected the Malhotras’ argument that, because it was conducted in their bankruptcy case, they were “insiders to the deposition.” The relevant channel of disclosure was an administrative investigation, not an administrative hearing. Accordingly, whether or not the relators were insiders to the deposition was irrelevant. The disclosure was “public” as a result of their status as outsiders to the Trustee’s Office investigation.
The court also rejected the relators’ attempt to distinguish Seal 1 based on the fact that they were unaware of the FCA at the time of the deposition and were not, at that time, seeking to take advantage of the disclosures by filing an action. Under Seal 1 there is no requirement that the relator intend to take advantage of the information by filing an action at the time of the disclosure. All that is required is that the recipient of the disclosure be “an outsider to the investigation who now seeks to profit from it as an FCA relator.”
Turning to whether the relators were “original sources” of the disclosed information, the court found that their knowledge of the information was not “independent.” Their “generalized suspicion” that the trustee was receiving kickbacks from the real estate agent were insufficient to constitute knowledge of the scheme given that they were unaware of any kickbacks actually paid until they attended the deposition. Thus, their actual knowledge of the disclosed transactions, as opposed to their suspicions, was not independent.
A copy of the court’s decision can be found here.