Opinion ID: 745387
Heading Depth: 3
Heading Rank: 1

Heading: Are the Disclosures of Allegations or Transactions?

Text: 36 We must first determine whether the County has identified any sources which publicly disclosed the alleged fraud or the underlying fraudulent transaction. The County points to four sources for the jurisdictional bar: (i) several newspaper articles discussing the acquisition of the Penza tract; (ii) a pre-trial memorandum filed with the court in prior unrelated litigation initiated by a community interest group to challenge the County's use of HUD funds; (iii) annual financial audits submitted to the federal government pursuant to the County's obligation under the Single Audit Act, 31 U.S.C. § 7502; and (iv) a 1992 Grantee Performance Report prepared by the County and submitted to HUD as required by § 104(e) of the Housing and Community Development Act of 1974, 42 U.S.C. § 5304(e). For the reasons that follow, we conclude that only the County's GPR, if considered a public disclosure, reveals information crucial to making an inference of fraud. 37 In this regard, the crucial question arises from the statutory language, based upon the public disclosure of allegations or transactions. 31 U.S.C. § 3730(e)(4)(A). We must consider whether the information disclosed constitutes allegations or transactions. As another court has explained, the Act bars suits based on publicly disclosed 'allegations or transactions,' not information. Wang v. FMC Corp., 975 F.2d 1412, 1418 (9th Cir.1992). 38 It is clear that the FCA's reference to allegations or transactions is in the disjunctive, so that disclosures which reveal either the allegations of fraud or the elements of the underlying fraudulent transaction are sufficient to invoke the jurisdictional bar. Findley, 105 F.3d at 686-87; United States ex rel. Precision Co. v. Koch Indus., Inc., 971 F.2d 548, 552 n. 2 (10th Cir.1992); see also Hagood v. Sonoma Water County Agency, 81 F.3d 1465, 1473 (9th Cir.), cert. denied, --- U.S. ----, 117 S.Ct. 175, 136 L.Ed.2d 116 (1996) (the jurisdictional bar may be raised by public disclosure unaccompanied by an explicit allegation of fraud). 39 The District of Columbia Circuit has devised a useful formula for determining the quantum of information that must be disclosed before the jurisdictional bar comes into play: 40 [I]f X + Y = Z, Z represents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulent transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., the conclusion that fraud has been committed. 41 United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 654 (D.C.Cir.1994). The Springfield Terminal court goes on to explain that the inference of fraud requires recognition of but two elements: a misrepresented state of facts and a true state of facts. Id. at 655. Injected into the above formula the variables take on the following labels: X (misrepresented state of facts) + Y (true state of facts) = Z (fraud). Findley, 105 F.3d at 687. 42 It is not seriously contended that the Z variable has been disclosed here. The record is devoid of any public accusation of wrongdoing against the County before Dunleavy filed his qui tam action. HUD's audit of Delaware County's CDBG Program Penza Tract Fund did not begin until March 1996 and was itself a product of this suit. Therefore, unless we find disclosures in the record of both the X and Y variables, we have no reason for calling down the jurisdictional bar. 43 In everyday language, a transaction generally involves an exchange between two parties or things that reciprocally affect or influence one another. Springfield Terminal, 14 F.3d at 654 (citing Webster's Third New International Dictionary 55 (1976)). What makes a particular transaction fraudulent within the meaning of the False Claims Act is less clear. We think it is sufficient, at least in considering the application of the disclosure bar, that the transaction merely be one in which a set of misrepresented facts has been submitted to the government. 9 This we believe is consistent with the broader definitions of fraud employed in the False Claims Act. See Wang, 975 F.2d at 1420 (The Act's scienter requirement is something less than that set out in the common law). 44 In discussing the contents of his Second Amended Complaint, Dunleavy insists that 45 his allegation of fraud was not Delaware County's mere failure to return the proceeds to HUD. By contrast, Mr. Dunleavy alleged that Delaware County only had the obligation to return the proceeds after the Blue Route opened. Mr. Dunleavy's allegation of fraud, therefore, is that after the Blue Route opened, Delaware County had an obligation to report or return the proceeds to the government but failed to do so. 46 Appellant's Br. at 14. By this statement, we understand Dunleavy to contend that the crucial acts by the County necessary to the completion of this fraudulent transaction were its retention of the proceeds from the sale of the Penza Tract and its failure to inform HUD that it had these funds after the opening of the Blue Route ripened the obligation to return the money. 47 We view the fraudulent scheme pled in Dunleavy's Second Amended Complaint as having four essential elements for purposes of our jurisdictional inquiry under the FCA's public disclosure bar: (1) the County was the recipient of funds belonging to the federal government; (2) the County had an obligation to repay those funds to the federal government; (3) the County failed to repay those funds to the federal government after the obligation became owing; and (4) the County failed to disclose to the federal government that funds belonging to it were in the County's possession. Elements one through three account for the actual state of facts, while the fourth element corresponds to the misrepresented state of facts.The County identifies three newspaper articles which appeared in February 1980 and discussed Delaware County's purchase and sale of the Penza tract as well as its relationship with HUD. 10 One of the articles stated the county paid $1.8 million in federal Community Development funds for the [Penza Tract] property in 1976.... In January [1980] the county sold 26--acres less than half the tract--to PennDOT for the Blue Route for $1.9 million.... App. at 90. Another article from the same year reported in greater detail on the possible uses for the sale proceeds: 48 [Delaware County's Council Chairman, Charlie] Keeler said the original $1.8 million the county spent with Community Development funds would have to be spent on projects permitted under that program's regulations. Any additional property accrued in interest could be spent for other purposes, including improving the remaining park area. 49 App. at 91 (emphasis added). A third article explained the transaction in which the Penza Tract was sold but contained no references to what would become of the sale's proceeds. App. at 92. The district court viewed all three articles as revealing essential facts about the purchase and sale of the Penza Tract as well as the use made by the County of CDBG funds and of the Penza Tract sale's proceeds. 50 The district court also relied on a Pretrial Memorandum prepared on the County's behalf in an unrelated citizens' suit against the County. Dunleavy refers to this memorandum in his Second Amended Complaint. Second Amended Compl. at p 24. In the memorandum, County officials represented that proceeds from the sale of the Penza Tract to the Commonwealth would be returned to the Community Development program in accordance with HUD regulations. App. at 33. The district court viewed the memorandum as a public disclosure of the County's knowledge of its obligation to return the funds to the federal fisc. 51 A third source of information derives from Annual Financial Audits submitted by the County to the federal government in accordance with its obligations under the Single Audit Act, 31 U.S.C. § 7501 et seq. These audits each contained a Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance for several accounts including one called the Penza Fund. The Penza Fund was described in the audits as a fund 52 established to account for the proceeds and related investment income on the sale of a County owned tract of land to the Commonwealth of Pennsylvania, the County's intention is to use these funds for the purchase of land. 53 See, e.g., App. at 94. Despite the changes in the status of the accounts from 1985 to 1993, this description of the fund's purpose remained a constant. The district court found that these audits revealed the County's retention of the proceeds from the sale of the Penza Tract and the County's use of the interest from these proceeds. 54 The final source identified by the parties and relied on by the district court is a 1992 GPR submitted by the County to the federal government. In this report, the County failed to account for the proceeds of the sale of the Penza Tract held in its accounts. The district court found that, by omitting the Penza Tract fund from the GPR, the County completed the disclosure of all material elements of the fraudulent transaction since this act disclosed the County's alleged failure to report the proceeds to HUD as program income. Dunleavy, 1996 WL 392545, at  3. 55 Dunleavy now contends that no combination of these documents could have revealed all the necessary elements to complete the inference of fraud. In particular, Dunleavy dismisses the GPR as devoid of any information related to the Penza tract, the escrow fund, or the fraud scheme. Dunleavy insists that the GPR does not complete the disclosure of the fraudulent transaction because[t]he 1992 GPR does not report any program income related to the sale of the Penza tract. It contains absolutely no information about the escrowed proceeds of the sale of a portion of the Penza tract, the obligation to return those proceeds or the use of those proceeds. It is absolutely silent as to any issue that is related the fraud scheme alleged by Mr. Dunleavy. 56 Appellant's Br. at 22. 57 The County concedes the accuracy of Dunleavy's reading of the GPR but argues the significance of this source derives from what the GPR does not say: 58 [T]he only allegation which arguably was not disclosed was the actual non-reporting of the proceeds (and the interest thereon) as Program Income under the CDBG program. However, as shown herein, the County did report the receipt of the proceeds and interest through other public disclosures (i.e. the articles and audits).... [T]he fact of non-reporting was in the possession of the Government--that is, in addition to being the recipient of most (if not all) of the public disclosures, the Government also received the annual Grantee Performance Report (GPR) which allegedly omitted the proceeds as Program Income.... HUD was in possession of the public disclosures outlined above and was in possession of the GPRs allegedly omitting the Program Income.... 59 Appellee's Br. at 27. The County maintains that it is the submission of the 1992 GPR to the federal government which completes the inference of fraud since it publicly exposed the inconsistencies in the County's other statements which acknowledged the County's retention and use of program income and interest, and the non-disclosure of that Program Income in the GPR itself. 60 We conclude that the 1992 GPR is the only source that, if publicly disclosed, would complete the inference of fraud. 11 As already stated, no source makes a public allegation of fraud. The remaining sources disclosed only the actual state of facts, i.e. the County's retention of the Penza Tract proceeds and interest. It is undisputed that only the 1992 GPR contained the misrepresented state of facts, i.e., the County's failure to inform the federal government that it had these funds in its possession. 12 61 Although neither Dunleavy nor the County has produced the 1992 GPR as part of the record, they are in apparent agreement that Delaware County was obliged, but failed, to disclose its possession of the Penza Tract proceeds in the 1992 GPR. Congress explicitly provided for the submission of such reports to be used in the Secretary's review of program implementation: 62 Each grantee shall submit to the Secretary ... a performance report and evaluation report concerning the use of funds made available under section 5306 of this title, together with an assessment by the grantee of the relationship of such use to the objectives identified in the grantee's statement [of objectives previously provided to the Secretary].... The grantee's report shall indicate its programmatic accomplishments, the nature and reason for changes in the grantee's program objectives, indications of how the grantee would change its program as a result of its experiences, and an evaluation of the extent to which its funds were used for activities that benefited low- and moderate-income persons. The report shall include a summary of any comments received by the grantee from citizens in its jurisdiction respecting its program. 63 42 U.S.C. § 5304(e) (1992) (emphasis added). Specifically, HUD regulations imposed a duty to record program income received or expended as part of the CDBG program. See 24 C.F.R. § 570.504(a) (1993). 64 Without the benefit of Dunleavy's insider position, someone investigating government fraud would be able to ascertain that the County had not fulfilled its reporting obligation only if that individual had access to the GPR. 65