Court Opinion

ID: 2746476
Source: CourtListenerOpinion
Date Created: 2014-10-29 17:00:59.54332+00
Date Added: 2024-06-11T09:53:22.852491
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

PARAMJEET S. MALHOTRA and                 No. 13-35165
SUNITA MALHOTRA, a marital
community,                                  D.C. No.
              Plaintiffs-Appellants,     2:09-cv-01618-
                                              JLR
                 v.

ROBERT D. STEINBERG; JAMES W.              OPINION
GRACE; DAVID RINNING; STEINBERG
& ASSOCIATES LLC; JOHN L. SCOTT,
INC.; RE/MAX EASTSIDE BROKERS,
INC.; WELLES RINNING,
             Defendants-Appellees.

      Appeal from the United States District Court
        for the Western District of Washington
       James L. Robart, District Judge, Presiding

                Argued and Submitted
          June 5, 2014—Seattle, Washington

                Filed October 29, 2014

  Before: Alfred T. Goodwin, M. Margaret McKeown,
          and Paul J. Watford, Circuit Judges.

               Opinion by Judge Watford
2                   MALHOTRA V. STEINBERG

                           SUMMARY*

                         False Claims Act

    The panel affirmed the district court’s dismissal of a qui
tam action brought under the False Claims Act on the basis
that the court lacked subject matter jurisdiction because the
Act’s “public disclosure” bar applied.

    The plaintiffs, chapter 11 debtors, alleged that a former
bankruptcy trustee presented fraudulent claims for payment
to the bankruptcy court, falsely certifying that he had
faithfully performed his duties as trustee.

    The panel held that alleged kickback scheme transactions
were publicly disclosed during a deposition taken by the
Office of the United States Trustee, as part of its
administrative investigation of the trustee, because the
transactions were disclosed to the plaintiffs, who were
outsiders to the investigation. In addition, the plaintiffs were
not original sources of the kickback scheme allegations
because they did not have independent knowledge of this
information. Accordingly, the public disclosure bar applied.

  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                 MALHOTRA V. STEINBERG                     3

                        COUNSEL

Angelo J. Calfo (argued) and Theresa DeMonte, Calfo
Harrigan Leyh & Eakes LLP, Seattle, Washington, for
Plaintiffs-Appellants.

Kent Michael Fandel (argued) and Daniel J. Oates, Graham
& Dunn PC, Seattle, Washington, for Defendants-Appellees.

                        OPINION

WATFORD, Circuit Judge:

    Paramjeet and Sunita Malhotra, a married couple, filed
this qui tam action under the False Claims Act, 31 U.S.C.
§§ 3729–3733. The district court held that it lacked subject
matter jurisdiction because the Act’s “public disclosure” bar
applies. We are asked to decide whether a deposition taken
by the Office of the United States Trustee triggered the bar
and, if so, whether the Malhotras fall within the “original
source” exception to the bar.

                              I

    In 2006, the Malhotras sought bankruptcy protection
under Chapter 11 after experiencing cash-flow difficulties in
their real estate business. The bankruptcy court appointed
Robert Steinberg as the trustee to administer the Malhotras’
bankruptcy estate. From their very first meeting with
Steinberg, the Malhotras suspected he was corrupt. They
turned out to be right.
4                MALHOTRA V. STEINBERG

    The Malhotras’ initial meeting with Steinberg took place
at their home shortly after Steinberg had been appointed
trustee. He showed up with a real estate agent named James
Grace. Steinberg informed the Malhotras that he would be
selling their home and other properties (which he oddly
referred to as “my properties”) immediately and that Grace
would be handling the sales. This plan of action struck the
Malhotras as highly suspicious. They viewed liquidation of
their assets—particularly a sale of their personal residence—
as entirely unnecessary to a successful reorganization under
Chapter 11. Their suspicions increased when Steinberg filed
an involuntary petition against a company owned by the
Malhotras, which had the effect of bringing additional
properties under Steinberg’s control. And they became still
more suspicious when Grace referred to Steinberg as his
“partner” and mentioned that he and Steinberg had worked
together on over 150 cases. These red flags convinced the
Malhotras that Steinberg was involved in some kind of
scheme whereby he intended to profit personally from their
bankruptcy.

    Their suspicions aroused, the Malhotras began
investigating Steinberg. They reviewed thousands of pages
of bankruptcy court and county assessor’s office records.
Those records revealed that Steinberg, in his capacity as
bankruptcy trustee, had employed Grace as a real estate agent
to sell bankruptcy estate property in scores of cases. When
the Malhotras took a closer look at some of the sales, they
discovered that the properties had been sold for what the
Malhotras believed was less than fair value. In some
instances, presumably to justify the low sales price, Steinberg
made representations to the bankruptcy court about the
condition of the property that, upon investigation, the
Malhotras believed to be untrue. The Malhotras also
                 MALHOTRA V. STEINBERG                       5

discovered what they termed “straw man” transactions—
instances in which Steinberg sold bankruptcy estate property
at below-market prices to his associates, who then resold the
property a short time later for a large profit. These sales led
the Malhotras to suspect that Steinberg was receiving
payment “on the side” for his role in orchestrating the sales.

    The Malhotras shared the fruits of their investigation with
the Office of the United States Trustee, the government entity
responsible for appointing Steinberg as a bankruptcy trustee.
The Trustee’s Office thanked the Malhotras for the
information and encouraged them to continue investigating
Steinberg, which the Malhotras did. They reviewed
additional bankruptcy court and county assessor’s office
records, visited the properties involved, and interviewed
witnesses. Those efforts revealed additional suspicious sales
involving Steinberg and Grace, and the Malhotras shared this
information with the Trustee’s Office as well. Much to the
Malhotras’ frustration, however, the Trustee’s Office took no
action.

    That changed in May 2008, when the Trustee’s Office
received a letter from one of Steinberg’s former employees.
The letter stated that Steinberg and an unnamed real estate
agent had struck an agreement under which Steinberg
received a “referral fee” from the agent in exchange for hiring
the agent to sell bankruptcy estate property. The letter
prompted the Trustee’s Office to launch its own investigation
of Steinberg. The Trustee’s Office ultimately subpoenaed
records from a number of real estate agencies, including
Grace’s current and former employers, which documented
Grace’s payment of “referral fees” to Steinberg over many
years.
6                 MALHOTRA V. STEINBERG

    After receiving these documents, the Trustee’s Office
deposed Grace under Rule 2004 of the Federal Rules of
Bankruptcy Procedure. For reasons of administrative
convenience, the Trustee’s Office noticed Grace’s deposition
in the Malhotras’ bankruptcy case. (At the time, the
Malhotras’ case was the only one still open in which
Steinberg and Grace had worked together while Grace was
employed by his then-current firm.) During the deposition,
which the Malhotras attended, Grace admitted that Steinberg
would hire him as a real estate agent to sell bankruptcy estate
property, and in return Grace would pay a percentage of the
commissions he earned to Steinberg. The Trustee’s Office
asked Grace a handful of questions relating to the Malhotras’
bankruptcy case, but most of the questioning focused on
property sales in other bankruptcy cases.

    About a year after the Grace deposition, the Malhotras
filed this qui tam action against Steinberg, Grace, and others
under the False Claims Act. The Act authorizes private
parties, known as relators, to bring civil actions in the name
of the United States against any person who presents a false
or fraudulent claim for payment to the federal government.
31 U.S.C. § 3730(b)(1). The Malhotras’ complaint alleges
that Steinberg presented fraudulent claims to the bankruptcy
court in order to obtain payment of the $60 trustee’s fee
Steinberg received for each bankruptcy case he administered.
Steinberg’s claims for payment were fraudulent, the
Malhotras allege, because to obtain payment he falsely
certified that he had faithfully performed his duties as trustee.

    The Malhotras’ complaint appears to allege two different
theories for why Steinberg’s certifications were fraudulent.
The first is that he failed to disclose to the bankruptcy court
the “referral fees” he received from Grace. The complaint
                 MALHOTRA V. STEINBERG                       7

refers to these payments as the “kickback scheme.” The
second theory is that Steinberg failed to disclose his role in
orchestrating below-market sales to his associates, who then
“flipped” the properties a short time later and paid a share of
the profits to Steinberg. The complaint refers to these sales
as the “straw man transactions.” Had Steinberg disclosed
either form of misconduct to the court, the complaint
suggests, he would not have been paid the $60 trustee’s fee
for each case.

    Defendants moved to dismiss the action for lack of
subject matter jurisdiction. They argued that the Malhotras’
action is barred by a provision of the False Claims Act known
as the public disclosure bar. That provision was amended in
2010, but at the time relevant here it provided:

       No court shall have jurisdiction over an action
       under this section based upon the public
       disclosure of allegations or transactions 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, unless
       the action is brought by the Attorney General
       or the person bringing the action is an original
       source of the information.

31 U.S.C. § 3730(e)(4)(A) (2006) (footnote omitted). The
statute defined “original source” as follows:

       For purposes of this paragraph, “original
       source” means an individual who has direct
       and independent knowledge of the
       information on which the allegations are
8                  MALHOTRA V. STEINBERG

       based and has voluntarily provided the
       information to the Government before filing
       an action under this section which is based on
       the information.

§ 3730(e)(4)(B).

    Defendants brought a factual attack on the complaint’s
allegations. They submitted evidence establishing that the
transactions underlying the kickback scheme were disclosed
during the Grace deposition. Defendants argued that those
transactions were therefore publicly disclosed as part of an
administrative investigation conducted by the Trustee’s
Office, which triggered § 3730(e)(4)(A)’s public disclosure
bar and deprived the court of jurisdiction over the Malhotras’
action. The Malhotras did not dispute defendants’ framing of
the issue. They made no attempt to argue that the alleged
straw man transactions—which were not disclosed during the
Grace deposition—provided an independent basis for their
claims.

    The district court therefore limited its analysis to whether
the Grace deposition constituted a “public disclosure” of the
transactions underlying the kickback scheme. It concluded
that the Grace deposition constituted such a disclosure under
our decision in Seal 1 v. Seal A, 255 F.3d 1154 (9th Cir.
2001). The court then turned to the original source analysis.
After conducting an evidentiary hearing to resolve disputed
factual issues, the court concluded that the Malhotras were
not original sources of the information underlying the
kickback scheme transactions, because the Malhotras didn’t
know anything about those transactions until they attended
the Grace deposition. Based on these rulings, the court
dismissed the action for lack of subject matter jurisdiction.
                  MALHOTRA V. STEINBERG                       9

                               II

    On appeal, the Malhotras do not challenge the district
court’s decision to limit its analysis to the kickback scheme
transactions. Instead, they contend the district court erred by
holding that those transactions were publicly disclosed during
the Grace deposition. If they’re right on that score,
§ 3730(e)(4)(A)’s public disclosure bar doesn’t apply; the
existence of a public disclosure is a threshold condition for
application of the bar. See Wang v. FMC Corp., 975 F.2d
1412, 1416 (9th Cir. 1992). If the Grace deposition
constitutes a public disclosure, we must then decide whether
the Malhotras are original sources of the information under
§ 3730(e)(4)(B).

                               A

    We start with the threshold issue. The public disclosure
bar is triggered if three things are true: (1) the disclosure at
issue occurred through one of the channels specified in the
statute; (2) the disclosure was “public”; and (3) the relator’s
action is “based upon” the allegations or transactions publicly
disclosed. § 3730(e)(4)(A).

    We agree with the district court that the Grace deposition
satisfies the first and third requirements. The Trustee’s
Office took Grace’s deposition as part of an internal
investigation into alleged wrongdoing by one of its trustees,
and that investigation fits comfortably within the
“administrative” investigations mentioned in § 3730(e)(4)(A).
See Seal 1, 255 F.3d at 1161. The disclosures Grace made
during the deposition therefore occurred through one of the
channels specified in the statute. The Malhotras don’t contest
that, during the deposition, Grace disclosed the material
10                MALHOTRA V. STEINBERG

elements of the fraudulent transactions underlying the
kickback scheme. See A-1 Ambulance Serv., Inc. v.
California, 202 F.3d 1238, 1243 (9th Cir. 2000) (holding that
“the jurisdictional bar is raised so long as the material
elements of the allegedly fraudulent ‘transaction’ are
disclosed”). Nor do the Malhotras contest the district court’s
ruling that their action is “based upon” those same
transactions. We have held that the phrase “based upon” in
§ 3730(e)(4)(A) means “substantially similar to,” not
“derived from.” United States ex rel. Meyer v. Horizon
Health Corp., 565 F.3d 1195, 1199 (9th Cir. 2009); United
States ex rel. Biddle v. Bd. of Trs. of the Leland Stanford
Junior Univ., 161 F.3d 533, 539–40 (9th Cir. 1998). The
kickback scheme transactions alleged in the Malhotras’
complaint are substantially similar to the transactions Grace
disclosed during his deposition.

     What the Malhotras dispute is whether the disclosures
Grace made during the deposition were “public.” In our
view, that issue is controlled by Seal 1. There, we construed
the word “public” in § 3730(e)(4)(A) as essentially a term of
art. We held that a disclosure need not be made to the public
at large to qualify as “public” under the statute. 255 F.3d at
1161–62. A disclosure made to a single individual can
constitute a “public disclosure” as to that individual in certain
circumstances, even though it might not constitute a public
disclosure as to other individuals. Id. A public disclosure as
to one member of the public, we stressed, doesn’t mean that
a public disclosure has occurred “as to some other member of
the public who independently comes upon information
already possessed by the government.” Id. at 1162.

    To understand why we adopted that reading of the statute,
a brief description of the facts in Seal 1 is required. The
                  MALHOTRA V. STEINBERG                      11

relator in that case, Abraham Gale, worked for a company
(Packard-Bell) that submitted fraudulent claims to the federal
government. Id. at 1156. Gale filed a qui tam action against
Packard-Bell and subsequently developed a relationship with
lawyers from the United States Attorney’s Office
investigating the fraud. Id. They showed Gale documents
relating to their investigation of a competitor company,
Zenith, which suggested that Zenith was perpetrating a
similar type of fraud. Id. at 1156–57. Gale turned around
and filed a separate qui tam action against Zenith based on
the very same information disclosed to him by the
government lawyers. Id.

    We held that the government’s disclosure of information
relating to Zenith constituted a “public disclosure” as to Gale.
Id. at 1163. We concluded that disclosure of information to
a single individual can constitute a public disclosure under
§ 3730(e)(4)(A) if that individual is a “member of the public”
for purposes of the investigation at issue. Id. at 1162. Gale
was a “member of the public” for purposes of the Zenith
investigation because he was “an outsider to the
investigation.” Id.

    In Seal 1, we had no occasion to define with precision the
meaning of “outsider.” Gale was neither an employee of the
target of the investigation (Zenith) nor an employee of the
government—the two categories of individuals who, even
under the broadest reading of our precedents, could be
deemed “insiders.” See United States ex rel. Schumer v.
Hughes Aircraft Co., 63 F.3d 1512, 1518–19 (9th Cir. 1995),
vacated on other grounds, 520 U.S. 939 (1997); United States
ex rel. Hagood v. Sonoma Cnty. Water Agency, 929 F.2d
1416, 1419–20 (9th Cir. 1991). That made it easy to
12                MALHOTRA V. STEINBERG

conclude that Gale was an “outsider” to the Zenith
investigation.

    Under our holding in Seal 1, the Grace deposition
constitutes a public disclosure as to the Malhotras. The
Malhotras were “outsiders” to the administrative
investigation conducted by the Trustee’s Office, which was
entirely independent of the Malhotras’ own investigation.
The Malhotras weren’t employees of Steinberg or any of the
other defendants, and they weren’t employed in any capacity
by the Trustee’s Office or any government agency related to
the Trustee’s Office.

     The Malhotras attempt to distinguish Seal 1 in two ways.
First, the Malhotras argue that, unlike the “outsider” in Seal
1, they were “insiders” to the Grace deposition. In their view,
because the Grace deposition occurred in their own
bankruptcy case, they had the right to attend while other
members of the general public would have been excluded.
Defendants argue just the opposite, maintaining that anyone
can attend a deposition noticed under Rule 2004.

    We don’t have to decide who has the better of this
argument. Whether the Grace deposition was open to the
public isn’t relevant because the public disclosure bar was
triggered in this case by a disclosure in an “administrative . . .
investigation,” not by a disclosure in a “civil[] or
administrative hearing.”        31 U.S.C. § 3730(e)(4)(A)
(emphasis added). So the relevant question is not whether the
Malhotras were insiders to the Rule 2004 deposition, but
rather whether they were insiders to the Trustee’s Office
investigation. As we’ve explained, under Seal 1 the
Malhotras were outsiders to that investigation, which renders
the Grace deposition a public disclosure as to the Malhotras.
                  MALHOTRA V. STEINBERG                      13

Whether the deposition would constitute a public disclosure
as to some other member of the public—say, someone who
didn’t actually attend the deposition—is an entirely different
question that we need not and do not address.

    Second, the Malhotras attempt to distinguish Seal 1 by
arguing that, when they attended the Grace deposition, they
didn’t know they could file an action under the False Claims
Act, and thus were not seeking at that point to take advantage
of the disclosure by filing such an action. It’s true that in
Seal 1 we noted that the relator there had a “significant
incentive (and no disincentive) to use allegations of fraud by
Zenith to his own advantage”—namely, by filing a False
Claims Act suit against Zenith. 255 F.3d at 1161. But, by
making that declaration, we didn’t intend to establish
additional criteria for being a “member of the public.” We
discussed Gale’s incentives only to explain why, as a general
matter, the test we established was in accord with the
purposes of the statute. All that Seal 1 requires is that the
recipient of the disclosure be “an outsider to the investigation
who now seeks to profit from it as an FCA relator.” Id. at
1162 (emphasis added). Thus, while we credit the Malhotras’
assertion that they didn’t know anything about the False
Claims Act when they attended the Grace deposition, that fact
has no bearing on the analysis under Seal 1.

                               B

    Because the Malhotras’ action is based upon a “public
disclosure” of the kickback scheme transactions, subject
matter jurisdiction exists only if they are “original source[s]”
of the information under § 3730(e)(4)(B).
14               MALHOTRA V. STEINBERG

    To qualify as original sources, the Malhotras must show,
among other things, that they have “direct and independent
knowledge” of the information underlying the allegations on
which their action is based—that is, the kickback scheme
allegations. § 3730(e)(4)(B); see Rockwell Int’l Corp. v.
United States, 549 U.S. 457, 470–72 (2007). We need not
decide whether the Malhotras had “direct” knowledge, for we
conclude that whatever knowledge they had was not
“independent.”

    Independent knowledge ordinarily means knowledge that
preceded the public disclosure. Meyer, 565 F.3d at 1202. So
here, the Malhotras were required to show that they knew of
the information underlying the kickback scheme allegations
before they attended the Grace deposition. The district court
correctly held that the Malhotras failed to make that showing.
Although the Malhotras had suspicions about Steinberg long
before the Grace deposition took place, they did not know of
a single kickback paid to Steinberg until they attended the
deposition and heard Grace describe the scheme. (As Mrs.
Malhotra put it, they had an “ah-ha moment” when they heard
Grace’s testimony.) The Malhotras’ generalized suspicion
that Steinberg was receiving payment “on the side” doesn’t
constitute knowledge of the kickback scheme. See United
States ex rel. Aflatooni v. Kitsap Physicians Servs., 163 F.3d
516, 525–26 (9th Cir. 1999). At best, before the Grace
deposition, the Malhotras could only speculate that Steinberg
was receiving a percentage of the commissions paid to Grace;
they had no information about money having changed hands
in that fashion. In fact, the information they did have
suggested that Steinberg’s “on the side” payments consisted
of a cut of the profits earned on the resale of bankruptcy
estate property (the straw man transactions), not a cut of the
commissions paid on the initial sale of the property (the
                  MALHOTRA V. STEINBERG                      15

kickback scheme). Because the Malhotras’ knowledge of the
kickback scheme, as opposed to their general suspicions
about Steinberg, derived entirely from the Grace deposition,
that knowledge is not independent under § 3730(e)(4)(B).

    The Malhotras argue that the district court did not give
sufficient weight to all the work they did prior to the Grace
deposition. We recognize that the Malhotras spent countless
hours reviewing real estate records to uncover the alleged
straw man transactions. But even if the Malhotras had direct
and independent knowledge of the information underlying
those transactions—a question we need not resolve—that fact
wouldn’t help them here. The original source analysis must
be conducted on a claim-by-claim basis. See Rockwell,
549 U.S. at 476. The district court ruled that the Malhotras’
claims rested on the kickback scheme transactions, not the
straw man transactions, and the Malhotras haven’t challenged
that ruling on appeal. As a result, the only question before us
is whether the Malhotras are original sources of the
information underlying the kickback scheme allegations. For
the reasons given above, we conclude that they are not.

                              III

   The Malhotras do not challenge the district court’s award
of costs to defendants under 28 U.S.C. § 1919, beyond
arguing that the award should be vacated if the district court’s
decision dismissing their action is reversed. Having
concluded that the district court’s decision must be affirmed,
we find no basis for disturbing the costs award.

   AFFIRMED.