Paramjeet S. Malhotra v. Robert S. Steinberg

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.

MALHOTRA 4 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.

MALHOTRA 6 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

MALHOTRA 8 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

MALHOTRA 10 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

MALHOTRA 12 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).

MALHOTRA 14 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.

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.