Nick and Nora Charles don’t get their man

Malhotra v. Steinberg, No. 13-35165 (9th Cir. Oct. 29, 2014).

The Malhotras, a married couple, filed for Chapter 11 bankruptcy. When Robert Steinberg, the trustee of their bankruptcy case, started acting suspiciously, the Malhotras launched an extensive private investigation of him—combing records, interviewing witnesses, and visiting properties that Steinberg had sold in other bankruptcy cases. 

The Malhotras brought their suspicions to the U.S. Trustee’s Office, but the Trustee’s Office didn’t act until a former employee of Steinberg reported that Steinberg might be involved in a corrupt kickback scheme. The Trustee’s Office then took the deposition of a business associate of Steinberg as part of the Malhotras’ bankruptcy case. The Malhotras attended that deposition, which revealed that Steinberg was getting kickbacks. At the deposition, the Malhotras learned for the first time that the corruption they had previously only suspected really did exist. 

Eventually the Malhotras sued Steinberg under the False Claims Act, a law that allows private parties to sue those who have defrauded the federal government. The False Claims Act, however, does not allow suits when the private party has learned about the fraud through a “public disclosure.” The district court dismissed the Malhotras’ case, ruling that the deposition at which they learned about the kickback scheme constituted just such a public disclosure.

The Ninth Circuit affirms the district court. The Malhotras were “outsiders” to the U.S. Trustee Office’s investigation of Steinberg, which makes the deposition a public disclosure. And so, despite the Malhotras’ hard work and keen nose for corruption—and despite Steinberg’s undisputed illegalities—their lawsuit cannot proceed. 

(For more on “Nick and Nora Charles,” see here.)