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U.S. ex rel. Dunleavy v. County of Delaware

August 21, 1997




On Appeal from the United States District Court for the Eastern District of Pennsylvania

(D.C. Civil Action No. 94-cv-07000)

Before: BECKER and ROTH, Circuit Judges and BARRY, *fn1 District Judge

ROTH, Circuit Judge

Filed August 21, 1997

Argued January 30, 1997

(Opinion Filed August 21, 1997)


With this appeal, we examine another chapter in the history of Route 476, known to those in the Philadelphia area, who for so many years awaited its opening, as the "Blue Route." In this qui tam action, Anthony J. Dunleavy (the "Relator") sues Delaware County on behalf of the United States to recover treble damages in the amount of $1,450,000, the return of over $16 million in Department of Housing and Urban Development funds made available to the County from 1992 to 1995, and various other costs, interest, and penalties associated with the County's alleged violations of the False Claims Act (the "FCA" or "Act"), 31 U.S.C. Section(s) 3729-3733.

The district court dismissed Dunleavy's Second Amended Complaint on the ground that it lacked subject matter jurisdiction because the action was based solely on information or allegations that had been publicly disclosed through various newspaper articles, a pre-trial memorandum prepared by Delaware County in previous unrelated litigation, several annual audits prepared by Delaware County and submitted to the federal government, and a 1992 Grantee Performance Report ("GPR") prepared by Delaware County and submitted to HUD. This appeal raises issues which require us to further define the circumstances under which a qui tam action will be deemed to be "based upon the public disclosures of allegations or transactions." We find that the district court relied upon assumptions which broadened the FCA's Public Disclosure Bar beyond its intended scope. Hence, we will reverse and remand this case for further proceedings.

I. Facts and Procedural History

The following facts are taken from Dunleavy's Second Amended Complaint. For purposes of this motion to dismiss, they, in the main, may be taken as true. *fn2

The events challenged here occurred in 1976 while Dunleavy was working as a consultant to Delaware County. Dunleavy's role was to advise the County with respect to HUD's Community Planning and Development programs, HUD's Community Development Block Grant program ("CDBG"), and other related federal government programs. In 1976, the County acquired by way of condemnation a 56.6 acre tract of land adjacent to the Smedley County Park in Nether Providence Township. The tract is known locally as the Penza Tract. To make this acquisition, the County appropriated approximately $1,839,500 in funds provided by HUD and $685,000 in its own funds.

Despite the County's original plans to expand the park, on January 26, 1979, it sold a 26.3 acre portion of the Penza Tract to the Pennsylvania Department of Transportation ("PennDOT") for $1,988,550. PennDOT acquired the land for the planned construction of Route I-476. A short time later, in 1981, the County conveyed an additional 1.9 acre section of the Penza Tract to PennDOT for $103,950. Both sales were, however, contingent on pending environmental litigation being resolved in a way that would permit the Blue Route to be constructed through the region. For this reason, the County agreed to place the proceeds of the two Penza Tract sales in an escrow investment account.

The completion of the Blue Route remained blocked by litigation for the next several years. In 1988, however, the County transferred yet another parcel of the Penza Tract to PennDOT at a cost of $1,000,000. *fn3 The last litigation barrier to the construction of the Blue Route was resolved in 1991, when the remaining actions were settled. Construction began again and the Blue Route was opened a short time later.

Dunleavy left the service of Delaware County in 1992 when his consulting firm's contract was terminated. On November 18, 1994, Dunleavy initiated this qui tam action against Delaware County, the County Council, and certain current and former members of the Council and officers in the County. On March 7, 1995, Dunleavy filed a First Amended Complaint. Then on August 14, he filed a Second Amended Complaint without seeking leave of the Court or the other parties' consent. On September 15, Dunleavy belatedly filed a Petition for Leave to Amend which, despite the procedural irregularity, was granted by the district court on November 8, 1995.

This action remained under seal, as required by 31 U.S.C. Section(s) 3730(b)(2), until September 5, 1995. During that period the U.S. Attorney and HUD investigated the viability of Dunleavy's complaint. *fn4 On August 10, 1995, at the conclusion of the investigation, the U.S. Attorney issued a Notice of Declination of Appearance, pursuant to 31 U.S.C. Section(s) 3730(b)(4)(B), concluding that the matters raised in Dunleavy's complaint did not constitute fraud within the meaning of the False Claims Act. At the same time, the U.S. Attorney turned over control of the investigation to HUD to review the matter for compliance with CDBG guidelines.

HUD pursued its own investigation of the Penza Tract fund in March and April of 1996 and issued a Limited Audit Review on April 29, 1996. As a result of the Audit, HUD made a demand on the County for the return of nearly $2 million in HUD funds. At some point the County and HUD began negotiations to determine the amount of the funds owing to HUD. After learning of the possibility of settlement, Dunleavy claimed rights to notice and a hearing under Section(s) 3730(c)(2)(B) of the FCA. He alsofiled numerous Freedom of Information Act requests on HUD and on the U.S. Attorney.

Despite Dunleavy's protests against a settlement, HUD denied him the opportunity to intercede and participate in the negotiations. On September 11, 1996, HUD agreed to accept the County's settlement offer of $1,921,699. Under the terms of the settlement, the County was to remit a check to HUD, and HUD would then return the funds to the County's line-of-credit where the monies would be available for eligible and fundable activities. Dunleavy unsuccessfully petitioned the district court to stay the administrative action necessary for settlement. *fn5 Dunleavy then unsuccessfully sought a stay from this Court. Dunleavy's Second Amended Complaint alleges three counts of violation of the False Claims Act, 31 U.S.C. Section(s) 3729(a)(1), (a)(2), & (a)(7), one count of common law fraud, one count of payment under mistake of fact, and one count of breach of contract. Dunleavy's theory is that Delaware County defrauded HUD by not reporting and returning proceeds from the sale of the Penza Tract.

Specifically, Dunleavy contends that the HUD funds used to acquire the Penza Tract were subject to a contractual agreement between the County and the federal government. This agreement required the County to follow HUD rules and regulations which limit the permissible uses of the funds and impose certain reporting requirements on the County. Dunleavy reasons that, since the Penza Tract was originally acquired with HUD funds, the County was required to treat the monies as "program income" and to provide accounts of the transactions to HUD. Dunleavy further contends that, once it became apparent in 1991 that the County would not reacquire the Penza Tract, the defendants should have known, or knew but recklessly disregarded, their obligation to report the receipt of the Penza Tract monies in Annual Audits and Grantee Performance Reports and to repay those moneys to HUD.

On July 12, 1996, the district court dismissed Dunleavy's Second Amended Complaint, finding that it lacked subject matter jurisdiction. United States ex rel. Dunleavy v. County of Delaware, No. 94-7000, 1996 WL 392545 (E.D. Pa. July 12, 1996). The district court held that Dunleavy's action violated the jurisdictional bar of 31 U.S.C. Section(s) 3730(e)(4)(A), which divests the federal courts of jurisdiction over qui tam suits "based upon publicly disclosed allegations or transactions." The trial court found that certain newspaper articles, a pre-trial memorandum from unrelated litigation, and the County's annual audits and GPRs publicly disclosed, prior to the filing of Dunleavy's complaint, both the misrepresented and the actual facts necessary to complete the inference of fraud. The district court assumed that all these documents were acceptable sources of public disclosure under the Act. The court then concluded that Dunleavy had not qualified as an original source under the Act.

Dunleavy filed a timely notice of appeal. We have jurisdiction pursuant to 28 U.S.C. Section(s) 1291. Our review of the district court's dismissal of the complaint for lack of subject matter jurisdiction is plenary. United States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1152 (3d Cir. 1991).

II. Discussion

The False Claims Act has been with us in one form or another since the Civil War. Act of March 2, 1863, ch. 67, Section(s) 4, 12 Stat. 698 (1863). The FCA sets out civil and criminal penalties for persons who knowingly submit false claims to the government.

The novel aspect of the FCA is the mechanism Congress has chosen for its enforcement. A private person with knowledge of fraud against the government, acting as a de facto "attorney general," can instigate litigation on the government's behalf against the parties responsible. Such suits are known as qui tam actions. *fn6

The FCA contains a built in incentive for a private plaintiff, known as the "relator," to bring suit. Under the original statute, a prevailing relator could come away with up to one-half of the damages and forfeitures recovered and collected. *fn7 S. Rep. No. 345, 99th Cong., 2d Sess., at 10, reprinted in 1986 U.S.C.C.A.N. 5266, 5275. Congress has shrewdly "offset inadequate law enforcement resources and encouraged `a rogue to catch a rogue' by inducing informers `to betray [their] conspirators.' " United States ex rel. Findley v. FPC-Boron Employees' Club, 105 F.3d 675, 679 (D.C. Cir. 1997) (quoting Cong. Globe, 37th Cong., 3d Sess. 955-56 (1863)).

The Act requires a qui tam plaintiff, before proceeding with suit, to disclose to the government the information on which the claim is based. 31 U.S.C. Section(s) 3730(b). The government then has sixty days to investigate the matter and to decide whether to intervene. The government also has the option to step into the action at a later date. 31 U.S.C. Section(s) 3730(c)(3). In either case, the relator is not entitled to a recovery under the Act if the action is one which runs afoul of the jurisdictional bars contained in 31 U.S.C. Section(s) 3730(e).

For example, the public disclosure bar operates under this section to divest the plaintiffs of subject matter jurisdiction if: (1) there was a public disclosure; (2) of "allegations or transactions" of the fraud; (3) "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."; (4) that the relator's action was "based upon." If the relator fails the public disclosure bar, he or she can ...

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