SCOTUS Ruling Revives FCA Claim Against Wells Fargo

FCA/FIRREA  •  Litigation

Supreme Ct ExteriorOn February 21, 2017, the U.S. Supreme Court issued an order remanding a False Claims Act (FCA) case, Bishop v. Wells Fargo & Co., No. 15-2449 (2d Cir. 2016), to the Second Circuit for further consideration of the availability of implied certification claims.  The Court’s decision to remand the case is significant because the subsequent proceedings have the potential considerably to widen the scope of the FCA within the Second Circuit.

The case involves two former employees of Wells Fargo, Paul Bishop and Robert Kraus, who allege that Wells Fargo made false representations to the Federal Reserve in order to borrow money during the period leading up to the 2008 financial crisis.  The plaintiffs allege that Wells Fargo applied to borrow money from the Federal Reserve pursuant to the Federal Reserve’s Operating Circular No. 10, known as the “Lending Agreement.”  The Lending Agreement requires applicants to make certain representations and warranties, including that: (1) the borrowing institution is not in violation of any laws or regulations that could have adverse effects on its performance of the agreement; (2) the borrowing institution has not made any untrue statements or material omissions relative to the loan transaction; and (3) the borrowing institution’s representations and warranties are all correct.  The plaintiffs in Bishop claim that Wells Fargo violated the FCA when, in applying for Wells Fargo’s loan from the Federal Reserve, predecessor companies of Wells Fargo made misleading statements to cause the bank to appear to be in better financial condition than it was.

The district court dismissed the case, concluding that the plaintiffs’ claims were not particular enough and that Wells Fargo’s financial statements had not been given to the Fed as a condition of payment.  The Second Circuit affirmed that holding.  Both courts relied heavily on a 2001 Second Circuit decision, Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001), which had created only a narrow window for implied certification liability under the FCA.  Under Mikes, in order to fall within the FCA, an implied certification claim had to allege that a specific underlying statute or regulation upon which the plaintiff relied expressly stated that the provider must comply with the regulation or law in order to be paid.  The district court and Second Circuit concluded that the plaintiffs’ claims in Bishop did not fall within this narrow circumstance.

A month after the Second Circuit issued its ruling in Bishop, the Supreme Court ruled in Universal Health Services, Inc. v. United States et al ex rel. Escobar et al,  579 U.S. ___ (2016) and unanimously abrogated Mikes interpretation of the FCA with respect to implied certification claims.  The Supreme Court held that an implied certification theory can be a basis for liability when a “defendant submits a claim for payment that makes specific represen­tations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement.  In these circumstances, liability may attach if the omission renders those representations misleading.”  The Court also held that “False Claims Act liability for fail­ing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment” (emphasis added).

Following the decision in Universal Health Services, the plaintiffs in Bishop filed a petition for a writ of certiorari to the Supreme Court, requesting that the Supreme Court vacate the Second Circuit’s decision in their case and remand the action for further consideration in light of the Court’s ruling in Universal Health Services—a request the Supreme Court granted on February 21, 2017.

 

With the remand, assuming the claim goes forward, financial institutions will see whether Universal Health Services opened up broader liability for financial services institutions who enter into transactions with government entities.  If the Second Circuit determines that it did, the Supreme Court’s reassurance that liability would still be limited through the FCA’s materiality and scienter requirements will be tested and we will begin to see how this new FCA regime unfolds.

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