2nd Circuit says loan requests at Fed banks are claims under the FCA

Courts Appellate Second Circuit False Claims Act / FIRREA Federal Reserve

On November 21, the U.S. Court of Appeals for the Second Circuit vacated the dismissal of a relator’s qui tam action, concluding that allegedly fraudulent loan requests made to one or more of the Federal Reserve Banks (FRBs) qualify as claims within the meaning of the False Claims Act (FCA). In the case, two qui tam relators brought an action under the FCA against a national bank and its predecessors-in-interest (defendants), alleging the defendants presented false information to FRBs in connection with their applications for loans. However the district court dismissed the action, holding that allegations of false or fraudulent claims being presented to the FRBs cannot form the basis of an FCA action because the FRBs cannot be characterized as the federal government for purposes of the FCA. In addition, the district court agreed with the defendants’ argument that the bank’s loan requests did not create FCA liability for claims, because the relators did not, and could not, “allege that the [g]overnment either provided any portion of the money loaned to the defendants, or reimbursed FRBs for making the loans.” (Previously covered by InfoBytes here.)

On appeal, the 2nd Circuit concluded that although the FRBs are not a “part of any executive department or agency,” the FRBs still act as agents of the U.S. because the U.S. “created the FRBs to act on its behalf in extending emergency credit to banks; the FRBs extend such credit; and the FRBs do so in compliance with the strictures enacted by Congress and the regulations promulgated by the [Board of Governors of the Federal Reserve System], an independent agency within the executive branch.” The 2nd Circuit also held that the loan requests qualified as claims under the FCA because the money requested by the defendants is provided from the Federal Reserve System’s (Fed’s) emergency lending facilities and “is to be spent to advance a [g]overnment program or interest.” In supporting its conclusion, the appellate court stated that the U.S. “is the source of the purchasing power conferred on the banks when they borrow from the Fed’s emergency lending facilities.” The 2nd Circuit also referred to a U.S. Supreme Court holding in Rainwater v. United States, which stated that “the objective of Congress was broadly to protect the funds and property of the government from fraudulent claims, regardless of the particular form or function, of the government instrumentality upon which such claims were made.”