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On September 24, U.S. District Court Judge Jesse Furman largely denied a bank’s motion to dismiss a complaint filed by the U.S. Attorney’s Office for the Southern District of New York (SDNY) in which the government alleges that the bank falsely certified loans under the FHA’s Direct Endorsement Lender Program in violation of the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). U.S. v. Wells Fargo Bank, N.A., No. 12-7527, 2013 WL 5312564 (S.D.N.Y. Sept. 24, 2013). Addressing four primary arguments raised by the bank, the court held that the government sufficiently pleaded (i) that the bank falsely certified compliance with FHA regulations upon which payment was conditioned, (ii) that the bank fraudulently induced the government to insure loans it otherwise would not have, and (iii) that this alleged misconduct caused the FHA to pay insurance claims it otherwise would not have. It also held that the government’s claims were pleaded with sufficient particularity. Citing two recent decisions from other Southern District of New York courts, the court held that FIRREA allows the government to pursue claims against an institution for engaging in alleged fraud that “affects” itself. Further, relying in part on a recent holding by the Fourth Circuit, the court held that the government’s claims were timely because they were tolled by the Wartime Suspension of Limitations Act. Finally, relying on an order issued earlier this year by the U.S. District Court for the District of Columbia, the court rejected the bank’s argument that the release it executed as part of the National Mortgage Servicing Settlement specifically released liability arising under the FCA and FIRREA for the government’s claims. The court dismissed as untimely certain of the government’s common law and quasi-contract claims, but preserved the government’s breach of fiduciary duty claim, reasoning that whether such a duty existed is a question of fact.
Spotlight on the False Claims Act: Wartime Suspension of Limitations Act Suspends Statute of Limitations in False Claims Act Cases
The False Claims Act (FCA), which allows both the government and whistleblowers to seek treble damages for claims of civil fraud on the United States, is a powerful tool. In the past two years, the government has aggressively used the FCA to target financial institutions for claims of reckless lending and improper servicing. (e.g. FCA, FHA Lending, and US v. Deutsche Bank). As events leading to the financial crisis have approached - and in some cases exceeded - the FCA’s statute of limitations, financial institutions have increasingly responded to such claims by arguing that the government did not assert them in a timely manner.
A recent Fourth Circuit decision interpreting the Wartime Suspension of Limitations Act (WSLA), an obscure act first enacted during World War II, however, threatens to make it significantly more difficult for financial institutions to assert a statute of limitations defense to FCA claims. The case, United States ex rel. Carter v. Halliburton, came before the Fourth Circuit after a lower court dismissed an FCA lawsuit brought against Halliburton and related entities (collectively “KBR”) as barred by the FCA’s six-year statute of limitations. In a critical decision, the Fourth Circuit reversed the dismissal on the grounds that the FCA’s statute of limitations was tolled by the WSLA.
The holding is significant as the Fourth Circuit held that the WSLA applies regardless of whether the government or a private plaintiff prosecutes the case or the case involves the defense industry. The case, therefore, has the potential to reach any FCA defendant in any civil case — from financial institutions to healthcare providers.
The WSLA, enacted in 1942, extended the time to bring charges related to “indictable” fraud against the U.S. when “at war.” An amendment in 1944 deleted the term “indictable.” In 2008, the Wartime Enforcement of Fraud Act further amended the WSLA to allow it to apply whenever “Congress has enacted specific authorization for the use of the Armed Forces,” and extend the tolling period until “five years after the termination of hostilities.”
In a novel interpretation, the Fourth Circuit held that the WSLA applies to both civil and criminal fraud claims against the U.S., regardless of whether the U.S. has intervened, and even without a formal declaration of war. The Fourth Circuit first held that a formal declaration of war is not required under the WSLA, and that the U.S. was “at war” in Iraq from the date that Congress authorized the use of military force in 2002.
The court also held that the U.S. was still “at war” for the purposes of the WSLA when the alleged fraud occurred because neither Congress nor the President had met the formal requirements of the act for ending the tolling period. The Fourth Circuit then held that the WSLA applies to both criminal and civil cases because the 1944 amendments removed the word “indictable.”
Finally, the Fourth Circuit held that whether the U.S. – or a plaintiff – brings an FCA claim under the qui tam provisions is “irrelevant” because the WSLA’s tolling provision hinges not on who brings the claim, but when the claim is brought. Accordingly, the Fourth Circuit held that the relator’s FCA claims against KBR were not time-barred.
As Dietrich Knauth, a reporter with Law 360, recently noted, “The Fourth Circuit's decision in Carter v. Halliburton caused consternation among many FCA defense attorneys, who said that the decision effectively eviscerates the FCA's time limits.” Indeed, while the Fourth Circuit’s decision is remarkable, the theory advanced by the relator is gaining traction, including in cases outside of the defense industry. In mid-2012, the Department of Justice successfully made the same arguments in United States v. BNP Paribas SA, when it brought civil claims against under the FCA, alleging that the defendants had defrauded the U.S. in connection with commodity payment guarantees provided by the Department of Agriculture.
Collectively – and with broad interpretation - the Halliburton and BNP Paribas decisions could be invoked to suspend the limitations period for a wide-range of FCA claims and are certain to spur increased litigation as the government, relators and defendants alike join the fast-growing debate about the WSLA’s proper application.
For more information, see:
- Little Known Statute May Breathe New Life Into Stale False Claims Act Cases Against Financial Institutions (April 18, 2013; Thomson Reuters Accelus/Compliance)
- FCA Allows Treble Damages - 'But Treble What?' (March 26, 2013; Law360)
- False Claims Act & FIRREA (BuckleySandler Practice Overview)
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- Jonice Gray Tucker to discuss “Government investigations, and compliance 2021 trends” at the Corporate Counsel Women of Color Career Strategies Conference
- Max Bonici to discuss “BSA/AML trends: What to expect with the implementation of the AML Act of 2020” at the American Bar Association Banking Law Fall Meeting