425 Broadhollow Road
Suite 417
Melville, NY 11747

631.282.8985
Freiberger Haber LLP
10 Grand Central
155 East 44th Street, 6th Floor
New York, NY 10017

212.209.1005

Supreme Court Reinstates Lawsuit Against Banks Under The Implied Certification Theory

Print Article
  • Posted on: Mar 14 2017

On February 21, 2017, the Supreme Court vacated the judgment in Bishop v. Wells Fargo & Co. and remanded the case to the Second Circuit “for further consideration in light of Universal Health Servs. v. United States ex rel. Escobar,” in which the Court recognized the implied certification theory as “a basis for liability” in False Claims Act (“FCA”) lawsuits.

In Bishop, the relators, Robert Kraus and Paul Bishop (together, the “relators”), brought a qui tam action under the FCA against Wells Fargo & Company and Wells Fargo Bank, N.A. (together, “Wells Fargo”), alleging that Wells Fargo defrauded the government by falsely certifying that it was in compliance with various banking laws and regulations when it borrowed money at favorable rates from the discount window operated by the Federal Reserve (the “Fed”). The relators contended that the Fed would not have permitted the banks to borrow at those favorable rates had it known that they were undercapitalized (itself a violation of Fed rules) as a result of the fraud. The relators alleged that each time the bank borrowed money from the Fed’s Term Auction Facility, it was falsely certifying to the Fed that they were in sound financial condition.

The government declined to intervene in the relators’ suit. Wells Fargo filed a motion to dismiss, which the district court granted, holding that the banks’ certifications of compliance were too general to constitute legally false claims under the FCA and that the relators had otherwise failed to allege their fraud claims with particularity. The relators appealed.

The Second Circuit affirmed the district court ruling. Relying heavily on Mikes v. Strauss, 274 F.3d 687 (2d Cir. 2001), the court held that even if the allegations concerning fraudulent accounting practices were true, the relators could not connect the fraud to any implied false claim submitted to the government for payment. Bishop v. Wells Fargo & Co., 823 F.3d 35, 48-49 (2d Cir. 2016). Because the Federal Reserve Act did not expressly condition Fed loans on compliance, it was irrelevant whether knowing the true capitalization of the banks would have caused the Fed to change its lending terms. Id. at 44 (stating that the FCA “does not encompass those instances of regulatory noncompliance that are irrelevant to the government’s disbursement decisions.”).

After Bishop was decided, the Supreme Court issued its decision in Escobar. 136 S. Ct. 1989 (2016). In Escobar, the Court held that implied certification liability under the FCA may exist where the following two conditions are satisfied: (1) the defendant does not merely request payment, but also makes specific representations about the goods or services provided; and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading. (This Blog discussed Escobar here.) In response to Escobar, the relators in Bishop filed a writ of certiorari, asking the Supreme Court to revive their lawsuit. The relators argued that the Court’s confirmation of the implied certification theory of liability in Escobar abrogated the Second Circuit’s longstanding rejection of the theory.

Takeaway

The Court’s summary disposition in Bishop serves as a reminder to the circuit courts, especially those that did not previously recognize the implied certification theory, that the theory is viable and should be considered when properly alleged.

The Supreme Court’s summary disposition in Bishop can be found here.

Tagged with:

legal500
bnechmark
superlawyers
AVVO
Freiberger Haber LLP Footer Logo
Copyright ©2020 Freiberger Haber LLP | Disclaimer
Attorney advertisement | Prior results do not guarantee a similar outcome.
425 Broadhollow Road, Suite 417, Melville, NY 11747 | (631) 282-8985
10 Grand Central, 155 East 44th Street, 6th Floor, New York, NY 10017 | (212) 209-1005
Attorney Website by Zola Creative