The touchstone of the civil False Claims Act (FCA) is a false claim for government money or property. In most cases, the question of whether the claim—false or not—involves “government money” is easily answered. But that was not the circumstance in United States ex rel. Kraus v. Wells Fargo & Co., 943 F.3d 588 (2d Cir. 2019). Over the arguments of the defendants and the United States, the US Court of Appeals for the Second Circuit adopted an expansive reading of “government money,” holding that certain loans made by the Federal Reserve Banks, which are independently chartered corporations with no federal employees and no federal appropriations, nevertheless fall within the ambit of the FCA. The Second Circuit’s decision is significant, representing an extension of the FCA’s reach to conduct well beyond what Congress intended.
In 2011, in the aftermath of the financial crisis, two relators—Bishop and Kraus—filed a qui tam complaint against Wells Fargo and entities that Wells Fargo had since acquired. The relators claimed that the defendant banks were subject to FCA liability for allegedly misrepresenting their financial conditions—falsely certifying that they were in “generally sound financial condition”— in order to borrow tens of billions of dollars at favorable rates (all of which was paid back timely) from one or more of the 12 regional Federal Reserve Banks (FRBs).
In 2015, after the government investigated and declined to intervene in the suit, the US District Court for the Eastern District of New York dismissed the qui tam complaint. The Second Circuit affirmed that dismissal in 2016. Both of these decisions had relied on Second Circuit precedent, Mikes v. Straus, concerning the necessary requirements for pleading a false certification theory under the FCA. The US Supreme Court’s subsequent 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar abrogated the Mikes v. Straus requirements. Consequently, in February 2017, the Supreme Court granted the relators’ petition for a writ of certiorari, vacated the judgment, and remanded the case for further consideration in light of Escobar.[1]
On remand, the district court identified two “critical threshold questions … [:] whether 1) FRBs should be characterized as the Government or its agents for purposes of the FCA; and 2) if the Government paid any portion of the loans defendants received, or reimbursed FRBs for issuing the loans.”[2] Finding that the FRBs are not the government and that the government did not provide the funds at issue, the district court dismissed the complaint on the grounds that there was no false claim for government money within the meaning of the FCA.
On appeal, the Second Circuit vacated that dismissal, finding instead, for FCA purposes, that the FRBs are agents of the United States and that the United States had “provided” the loans in question.[3]
The Supreme Court repeatedly has confirmed that the FCA is not a generalized all-purpose fraud statute. Instead, it is long settled that its reach extends only to those situations where federal government money or property is at issue.[4]
The FCA expressly defines what qualifies as an FCA “claim”:
For purposes of this section— the term “claim”— means any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that—
(i) is presented to an officer, employee, or agent of the United States; or
(ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government—
(I) provides or has provided any portion of the money or property requested or demanded; or
(II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded[.][5]
This concept that the government does not need to have title to the “money or property” at issue was added by the FCA amendments in the Fraud Enforcement and Recovery Act of 2009 (FERA) and made applicable to conduct that took place on or after May 20, 2009.[6]
The Second Circuit directly confronted the question of whether FRB loans fit into the FCA’s “claim” definition. Referring to the text of subsection (i) as “capacious,” the appeals court reasoned that FRB personnel—while not “officers” or “employees” of the United States—are “agents” of the United States.[7] The court further held that, under subsection (ii), the loan money was “provided” by the United States.[8]
In doing so, in an unusual move after oral argument, the Second Circuit invited the Board of Governors (the government agency which oversees the FRBs), the FRB of Richmond, and the FRB of New York to file amicus briefs addressing whether the FRBs should be considered part of the federal government for FCA purposes. The United States, the Board of Governors, and the FRBs of New York and Richmond all submitted amicus briefs arguing that the FRBs are not officers, employees, or agents of the United States for the purposes of the FCA and that the United States does not provide any of the funds at issue. As these amici explained, the originating statute made the FRBs independent because FRBs are separately incorporated banks, and the Board of Governors is an “independent agency within the executive branch.”[9] The FRBs have independent boards, have employees who explicitly are not federal employees, and do not receive any federal appropriations. With respect to the “agent” question in particular, all of the amici—including the United States—argued that the FRBs are not “agents” because the Board of Governors cannot direct FRB lending decisions. Instead the FRBs decide whether or not and how much to lend to certain institutions.
Examining the text of the statute, the Second Circuit conceded that Congress went “out of its way to formally separate the FRBs from the government,” and thus FRB employees are not officers or employees of the United States.[10]
But, on the “agent” question, the Second Circuit rejected these amici’s argument, pointing instead to agency law principles that allow for agents to be delegated discretion.[11] Thus, the Second Circuit found that the FRBs are agents of the United States because “the United States’ overall control is undisputed” in that it can legislate to revoke the ability of the FRBs to operate and that the Board of Governors sets credit rules and interest rates.[12]
The Second Circuit also addressed the alternative basis for satisfying the FCA “claims” definition – namely, whether the United States “provides” the loan funds. On this question, too, both defendants and amici argued that there were no “claims” because FRB capital was provided by member banks and no US Treasury funds were used to supply advances or reimbursements. Notably, in the amicus brief of the United States and the Board of Governors, the United States took the Second Circuit’s question of whether the government “provides” any portion of the funds to mean whether “the federal Treasury” is the source of funds.[13] Recognizing that the text of the FCA does not refer to the “Treasury,” the United States argued “the better reading is that the FCA does not apply to this sui generis context” because the federal government did not exercise substantial control over the loans at issue. The United States also argued that the FRBs’ “essentially creat[ing] those funds” was not unlike the credit created by the lending of traditional banks.[14]
But the Second Circuit rejected these arguments as well. Observing that the FCA text does not reference money coming from the US Treasury, it held that the United States provided the money at issue because the FRBs essentially “create” money and increase the overall money supply in issuing loans, a power unique to Congress.[15]
The Second Circuit also briefly addressed the related question of damages – the requirement that FCA damages are limited to losses “which the Government sustains because of the” violation.[16] Despite the fact that for the period in question the FRBs were not statutorily mandated to return their profits to the US Treasury (but routinely did so at the direction of the Board of Governors), the Second Circuit found that in obtaining more favorable interest rates:
Defendants’ alleged underpayment of interest reduced FRB earnings, which dollar for dollar reduced the sums the FRBs transferred to the Treasury. Fraud during a national emergency against entities established by the government to address that emergency by lending or spending billions of dollars is precisely the sort of fraud that Congress meant to deter when it enacted the FCA.[17]
The Second Circuit’s decision did not address the merits of the underlying qui tam allegations, including whether there were any misrepresentations at all, let alone false and material ones made with the requisite scienter. The sole question was whether—assuming the truth of the complaint allegations—the conduct could constitute a “claim” for FCA purposes. Thus, the litigation is far from over, as other grounds for dismissal or judgment are litigated. Indeed, given the government’s stated position in the litigation, the government should be considering whether to dismiss it outright pursuant to its statutory authority under 31 U.S.C. § 3730(c)(2)(A).
Even so, the Second Circuit’s decision on the “claim” question represents a significant expansion of the FCA’s reach—even beyond what the government itself deemed appropriate—that could have implications beyond this one case. The Second Circuit’s commentary that the US Treasury is not a necessary part of the FCA equation and instead that the “power” of the United States behind a function, such as the creation of money, is all the “control” necessary to create FCA claims will be of particular interest to relators because, taken to the extreme, any corporation created by statute is a creation within the inherent power of Congress.
However, this reasoning conflicts with other FCA decisions that have found a federal “mandate” insufficient and thus that various government-chartered corporations, such as Amtrak, Fannie Mae, and Freddie Mac, are not part of the United States for FCA purposes.[18] While the Second Circuit attempted to distinguish these cases as hinging on the idea that the United States is not a beneficial owner of the money, whereas FRB money reverts to the United States, this reversion only happens in the unlikely event that an FRB is liquidated (and after all debts/other payments are made).
The Second Circuit’s characterization of the FCA’s statutory text as “capacious” also stands in stark contrast with the Supreme Court’s repeated dictates that FCA terms “must be carefully restricted, not only to their literal terms but to the evident purpose of Congress in using those terms, particularly where they are broad and susceptible to numerous definitions.”[19] Indeed, it is notable that the Second Circuit rejected the United States’ own arguments as to the meaning of “claim” in this context. As the amici pointed out, making a false statement when borrowing from an FRB already is a federal crime, 18 U.S.C. § 1014, and where the delicate balance of the Federal Reserve system is at stake, it may not be in the government’s interest to allow qui tam relators to control such litigation. Under such circumstances, the government can and should exercise its statutory dismissal authority.
Contacts
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John W. Petrelli
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Alison Tanchyk
New York
Kelly A. Moore
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Philadelphia
Nathan J. Andrisani
Meredith S. Auten
John C. Dodds
Lisa C. Dykstra
Rebecca J. Hillyer
Ryan P. McCarthy
Zane David Memeger
John J. Pease, III
Brian W. Shaffer
Eric W. Sitarchuk
Washington DC
Douglas W. Baruch
Jennifer M. Wollenberg
Brad Fagg
Kathleen McDermott
Scott A. Memmott
Howard J. Young
[1] See Bishop v. Wells Fargo & Co., 137 S. Ct. 1067 (2017).
[2] United States ex rel. Kraus v. Wells Fargo & Co., No. 11 CIV. 5457 (BMC), 2018 WL 2172662, at *2 (E.D.N.Y. May 10, 2018).
[3] United States ex rel. Kraus v. Wells Fargo & Co., 943 F.3d 588 (2d Cir. 2019).
[4] See United States v. Neifert-White Co., 390 U.S. 228, 233 (1968) (FCA reaches “all fraudulent attempts to cause the Government to pay out sums of money”); Rainwater v. United States, 356 U.S. 590, 592 (1958) (“It seems quite clear that the objective of Congress was broadly to protect the funds and property of the Government from fraudulent claims.”); United States v. McNinch, 356 U.S. 595, 599 (1958) (“Congress wanted to stop this plundering of the public treasury.”).
[5] 31 U.S.C. § 3729(b)(2)(A) (2010) (emphasis added).
[6] Pub. L. No. 111-21, 123 Stat. 1621, 1625 (2009). Compare 31 U.S.C. § 3729(c) (2000).
[7] 943 F.3d at 592, 595.
[8] Id. at 592.
[9] See 12 U.S.C. §§ 221 et seq.
[10] 943 F.3d at 597-98.
[11] Id. at 599-600.
[12] Id. at 598-600.
[13] Amicus Br. (ECF No. 116), at 16.
[14] Id. at 9.
[15] 943 F.3d at 603.
[16] 31 U.S.C. § 3729(a) (emphasis added).
[17] 943 F.3d at 601.
[18] See United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004) (Amtrak); United States ex rel. Adams v. Aurora Loan Servs., Inc., 813 F.3d 1259 (9th Cir. 2016) (Fannie Mae, Freddie Mac); see also United States ex rel. Shupe v. Cisco, 759 F.3d 379 (5th Cir. 2014) (requiring involvement of Treasury funds in analyzing entities created by Telecommunications Act and FCC rulemaking).
[19] McNinch, 356 U.S. at 598.