Construction

Good News for Sureties Under the False Claims Act

In United States ex rel. Scollick v. Narula, 2017 WL 3268857 (D.D.C. July 31, 2017), the court seemed to hold that a surety can be liable under the False Claims Act for its principal’s participation in a fraudulent scheme on a bonded federal project, where the surety did nothing more than issue a bond. In other words, a surety might be liable under the False Claims Act for seemingly innocuous conduct. The decision was in response to a motion to dismiss, meaning that it underwent only the lowest level of scrutiny. In Scollick, the court held that a surety could be liable for its principal’s fraud where it should have known of its principal’s fraud and nonetheless issued a bond. No affirmative conduct beyond the issuance of the bond was mentioned by the court as required for liability. The court also opined that the complaint’s allegations were “sufficient to allege that the [surety] defendants continued to do business with [their co-defendants] upon becoming aware that [they] were submitting false claims, which ... is grounds for alleging an indirect presentment claim.” This would seem to be a very low threshold for liability. The good news for sureties is that the lax approach taken by the court in Scollick was largely corrected by its latest decision, recently unsealed. Click here for the decision. This recent decision addressed several pending summary judgment motions, including motions filed by the sureties. With the benefit of a fully developed factual record, the court concluded that no reasonable jury could find the sureties liable for False Claims Act violations. The court explained that there was simply no basis for charging the sureties with knowledge of the allegedly fraudulent scheme. Moreover, the court explained that the sureties were not “participants” in the government’s disabled veterans program. To the contrary, the principals were the participants. The court refused to impose an affirmative duty on the sureties to double-check the government’s decision to include the principal. The court explained that no case placed such an affirmative obligation on a surety. The court ultimately rejected the False Claim Act action against the sureties as based on a duty constructed “out of thin air.” Although the original Scollick decision was concerning, the more recent Scollick decision should alleviate most of those concerns. Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest

The Connection Between Surety Bonds and Hollywood Scripts

Is a principal trying to escape its indemnity obligation under the law like the plot of a Hollywood movie? One federal judge thought so, comparing the surety chasing down its indemnity rights to the U.S. Marshalls chasing down a convict in The Fugitive. This case concerned the surety’s decision to honor a bond claim and complete the principal’s work. Although factually disputed, the principal claimed that it insisted that the surety deny the bond claim. After completing the work, the surety brought an indemnity claim and the principal counterclaimed. The principal alleged that the surety violated the implied covenant of good faith and fair dealing in at least four ways: insufficiently investigating the bond claim before honoring it, honoring the claim despite knowing the claim was meritless, spending too much to finish the work and being motivated by self-interest. The court assumed all of these allegations were true yet still dismissed the claim as a matter of law. According to the court, the general agreement of indemnity gave the surety the “absolute” right to take over the work upon demand and expressly contemplated that the surety might honor claims for which the principal might ultimately be found not liable. Furthermore, the indemnity agreement reflected the surety’s right and entitlement to act in its own self-interest. The court noted that the implied covenant is a gap-filling rule and cannot overcome or contradict the express terms of the indemnity agreement. Consequently, the counterclaim failed as a matter of law. In perhaps the most colorful language in a surety case ever written, the judge likened the surety to Tommy Lee Jones in The Fugitive. In the film, his character is chasing down an alleged criminal who, when confronted, claims, “I didn’t do it.” Jones responds, “I don’t care.” The court used this bit of allegory to emphasize that under the terms of the general agreement of indemnity, the surety was within its contractual rights to say “I don’t care” in response to a principal that proclaims its innocence and insists that the surety deny a claim. The case citation is Hartford Fire and Ins. Co. v. E.R. Stuebner, Inc., 2022 WL 245237 (E.D. Pa 2022).   Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.