Does the civil liability of a bonded contractor extend to his bond? | Fox Rothschild LLP
In a recent U.S. District Court case for the District of Columbia, United States ex rel. Scollick vs. Narula, Case #1: 14-cv-01339, two surety companies and the broker who issued bonds on federal construction projects succeeded in summarily dismissing False Claims Act civil claims about federal contracts set aside for small businesses. companies. The case is alarming because it suggests that payment and performance sureties could potentially be liable for civil violations of the law on false claims by principals on bonds they issue.
On July 19, 2022, in the decision filed under seal, the District Court found in favor of Hudson Insurance Co., Hanover Insurance Co. and Centennial Surety Associates (collectively, the sureties) dismissing the claims of whistleblower, Andrew Scollick, which attempted to extend the scope of civil liability under the False Claims Act to sureties who provide bid, performance and payment bonds on federal construction projects. The whistleblower argued that the sureties reasonably knew from underwriting activity that large contractors were using Disabled Veteran-Owned Small Businesses (SDVOSB) and, in some cases, historically underutilized commercial areas (HUBZone, entrepreneurs as fronts to get work reserved for these socio-economic people). – economic categories.
The Civil Misrepresentation Act (FCA) imposes liability on anyone who commits fraud against the federal government and provides significant civil and criminal penalties for violations of the FCA. For example, submitting false invoices or inflated material costs to the government for payment or knowingly certifying false information will fall under the conduct punishable under the FCA. In the past, however, bond sureties were almost never parties to FCA lawsuits.
In Scollick, the whistleblower filed suit on behalf of the government against several major contractors who allegedly fraudulently obtained federal contracts worth millions of dollars earmarked for HUBZone and SDVOSB concerns. In addition, Scollick sued the sureties who issued offer, performance and payment bonds based on the theory that the sureties allegedly knew that the small business, SDVOSB contractor, was in fact controlled. by a large contractor and issued the bonds based on the strength of the contractor’s large bonding capacity. Without this bond, the SDVOSB contractor would not have been able to compete for and obtain federal government contracts reserved for SDVOSB or HUBZone concerns. The whistleblower claimed that the sureties were aware that large contractors were neither small businesses as defined by Small Business Administration (SBA) regulations, nor small businesses owned by disabled veterans as defined by the Department. of Veterans Affairs (VA) and that the large contractor was in fact going to perform the work and issued the bonds despite allegedly having this knowledge in connection with the fraud.
The district court initially dismissed the claims against the sureties because the whistleblower had failed to plead sufficient facts to support his claims. Scollick then filed an amended complaint, in which he alleged that the sureties knew or should have known through a process of due diligence and bonding that the SDVOSB contractor was really just an ineligible front company. to SDVOSB status. The amended complaint asserted that the sureties had an existing business relationship with the large contractors; that the sureties were aware that the SDVOSB contractor shared office space with one of the large contractors; and that they shared finances and common property. In addition, sureties have reviewed proposals that major contractors have submitted to the federal government as a concern of the SDVOSB. Finally, the sureties demanded that the large contractors sign indemnification agreements on behalf of the SDVOSB contractor, because the latter would not have had the financial capacity on his own to carry out the construction contracts had been assigned. As a result, the whistleblower concluded that even though he was aware that the large contractors did not qualify for SDVOSB status, the sureties issued bonds and thereby allowed the large contractors to bid and bid. to obtain federal government construction contracts reserved for small businesses. Based on these factual allegations, the district court allowed the case to proceed against the sureties.
Upon completion of discovery, after filing motions for summary judgment, the district court granted the sureties’ motions dismissing the FCA claims pending against them. The decision was filed under seal due to the filing of certain documents under seal. Therefore, it is difficult to say what the Court’s reasoning was in deciding not to extend CAF’s liability to sureties. However, ScollickThe lesson for sureties is that they need to be more careful when doing due diligence. A surety cannot just put his head in the sand. If the Surety learns through an underwriting process of misleading statements or dishonest actions taken by the Principal on the Surety, the Surety shall not issue a Surety; otherwise, the guarantor could be exposed to the liability of CAF.