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United States ex rel. Kraus v. Wells Fargo & Co.

United States Court of Appeals for the Second Circuit

April 4, 2019, Argued; November 21, 2019, Decided

Docket No. 18-1746

Opinion

 [*591]  Katzmann, Chief Judge:

This case arises out of the 2008 financial crisis. This [**3]  appeal—appellants' second—asks us to decide whether the False Claims Act (the "Act" or the "FCA"), 31 U.S.C. § 3729 et seq., applies to persons who defraud the emergency lending facilities of the Federal Reserve System (the "Fed").

Paul Bishop and Robert Kraus ("relators") allege that Wells Fargo & Company and Wells Fargo Bank N.A. (jointly, "Wells Fargo") fraudulently misrepresented their financial condition to one or more of the Fed's twelve regional Federal Reserve Banks ("FRBs") so that they could obtain emergency loans at favorable interest rates for which they were not qualified. The district court (Cogan, J.) granted Wells Fargo's motion to dismiss, holding that knowingly presenting false or fraudulent loan applications to FRBs does not violate the FCA because (1) FRB personnel are not "officer[s], employee[s], or agent[s] of the United States" within the meaning of § 3729(b)(2)(A)(i); and (2) the  [*592]  United States does not "provide[] . . . the money . . . requested or demanded" by Fed borrowers within the meaning of § 3729(b)(2)(A)(ii).1 See United States ex rel. Kraus v. Wells Fargo & Co. ("Bishop IV"), 11-cv-5457, 2018 U.S. Dist. LEXIS 79292, 2018 WL 2172662, at *2 (E.D.N.Y. May 10, 2018).2

Although we agree that FRB personnel are not "officer[s]" or "employee[s] . . . of the United States" within the meaning [**4]  of 31 U.S.C. § 3729(b)(2)(A)(i), we conclude that loan requests presented to the FRBs under the Discount Window and Term Auction Facility are nonetheless "claims" under the FCA because the FRBs are "agents of the United States" within the meaning of § 3729(b)(2)(A)(i), and also because the "money . . . requested" by Fed borrowers is "provided" by the United States to advance a Government program or interest within the meaning of § 3729(b)(2)(A)(ii).

The FRBs are instrumentalities of the federal government and the operating arms of its central bank. See Starr Int'l Co. v. Fed. Reserve Bank of N.Y., 742 F.3d 37, 40 (2d Cir. 2014). The Federal Reserve Act ("FRA") empowers the FRBs, in conjunction with the Board of Governors of the Federal Reserve System (the "Board"), to issue legal tender and to finance the Fed's activities by purchasing public and private debts. The FRA also authorizes the FRBs to administer the Fed's emergency lending facilities. Requests for loans made to these facilities are requests for loans from the United States. And as the FRBs are required to remit all their excess earnings to the United States Treasury, a borrower's failure to pay the appropriate amount of interest on a loan from an FRB injures the public fisc, not merely the FRBs' nominal shareholders.

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943 F.3d 588 *; 2019 U.S. App. LEXIS 34755 **; 2019 WL 6205220

UNITED STATES OF AMERICA EX REL. ROBERT KRAUS AND PAUL BISHOP, Plaintiffs-Appellants, STATE OF NEW YORK, EX REL. PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF DELAWARE, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, DISTRICT OF COLUMBIA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF FLORIDA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF HAWAII, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF CALIFORNIA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF INDIANA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF ILLINOIS, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF MINNESOTA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NEVADA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NEW HAMPSHIRE, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, COMMONWEALTH OF MASSACHUSETTS, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NEW MEXICO, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF MONTANA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NORTH CAROLINA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF NEW JERSEY, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF OKLAHOMA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF RHODE ISLAND, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, STATE OF TENNESSEE, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, COMMONWEALTH OF VIRGINIA, EX REL PAUL BISHOP, EX REL ROBERT KRAUS, Plaintiffs, -v.- WELLS FARGO & COMPANY, WELLS FARGO BANK, N.A., Defendants-Appellees.

Subsequent History: As Corrected November 25, 2019.

Counsel Amended November 22, 2019.

Prior History: Paul Bishop and Robert Kraus appeal from a judgment of the United States District Court for the Eastern District of New York (Cogan, J.) granting the motion to dismiss of Wells Fargo & Company and Wells Fargo Bank, N.A. Bishop and Kraus argue that the district court erred in concluding that fraudulent loan requests knowingly presented to one or more of the Federal Reserve System's twelve Federal Reserve Banks ("FRBs") are not "claims" within the meaning of the False Claims Act ("FCA"), and hence do not give rise to FCA liability. We agree in an opinion narrowly focused on the FCA. The FCA's definition of a "claim" is capacious. Although FRB personnel are not "officer[s]" or "employee[s] . . . of the United States," 31 U.S.C. § 3729(b)(2)(A)(i), the FRBs administer the Federal Reserve System's emergency lending facilities on behalf of the United States, using authority delegated by Congress and money provided by the Board of Governors of the Federal Reserve System. We conclude, therefore, that the FRBs are "agent[s] of the United States" within the meaning of § 3729(b)(2)(A)(i). We also conclude that the "money . . . requested" by defendants and other Fed borrowers is "provided" by the United States to advance a Government program [**2]  or interest within the meaning of § 3729(b)(2)(A)(ii) [**1] . Accordingly, we VACATE the judgment of the district court and REMAND the case for further proceedings.

United States ex rel. Kraus v. Wells Fargo & Co., 2018 U.S. Dist. LEXIS 79292 (E.D.N.Y., May 9, 2018)

CORE TERMS

lending, emergency, banks, loans, Amici, borrow, facilities, Treasury, federal reserve bank, funds, fraudulent, demanded, instrumentalities, Discount, entities, requests, billion, regulations, district court, recipient, reimburse, shareholders, reserves, dollars, depository institutions, government program, contractor, personnel, delegate, terms

Civil Procedure, Appeals, Standards of Review, De Novo Review, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Governments, Federal Government, Claims By & Against, Banking Law, Banking & Finance, Regulators, US Federal Reserve System, Employees & Officials, Legislation, Interpretation, Business & Corporate Law, Agency Relationships, Authority to Act, Authority to Act, Delegation of Authority, US Federal Reserve System, Board of Governors