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Quebec Court orders “modest” $1 million suretyship for short-term stay of Canadian enforcement pending U.S. annulment

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In Lakah v. UBS, 2019 QCCA 1869, the Court of Appeal of Québec denied leave to appeal a Superior Court decision that ordered than an arbitral party post a $1 million suretyship pending U.S. annulment proceedings. The Court of Appeal, in a very brief judgment, based its decision on the following considerations: The decision to impose a surety of $1 million was a matter of discretion and was governed by a standard of reasonableness; A surety of $1 million was not unreasonable considering that the arbitral award was in excess of US$150 million; The Superior Court decision was not inconsistent with the principle of proportionality in civil proceedings; and A stay of proceedings is a case management measure and, in principle, cannot be appealed barring exceptional circumstances. Background of Facts An arbitral award was issued on November 2, 2018 that required that Michel Lakah (“Mr. Lakah”) pay US$151,603,902.00 plus 12% interest per annum to UBS AG et al. (“UBS”). On February 4, 2019, Mr. Lakah applied to vacate the Arbitral Award before the U.S. District Court, Southern District of New York. Although no exact date has been set for the hearing of the application, a judgment is expected to be rendered by the U.S. District Court by December 2019. The Superior Court’s Decision In June 2019, in the face of the application to vacate the arbitral award in the United States, UBS applied to the Québec Superior Court in Montreal to recognize and enforce the Arbitral Award (the “Enforcement Proceedings”). Invoking article 654 of Québec’s Code of Civil Procedure, which was modeled after article 36(2) of UNCITRAL Model Law on International Commercial Arbitration (1985), Mr. Lakah sought to stay the Enforcement Proceedings until a final decision was rendered on the application to vacate before the U.S. District Court. In response, UBS requested that Mr. Lakah post a $5 million suretyship in the event that the Superior Court issued a stay. Justice Peter Kalichman of the Québec Superior Court noted that the right to a stay under article 654 C.C.P. is not automatic and should be granted only in exceptional circumstances, as a stay “impedes one of the key goals of arbitration, which is to avoid protracted litigation”. However, Justice Kalichman noted that the grounds alleged in the U.S. annulment proceedings “appeared serious” on their face and merited a stay of the Enforcement Proceedings, which was limited to a period of sixty days following the release of the decision in the application to vacate. After determining that a temporary stay was justified, Justice Kalichman stated that Mr. Lakah had the burden of resisting suretyship by demonstrating that he lacked the means to satisfy such an order, which he failed to do. The Court ultimately ordered Mr. Lakah to provide a suretyship in the amount of $1 million, noting that it was a “relatively modest” amount considering the quantum of the arbitral award. Court of Appeal Decision Mr. Lakah sought leave to appeal the Superior Court’s decision, claiming that the order to provide a $1 million surety was “unreasonable in the light of the guiding principles of procedure” and that the decision was “manifestly erroneous in fact and in law[1]”. Justice Patrick Healy held that a stay of proceedings is a case management measure and cannot be appealed barring “exceptional circumstances” in which the “ruling appears unreasonable” and results in a serious prejudice[2]. Justice Healy added that the decision to impose a surety of $1 million was “essentially a matter of discretion that is governed by a standard of reasonableness.” Quoting Justice Kalichman, he agreed that in an action of over $150 million, a surety of $1 million was “modest” and could not possible be considered unreasonable[3]. Finally, Justice Healy noted that nothing in the file established prima facie that the Superior Court decision was inconsistent with the principle of proportionality in civil proceedings and that nothing would “justify interference with the judge’s exercise of discretion under article 654 C.C.P.”[4] Implications to Arbitral Proceedings This case is representative of Canadian courts’ pro-arbitration stance and the reluctance to permit parties to engage in conduct that may result in parallel proceedings. Indeed, the Court of Appeal confirmed that a court’s exceptional power to stay the enforcement of an arbitral award pending an application to vacate that very award is entirely consistent with the general judicial policy in favour of the enforcement of arbitral awards. https://www.mccarthy.ca/en/insights/blogs/international-arbitration-blog/quebec-court-orders-modest-1-million-suretyship-short-term-stay-canadian-enforcement-pending-us-annulment?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original

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Nationwide attorney: Insurer not surety of shop’s work, but will pay until right

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An attorney for Nationwide told the Pennsylvania Supreme Court last month that the insurer didn’t count as a surety responsible for the quality of its repair shops’ work. The Nov. 21 comments by Derecht lawyer Robert Heim during oral argument for Berg v. Nationwide provide consumers — and DRP shops — a view into how a carrier might view a DRP relationship. (Special thanks to PCNTV, whose video coverage of the oral arguments identified speakers and allowed us to capture what was said at the proceedings.) The Supreme Court had agreed in March to re-examine Pennsylvania Superior Court 2-1 decision in the long-running case. The Superior Court had determined Common Pleas Judge Jeffrey Sprecher overreached in finding Nationwide’s behavior bad faith and awarding $21 million in damages. Nationwide had suggested plaintiffs Daniel and Sheryl Berg (who died during the course of the litigation) have their 3-month-old, leased 1996 Jeep Grand Cherokee repaired at one of its direct repair program shops following a 1996 crash, according to a 2017 summary of the case by collision industry attorney Erica Eversman and another summary by plaintiffs’ attorney Mayerson Law. Heim said Nov. 21 the record showed that plaintiff Daniel Berg selected the Blue Ribbon shop, Lindgren Chrysler-Plymouth, based on prior work it had performed. Lindgren estimated Sept. 10, 1996, the repair would cost $12,326.50, but also had called the Grand Cherokee a total loss given its frame damage. Nationwide opted not to total the vehicle, and a claims log item notes: “REPAIRS ARE APPROXIMATELY 50% of ACV NATIONWIDE WILL NEVER RECOVER THE DIFFERENCE IN SALVAGE VALUE.” Four months later, the Jeep Grand Cherokee work was finished, with some of the frame work outsourced to a third party. The vehicle was unsafe, but Nationwide either didn’t inspect it as it should have or did inspect it and didn’t tell the Bergs, Sprecher concluded in 2014. Sprecher in 2015 decried Nationwide’s attempt to use a “scorched earth” litigation policy costing $3 million in its own attorneys fees and notes “several legal duties and fiduciary obligations that it recklessly disregarded.” He awarded $18 million plus another $3 million based on what Nationwide paid in its own attorneys. The Superior Court’s overturning of Sprecher’s decision appears to mean that Nationwide would only be responsible for the $295 in actual damages a jury awarded for finding Nationwide violated Pennsylvania’s unfair trade practices law. The jury also determined Lindgren should have to pay $1,925 in compensatory damages. Duty just to pay? Berg sued Lindgren and received a judgment for poor repairs, Heim told the Supreme Court Nov. 21, “which is the way this should have worked. Nationwide’s duty, under its policy, was to pay.” Pennsylvania Supreme Court Justice David Wecht said an “interesting” legal issue involved whether there was a “guarantee” and/or “heightened duty” in a DRP network. Presumably in developing such a network, Nationwide procedures exist to “inspect these shops and maintain certain standards,” Wecht said. Heim said there was a “heightened guarantee” over what support the consumer would receive should they pick a non-network body shop. If the non-Blue Ribbon body shop erred, the customer’s recourse would be to take action against the shop, Heim said. But using a DRP shop offered a “heightened guarantee” in which Nationwide would stand behind such a consumer until that repair was done, he said. Asked by Justice Max Baer if Nationwide agreed that it was the “surety” of its Blue Ribbon direct repair shops, Heim said “no.” How could the carrier offer a guarantee the work would be appropriate but not be the “guarantor of the work,” Baer asked. The insurer offered a guarantee that if their DRP shop’s work was wrong, “they will continue to pay for it until it is done correctly,” Heim said. “That’s really what it is, judge.” Plaintiff’s attorney Kenneth Behrend of Behrend & Ernsberger also addressed Nationwide’s duty regarding repair quality. However, he largely seemed to tie that responsibility to the insurer’s election to repair the Jeep rather than Lindgren being a DRP shop. https://www.repairerdrivennews.com/2019/12/10/nationwide-attorney-insurer-not-surety-of-shops-work-but-will-pay-until-right/

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Contractor named to finish East Gadsden Community Center [Main Street]

Blog, Claims, Repost / /

A new contractor has been chosen to finish work on the long-delayed East Gadsden Community Center. At Tuesday’s meeting of the Gadsden City Council, it authorized an agreement with Bob Smith Construction, Inc. to complete the remaining work under the original contract for the project The original bid for the project was $5.5 million, and City Attorney Lee Roberts said the city has $3.5 million remaining that has not been spent. He said the cost for completion will be $5.2 million, but the bonding company will cover the difference between the amounts. “Assuming there are no further hiccups out there, this project will be completed without any further spending of taxpayer money,” Roberts said. Groundbreaking on the project was held in February 2018, and the plan was to have the project completed in about nine months. However, Roberts said work on the new community center stopped during construction, and the city engaged the surety company earlier this year to step in and help finish the project. All public construction projects by the city are bonded through a surety company that ensures the project is completed by the terms of the contract, which includes things like quality and timeliness. Roberts said NGM Insurance Company worked with the city on the claim. “They have secured another contractor that is familiar with our city engineer and has a good past working with [him],” Roberts said. “We have entered into an agreement on how we’re going to finish the project.” In addition to the money covered by the bonding company, the city has received some money in liquidated damages, which hopefully will offset additional architecture fees and any unforeseen costs. Roberts said the new contractor has a year to finish the project, but he has told the city it will hopefully be finished before then. City Engineer Heath Williamson said after the meeting that he expects work to start after the first of the year as there is still paperwork to be done. Another infrastructure issue got attention at the meeting as District 3 council member Thomas Worthy talked about street lights being out on Tuscaloosa Avenue. Worthy said there are 19 lights out from Henry Street to 10th Street, and the first resolution to fix them came up in 2018. “I just don’t understand — we can find money for any project we want to have except for doing something in District 3,” said Worthy, who said he had been told by Mayor Sherman Guyton weeks ago that the city would fix the lights, and they shouldn’t have to wait until a new budget comes around. Guyton said it would have to be added to the city’s next budget, and he was mistaken when he said there was money already available. “To portray me as not [doing] anything for Carver, we’ve put more than $2 million into that whole strip since I’ve been in office,” said Guyton, who also listed several of those projects. “I’m glad to do that just like any other part of town, but it’s not in the budget and it’ll have to wait,” he said. The city also approved a memorandum of understanding regarding the use of Everbridge by Safeware — software that allows the sending of public alerts. The memo allows the Gadsden/Etowah Emergency Management Agency to split costs for the service with DeKalb, Marshall, Lauderdale, Calhoun, Cleburne and Morgan counties. Each agency’s cost will be determined by its population. https://www.gadsdentimes.com/news/20191210/contractor-named-to-finish-east-gadsden-community-center

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How this surety bond could be examined by Supreme Court of Canada

Blog, Court, Market, Repost, Surety / /

When do the terms of a surety bond allow a construction project owner to withhold payments to a contractor? This question could go to the Supreme Court of Canada, which recently announced a federal crown corporation wants to appeal a Newfoundland court decision resulting from a $2.3-million ferry wharf construction project that did not get finished on time and spawned a lawsuit. In 2013, Western Surety Company wrote a $1.6-million performance bond for RJG Construction Limited in connection with a ferry wharf construction project in Argentia, Nfld. for Marine Atlantic Inc., which operates ferry service between North Sydney, N.S. and Argentia. After delays in the work and delays in payments, Marine Atlantic and RJG Construction sued one another, each claiming the other was in breach of contract. Western Surety is not a party to the lawsuit. In RJG Construction Limited v. Marine Atlantic, released Feb. 23, 2018, Justice James Adams of the Supreme Court of Newfoundland and Labrador awarded Marine Atlantic $1.3 million for the extra money Marine Atlantic said it had to pay to complete the project using a different contractor That was overturned in 2019, with the Court of Appeal for Newfoundland and Labrador quashing the damage award and remitting the matter back to the Supreme Court, General Division, to assess damages owed by Marine Atlantic to RJG. Marine Atlantic is applying for leave to appeal that ruling, the Supreme Court of Canada announced Nov. 29. The top court could dismiss the leave application – in which case, the appeal court ruling stands – or decide to hear an appeal. A surety bond – which construction firms often must obtain before being awarded contracts – is a three-way contract for the benefit of the client’s clients. The insurer (the surety) writes a bond for its customer (the principal). If the principal fails to fulfill the terms of its contract, a surety bond could be payable to an obligee (such as a construction project owner) which is the principal’s customer. A performance bond in intended to provide assurance to a project owner that a project will actually get done. In the case of Marine Atlantic, the contract it awarded to RJG required RJG to complete the wharf project by June 15, 2013. But by October the wharf project was still not done. In January, 2014, RJG and Marine Atlantic both purported to terminate the contract, after Marine Atlantic froze some payments to RJG. Rather than pay the entire cost of the project when it was completed, the contract provided for the owner to make several progress payments after portions of work were done. In December, 2013, Marine Atlantic refused to release the fifth progress payment. Marine Atlantic was seeking a remediation agreement and had told RJG if no agreement was reached then funds that Marine Atlantic owed to RJG would be withheld to cover any additional costs incurred by Marine Atlantic in completing the project. Initially in 2018, Justice Adams ruled that Marine Atlantic was entitled to freeze payments to RJG in order to protect itself under the performance bond – which is a separate contract from the construction project. The construction contract gave Marine Atlantic the right to use any payments due to RJG to pay the cost of correcting RJG’s default, Justice Adams reasoned. That finding was overturned on appeal. Marine Atlantic told both Western Surety and RJG that, in Marine Atlantic’s view, RJG was in default by not meeting the construction schedule. At that point, Western Surety had four options: remedy the default; complete the contract in accordance with its terms and conditions; obtain a bid from other contractors to complete the contract; or pay the project owner (Marine Atlantic) the amount of the bid bond (or the owners’ proposed cost of completion) less the balance of the contract price. The construction contract between Marine Atlantic and RJG gives the owner the right to take possession of the work if the owner terminates the contract. Under that clause, the owner could withhold payments if it terminates the contract and charge the contractor the extra cost for the owner to continue the work. But that can only happen if the owner actually terminates the contract, Justice Francis O’Brien wrote on behalf of the appeal court in its unanimous ruling. The contract does not permit Marine Atlantic to freeze funds while the contract is ongoing, noted Justice O’Brien. Marine Atlantic did not actually correct a default at the time it was withholding payments, Justice O’Brien added. Therefore, Marine Atlantic did not incur any costs for which it would need to withhold funds from the contractor. “The fact that Western Surety had various options under the performance bond contract, and the fact that Marine Atlantic was waiting for Western Surety to select an option, did not entitle Marine Atlantic to freeze ‘any and all funds’ until an option had been chosen and acted upon by the surety,” Justice O’Brien wrote in the ruling against Marine Atlantic. “The language of the performance bond contract simply does not support such an interpretation.” Ultimately, the appeal court ruled that by freezing funds, Marine Atlantic repudiated the contract, meaning RJG was entitled to terminate the contract and seek damages. Citing previous court decisions involving surety bonds, Justice O’Brien wrote that if a contractor earns money and is not paid for that work, that money cannot be retained for the benefit of the obligee (in this case Marine Atlantic) or the surety (Western Surety) because to do so would mean the oblige or surety is enriched by RJG’s unpaid work under the contract. “Significantly, there is nothing in the record to indicate that the bondholder, Western Surety, agreed with the position taken by Marine Atlantic’s counsel,” wrote Justice O’Brien. “There is no evidence that Western Surety suggested or directed that Marine Atlantic freeze these funds. At no time did Western Surety indicate that payment of these funds to RJG could contravene Marine Atlantic’s obligations to Western Surety or cause prejudice which might void

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Bond surety company targeted by insurance regulator [Libre by Nexus Inc.]

Blog, Fraud, Repost / /

Virginia insurance regulators say the immigration bond surety company known as Libre by Nexus Inc. is violating the law by acting as an unlicensed insurance agent. The State Corporation Commission’s Bureau of Insurance says the company solicits, negotiates and sells immigration surety bonds without a required insurance license. Read More… https://valawyersweekly.com/2019/10/07/bond-surety-company-targeted-by-insurance-regulators/

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Slowdown woes: Trade credit insurance claims rise 38%, premiums jump 14%

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The insurers feel that various initiatives taken by the government such as recapitalisation of PSBs and their mergers will boost the liquidity situation in the market Slowdown in the economy has adversely impacted the trade credit insurance segment of general insurers. This is because claims in this segment have seen a 38 per cent year-on-year rise in FY19 while the premium growth was only 14 per cent during the same period. Trade credit insurance covers a seller against the risk of non-payment by its customers arising due to wilful default or insolvency. The repaying capability of the customer depends on various macro and micro economic factors. “During the last few quarters, we have witnessed a spurt in claims, primarily due to …/p> Read More … https://www.business-standard.com/article/pf/slowdown-woes-trade-credit-insurance-claims-rise-38-premiums-jump-14-119100600010_1.html

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Surety market braces for Thomas Cook Atol claim

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AIG, Chubb, Markel, Swiss Re and Zurich are potentially liable for Thomas Cook repatriation and refund costs as they provide shortfall insurance for the Air Travel Organiser’s Licence’s (Atol) primary source of funding, The Insurance Insider can reveal. The Air Travel Trust (ATT) fund is the main source of funding for Atol, a financial protection scheme for package holidays backed by the UK government and managed by the Civil Aviation Authority (CAA). In its latest financial report for the year ended 31 March 2018, the ATT stated that it had a surplus of £170mn ($210mn). The ATT fund derives from Atol licence holders paying £2.50 for each person who books air travel covered by Atol. The ATT’s latest report said the fund had insurance cover with a £400mn annual limit. Sources said this “shortfall insurance” was provided by a panel of insurers including AIG, Chubb, Markel, and Zurich. The cover means there is around £570mn in place in total to meet refund and repatriation costs for any Atol holder failure. Swiss Re does not sit on the panel but reinsures part of the policy. Willis Towers Watson is also understood to have brokered part of the placement. The ATT’s policy was renewed on 30 April 2018 and provides cover until 31 March 2020, when it is up for renewal, the report stated. According to the ATT, the policy is triggered when costs arising from refunds or repatriations exceed £10mn, £70mn or £150mn in a policy year, with different thresholds applicable depending on the size of the tour operator. In its report the ATT said that there had been no claims on the policy since 2017, but sources told this publication there had been no claims since its inception in 2007. There is still uncertainty about the final repatriation bill but, in a statement to the House of Commons Transport Secretary Grant Schapps said that the Thomas Cook repatriation effort will cost around £100mn – twice the size of the Monarch Airlines collapse which cost the taxpayer around £50mn. According to the Financial Times, the government has also said the cost of refunding future bookings will be around £420mn. It is thought that the Thomas Cook collapse will severely deplete the ATT fund, with some sources saying it could wipe it out completely. In the case of fund exhaustion the government would likely be forced to provide assistance, possibly in the form of a loan, to mitigate the cost of repatriation operations and to ensure that protection is in place for future collapses. The CAA has denied that government intervention with taxpayer money would be necessary, saying that its insurance pot is healthy and that a credit facility could also be used to make up the shortfall. CAA CEO Richard Moriarty said that the refund programme for the 360,000 future holidays booked through Thomas Cook was three times larger than any refund programme it had ever managed before, and it was putting new systems in place to process refunds as quickly as possible. He added that around 100,000 bookings were made by direct debit and that these would be refunded in 14 days whereas other payments would take longer, but that an online system would be launched on 7 October to manage those claims. Direct debit and credit card companies could also have exposure to surety losses as they facilitated payment for the package holidays. Sources also told this publication that Zurich and Swiss Re could also be exposed to losses for Thomas Cook’s German subsidiary and its affiliate tour operator Condor, which is 49 percent owned by Thomas Cook. Condor was granted a EUR380mn ($414.8mn) bridging loan from the German government, which will allow it to continue operations until a buyer is found. Thomas Cook GmbH filed for insolvency last Wednesday and said it would restructure its business independently. A Zurich spokesperson told this publication that the maximum amount of contractual obligations to Thomas Cook in Germany was EUR110mn. Parent company Thomas Cook filed for insolvency on 23 September after it failed to secure £250mn rescue deal and the government refused to bail out the business. Following its collapse, the CAA launched the largest ever peacetime repatriation effort to bring the estimated 150,000 UK holidaymakers home. According to the CAA more than 100 aircraft have been used for the operation. As of 1 October, over three quarters of the holidaymakers, or 115,000 people, had been returned to the UK, with around 94 percent having flown on their original departure date. The repatriation will continue until 6 October, with more than 1,000 flights planned. A Zurich spokesperson confirmed that the insurer is one of number of carriers that covered the ATT fund through a surety policy, adding that they were in the “process of assessing the net impact after reinsurance for the group”. A CAA representative said the state agency did “not want to speculate on the likely impact on the ATT fund of the collapse of Thomas Cook” as the final figure may not be known for many months, until all outstanding claims are processed. AIG, Chubb, Markel, Willis and Swiss Re declined to comment. https://www.insuranceinsider.com/articles/129146/surety-market-braces-for-thomas-cook-atol-claim

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Audit alleges W.Va. DEP violated state law for nearly a decade

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In a report presented to the joint Post Audit Committee, legislative auditors contend that the state Division of Environmental Protection has been skirting a law designed to make sure that coal mine reclamation bonds are on solid financial ground. Coal companies have to get the bonds to guarantee the land will be repaired once the mining is over. But, the audit report says the DEP ignored a stipulation that said insuring agencies have to be approved by the U.S. Treasury with a T-Listing. That certifies the insurers have suitable assets and financial practices. First Surety Corporation got into the business in 2006 and insures hundreds of bonds worth about 48 million dollars. However, the agency does not have the financial credentials that auditors say the law requires. “The legislature is very committed to requiring a T-Listing for these bills, surety bonds and so forth, that protect the land in West Virginia as its being mined for coal,” West Virginia Senate President Mitch Carmichael, (R) Jackson, said. The DEP’s general counsel says the agency interprets the law as having two paths to insure the reclamation bonds. One is for a company to have a T-Listing, the other is by the permission of the West Virginia Insurance Commissioner. Carmichael questioned the lawyer about the DEP’s stance. “Mr. President, my testimony is that the agency thought that there were two avenues pursuant to that rule by which a company would be allowed to submit surety bonds to the state,” Jason Wandling, General Counsel for the W.Va. DEP said. “And one of those avenues would be, would not include T-Listing?” Carmichael asked. Wandling replied, “That’s correct Mr. President.” “I’m at a loss as to how you obtain that understanding of it,” Carmichael said. “I accept that you have to say that.” The legislative auditor says insuring reclamation surety bonds without a T-Listing has a four-year time limit and that First Surety Corporation’s four-year grace period expired in 2010. “Our view is that that stopped in 2010,” Aaron Allred, W. Va. Legislative Auditor said. “And that DEP has allowed this company to continue to issue mine reclamation laws in violation of state law now for nine years.” https://wchstv.com/news/local/audit-alleges-wva-deprotection-ignores-state-law-for-nearly-a-decade

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The Sword Of Damocles Hangs Over Miller Act Sureties And Brokers: Scollick Case Stayed Sixty Days For Mediation, But Outcome Remains Uncertain

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On August 6, 2014, plaintiff-relator Andrew Scollick filed a complaint in the United States District Court for the District of Columbia against eighteen defendants for multiple violations of the False Claims Act (“FCA”) in connection with an alleged scheme to submit bids and obtain millions of dollars in government construction contracts by fraudulently claiming or obtaining service-disabled veteran-owned small business (“SDVOSB”) status, HUBZone status, or Section 8(a) status, when the bidders did not qualify for the statuses claimed. United States ex. rel. Scollick v. Narula, et al., No. 14-cv-1339 (D.D.C.). Unique in this case were not the claims against the contractors, who were alleged to have falsely certified their status or ownership. Rather, what set this case apart was that Scollick also named as defendants the insurance broker who helped secure the bonding that the contractor defendants needed to bid and obtain the contracts, and the surety that issued bid and performance bonds to the contractor defendants. Scollick alleged that the bonding companies “knew or should have known” that the construction companies were shells acting as fronts for larger, non-veteran-owned entities violating the government’s contracting requirements—and thus the bonding companies should be held equally liable with the contractors for “indirect presentment” and “reverse false claims” under the FCA. This suit appropriately seized the attention of the surety industry, which had never before faced similar claims or the threat of trebled damages liabilities under the FCA. Pursuant to the Miller Act (40 U.S.C. §3131), contractors who bid on government construction contracts are required to post bid bonds (to ensure a contractor will undertake the contract if the bid is accepted), performance bonds (guarantees that the contractor will complete the project per contract specifications), and payment bonds (to ensure that those who furnish labor and materials for the project will be paid). A construction contract cannot be awarded and cannot commence unless the required bonding is in place. Surety bonding is subject to underwriting, which provides government contracting officers with reasonable assurances that the contractor’s organization and financial ability can satisfy the obligations of the construction contract. The claims alleged in this suit have the potential to fundamentally rewrite the “rules of the road” for the underwriting and due diligence requirements for the entire industry. The surety defendants were initially dismissed. United States ex. rel. Scollick v. Narula, et al., 215 F. Supp. 3d 26, 30-31 (D.D.C. 2016). But Scollick amended his complaint to add factual allegations that the bonding defendants necessarily engaged in underwriting and due diligence efforts that should reasonably have revealed that the contractors lacked the skill, resources, and experience to carry out the scope of work, and should have reasonably revealed that these contractors did not qualify for SDVOSB or HUBZone set-asides. Scollick specifically alleged in the Amended Complaint that the bonding defendants “knowingly facilitated the fraud scheme and knowingly caused false claims to be submitted to the government” by providing surety bonds when they “knew, or should have known, that the Defendants were concealing material information from the government” regarding their eligibility for these set-aside contracts. Scollick further claimed that “[h]ad the government known . . . it would not have entered the contracts at issue . . . [and] premiums and fees knowingly derived from the fraud scheme, and thereby indirectly charged to the government, were paid [to the insurer].” In a stunning reversal, the court issued a second opinion in July 2017 reinstating the claims against the broker and the surety on the grounds that the plaintiff-relator had adequately alleged that the bonding defendants had knowledge of the scheme and were sufficiently complicit in the alleged misconduct to allow these claims to proceed against them. Scollick, 2017 WL 3268857 (D.D.C. July 31 2017). Specifically, the court pointed to allegations that the insurance defendants knew or should have known that the contractors were violating federal contracting requirements because the insurance defendants conducted on-site inspections of the contractors’ offices, which would have revealed that there were “shell compan[ies] dependent on the resources and capabilities of [other defendants],” who dominated and controlled the entity held out to qualify for SDVOSB set-asides. Even though neither the broker nor the insurer directly presented false claims or made false statements to the government, the court permitted the plaintiff-relator’s theory of “indirect presentment” to proceed. Notably, the court pointed to specific statements in the bond forms—e.g., Standard Form 25, which states, among other things, that the performance guarantee extends to “all the understanding, covenants, terms, conditions, and agreements of the contract.” In United States v. Sci. Applications Int’l Corp., 626 F.3d 1257 (D.C. Cir. 2010), the D.C. Circuit held that where a defendant fraudulently sought payment for participating in a program designed to benefit third parties rather than the government itself, “the government can easily establish that it received nothing of value from the defendant and that all payments made are therefore recoverable as damages.” Thus, under a Standard Form 25 performance guarantee, a Miller Act surety may incur reverse False Claims Act liability for a bonded contractor’s violation of that guarantee. For more than five years, the surety industry has been watching this case and waiting to see if the Sword of Damocles would actually fall on sureties and brokers involved in issuing Miller Act bonds on government projects. The issues raised by this suit, especially whether insurance companies and brokers might be subject to FCA liability and treble damages if they offer underwriting and Miller Act sureties to contractors who submit fraudulent claims or certifications to the government, have already elevated the stakes and raised a significant flag of caution to brokers and sureties involved in issuing Miller Act bonds on government construction projects. On August 28, 2019, the parties jointly requested a sixty-day stay of proceedings to pursue mediation, which request was granted on September 13, 2019. If the case is not settled at mediation, the parties must submit by November 12 a joint proposal for further proceedings. An adverse outcome against the surety defendants in this case

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Government Announces Million Dollar Settlement with Surety for Alleged Violations of False Claims Act

Blog, Claims, Repost / /

In the summer of 2017, a District Judge sitting in the District of Columbia issued a decision holding that a surety could be held liable under the False Claims Act where it becomes aware of facts suggesting that a bonded principal is fraudulently participating in a government set-aside program and nonetheless continues to do business with that principal. United States ex rel Scollick v. Narula, 2017 WL 3268857 (D.D.C. July 31, 2017). Although the Narula decision arose in the context of a motion to dismiss, where the court’s findings are limited to determining the viability of the claims as plead, the decision has drawn close scrutiny (and criticism) from professionals across the surety industry. Many underwriters have exercised additional caution prior to bonding set-aside contractors due, in large part, to the draconian penalties that may be imposed for violations of the False Claims Act, including treble damages. The close scrutiny and additional caution unfortunately appear to have been well-founded. On September 4, 2019, the United States Attorney’s Office for the Western District of North Carolina announced that it had entered into a settlement agreement with a surety to resolve allegations that the surety violated the False Claims Act by bonding a general contractor that submitted false claims to the government for services performed under fraudulently obtained government contracts. The surety agreed to pay $1,040,035.20 to resolve the government’s allegations. The government alleged that South Carolina general contractor Claro Company, Inc. (“Claro”) made materially false, fictitious, and fraudulent statements and representations, or material omissions, to gain entry into and to continue participation in the 8(a) program and that Claro’s surety knew or should have known that Claro was not eligible for 8(a) set-asides. The government contended that the surety knew or should have known that Claro was not controlled by a socially and economically disadvantaged individual, and that it was affiliated with and controlled by another entity and/or individuals that did not meet the SBA’s definition of being socially and economically disadvantaged; that neither the affiliation nor control were disclosed to the SBA; and that Claro made material misrepresentations regarding its financial status to the SBA in order to avoid early graduation from the 8(a) program. The government further contended that despite the foregoing allegations, the surety continued to do business with Claro by bonding its projects and therefore allowing it to continue to fraudulently bid for contracts under the preferences in the 8(a) program. In announcing the settlement, the government acknowledged that the claims resolved in the settlement are allegations only and there has been no determination of liability against the surety. As of this writing, detailed information regarding the government’s investigation and allegations are not publicly available. It is, thus, not clear at this time whether this settlement marks the next step in a trend by the government (and qui tam plaintiffs), which started with Narula, to pursue recovery under the False Claims Act against sureties, or if this settlement is a one-off due to the unique facts and circumstances of the Claro matter. We all hope it is the latter.

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