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Ninth Circuit Holds That SBA Loan Fraud Was Alleged Too Late: Takeaways for SBA Borrowers and Lenders

Ninth Circuit Holds That SBA Loan Fraud Was Alleged Too Late: Takeaways for SBA Borrowers and Lenders Background Decorative Image

On April 1, 2020, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court decision holding that a qui tam relator in a False Claims Act (“FCA”) action failed to file its complaint alleging Small Business Administration (“SBA”) loan fraud within the required statute of limitations. The Ninth Circuit opinion addresses how the two limitations periods for qui tam relators bringing FCA actions, which the Supreme Court interpreted in 2019, applied to an SBA loan process. This decision comes at a time when SBA loans have received significant attention as the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act added the Paycheck Protection Program (“PPP”) and made changes to the SBA’s disaster loan program.

In Houpt ex rel. United States v. Wells Fargo Bank, N.A.,1 the qui tam relator, Charles W. Houpt, alleged that Wells Fargo made false statements and certifications that induced the SBA into improperly paying the guaranteed portion of a 7(a) loan that Houpt and his wife had taken out.2 At the time relevant to Houpt’s claims, Wells Fargo held the loan’s promissory note, and the Houpts were required to make their loan payments to Wells Fargo. When the Houpts ceased making their loan payments, Wells Fargo requested that the SBA pay it the loan guarantee, and the SBA obliged. However, Houpt alleged that the SBA only paid the loan guarantee to Wells Fargo because Wells Fargo falsely stated and falsely certified to the SBA that it had a beneficial interest in and the right to enforce Houpt’s promissory note and that it had complied with certain SBA reporting regulations.

The validity of Houpt’s action as a qui tam relator turned on whether he timely filed his complaint under the FCA statute of limitations. For an FCA action, qui tam relators may file cases under the later of two limitations periods: either (1) within six years of the false claim, or (2) within three years of the date on which the facts material to the right of action were known or reasonably should have been known by the government but not later than ten years after the date of the false claim.3 The Ninth Circuit found that Houpt had not timely filed his complaint in accordance with either of the limitations periods.

For the six-year limitations period, the Ninth Circuit explained that a false claim occurs at the time of the request or claim for payment, meaning that Wells Fargo’s allegedly false claim would have occurred when it sought payment from the SBA on April 19, 2010. Because Houpt did not file his complaint until September 11, 2017, Houpt’s complaint was untimely under the six-year limitations period.

For the three-year limitations period, the Ninth Circuit explained that, at the latest, the SBA either knew or should have known of the facts material to Houpt’s FCA claim no later than April 30, 2014, the date on which Wells Fargo repaid the loan guarantee to the SBA (with proceeds from the sale of the Houpts’ property securing the promissory note) and SBA closed the loan file. The Ninth Circuit reasoned that, on the loan file closing date, the SBA would have, or should have, known the relevant information about whether Wells Fargo had made proper representations to the SBA and whether the SBA should have paid the loan guarantee. Because Houpt did not file his complaint until September 11, 2017, Houpt’s complaint was untimely under the three-year limitations period as well.

What This Means For You

Recently, SBA loans have received much attention, and there has been a flurry of activity and interest in the PPP loans that were established by the CARES Act under the SBA’s program for loans to small businesses. The underlying SBA loan in Houpt was a 7(a) loan, and Section 1102 of the CARES Act expands the 7(a) loan program to include PPP. Although specifically addressing a claim against an SBA lender, the Ninth Circuit’s decision illustrates how courts will likely evaluate the timeliness of qui tam fraud claims involving PPP loans for SBA borrowers as well. FCA actions in this area could become increasingly relevant and more common as qui tam relators and government regulators scrutinize how individuals and entities certified their eligibility for PPP loans. The FCA prohibits knowingly submitting false statements to the government, including false certifications. With the FCA providing for treble damages, SBA borrowers and lenders should be wary of such actions and should consider the following takeaways from Houpt.

First, the Ninth Circuit reiterated the well-established principle that the six-year limitations period begins to run when payment is requested and the allegedly false claim is thereby presented to the government. In Houpt, this meant that the six-year limitations began to run when Wells Fargo requested that the SBA pay it the loan guarantee. The Ninth Circuit reiterated that other events that were part of the SBA loan process, such as when SBA paid the loan guarantee or when Wells Fargo’s alleged noncompliance with SBA regulations occurred, were not relevant to the start of the six-year limitations period.

Second, in Houpt, the Ninth Circuit cited the SBA’s closing of a loan file as the date when the SBA will be considered, at the latest, to have the actual or constructive knowledge necessary to start the three-year limitations period. Under the standard of review requiring the court to make all reasonable inferences in the light most favorable to the relator, the Ninth Circuit determined that the closing of the loan file was the latest possible date that the SBA would have had or should have had the requisite knowledge to start the limitations period. The district court had also considered other events to possibly start the three-year limitations period, including the much earlier dates when Wells Fargo first contacted the SBA about Houpt’s default, when Wells Fargo requested payment from the SBA, and when the SBA provided payment to Wells Fargo. Other courts could find any of these earlier dates to be the relevant date when the statute of limitations begins to run in other FCA cases involving SBA loans.

Houpt provides one view on how courts may address timeliness issues that arise in FCA actions involving SBA loans, particularly at summary judgment when facts and dates related to certain events in the SBA loan processes are not in dispute. If facing a qui tam FCA claim related to SBA loans, a company may want to consider statute of limitations arguments to defeat a claim at summary judgment. A company can prepare for statute of limitations arguments well before a qui tam FCA complaint is filed by keeping clear records of communications and interactions with the SBA with regard to loans. Such recordkeeping can ensure that facts relevant to the statute of limitations are easily proven, thereby teeing up statute of limitations arguments for summary judgment. While companies taking SBA loans are in particular preparing to face scrutiny in light of the challenges posed by the PPP, Houpt shows that SBA borrowers can benefit from preparing for such scrutiny, including by keeping thorough records of interactions with the SBA and SBA lenders.

1 No. 19-35205 (9th Cir. Apr. 1, 2020) (memorandum), aff’g No. 4:17-cv-00377-CWD, 2019 WL 591441 (D. Idaho Feb. 13, 2019).

2 While neither the Ninth Circuit or district court refer to Houpt’s SBA loan as a 7(a) loan, Houpt’s complaint filed with the district court refers to 13 C.F.R. § 120.520, a regulation for 7(a) loan guarantees, making clear that the loan was through the SBA’s 7(a) program. See Compl. ¶ 2, ECF No. 1, Houpt ex rel. United States v. Wells Fargo Bank, N.A., No. 4:17-cv-00377-CWD (D. Idaho Sept. 11, 2017).

3 31 U.S.C. § 3731(b).

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.