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Scollick v. Narula False Claims Act Case Update



This post is part of a series sponsored by IAT Insurance Group.

Warning:

This article should not be used as legal advice. All parties should consult legal counsel of their choice and seek expert advice on legal and compliance matters.

The decision from July 201

7 i USA ex rel. Scollick v. Narula[1] (Scollick), established that sureties and surety agents can be held liable under the False Claims Act (FCA) for binding a fraudulent assigned contractor. The complaint alleged that a larger contractor set up a shell company, purportedly owned and operated by a service-disabled veteran, but actually controlled by the larger contractor to illegally bid on federal service-disabled veteran-owned small business (SDVOSB) contracts. government. Although in 2017 Scollick opinion was decided at the pleading stage and therefore found no party liable, it was the first decision to hold that a surety could face potential FCA liability for binding a fraudulently assigned contractor.

Five years later, on July 29, 2022, all claims against the sureties came in Scollick v. Narula[2] was dismissed due to judgment. Year 2022 Scollick the judge found no evidence that the bail defendants knew of the SDVOSB requirements or intended to defraud the government. Without such evidence, the whistleblower could not prove that the surety defendants knew or should have known that the bonded contractors’ statements to the government were false, as is required for FCA liability.

The judge also found that the sureties and the agent were not required to know the state rules on disabled veterans programs or other designated programs because the sureties did not participate in them, rather the contractors did. Because of this, the surety defendants could rely on the government’s certification that the tied contractors met federal set aside program requirements.

The question is: What does this mean for guarantors?

No “free pass” for the bond that Bond Federal set aside contractors

The potential for FCA claims against guarantors is now widely known and the issue is not going away any time soon. This recent decision in favor of the surety defendant is just the latest chapter in a series of ongoing developments. Here’s what you need to know.

Is Scollick final decision?

No. Because the decision was made at the district court level, it can be overturned on appeal after the case against the remaining defendants has gone to trial. In fact, the whistleblower’s lawyers have already noted that they plan to appeal the decision.[3]

Can the surety still be sued in similar cases?

Yes. The judge’s decision does not exonerate a surety who knows the contractor that its bond is defrauding the government. So if the whistleblower had provided evidence that the sureties and agent knew the contractors were lying about their qualifications to bid on the projects in question, there would have been a different outcome.

Does it matter who certifies a seconded contractor?

Yes. In it Scollick case, the Veterans Administration certified that the contractor was a valid SDVOSB contractor, and the court found that the sureties could rely on the government’s certification. The decision might have been different if a contractor self-certified that it was qualified to work on a federally set aside program.

Is the decision binding on other courts?

No. The Scollick The decision is not a binding precedent for other federal courts, meaning it need not be followed by other courts.

What can sureties and surety agents do to protect themselves from potential FCA liability for binding a deposed contractor who proves to be fraudulent?

Despite the judgment in Scollick that guarantors are not required to be familiar with the requirements of federal set-off programs, it is still recommended that sureties have sufficient knowledge of federal set-off requirements to be alert to “red flags” indicating that the account may not be a valid set-off contractor and avoid binding such contractors.

For more information on how to protect yourself against FCA risks and ensure compliance with new laws, regulations and other requirements, contact the IAT team.

For a more complete legal analysis, visit this link.


[1] United States District Court for the District of Columbia “United States, Ex. Rel. ANDREW SCOLLICK, Plaintiff-Realtor, v. VIJAY NARULA, et. al., Defendants”, July 31, 2017.

[2] Case text “Scollick ex. rel. USA v. Narula”, 29 July 2022.

[3] Law360 “Insurers escape FCA liability for Bonding Construction Co.” 20 July 2022.

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