Think the Government’s Claim Against You Is Time-Barred? Not So Fast!

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When a company understands that the United States Government may have a claim against it, the company’s directors and officers are usually very aware of the applicable statute of limitations and the passage of time. When the relevant time period has passed without an action being filed, they may be inclined to indulge in a round of self-congratulation. Unfortunately, such celebration may be premature. Under significant pressure to bring more cases against alleged wrongdoers, the Government is increasingly relying on a 1948 statute, the Wartime Suspensions of Limitations Act (“WSLA”), to revive claims that would otherwise be time-barred.

The WSLA, which was based on the provisions of several World War II-era statutes, mandates in essence that when the country is at war, the statutes of limitation applicable to certain actions brought by the Government involving, among other things, frauds committed against the United States, are suspended until five years after the cessation of hostilities. The law has been amended several times, including a modification to address military engagements without a declaration of war pursuant to the War Powers Resolution. The relevant language of the statute specifies that when the US “is at war or Congress has enacted a specific authorization for the use of the Armed Forces…the running of any statute of limitations applicable to any offense (1) involving fraud or attempted fraud against the United States or any agency thereof in any manner…or (2) committed in connection with…any real or personal property of the United States, or (3) committed in connection with [a government contract]…related to the…the war or …use of the Armed Forces” shall be suspended until 5 years after the termination of hostilities…”

The WSLA is found in Title 18 of the US Code, dealing with criminal law, but there is nothing in its language expressly limiting its application to criminal prosecutions. Similarly, the name and legislative history of the statute suggest that it was intended to deal with cases in which the conduct at issue involved the ongoing war, but only subsection (3) of the statute is explicitly so limited. There is also the question of when exactly hostilities have been terminated.1 In the 50 years following the law’s enactment the Government made very sparing use of it, and there are not many cases addressing its scope. In recent years, the Government has relied on the WSLA far more frequently and in a wider variety of types of cases, including False Claims Act, FIRREA (Financial Institutions Reform, Recovery and Enforcement Act) and common-law actions. Claims of tax fraud seem tailor-made to fit within the language of the WSLA, and it may be anticipated that the Government will seek to employ it even in securities claims. Most courts and commentators that have addressed the scope of the statute’s applicability have focused on the type of military action that is covered by the statute. But few have explored what types of conduct constitute a “fraud or attempted fraud against the United States.” This broad phrase could encompass many different types of actions, and the Government can be expected to test the breadth of the WSLA’s applicability in future actions.

In an ongoing case, U.S. v. Wells Fargo Bank, N.A.,2 the Government alleged under the False Claims Act, FIRREA and the common law that defendant Wells Fargo Bank, N.A. (“Wells Fargo”) had defrauded the Department of Housing and Urban Development regarding the origination of federally insured home mortgage loans, and failure to disclose the bad loans to the Government. Wells Fargo moved to dismiss the Government’s claims as, among other things, time-barred, and the Government opposed the motion relying, in part, on the WSLA. Wells Fargo argued in reply that the WSLA applied only to criminal cases and that it was not clear whether the statute applied to matters that did not concern wartime contracting. Wells Fargo’s motion to dismiss is pending.

Although the the position asserted by Wells has many good policy and other arguments to support it, a number of courts, including the Fourth Circuit in a very recent decision,3 have ruled that the WSLA applies to civil claims. And while there is some authority, and a very strong policy argument, in favor of limiting the scope of the WSLA to war-related matters, the language of subsection (1) of the WSLA does not clearly limit the statute to such claims. Furthermore, the Supreme Court held in 1953 in a case unrelated to war that the WSLA applies to frauds against the Government “of pecuniary nature or of a nature concerning property.”4

Even if the WSLA applies to civil frauds unrelated to war, could it possibly apply to securities fraud claims? Courts have yet to address whether a violation of securities laws is a fraud “against the United States.” In the typical securities fraud case, the Government is not itself the victim of the fraud. Rather, investors are the victims and the Government merely brings enforcement actions aimed at enjoining the alleged wrongdoers from further violations and punishing them by imprisoning or fining them or causing them to disgorge ill-gotten gains. When viewed in this context, a typical securities fraud does not seem to be a fraud “against the United States.” Moreover, the distinction between the Government as victim and as enforcer is a significant one, as made clear by the Supreme Court in a recent decision, S.E.C. v. Gabelli, in which it rejected an argument by the Securities and Exchange Commission that the limitations period for a securities fraud claim for civil penalties was subject to a discovery rule.5 Thus, applying the WSLA to securities fraud claims seems to be a stretch.

But entities that know of potential claims against them by the Government should be aware that the Government may nonetheless try pushing the envelope in order to test how many different types of claims the courts will let it rescue from time bar by its newly invigorated claim resuscitator, the WSLA.

Footnotes

1 While United States v. Prosperi, 573 F. Supp. 2d 436 (D. Mass. 2008), took a functional approach to this question, holding that the wars in Afghanistan and Iraq had ended when a new government had been recognized or the President had declared “major combat operations” to have ended, this view has not generally been followed, since the statute by its terms requires “a Presidential proclamation, with notice to Congress” or “a concurrent resolution of Congress” to establish “termination of hostilities.” See United States v. Pfluger, 685 F.3d 481 (5th Cir. 2012).

2 12 Civ. 7527 (S.D.N.Y.).

3 U.S. ex rel. Carter v. Halliburton Co., 710 F.3d 171, 179-80 (4th Cir. 2013), another False Claims Act case, but one directly concerned with war-related activities. The most novel aspect of this decision was that the WSLA was applied to a case prosecuted not by the Government itself but by a relator.

4 U.S. v. Grainger, 346 U.S. 235, 241 (1953). More recently, in U.S. v. BNP Paribas SA, 884 F. Supp. 2d 589, 605 (S.D. Tex. 2012), the court ruled that the WSLA tolled the statute of limitations on a fraud unrelated to war that was allegedly committed against the Department of Agriculture. However, the complaint was dismissed on other grounds. On the other hand, there is at least one decision suggesting that the WSLA was intended to apply only to war-related frauds. See United States v. Sack, 125 F. Supp. 633, 636 (S.D.N.Y. 1954) (“The purpose of the Suspension Act was to give the Government’s law enforcement officials additional time to discover and punish offenses related to the commercial aspects of the war program.”). For an extended discussion of the breadth of “fraud” covered by the WSLA and whether it must be war-related, see Note, The Wartime Suspension of Limitations Act, the Wartime Enforcement of Fraud Act, and the War on Terror, 85 NOTRE DAME L. REV. 313 (2009).

5 S.E.C. v. Gabelli, 133 S. Ct. 1216, 1217-18 (2013) (“This Court, however, has never applied the discovery rule in this context, where the plaintiff is not a defrauded victim seeking recompense, but is instead the Government bringing an enforcement action for civil penalties.”).