Holding Bonding Companies Liable when a Construction Firm Falsifies its Service Disabled Veteran-Owned Status

Last month a U.S. District Court extended federal False Claims Act liability to bonding companies who have reason to know that they bonded construction firms who falsified their Service Disabled Veteran Owned Small Business (SDVOSB) status. Under the Miller Act, government construction projects must be bonded before they can be awarded. That bonding underwriting process is arduous and provides the bonding company with an opportunity to determine whether the construction firm being bonded falsified its SDVOSB status. In that case, according the recently decided United States ex. rel. Scollick v. Narula, et al., the bonding company can be held accountable under the False Claims Act.

In Scollick, two bonding companies are alleged to have knowingly bonded $12.5 million in SDVOSB set-aside construction contracts to firms the bonding companies knew or should have known were not SDVOSB entities. The district court concluded that a “reverse false claim” exists because the bonding agreements guaranteed that the work would be performed in accordance with the terms of the construction contracts and that those contracts explicitly required that the work had be undertaken by a SDVOSB entity.

The case will now move forward to determine whether the bonding companies must pay back to the government three times the amount of the fraudulent payments the government made to the construction firms. The complaint was filed by whistleblower Andrew Scollick on behalf of the United States government. False Claims Act whistleblowers can collect a reward of up to 30% of the total recovery, plus legal fees.

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