conditions precedent. If any such violations were found to exist, we do not believe they would be material under Eastern. The SBA thus cannot avoid liability on its guaranty obligation.
B. Effect of Statute of Limitations on Count II
In Count II, the SBA seeks recovery for several alleged misrepresentations made by the Bank. Specifically, the SBA alleges that, in its Lender's Application, the Bank misrepresented the amount of money owed to it by Holiday and Cohodes' creditworthiness and financial condition, and that the SBA relied on these misrepresentations. Count II of Plaintiff's Complaint, paras. 8, 9. The SBA also alleges that by making a demand for payment on the guaranty, the Bank falsely certified that it had disbursed the loan proceeds in accordance with the Agreement and Authorization, and that the SBA relied on this false certification. (Count II, paras. 12, 13). In paragraph 16, the SBA alleges that the Bank's failure to disclose or correct these misrepresentations, "whether negligent or otherwise," constituted a material breach of the Bank's "duty of care and/or good faith" owed to the SBA under the common law and under the Agreement, and caused the SBA to suffer a loss. The SBA further alleges that the Bank's misconduct and breach of the agreement released it, as a matter of federal law, from its guaranty obligation. (para. 17).
The Bank argues that Count II is essentially a tort claim, and as such is barred by the three-year statute of limitations for tort claims asserted by the United States. 28 U.S.C. § 2415(b). The SBA contends that Count II is really a contract claim, and is thus subject to the six-year statute of limitations governing contract claims asserted by the U.S. 28 U.S.C. § 2415(a). We find that Count II is more in the nature of a tort claim and that it is thus barred by the three-year statute of limitations of 28 U.S.C. § 2415(b).
In determining the proper statute of limitations to apply, a court should focus on the "substance of a claim." Blusal Meats, Inc. v. United States, 638 F. Supp. 824, 831 (S.D.N.Y. 1986). Determining the "substance of a claim" involves looking at the factual basis for the claim. Id. at 832. In this case, the SBA's claim in Count II is in the nature of a tort claim. While the SBA refers to contract provisions, alleges that these provisions were breached, and also refers to payment "by mistake (Count II, paras. 19-20)," the essence of Count II is a tort claim. The factual basis for Count II is the Bank's alleged wrongful misrepresentations concerning Cohodes' financial condition and the Bank's proper disbursement of the loan, misrepresentations which caused it to suffer a loss. The SBA repeatedly alleges that it relied upon the Bank's alleged misrepresentations. (Count II, paras. 9, 13, 15). To allege that someone relied on the intentional or negligent misstatements of another is to allege the elements of negligent misrepresentation or fraud, both of which are torts. See Zahorik v. Smith Barney, Harris Upham & Co., 664 F. Supp. 309, 313 (N.D. Ill. 1987); Chicago College of Osteopathic Medicine v. George A. Fuller Co., 719 F.2d 1335, 1347 (7th Cir. 1983). The "substance" of Count II is a tort claim, and our conclusion is not altered by the SBA's attempt to mix in language related to contractual or quasi-contractual theories.
Because it is a tort claim, Count II is subject to the three-year statute of limitations of 28 U.S.C. § 2415(b). There is no dispute that this suit was not filed within the three-year statute of limitations. The statute of limitations on Count II would begin to run, at the latest, when the SBA knew or should have known that the Bank's statements were false. See Blusal, 638 F. Supp. at 832. As suit was filed on April 14, 1987, the SBA's claim is barred if it knew or should have known of the falsity of the Bank's misrepresentations on or before April 14, 1984. While the parties do not discuss the date on which SBA's tort claim accrued, it is obvious that this occurred sometime before April 14, 1984, as the last alleged misrepresentation was made on April 10, 1981, when the Bank requested payment under the guaranty. In fact, while the SBA debates the applicability of the three-year statute of limitations, it does not dispute the Bank's contention that its claim would be barred under a three-year statute of limitations. Count II is barred by the three-year statute of limitations contained in 28 U.S.C. § 2415(b).
We have found that Count II is essentially a tort claim. Even if we were to find that Count II is a contract claim, it is unlikely that it would withstand a motion for summary judgment. To the extent that Count II seeks damages for breach of the agreement between itself and the Bank, the Bank would prevail on summary judgment because the alleged breaches of this agreement, whether misrepresentations or other breaches, would not be material, for the reasons set out in Part II.A of this opinion.
C. False Claims Act
In Count III the SBA seeks recovery of damages under the False Claims Act ("Act"), 31 U.S.C. § 3729-31. The Act allows the government to recover a $ 5000 to $ 10,000 penalty plus three times its money damages when a person knowingly presents a false claim for payment to the United States. 31 U.S.C. § 3729. The Bank contends that the SBA cannot recover under the False Claims Act because it cannot demonstrate the existence of a causal relation between the false claim and the government's loss, as required by United States v. Hibbs, 568 F.2d 347 (3d Cir. 1977).
The False Claims Act, which was amended in 1982 and in 1986, now reads in relevant part as follows:
Any person who -- (1) knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval . . . is liable to the United States Government for a civil penalty of not less than $ 5,000 and not more than $ 10,000, plus 3 times the amount of damages which the Government sustains because of the act of that person. . . .
31 U.S.C. § 3729(a). Hibbs involved a real estate broker who submitted certificates to the Federal Housing Administration which misrepresented the condition of certain houses. 568 F.2d at 349. After the FHA insured the mortgages on the houses, their owners defaulted for various reasons. All of the defaults were due to personal financial problems, such as losing a job or suffering a cut in pay. Id., n. 2. None of the reasons were related to the defendant's false certifications. Id. The court held that the United States was required to demonstrate that a "causal connection" existed between the loss and the fraudulent conduct, and that the government in that case could not make such a showing. Id. at 351. The court expressly held that the government could not recover under the Act merely by demonstrating the existence of "but-for" causation, i.e., by showing that it would not have insured the mortgage if the defendant had not furnished the false certification. Id. at 349, 351. The Fifth Circuit accepted the Hibbs holding in United States v. Miller, 645 F.2d 473, 475-76 (5th Cir. 1981).
The Hibbs requirement, strictly speaking, is not a "causation" requirement. A false statement can never really "cause" a loss. Rather, the Hibbs court was requiring that there be some sort of relationship between the false statement and the event which caused the government's loss. Id. at 351. The court read such a requirement from the statutory language, which at that time was that the government could recover damages sustained "by reason of" the defendant's unlawful act. Id. While, again, the causation-type language might not be technically correct, this language indicated that Congress meant to require some sort of relationship between the false statement and the government's loss. In addition, the Hibbs court noted that allowing the government to recover merely upon demonstrating "but-for" causation could easily lead to inequitable results. Id.
The SBA cannot seriously argue that it meets the Hibbs requirement in this case. The Bank's claim for payment was "false" because the Bank represented that it had properly disbursed the funds when in reality it had improperly applied $ 86,000 to retire prior debt. The SBA's loss was unrelated to the Bank's false statements; it was caused by the fire to the dealership, and by Holiday's subsequent default.
The SBA devotes most of its discussion of the False Claims Act issue to its argument that the Hibbs requirement should not apply. We reject its challenges to the reasoning of the Hibbs decision itself, for we find the opinion to be well-reasoned and persuasive. The SBA also contends that Hibbs should no longer be applied because the statute has been amended since the Hibbs decision. While the statute has been amended twice since 1977, neither of the amendments have had anything to do with the Hibbs requirement. See "Explanatory Notes" to 31 U.S.C.A. § 3729 (West 1983), and "Historical Note" contained in 1989 Pocket Part thereto (West 1989).
The SBA also argues that Hibbs is no longer applicable because it relied on the "by reason of" language in the statute as it existed in 1977. The "by reason of" language, however, was replaced in the 1982 recodification and amendment to the statute by the present language, which refers to damages the government sustains "because of" the act of the defendant. 31 U.S.C. § 3729; see United States v. Hill, 676 F. Supp. 1158, 1180 (N.D.Fla. 1987). This new language supports the Hibbs requirement as well as the "by reason of" language. See Hill, 676 F. Supp. at 1180. In fact, while the 1982 Notes refer to the deletion of the "by reason of" language, they do not refer to the inclusion of the "because of" language, suggesting that the change reflects nothing more than a wording preference. Finally, the SBA points to a statement in Senate Report No. 3345 which criticizes the Hibbs decision. S. Rep. No. 3345, 99th Cong. 2d Sess., reprinted in 1986 U.S. Code Cong. & Ad. News 5266, 5285. It is clear from the context of this quote, and a review of the 1986 Act as passed, that this language refers to a proposed amendment which was never adopted. Id.; Pub. L. 99-562, 100 Stat. 3153-54 (1986); Hill, 676 F. Supp. at 1181, n.27. The Hibbs requirement that the government show some relationship between the defendant's false statement and its damages is equally applicable to the present statute as amended. Because the SBA cannot demonstrate that such a relationship exists, it cannot recover under the False Claims Act.
For the above reasons, plaintiff's Motion to Strike Exhibit to Defendant's Motion for Summary Judgment is denied. Plaintiff's motion for summary judgment is denied, and defendant's motion for summary judgment is granted.
DATED: April 26, 1990
Plaintiff is unable to show, under Count I of the complaint, that defendant materially breached the agreement between the parties. Count II is barred by the three-year statute of limitations of 28 U.S.C. § 2415(b). Plaintiff is unable to demonstrate any significant relationship between its loss and defendant's false statements under Count III, its False Claims Act count. Accordingly, plaintiff's motion for summary judgment is denied, and defendant's motion for summary judgment is granted.
DATED: April 26, 1990