U.S. Government Intervenes In False Claims Lawsuit Against Pinnacle Bank
The United States Attorney’s Office has intervened in a lawsuit against Pinnacle Bank (Pinnacle) in the U.S. District Court for the District of Wyoming according to U.S. Attorney Christopher A. Crofts. The whistleblower lawsuit was originally filed in May 2012 by Hospitality Management, Inc., under the qui tam provisions of the False Claims Act, which permits private parties to sue on behalf of the United States when they believe that someone has submitted false claims for government funds. The complaint alleges that Pinnacle made false statements to the United States Small Business Administration (SBA) regarding a loan under the SBA’s “504 Loan Program.”
Background of the 504 Loan Program
The 504 Loan Program is designed to provide small businesses with long-term financing to cover a portion of the cost to acquire major fixed assets. The loans are funded by the sale of debentures guaranteed by the United States. Financing of 504 Loan Program projects typically consists of (1) a contribution from the borrower covering approximately 10 percent of the project costs; (2) a loan obtained from a Certified Development Company and assigned to the SBA, covering approximately 40 percent of the project costs and certain administrative costs, collateralized by a second lien on the project property; and (3) a loan secured from a private sector lender covering the remainder of the project costs (approximately 50 percent) and collateralized by a first lien on the project property. If a borrower defaults on a 504 loan, the United States must expend taxpayer dollars to repurchase the debenture used to fund the loan pursuant to the guarantee, effectively buying the bad debt. Because of this risk, the 504 Loan Program requires that participating banks must make certain certifications to the SBA regarding the financial condition of the borrower before the government will approve the loan and guarantee the debenture.
Specifics of the Lawsuit
According to the complaint, Pinnacle Bank, which had provided the Columbine Group, LLC, (developer of the hotel) with an interim construction loan for the AmericInn Lodge and Suites located in Laramie, Wyoming, falsely certified to the SBA that at the time of closing on permanent financing for the project: (1) it had no knowledge of any un-remedied substantial adverse change in Columbine’s financial condition since the date of the application for the SBA loan, (2) Columbine was current on its payments to Pinnacle and not otherwise in default of the loan, and (3) Pinnacle had disclosed to the SBA all material information know to it. Columbine later defaulted on its loans and the United States was required to repurchase the debenture pursuant to its guarantee.
The False Claims Act permits the government to recover three times its damages plus civil penalties. The private plaintiffs who bring these claims are entitled to receive a share of any funds recovered through the lawsuit. The government has asked the court for 30 days to file its own complaint stating the United States’ allegations.