On September 4, 2020, Acting Assistant Attorney General Ethan Davis issued guidance to the U.S. Department of Justice’s Civil Division on evaluating inability-to-pay claims. The memorandum, titled “Assessing an Entity’s Assertion of an Inability to Pay,” sets forth an analytical framework for evaluating an individual or company’s claim that it cannot pay a civil fine or monetary penalty because it lacks sufficient assets. This framework would apply to civil claims under the False Claims Act.
The recent guidance reinforces the Civil Division’s long-standing practice of taking under consideration an entity’s assertion that it is unable to both “pay the government and meet its ordinary and necessary business and/or living expenses.” In making an inability-to-pay argument, entities must complete the Division’s certified Financial Disclosure Form, which identifies assets and liabilities, current and anticipated income and expenses, cash flow, projections, working capital, and other relevant information. Entities must also cooperate in providing access to appropriate personnel and documentation responsive to DOJ’s inquiries, including tax returns and audited financial statements.
In addition to these financial disclosures, the memorandum outlines a range of factors that the Civil Division will consider in assessing an entity’s inability to pay, including:
- Background on current financial condition: The Division will consider what gave rise to an entity’s current financial condition, as well as projected financial earnings and expenses. The Division will consider whether the entity, g.: (1) engaged in related party transactions; (2) removed capital in the form of dividends, distributions, or loans, or invested in facilities expansion, capital improvements, or acquisitions; and/or (3) may reduce discretionary expenses, such as executive bonuses.
- Alternative sources of capital: The Division will consider “an entity’s ability to borrow funds (g., by obtaining a mortgage on real property), or to raise capital (e.g., through existing or new credit facilities or via a sale of assets or equity).” The Division will also consider “whether an entity has any claim under an insurance or indemnification agreement, or has any other type of enforceable monetary claim against a third party.”
- Timing of payments: The Division will consider “the amount that an entity can afford to pay immediately and over time, typically for a period not to exceed three to five years.”
- Tax deductibility of any monetary payments
- Acceleration or escalation contingency arrangements: The Division will consider, g., “forecasts of a future sale of significant assets, a new product launch or contract, other new earnings, or growth opportunity.”
- Collateral consequences: The Division will consider “any significant adverse collateral consequences of a monetary resolution that exceeds an entity’s financial capacity,” including potential disproportionate impacts on an entity’s operations and obligations and its “ability to maintain the amount of capital, maintenance, or equipment required by law or regulation.” Collateral consequences that generally are not considered relevant include “adverse impacts on growth, future opportunities, planned or future product lines, future dividends, unvested or future executive compensation or bonuses, and planned or future hiring or retention.”
- Third party liability: In certain cases, the Division will consider whether additional entities “may be liable for the debt as a result of a fraudulent transfer, successor liability, or the Federal Priority Statute.”
Overall, the memorandum better prepares companies in formulating and propounding inability-to-pay arguments by delineating the criteria used to assess such arguments. The memorandum emphasizes that the entity bears the burden of establishing its inability to pay, including by making detailed financial disclosures and “providing all information requested by the Division.” In light of these requirements, companies should carefully consider whether to advance inability-to-pay arguments in order to minimize exposure during settlement negotiations in False Claims Act matters.
A copy of DOJ’s memorandum can be found here.