How Much Money Do You Have? DOJ Releases New Guidance on Settling Civil Cases Based on an Ability to Pay

Last month, the Department of Justice released new guidance for assessing a company’s claim that it is unable to pay the amount of money demanded by the DOJ to settle a civil lawsuit.   When the DOJ brings a lawsuit seeking damages or penalties from an entity, while the entity may be interested in settling, it may seek to claim that it does not have sufficient funds to satisfy the amount demanded by the government.  This is particularly prevalent in False Claims Act cases where the government’s demand – up to treble damages plus up to $23,331 per false claim allegedly submitted – can be astronomical and draconian.   The recent memo released by the DOJ “provides guidance and an analytical framework for the [DOJ] to assess an assertion of inability to pay an otherwise appropriate amount to resolve potential civil liability.”  This guidance sheds some light on a process that has been frustrating for civil defendants because of a lack of information as to how the government determines the amount that they can pay.

Ability to Pay Process

Most lawsuits – whether brought by the government or between private parties – settle rather than proceeding to trial.  Litigants settle cases for a variety of reasons that may have nothing to do with the merits (or lack thereof) of the case.  Perhaps the risks at trial are too great; perhaps the legal fees to fully fight the case are higher than the potential exposure; perhaps the lawsuit is an unnecessary distraction for the company and its officers and employees.  Whatever the reason, while the company may be interested in pursuing settlement without any admission of liability, there are instances when it simply cannot afford to pay what the government is seeking and still remain in business.  The government has the ability to settle for less than its demand in such cases.

With the ability to pay process, the company bears the burden of establishing its inability to pay and explaining why paying a higher amount would constitute an undue financial hardship.  It does this by completing a Financial Disclosure Form and providing all requested information, which can include tax returns, audited financial statements and forward looking financial projections.   In some instances, the DOJ also may request to speak with company personnel, such as the Chief Financial Officer.  The DOJ employs financial analysts to review the materials and determine the amount it believes the company can pay and still remain a viable business.  Sometimes, the government demands a single lump sum payment, and sometimes it will agree to an amount spread over a period of years, which can be based on the projected financial performance of the company.   After the DOJ determines what it believes is the appropriate ability to pay amount there can still be some further negotiations.  But the process is often opaque with the defendant company at times questioning the DOJ’s analysis.

If a settlement is reached based on an ability to pay amount, some U.S. Attorney’s Offices have demanded additional security for the payment of the settlement amount.  There is a lack of uniformity across U.S. Attorney’s Offices, with some requiring additional security, while others do not. Some U.S. Attorney’s Offices claim that settlements based on an ability to pay that are to be paid over time require either an irrevocable letter of credit or a consent judgment by the defendant to secure payment.   And in these instances, some DOJ employees claim that the amount of the letter of credit or consent judgment should be for the entire disputed amount and not simply the amount of the settlement. However, there is nothing in the Justice Manual, which contains publicly available DOJ policies and procedures, requiring this.  In fact, the Justice Manual merely says: “If a compromise with a going business concern necessitates the acceptance of payments over a period of time, the United States Attorney should obtain adequate security for deferred payments,”¹   and “If the settlement is to be paid in installments, judgment may be entered, with the defendant’s permission, as security for the deferred installments.”²

New DOJ Guidance

In light of the increased use of the ability to pay process and questions about how the DOJ determines the amount, the recently released guidance is helpful in understanding the factors the DOJ considers when assessing ability to pay.  The new guidance specifically discussed the following non-exclusive factors to be considered:

Background on Current Financial Conditions

This includes an analysis of factors that gave rise to the entity’s current financial condition and projected earnings and expenses.  The government will also specifically assess whether the company engaged in related party transactions, removed significant capital (such as through dividends, distributions or loans), invested in capital improvements, or reduced discretionary expenses (such as decreasing executive bonuses).

Alternative Sources of Capital

The DOJ will assess whether the entity can borrow additional funds to pay the settlement.  This includes possibly mortgaging property, selling assets, or entering new credit facilities. The government also assesses whether the company has viable insurance or indemnification claims.

Timing of Payments

While the government prefers immediate payment, it will consider whether payment over time would enhance recovery and is administratively feasible.  Payments over time include interest and provisions to protect the government’s recovery in the case of bankruptcy.  And, “the entity typically will need to provide appropriate security.  In some cases, a solvent entity may provide guarantees from a third party.”  Notably, the government does not require collateral if there is payment over time, but simply says it is “typical” to include it, without specifically delineating the amount or type of security.

Tax Deductibility

If the settlement amount is tax deductible, the government considers such savings in assessing how much the entity can pay.

Contingency Arrangements

In certain instances, the government considers an acceleration or escalation of payments.  This could be included if the company anticipates, for example, a future sale of significant assets, a new product launch or other growth opportunity.

Collateral Consequences

The government will consider significant adverse consequences of a payment that exceeds an entity’s financial capacity.  This could include disproportionate impacts on a company’s operations and obligations and the company’s ability to maintain the amount of capital, maintenance or equipment required by law.  It generally does not include adverse impacts on growth, future opportunities, future dividends, future bonuses, or future hiring.

Third Party Liability

The government may consider whether additional entities or people may be liable for the debt as a result of a fraudulent transfer or successor liability, for example.

What the New Guidance Means for Companies Seeking to Settle FCA (and Other Civil) Cases

Settlements are the result of negotiation, particularly so when a company is not admitting to liability.  But in some cases, the government’s calculation of damages far exceeds what the company can pay.  In these instances, it is appropriate to consider what the company can actually afford to pay and still remain viable.  While the government should receive payment for the alleged wrongs, it also realizes that bankrupting the company and putting employees out of work is generally not desirable.

The recently issued DOJ guidance provides some additional visibility into the ability to pay process.  Understanding the specific factors the government considers helps companies, which bear the burden of showing that the amount demanded by the government would result in undue financial hardship, assess what they could realistically pay in settlement.  There are still issues with the ability to pay process as it generally involves financial analysts that may not be well-versed in a company’s particular industry determining what that company could pay in the future without a sufficient appreciation for business considerations of the company and industry.  That said, the guidance is helpful in allowing companies to assess whether and how to make an inability to pay argument when trying to settle a civil suit brought by the government.

[1]  Justice Manual section 4-3.210 – Compromising Claims Against a Going Business Concern

[2]  Justice Manual section 4-3.412 – Dismissal Where Suit Has Been Filed