No matter your industry or line of business, insolvency is not a pleasant process. Debts stack up, paperwork starts flying back and forth, and creditors circle their wagons. But it may surprise even a seasoned corporate attorney when one debtor in particular comes calling: The federal government.
The law that makes it possible — and pushes Uncle Sam to the front of the creditor line — is the Federal Priority Act. The statute dates back centuries, but is little-known among today’s practitioners. And that’s not a good thing.
Since 2011, the government has used the FPA to recover significant sums from all types of insolvent businesses and individuals — manufacturers, insurance companies, shareholders of a tech company, government contractors, even an individual attorney. In many cases, the FPA allows personal liability to attach to the debtor’s representatives, including corporate officers and directors.
In a recent article for The Federal Lawyer, the magazine of the Federal Bar Association, “Addressing the language and scope of the Federal Priority Act,” I write in depth about the FPA, the types of cases where FPA claims crop up, successful defenses against the Act, and the surprisingly expansive breadth the law has enjoyed before federal and appellate courts.
Below are some relevant excerpts from the article that explain when the FPA applies and what constitutes a claim.
- Different government agencies have invoked the FPA fairly actively in recent years. Since the end of 2011, the Act has been cited in approximately 15 cases. Of these cases, the most common circumstances involved claims against insolvent government debtors arising from unpaid estate taxes. About 60 percent of FPA cases filed since 2011 involved taxes. Clearly, tax delinquency is the most active area in which the government currently pursues claims under the FPA.
- The common facts tended to involve an executor of an estate who distributed an estate’s funds before paying debts owed to the federal government, and consequently left the estate with insufficient funds to fully discharge its debt to the federal government.
- In practice, it is very difficult to put forward a precise definition of a “claim” within the meaning of the FPA, because courts have employed a very expansive definition of what a “claim” can be. However, it appears that as long as a debt to the federal government existed when the act of bankruptcy was committed, the government can pursue a claim under the FPA.
- As early as the 1926 case Bramwell v. U.S. Fid. & Guar. Co., the Supreme Court has instructed lower courts to give the FPA “a liberal construction.” In that decision, the court declared that “all debtors to the United States, whatever their character, and by whatever mode bound, may be fairly included” within the statute. Therefore, a “claim” is interpreted expansively, and courts have applied the priority statue to claims of all types.
- Courts have also held that the government had a “claim” within the meaning of the FPA even though its cause of action for recovery was barred by the statute of limitations . In another case, a defendant’s tax liabilities were subject to the government’s claim of priority even though they were contested and had not been formally assessed.
- In short, because the Act has been consistently interpreted expansively, it is difficult to delineate a “threshold” for when a claim may arise. Nonetheless, it may be that as long as a debt existed when the act of bankruptcy was committed, the government may have a claim of priority, regardless of whether the amount of the debt was precisely determined.