On September 4, 2020, the outgoing Acting Assistant Attorney General for the U.S. Department of Justice’s (“DOJ”) Civil Division issued a memorandum providing guidance and an analytical framework for the Civil Division to assess an entity’s inability to pay what would otherwise be an appropriate amount to resolve potential civil liability. The Criminal Division released its own internal guidance last year regarding inability to pay a criminal fine or monetary penalty.
Under the Civil Division’s formal memorandum, an entity’s inability to pay means that an entity lacks sufficient assets to pay the government and to meet its ordinary and necessary business and/or living expenses.
In asserting an inability to pay, an entity should expect to produce a financial disclosure form and any other related documents, such as tax returns and audited financial statements, as well as provide access to appropriate personnel. The Civil Division will also consider:
- The background on the entity’s current financial condition, including the current financial situation, what gave rise to it, and project earnings and expenses.
- An entity’s ability to borrow and whether it has booked reserves, plans for acquisition or divestment of assets, and forecasts. This factor also includes an assessment of whether the entity has insurance or indemnification agreements.
- The amount an entity could potentially pay over time, as opposed to an immediate payment. The Civil Division may agree to accept payments over time if it would enhance recovery.
- Whether the payments would be tax deductible.
- Acceleration or escalation contingency arrangements, including forecasts of a future sale of significant assets or a new product launch.
- Significant adverse collateral consequences, which would include a party’s ability to support family members or an entity’s operations and obligations, as well as amounts required by law.
- Third-party liability, which may be relevant in cases of fraudulent transfer or successor liability.
Finally, the memorandum states that Civil Division attorneys must receive the appropriate level of authority before entering into a settlement to reduce the recovery due to inability to pay.