Chapter 7 Bankruptcy and the False Claims Act

posted on:
March 16, 2016

author:
Andrew Brashier

In 1838, Justice McKinley, speaking for the Court, wrote, “All debtors to the United States, whatever their character, and by whatever mode bound, may be fairly included within the language used in the fifth section of the act of congress. And it is manifest, that congress intended to give priority of payment to the United States over all other creditors, in the cases stated therein. It therefore lies upon those who claim exemption from the operation of the statute, to show that they are not within its provisions.” These words embody the purpose of the priority statute, which gives the government priority when recovering debts from a debtor.

The False Claims Act (FCA) has been an invaluable tool in recovering tax money that has been stolen from the tax pool due to people defrauding the government. In fact, fiscal year 2015 (FY2015) was the fourth year running where the Department of Justice (DOJ) recovered more than $3.5 billion under the FCA. FY2015 brings the total amount recovered, since January 2009, to $26.4 billion.

Each case brought under the FCA has the potential to replenish millions of dollars to the tax pool, but what happens if the person defrauding the government declares bankruptcy?

If the government has a claim against a person, that claim has priority as long as the person has not declared Chapter 11 bankruptcy. The priority statute states “A claim of the United States Government shall be paid first when…(A) a person indebted to the Government is insolvent and…(iii) an act of bankruptcy is committed.” Though section 3713 exempts a Chapter 11 (reorganization) bankruptcy from this priority payment scheme, it does not exempt a Chapter 7 (liquidation) bankruptcy. Therefore, the government will be first in line to recover and replenish our tax dollars if the debtor files Chapter 7 bankruptcy.

Typically, all pending cases are subject to an automatic stay when a relator or defendant in a FCA case declares bankruptcy. However, there are specific exceptions to the automatic stay as it relates to the government:

[U]nder paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, opened for signature on January 13, 1993, to enforce such governmental unit’s or organization’s police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s or organization’s police or regulatory power.

11 U.S.C.A. § 362(b)(4) (West). Therefore, there are two elements that must be met for the action to be exempt from the automatic stay. The action or proceeding must be (1) a continuation by a governmental unit (2) enforcing its police and regulatory powers.

Anyone considering blowing the whistle and potentially filing bankruptcy should contact a whistleblower attorney immediately before taking any action. Filing bankruptcy will have implications affecting the whistleblower case and the management of filing either case must be handled by those knowledgeable about the implications a bankruptcy will have on a whistleblower action.

If you aware of fraud being committed against the federal government or a state government then the FCA can protect and reward you for doing the right thing by reporting the fraud. If you have any questions about whether you qualify as a whistleblower, please contact an attorney at Beasley Allen for a free and confidential evaluation of your claim. There is a contact form on this website, or you may email one of the lawyers on our whistleblower litigation team: Archie Grubb, Larry Golston, Lance Gould or Andrew Brashier.

Sources:
Beaston v. Farmers’ Bank, 37 U.S. 102, 134 (1838)
31 U.S.C.A. § 3713(a)(2) (West)
Department of Justice: Justice News

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