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The Reverse-False-Claim Provision As A Tool For Collecting Judgment Debts Owed To The Federal Government

By Lorenzo Cellini, Associate

While the False Claims Act (FCA) prohibits the making of false statements to obtain money or property from the Government, one portion of the statute, commonly referred to as the “reversefalse-claim” provision of the FCA does the opposite: it renders unlawful the use of a false statement or record to avoid paying a monetary or property obligation owed to the Government. And in May 2009, this provision was amended to applyeven more broadly to anyone that “knowingly conceals or knowingly or improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” Accordingly, under the new language of the reverse FCA, a false statement to the Government is not even required to trigger liability; it is enough if a person is engaging in conduct designed to improperly avoid an obligation to pay the Government.

The new amplified reverse FCA could be a new and important tool to enable the Government to recover the vast sums of money owed in the form of civil and criminal judgment debts. Although the Government does not publish statistics on the amount of civil and criminal judgment debt it is owed, a 2005 study by the Government Accountability Office found that as of 2002 the outstanding criminal debt alone was approximately $25 billion, and had quadrupled since 1996 when the criminal debt was $6 billion. Thus, the amount of judgment debt owed to the Government is clearly enormous and growing.

Moreover, although the reverse FCA has not historically been the means through which the Government has attempted to collect judgment debt, the Government appears to be increasingly interested in entertaining these types of cases. For example, in US ex rel. Mustafa v. Najjar, Case No. 6:10-cv-414-Orl -31DAB (M.D. Fla. March 8, 2010), a case brought by Tycko & Zavareei LLP, the whistleblower was a real estate agent for a doctor who, as part of a plea agreement in an earlier case, had agreed to pay $3.3 million in criminal restitution to compensate the victims of his wrongdoing. A judgment entered in the criminal case required the doctor to pay that entire amount over six years. The doctor, however, repeatedly told the Government that he had no assets and failed to make any payments on the $3.3 million judgment. The qui tam complaint alleges that, contrary to the doctor’s representations to the Government, he in fact had substantial wealth and engaged in a conspiracy with his brother to hide his assets from the Government by purchasing vast amounts of real estate in the name of various limited liability companies.

The Defendants moved to dismiss the Complaint, arguing that because the $3.3 million was restitution ultimately to be paid out to the victims of the doctor’s fraud, it was not an obligation owed to the Government within the meaning of the reverse FCA. The Court flatly rejected this argument. Because the doctor was required to pay the restitution award to the Government, any of the alleged steps the doctor took to avoid payment were actionable under the reverse-false-claims provision of the FCA, regardless of whether the Government eventually distributed the money to third parties.

Although the Government has many weapons it can use to enforce judgment debt obligations, the reverse FCA may be particularly enticing to the Government for at least two reasons. First, many judgment debtors do not actually have resources to repay the awards entered against them. Whistleblowers, therefore, can provide an invaluable service to the Government by identifying those judgment debtors that are collectable and are simply avoiding payment, and where the debtor’s assets are located. Second, the reverse FCA provides for penalties and treble damages that can substantially increase the amount a judgment debtor is required to pay.

Given the recent expansion in the scope of the reverse FCA, the vast amount of uncollected judgment debt owed to the Government, and the Government’s evident interest in using the reverse FCA as anenforcement mechanism to collect this debt, it is likely that this is an area of qui tam law that will see more activity in the future.