July 29, 2011 / 10:37 PM / 8 years ago

If U.S. defaults, lawsuits await

NEW YORK (Reuters) - If the United States stops paying its bills, who can sue?

Potentially, at least, it’s a staggering answer: In all, the U.S. government cuts about 100 million checks a month, including to Medicare and Social Security recipients, bondholders, and government contractors. Anyone whose check from the government was not paid on time could try to file a lawsuit, and legal experts say it is not unimaginable that aggrieved parties would be tempted to turn in substantial numbers to the courts if their situation gets dire enough.

The government has not yet provided details on who would get paid and who wouldn’t if the debt limit is not raised by next week.

Should recipients of federal entitlements including the Social Security and Medicare programs for seniors stop receiving their payments, they would likely have to go through an administrative procedure before getting into court. If those challenges did get into the federal courts, judges might be reluctant to question how the available federal funds were distributed.

“It would be hard for courts to have any standards in which they could contest the president’s allocation,” said Charles Rothfeld, a Supreme Court litigator in the Washington office of law firm Mayer Brown.

The American Association for Retired Persons declined to say whether the group would consider legal action in the event that entitlement checks stop flowing. “We expect Social Security checks will not be jeopardized,” AARP spokeswoman Mary Liz Burns said. “We’re focused on what could happen right now.”

SUING THE SOVEREIGN

Potential plaintiffs looking to sue the United States would also have to overcome one of the most potent weapons in the government’s legal arsenal: the doctrine of sovereign immunity, which protects the government from liability except when it has specifically waived immunity or consented to a suit.

Nevertheless, some creative legal thinkers are already devising theories about how lawsuits against a U.S. government in default could proceed. They are citing the same, once-obscure 14th Amendment constitutional provision that many have urged President Barack Obama to invoke in order to raise the debt ceiling on his own.

Under Section 4 of the 14th Amendment, which holds that the “validity” of government debt “shall not be questioned,” the federal government could be obligated to pay at least bondholders and government contractors, Cornell University constitutional law professor Michael Dorf said. Under that theory, bondholders and contractors could seek standing in court by citing the 14th Amendment.

But Dorf said that would be a very difficult case to make, because under sovereign immunity individuals are generally prevented from suing the federal government to recoup money, as opposed to challenging government conduct.

“These are all questions we haven’t had to consider because it’s never happened before,” Dorf said.

BREACH OF CONTRACT

One group bracing for an interruption in payment is government contractors. But they are unlikely to bring lawsuits immediately, experts in government contracting said, even though they are operating under a contract.

That is because unlike typical contracts between private parties, government contracts, whether for fighter jets or delivering office supplies, contain clauses that give one side — the government — an inordinate amount of leverage. “When you sign up for a government contract, you have a duty to perform. And that’s without regard to if the government is paying you,” said Angela Styles, co-head of Crowell & Moring’s government contracts practice.

Another factor mitigating against litigation is that contractors know they will eventually get compensated, likely with interest. Of course, that assumes the debt crisis will be solved sooner rather than later.

“You have the problem you have with any debtor who can’t pay his bills,” said Dorf “You can get a judgment, but if the debtor doesn’t have the money, it doesn’t help.”

Editing by Eileen Daspin and Eric Effron

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