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United States v. First National Bank of Circle

Citations: 732 F.2d 1444; 55 A.F.T.R.2d (RIA) 626; 1984 U.S. App. LEXIS 22663Docket: 83-3507

Court: Court of Appeals for the First Circuit; May 9, 1984; Federal Appellate Court

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The First National Bank of Circle sought over $35,000 in attorney fees under the Equal Access to Justice Act (EAJA) after prevailing against the United States in a tax-related lawsuit. The district court denied the fee request, determining the government's position was substantially justified. The Ninth Circuit Court of Appeals remanded the case for the district court to clarify its reasoning for this conclusion.

Procedurally, the Fort Belknap Indian Community established a subsidiary, Fort Belknap Builders, Inc., to construct homes under a HUD contract. The Bank loaned $350,000 to the Indian Community, with a significant portion allocated to Builders. After facing financial difficulties, Builders ceased operations in November 1971, having paid over $300,000 in wages without remitting payroll taxes.

In 1974, the government sued the Bank for liability under Section 3505(b) of the Internal Revenue Code, arguing that the Bank had actual notice of Builders' inability to pay withheld taxes. The Bank contended that Builders' officials, particularly its CEO Steve Long, intentionally neglected tax payments, while Builders claimed the Bank controlled their finances and failed to process tax payments. 

Initially, the Bank obtained summary judgment, asserting it was not a supplier of funds under the statute, but this was reversed by the Ninth Circuit. After a four-day trial in 1982, the jury ruled in favor of the Bank, and the government's subsequent motions for judgment notwithstanding the verdict or a new trial were denied. The Bank's application for attorney fees was partially granted, covering court costs and some witness fees, but the appeal focused on the denial of the full attorney fee request. The EAJA mandates that a prevailing party, other than the United States, is entitled to recover fees unless the government's position is found to be substantially justified, a fact not contested in this case.

The Bank contends that awarding attorney fees under the Equal Access to Justice Act (EAJA) does not involve judicial discretion, contradicting established precedent that such decisions are reviewed for abuse of discretion. The Bank points to the use of "shall" in Section 2412(d)(1)(A) versus "may" in Section 2412(b) to argue that the EAJA mandates fee awards without judicial discretion. However, the court clarifies that discretion lies in determining the existence of "substantial justification" or "special circumstances," which must be evaluated before fees are awarded. 

The district court determined that the Bank was not entitled to fees, concluding that the government's legal position was defensible and substantially justified. To assess whether this conclusion constituted an abuse of discretion, the appellate court requires clarity on the reasoning behind the judge's finding of substantial justification. The judge's mere conclusion, despite his familiarity with the case, lacks sufficient detail on how the government's position was justified. 

The standard for substantial justification is one of reasonableness, where the government must demonstrate that its case had a reasonable basis in law and fact. The government’s loss does not automatically imply a lack of substantial justification, nor does it need to show a substantial likelihood of success. However, previous reversals of summary judgment do not inherently indicate that the government’s position was justified. The court seeks further clarification on the basis for the judge's determination of reasonableness, especially in light of claims made during this appeal, including the Bank's assertion that the government's position relied on self-serving testimony from a Builders officer, which they argue is insufficient justification.

Builders had alternative funding sources independent of the Bank, but this does not absolve the Bank's liability, as it could have knowingly advanced wages while withholding taxes. Evidence indicates those alternative funds were insufficient for payroll taxes, and the Bank's own officer acknowledged the limited income from non-HUD sources. Additionally, while the Bank criticizes the government for not fully investigating its claims, evidence shows an investigator met with the Bank's attorney, and any lack of communication with the Bank's president is not detrimental to the government's case. Testimonies from Long and Carmelita Thompson, key government witnesses, align with the assertion of the Bank's substantial control over Builders' finances.

The district judge may have found the government's position reasonable and potentially justified, but the reviewing court requires clarity on the judge's rationale for denying attorney fees under the Equal Access to Justice Act (EAJA). The judge may have evaluated the behavior of both parties, including any delays caused by the Bank's counsel.

Regarding the EAJA's effective date, the government contends that it is not liable for attorney fees incurred before the Act's implementation. However, prior rulings indicate that fees from cases pending on October 1, 1981, are recoverable. The Bank also seeks fees under the Allen Amendment for expenses incurred prior to this date. The Allen Amendment allowed courts discretion to award fees in civil rights cases but was repealed for tax actions when the EAJA took effect. To qualify for fees under the Allen Amendment, a prevailing taxpayer must demonstrate some level of vexatiousness, frivolousness, or bad faith.

The Equal Access to Justice Act (EAJA) establishes a more lenient standard for attorney fees compared to the Allen Amendment. If the government’s position is found to be substantially justified upon remand, bad faith or vexatiousness may not be established. Conversely, if it is not substantially justified, the Bank is entitled to attorney fees under the EAJA, rendering the Allen Amendment irrelevant. The judgment has been vacated and remanded to the district court for further proceedings consistent with this opinion.

Concurring Circuit Judge Norris raises three points: 

1. He believes the majority's commentary on the Bank's challenge to the district court's substantial justification determination is inappropriate since such arguments are not before the court at this stage.
  
2. He expresses concern regarding the majority’s discussion of factors for determining the "special circumstances" exception under EAJA. Specifically, he argues that the behavior of government attorneys should not influence whether extraordinary circumstances exist that would preclude the awarding of attorney fees. The proposed standards for evaluating counsel's conduct are deemed overly vague and subjective, lacking clear guidance.

3. Norris identifies a potential error in Ninth Circuit law regarding the application of the abuse of discretion standard for attorneys' fees under EAJA. He notes that the precedent established in Foster v. Tourtellotte may not have been critically analyzed and relies on prior cases, such as Kerr v. Screen Extras Guild, which dealt with discretionary awards in contexts where such discretion was explicitly permitted. He emphasizes that attorney fee awards are not mandatory and should be granted only if deemed appropriate by the district court.

Section 204(d)(1)(A) of the EAJA mandates that a court must award fees and expenses to a prevailing party other than the United States in civil actions involving the government, unless the court finds the government's position was substantially justified or special circumstances render the award unjust. The term "shall" indicates a requirement rather than a discretion, implying that attorneys' fees must be awarded when the conditions are satisfied. The majority's view suggests discretion arises from the terms "substantially justified" and "special circumstances," which are legal standards akin to established terms such as "exigent circumstances" and "probable cause." These standards do not allow for judicial discretion; a government's position is either justified or it is not.

The case of Kerr v. Screen Extras Guild, Inc. does not provide guidance for reviewing decisions under section 204(d)(1)(A). Additionally, the Fifth Circuit's decision in Knights of the Ku Klux Klan Realm of Louisiana v. East Baton Rouge Parish School Board, which applies an abuse of discretion standard, does so without thorough analysis and relies on a misinterpretation of the EAJA’s legislative history. The referenced House Conference Report section pertains to agency fee awards, not to the review standard for section 204(d)(1)(A). Consequently, both the Fifth Circuit decision and Foster's reliance on it lack validity, leading to the conclusion that existing appellate opinions do not offer reliable guidance on the appropriate standard of review for these cases.

The case Knights of Ku Klux Klan v. East Baton Rouge Parish School Bd. established that the Fifth Circuit's role in reviewing attorney fee awards under the EAJA is to determine whether there has been an abuse of discretion in either awarding or denying fees. However, the issue of the appropriate standard of review was not thoroughly addressed or essential to the decision. In contrast, the Ninth Circuit's recent cases, particularly Foster v. Tourtellotte, acknowledged the abuse of discretion standard for denying attorney fees but did so without critical examination of the supporting authorities. The conclusion drawn is that Foster’s reliance on these authorities is flawed and warrants reassessment. 

The appropriate standards of review under section 204(d)(1)(A) of the EAJA are suggested: factual determinations should follow a "clearly erroneous" standard, legal determinations should be reviewed de novo, and mixed questions should be analyzed in line with United States v. McConney. This distinction is supported by the legislative intent observed in the wording of the EAJA, particularly in section 204(a). Additionally, discrepancies exist within the legislative history, as highlighted by the Fifth Circuit's reliance on conflicting passages. The D.C. Circuit's interpretation of the abuse of discretion standard is noted, where it suggests a more deferential approach, but this interpretation differs from the approach taken in the Ninth Circuit.