United States v. First National Bank of Circle , 732 F.2d 1444 ( 1984 )

EUGENE A. WRIGHT, Circuit Judge:

The First National Bank of Circle sought over $35,000 in attorney fees under the Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412(d)(1)(A) (Supp. IV 1980). The district court denied the award because it found the government’s position substantially justified. We remand to the district court to specify its basis for finding substantial justification.

PROCEDURAL BACKGROUND

In February 1970, the Fort Belknap Indian Community created a subsidiary corporation, Fort Belknap Builders, Inc. (Builders), to build 50 houses for tribal members under a Department of Housing and Urban Development (HUD) contract. The Bank and its affiliates loaned $350,000 to the Indian Community, of which at least $200,-000 went to Builders for operating capital. This and subsequent loans were secured by proceeds from the HUD contract.

As early as the summer of 1970, Builders experienced financial difficulties. The Bank supplied additional loans and honored overdrafts, amounting to some $600,000. Builders ceased operations in November 1971.

Through its account at the Bank, Builders had paid over $300,000 in wages. In its last five quarters, Builders paid no payroll taxes on these wages.

In July 1974, the government sued the Bank under § 3505(b) of the Internal Revenue Code, 26 U.S.C. § 3505(b) (1976). This imposes liability for federal withholding taxes upon lenders who supply funds for paying wages “with actual notice or knowledge ... that [the] employer does not intend to or will not be able to make timely payment or deposit” of withheld income and FICA taxes. Id.

The extent to which the Bank was involved with Builders’ operations is unclear. The Bank claims that Builders officials, including its chief executive officer, Steve Long, intentionally avoided paying the taxes. It says that checks were made out but not sent, checks were sent to the I.R.S. when there were no funds to cover them, and tax returns were prepared but not mailed. According to the Bank, Long assumed that the government would not sue an Indian corporation.

Builders officials contend that Bank officials controlled Builders' finances, including payments to creditors and the I.R.S. They argue that the Bank simply did not process or honor checks for taxes. The Bank officers denied such knowledge and control.

In 1976, the Bank won summary judgment on the ground that its loans to Builders were working capital loans. We reversed and remanded. 556 F.2d 589 (9th Cir.1977).

On the first day of trial in April 1978, Judge Battin again granted summary judgment for the Bank because it had not been a supplier of funds under the statute. He held that it was only an agent for affiliates that had supplied funds, and its temporary honoring of overdrafts did not constitute supplying funds. Again we reversed and remanded, and set out factual issues to be resolved at trial. 652 F.2d 882, 887-89 (9th Cir.1981).

After a four-day trial in 1982, the jury found for the Bank. The government’s motions for judgment n.o.v. or new trial were denied.

The Bank applied for an award of costs and attorney fees totalling $35,982.57. The clerk allowed only court costs and some witness fees totalling $2444.14. The court approved the award and the Bank appeals.

ANALYSIS

The EAJA provides that “a court shall award to a prevailing party other than the United States fees and other expenses ... incurred by that party in any civil action ... against the United States ... unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.” 28 U.S.C. § 2412(d)(1)(A) (Supp. IV 1980). It is not disputed that the Bank prevailed in this case.

I. Discretion Under the EAJA

The Bank argues that the decision whether to award attorney fees under the EAJA does not involve judicial "discretion. This flies in the face of well-established precedent. We have held that the district court’s decision on fees will be reversed only for abuse of discretion. See, e.g., Rawlings v. Heckler, 725 F.2d 1192 at 1193, 1194 (9th Cir.1984); Southern Oregon Citizens Against Toxic Sprays, Inc. v. Clark, 720 F.2d 1475, 1481 (9th Cir.1983); United States v. 101.80 Acres of Land, More or Less, in Idaho County, Idaho, 716 F.2d 714, 728 (9th Cir.1983); Hoang Ha v. Schweiker, 707 F.2d 1104, 1105 (9th Cir.1983); Foster v. Tourtellotte, 704 F.2d 1109, 1110 (9th Cir.1983).

The Bank argues that use of the word “shall” in § 2412(d)(1)(A), as contrasted with use of the word “may” in § 2412(b) (allowing fee awards against the United States to the same extent that any other party would be liable under the common law), indicates that § 2412(d)(1)(A) does not call for judicial discretion. It is the government’s burden, says the Bank, to establish the “defenses” of substantial justification or special circumstances, leaving no room for discretion by the court.

This argument misplaces the source of judicial discretion. The court exercises discretion in determining whether “substantial justification” or “special circumstances” exist. If not, it “shall” award fees.

The Bank correctly argues that the “shall ... unless” language creates a presumption of a fee award. It does not, however, detract from the court’s duty to use discretion in evaluating the criteria in the clause following “unless.”

II. Substantial Justification and Special Circumstances

The district court held that the Bank was not entitled to fees “on the basis that the legal position of [the United States] was defensible, asserted in good faith, and substantially justified within the meaning of the law.”

This conclusion invokes the substantial justification exception to the Act’s provision for attorney fees. To determine whether the conclusion was an abuse of discretion, this court needs to know the basis for finding the exception.

The district judge’s finding shows only his conclusion. That he had almost ten years of familiarity with the case does not tell how the government’s position was substantially justified. The judge must show us that he has considered the several factors relevant to his conclusion.

The test for substantial justification is one of reasonableness. The government has the burden to show “that its case had a reasonable basis both in law and in fact.” Southern Oregon Citizens, 720 F.2d at 1481; Hoang Ha, 707 F.2d at 1106; H.Rep. No. 96-1418, 96th Cong., 2d Sess. 10-11 (1980), reprinted in 1980 U.S.Code Cong. & Ad.News 4953, 4984, 4989.

That the government lost does not raise a presumption that its position was not substantially justified. Foster v. Tourtellotte, 704 F.2d at 1112. It need not even show that it had a substantial likelihood of prevailing. 1980 U.S.Cong. & Ad. News at 4990. On the other hand, that this court twice reversed adverse summary judgment rulings because genuine issues of material fact existed does not compel a conclusion that the government’s case was substantially justified.

In light of the several proceedings below, both before and after appellate review, we need to know on what basis the judge concluded that the government and its counsel acted reasonably. The parties have now aided the trial judge by stating a number of substantive claims and responses in this appeal.

Specifically, the Bank claims that the government’s position was not substantially justified because it was based entirely on the self-serving testimony of Builders officer Long, who escaped personal liability under 26 U.S.C. § 6672 by asserting that the Bank controlled Builders’ funds and prevented Long from paying the taxes. This is inadequate, the Bank argues, for several reasons.

First, Builders had other sources of funds unrelated to the Bank. Even if this is true, it does not necessarily affect the Bank’s liability. The Bank could have advanced funds for wages with knowledge that withholding taxes could not or would not be paid from these other sources. There is no evidence that these other funds were available for payroll taxes. Bank officer Jacobson conceded that Builders’ income from sources other than the HUD contract assigned to the Bank was insignificant. In any event, the existence of any outside funds does not undermine the reasonableness of the government’s position, which was based on evidence of the Bank’s involvement.

Second, the Bank faults the government for accepting Long’s statements without investigating the Bank’s explanation. Government evidence shows, however, that an investigator did visit the Bank and meet with its attorney. Any failure to speak with Bank president Towe does not diminish the reasonableness of the government’s case because the result would have been a contrast of Long’s word against Towe’s. Indeed, contradictions in their testimony could indicate some reasonableness in pursuing the matter.

Third, the Bank says that Long and Carmelita Thompson, the government’s chief witnesses, gave unsupportive testimony that made it unreasonable for the government to press its ease. Their testimony, however, is consistent with the government’s position that the Bank had substantial control of Builders’ financial activities.

In sum, the government may have acted reasonably, and the district judge may have been correct in concluding that the government’s position was substantially justified. However, we can review his exercise of discretion only by evaluating what he considered, not what the parties tell us.

In addition to invoking the substantial justification exception, the trial judge may have considered the special circumstances exception in his reference to the government’s good faith. As with substantial justification, we need to know the basis for any finding of special circumstances.

Here, the trial court may have considered, for example, whether counsel’s attitude and approach to the issues were inappropriate, and whether counsel for the bank unnecessarily protracted the proceedings by unwarranted discovery or other unprofessional delay, as well as whether government counsel’s attitude was helpful to the court.

Without implying that we disagree with the judge’s conclusion, we remand this case for him to articulate his reasons for denying attorney fees under the EAJA. See Wolverton v. Heckler, 726 F.2d 580 at 583 (9th Cir.1984) (remanded for substantial justification findings).

III. Effective Date of EAJA

The government argues that, even if its position was not substantially justified, it would not have to pay attorney fees incurred before the effective date of the Act. We recently rejected this argument in Rawlings v. Heckler, 725 F.2d 1192 (9th Cir.1984). “[T]he plain meaning of the statute allows for recovery of fees incurred prior to October 1, 1981, as long as the action was pending on that date. Had Congress intended no reimbursement for fees incurred prior to October 1, 1981, it could easily have so stated.” Id. at 1194.

IV. Fees Under the Allen Amendment

The Bank claims that, regardless of whether it is entitled to fees under the EAJA, it deserves an award under the Allen Amendment for fees incurred prior to October 1, 1981.

The Civil Rights Attorneys Fees Act of 1976, called the Allen Amendment by these parties, gave courts the discretion to award fees to prevailing parties other than the United States in civil actions by the government under civil rights laws and the Internal Revenue Code. 42 U.S.C. § 1988 (1976). The portion of the Allen Amendment that referred to tax actions was repealed when the EAJA took effect on October 1, 1981. Pub.L. No. 96-481, § 205(c), 94 Stat. 2321 (1980).

The prevailing taxpayer must establish some degree of vexatiousness, frivolousness, or bad faith to win fees under the Allen Amendment. See, e.g., Klotz v. United States, 602 F.2d 920, 924 (9th Cir.1979).

The EAJA provides a more liberal standard for attorney fees than does the Allen Amendment. If the position of the government is shown to be substantially justified on remand, we may not find bad faith or vexatiousness. Foster v. Tourtellotte, 704 F.2d at 1111. If the position was not substantially justified, the Bank is entitled to fees under the EAJA and the Allen Amendment has no relevance.

CONCLUSION

The judgment is vacated and remanded to the district court for proceedings consistent with this opinion. Further proceedings before this court will be referred to this panel.