Dunn & Black, P.S. v. U.S.

Decision Date11 July 2007
Docket NumberNo. 05-35766.,05-35766.
PartiesDUNN & BLACK, P.S., Plaintiff-Appellant, and Fidelity Deposit Company of Maryland, a Maryland corporation; American Guaranty & Liability Insurance Company, a New York corporation, Intervenors, v. UNITED STATES of America, Defendant-Appellee, and Environmental Reclamation Inc., an Idaho corporation, Defendant.
CourtU.S. Court of Appeals — Ninth Circuit

Michael R. Tucker, Dunn & Black, P.S., Spokane, WA, argued the cause for the plaintiff-appellant and filed a brief; Richard D. Campbell, Robert A. Dunn, and Ryan D. Yahne, Dunn & Black, P.S., Spokane, WA, were on the briefs.

Curtis C. Pett, Tax Division, U.S. Department of Justice, Washington, DC, argued the cause for the defendant-appellee, and filed briefs; James A. McDevitt, U.S. Attorney, Eileen J. O'Connor, Assistant Attorney General, and Thomas J. Clark, Tax Division, U.S. Department of Justice, were on the briefs.

Appeal from the United States District Court for the Eastern District of Washington; Lonny R. Suko, District Judge, Presiding. D.C. No. CV-04-00229-LRS.

Before: DIARMUID F. O'SCANNLAIN, A. WALLACE TASHIMA, and MARSHA S. BERZON, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

We must decide whether a law firm can bring an action against the United States to recover attorney's fees from monies that its client was awarded as a result of a settlement with the Federal Highway Administration, but never received because the Internal Revenue Service requested that payment be withheld to offset unpaid tax liabilities.

I

The United States, through the Western Federal Lands Highway Division of the Federal Highway Administration ("FHWA"), contracted with Environmental Reclamation, Inc. ("ERI") to work on the Warren Profile Gap Road Project ("Project") in south central Idaho. After the government terminated the contract for default, ERI engaged the law firm Dunn & Black, P.S. ("Dunn & Black") to file an action in the Court of Federal Claims to recover $1,724,296 in damages for wrongful termination of the contract. The government asserted a counterclaim for reprocurement costs in the amount of $948,168.82.

Until November 20, 2002, Dunn & Black represented ERI at an hourly rate on matters concerning the Project. At that time, ERI owed Dunn & Black $137,682.33 for legal services rendered on the Project and other legal matters. On November 20, Dunn & Black renegotiated its hourly fee agreement with ERI, changing it to a contingency fee arrangement, which provided that Dunn & Black "shall be entitled to the first $137,682.33 of any recovery from any claims related to the Project, ... for [ERI's] debt on this and other matters." The agreement further provided that Dunn & Black shall receive compensation for "its future services regarding the claims arising out of the Project" in the amount of 50% of any remaining recovery. ERI remained responsible for all litigation costs.

On March 30, 2004, the FHWA, without admitting liability, settled the dispute with ERI, stipulating to entry of judgment in favor of ERI for $450,000. On April 5, 2004, the Court of Federal Claims entered a judgment against the government in the amount of $450,000. Upon learning of the judgment, the Internal Revenue Service ("IRS"), requested that the Secretary of the Treasury withhold payment of the judgment for setoff against ERI's unpaid tax liabilities. On May 5, 2004, the government informed Dunn & Black that the IRS would be making claims to the settlement funds as an intended offset of the entire amount of the judgment based on an unrelated tax debt purportedly owed by ERI. On the same day, Dunn & Black served the government with a notice of attorney's lien. On May 7, 2004, ERI terminated its attorney-client relationship with Dunn & Black without paying any fees owed.

On June 3, 2004, the United States filed a civil action in the district court to reduce ERI's federal tax assessments to judgment. The government originally demanded $988,000 in unpaid tax assessments, but amended the complaint to demand only $567,304.85 for unpaid federal employment and unemployment tax liabilities plus interest and certain penalties. The district court entered judgment in the amount of $609,079.96, upon the government's motion for default judgment against ERI.

On June 30, 2004, Dunn & Black commenced the instant action by filing a complaint for declaratory judgment in district court against the United States and ERI. Dunn & Black requested that the district court declare that its fees in the amount of $361,037.20 were reasonable for the legal services rendered. Furthermore, Dunn & Black requested that the district court declare its attorney's lien superior to all subsequent liens, claims, and interest in and to the judgment. Alternatively, Dunn & Black requested that the district court declare that the government's setoff constituted unjust enrichment without fairly compensating the firm for services in creating the judgment fund. Lastly, Dunn & Black requested that the district court declare that the government's setoff was a violation of a property interest in the contingent fee and therefore an unlawful property taking without compensation and a violation of due process. The government asserted in its answer that ERI owed the IRS $987,839.84 as of April 30, 2004.

Dunn & Black filed a motion for summary judgment. The district court entered an order and judgment in favor of the government. See Dunn & Black, P.S. v. United States, 366 F.Supp.2d 1008 (E.D.Wash.2005). The district court first held that it had jurisdiction over Dunn & Black's claim pursuant to 28 U.S.C. § 1346(a)(1). Dunn & Black, 366 F.Supp.2d at 1022-23. Furthermore, the district court denied Dunn & Black's motion for summary judgment and held that the government's claim of setoff in the amount of $450,000 was appropriate pursuant to 31 U.S.C. § 3728. Dunn & Black, 366 F.Supp.2d at 1032-36.

Dunn & Black timely appealed.1

II

As a threshold matter, the government contends that the district court lacked subject matter jurisdiction because Dunn & Black's claim is barred by the doctrine of sovereign immunity, which, of course, "is an important limitation on the subject matter jurisdiction of federal courts."2 Vacek v. U.S. Postal Serv., 447 F.3d 1248, 1250 (9th Cir.2006).

"It is well settled that the United States is a sovereign, and, as such, is immune from suit unless it has expressly waived such immunity and consented to be sued. Such waiver cannot be implied, but must be unequivocally expressed. Where a suit has not been consented to by the United States, dismissal of the action is required .... [because] the existence of such consent is a prerequisite for jurisdiction." Gilbert v. DaGrossa, 756 F.2d 1455, 1458 (9th Cir.1985) (internal quotation marks and citations omitted). The Supreme Court has "frequently held ... that a waiver of sovereign immunity is to be strictly construed, in terms of its scope, in favor of the sovereign." Dep't of the Army v. Blue Fox, Inc., 525 U.S. 255, 261, 119 S.Ct. 687, 142 L.Ed.2d 718 (1999).

Unless Dunn & Black satisfies the burden of establishing that its action falls within an unequivocally expressed waiver of sovereign immunity by Congress, it must be dismissed. Cunningham v. United States, 786 F.2d 1445, 1446 (9th Cir. 1986). Dunn & Black invokes 28 U.S.C. § 1346(a)(1) and 28 U.S.C. § 2410 as the basis of waiver of sovereign immunity in this case.3 The district court concluded that jurisdiction was proper pursuant to § 1346(a)(1), and proceeded to the merits. Dunn & Black, 366 F.Supp.2d at 1023. We consider each provision in turn.

A

Dunn & Black first relies on 28 U.S.C. § 1346(a)(1) as the basis for waiver of sovereign immunity in this case. That section waives the government's sovereign immunity by authorizing federal district courts to hear "[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws." 28 U.S.C. § 1346(a)(1); United States v. Williams, 514 U.S. 527, 531-32, 115 S.Ct. 1611, 131 L.Ed.2d 608 (1995); see also Imperial Plan, Inc. v. United States, 95 F.3d 25, 26 (9th Cir.1996) ("Title 28 U.S.C. § 1346(a)(1) waives the sovereign immunity of the United States to permit suit in the United States District Courts for the recovery of taxes which have been erroneously collected."). However, "[d]espite its spacious terms, § 1346(a)(1) must be read in conformity with other statutory provisions which qualify a taxpayer's right to bring a refund suit upon compliance with certain conditions." United States v. Dalm, 494 U.S. 596, 601, 110 S.Ct. 1361, 108 L.Ed.2d 548 (1990).

One express condition of Congress's waiver of sovereign immunity is 26 U.S.C. § 7422(a), which, tracking the language of § 1346(a)(1), provides that

[n]o suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

26 U.S.C. § 7422(a); see also Dalm, 494 U.S. at 601, 110 S.Ct. 1361.

If a person neglects to file an administrative claim as required by § 7422(a), that person has failed to satisfy a necessary condition of the waiver of sovereign immunity under § 1346(a)(1), and, as we have repeatedly held, the district court is necessarily divested of jurisdiction over the action.4 Other circuits have reached...

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