S.E.C. v. Comserv Corp.

• Decision Date: 24 July 1990
• Docket Number: Nos. 89-5063,89-5064,s. 89-5063
• Citation: 908 F.2d 1407
• Parties: Fed. Sec. L. Rep. P 95,390 SECURITIES AND EXCHANGE COMMISSION, Appellant/Cross-Appellee, v. COMSERV CORPORATION, Richard P. Daly, Theodore Priem, William Gilster, and Thomas A. Johnson, Appellees/Cross-Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1407

908 F.2d 1407

Fed. Sec. L. Rep. P 95,390

SECURITIES AND EXCHANGE COMMISSION, Appellant/Cross-Appellee, v. COMSERV CORPORATION, Richard P. Daly, Theodore Priem William Gilster, and Thomas A. Johnson Appellees/Cross-Appellants.

Nos. 89-5063, 89-5064.

United States Court of Appeals Eighth Circuit.

Submitted Oct. 9, 1989.

Decided July 24, 1990.

James A. Brigagliano, Washington, D.C., for appellees/cross-appellants.

Jeffrey L. Sikkema, Minneapolis, Minn., for appellant/cross-appellee.

Before LAY, SNEED ^*, and McMILLIAN, Circuit Judges.

SNEED, Senior Circuit Judge:

The Securities and Exchange Commission (SEC) appeals the district court decision awarding $195,496.85 in attorneys' fees and expenses to Thomas A. Johnson under the Equal Access to Justice Act (EAJA). The SEC contends that it was "substantially justified" in bringing the underlying suit against Johnson. It also argues that Johnson did not "incur" fees within the meaning of EAJA because his attorneys' fees ultimately may be or have been paid for by an insurance company.

Johnson cross-appeals, seeking a cost of living increase in the hourly rate used to calculate the amount of the award.

We affirm the district court's holding that the SEC was not substantially justified in pursuing its case against Johnson. However, we reverse its holding that Johnson was eligible for an EAJA award and accordingly vacate the award of attorneys' fees. Our jurisdiction is derived from 28 U.S.C. Sec. 1291 (1982).

I. FACTS AND PROCEEDINGS BELOW

At the time this lawsuit began, Comserv licensed computer software products to manufacturers. ¹ In May 1985, the SEC filed suit in U.S. District Court, alleging that Comserv and four of its officers, including Johnson, had engaged in various securities law violations. ² The SEC sought an injunction to prevent all of the defendants from engaging, in the future, in the acts and practices alleged in the complaint. Each of the defendants except Johnson consented to a permanent injunction against future violations, while neither admitting nor denying the allegations. Johnson denied the allegations as they related to him. The SEC pursued its suit against Johnson.

After conducting discovery, Johnson and the SEC filed cross-motions for summary judgment. The district court judge denied both motions in a written order on December 28, 1987. He noted that while he was "inclined to believe that Johnson did commit one or more violations of the securities laws," he had "serious doubts" that an injunction against Johnson was required.

The SEC proceeded with the trial, and Johnson moved to dismiss the action after the SEC completed its case in chief. The district court granted Johnson's motion in May 1988. In its prior bench ruling on April 22, 1988, the court stated that "the SEC has failed to convince the Court that Johnson violated the law," and "the Court would not order an injunction against Johnson even if the SEC had shown a violation." The court ruled that Johnson did not have the requisite scienter, i.e., recklessness, for the violations with which he was charged. Furthermore, the court said that even if Johnson had violated the law, it found no "evidence to show that 'there is a reasonable likelihood of further violations in the future.' " Such a finding is a necessary predicate to an injunction in these circumstances. The SEC did not appeal the district court's ruling on the merits.

Johnson subsequently filed a timely application for attorneys' fees and expenses under the Equal Access to Justice Act (EAJA), Pub.L. No. 96-481, tit. II, 94 Stat. 2325 (1980) (codified at 5 U.S.C. Sec. 504 (1988) and 28 U.S.C. Sec. 2412 (1988)). Under EAJA,

a court shall award to a prevailing party ... fees and other expenses ... incurred by that party in any civil action ... brought by or 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. Sec. 2412(d)(1)(A).

The SEC opposed Johnson's motion, asserting that: (1) it had been "substantially justified" in seeking an injunction against Johnson; (2) "special circumstances" precluded the award; ³ and (3) Johnson had failed to demonstrate that he was eligible for an award of fees under EAJA. Concerning the third assertion, the SEC pointed to the existence of an insurance policy held by Comserv ("the policy"). By the terms of the policy, the insurer, National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National Union) agreed to reimburse Comserv for Comserv's own indemnification of its officers and directors for "damages, judgments, settlements, costs, charges or expenses incurred in connection with the defense of any action, suit or proceeding or any appeal therefrom to which the Directors or Officers may be a party or with which they may be threatened...." The policy specifies that National Union would pay ninety-five percent of all "costs, charges and expenses" over and above an initial $5,000 deductible per director or officer. In addition, the insurance policy contains a subrogation clause, requiring Comserv to allow National Union to recover payments made under the policy if Comserv has any rights to obtain such recovery. Introducing a copy of the policy into the record, the SEC argued that Johnson had not "incurred" attorneys' fees within the meaning of the statute because his fees were paid by National Union, and that therefore, he was ineligible for an EAJA award.

The district court rejected each of the SEC's three arguments and granted Johnson's motion. It held that "[g]iven the dearth of evidence [presented by the SEC to support its case against Johnson], the SEC's position was barely tenable, much less substantially justified.... The court cannot condemn too strongly the SEC's decision to take this case to trial when it knew that no injunction would be issued." Second, it rejected the SEC's "special circumstances" argument, and held that "without additional evidence Johnson's silence is not a sufficient basis for the SEC's action." Finally, the court held that Johnson was eligible for an EAJA award, despite the indications in the record that Comserv was paying Johnson's legal fees, that National Union would reimburse Comserv for the large part of these expenses, and that National Union might obtain some of In one respect, however, Johnson did not prevail below. His initial request for attorneys' fees incorporated a 26.5% cost-of-living increase in the statutory level of seventy-five dollars per hour. The district court ruled that an increase was "not appropriate," and awarded Johnson $125,936.25 for attorneys' fees and $69,560.60 for litigation expenses.

the proceeds of an EAJA award to Johnson pursuant to a subrogation clause.

Both Johnson and the SEC appealed to this court. The SEC asserted that it was substantially justified in seeking an injunction against Johnson and that Johnson is ineligible to receive an EAJA award. With respect to ineligibility, the SEC alleged that Johnson did not personally "incur" attorneys' fees or other expenses because his defense costs were covered by Comserv's director and officer liability insurance policy. National Union, the SEC argued, is the real party in interest for receipt of an EAJA award, and is clearly ineligible under EAJA.

Johnson responded that the SEC was not substantially justified in seeking an injunction against him and that the existence of insurance coverage does not render him ineligible for an award under EAJA. He argued that Congress did not intend that courts should probe into the facts of every case to determine who would be responsible ultimately for attorneys' fees. Johnson said such inquiries would tend to spawn additional litigation to resolve the issue of ultimate responsibility. In the alternative, Johnson argued that if he is ineligible, the court should look to Comserv, not National Union, in determining whether an EAJA award is still appropriate. He asserted that National Union was not a party to the underlying suit and thus cannot be either the real party in interest or the prevailing party for purposes of an EAJA award.

Johnson also argued that the district court's denial of a cost of living increase was improper. He insisted that most courts have viewed a cost of living increase as an automatic adjustment, and that most have used the rate of inflation from the Consumer Price Index to calculate the proper rate.

Because of what we considered to be numerous deficiencies in the record, we ordered the parties, on April 16, 1990, to provide additional information in response to enumerated questions within 60 days. We received a timely response from Johnson, in which the SEC joined.

II. STANDARD OF REVIEW

This court will reverse a district court's decision to award fees under EAJA only for an abuse of discretion. SEC v. Kluesner, 834 F.2d 1438, 1439 (8th Cir.1987). In applying this standard, we review the district court's conclusions of law de novo, and reject its findings of fact only if clearly erroneous. Kluesner, 834 F.2d at 1439-40 (quoting Brouwers v. Bowen, 823 F.2d 273, 275 (8th Cir.1987) (per curiam)).

We also apply the abuse of discretion standard when reviewing the amount of an award under EAJA, including the district court's refusal to grant a request for a cost of living increase. Pierce v. Underwood, 487 U.S. 552, 571, 108 S.Ct. 2541, 2553, 101 L.Ed.2d 490 (1988); McNulty v. Sullivan, 886 F.2d 1074, 1074-75 (8th Cir.1989) (per curiam).

III. SUBSTANTIAL JUSTIFICATION

The burden of showing that its position in the underlying suit against Johnson was substantially justified rests on the SEC. Cornella v. Schweiker, 728 F.2d 978, 982 (8th Cir.1984). To discharge this burden, it must show that its decision to seek an injunction was "justified to a degree that could satisfy a reasonable person." Pierce v. Underwood, 487 U.S. at 565, 108 S.Ct. at 2550....