Centex Corp. v. U.S.

• Decision Date: 17 May 2007
• Docket Number: No. 2006-5108.,No. 2006-5105.,2006-5105.,2006-5108.
• Citation: 486 F.3d 1369
• Parties: CENTEX CORPORATION and CTX Holding Company, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee. First Heights Bank, FSB, Pulte Diversified Companies, Inc., and Pulte Homes, Inc., Plaintiffs-Appellants, v. United States, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

486 F.3d 1369

CENTEX CORPORATION and CTX Holding Company, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.

First Heights Bank, FSB, Pulte Diversified Companies, Inc., and Pulte Homes, Inc., Plaintiffs-Appellants, v. United States, Defendant-Appellee.

No. 2006-5105.

No. 2006-5108.

United States Court of Appeals, Federal Circuit.

May 17, 2007.

Kent A. Yalowitz, Arnold & Porter LLP, of New York, NY, argued for plaintiffs-appellants, CTX Holding Company, et al. With him on the brief were J. Alex Brophy of New York, NY, and Melvin C. Garbow, Howard N. Cayne, and Thomas R. Dwyer, of Washington, DC.

Robert K. Huffman, Miller & Chevalier, Chartered, of Washington, DC, argued for plaintiffs-appellants, First Heights Bank, et al. With him on the brief were Emmett B. Lewis and Alan I. Horowitz.

Scott D. Austin, Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, for defendant-appellee. With him on the brief were Stuart E. Schiffer, Deputy Assistant Attorney General, David M. Cohen, Director, Jeanne E. Davidson,

Deputy Director and Jeffrey T. Infelise, Trial Attorney.

Before BRYSON and LINN, Circuit Judges, and ROBINSON, District Judge.^*

BRYSON, Circuit Judge.

In 1989, the plaintiffs in these consolidated cases entered into contracts with the United States by which they agreed to acquire failing thrifts insured by the government. In exchange, the parties contemplated that the plaintiffs would receive certain financial benefits, including favorable tax treatment. Congress subsequently became disenchanted with the arrangements and, in 1993, retroactively eliminated the tax benefits by enacting legislation known as the "Guarini amendment." The plaintiffs sued the United States, claiming that the enactment of the Guarini amendment resulted in a breach of their contracts. The plaintiffs prevailed on their claim and were awarded damages for the breach. First Heights Bank, FSB v. United States, 422 F.3d 1311 (Fed.Cir. 2005); Centex Corp. v. United States, 395 F.3d 1283 (Fed.Cir.2005).

The plaintiffs then moved in the trial court to recover their attorney fees. They noted that the United States had waived its sovereign immunity with respect to the award of attorney fees in civil cases "to the same extent that any other party would be liable under the common law or under the terms of any statute which specifically provides for such an award." 28 U.S.C. § 2412(b). The common law rule is that a party generally may not collect its attorney fees from the loser; rather, each party is expected to bear its own attorney fees pursuant to the longstanding "American Rule." There are several recognized exceptions to that rule, however, one of which allows fee-shifting when the successful party's opponent has acted in bad faith. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247, 259, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975) (recognizing the bad faith exception as an "assertion of inherent power in the courts").

The plaintiffs argued that the bad faith exception to the American Rule warranted an award of attorney fees because the government had acted in bad faith both before and after the enactment of the Guarini amendment. The trial court disagreed. We affirm the trial court's ruling in both cases.

I

The plaintiffs' main argument is that the trial court erroneously decided not to consider the actions of government agents between 1989 and 1993 in encouraging Congress to enact the Guarini amendment. The plaintiffs contend that those government agents acted in bad faith and that their bad faith conduct authorized the trial court to award attorney fees in this litigation.

The trial court held that it could not consider the government agents' pre-1993 conduct because that conduct was extrajudicial, i.e., it did not implicate the judicial process. The trial court held that its authority to assess attorney fees for bad faith conduct extends only to cases in which the bad faith conduct undermines the judicial process and that nothing in the government's 1989-1993 conduct was "an assault on legal processes in any way." Instead, the conduct of government agents in promoting the Guarini amendment related to the plaintiffs' substantive claim (what the plaintiffs call "primary conduct"). The trial court held that awarding attorney fees based on such conduct would contravene a central purpose of the American Rule: to protect a defendant's right to go to court and argue a nonfrivolous defense to a claim, even if the claim arose from the defendant's bad faith conduct. The trial court agreed with the Sixth Circuit that shifting fees on account of bad faith primary conduct would discourage a party from using the judicial process to argue good faith legal defenses to bad faith primary conduct. Shimman v. Int'l Union of Operating Eng'rs, 744 F.2d 1226, 1231 (6th Cir.1984).¹

We agree with the trial court that authorizing a court to shift fees based solely on bad faith conduct that forms the basis for the substantive claim for relief would undermine the American Rule by penalizing a party who raises good faith defenses to claims of liability for bad faith conduct. In so doing, we align ourselves with eight other circuits that have taken the position that fee awards cannot be assessed based on claims of bad faith primary conduct. See Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 313 F.3d 385, 391 (7th Cir.2002) (holding that "behavior in the litigation itself . . . is the only lawful domain of the relevant concept of `inherent authority'"); Towerridge, Inc. v. T.A.O., Inc., 111 F.3d 758, 765 (10th Cir.1997) ("[A]n award of attorney fees may not be premised solely on prelitigation conduct."); Lamb Eng'g & Const. Co. v. Neb. Pub. Power Dist., 103 F.3d 1422, 1435 (8th Cir.1997) ("[A court] may not base an [attorney fees] award solely on the conduct that led to the substantive claim."); Ass'n of Flight Attendants v. Horizon Air Indus., Inc., 976 F.2d 541, 550 (9th Cir.1992) ("[N]o federal appellate authority in or out of the Ninth Circuit has clearly approved an order shifting attorney's fees based solely upon a finding of bad faith as an element of the cause of action presented in the underlying suit. We decline to do so."); Sanchez v. Rowe, 870 F.2d 291, 295 (5th Cir.1989) ("We hold that the requisite bad faith . . . may not be based on a party's conduct forming the basis for [the] substantive claim." (emphasis omitted)); Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1014 (11th Cir.1985) ("Vexatious conduct inherent in the fraudulent acts that make up the 10b-5 cause of action cannot be the basis for an attorney fee award . . . ."); Shimman, 744 F.2d at 1230-33 ("We therefore hold that the bad faith exception to the American Rule does not allow an award of attorney fees based only on bad faith in the conduct giving rise to the underlying claim."); Cordeco Dev. Corp. v. Santiago Vasquez, 539 F.2d 256, 262-63 (1st Cir.1976) (disapproving the position that the bad faith exception extends to bad faith in the events giving rise to litigation).

The plaintiffs point to two cases from the D.C. Circuit that they argue allow an award of attorney fees based on bad faith in the conduct forming the basis for the lawsuit. See Am. Hosp. Ass'n v. Sullivan, 938 F.2d 216, 220 (D.C.Cir.1991); Nepera Chem., Inc. v. Sea-Land Serv., Inc., 794 F.2d 688, 702-03 (D.C.Cir.1986). Neither of those cases provides persuasive support for the plaintiffs' position.

American Hospital involves bad faith conduct during the course of litigation (the violation of a court order). Moreover, even the more general language in American Hospital about the bad faith exception to the American Rule does not support the plaintiffs. Although the court stated that "[b]ad faith in conduct giving rise to the lawsuit" may allow fee-shifting, that statement appears to have referred to a defendant's refusal to accede to a plaintiff's meritorious claim for relief before litigation, not to bad faith primary conduct. See Am. Hosp., 938 F.2d at 220.

In Nepera, the court denied a request for attorney fees that was based on the conduct that gave rise to the substantive claim, for which punitive damages could not be awarded. Nepera proves useful to the plaintiffs in one respect—it cites a 1947 D.C. Circuit case that approved an attorney fee award for bad faith conduct forming the basis for the lawsuit. Schlein v. Smith, 160 F.2d 22, 25 (D.C.Cir.1947) (allowing a borrower to collect attorney fees for bringing successful claims for usury and fraud in what amounted to an exercise of the district court's equitable power to award fees for bad faith conduct). While Schlein seems to be a case in which a district court was allowed to award attorney fees based solely on bad faith primary conduct, it does not represent the prevailing view of the bad faith exception at common law, as indicated by the great majority of courts that have disapproved such awards.

Although the plaintiffs invoke several Supreme Court decisions, the cases they cite do not help them. The plaintiffs rely on Vaughan v. Atkinson, 369 U.S. 527, 82 S.Ct. 997, 8 L.Ed.2d 88 (1962), as the most favorable Supreme Court authority. In Vaughan, however, the Supreme Court approved an attorney fee award based not on conduct giving rise to the substantive claim but, rather, on the defendant's "willful and persistent" bad faith treatment of that claim after it accrued. Id. at 528-34, 82 S.Ct. 997. Moreover, the Court held that attorney fees are recoverable as damages in an admiralty case, a principle that has long been recognized in admiralty law, notwithstanding the applicability of the American Rule in other contexts. Compare The Apollon, 22 U.S. (9 Wheat.) 362, 379, 6 L.Ed. 111 (1824) (allowing counsel fees as part of damages under admiralty law), with Day v. Woodworth, 54 U.S. (13 How.) 363, 371-73, 14 L.Ed. 181 (1851) (stating that a court cannot...