Kuhns v. Board of Governors of Federal Reserve System

• Decision Date: 12 April 1991
• Docket Number: No. 90-1398,90-1398
• Parties: Eldon E. KUHNS, Petitioner, v. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 39

930 F.2d 39

289 U.S.App.D.C. 154

Eldon E. KUHNS, Petitioner, v. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Respondent.

No. 90-1398.

United States Court of Appeals, District of Columbia Circuit.

Argued Feb. 15, 1991.

Decided April 12, 1991.

Petition for Review of an Order of the Federal Reserve System.

Mary E. Curtin, Minneapolis, Mn., for petitioner.

Douglas B. Jordan, Sr. Atty., Bd. of Governors of the Federal Reserve System, with whom Stuart M. Gerson, Asst. Atty. Gen Dept. of Justice, James V. Mattingly, Jr., Gen. Counsel, and Richard M. Ashton, Associate Gen. Counsel, Bd. of Governors of the Federal Reserve System, were on the brief, Washington, D.C., for respondent.

Before: SILBERMAN, WILLIAMS, and RANDOLPH, Circuit Judges.

Opinion for the Court filed by Circuit Judge RANDOLPH.

RANDOLPH, Circuit Judge:

Eldon E. Kuhns challenges the Federal Reserve Board's refusal to award him attorney's fees and other expenses under the Equal Access to Justice Act ("EAJA"), 5 U.S.C. Sec. 504. An individual who has prevailed against a government agency in an "adversary adjudication" may recover fees and expenses if the individual's "net worth did not exceed $2,000,000 at the time the adversary adjudication was initiated" and if the agency's position was not "substantially justified." 5 U.S.C. Sec. 504(a)(1) & (b)(1)(B)(i). Kuhns claims the Board erred in finding him financially ineligible for an award and in ruling that the Board's Division of Banking Regulation and Supervision had carried its burden of justifying the position it took against him.

Proceedings began in January 1988, when the Division issued a notice of intention under the Federal Deposit Insurance Act to remove Kuhns from his position as an officer and director of First National Bancorp, a bank holding company in Arizona, and to prohibit him from participating in the affairs of other financial institutions without the Board's prior written approval. 12 U.S.C. Sec. 1818(e). Three months later and only one week before the date set for an evidentiary hearing, the Division moved to dismiss its notice without prejudice. The Division claimed the hearing might interfere with a pending criminal investigation of Kuhns and that administrative action would be unnecessary if Kuhns were prosecuted and convicted.

The Board agreed to dismiss, but with prejudice. As the Board saw it, the Division's argument for dismissal without prejudice was less than "compelling." The Board pointed out that the Attorney General of the United States had not requested a rescheduling of the hearing, although the Federal Deposit Insurance Act permitted him to make such a request whenever a removal hearing might interfere with a criminal investigation. See 12 U.S.C. Sec. 1818(e)(5) (1988) (to be recodified at 12 U.S.C. Sec. 1818(e)(4) (Supp. I 1989)). Furthermore, the Division's delay in moving for dismissal had caused Kuhns to expend a considerable amount of time and money getting ready for the hearing.

Kuhns then sought attorney's fees and other expenses. The Board rejected his application because he failed to provide reliable financial information showing that his net worth did not exceed $2 million and because the Division's filing against him had been "substantially justified" within the meaning of section 504(a)(1). We sustain the Board's decision on both grounds.

I

Kuhns' argument is that he submitted reliable data to the Board showing his net worth to be less than $2 million. When Kuhns filed his initial application for fees and expenses, he supplied no financial information. Through his attorney, Kuhns simply asserted that his net worth did not exceed $2 million in January 1988 and that "[i]n fact" he "had filed [for] bankruptcy under Chapter 11 of the Bankruptcy Code." ¹ The Division, perhaps prompted by this assertion, discovered a disclosure statement Kuhns had filed with the bankruptcy court in August 1987 placing his net worth at $41 million. On the basis of Kuhns' bankruptcy filing and his failure to furnish any evidence supporting his claim of financial eligibility, the administrative law judge denied his application. On his motion for reconsideration, Kuhns explained that his August 1987 bankruptcy filing, which listed many "contingent assets," including potential recoveries in lawsuits, was not designed to provide "reliable information" about his "realizable net worth." Kuhns then presented another statement purportedly showing a negative net worth of $4,026,007 in August 1987, and a negative net worth of $1,404,132 in October 1988. The statement, which apparently was also prepared for the bankruptcy court, was captioned "Summary of Assets and Liabilities at Liquidation Value August 15, 1987 and October 11, 1988." This satisfied the administrative law judge of Kuhns' financial eligibility.

On review the Board found Kuhns' latest statement unreliable because it did not reveal the basis on which Kuhns had valued his assets and liabilities. The Board sent the case back to allow Kuhns an opportunity to submit a new net worth statement "prepared in accordance with generally accepted accounting [principles] ('GAAP'), by an independent auditor if possible, or, if GAAP are not used, a description of the principles used in valuation of assets and liabilities and a statement that these principles were applied uniformly in the preparation of the net worth statement." Instead of submitting a new net worth statement, Kuhns resubmitted the August 1987/October 1988 statement the Board found unacceptable and an affidavit reciting that some of his assets had been valued on the basis of GAAP. ² The Board ruled that Kuhns had failed to establish his financial eligibility for an award of attorney's fees.

Our review of the Board's decision is limited to determining whether there is substantial evidence to support it. 5 U.S.C. Sec. 504(c)(2). Both sides agree that "net worth," although undefined in EAJA, means total assets less total liabilities. Kuhns complains that the Board has yet to adopt uniform procedures for EAJA applications, but we fail to see how this caused him any harm. Kuhns had three bites at the apple, first upon his initial application, again on reconsideration and once again after the Board's remand of the case. On the last occasion the Board instructed him to follow GAAP, ³ or to explain why he was not doing so. Kuhns claimed to have complied with the instruction. The question for us is whether the Board was warranted in finding that his financial statement fell short of what the Board reasonably required.

On that score, Kuhns thinks his affidavit sufficiently explained the principles he used in reporting his liabilities. But it did no such thing. The affidavit said only:

The liabilities of E.E. Kuhns represent the amounts of unsettled claims filed in this Chapter 11 Reorganization.

The principles utilized in valuing the assets and liabilities of E.E. Kuhns have been uniformly applied consistent with past practice.

Even Kuhns' brief in this court does not reveal the principles he followed in determining what liabilities to report and in what amounts. We agree with the Board that whatever accounting system Kuhns was using, it was not GAAP. Against $6,154,702 in assets as of August 15, 1987, he listed a total of $10,180,709 in liabilities. But according to the schedule attached to the August 1987/October 1988 statement, each of these "liabilities" was either "contingent"" or "disputed" or both. As the Board pointed out, GAAP does not permit the recording of all contingent liabilities. Contingencies are classified into three categories: probable, reasonably possible, and remote. Financial Accounting Standards Board, Statement of Financial Accounting No. 5, p 3 (Mar. 1975) ("FASB No. 5"). Only those contingent liabilities that are probable and can be reasonably estimated must be recorded on the financial statement. Id. p 8. Contingent liabilities that are reasonably possible are simply disclosed in a note to the financial statement. See id. p 10; M. MILLER, COMPREHENSIVE GAAP GUIDE 1989, at 6.03 (1988). Remote contingencies are not disclosed.

Into which category Kuhns' contingent liabilities fell was impossible to determine. The Board had an ample basis for concluding that Kuhns had not carried his burden of showing that all were "probable," which is the only way the liability side of his balance sheet could have conformed to GAAP. Despite the Board's instruction to him, Kuhns never represented that, in reporting his contingent liabilities, he was adhering to the generally accepted accounting principles set forth in FASB No. 5. Kuhns' earlier affidavit, filed on reconsideration of the administrative law judge's initial decision, cast further doubt on the reliability of his financial reporting. He there admitted that his bankruptcy filings, which were the source of his August 1987/October 1988 statement, tended to distort the true state of his financial condition by "exaggerat[ing] both my assets and liabilities."

Kuhns maintains that even if all his contingent and disputed liabilities are disallowed, his net worth still would fall well below the $2 million ceiling. That is not accurate. Kuhns assumes that only a portion of his liabilities--those he listed as "unsecured"--should be viewed as contingent. But the liabilities he reported as "secured" were also contingent according to the schedule he submitted. The Board correctly determined that if all of Kuhns' contingent liabilities were disallowed, Kuhns' net worth exceeded the $2 million ceiling during the relevant period, that is, the "time the adversary adjudication was initiated." 5 U.S.C. Sec. 504(b)(1)(B).

We also reject Kuhns' argument that the Board failed to consider a revised liquidation value summary he submitted to the Board in March 1990. The Board concluded that the summary was not "a reliable presentation of Kuhns' net worth at the relevant time" because it took into...