U.S. S.E.C. v. Zahareas

• Decision Date: 07 July 2004
• Docket Number: No. 03-2630.,03-2630.
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Appellee, v. Nicholas A. ZAHAREAS; Tuschner & Company, Inc.; Defendants, John M. Tuschner; Appellant, Euroamerican Securities, S.A. Defendant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 624

374 F.3d 624

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Appellee, v. Nicholas A. ZAHAREAS; Tuschner & Company, Inc.; Defendants, John M. Tuschner; Appellant, Euroamerican Securities, S.A. Defendant.

No. 03-2630.

United States Court of Appeals, Eighth Circuit.

Submitted: February 13, 2004.

Filed: July 7, 2004.

Counsel who presented argument on behalf of the appellant was James H. Schropp of Washington, D.C.

Counsel who presented argument on behalf of the appellee was Timothy N. McGarey of Washington, D.C.

Before BYE, HEANEY, and SMITH, Circuit Judges.

HEANEY, Circuit Judge.

John M. Tuschner appeals the denial of his application for attorney's fees under the Equal Access to Justice Act (EAJA). For the reasons stated below, we reverse and remand to the district court for further proceedings consistent with this opinion.

I. BACKGROUND

This case has been in the courts for over six years and is currently before this court for the fourth time. The facts have been clearly articulated in prior opinions. We summarize them here for the purposes of this appeal.

In July 1993, the Securities and Exchange Commission (SEC) settled a civil enforcement proceeding filed against Nicholas Zahareas resulting in Zahareas being permanently barred from "associating with" an investment broker, dealer, advisor, or company or participating in the securities industry in the United States. In 1996, Zahareas, who was then living in Greece, founded Euroamerican Securities (Euroamerican), a brokerage and financial consulting company doing business in Athens, Greece. Also in 1996, Zahareas entered into an agreement with Tuschner in which Zahareas would recruit Greek investors to open accounts with Tuschner & Co., a securities broker-dealer located in Minneapolis, Minnesota, to purchase shares in an initial public offering that Tuschner & Co. was underwriting.

In 1997, the SEC filed suit against Tuschner, Tuschner & Co., Zahareas, and Euroamerican alleging that Zahareas's relationship with Tuschner & Co. violated the 1993 bar order and that the defendants had violated various provisions of the Securities and Exchange Act. On January 28, 1998, the district court denied the defendants' motions to dismiss for lack of jurisdiction and granted the SEC's motion for a preliminary injunction. The defendants appealed the injunction and a divided panel of this court affirmed the district court's order. SEC v. Zahareas, 167 F.3d 396 (8th Cir.1999).

In 2000, after extensive discovery, the SEC and Tuschner brought cross motions for summary judgment.¹ The district court granted the SEC's motion and permanently enjoined Tuschner from violating, and aiding and abetting violations, of 15 U.S.C. § 78o(b)(6)(B)(i) and (ii) of the Securities and Exchange Act. SEC v. Zahareas, 100 F. Supp 2d. 1148, 1156 (D.Minn.2000). On appeal, again in a divided panel decision, this court reversed the district court, vacated the permanent injunction, and remanded for entry of judgment in favor of Tuschner. SEC v. Zahareas et al., 272 F.3d 1102 (8th Cir.2001). The SEC's petition for rehearing was denied.

Tuschner then filed for attorney's fees pursuant to 28 U.S.C. § 2412(b) and (d)(1)(A), asserting that the SEC's case was not substantially justified and was pursued in bad faith. The district court denied the motion holding that: (1) the SEC's case was reasonable, and therefore substantially justified; (2) the SEC's case was novel, therefore special circumstances dictated against awarding fees; and (3) Tuschner was ineligible for an award because he failed to demonstrate that he actually incurred any attorney's fees. Tuschner now appeals.

II. EQUAL ACCESS TO JUSTICE ACT

The EAJA provides that a prevailing party is entitled to an award of fees and expenses in any 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. § 2412(d)(1)(A). In Pierce v. Underwood, the Supreme Court defined substantially justified as having a "reasonable basis both in law and fact," or being "justified in substance or in the main." 487 U.S. 552, 565, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988) (citations and internal quotations omitted). Therefore, the government's position can be substantially justified even though ultimately incorrect, as long as "a reasonable person could think it correct." Id. at 566 n. 2, 108 S.Ct. 2541. The government, however, is not exempt "from liability under the EAJA merely because it prevailed at some interim point in the judicial process." Sierra Club v. Sec'y of Army, 820 F.2d 513, 517 (1st Cir.1987). The fact that the district court in this case found for the SEC is a factor weighing in the government's favor, but the district court's judgment "is not sufficient in and of itself, to show that the Government's position was substantially justified." Davidson v. Veneman, 317 F.3d 503, 507 (5th Cir.2003). Rather, "[t]he most powerful indicator of the reasonableness of an ultimately rejected position is a decision on the merits and the rationale which supports that decision." Friends of Boundary Waters Wilderness v. Thomas, 53 F.3d 881, 885 (8th Cir.1995) (reversing the district court and awarding attorney's fees). Moreover, the government must show "that it acted reasonably at all stages of the litigation." Davidson, 317 F.3d at 506 (citing 28 U.S.C. § 2412(d)(2)(D)); see also Keasler v. United States, 766 F.2d 1227, 1231 (8th Cir.1985) (stating that "the position of the government" includes "the government's positions at both the prelitigation and litigation states"). The government bears the burden of proving that its position was substantially justified. Friends of Boundary Waters Wilderness, 53 F.3d at 885.

The substantial justification standard, however, should not be used to deter the government from bringing cases of first impression or offering novel arguments. The special circumstances exception "is a `safety valve' designed to `insure that the Government is not deterred from advancing in good faith the novel but credible extensions and interpretations of the law that often underlie vigorous enforcement efforts.'" Russell v. Nat'l Mediation Bd., 775 F.2d 1284, 1290 (5th Cir.1985) (quoting H.R.Rep. No. 96-1418 at 11 (1980)). Still, the mere fact that the government advances a novel argument does not automatically insulate it from EAJA liability. Keasler, 766 F.2d at 1234 ("That a case presents an issue of first impression in the forum does not ipso facto make the government's position in the litigation reasonable."); Russell, 775 F.2d at 1290 (stating that the special circumstances exception "merely preserves government efforts to present creative legal interpretations, which though not yet commonly accepted, still merit the court's careful examination" (citation and internal quotations omitted)).

In addition, the EAJA provides that the "United States shall be liable for such fees and expenses to the same extent that any other party would be liable under the common law." 28 U.S.C. § 2412(b). Therefore, the government may be liable for attorney's fees if it acted in bad faith. Am. Hosp. Ass'n v. Sullivan, 938 F.2d 216, 219 (D.C.Cir.1991); Brown v. Sullivan, 916 F.2d 492, 495 (9th Cir.1990). "Bad faith has been broadly defined to include acts of `obdurate obstinacy,' or conduct that has compelled the plaintiff to litigate recognized legal rights clearly owed." Haycraft v. Hollenbach, 606 F.2d 128, 133 (6th Cir.1979) (per curiam) (citation omitted). Attorney's fees can be awarded if the "bad faith (1) occurred in connection with the litigation, or (2) was an aspect of the conduct giving rise to the lawsuit." Am. Hosp. Ass'n, 938 F.2d at 219. This basis for recovery is a narrow one and is to be "imposed only in exceptional cases and for dominating reasons of justice." Brown, 916 F.2d at 495 (citation and internal quotations omitted).

III. ANALYSIS

We review the district court's decision denying attorney's fees under the EAJA for an abuse of discretion; reviewing conclusions of law de novo and findings of fact for clear error. United States Dep't of Labor v. Rapid Robert's Inc., 130 F.3d 345, 347 (8th Cir.1997).

A. Substantial Justification

The district court cited to several factors in finding that the SEC's case was substantially justified. First, the district court referred to the previous district and circuit court holdings in the government's favor. According to the district court, the SEC's victories below "individually have, at the very least, some probative force of the existence of substantial justification; collectively, however, these factors stand as a powerful testament to the existence of substantial justification for the SEC's position." (Appellant's Addendum B at 11.) Second, citing to several cases in which our court interpreted the word "control," the district court found that the SEC's argument that Zahareas was controlled by Tuschner was reasonable in law. According to the district court, although our court ultimately disagreed with the conclusion that Tuschner controlled Zahareas, "the SEC's legal position was at least a colorable, reasonable attempt at defining an otherwise undefined phrase." (Id. at 12.) Third, relying on the undisputed communications and dealings between Tuschner and Zahareas, the district court found that the SEC's factual basis was reasonable.

The fact that the district court and our court found for the SEC at various stages in the litigation does not automatically grant the government immunity from EAJA liability. See Herman v. Schwent, 177 F.3d 1063 (8th Cir.1999) (reversing district court and granting attorney's fees); Friends of the Boundary Waters Wilderness, 53 F.3d at 885 (holding that the district court erred in denying fees by relying "too heavily upon its original opinion and Judge Magill's dissent from our decision reversing that opinion"). In...