U.S. v. 87 Skyline Terrace

• Decision Date: 17 December 1993
• Docket Number: No. 92-16265,92-16265
• Citation: 26 F.3d 923
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. 87 SKYLINE TERRACE; 47 Ridge Ave., Mill Valley, California, Defendants, and John Olagues, Norman Olagues and Southern Diversified Investors Inc., Claimants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 923

26 F.3d 923

29 Fed.R.Serv.3d 676

UNITED STATES of America, Plaintiff-Appellee, v. 87 SKYLINE TERRACE; 47 Ridge Ave., Mill Valley, California Defendants and John Olagues, Norman Olagues and Southern Diversified Investors Inc., Claimants-Appellants.

No. 92-16265.

United States Court of Appeals Ninth Circuit.

Submitted Dec. 17, 1993 ^*.

Submission Withdrawn March 2, 1994.

Resubmitted April 18, 1994.

Decided June 6, 1994.

N.C. Deday LaRene, Detroit, MI, and Doron Weinberg, Larson & Weinberg, San Francisco, CA, for claimants-appellants.

Michael D. Howard, Asst. U.S. Atty., San Francisco, CA, for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of California.

Before: WALLACE, Chief Judge, GARTH ^** and WIGGINS, Circuit Judges.

Opinion by Judge WIGGINS.

WIGGINS, Circuit Judge:

The Internal Revenue Service (IRS) initiated forfeiture proceedings against two properties owned by appellants. The IRS failed to obtain prior authorization from the Treasury Secretary, as it was statutorily required to do. The district court dismissed with prejudice for lack of subject matter jurisdiction. Appellants moved for both attorneys' fees and restoration. The district court granted attorneys' fees, but awarded a significantly lower amount than appellants requested. The district court denied the motion for restoration. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291. We affirm in part, and reverse and remand in part.

I.

Between 1983 and 1988, appellants built and sold a number of expensive homes in Mill Valley, CA. In December of 1986, the IRS began to investigate appellants for tax fraud. The IRS believed that appellants had devised a scheme to evade taxes on the proceeds from the sales of the homes. The scheme included filing fraudulent deeds of trust with the County Recorder's Office and paying "a fair amount" of the contractors' costs in gold coins. Appellants had not filed a tax return since 1983. The IRS alleged that it obtained a letter to appellant Norman Olagues, handwritten and signed by appellant John Olagues, evidencing John Olagues's intent to evade taxes. John Olagues wrote, "I want to put mortgages on Princeton and Ridge for $500,000 [and] $600,000 respectively. We are not going to actually borrow any money but we are establishing mortgages which will make any potential assessments from the IRS subordinate to the $500,000 and $600,000 mortgages. If the IRS would subsequently lien the properties, we could then borrow the money or at least most of the [$500,000] or [$600,000] and just let the I.R.S. take what is left."

During the tax fraud investigation, the IRS learned that appellants were in the process of selling their last two properties, 87 Skyline Terrace and 47 Ridge Avenue, Mill Valley, CA. The IRS alleged that appellants planned to deposit $1,000,000 profit on the transactions into a Swiss bank account. The IRS therefore filed Forfeiture Complaints against the two properties. Appellants in turn filed Notices of Claims for the two properties.

Both properties were already in escrow and subject to signed sales contracts. Consequently, appellants and appellee stipulated that the sales should go forward and that the proceeds should be deposited into an interest-bearing account under the supervision of the United States Marshals Service until the forfeiture actions were resolved. The district court entered orders confirming the sales and instructing that the proceeds be deposited accordingly. The sales went forward. The Marshals Service made an error, however. The Service did not deposit the proceeds from the sale of 87 Skyline Terrace into an interest-bearing account. Consequently, the district court later ordered the Service to pay appellants $74,489 in interest on the proceeds from the sale of 87 Skyline Terrace.

On May 10, 1989, appellants deposed Internal Revenue Special Agent Stephen V. Shekter. Agent Shekter testified that the IRS had not obtained authorization from the Treasury Secretary prior to the seizure and initiation of forfeiture proceedings. The failure to obtain authorization was a violation of 26 U.S.C. Sec. 7401. ¹ This violation ultimately caused the district court to dismiss the forfeiture actions. Appellants contend that this deposition provided them with the first evidence of the illegality of the forfeiture proceedings. During this same discovery period, John Olagues failed to appear to be deposed on three separate occasions.

In the meantime, a grand jury investigation was under way against John Olagues for violations of the criminal tax laws. The parties stipulated to a stay of the civil proceedings until the criminal investigation was completed. The district court granted a joint motion to stay these proceedings.

On January 18, 1991, appellants filed a motion to lift the stay for the limited purpose of determining a motion to dismiss for lack of subject matter jurisdiction. Appellants argued that the district court lacked subject matter jurisdiction because the IRS never obtained authorization from the Treasury Secretary. See 26 U.S.C. Sec. 7401. In response, Assistant United States Attorney Michael D. Howard (Howard), appellee's principal counsel in the forfeiture actions, asserted that it had been his understanding that authorization was obtained before the properties were seized. Howard further declared that appellants' motion prompted him to search for a record of the authorization. He alleged that it was not until this time that he learned there was no written record authorizing the two forfeiture actions, nor did anyone remember giving oral authorization. Having failed to find a record of authorization, appellee acceded to appellants' motion to dismiss for lack of subject matter jurisdiction. On February 11, 1991, the district court entered an order dismissing the case with prejudice and instructing the Marshals Service to release the proceeds from the sale of the two properties, plus interest.

On May 10, 1991, appellants filed several post-dismissal motions. Appellants moved in relevant part (1) for $158,807.99 ² in attorneys' fees and costs under Rule 11 and the Equal Access to Justice Act (EAJA); (2) for sanctions under Rule 11 in the form of $4,301.20 in interest on the proceeds from 87 Skyline Terrace which were not deposited into an interest-bearing account; and (3) for restoration.

On May 29, 1992, the district court entered an order disposing of appellants' post-dismissal motions. It granted appellants' motion for attorneys' fees under Rule 11. The district court found that appellee acted unreasonably in asserting that the forfeiture actions were authorized by the Treasury Secretary. The district court also found, however, that appellants should have discovered the lack of jurisdiction within two months of filing their answer. The district court stated, "[I]t does not appear that there was a good reason for any gap of more than two months." The district court then concluded that appellants were only entitled to attorneys' fees incurred during this two-month period. Accordingly, the district court awarded appellants $1,500. ³ The district court declined to award attorneys' fees under the EAJA.

The district court also granted appellants' motion for Rule 11 sanctions on other grounds. The district court determined that sanctions were appropriate because appellee failed to deposit the proceeds from 87 Skyline Terrace into an interest-bearing account and because Howard falsely declared that the proceeds had been so deposited. The district court found that monetary sanctions were inappropriate under the circumstances, however. The loss of interest did not appear to be anything other than a mere failure to act. And, the loss of interest was not caused by Howard's erroneous declarations. Thus, the district court sanctioned only by public reprimand.

The district court denied the motion for restoration. The district court determined that the remedy sought was a tort claim, and thus must be brought under the Federal Torts Claims Act (FTCA). The FTCA requires that administrative remedies be exhausted before judicial relief is granted. Because appellants had not satisfied this prerequisite, the district court denied relief.

II.

A. Attorneys' Fees Under Rule 11

Appellants contend the district court abused its discretion in awarding only $1,500 in attorneys' fees on the basis of Rule 11. Specifically, appellants contend that the district court abused its discretion by finding that appellants should have discovered the lack of jurisdiction within two months after answering the complaint. Appellants note that, by arbitrarily setting such a cut-off date, the district court, in effect, shifted the burden onto appellants to discover the unlawfulness of the forfeiture proceedings.

Second, appellants argue, given appellee's "outrageous conduct," the district court abused its discretion by awarding a minimal amount of money. Appellants stress that, during the two-and-a-half-year pendency of the forfeiture actions, appellants suffered the seizure of their property; the loss of the use of their business capital; the sale of the seized property; ⁴ and, incurred the costs of defending these actions.

We review all aspects of a Rule 11 determination for an abuse of discretion. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2460, 110 L.Ed.2d 359 (1990). The district court has broad fact-finding powers when imposing sanctions under Rule 11. Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1366 (9th Cir.1990) (en banc). These broad fact-finding powers include setting a cut-off date after which attorneys' fees are not compensable. Hendrix v. Naphtal, 971 F.2d 398 (9th Cir.1992).

We note that the district court could have indicated more clearly how it determined the two-month cut-off. We affirm, however, in light of the district court's wide discretion in awarding attorney's fees under Rule 11. We find...