U.S. v. Guess

• Decision Date: 01 July 2005
• Docket Number: No. 04CV2184-LAB (AJB), 128.,04CV2184-LAB (AJB), 128.
• Citation: 390 F.Supp.2d 979
• Parties: UNITED STATES of America, Plaintiff, v. L. Donald GUESS, et al., Defendants.
• Court: U.S. District Court — Southern District of California

390 F.Supp.2d 979

UNITED STATES of America, Plaintiff, v. L. Donald GUESS, et al., Defendants.

No. 04CV2184-LAB (AJB), 128.

United States District Court, S.D. California.

July 1, 2005.

COPYRIGHT MATERIAL OMITTED

U.S. Attorney, U.S. Attorneys Office, Southern District of California, San Diego, CA, Stuart D. Gibson, United States Department of Justice, Washington, DC, for Plaintiff.

Darrell D. Hallett, John M. Colvin, Chicoine and Hallett, C. James Frush, Gordon Thomas Honeywell Malanca Peterson and Daheim, Seattle, WA, James N. Mastracchio, Miriam L. Fisher, Bruce Zagaris, Berliner Corcoran and Rowe, Washington DC, Frank T. Vecchione, Law Office of Frank T. Vecchione, Michael L. Lipman, Coughlan Semmer and Lipman, San Diego, CA, Bernstein, Martina, Morgan Lewis, Counselors at Law, S. Thomas Pollack, Irell and Manella, Los Angeles, CA, for Defendants.

ORDER RE RECOVERY OF XÉLAN FOUNDATION'S ATTORNEYS' FEES AND DEFENSE COSTS

[Dkt No. 128]

BURNS, District Judge.

This matter is before the Court on the motion of defendant xélan Foundation, Inc. ("Foundation") under the Equal Access To Justice Act ("EAJA"), 28 U.S.C. 2412 or, alternatively, under analogous provisions of the Internal Revenue Code, 26 U.S.C. § 7430 ("Section 7430") for recovery of its attorneys' fees and costs incurred to defend this injunctive relief action ("Motion"). The Foundation seeks recovery of its actual litigation expenses from the government in the amount of $232,176.30, with waiver of the statutory maximum hourly rate for attorneys' fees compensation or, alternatively, in the amount of $101,008.05 at the statutory rate. Plaintiff the United States filed an Opposition, and the Foundation filed a Reply. For the reasons discussed below, the Motion is CONDITIONALLY GRANTED.

I. DISCUSSION

A. Background

The United States brought this action for injunctive relief against several entities in the xélan family of companies and six individuals associated with the management of one or more of the entities, alleging they engaged in schemes to defraud the United States of tax revenues involving many millions of dollars. The Complaint was based on 18 U.S.C. § 1345 (a fraud injunction statute) and 26 U.S.C. § 7402(a) (a tax injunction statute). Concurrently with its sealed Complaint, filed October 29, 2004, the United States filed an unnoticed ex parte application for a broad Temporary Restraining Order ("TRO") and for the appointment of a temporary receiver with powers to engage accountants and attorneys. On November 3, 2004, District Judge Thomas J. Whelan granted the government's requested TRO in its entirety and immediately appointed William A. Leonard, Jr. as Temporary Receiver without bond. Judge Whelan set the OSC hearing for November 18, 2004 to decide whether a preliminary injunction should issue, whether a Receiver should be appointed, and to address issues regarding the repatriation of foreign assets, among other things. Dkt No. 6. Judge Whelan ordered the Complaint unsealed on November 3, 2004, to coordinate this action with the government's planned execution of search warrants in a related criminal investigation of xélan. The United States had represented the circumstances would create a substantial likelihood that defendants would dissipate assets if they received prior notice of the TRO application. Owing to Judge Whelan's absence from the district, this case was reassigned to the undersigned District Judge on November 3, 2004.

This Court granted the Temporary Receiver's ex parte applications to appoint particular counsel and accountants to assist in his work for the duration of the receivership, and continued the preliminary injunction hearing to December 3, 2004 at the parties' request. After a lengthy hearing, this Court dissolved the TRO, denied the entry of any preliminary injunction, terminated the Temporary Receiver's appointment, and ordered the return of all assets frozen and property seized pursuant to the TRO. Dkt Nos. 110, 116. The Order Denying Preliminary Injunction recited the government failed to establish a likelihood of success on the merits of its tax evasion suspicions. Among the evidentiary shortcomings this Court identified were: the IRS had not ruled any particular xélan program actually violates any particular statute or regulation; no other agency or court had made such a finding; an absence of evidence of actual dissipation of defendants' assets or to support the claim that assets seized under the TRO were traceable to criminal activity; no evidentiary basis to substantiate suspicions that xélan doctors underpaid taxes through purportedly impermissible tax avoidance schemes; a showing by defendants that refuted the government's assertion the xélan entities lacked adequate funds or reserves to cover their outstanding obligations, as reflected in the Temporary Receiver's own Initial Preliminary Report; the entities' financial condition discredited the government's "Ponzi scheme" allegations; the freezing of all the Foundation's assets, including approximately $42 million administered in pursuit of legitimate charitable work nationally and internationally, far exceeded the fraction of its programs targeted by the IRS; and even if the government ultimately prevailed on the merits, the scope of the TRO it requested was overly broad and disproportionate to the tax liability exposure. Dkt No. 116, pp. 10-11.

On December 17, 2004, the government dismissed the case in its entirety. Dkt No. 119. The Foundation now moves under the EAJA for an award of its attorneys' fees and costs incurred in connection with its defense of the government's unsuccessful suit for injunctive relief. Alternatively, the Foundation moves for that relief under Section 7430. The Foundation does not seek damages arising from the problems it encountered as a result of the TRO.¹ Rather, it confines its request to reimbursements of actual costs to defend the government's lawsuit. It seeks an upward adjustment to the statutory cap on hourly rates paid its attorneys so that it can recover all of its litigation expenses.

The government responds its decision to seek a Receiver was justified, and "the IRS had a reasonable basis in law for attempting to temporarily shut down the Foundation's activities" to preserve the status quo, precluding the Foundation's request for defense fees and costs. Opp. pp. 13-14. The government also contends the Motion is procedurally defective, alleging: (1) the Foundation's fee request does not include the information required by statute (i.e., itemized statements from attorneys); and (2) the recovery amounts sought are unreasonable ("nearly a quarter million dollars in costs and fees for a month's worth of work for one of many defendants in this case" exceeds "by 1/3 the professional fees that the Temporary Receiver seeks to recover for the same time period, for administering the assets and records of all of the defendants")(Opp. pp. 19-20). The government urges the Motion be rejected as "not complying with the procedural and substantive requirements of the fee-shifting statutes." Opp. 21:14-17.

B. Legal Standards

A preliminary injunction is a "device for preserving the status quo and preventing the irreparable loss of rights before judgment" and is intended to "last until a final judgment is reached." Sierra On-Line, Inc. v. Phoenix Software, Inc., 739 F.2d 1415, 1422 (9th Cir.1984); see Nintendo of America, Inc. v. Lewis Galoob Toys, Inc., 16 F.3d 1032, 1036 (9th Cir.1994). A TRO issues to preserve the status quo before a preliminary injunction hearing may be had, and remains in effect only until the preliminary injunction hearing is held. Qualcomm, Inc. v. Motorola, Inc., 185 F.R.D. 285, 287 (S.D.Cal.1999). "Wrongful enjoinment" is determined "when a party enjoined had the right all along to do what it was enjoined from doing," and "correlates with the concept that a preliminary injunction is intended to protect `loss of rights before judgment' and to last until a final judgment is reached." Id. at 287-88, citing Nintendo, 16 F.3d at 1036; Sierra On-Line, 739 F.2d at 1422. A TRO restraint may be found wrongful when a preliminary injunction is denied because the court finds failure to establish likelihood of success on the merits. Qualcomm, 185 F.R.D. at 287-88.

The EAJA provides:

Except as otherwise specifically provided by statute, a court shall award to a prevailing party other than the United States fees and other expenses, in addition to any costs awarded pursuant to subsection (a), incurred by that party in any civil action (other than cases sounding in tort), including proceedings for judicial review of agency action, brought by or against the United States in any court having jurisdiction of that action, 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) (emphasis added).

Applying that standard, attorneys' fees and costs are awarded if: (1) the applicant is a "party" eligible to seek relief under the EAJA; (2) the moving party is the "prevailing party" in the underlying action; and (3) the government's position in the underlying action was not "substantially justified." A "party" eligible to seek attorneys fees and costs is defined in terms of maximum net worth standards, "except that an organization [exempted from taxes under 26 U.S.C. § 501(c)(3) as a charitable organization] ... may be a party regardless of the net worth of such organization...." 28 U.S.C. § 2412(d)(2)(B). A "prevailing party" is "one who has been awarded some relief by the court." Buckhannon Bd. and Care Home, Inc. v. West Virginia Dept. of Health and Human Resources, 532 U.S. 598, 603, 121 S.Ct. 1835, 149 L.Ed.2d 855 (2001); Farrar v. Hobby, 506 U.S. 103, 111, 113 S.Ct. 566, 121 L.Ed.2d 494 (1992) (a party "prevails" in an action when the relief granted represents a "material alteration of the legal...