U.S. v. Paisley, s. 90-3510

CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)
Writing for the CourtBefore RUSSELL, HALL, and PHILLIPS; PHILLIPS; K.K. HALL
Citation957 F.2d 1161
Parties, 121 Lab.Cas. P 10,172, 37 Cont.Cas.Fed. (CCH) P 76,274 UNITED STATES of America, Plaintiff-Appellant, v. Melvyn R. PAISLEY; Thomas K. Jones; Herbert A. Reynolds; Harold Kitson, Jr.; Lawrence H. Crandon, Defendants-Appellees, and The Boeing Company, Inc., Defendant. (Two Cases)
Docket Number90-3513,Nos. 90-3510,s. 90-3510
Decision Date23 March 1992

Page 1161

957 F.2d 1161
121 A.L.R.Fed. 717, 121 Lab.Cas. P 10,172,
37 Cont.Cas.Fed. (CCH) P 76,274
UNITED STATES of America, Plaintiff-Appellant,
Melvyn R. PAISLEY; Thomas K. Jones; Herbert A. Reynolds;
Harold Kitson, Jr.; Lawrence H. Crandon,
The Boeing Company, Inc., Defendant. (Two Cases)
Nos. 90-3510, 90-3513.
United States Court of Appeals,
Fourth Circuit.
Argued Oct. 2, 1991.
Decided March 3, 1992.
As Amended March 23, 1992.

Page 1162

Mark William Pennak, Civ.Div., U.S. Dept. of Justice, Washington, D.C., argued (Stuart M. Gerson, Asst. Atty., Gen., William Kanter, Civ., Div., U.S. Dept. of Justice, Washington, D.C., Henry E. Hudson, U.S. Atty., Alexandria, Va., on brief), for plaintiff-appellant.

William Robert Stein, Hughes, Hubbard & Reed, Washington, D.C., argued (John C. Moylan, Paul Greco, Washington, D.C., for defendants-appellees Jones, Reynolds and Kitson; Gerard F. Treanor, Jr., Amy Berman Jackson, Venable, Baetjer & Howard, McLean, Va., for defendant-appellee Crandon; Robert Plotkin, Washington, Perito & Dubac, Washington, D.C., for defendant-appellee Paisley, on brief), for defendants-appellees.

Before RUSSELL, HALL, and PHILLIPS, Circuit Judges.


PHILLIPS, Circuit Judge:

The question is the entitlement of certain government employees, appellees in this appeal, to an award of attorney fees as prevailing parties under the Equal Access to Justice Act, 28 U.S.C. § 2412 (the EAJA), following the Government's unsuccessful attempt to recover from them a civil penalty for allegedly receiving from their former private employer compensation in violation of 18 U.S.C. § 209(a). Because the former employer is legally obligated to indemnify the employees for their attorney fees in the event of their successful defense of the Government action, we conclude that they did not "incur" the fee expenses, hence are not eligible for a fee award under the EAJA. Alternatively, we conclude that in any event the Government's position in the underlying litigation was "substantially justified," so that on that basis as well the employees are not entitled to a fee award under the EAJA. Accordingly we reverse the order of the district court awarding fees to the employees.

Page 1163


In 1986, the United States brought a civil penalty action against The Boeing Company, Inc. (Boeing), and appellees, five former Boeing employees, alleging that the lump sum payments appellees received as "severance payments" from Boeing upon leaving their employment with that company, but before accepting government appointments, violated 18 U.S.C. § 209(a), a criminal statute prohibiting payment of any government employee's salary by anyone other than the Government or receipt of supplemental salary by a government employee from an outside source. Boeing advanced the attorney fees and expenses of four of the five appellees pursuant to agreements obligating these appellees to repay Boeing all amounts advanced "unless it shall ultimately be determined pursuant to Section 145 of the Delaware Corporation Law and Section 4 of Article VII of the ByLaws of the Company" that appellees are entitled to indemnification by Boeing.

The district court held that the payments did not violate 18 U.S.C. § 209(a); a divided panel of this court reversed; and the Supreme Court, on writ of certiorari, reversed this court, holding that the payments did not violate section 209(a) because the statute does not apply to payments made to or received by persons who, like appellees, were not government employees at the time the payments were made and received. United States v. Boeing Co., 653 F.Supp. 1381 (E.D.Va.1987), aff'd in part and rev'd in part, 845 F.2d 476 (4th Cir.1988), rev'd sub nom. Crandon v. United States, 494 U.S. 152, 110 S.Ct. 997, 108 L.Ed.2d 132 (1990).

Appellees then applied to the district court for an award of attorney fees and costs of defending the action under the EAJA, which, in pertinent part, provides that a court

shall award to a prevailing party other than the United States fees and other expenses ... incurred by that party in any civil action (other than cases sounding in tort) ... 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).

The Government opposed appellees' EAJA claim by arguing that because controlling Delaware law obligated Boeing to indemnify appellees, only Boeing, and not the appellees, actually "incurred" the fees in this action. 1 The Government also argued that even if appellees were held to have incurred the fees and expenses in this matter, the Government had been "substantially justified" in bringing and prosecuting the underlying action against appellees. Rejecting both of the Government's arguments, the district court granted appellees' application for an EAJA award. United States v. Boeing Co., 747 F.Supp. 319 (E.D.Va.1990).

This appeal by the Government followed.


The Government challenges both grounds upon which the district court found the appellees entitled to a fee award: (1) that appellees incurred the fees and costs at issue, and are therefore eligible to recover them under the EAJA; and (2) that the Government's position in the underlying merits litigation was not substantially justified. We take these in order.


The Government argues that because Del.Code Ann. tit. 8, § 145(c) unconditionally required Boeing to indemnify appellees for all of their attorney fees and costs, appellees did not "incur" those expenses, an essential condition to entitlement under the EAJA. Section 145(c) provides:

To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a)

Page 1164

and (b) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith.

We agree with the Government.

The underlying merits litigation was of a type referred to in subsection (a) of section 145 of the Delaware Code, so that its subsection (c) applies. 2 Appellees indisputably were successful on the merits. Under these circumstances, section 145(c) plainly directs that appellees "shall be indemnified" by Boeing and we therefore hold that Delaware law requires Boeing to indemnify appellees for the attorney fees and costs of defending the underlying action.

Appellees contend, however, that even if Delaware law gave them an unconditional right to be indemnified, this does not resolve the question whether they nevertheless should be deemed to have "incurred" the expenses for EAJA purposes. They argue that they should be deemed to have incurred them because having paid them, Boeing's indemnification (or, more properly, declination to demand return of its advances) can only be counted at this point "a mere possibility." The district court accepted this argument, Boeing, 747 F.Supp. at 321. We disagree.

To hold that a prevailing party with an unconditional legal right to indemnification of its attorney fees by a manifestly solvent third party might nevertheless qualify for an EAJA award because indemnification had not yet occurred is unacceptable for several reasons. In the first place, it necessarily would imply an assumption by a court that the indemnitor either would default deliberately on its legal obligation, or, even more questionably, would conspire with the indemnitee to alter the intended operation of the EAJA by jointly disregarding the legal right and duty.

Aside from the unseemliness of such a judicial assumption, such a holding would not in fact serve a principal purpose of the EAJA: to avoid the deterring effect which liability for attorney fees might have on parties' willingness and ability to litigate meritorious civil claims or defenses against the Government. The EAJA provides for feeshifting precisely to avoid this result. See SEC v. Comserv Corp., 908 F.2d 1407, 1415 (8th Cir.1990). Consequently, in any situation in which the eligibility of a particular prevailing party for an EAJA award is in issue, it is appropriate to inquire whether that party would, as a practical matter, have been deterred from litigating had it been known that a fee-shifting award was not available upon a successful conclusion. If that question is asked here, it is obvious that appellees, all but one of whom were funded by an advance which by contract they need not refund if they prevailed in litigation, would not have been deterred had the EAJA not then existed. This is the critical concern underlying the EAJA precondition that a fee claimant shall have "incurred" the expense.

Accordingly, we hold that, to effectuate the purposes of the EAJA, a claimant with a legally enforceable right to full indemnification of attorney fees from a solvent third party cannot be deemed to have incurred that expense for purposes of the EAJA, hence is not eligible for an award of fees under that Act.


The Government also contends that even if appellees should be deemed to have "incurred" these expenses, thereby qualifying

Page 1165

for a fee award if the other requirements of the EAJA were met, the district court also erred in concluding that the Government's position was not substantially justified. We agree.

Whether for purposes of the EAJA the Government's "position" in particular litigation is "substantially justified" has proved to be an issue of considerable conceptual and practical difficulty, given the open-endedness of the statutory language and, no doubt, the delicacy of the question. It had given the lower federal courts enough trouble that in 1987 the Supreme Court undertook to clarify the matter--so far as was possible in light of the statutory text. In Pierce v. Underwood, 487 U.S. 552, 108 S.Ct. 2541, ...

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