1 United States Court of Appeals,

Fifth Circuit.

Nos. 96-20004, 96-20147.

Richard L. MARRÉ, et al., Plaintiffs,

Agritech Enterprises, Inc., Plaintiff-Appellee,

v.

UNITED STATES of America, Defendant-Appellant.

Richard L. MARRÉ; Agritech Enterprises, Inc., PlaintiffsAppellees,

v.

HP-84 NURSERY ASSOCIATES, INC., Intervenor-Plaintiff-Appellant,

v.

UNITED STATES of America, Defendant-Appellant.

July 22, 1997.

Appeals from the United States District Court for the Southern

District of Texas.

Before KING, GARWOOD and PARKER, Circuit Judges.

GARWOOD, Circuit Judge:

Plaintiffs-appellees Richard L. Marré (Marré) and Agritech

Enterprises, Inc. (Agritech), Marré's wholly owned corporation,

sued the United States (government) under 26 U.S.C. § 7431 of the

Internal Revenue Code for wrongful disclosure of plaintiffs' tax

return information. The district court awarded statutory damages

and attorneys' fees to Marré but rejected Agritech's claim for

damages and attorneys' fees. Plaintiffs appealed and the

government cross-appealed on the amount of attorneys' fees awarded

to Marré. A panel of this Court affirmed Marré's damages award but2

reduced his attorneys' fees. The Court also reversed and remanded

Agritech's claim for damages and attorneys' fees. On remand, the

government and Agritech agreed on the amount of statutory damages.

The district court awarded Agritech attorneys' fees in the amount

of $55,50 0 and ordered the government not to set off the damages

and attorneys' fees awarded to the plaintiffs against tax

assessments made by the government against plaintiffs u nder 26

U.S.C. §§ 6700 and 6701. Further, the Court allowed HP-84 Nursery

Associates (Nursery Associates), a judgment creditor of Marré, to

i ntervene and held that Nursery Associates was entitled to fi fty

percent of Marré's damages and attorneys' fees. The government and

Nurse ry Associates now appeal. We affirm in part and reverse in

part.

Facts and Proceedings Below

In 1981, Marré founded Agri tech, a corporation organized to

construct modular solar-heated greenhouse facilities on various

tracts of lan d in Ellis and Waller counties in Texas. Marré

marketed these greenhouses to limited partnerships and individual

investors as tax shelters. In early 1985, the Criminal

Investigation Division of the Internal Revenue Service (IRS) began

a criminal investigation of the plaintiffs' greenhouse operation.

The IRS believed that the plaintiffs had marketed the solar

greenhouses as a tax shelter but failed to construct completed

greenhouse facilities.

During the course of the investigation, Special Agent Lindell

Parris h of the IRS interviewed numerous Agritech investors,3

promoters, suppliers, and employees and mailed out a large number

of form or "circular" letters to the Agritech investors and various

suppliers. In these interviews and letters, Agent Parrish stated

that Marré and Agritech were under investigation by the IRS for

allegedly aiding and assisting in the filing of false tax returns

in violation of 26 U.S.C. § 7206(2), and in t he view of the IRS,

any tax return that showed deductions or credits in connection with

the Agritech tax shelter was false and fraudulent. Attached to

each letter was a questionnaire that included statements that

indicated Marré had been dishonest with the investors.

Marré and Agritech filed suit against th e government in the

district court below under 26 U.S.C. § 7431, seeking damages for

wrongful disclosures of their tax return information as defined in

26 U.S.C. § 6103(b)(2), in violation of 26 U.S.C. §§ 6103(a)(1) and

6103(k)(6). M arré v. United States, No. Civ. A. H-88-1103, 1992 WL

3240527 (S.D.Tex. June 22, 1992). Following a bench trial, the

district court found that the IRS had made 215 unauthorized

disclosures. The court determined that Marré suffered no actual

damages from the disclosures and, therefore, was not entitled to an

award for either compensatory or punitive damages. The court did,

however, award Marré statutory damages of $1,000 per disclosure, or

$215,000. The court also held that Agritech was not entitled to

any damages because it had ceased doing business approximately two

years before the disclosures were made; hence, the court opined,

an award of damages to Agritech would amount to a double recovery

for Marré. Finally, the court held that Marré, but not Agritech,1 This Court recognized that although Agritech had not actively

engaged in business for two years prior to the time the disclosures

were made, under Texas law Agritech was still "technically alive."

We reasoned that because Agritech was a taxpayer for purposes of

section 7431 at the time of the disclosures, it could still recover

damages and attorneys' fees for the wrongful disclosure of its tax

return information.

4 was en titled under 26 U.S.C. § 7430 to recover reasonable

attorneys' fees of $308,444.60 and costs of $17,738.02, for a total

of $326,182.62.

Marré appealed on the amount of damages and Agritech appealed

the district court's rejection of its claim for damages and

attorneys' fees. The government cross-appealed on the amount of

attorneys' fees awarded to Marré. On appeal, we affirmed Marré's

damages award, holding that the district court did not err in

denying him actual damages and that, even if punitive damages were

recoverable under 26 U.S.C. § 7431(c) in the absence of actual

damages, the evidence did not sufficiently support an award for

punitive damages. M arré v. United States, 38 F.3d 823, 825-28 (5th

Cir.1994) ( Marré I ). This Court also reduced Marré's attorneys'

fees award to $107,500 plus costs of $17,738.02, to reflect the

actual expenses incurred under his contingency fee agreement with

his attorneys. With respect to Agritech, this Court concluded that

nothing in section 7431 precluded the corporation from recovering

damages under that provision. We vacated that part of the district

court's judgment denying damages to Agritech and remanded for

reconsideration of Agritech's claim for damages and a ttorneys'

fees. 1

On remand, the part ies agreed that Agritech was entitled to2 Those sections impose penalties for promoting abusive tax

shelters and for aiding and abetting understatement of tax

liability. The issue of whether the tax assessments made against

Marré and Agritech under those sections are valid is currently

being litigated in the district court.

5 statutory damages under section 7431 of $111,000 for 111 separate

acts of unauthorized disclosure of its tax return information. The

parties disagreed, however, on whether Agritech was entitled to any

attorneys' fees under section 7430. The district court determined

that Agritech was entitled, "under the la w of the case," to an

award of $55,500 for its attorneys' fees. The court also held that

the government could not set off the plaintiffs' damages and

attorneys' fees awards against tax assessments the IRS had made

against Marré and Agritech und er sections 6700 and 6701 while

appeal was pending in Marré I. 2 Finally, the judgment required the

government to pay fifty percent of Marré's damages and attorneys'

fees to Nursery Associates, a creditor that had obtained a judgment

and turnover order against Marré in Texas state court and that the

district court had allowed to intervene.

The government now appeals, arguing that the district court

erred in awarding Agritech attorneys' fees and in prohibiting the

government from setting off plaintiffs' damages and attorneys' fees

against their tax liabilities. Nursery Associates appeals the

district court's judgment limiting its award to only fifty percent

of Marré's damages and attorneys' fees and denying its request for

reasonable attorneys' fees.

Discussion

I. Agritech's Attorneys' Fees3 Fur thermore, the taxpayers must have exhausted all

administrative remedies within the IRS. See 26 U.S.C. §

7430(b)(1). The government does not contend that Agritech failed

to exhaust its administrative remedies.

6 Section 7430 of the Internal Revenue Code provides that

taxpayers who prevail in tax proceedi ngs may recover their

attorneys' fees incurred in such proceeding if they establish that

(1) the position of the government at the time of litigation was

not substantially justified; (2) the taxpayers substantially

prevailed with respect to the amount in controversy or with respect

to the most significant issue or set of issues presented; and (3)

the taxpayers meet applicable net worth requirements. 26 U.S.C. §

7430(c)(4)(A); see also Nalle v. C.I.R., 55 F. 3d 189, 191 (5th

Cir.1995). 3 The burden of proving that the government was not

substantially justifi ed in its litigation position is with the

taxpayers. I nformation Resources, Inc. v. United States, 996 F.2d

780, 786 (5th Cir.1993).

The government concedes that Marré and Agritech substantially

prevailed on the most significant issues and meet the net worth

requirements. The government contends, however, that the district

court's award of attorneys' fees to Agritech was erroneous and

should be reversed because, among other things, Agritech has failed

to show that the government's position in the litigati on with

respect to Agritech was not "substantially justified," i.e. that it

was not "justified to a degree that could satisfy a reasonable

person" or had no "reasonable basis both in law and fact." N alle,

55 F.3d at 191 (citations omitted). "In determining whether the7

[government's] position was not substantially justified, the

question is whether the [gove rnment] acted unreasonably—that is,

whether [it] knew or should have known that [its] position was

invalid at the onset of the litigation." Id. ( citing Bouterie v.

C.I.R., 36 F.3d 1361, 1373 (5th Cir.1994)).

We review the lower court's award of attorneys' fees under

section 7430 for abuse of discretion, s ee Wilkerson v. United

States, 67 F.3d 112, 119 (5th Cir.1995), and the supporting factual

findings are reviewed for clear error. Riley v. City of Jackson,

Miss., 99 F.3d 757, 759 (5th Cir.1996). Review of the conclusions

of law underlying an award or denial of attorneys' fees is de novo.

Texas Food Indus. Ass'n v. United States Dept. of Agric., 81 F.3d

578, 580 (5th Cir.1996). This Court reviews the district court's

ruling on sub stantial justification for abuse of discretion, and

will reverse only if we have a definite and firm conviction that an

error of judgment was committed. P ortillo v. C.I.R., 988 F.2d 27,

28 (5th Cir.1993).

Having reviewed the record, we conclude Agritech has failed to

demonstrate that the government's position in the litigation

vis-à-vis Agritech was not substantially justified, as the

government did not know and had no reason to know that Agritech

could recover statutory damages and attorneys' fees under section

7430. There is no evidence Agritech suffered actual damages, and

we have held there was no basis for punitive damages. From the

very outset of this litigation, the government's position has been

that Agritech was not entitled to damages for the unauthorized8

disclosure of its tax return information because it was, at all

relevant times, essentially a defunct entity. The government

vehemently argued, and the district court found, that Agritech—at

all relevant times wholly owned b y Marré—was not entitled to

damages because it had not actively engaged in business ever since

a time some two years before the complained of disclosures were

made. The government reasonably relied on the fact that the Texas

Secretary of State had forfeited Agritech's charter twice and the

charter had remained forfeited until two months before trial.

Tellingly, even the district court in M arré I believed tha t

the government's position was reasonable, as evidenced by its

observation that Agritech was "dead in the water" and "little more

than a corporate corpse." Although the court's agreement with the

government's argument is not of itself dispositive of the issue, we

believe that the court's acceptance of the government's litigation

position further demonstrates the reasonableness of that position.

This is not a case where the government "unreasonably defended

[its] position after several earlier courts had rejected it, when

the IRS had ignored state law that clearly supported the taxpayer,

[or] when the IRS had failed to conduct a reasonable investigation

that would have revealed the flaw in its position." N alle, 55 F.3d

at 191-92 (internal footnotes omitted). Instead, the issue of

Agritech's essentially defunct corporate status at all relevant

times was a relatively novel one, a s neither this Court nor any

other federal court had addressed this precise issue until Marré I.

A lthough we were not persuaded by the government's (and distr ict4 This Court concluded in Marré I that Agritech was

"technically alive" because under Texas law, "the reinstatement of

[ Agritech's] charter will relate back and will revive whatever

rights the corporation had at the time the suit was filed." M arré

I, 38 F.3d at 828. Although we ultimately vacated the district

court's judgment as to Agritech and remanded so that the court

c ould determine whether Agritech was entitled to any damages and

att orneys' fees and if so in what amount, we did not offer any

opinion as to whether the government's litigation position with

respect to Agritech was substantially justified. S ee, e.g., Lennox

v. C.I.R., 998 F.2d 244, 248 (5th Cir.1993) (explaining that "the

ultimate failure of the government's legal position does not

necessarily mean that it was not substantially justified").

We further note that the district court on remand did not

find that th e government's position was not substantially

justified. Rather, the court awarded attorneys' fees to

Agrite ch apparently without giving any consideration to the

substantial justification issue, as evidenced by the court's

own inconsistency—that is, agreeing with the government's

litigation position during the first trial, and then awarding

attorneys' fees to Agritech on remand.

9 court's) reliance on Shapiro v. Smith, 652 F.Supp. 218 (S .D.Ohio

1986), which the government claimed supp orted its position that

Agritech was not entitled to damages and attorneys' fees because it

was "as good as dead," see Marré I, 38 F.3d at 828, our rejection

of this argument was neither an express nor implied finding that

the government's position was unreasonable. 4 Indeed, the

government had no reason to know at the outset of litigation,

either by analyzing federal and state case law or through some

other reasonable investigation, that Marré's wholly owned

corporation Agritech could recover damages an d attorneys' fees

despite having been inactive and essentially defunct ever since a

time approximately two years before the challenged disclosures were

made. Because Agritech has failed to demonstrate that the

government's position at litigation was not substantially5 Because we conclude that Agritech was not en titled to any

attorneys' fees on the basis that the government's litigation

position was substantially justified, we need not reach the merits

of the othe r arguments made by the government in respect to the

attorneys' fee award to Agritech.

6 As part of its setoff argument, the government contends that

it should be allowed to set off Agritech's attorneys' fees as well.

However, our holding that Agritech is not entitled to recover any

attorneys' fees necessarily renders moot the issue of whether

Agritech's attorneys' fees are subject to the government's right of

setoff.

10 justified, we hold that the court below abused its discretion by

awarding Agritech attorneys' fees. 5

II. Government's Right of Setoff

Next, the government contends that the district court erred in

not allowing it (the government) to set off the plaintiffs' damages

and Marré's attorneys' fees against their tax liabilities. 6 While

appeal was pend ing in M arré I, the government assessed tax

penalties of $2,010,733.40 agai nst Marré (in October 1993) and

Agritech (in February 1994) for promoting abusive tax shelters in

v iolation of section 6700 and for aiding and abetti ng the

understatement of tax liability in violation of section 6701.

Marré and Agritech then filed a separate suit in district court

challenging the tax assessments. Meanwhile, the court on remand

held that the government could not set off the damages and

attorneys' fees awarded to Marré and Agritech against their

outstanding tax liabilities.

The government has both a common law and a statutory right of

setoff. The government's common law right of setoff—which is

inherent in the federal government—is broad and "exists independent11

of any statutory grant of authority to the executive branch."

United States v. Tafoya, 803 F.2d 140, 141 (5th Cir.1986). "The

government has the same right which belongs to every creditor, to

apply the unappropriated moneys of his debtor, in his hands, in

extinguishment of the debts due to him." United States v. Munsey

Trust Co. of Washington, D.C., 332 U.S. 234, 239, 67 S.Ct. 1599,

1602, 91 L.Ed. 2022 (1947) (internal quotations omitted).

The government's statutory right of setoff is found in 31

U.S.C. § 3728, which provides:

"(a) The Comptroller General shall withhold paying that part

of a judgment against the United States Government presented

to the Comptroller General that is equal to a debt the

plaintiff owes the Government.

(b) The Comptroller General shall—

(1) discharge the debt if th e plaintiff agrees to the

setoff and discharges a part of the judgment equal to the

debt; or

(2)(A) withhold payment of an additional am o unt the

Comptroller General decides will cover legal cos ts of

bringing a civil action for the debt if the p laintiff

denies the debt or does not agree to the setoff; and

(B) have a civil action brought if one has not already

been brought.

(c) If the Government loses a civil action to recover a debt

or recovers less than the amount the Comptroller General

withholds under thi s section, the Comptroller General shall

pay the plaintiff the balance and interest of 6 percent for

the time the money is withheld."

The government's right of setoff, although broad, is not

unlimited. In order for the government to invoke its right of

setoff, there must be mutuality of debt between the parties. See

United States v. 717.42 Acres of Land, 955 F.2d 376, 381 (5th

Cir.1992); s ee also Capuano v. United States, 955 F.2d 1427, 1429-7 Although it is possible to conjecture that the reason the

district court prohibited the government from setting off the

plaintiffs' tax liabilities was that the court believed the

government's assessments were retaliatory in nature, the court made

no such express finding of bad faith on the part of the government.

In a similar vein, the plaintiffs argue that setoff should not be

allowed because they are not liable for the allegedly retaliatory

penalties that the government see ks to set off against the

judgment. Plaintiffs claim the penalties were retaliatory in that,

inter ali a, the assessments were made after plaintiffs were "no

longer under investigation." The parties are currently litigating

the legitimacy of the assessments in the district court below.

That issue is not properly before us.

12 30 (11th Cir.1992) (explaining that "[t]he right of set-off is

within the equitable power of a court to offset mutual debts

running between two parties"). Mutuality requires "that the

judgment creditor must be the same person (in the view of the law)

as the party who owes the debt to be collected, and the government

must be the same person to whom the debt is owed." I n re Mr. Alan

I. Saltman, Comp. Gen. B-259532, 1995 WL 905738, at *2 (March 6,

1995) (unpublished).

A. Setoff of Plaintiffs' Damages

With respect to the plaintiffs' damages awards in this case,

the government has the authority to set off the damages against the

plaintiffs' alleged tax l iabilities. A mutual debt exists as

between the plaintiffs and the government—that is, the government

owes the plai ntiffs $326,000 in total damages and the plaintiffs

allegedly owe the government in excess of $2,000,000 in taxes.

Because there is mutuality of debt between the plaintiffs and the

government, and because we see no valid reason to disallow setoff, 7

we conclude that the district court erred in prohibit ing the

government from exercising its right of setoff against plaintiffs'8 Moreover, the district court's prohibiting the government

from setting off mutual debts raises serious sovereign immunity and

jurisdictional concerns as well.

9 Likewise, the court added Agritech's $111,000 in damages to

its $55,500 in attorneys' fees, and dividing the total in half,

calculated the attorneys' fifty percent interest to be $83,250.

13 tax debts. 8

B. Setoff of Marré's Attorneys' Fees

Next, we consider whether the dist rict court erroneously

prohibited the government from setting off the awar d to Marré's

attorneys against Marré's tax liabilities. At the conclusion of

the first trial, the court awarded Marré, in addition to $215,000

in damages, $308,444.60 in attorneys' fees and $17,738.02 in costs

pursuant to section 7430. On appeal, we affirmed the judgment as

to the amount of damages and costs, but reduced the attorneys' fees

award to $107,500, to ref lect the reasonable fees "paid or

incurred" by Marré for the services of his attorneys, Urquhart &

Hassell, under their contingency fee agreement. On remand, the

dist rict court in setting forth the plaintiffs' damages and

attorneys' fees awards in a final judgment calculated Marré's

attorneys' fees by adding his damages of $215,000 and attorneys'

fees of $107,500, and then dividing the total in half to reflect

the attorneys' fifty percent interest in the amounts recovered, or

$161,250. 9 After adding the $17,738.02 in costs, the court ordered

that the government pay Urquhart & Hassell a total of $178,988.02.

Sec tion 7430 provides that "the prevailing party may be

awarded a judgment or a settlement for ... reasonable litigation10 The statute reads, in relevant part, as follows:

"(a) In general.—In any administrative or court

proceeding which is brought by or against the United

States in connection with the determination, collection,

or refund of any tax, interest, or penalty under this

title, the prevailing party may be awarded a judgment or

settlement for—

(1) reasonable administrative costs incurred in

connection with such administrative proceeding within the

Internal Revenue Service, and

(2) reasonable litigation costs incurred in

connection with such court proceeding....

(c) Definitions.—For purposes of this section—

(1) Reasonable litigation costs.—The term

"reasonable litigation costs' includes—

(A) reasonable court costs, and

(B) based upon prevailing market rates for the kind

of quality of services furnished ...

(iii) reasonable fe e s paid or incurred for the

services of attorneys in connection with the court

proceeding, ...

(3) Attorney's fees. For purposes of paragraphs (1) and

(2), fees for the services of an individual (whether or

not an attorney) who is authorized to practice before the

Tax Court or before the Internal Revenue Service shall be

treated as fees for the services of an attorney." 26

U.S.C. § 7430.

14 cos ts incurred in connection with such court proceeding." 1 0 26

U.S.C. § 7430. Under the statute, if the court decides to award

attorneys' fees to the prevailing party, the fees are to be awarded

in addition to any damages awarded to the prevailin g party. In

other words, the attorneys' fees are not awarded out of the

prevailing party's damages, but rather are awarded on top of any

damages the prevailing party receives. S ee generally Plant v.15

Blazer Financial Services, Inc. of Ga., 598 F.2d 1357, 1365-66 (5th

Cir.1979) (disallowing setoff by creditor for violation of Truth in

Lending Act where debtor was awarded attorneys' fees under statute

making creditor liable for "the costs of the action together with

a reasonable attorney's fee as determined by the court"); Duncan

v. United States Dept. of Army, No. 88-2143, 1989 WL 117742, at *1

(4th Cir. Oct.4, 1989) (unpublished opinion) (disallowing setoff of

attorneys' fees by Army for violation of Right to Privacy Act, 12

U.S.C. § 3401 et seq., wh ere fees were awarded under 12 U.S.C. §

3 417(a)(4), making Army responsible for "the costs of the act ion

together with reasonable attorney's fees as determined by the

court"). Thus, damages and attorneys' fees under section 7430 are

separate awards, the former going to the prevailing party and the

latter to the prevailing party's attorneys. In this case, because

the attorneys' fees awarded under section 7430 belong to Urquhart

& Hassell, and not Marré, the government cannot set off Marré's tax

obligations against the attorneys' fees award, as no mutuality of

debt exists between the government and Marré's attorneys.

That the statute provides that attorneys' fees are to be

awarded to the prevailing party is not controlling. The issue "is

not whether plaintiff is nominally to receive the money but whether

ultimately it is to go to her attorney or to be credited toward

defendant in repayment of plaintiff's debt." P lant, 598 F.2d at

1366. Here, as in Plant and Duncan, the prevailing party is only

nominally the person who receives the award; the real party in

interest vis-à-vis attorneys' fees awarded under the statute are1 1 For the same reasons, the fact that the district court

awarded the attorneys' fees to Marré, and not his attorneys, does

not affect our conclusion that, in this particular case, "the fee

once awarded becomes in effect an asset of the attorney, not the

client." Plant, 598 F.2d at 1366.

16 the attorneys themselves. 11 See, e.g., Id. at 1366; D uncan, 1989

WL 117742, at *3.

To the extent we conclude that Marré's attorneys' fees award

belongs to Urquhart & Hassell—and therefore is not subject to set

off—the government cannot take advantage of either United States v.

Cohen, 389 F.2d 689 (5th Cir.1967), or United States v. Transocean

Air Lines, Inc., 386 F.2d 79 (5th Cir.1967), cert. denied, 389 U.S.

1047, 88 S.Ct . 784, 19 L.Ed.2d 839 (1968). C ohen involved a

prisoner who successfully sued the United States under the Federal

Tort Claims Act for f ailure to prevent his being assaulted by a

fellow inmate. The court awarded the plaintiff $110,000, and of

that amount $15,000 was awarded in attorneys' fees under 28 U.S.C.

§ 2678, "free and clear of any and all cl aims which the Internal

Revenue Servi ce, the Treasury Department or the United States of

America

... might have or assert against the plaintiff in this

case." I d. at 690 (i nternal quotations omitted). On appeal, we

reversed the district court's denial of setoff, holding that under

section 2678, the attorneys' rights to the fees were derivative of

the plaintiff 's recovery and, therefore, subject to the

government's right of setoff. Id. at 691-92.

In Transocean Air Lines, plaintiff, a bankrupt air carrier,

sued the government over disputed compensatio n allegedly owed it

for its transportation services. The government and the trustee in1 2 Sectio n 203 has since been revised. S ee 31 U.S.C. § 3727.

These revisions, however, are not relevant to our discussion.

17 ban kruptcy settled for $75,000, to be credited against a larger

claim the government held against Transocean. Plaintiff's

attorneys, who under a contingency fee agreement were to be given

a one-third interest in all amounts r ecovered, sought to recover

$25,000 for their services. The district court granted judgment in

favor of the attorneys in the amount of $25,000 directly against

the government an d reduced Transocean's judgment to $50,000. In

reversing the judgment, we reasoned that the attorneys' interest in

the fees was derived from Florida contracts law, and because the

right to sue the federal government cannot be granted by state law

or through co ntractual relationships with third parties, the

judgment could not be sustained as against the government. I d. at

81-82. We also held that the attorneys' fees award could not be

characterized as an assignment of Transocean's claim, as any such

assignment of the judgment would be invalid under the AntiAssignment Act, 31 U.S.C. § 203. 12 Id.

Unlike the case at bar, the attorneys' fees in Cohen and

Transocean Air Lines were awarded out of the plaintiffs' damages.

In Cohen, the attorneys' fees were awarded pursuant to a statute

that then provided that the court could award reasonable attorneys'

fees of up to twenty percent of the a mount recovered by the

plaintiff " " to be paid out of but not in addition to the amount of

judgment

... recovered, ...' " Cohen, 389 F.2d at 690 n. 3 ( citing

28 U.S.C.A. § 2678) (emphasis added). In T ransocean Air Lines, the1 3 None of the other cases cited by the government involves

attorneys' fees awarded pursuant to a statute. See United States

v. Munsey Trust Co., 332 U.S. 234, 67 S.Ct. 1599, 91 L.Ed. 2022

(1947); M assachusetts Bonding & Ins. Co. v. New York, 259 F.2d 33

(2d Cir.1958); South Side Bank & Trust Co. v. United States, 221

F.2d 813 (7th Cir.1955); M alman v. United States, 207 F.2d 897 (2d

Cir.1953).

18 fees were awarded under a contingency fee contract that p rovided

that the atto rneys would receive a one-third interest in the

recovery. See Transocean Air Lines, 386 F.2d at 80. Because the

attorneys' interest in the fees was derivative of the plaintiffs'

interest in the judgment, we allowed the government to set off the

attorneys' fees awarded to the plaintiffs against the judgments

favorable to the plaintiffs. S ee Du ncan, 1989 WL 117742, at *3

(distinguishing Cohen on the basis that the case inv olved two

creditors, the government and plaintiff's attorneys, competing for

rights to the plaintiff's judgment). As stated earlier, the case

before us does not involve derivative rights of the attorneys to

the fees; instead, the fees were awarded to Marré's attorneys in

addition to the full statutory damages awarded to Marré. 13

Our holding that the government may not set off the attorney's

fees extends to, but only to, that portion of the fees awarded

pursuant to section 7430, i.e. $107,500 in fees and $17,738.02 in

costs, or $125,238.02. The government may still set off the

remaining portion of the attorneys' fees which was awarded out of

M arré's $215,000 in damages, or $53,750. This is so because the

$53,750 falls within and comes out of the $215,000 awarded to Marré

as damages, which we have held may be set off by the government1 4 We note that Marré has not challenged the propriety of

awarding his attorneys more than the amount we held in Marré I was

the maximum proper award. Our disposition of the claims of the

other parties renders it unnecessary to decide that matter.

15 Section 31.002 provides, in relevant part:

"(a) A judgment creditor is entitled to aid from a court

of appropriate jurisdiction through injunction or other

means in order to reach property to obtain satisfaction

on the judgment if the judgment debtor owns property,

including present or future rights to property, that:

(1) cannot readily be attached or levied on by

ordinary legal process; and

(2) is not exempt from attachment, exec ution, or

seizure for the satisfaction of liabilities....

....

(c) The court may enforce the order by contempt

proceedings or by other appropriate means in the event of

refusal or disobedience.

(d) The judgment creditor may mov e for the court's

assistance under this section in the same proceeding in

which the judgment is rendered or in an independent

proceeding.

19 because of mutuality of debt between the government and Marré. 14

III. Nursery Associates' Rights Under the Turnover Order

Nursery Associates, following a jur y trial in Texas state

court, secured a judgment against Marré individually on December 4,

1989, in the amount of $345,800 plus post-judgment interest of 10%

per annum on the amount of $204,000 until paid. Through

post-judgment discovery, Nursery Associates identified Marré's

interest in the present case as his only significant asset.

Pursuant to section 31.00 2 of the Texas Civil Procedure Practice

and Remedies Code, Nursery Associates obtained an order for

turnover relief from the state court on March 16, 1993. 15 The order(e) The judgment creditor is entitled to recover reasonable costs, including attorney's fees."

20 required that Marré "and his agen ts, representatives, and/or

attorneys turn over to HP-84 Nursery Associates any and all

benefits or items of value that arise or result from [Marré's suit

aga inst the government]." In addition, Nursery Associates was

awarded r easonable and necessary attorneys' fees of $1,000 along

with the costs of the turnover proceeding.

O n April 7, 1993, Nursery Associates filed its Notice of

Interest, Motion to Intervene and Brief in Support, and Complaint

In Inte rvention, requesting permission to intervene in Marré's

federal lawsuit as a judgment creditor pursuant to the Texas state

court turnover order. On April 16, 1993, the court denied the

intervention. On remand to the district court from M arré I,

Nursery Associates again sought t o intervene in this case as

judgment creditor. On April 21, 1995, the district court granted

the Motion to Intervene and thereafter, on May 1, 1995, Nursery

Associates filed its Complaint in Intervention. Nursery Associates

filed a Motion to Enforce Turnover Order on November 3, 1995,

asserting that it was entitled to enforcement of its judgment in

the total amount of $503,198.44 ($345,800 principal plus interest).

The district court, however, did not order turnover of all of

the damages and attorneys' fees awarded to Marré, which totaled

$322,500. Instead, in its enforcement of the turnover order, the

d istrict court apparently relied on Marré's contingency fee

agreement, which provided for a fee of 50% of all amounts1 6 It is undisputed that Nursery Associates complied with Texas

law in obtaining the turnover order; that the order requires Marré

to turn over any and all benefits and items of value received or to

be received by Marré, inc luding any damages and attorneys' fees,

fromhis action against the government; and that Nursery

A ssociates was properly before the district court to enforce its

turnover order.

21 "recovered" by Marré, and awarded Nursery Associates only $161,250,

to be paid by the government. The court also denied Nursery

Associates's request for attorneys' fees.

On appeal, Nursery Associates argues that the district court

erred in prohibiting it from receiving all of the proceeds of the

judgment obtained by Marré against the govern ment, including all

damages and attorneys' fees. It claims that the court was required

to look to state law in enforcing the state court tur nover order

and, because the language of the turnover order awards Nursery

Associates any and all benefits or items of value that arise from

Marré's suit against the government, the district court was

required to honor the terms of the turnover order without regard to

any contractual arrangement betwe en Marré and his attorneys.

Moreover, Nursery Associates complains that it was entitled to all

attorneys' fees and costs incurred in enforcing its turnover order

in these proceedings. 16

A. Nursery Associates' Interest in Marré's Damages

With respect to the $215,000 in damages awarded to Marré, we

held above that the government could set off the entire amount

against Marré's tax liabilities, as the government's right of

setoff is superior to both Marré's interest and his attorneys'

derivative interest in t hat award. Because Nursery Associates'1 7 We observe that neither the government nor Nursery Associates

contends that their rights vis-a-vis each other in respect to the

setoff issue differ in any way from the rights of Marré and the

government vis-a-vis each other in respect to the same issue. In

other words, Nursery Associates does not contend that it has any

greater right than has Marré to prevent the government from setting

off against Marré's damage award Marré's asserted indebtedness for

taxes as per the tax assessments made against Marré October 18,

1993, during the pendency of the Marré I appeal ; and, Nursery

Associate s has stated its agreement with the government's

contention that Nursery Associates simply stands in Marré's shoes

in this respect, with rights as against the government no greater

or lesser than those of Marré. In this respect, neither the

government nor Nu rsery Associates contends that their rights as

against each other are determined by the body of law governing the

relative priorities of federal tax liens and the claims of state

law cre ditors of the taxpayer. S ee 26 U.S.C. § 6321 et seq. We

note in passing that, for pu rposes of this body of law, Nursery

Associates' March 1993 turnover order appears not to have resulted

in a choate or perfected interest in Marré's judgment against the

government before the conclusion of the appeal of that judgment in

our 1994 decision in Marré I, so that the lien of the government's

October 1993 assessment was "first in time" vis-a-vis Nursery

Associates' i nterest. S ee United States v. McDermott, 507 U.S.

447, 449-51, 113 S .Ct. 1526, 1528, 123 L.Ed.2d 128 (1993)

(explaining that a state lien is perfected when "the identity of

the lienor, the property subject to the lien, and the amount of the

lien are established"); W estern National Bank v. United States, 8

F.3d 253, 255 (5th Cir. 1993) (same); P alandjoglou v. United

National Insurance Co., 821 F.Supp. 1179, 1186-87 (S.D.Tex.1993).

See also Commercial Credit Corp. v. U.S. Fire Ins. Co., 630 S.W.2d

651, 652 (Tex.App.—Houston [1st Dist.] 1981, no writ). Even if we

were to assume, arguendo, that after our Marré I decision Nursery

Associates was a "judgment lienor creditor" for purposes of 26

U.S.C. § 6323(a), nevertheless Nursery Associates does not contend

the government had not properly filed notice of its tax lien prior

to our Marré I decision.

22 interest in Marré's damages is also merely derivative of Marré's

interest, we likewise conclude that the government's right of

setoff is superior to Nursery Associates' interest in the damages.

See Cohen, 389 F.2d at 692. 17

Our analysis regarding Nursery Associates' interest in

Marré's damages does not end here, however. With the litigation

over the legitimacy of Marré's tax assessments currently pending in1 8 Marré argues that an equitable assignment of a present

interest in a cause of action can occur, although not expressed, if

the parties intended such an assignment. Marré claims that he and

his attorneys intended an assignment of an interest in the cause of

action in the November 1, 1989, amended fee agreement. The amended

fee agreement letter, however, does not support Marré's argument,

as the letter states only that "Urquhart & Hassell will be entitled

to 50% of all amounts recovered." The letter does not state, for

example, that Marré a grees to "sell," "transfer," "assign," or

23 the district court below, there remains the possibility t hat the

district court could invalidate the government's tax assessments.

To that end, we must also consider whether Nursery Associates'

interest in the $215,000 damage award is superior to the interests

of Marré and his attorneys. As between Nursery Associates and

Marré, Nursery Associates' interest in the entire amount of the

award is superior to Marré's inte rest. The turnover order's

mandate that Marré turn over to Nursery Associates any and all

benefits or items of valu e that result from the present law suit

was clear and unequivocal. Hence, the district court erred in

awarding Nursery Associates only half of Marré's recovery.

Likewise, as bet ween Nursery Associates and Marré's

attorneys, Nursery Associates' inte rest in that portion of the

$215,000 in damages that was awarded to the attorneys under the

contingency agreement—$161,250 less $107,500, or $53,750—is also

superior to the interest of Marré's attorneys. An attorney's right

to compensati on pursuant to a contingency fee agreement is a

property right determined under applicable state law. A ugustson v.

Linea Aerea Nacional-Chile S.A., 76 F.3d 658, 662 (5th Cir.1996).

Under Texas law, a contingency fee agreement is generally

considered to be an executory con tract. 1 8 S ee Lee v. Cherry, 812"convey" to his attorneys a specified interest in his claim. S ee,

e.g., Carroll v. Hunt, 140 Tex. 424, 168 S.W.2d 238, 239

(Tex.Com.App.1943, opinion adopted); In re Willis, 143 B.R. 428,

431 n. 4 (Bankr.E.D.Tex.1992).

1 9 Although it is unclear what constitutes the defining moment

at which the contingency occurs, compare Lee, 812 S.W.2d at 363

(contingency occurs after "reduction to judgment") with White, 371

S.W.2d at 600 (contingency occurs after "prosecuting or defending

to final judgment all suits") and Carroll, 168 S.W.2d at 240, 242

(contingency occurs after "successful termination of the

lit igation"), we believe that at minimum, the contingency cannot

occur before judgment is affirmed on appeal or when t he time for

filing an appea l has lapsed. S ee Lee, 812 S.W.2d at 363

(explaining that "an executory co ntract is one that is still

unperformed by both parties or one with respect to which something

still remains to be do ne on b oth sides") (internal quotations

omitted) (emphasis in original).

24 S.W .2d 361, 363 (Tex.App.—Hous.[14th Dist.] 1991, reh'g of writ

overruled); B renan v. LaMotte, 441 S.W.2d 626, 630

(Tex.Civ.App.San Antonio 1969, no writ); W hite v. Brookline Trust

Co., 371 S.W.2d 597, 600 (Tex.Civ.App.Amarillo 1963 , writ ref'd

n.r.e.); C arroll, 168 S.W.2d at 240. Therefore, as a general

rule, "an attorney does not receive a legal or equitable interest

pursuant to a contingency fee con tract until the contingency

actually occurs." 19 I n re Willis, 143 B.R. at 431. Once the

contingency occurs, the attorney has a lien on the judgment or

settlement securing his services, and "an attorney's lien is

paramount to the rights of the parties in the suit, and is superior

to other liens on the money or property involved, subsequent in

point of time." Id. at 432 (citations omitted).

Nursery Associates obtained its turnover order from the state

court on March 16, 1993, while appeal was pending in Marré I —before

the contingency occurred. Because the contingency fee contract2 0 Marré argues that, under the common fund doctrine, it would

be inequitable to allow Nursery Associates to reap the benefits of

Urquhart & Hassell's labor, as the attorneys' fees "fund" that

Nursery Associates seeks to acquire through the turnover order was

only made possible through Urquhart & Hassell's work in this case.

The common fund doctrine, however, typically applies in situations

where the attorneys sue for an interest commonly held by members of

a class or third parties who benefit from the suit—which is not the

situation here. See, e.g., Boeing Co. v. Van Gemert, 444 U.S.

472, 477-81, 100 S.Ct. 745, 749-50, 62 L.Ed.2d 676 (1980); Sprague

v. Ticonic National Bank, 307 U.S. 161, 164-68, 59 S.Ct. 777, 779-

80, 83 L.Ed. 1184 (1939). Although application of the doctrine may

be appropriate in exceptional cases, we believe the case at bar

does not present any exceptional or compelling reasons that would

warrant invoking the doctrine. See In re Delta Towers, Ltd., 924

F.2d 74, 78 (5th Cir.1991).

25 between Marré and his attorneys was still executory at the time

Nursery Associates obtained its turnover order, Nursery Associates'

interest in the fees is superior to the interest held by Urquhart

& Hassell. Thus, Nursery Associates' interest in the entire

$215,000, including the $53,750 in attorneys' fees awarded out of

the damages, is superior to the interests of both Marré and his

attorneys. 20

B. Nursery Associates' Interest in the $107,500 in Attorneys' Fees

For the same reasons that the government cannot set off the

$107,500 in attorneys' fees again st Marré's tax assessments,

Nursery Associates cannot claim an interest in the $107,500 of the

fee award which would be superior to Urquhart & Hassell's interest.

Any rights that Nursery Associates has in that portion of the

attorneys' fees under the turnover order are, at most, derivative

of Marré's right to the fees. Thus, because the fees were awarded

to Ma rré's attorneys, and not Marré, and because Nursery

Associates' interest stems from Marré's right to the fees, Urquhart2 1 Nursery Associates make no claim to the $17,738.02 in costs

awarded to Marré's attorneys. However, even if Nursery Associates

had asked for the costs, it s interest would nevertheless come

behind the attorneys' interest because the costs were awarded,

along with the $107,500 in attorneys' fees, directly to the

attorneys under the attorneys' fees statute.

2 2 Tex. Civ. Prac. & Rem.Code Ann. §§ 38.001-.006 govern the

award of attorneys' fees under section 31.002(e). S ee Great Global

Assurance Co., 904 S.W.2d at 775.

26 & Hassell's interest in the $107,500 of the attorneys' fees is

superior to the interest held by Nursery Associates. 21

C. Nursery Associates' Reasonable Attorneys' Fees

Finally, Nursery Associates argues that it is entitled to all

of its reasonable and necessary attorneys' fees incurred in having

to obtain and enforce the turnover order: $1,000 in attorneys'

fees for obtaining the order plus $15,000 in attorneys' fees for

the intervention. Attorneys' fees are mandatory under the turnover

statute if the evidence shows that the judgment credi tor was

successful in obtaining turnover relief and the attorneys' fees and

costs are reasonable. 22 G reat Global Assurance Co. v. Keltex

Properties, Inc., 904 S.W.2d 771, 775-76 (Tex.App.—Corpus Christi

1995, no writ); see also Cortland Line Co. v. Israel, 874 S.W.2d

178, 184 (Tex.App.—Houston [14th Dist.] 1994, writ denied) (stating

that "[a] court has the discretion to fix the amount of attorney's

fees, but it does not have the discretion in denying them if they

are proper un der § 38.001"). Because Nursery Associates was

successful in obtaining turnover relief and we find nothing in the

record that would indicate to us that t he fees are anything but2 3 No party below or on appeal has questioned the reasonableness

of the $16,000 amount requested by Nursery Associates.

27 reasonable, 23 we conclude the district court err ed in refusing to

award Nursery Associates its requested attorneys' fees as against

Marré.

Conclusion

In sum, we reverse the distric t court's award of attorneys'

f ees to Agritech as well as the court's refusal to al low the

government to set off Marré's and Agritech's damages of $326,000,

which incl udes the $53,750 in attorneys' fees awarded to Marré.

The setoff is allowed so that the government can withhold payment

of the damages to Marré and Agritech pending final adjudication of

their tax liabilities on the assessments made while the Marré I

appeal was pending. However, we affirm the court's judgment to the

extent that it prohibits the government from setting off Urquhart

& Hassell's fee award of $107,500 and costs of $17,738.02, as these

fees and costs belong solely to Marré's attorneys, unencumbered by

the government's right of setoff.

We further hold that Nursery Associates' interest in Marré's

damages award of $215,000 is likewise subject to the government's

right of setoff, but is superior to bot h Marré's and Urquhart &

Hassell's rights to the award. As for the $107,500 in attorneys'

fees (and $17,738.02 expenses), Urquhart & Hassell's interest in

the fees (and expenses) is superior to both the government's right

of setoff and Nursery Associates' rights. Lastly, Nursery

Associates is entitled to $16,000 in reasonable attorneys' fees as28

against Marré.

The district court's judgment is AFFIRMED in part and REVERSED

in part.