1The Honorable Pasco M. Bowman stepped down as Chief Judge of the United

States Court of Appeals for the Eighth Circuit at the end of the day on April 23, 1999.

He has been succeeded by the Honorable Roger L. Wollman.

2The Honorable Andrew W. Bogue, United States District Judge for the District

of South Dakota, sitting by designation.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 98-3495

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Alexis M. Herman, Secretary of the *

United States Department of Labor, *

*

Plaintiff - Appellee, *

* Appeal from the United States

v. * District Court for the

* Eastern District of Missouri.

Timothy J. Schwent, *

*

Defendant - Appellant, *

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Submitted: April 19, 1999

Filed: May 27, 1999

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Before BOWMAN, Chief Judge,1 FAGG, Circuit Judge, and BOGUE,2 District Judge.

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BOWMAN, Chief Judge.
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The Secretary of the United States Department of Labor sued Thomas J.

Schwent, among others, for alleged violations of the Employee Retirement Income

Security Act (ERISA), 29 U.S.C. §§ 1001-1461 (1994). The District Court granted

judgment against Schwent, and Schwent appealed. In Herman v. Mercantile Bank,

N.A., 137 F.3d 584 (8th Cir. 1998), this Court reversed and ordered the District Court

to dismiss the Secretary's claims against Schwent. 

The Secretary's claims having been dismissed, Schwent applied pursuant to the

Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412 (1994), for payment of his

attorney fees and costs by United States. The District Court granted Schwent's

application for costs but denied his application for attorney fees after determining the

Secretary's position in the litigation was substantially justified. Schwent appeals. We

reverse.

I.

As Mercantile Bank describes in greater detail, Schwent was a vice-president of

Lenco, Inc. and the administrator and trustee of Lenco's health plan. Jerry Ford

purchased Lenco in 1986, relying in part on funds borrowed from Marine Midland

Bank (Midland Bank). Seeking to ensure repayment of its loan, Midland Bank

established a financing arrangement that ultimately caused Lenco to suffer serious cashflow shortages. 

When cash-flow shortages occurred, Ford elected to pay certain operating

expenses instead of funding Lenco's health plan fully. Lenco continued to pay medical

claims, but payments for most claims filed between November 1986 and March 1988

were delayed several months. (Lenco switched to another health-insurance plan in

March 1988 and remained current in its payment of claims filed under this second

plan.) When Lenco entered bankruptcy on June 20, 1989, approximately $143,166 in

claims had not been paid.
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The Secretary subsequently filed suit against Schwent and other Lenco officers,

claiming in part that Schwent had breached his fiduciary duty to the health plan. Before

trial, the Secretary knew that Schwent frequently had demanded additional funds for

the health plan and twice had induced Ford to make personal loans to pay delinquent

medical claims. The Secretary also knew that Schwent's efforts had caused Lenco to

pay almost ninety percent of all medical claims filed between November 1986 and

March 1988, and that Schwent had convinced Ford and Lenco to change plans in

March 1988 to protect health-plan beneficiaries' rights. Nevertheless, the Secretary

took the case to trial and there asserted that Schwent had breached his fiduciary duty

by failing to sue Lenco when it deprived its employees' health plan of funds.

The District Court agreed with the Secretary's position. It entered judgment in

her favor, awarding the Secretary $137,770.41 in damages (the amount of unpaid

claims not satisfied by Lenco's bankruptcy estate) and enjoining Schwent from serving

in the future as an ERISA plan administrator. 

Schwent appealed to this Court. In Mercantile Bank, we determined that the

circumstances of this case required the Secretary to prove that, if Schwent had sued

Lenco, the lawsuit would have been successful and provided benefit to the plan. The

Secretary offered no evidence supporting this conclusion. See Mercantile Bank, 137

F.3d at 587. We also determined that a prudent plan administrator in Schwent's

position would not have sued Lenco because a lawsuit and the accompanying publicity

only would have harmed Lenco and the plan beneficiaries. See generally id. at 588.

In light of these two determinations, this Court concluded that the District Court

"clearly erred in finding a lawsuit would have been prudent and successful in

decreasing the amount of unpaid medical claims." Id. at 587. We reversed and ordered

the District Court to enter judgment in Schwent's favor, dismissing the Secretary's case

against him. See id. at 588. The District Court did so.
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After the District Court dismissed the Secretary's claims against him, Schwent

applied under EAJA for the United States to pay $54,290.42 in attorney fees and

$867.30 in costs. The District Court awarded Schwent costs, but denied his application

for attorney fees after determining the Secretary's position in the litigation was

substantially justified. See Herman v. Schwent, No. 1:91CV00011ERW, slip op. at 5

(E.D. Mo. Aug. 25, 1998) (Memorandum and Order denying attorney fees) [hereinafter

Order Denying Attorney Fees]. Schwent now appeals the denial of his application for

attorney fees.

II.

EAJA allows most parties who prevail against the United States in civil litigation

to recover costs. See 28 U.S.C. § 2412(a) (1994). EAJA also allows those parties to

recover attorney fees and some litigation expenses if the Government fails to prove that

its position in the litigation "was substantially justified or that special circumstances

make an award unjust." Id. § 2412(d)(1)(A); see also Friends of the Boundary Waters

Wilderness v. Thomas, 53 F.3d 881, 885 (8th Cir. 1995) (stating the Government bears

the burden of proving its position was substantially justified). The Government proves

its position was substantially justified by showing the position was "'justified in

substance or in the main'--that is, justified to a degree that could satisfy a reasonable

person." Pierce v. Underwood, 487 U.S. 552, 565 (1988). The position must have a

"reasonable basis both in law and fact." Id. Once a district court has determined that

the Government has proved its position was substantially justified, this Court reviews

for abuse of discretion. See Patterson v. Buffalo Nat'l River, 144 F.3d 569, 571 (8th

Cir. 1998). 

This Court previously has stated that the Government's ability to convince

federal judges of the reasonableness of its position, even if the judges' and

Government's position is ultimately rejected in a final decision on the merits, is "the

most powerful indicator of the reasonableness of an ultimately rejected position."
3The judge who denied Schwent's application for the recovery of costs and fees

was not the original trial judge.

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Friends, 53 F.3d at 885. Following this principle, the District Court relied to a large

degree on the order and judgment we reversed in Mercantile Bank to find the

Secretary's position was substantially justified.3 The District Court determined the

Secretary's position that Schwent had breached his fiduciary duty was not "plainly

contrary to existing law." Order Denying Attorney Fees at 6 (quoting Friends, 53 F.3d

at 885). Rather, the Government reasonably believed Diduck v. Kaszycki & Sons

Contractors, Inc., 874 F.2d 912, 916-17 (2d Cir. 1989), supported the position that

Schwent had breached his fiduciary duty by failing to sue Lenco. See Order Denying

Attorney Fees at 6. The District Court also found substantial justification for the

Secretary's position in the facts of the case. According to the District Court, there was

evidence from which the Secretary could reasonably believe that Schwent had failed

even to consider filing a suit against Lenco. See id. at 7-8. The District Court also

found that the Secretary reasonably countered Schwent's arguments that suing Lenco

clearly was imprudent or futile. See id. at 8-9.

The District Court did not abuse its discretion when it determined that the

Secretary reasonably could have believed her position was supported by the applicable

law. But the District Court did abuse its discretion when it concluded the Secretary's

position was substantially justified on the basis of facts and arguments we rejected in

Mercantile Bank as clearly erroneous and unsupported by the record. In Mercantile

Bank, this Court determined that the District Court's finding that Schwent failed even

to consider filing suit against Lenco was clearly erroneous. All the evidence in the

record instead pointed one way: Schwent did not file suit because, having thought about

the issue, he realized a lawsuit would harm, not help, the plan and its beneficiaries.

See Mercantile Bank, 137 F.3d at 588. Further, in Mercantile Bank we found several

reasons for rejecting the Secretary's arguments that Schwent's filing of a lawsuit would

have been reasonable, including: (1) the absence of evidence supporting the Secretary's
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claim that filing a lawsuit would have benefitted the plan or its beneficiaries; (2)

evidence that Lenco's financial difficulties and debt structure would have made a

lawsuit futile; (3) evidence that Lenco filed for bankruptcy before a lawsuit could have

produced additional funds to pay medical claims; (4) evidence that Schwent, by

demanding additional funds from Ford and by convincing Ford to make personal loans

to the health plan, had consistently decreased the number and amount of delinquent

medical claims; (5) evidence that the a lawsuit filed by the health-plan administrator

would have caused healthcare providers to deny treatment for plan beneficiaries or

require that beneficiaries pay for all treatments with cash; and (6) evidence that the

filing of a lawsuit by Schwent, a Lenco corporate officer, would have harmed Lenco's

relationships with its customers and suppliers, thus undermining Lenco's chances of

remaining financially viable. See id. at 587-88.

Neither in Mercantile Bank nor in the present litigation has the Secretary offered

evidence refuting any of these reasons or showing the basis for her belief that a prudent

plan administrator would have filed suit despite its obvious futility. In the absence of

such a showing, the Secretary has failed to carry her burden of proving she was

"justified in substance or in the main," see Pierce, 487 U.S. at 565, when she pursued

this litigation against Schwent.

III.

Schwent made reasonable, prudent, and largely successful efforts to obtain as

much funding as possible for Lenco's health plan. He then successfully defended his

actions against the Secretary's baseless claims that he should have done something

more. The resulting situation is one EAJA was designed to prevent: an individual's

suffering financial ruin because he had to defend himself against the Government's

unjustified lawsuit. In these circumstances, we conclude the District Court abused its

discretion in denying Schwent's application for attorney fees. The District Court's order
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denying Schwent's application for attorney fees is reversed, and the case is remanded

to the District Court for the awarding of fees.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.