William H. Rehnquist: We'll hear argument next in No. 89-1926, United States v. Centennial Savings Bank. Mr. Roberts.
John G. Roberts, Jr.: Thank you, Mr. Chief Justice, and may it please the Court: This case is here on certiorari to the United States court of appeals for the Fifth Circuit. That court issued two rulings adverse to the Commissioner of Internal Revenue. First, on the mortgage swap issue as just discussed in the Cottage Savings case, the Fifth Circuit agreed with the United States that there was a materially different requirement in the tax law. It then disagreed with the United States on application of that requirement, concluding that these mortgage... these pools of substantially identical mortgage loans were in fact an exchange of property that is materially different. The second, unrelated issue, the Fifth Circuit held that when Centennial's depositors incurred a penalty under Federal law for early withdrawal of their savings from certificates of deposit and Centennial deducted that penalty from the savings before turning them over, that the depositors were actually discharging their savings and loan of part of its obligation to them. That meant that the income to Centennial was entitled to special deferred treatment under section 108 of the Code. The Fifth Circuit was wrong with its... in its conclusion with respect to the mortgage swap issue, and it was wrong in its conclusion with respect to the section 108 issue, and the judgment below should be reversed. The facts with respect to the mortgage swap issue are not, to coin a phrase, materially different from the facts in the Cottage Savings case. In April of 1981 Centennial and a trading partner decided to enter into one of these swaps. They plugged their mortgage loan portfolios into the computer, came up with $8.5 million in book value of loans that matched. Centennial then sold its loans to its partner for $5,662,045, and its partner sold its loan to Centennial for $5,662,043. Conducted no independent valuation of the loans, applied a common discount factor. If the loans matched up, they were worth the same.
Antonin Scalia: How do you feel about this one, Mr. Roberts?
John G. Roberts, Jr.: This one comes out the same way as the Cottage Savings case, Your Honor. [Laughter] Centennial, because--
Antonin Scalia: You're sure there's not a material difference between the two?
John G. Roberts, Jr.: --There's not a material difference in the two cases on this issue. Centennial reported no loss to the bank board, deducted a $2.8 million loss on its tax return, which the Commissioner disallowed for failure to satisfy the materially different requirement. For reasons I have already stated, the Commissioner's decision is correct. The R-49 match-up ensured that the loans that were given up were substantially identical to those that Centennial got back. The differences in borrowers and collateral were not a material difference because the parties to this transaction in this market didn't consider those significant. In fact, Centennial conducted no credit checks, performed no appraisals of property. It didn't even know who the borrowers were at the time of the transaction. It didn't get the files on the loans until 6 years later. The market also regarded these now-claimed differences as not material. In this case, as I mentioned earlier, the district court found as fact that the secondary mortgage market was unable to and did not differentiate between these pools of loans on the basis of the borrowers and the collateral. A contrary conclusion would require overturning that factual finding. The Fifth Circuit, which concluded that the loans were materially different, did so because of its view of the nature of this transaction and this type of property. It disregarded the factual findings of the district court as to what the market was like and what the property was like. The second issue presented in this case concerns the treatment of income that Centennial received when its depositors paid penalties required by Federal law for the early withdrawal of their savings. In 1981 Centennial had income of over $250,000 from such penalties. Centennial claims that this is income by the reason of the discharge of indebtedness, and therefore entitled to special deferred treatment under section 108 of the Code. It is not. It is income by reason of the receipt of a penalty, a penalty mandated by Federal law. The fact that Centennial used an offset as a method of paying the penalty doesn't mean that the loan was at any extent forgiven. It simply means that that was the method of payment that they used. Now, in a typical income from the discharge of indebtedness case, if I loan you $1,000, payable in 2 months, and then after 6 weeks, for reasons of my own, I need the money early, I have doubt about your ability to pay at the end of the term, we get together and agree to call it quits if you pay me $800. In that situation, you have $200 of income by reason of my forgiving you that much of your debt.
Antonin Scalia: Um-hum. Suppose I say, when you come to me with that proposition, can I pay it off... well, let's see. You want to pay it off... no, I want you to pay it off early. And you say to me okay, I'll pay it off early, but you'll have to pay a penalty of $200. Suppose it's put that way. Would that make the difference whether you call it a penalty or put it in another way?
John G. Roberts, Jr.: The label you put on it would not make a difference. In your hypothetical, however, that would not be income from the discharge of indebtedness. It would be income from the receipt of the liquidated damages that we'd agreed to prior to the transaction. The key question is whether there is one obligation or two obligations. In the case that I put, where all we know is that you owe me $1,000, payable in 2 weeks, and we agree to lower the debt, I forgive some of the debt, there is only one obligation. The only obligation is yours to pay me $1,000 in 2 weeks.
Antonin Scalia: Um-hum.
John G. Roberts, Jr.: In the case that you pose, and in this case, there are two obligations: your obligation to pay back the $1,000, and my obligation which we agreed to prior to the transaction to pay $200 if I want the money back early. The language of the statute, by reason of the discharge of indebtedness, looks to the source of the income that's received. In your case you have $200 income because you received the damages we agreed to, or in the facts of this case the penalty. I was obligated to you to pay that. The fact that there was a condition precedent to triggering the obligation of my wanting my money back doesn't alter the fact that there are two separate obligations. And that's the case here. When the depositors put their money in the S&L, under Federal law they had an obligation if they withdrew it early to pay a penalty. Two separate obligations. Obligation of the S&L to pay them their money back with the agreed interest--
John Paul Stevens: Mr. Roberts, can I just ask you a question there? As I read the instruments in the appendix, the depositor never gets less than the principal back. What is described as a penalty actually is a failure to receive some of the interest that would otherwise have been earned. Am I correct on that?
John G. Roberts, Jr.: --I think not, Your Honor. It... if you attempted to withdraw your money very early in a longer-term CD you would forfeit some of the principal.
John Paul Stevens: That's not what... do any of the instruments in the record say that? They all say you would not get the interest that would otherwise have been earned during the period. This is in a less than 90-day period. That's the phrasing of each of these instruments.
John G. Roberts, Jr.: My understanding... the current, the 1981 Federal regulation provided that if you had a certificate of deposit for more... the term of which was more than 3 months, and you withdrew the amount prior to the expiration of 3 months, you would forfeit not just the interest that had been earned, but all the interest that could have been earned.
John Paul Stevens: Well, that's right, but you still get your principal back. You still get your principal... I don't think there are any of these certificates--
John G. Roberts, Jr.: Well, you wouldn't--
John Paul Stevens: --you get less than the principal.
John G. Roberts, Jr.: --I... well, the fact of the matter is you would forfeit all the interest that would be earned for 3 months.
John Paul Stevens: Correct.
John G. Roberts, Jr.: If you withdrew that after 2 days you wouldn't have any of that interest yet.
John Paul Stevens: You'd get... but you'd forfeit then the interest that would have been earned during the period that you held the certificate.
John G. Roberts, Jr.: Yes. That's what it's measured by. But it would in effect have to come out of some of your principal.
John Paul Stevens: Well--
John G. Roberts, Jr.: Well, here, if you deposited $1,000 for 3 months, and over that time it's going to earn $30 in interest. And you withdraw it back at the end of 2 days, you've got to pay a penalty of $30 in interest. So all you're going to get back is $970.
John Paul Stevens: --I don't read it that way. But you're telling me that's the way these instruments should be read?
John G. Roberts, Jr.: Well, that's what's provided in the 1981 regulation, which sets that as the minimum penalty.
John Paul Stevens: Where is that regulation in the record?
John G. Roberts, Jr.: It's in the record. It's not reproduced anywhere in the briefs. It is cited in our brief. Centennial... Centennial argues that there is income by reason of indebtedness in this case because the penalty would not have arisen but for the depositor seeking to withdraw his funds earlier. And that's true. The obligation is conditioned upon that event. But the statute doesn't say "but for". It says "by reason of", and that language looks to the source of the income. Here the source of the income is the penalty obligation, not any discharge of indebtedness. When the depositor withdraws his funds early, he is not saying to the S&L I forgive you whatever the amount of the penalty is that you owe me. He's saying give me my money back. And the S&L says before I can do that you have an obligation under these circumstances to pay a penalty. That's the way that the IRS treated this transaction in the 1973 Revenue Ruling that we cite in our brief. It said there is two separate transactions, the crediting of interest and the payment of the penalty.
Byron R. White: This is... you concede this is a qualified business indebtedness--
John G. Roberts, Jr.: Yes.
Byron R. White: --within the 108?
John G. Roberts, Jr.: Within the 108 as it stood at the time. It's been changed since then.
Byron R. White: But to be a qualified business indebtedness, the taxpayer has to make an election--
John G. Roberts, Jr.: Yes.
Byron R. White: --under this paragraph with respect to the indebtedness?
John G. Roberts, Jr.: Yes.
Byron R. White: Now, we're talking about the debtor here, the bank.
John G. Roberts, Jr.: Yes.
Byron R. White: What election did it make?
John G. Roberts, Jr.: It made an election when it--
Byron R. White: It didn't have any election to make. They made a deal... they were... it was on the hook.
John G. Roberts, Jr.: --It had no choice in the transaction.
Byron R. White: Exactly. So it didn't make an election.
John G. Roberts, Jr.: The election refers to when you are filling out your tax returns at the end of next year. You have a choice. You can take this as gross income or, in filling out your returns you can elect--
Byron R. White: I see.
John G. Roberts, Jr.: --elect to reduce the basis of depreciated property that you have. And that also... that points out--
Byron R. White: I thought that was an easy way out, but it isn't. [Laughter]
John G. Roberts, Jr.: --It points out a further incongruity in the decision of the court below. When Centennial and other S&L's are paying interest on the CD's that are held, they get a current deduction from income for the interest that is credited. Now, when they get that interest back because of an early withdrawal penalty, they want to spread the income out over time. It seems more natural to treat the two sides of the transaction the same way. They're getting a current deduction for the interest payment, they ought to take the current income they get from the penalties in at that time rather than spread it out over time. Now, the situation in reality is no different than, and the regulations don't prohibit this, that if the depositor wanted to say here's my check for the penalty, give me all my money back, that would have to be permitted under the Federal regulations. When you just say give me back all my money less the amount of the penalty, it's clear that all you're doing there is using the offset as a method of payment. The depositor is not forgiving any obligation that the S&L has. As I started to point out earlier, the Commissioner--
Antonin Scalia: Would you describe for me... you say "but for" is not enough causation to say that it's a... it's by reason of the discharge of the indebtedness. What must it be beyond "but for"? The motivation for the payment must be to--
John G. Roberts, Jr.: --It has to be the reason, as the statute says, and the reason means the source. Why do you have that income? Is it from discharge of indebtedness? Is it because I, the depositor, say for reasons of my own I'd like my money back now? No. That's not how it works. The reason is because of the penalty mandated by Federal law. Why am I... why am I letting you take... to deduct that from my savings, or why am I giving you a check for that amount? Because I have an obligation to do that in the event of an early withdrawal, not because... and that obligation applies whether you and I like it or not. It's not like the earlier situation we discussed, where we sit down and say, you know, let's call it quits for $800. It's a very different sort of transaction.
Antonin Scalia: --What if it isn't a Federal regulation? What if we just agree at the time we make the loan, you and I, that if you discharge it early you'll have to pay a premium? Then that would not be--
John G. Roberts, Jr.: That would not be income by reason of the discharge of indebtedness. It would be establishing a separate obligation between ourselves prior to the transaction. And at the time, if I said I'd like my money back early, I would have triggered my obligation to pay you the penalty, the liquidated damages in that case, that we agreed upon. We would not be entering into a negotiation to forgive some of the debt. There would be two obligations between us. Yours to give me the money back, mine to pay you what we agreed upon in the event of an early withdrawal.
Antonin Scalia: --Why does that make any sense? It's the same deal, whether we negotiate it before... before I come asking for prepayment or afterwards. It's exactly the same deal. What sense does it make to say if you negotiate it beforehand it can't qualify for this treatment, but if you negotiate it at the time it can?
John G. Roberts, Jr.: It's not the same deal. The question is whether or not there are separate obligations that are being discharged. Now, if we don't have any agreement ahead of time and I just come to you and say I'd like the money early, can we talk about it, there's still only one obligation.
Antonin Scalia: Well, there's one obligation until we make an agreement. At some point before the money is paid over you're going to say okay, yes, you can prepay, but, and at that point there'll be an agreement. Instead of having been made 2 years ago, it'll be made a minute before the money changes hands. But there will be an agreement.
John G. Roberts, Jr.: Well... but the agreement will be your forgiving me part of the debt that I owe you. In the other example it's just setting an obligation, a separate obligation. When we come down the line and that condition is triggered, we're not forgiving the debt. We're paying, as the Seventh Circuit put it in the Colonial Savings case, liquidated damages.
William H. Rehnquist: Would it make any difference in your analysis if the penalty had not been required by Federal regulation?
John G. Roberts, Jr.: No, Your Honor, it would not. If it had been set in advance it would still set up a system of two different obligations. And the question under the statute, what's the reason for the income that you... that you receive, and you would say the reason is that we had this deal and you are obligated to pay me that on early withdrawal. You wouldn't say the reason is that you have decided to forgive me some of what I owe you. Now, the Commissioner of Internal Revenue set forth his understanding of these transactions in a revenue ruling. He said there are two separate transactions: the payment of the interest and the payment of the penalty. The fact that the S&L's typically just netted out when... in the event of early withdrawal, doesn't obscure that fact. Congress knew about that revenue ruling. It modified the Internal Revenue Code to take account of it, adding a provision that let depositors who didn't itemize their deductions take a deduction in the case of the penalty that they incurred. But it didn't alter the Commissioner's understanding of how the transaction took place. Two separate transactions. Separate transactions because they involve separate obligations. Since they are separate obligations, the income is not income from the forgiveness of debt. It is income used to pay the other obligation.
John Paul Stevens: May I ask you a hypothetical question? Supposing, just to... testing the importance of whether there are two separate obligations or only one, supposing you had one separate document that in substance says I hereby loan you $10,000 as a certificate of deposit on the understanding that you will repay at the end of 90 days $10,250, whatever the interest rate might be. Or if you repay, and then it has a schedule of 89 different entries on it, and a slightly different dollar value at each one of those dates, depending on how much interest, you know, you balance the thing out. So there is one document describing one obligation that can be discharged in 90 different ways. Would then the... and you don't describe anything as a penalty. Would that be a different case than this?
John G. Roberts, Jr.: Well, I'm not even sure that in that... yes, I think so. And in that case I'm not sure that you could say that there was any debt at all. If I came back at the end of 20 days, I say our deal was set for 20 days--
John Paul Stevens: Well, there's a debt. You deposit the $10,000 just like a bank deposit. You just fill out the payment obligation for each possible day on which payment might be made. It's clearly--
John G. Roberts, Jr.: --But there's no forgiveness of the debt if I come in 3 days later and I say our deal for 3 days was that you would give me this much back, and that what I would like.
John Paul Stevens: --Yes. It tells you just how much you get back on each day that it might be paid off. Economically it would be precisely the same as what you have got here, but you don't use the term penalty. You just have a schedule so people can figure it out in advance, what, how much it would cost to with... for an early withdrawal.
John G. Roberts, Jr.: Well, but I don't think--
John Paul Stevens: And I say it's all in one document, so you don't worry about whether it's two separate obligations or not. I'm not sure that's not a stronger case for you, frankly, but I just... I'm just wondering whether you really need to rely on this two separate obligation notion.
John G. Roberts, Jr.: --Well, I think the two separate obligation notion is of course stronger in this case because it's set forth in the Federal regulations and in the... in the opinions.
John Paul Stevens: It describes it as a penalty, but it describes economically the same thing I have described to you in one document.
John G. Roberts, Jr.: But in your... in your case I don't understand that there's... it's as if there are, for 30 days, 30 different deals.
John Paul Stevens: Well, they might be, some of these you forfeit the interest accrued up to the date. You could do these in a way that would have a smaller penalty if you withdrew on the 89th day than if you withdrew on the second day.
John G. Roberts, Jr.: I'm just saying that in your case I don't see that there is an ongoing, an entire ongoing obligation. You wouldn't be--
John Paul Stevens: Sure there is.
John G. Roberts, Jr.: --For example, if you decide to withdraw it after 3 days you couldn't be said to be forgiving the obligation for the next 27 days.
John Paul Stevens: No, because it's all one obligation. But it seems to me it's the functional equivalent of what... what the regulations describe.
John G. Roberts, Jr.: Well, I think it's different in that there are, as I would say, 30 different deals in your case.
John Paul Stevens: Well, there are under the regulations, too. The penalty differs depending on... as I understand it, the penalty differs depending on which day you withdraw it. The longer you keep the money in, the less... the more interest you receive.
John G. Roberts, Jr.: Yeah. But the obligation going the other way is not one to pay back at set days. It is simply to pay back at the end of the... at the end of the term.
John Paul Stevens: Well, subject to the right to withdraw upon payment of a penalty, which is the equivalent of an obligation to pay back a little less if they withdraw earlier. Well, you don't think it's the same?
John G. Roberts, Jr.: I think that the case where the penalty is set in advance, it's easier in that situation to see why... why are you getting the money. You're getting the money because of the obligation I have to pay the penalty set by the Federal law and our agreement. And that separate obligation means that the income you receive is not income by reason of the discharge of indebtedness. It's income because of the obligation that I have.
Anthony M. Kennedy: So are you saying the discharge of indebtedness must always be something that is renegotiated?
John G. Roberts, Jr.: It's difficult for me to envision a situation where, if it's all set in advance, that that's not also a separate obligation. If it's something--
Anthony M. Kennedy: And the distinction is between the original... an original contract and the novation?
John G. Roberts, Jr.: --Well, the novation would be the negotiation to forgive some of the debt, only one obligation, the debtor's, forgive some of that. And that would result in income by reason of the discharge of indebtedness. In the other situation there is a separate obligation, and that's the source of the income. On this issue the Seventh Circuit in Colonial Savings we think got it right in recognizing that the situation is no different from the depositor writing a check for the penalty and getting the full amount back. The fact that they chose the offset as the method of payment shouldn't lead to a different tax result. I'd like to reserve the remainder of my time for rebuttal.
William H. Rehnquist: Very well, Mr. Roberts. Mr. Duhl, we'll hear from you.
Michael F. Duhl: Mr. Chief Justice, and may it please the Court: I know you've heard a lot about the mortgage exchange issue, but I would like to make four short points, if I could, because we take a somewhat different position from Cottage, and it will be addressed to some of the questions that were raised in that earlier argument. First, we believe the "materially different" phrase in the regulation should be interpreted in the context in which it arose. Those very same words were used by this Court in a series of cases in the early 1920's to try and distinguish a very narrow class of situations in which the properties exchanged were so identical that income could not be said to have been realized in the constitutional sense. That's really what that phrase is aimed at. Secondly, the Weiss v. Stearn case and Marr v. the United States shows how narrow that class of exchanges is.
Anthony M. Kennedy: Well, I take it, or correct me if I'm wrong, that income as defined in section 61 reaches to the full extent of income under the Sixteenth Amendment?
Michael F. Duhl: That's correct, Your Honor.
Anthony M. Kennedy: So then what those cases say is relevant here?
Michael F. Duhl: Yes, Your Honor, that's exactly what we... exactly how we interpret this regulation. That the Court has said in other cases that 61 stretches to the entire power of Congress' power to tax, and in those earlier cases all the Court was doing was defining out that very narrow category that doesn't cross over that threshold. And if you look at the Weiss case and the Marr case--
Anthony M. Kennedy: And so you're saying that the Government couldn't tax, under its theory couldn't tax this even if it chose to by a specific statutory provision?
Michael F. Duhl: --I'm not... I think if you were to apply those cases, yes. In the last 50 years the constitutional thinking about taxation has changed dramatically. In the Horse case the Court said that realization is really a principle of convenience. And in fact there is now a section of the Internal Revenue Code that purports to tax unrealized appreciation in certain foreign currency exchange transactions and certain regulated investment contracts. It isn't whether or not it could be taxed or not. All we are saying is that these words were used at an earlier time to define a very narrow class. The regulation comes in at that time, uses the same words, and defines a very narrow category. In Weiss and in Marr the very same thing happened. One corporation transferred all of its assets to a newly formed corporation. The shareholders of the old corporation received stock in the new corporation in exchange for their stock in the old corporation. In both cases. In the Weiss case the stockholder also got some cash, but there was no dispute about the taxability of that. In both cases the Government argued that the exchange of shares in the new corporation for shares in the old corporation causes gain to be realized in that case. And in Weiss the Court said well, because the new corporation was... was incorporated in the very same State, and therefore presumably had the same rights and powers as the old corporation, the shares really represented the same property interests that the old corporation shares did. There wasn't in effect any potential for different consequences to flow strictly from the fact that you had two different shells. In Marr, on the other hand, the new corporation was organized in a different State, and Justice Brandeis noted that the different noted that the different State, it therefore had different rights and powers under the new State's law, and therefore it was materially different. He didn't ask whether the shareholders knew what those rights and powers were, whether the market knew. The fact is the shares of stock were still valued at the same price on the market, so that although there may be different risks involved, the market can't perceive what the difference is at that time, but it's the potential for significant different consequences that makes the difference.
William H. Rehnquist: When was the regulation promulgated, Mr. Duhl?
Michael F. Duhl: The regulation was promulgated in 1935, but there was an earlier regulation that was in existence prior to 1924 that used the same phrase, it used "essentially different" instead of "materially different".
William H. Rehnquist: And what are the dates of the Weiss and Marr decisions?
Michael F. Duhl: Weiss and Marr were... Weiss came down in 1924. Marr was decided in 1925, but both under the old statute. The statute was changed significantly in 1924.
William H. Rehnquist: And is it your view that the predecessor of the present regulation was based on Weiss and Marr?
Michael F. Duhl: Yes, it is, Your Honor.
William H. Rehnquist: And it was then... the regulation... the predecessor was promulgated after those two decisions?
Michael F. Duhl: I don't know when the predecessor regulation was promulgated. To be based on, it must have been... it must have been, yes.
Speaker: Well, to be based on Weiss and Marr... correct, it would have to be.
Michael F. Duhl: Yes.
Antonin Scalia: Mr. Duhl, you would... this is the moment of truth. You would say that exchanging one bushel of wheat for another bushel of wheat would quality?
Michael F. Duhl: Would not be materially different.
Antonin Scalia: No, it would be materially--
Michael F. Duhl: No--
Antonin Scalia: --Would or would not? That would not be materially different?
Michael F. Duhl: --My... I don't think you know enough when you ask is one bushel of wheat the same as another bushel of wheat. You have to--
Antonin Scalia: It's different wheat, in two different bushels.
Michael F. Duhl: --But to the extent that there are no different consequences that can flow from one bushel or the other, I would suggest that's what the not materially different phrase is for.
Antonin Scalia: All you know is it's two different bushels of wheat. One bushel may have worms in it, the other one may not. I don't know what consequences there are.
Michael F. Duhl: Well, and I think what--
Antonin Scalia: But chances are there is no difference, but I can't say for sure, just as with these mortgages.
Michael F. Duhl: --Well, I believe you have to look at what you have.
Antonin Scalia: What I know for sure is it's not the same bushel of wheat, which you couldn't say in these cases. It's the same assets, the same rights, it's... it has a different name. This is not a bushel that has just a different name, the way that two different corporations in the same State with the same assets, just a different name. These are different bushels of wheat.
Michael F. Duhl: Then they would be materially different, Your Honor. But I point out to you there is also a section of the Internal Revenue Code, section 1031, which says you don't recognize gain or loss on the exchange of like kind properties. And surely the two bushels of wheat are like kind properties. And so Congress has answered that question. I mean, it becomes a theoretical question that is unnecessary to answer.
John Paul Stevens: Well, you don't content that fungible goods are materially different, do you?
Michael F. Duhl: I believe that's what the materially different phrase was designed to do. It's designed to say fungible goods may be different, but if they're fungible then they're not... it's not material.
John Paul Stevens: Almost by definition, if they're fungible.
Michael F. Duhl: That's correct. In our case... the legislative history--
Antonin Scalia: Excuse me, what does fungible mean except that the market treats them as the same? They are really different wheat, but the market doesn't care. I thought that's the very definition of fungible?
Michael F. Duhl: --Well--
Antonin Scalia: And if you buy that, you've bought, you've bought the Government's theory.
Michael F. Duhl: --No, Your Honor. I don't believe fungibility in that sense, because the market makes everything fungible in terms of dollars and value. That is presumably in the marketplace anything that sells for $25 is fungible with anything else that sells for $25. Fungibility to me, as I understand the term "fungibility", has always been two of the exact same kind of article. But all I am suggesting, Your Honor, is that the term "materially different" is really aimed at, just as at the shares of stock in the Weiss case. They're different shares, because they're two different corporations, different serial numbers. They are different. But they're not materially different because nothing potentially can flow from them. They represent the same property interest. The legislative history of the 1924 statute, the very structure of the Code itself and the sections of the Code we point out, all demonstrate that Congress intended that all exchanges, almost all exchanges, be taxable. That's why in this case, in all these mortgage exchange cases, all the 9 court of appeals judges and all of the 16 tax court judges that considered the issue held that loss was realized. The question... they then went on to ask whether there was a non-recognition provision. The Government's argument here is really created in this case. It is inconsistent with the position it has taken over the last 50 years. It was created to try to deal with this situation, because of R-49. We think R-49 has nothing to do with the tax consequences of the transaction and that it should not be adopted. It is simply inconsistent with all of this history. Finally, finally I do think the prior discussion about mutual funds, about stocks, about bonds, demonstrates that it's difficult to reconcile the Government's position about this, and I think the easiest example to see that in is in the case of Triple-A bonds. If I happen to hold an investment in Triple-A bonds of one company, and those bonds have gone up substantially in value, and I want to diversify my investment, under the Government's argument I think I can call my broker and say I want you to exchange my bonds for other Triple-A bonds, having the same interest rates, the same maturities, the same payment schedules. I don't care who the issuers are, so long as they are Triple-A. And I can say to myself I haven't realized any income because I don't care who the other issuers are. It has all the same characteristics, the same market value, and I therefore don't report anything. And the Government, the IRS never knows whether I have engaged in that transaction or not, because I don't tell them. I don't have to tell them. More aggressive taxpayers, I think, can use that kind of analysis to deal with stocks. It seems to me the Government never really comes to grips with the concept of material difference and how its effect on value in the marketplace. That is the marketplace only looks at things in terms of valuation. And its risk analysis is only in terms of what is the potential consequence that can happen. But all of that is a foresight look. And in our case, in our case... in every exchange case you know the obligors are different. You know the collateral is different. And therefore you know that different consequences can result. You don't know what they may... what they will be. You don't know whether they will occur. But if I hold a mortgage of John Doe and I hold a mortgage of Tom Roe, they may... because John Doe defaults doesn't mean that Tom Roe is going to default.
William H. Rehnquist: Yet the purpose of R-59... 49, Mr. Duhl, was to enable the savings and loans to generate income by taking a tax loss without really altering their fundamental economic position, wasn't it?
Michael F. Duhl: Well, I think it depends on what you mean by fundamental economic position, Mr. Chief Justice. That is, they clearly have modified their economic position in the sense that their financial fortune was tied in with the loans they had originally, and their financial fortune is now keyed into the new ones.
William H. Rehnquist: But wasn't the idea behind R-49 that this change really was not going to change anybody's net worth?
Michael F. Duhl: That's correct, because nothing changes net worth so long as you get equivalent value. And the concept was, well, they wouldn't be changing their risk because it's... the possibility that Tom Roe will default may be equal to the possibility that John Doe will default. But if I hold Tom Roe's and he defaults, and I used to hold John Doe's, that's materially different to me. I have now lost. And if I had kept what I had I wouldn't have lost, whereas at the time the market says they're both worth the same amount. The market can't tell that Tom is going to default and John is not. That's the key to the entire concept of substance in the tax law. My fortune is tied into this piece of property or it's tied into this piece of property. And here everybody knew, in fact the tax court in the Fannie Mae case said it was common sense that the difference in mortgages, the difference in obligors, the difference in collateral, would cause a difference in economic consequence to occur. That's all that--
Antonin Scalia: I... suppose you trade... you trade wheat in one warehouse for wheat in another warehouse, and one, and the warehouse you've traded burns down. It would've made a big difference.
Michael F. Duhl: --It makes a big difference.
Antonin Scalia: So, I guess what you say is it depends on whether you're trading wheat in baskets or in warehouses? Is that the difference?
Michael F. Duhl: Well, that's... one of the questions I would have asked is what's the location of the wheat? Are they sitting right next to each other or are they... is one in California and one in New York? If they are, I think that... that's materially different. That is, the "materially different" phrase really was coined in the context of the constitutional issue. That issue was simply... has subsided over the years, but the phrase has stayed. And it is... it is necessary, I think, to have a concept like that where there are very minor changes, for example in a bond term, or some other very minor modification that gives the flexibility to say, well, it really isn't an exchange, it's the same property. But in our case it just isn't the same property. In none of these cases is it the same property. And it's no different than what goes on at the end of the year, every tax year, when taxpayers who have losses in certain investments sell them and reinvest in other investments that are in the same industry and therefore subject to the same kinds of risks, but they're different companies. Different companies have different fortunes, different obligors on notes have different fortunes.
Anthony M. Kennedy: And I take it if the Government doesn't like that they can have a wash sale statute?
Michael F. Duhl: That is exactly right, Your Honor. That the Congress over the years has created a very complex set of rules to deal with nonrecognition in those situations where either gain isn't appropriately recognized, or, in the context on the loss side where they don't think it's appropriate that taxpayers be able to recognize that. There are such rules in the Code now. They don't apply here. And to create a nonstatutory judicial rule creates and raises all the problems that were discussed in the Cottage argument about what are the facts, did it matter, did he care. All of things are things that Congress can set forth in statutory rules specific things to deal with. And we just don't have that here. We don't have it here for a reason. In fact, the whole concept of exchanges of notes came up in the section 1031 context and Congress decided they want gain to be... or loss to be recognized there, because they think those things are like money. So they specifically made a judgment. And now here we're pulling back, and it's just--
Anthony M. Kennedy: On that point, was there ever an argument that these mortgages were securities within that provision?
Michael F. Duhl: --In one of the cases earlier on the Government argued not that they were securities within the meaning of 1031, but that they were securities within the meaning of the wash sale rule, 1091. And the courts held that they clearly were not, and the Government dropped the argument, I think.
Anthony M. Kennedy: But not within the context of 1031?
Michael F. Duhl: But not within the context of 1031. Let me now turn to the discharge of indebtedness issue, and here we're again talking about realization, but here we all agree income was realized. The question was, was it realized within the meaning of the statutory phrase by reason of the discharge of indebtedness? And we have suggested in our brief that the only reason the taxpayer here realized income was because the depositor came in and said he wanted to cancel the debt, he wanted the debt discharged, he wanted his money back. And but for the depositor coming in and seeking the discharge, we would not have had income. I think the easiest way to think about the difference between the two sides, and I think why our position is correct, is to go back to some of the hypotheticals that were discussed, including the hypotheticals in the petitioner's reply brief that he brought forth this morning. That is, earlier on it was agreed that if the depositor... if there is no regulation, if there is no provision in the CD agreement, and the depositor simply walks into the bank and says I would like to deposit my $100,000 for 2 years in a certificate of deposit. The bank takes the money, opens the account, the depositor walks away. And then a year later the depositor comes back and says I know my CD is for 2 years, but I would like to have my money back, and the bank says, well, I don't have to give it back to you, but I will if you agree to accept $95,000. And the depositor agrees and the bank gives him the $95,000. There is discharge of indebtedness income, income realized by reason of the discharge. It should not matter whether the bank says to the depositor at that time, well, I don't have to give it back to you. I will give... I will give it back to you, but you have to pay me a penalty of $5,000--
William H. Rehnquist: Mr. Duhl, if there are, you know, plausible, reasonable arguments on both sides of this question, don't we customarily defer to a revenue ruling by the Commissioner, which I understand there is in this situation?
Michael F. Duhl: --Well I... there are two answers to that, Your Honor. First of all, I think normally deference isn't given to revenue rulings the way it is to regulations. That is, revenue rulings are simply litigating positions--
William H. Rehnquist: No deference whatever, or simply less deference than to regulations?
Michael F. Duhl: --Well, there is definitely... the Court has said, last term in the Davis case, said the Court gives deference to a revenue ruling when it is longstanding and when it is contemporaneously adopted. That's not the case here, first of all. Second of all, the--
William H. Rehnquist: When was this revenue ruling adopted?
Michael F. Duhl: --1973. And we're talking about a change in the statute that goes back to 1942 with respect to solvent taxpayers. And secondly, the revenue ruling doesn't deal with our situation. The revenue ruling simply says that a depositor who incurs such a forfeiture or a penalty must separately deduct that charge, as opposed to not reporting interest income. And the reason it says that is because interest income is accrued as it is credited to a depositor's account. So that if the bank credits interest quarterly, under these CD arrangements the depositor is entitled to withdraw the interest. So all the ruling is saying is once it's in his account and he can withdraw it, it's no different than his principal. It's as if he took the money out and redeposited it. And so therefore, they say, once it's income to you, you can't retroactively go back and say it's not income because you forfeited. They say you treat it as a separate... as a separate deduction. That doesn't answer the question, however, of whether that separate deduction is income by reason of the discharge of indebtedness to the bank. It's simply dealing with the depositor's side.
Antonin Scalia: Mr. Duhl, I'm concerned about the hypothetical that Justice Stevens gave to Mr. Roberts about a debt agreement in which you pay less and less depending upon how soon you pay it off. It... is every time you pay it off voluntarily earlier, is the difference between that price and what you would have had to pay if you waited longer, is that always income by reason of discharge of indebtedness?
Michael F. Duhl: I believe, Your Honor, that if in fact the agreement is that there is a schedule that says if it is paid back in 1 year you would pay X, if 2 years you pay Y, and Y is greater, that that is the essence of discharge of indebtedness, yes.
Antonin Scalia: Could... isn't it possible that discharge of indebtedness means only permitting you to pay it off before it... before you're entitled to... before you're entitled to? I mean, normally when a debt matures and you pay it, you don't say you're discharging the debt. Discharging the debt means interrupting the whole process of the loan, doing it prematurely.
Michael F. Duhl: I can agree with that, Your Honor. But it seems to me--
Antonin Scalia: In which case Justice Stevens' hypothetical wouldn't qualify as a discharge of an indebtedness.
Michael F. Duhl: --Well, I would look at Justice Stevens' hypothetical as the last date being the maturity date, and any period point in between is an early discharge. It seems to me it's a question of how one looks at it.
Antonin Scalia: Well, but it's not an earlier discharge if you have an absolute right at any point to pay it off. I mean, couldn't it have been directed to the classic situation where you say I know that... I know that technically this money is out for longer. You don't have to pay it back to me yet, but gee, I would really like to have it back. And I'll tell... you have no obligation to.
Michael F. Duhl: Let me--
Antonin Scalia: Whereas the bank here had an obligation to turn the money over.
Michael F. Duhl: --Perhaps--
Antonin Scalia: If the depositor came in and said I want it now, the bank had to give it over.
Michael F. Duhl: --That is correct, Your Honor. But that... that's true only in the sense that the bank agrees that it will give it back if it doesn't have to give everything back. And the parties here did agree on a specific maturity date. And all they did was anticipate in advance that it may very well be that the depositor will want his money back early. So that there's no disagreement here that this was an early discharge on these facts. Everyone agrees to that. And surely--
John Paul Stevens: Well, but you can also view it as an agreement pursuant to which there are... during a 90-day CD for example... there are 90 alternative ways of discharging that indebtedness. And you just elected alternative February 16 rather than the other. And then there has been no premature discharge of that particular method of satisfying the debt.
Michael F. Duhl: --Well, except that in our case... in our case the election is made by the creditor, not the debtor.
John Paul Stevens: Yes, but in the agreement made at the outset it was clear that the... that he could do that and the bank would have to comply with his request. There was no post-contract formation, renegotiation of a debt.
Michael F. Duhl: That's correct, Your Honor, but the bank says I will--
John Paul Stevens: Are there any cases other than in this particular area where this provision has been applied to a situation in which the parties in advance had agreed on the different ways in which the debt could be discharged?
Michael F. Duhl: --Yes, Your Honor. The Columbia Gas case that we cite in our brief, we believe is exactly this case, in the sense that in that case a corporation issued certain bonds that were convertible into stock before maturity. And the bond document specifically said that if a bondholder chooses to convert into stock prior to maturity, that any interest that has accrued in the meantime, from the last interest payment date until the date of conversion, will not be taken into account in the conversion. That is, stock will not be given for that interest. So that the bondholder forfeited that interest, paid a penalty equal to that amount of interest. And the issue in that case was whether or not the corporation has discharged of it and had realized income by reason of the discharge of indebtedness because of that interest that it was... that it was released from, and the court held it was. And the court of claims in Bethlehem Steel case also held it was. In our view the Government doesn't say that case is wrongly decided, it simply says, well, there was no obligation to make a payment in that case. And we say that there was just as much an obligation to make a payment in that case as there is in our case. Neither one of them... do the documents talk about making a payment, having an obligation, but in both cases there is an amount that gets, in advance, agreed to be forfeited. The more basic point really is that the medium of payment characterization of discharge of indebtedness income to which the Government is trying to push our case really doesn't have anything to do with situations in which the discharge, the penalty, the forfeiture, is all integrally related to the initial creation of the debt. It's very easy to distinguish those cases because they deal with totally separate, independent obligations. It's the independence that draws that doctrine into play. It's not that there is a separate obligation. So that in the painting, house painting case, for example, that's on page 16 of the reply brief of the petitioner, where he suggests, in the context of our facts, that we can continue to think about this example, if the depositor says to the bank here is my $100,000, but if you paint my house you only have to return $95,000. The Government uses that example to suggest our "but for" test is incorrect because it says there too the bank would not have realized income but for the fact that it... that the debt was discharged, because it... he says... the bank didn't... the depositor didn't contract to pay the bank to paint his house. But surely he did contract to pay the bank to paint his house. That was the deal. If you paint my house you only have to give me back $95,000. The value of the painting is $5,000.
Antonin Scalia: Mr. Duhl, suppose I enter into an agreement with somebody, they give me money now, and in exchange... I have to pay back $10,000 after 10 years. But it's agreed that if I pay back within 9 years it's only $9,000, 8 years $8,000, 7 years $7,000, and so forth. Now suppose 7 years go by and I pay the $7,000. Have I acquired $3,000 income by reason of discharge of an indebtedness?
Michael F. Duhl: And interest is being paid currently, so that extra $3,000 doesn't represent interest for keeping the debt out longer?
Antonin Scalia: Well, I don't know what it... that's just the deal between us. They gave me $3,000 to begin with, and I said I would pay back $10,000 after 10 years. But 9 after 9 years, and so forth.
Michael F. Duhl: I don't think that's discharge of indebtedness income, Your Honor, because the Internal Revenue Code has other rules that deal with such zero coupon, no-interest-bearing notes, so to speak. That is in that case it's clear that the time value of money is such that if you give somebody $3,000 today, he's getting the use of those funds, you're being deprived of the use of those funds, and you're entitled to interest in compensation for that. And so the growing... the growing amount of principal that has to be repaid, depending on when it is repaid, is really a substitute for interest. And I think under the Internal Revenue Code, the Internal Revenue Service would clearly treat it that way. There are sections that require it to be treated that way. And it's not discharged at all. Here we ought to ask what is the... what is the depositor paying for? The depositor here is paying to discharge the debt. He wants to terminate the debt. In the house painting case he wants his house painted, so he is paying for it. If you look at the creditor's balance sheet you will always be able to distinguish pure discharge from... from medium of payment, because in the pure discharge case he starts with $100,000 receivable, he winds up with $95,000 cash after he withdraws, and he has a loss of $5,000, because there's nothing else there. In the medium of payment case, in the house painting case, he similarly starts with an asset of $100,000. That turns into $95,000 of cash, but there is another asset on his balance sheet now that's worth $5,000. That is his house has gone up by 5. His net worth in a medium of payment case is exactly the same. It's simply that the payment is incidental to the debtorcreditor relationship. Because it exists, because two relationships exist, they simply offset one against each other. That's the independent nature of a medium of payment obligation. In this case all the obligations, as the Fifth Circuit held, are integrally related to each other. They all relate to the pure debtor-creditor relationship, and because of that the penalty is being paid to discharge the debt. And as a result, it is... it would not have been realized but for the discharge, and therefore it is realized by reason of the discharge.
John Paul Stevens: If you're through, can I ask you a question about Columbia Gas?
Michael F. Duhl: Yes.
John Paul Stevens: I noticed from your footnote in your brief that the Second Circuit adopted the IRS position in that case. So was the taxpayer arguing that it was not... not income at all? Is that what they were doing?
Michael F. Duhl: No, the taxpayer was arguing that yes, they did not have to report that income--
John Paul Stevens: I see.
Michael F. Duhl: --but they could simply offset it. Because in that case, Your Honor, the taxpayer did not make the election that he needed to make, and so it didn't help him that it was discharged.
John Paul Stevens: I see.
Michael F. Duhl: Thank you.
William H. Rehnquist: Thank you, Mr. Duhl. Mr. Roberts, do you have rebuttal?
John G. Roberts, Jr.: Very brief, Your Honor. On the mortgage swap issue, it's important to keep in mind what the taxpayer is trying to accomplish here. He is trying to have his cake and eat it too. He structured a transaction to ensure that the pools of mortgages that were swapped would be substantially identical. Because they were, because they did not change his economic position, the taxpayer showed no loss to the bank board. They said our position hasn't changed, everything is the same, and then turned around and, industrywide, claimed hundreds of millions of dollars of tax losses. As one of the district judges noted, it is almost ludicrous to maintain, as the taxpayer does and must, that something can at the same time be substantially identical and materially different. Their position rests on that inherent contradiction, and I would respectfully urge the Court not to embrace that position.
Antonin Scalia: Of course, isn't it also somewhat ludicrous to assume the savings and loan industry didn't suffer all these losses?
John G. Roberts, Jr.: It certainly suffered the losses. They did not realize the losses as a result of these swap of substantially identical pools. On the section 108 issue I will take one more run at Justice Stevens' hypothetical. There is no income from discharge of indebtedness, forgiveness of indebtedness in that case, because there is no forgiveness of any obligation at all, either to forgive the indebtedness or as a method of offset. The debt obligation is simply being satisfied according to its 90 or 30 different terms. The Columbia Gas case, as Justice Stevens points out, the issue in that case was whether there was income at all. It wasn't litigated as an issue of whether it should be income from discharge of indebtedness or regular income. Thank you, Mr. Chief Justice.
William H. Rehnquist: Thank you, Mr. Roberts. The case is submitted.


Warren E. Burger: We'll here arguments next in Webb against County Board. Mr. Ralston, I think you may proceed whenever you're ready.
Charles Stephen Ralston: Thank you. Mr. Chief Justice and may it please the Court: This case presents for the Court a single issue, and that is whether or not attorney time expended before a civil rights action is brought under 1981 and 1983, Title 42 of the United States Code, is filed in federal court, work done before that filing, can that time be excluded from a fee award simply because the time was spent pursuing the same federal claim in an available state administrative proceeding. Our position, Petitioner's position, is quite simply that it should not and cannot be excluded, that it is awardable under the specific language of 42 U.S.C. Section 1988 and under the decisions of this Court that interpret that statute. Our position is, first, that if that time, as we contend it was here, is reasonably expended, reasonably spent, then within the meaning of Section 1988 and this Court's decision in Hensley versus Eckerhart, then it can be compensated for. That is, it is chargeable to the defendant when the plaintiff prevails in his federal court action.
Warren E. Burger: Could you have brought the proceeding in court without going into the administrative process?
Charles Stephen Ralston: Yes, Mr. Chief Justice, we could have gone straight to the federal court, and that is true. And the court below based their decision on the principle that, since it was not mandatory that the state administrative proceedings be exhausted and we did not have to go into federal court, therefore the time should not be compensated for.
Warren E. Burger: Do you read the opinions of the courts as encouraging, even if they do not require, the exhaustion of administrative remedies?
Charles Stephen Ralston: Your Honor, in the Patsy case, which held that exhaustion is not required, this Court pointed out that one of the concerns of Congress when it passed 1983 was to provide concurrent remedies in both state and federal courts. So there's certainly no intention of Congress or the decisions of this Court to discourage the going and utilization of an available state remedy, which is precisely the result of the decision below. The result would be to tell to a potential plaintiff that, go straight into federal court, do not spend any time at all pursuing any other available remedy. Go into federal court, because if you don't you will lose any time you spend prior to going into federal court.
William H. Rehnquist: Mr. Ralston, the district court's memorandum as I read it refers to the state administrative proceeding as one before the County Board of Education of Dyer County, Tennessee.
Charles Stephen Ralston: Yes, Your Honor.
William H. Rehnquist: You say you were pursuing the federal claim before that, the County Board. What's the nature of that proceeding under Tennessee?
Charles Stephen Ralston: Your Honor, we have reprinted in our brief, our main brief, in the appendix, pages 1a to 4a, the statute under Tennessee law which sets out the proceeding. Now, that proceeding and what occurred before the Dyer County Board of Education followed that statute. There's a right to charges, there's a right to have witnesses subpoenaed, there's a right to be represented by counsel. There's a right to present the claims that the person has and have them considered by the Board. And indeed, the statute even provides that if the teacher prevails the Board can award the teacher his costs. So it is an administrative proceeding and a quasi-judicial proceeding.
William H. Rehnquist: What are the standards for showing that you're entitled to reinstatement? Is it kind of a breach of tenure kind of thing?
Charles Stephen Ralston: Certainly under the tenure act there is that. You'd have the right to do that. If your rights under the Tennessee tenure law have been violated, you can present those. But the statute does not limit what can be presented to the Board. Section 512(4), which is at 3a of our appendix, states that: "The teacher may present witnesses and shall have full opportunity to present his contentions and to support them with evidence and argument. "
William H. Rehnquist: Is there any indication in this statutory language that a federal claim is contemplated?
Charles Stephen Ralston: There is certainly no language that indicates that it could not be presented. It simply says Mr. Webb's attorney presented squarely claims arising under the Fourteenth Amendment to the Constitution, presented evidence to support the claim that racial discrimination was behind the attempted disciplinary action.
William H. Rehnquist: Do you ordinarily expect a County Board of Supervisors to pass on constitutional claims?
Charles Stephen Ralston: Well, Your Honor, it certainly is not the normal kind of case they'll handle. But to give an example, we said in our brief, the basic claim of Mr. Webb was that everything was fine in his employment until integration came and he, a black teacher, was assigned to teach in a predominantly white school and he imposed the same kind of discipline he had imposed throughout his career on a white student, and that was the reason why he was discharged. Now, assume for the moment... and he presented evidence to support that claim. Assume for the moment it turned out that indeed there was such a policy. A document had appeared saying that a black teacher who disciplined white students should be discharged. It's inconceivable to me that the County Board would not have dealt with that claim and reinstated Mr. Webb.
William H. Rehnquist: But they probably would have dealt with it under some principle of state law, rather than saying something was unconstitutional.
Charles Stephen Ralston: Your Honor, the members of the County Board I would assume, as are all other state officials, are bound by oath to support the Constitution of the United States and to conform their activities to that Constitution.
William H. Rehnquist: I don't really claim to know anything about Tennessee proceedings. Are you familiar with the way County Boards in Tennessee conduct their affairs, whether this is a typical claim brought before them?
Charles Stephen Ralston: Your Honor, I am not. I am familiar with the record in this case, and in this case the claims were squarely presented, listened to. Most of the testimony before the Board dealt with... most, at least half of it, dealt with the racial discrimination claim which was presented under Constitutional terms.
Byron R. White: I would find it rather strange to have the constitutional issues presented to and passed on by an administrative agency or a County Board. For example, what if the County Board had concluded that this action comported entirely with Tennessee law, it violated nothing in Tennessee law. We've had a hearing on it and everybody turned square corners. Do you think it would have entertained a constitutional argument?
Charles Stephen Ralston: Your Honor, if given the hypothetical I've given, if it had emerged that in fact there was a policy to discharge black teachers in violation of their rights to be free of racial discrimination, I would hope that they would entertain such a claim and that they would not allow such a discharge.
Byron R. White: But it certainly could hardly comport with Tennessee law, then, could it?
Charles Stephen Ralston: It might not have. But it was presented as a federal constitutional claim. But the issue again... again, the facts of this case is the claim was presented, it was heard by the Board, it was not excluded, evidence was not excluded. And indeed, reading the transcript, it even indicates it was objected to. And the question again is whether it was reasonable to attempt to have those rights vindicated by the County Board before going straight into federal court. Now, we pointed out that the judge in the district court excluded absolutely all time spent prior to the actual sitting down and drawing up of the complaint to go into federal court, the 82.8 hours as shown by the joint appendix. Pages 39 to 47 set out the time. But everything prior to the work done in August of 1977 to actually prepare to go to federal court was excluded. And in that time such things were done as to investigate the case, talk to witnesses, talk to the client, to in fact in effect have depositions of two witnesses, at least two witnesses of the defendant... all time that would be compensable if it had been done in connection with the federal court action. Yet it's excluded, absolutely simply because that work was done in connection with the state administrative proceeding. And again, our contention is it was reasonable to do that work and in fact it was the type of work that anyone would have done if he had gone straight into federal court and prosecuted his federal claim.
Byron R. White: Is there any provision for judicial review of the County Board's decision at the end of this sort of an administrative process?
Charles Stephen Ralston: Yes, Your Honor. Under Tennessee law review can be sought in the Tennessee courts.
Byron R. White: And I take it, then, that your constitutional claim was rejected by the County Board?
Charles Stephen Ralston: They simply issued a short decision saying--
Byron R. White: Well, they certainly didn't grant it.
Charles Stephen Ralston: --They certainly didn't grant it.
Byron R. White: So ordinarily you would say they rejected it.
Charles Stephen Ralston: Yes.
Byron R. White: So why didn't you take it to the Tennessee courts?
Charles Stephen Ralston: Well, at that point, Your Honor, we had the option of going either to federal court or to state court, and the counsel decided that they would prefer going to federal court at that point, now that they were going to have to go to court.
Byron R. White: You don't think that... you don't think that if you don't appeal a county commissions's judgment, that doesn't foreclose you from another judicial action?
Charles Stephen Ralston: No, Your Honor, we would not say... no, we take the position that it doesn't. This Court has held--
Byron R. White: There's no administrative res judicata?
Charles Stephen Ralston: --Not under a claim under 1981, I would urge not.
Byron R. White: Why not?
Charles Stephen Ralston: In the same way that this Court has held that in a Title VII case the fact that one goes to--
Byron R. White: Title VII requires you to go to the court and specifically leaves the court open after you've resorted to that.
Charles Stephen Ralston: --Yes, but 1981 and 1983 also allow an independent federal claim to be brought. I might just say that this argument was never made in the court below, that this had some preclusive effect.
Byron R. White: It may not, it may not. But if you had taken this... if you had taken an appeal from the county commission's judgment into the Tennessee courts and you had lost there, you could not come over to federal court?
Charles Stephen Ralston: Well, as I--
Byron R. White: Could you?
Charles Stephen Ralston: --Well, if the federal constitutional claims had been raised and had a final decision from the state courts, yes. If they were not raised, then it would depend on Tennessee law, as I understand the decisions of this Court.
Byron R. White: Well, if they weren't raised you weren't entitled to attorneys' fees.
Charles Stephen Ralston: If they weren't raised in state court, yes. But if they'd been raised in the administrative process and then gone to state court without raising them, whether we could get into federal court would depend on Tennessee law. But if we had gone to a Tennessee court, raised them and had lost, then that would have been preclusive.
William J. Brennan, Jr.: Mr. Ralston, did any of the proceedings in the administrative agency get into the federal court suit in any way?
Charles Stephen Ralston: Yes, Your Honor. Our response... at some point during the litigation, the transcript of the proceedings before the Board of Education were filed, introduced by the Plaintiff. It was subsequent to that that the case was settled.
William J. Brennan, Jr.: Did those proceedings have any relevance to the settlement at all?
Charles Stephen Ralston: Well, the record is not clear, although in the hearing on counsel fees the district court stated that he had in fact read those proceeding. He did not elaborate, but he did discuss that--
William J. Brennan, Jr.: Were they stipulated into evidence, so that the facts were brought before the court by way of stipulating that record in?
Charles Stephen Ralston: --It was introduced as an attachment to an affidavit by counsel for Mr. Webb attesting to their accuracy. The case didn't get to the point where they were stipulated into evidence because the case was settled prior to trial.
William J. Brennan, Jr.: Oh, I see.
Charles Stephen Ralston: They were put in at a point where motions for summary judgment were pending before the district court relating to a number of issues. None of those motions were ever resolved because the case was settled.
Sandra Day O'Connor: Mr. Ralston, may I ask whether by relying on Carey you're asking us to hold that Section 1988 creates an independent action for attorneys' fees for time spent in administrative proceedings, or whether you are asking us to say that you can recover something for attorneys' fees just to the extent you would be able to do so anyway, like for discovery conducted before a federal action? It isn't clear to me what you're asking.
Charles Stephen Ralston: In the present case, the Court only need reach the second point, because in this case we had an action filed in federal court to raise the merits of the claim, there was no final disposition in the state administrative processes. So this case itself presents the claim that the time spent in the administrative process can be compensated because it was reasonable time spent in connection with the federal Court action.
Sandra Day O'Connor: And what do you think about the other question?
Charles Stephen Ralston: The other question... Carey did hold, at least in the context of a Title VII case, that an action could be brought solely for the purpose of obtaining counsel fees. And we would think such a result would be consistent with Carey. Alternatively, as we pointed out, an action might lie in state court under Maine versus Thiboutot to recover counsel fees if the person were fully successful with regard to his federal constitutional claim in the state administrative proceeding. And that is not the case here.
William H. Rehnquist: A moment ago, in answer to Justice O'Connor's question, you said there had been... at least I understood you to say that there had been no final disposition of the state administrative proceeding.
Charles Stephen Ralston: I'm sorry, Not in favor of the plaintiff. The disposition had been to--
William H. Rehnquist: Against the plaintiff.
Charles Stephen Ralston: --Against the plaintiff.
William H. Rehnquist: Right.
Charles Stephen Ralston: I'm sorry, I did not mean to indicate otherwise.
John Paul Stevens: May I ask you a factual question, Mr. Ralston? I understood you to say earlier that the court allowed you fees from the period of August '78 forward, and I looked at pages 46 and 47 of the transcript and I wonder if you meant '78 or '79, because it--
Charles Stephen Ralston: '79, I'm sorry. I misspoke. From 3-7 August '79, preparation and forwarding of the complaint in federal court, that was the time allowed. Everything else before that was excluded.
John Paul Stevens: --And is it your contention that everything that precedes that, it was reasonably necessary in order to prepare and prosecute the federal case?
Charles Stephen Ralston: That is our contention. Now, the district court never reached the question whether there were particular parts of that 82.8 hours that might or might not have been reasonably spent. So there was never any decision, and the Respondents' main claim was none of it could be compensated for because it was done in connection with the administrative proceeding. They did raise some general objections to a couple of items. But the issue of whether every minute of that time should have been compensated for was never reached. Ordinarily in these cases, the district court will look at the time--
John Paul Stevens: Of course, the district court did something else that smacks of a compromise in a way. He gave you, I think, $120 or $125 an hour for all that time, and then added a 25 percent amount for it. And I guess your rate, your going rate, was only... was a lesser amount at the beginning of the period, was it not?
Charles Stephen Ralston: --It's my understanding that the rate at the beginning of the period may have been less. But he gave the current rate for the time spent in federal court and then enhanced it by a multiplier. Now, this case was decided before Blum versus Stenson.
John Paul Stevens: Right.
Charles Stephen Ralston: And the Respondents did not cross-petition on that issue. So it really is not before the Court at all. I just might point out that, even with that multiplier, since the court excluded far more than half of the hours requested, the total amount given was still substantially less than what would have been given if that 82.8 hours had been included and no multiplier given at all.
John Paul Stevens: Right. But you're in effect, your legal position here is that at least some of time should have been counted? You're not necessarily claiming that every hour of the four or five years of negotiating with the school board was necessary for the lawsuit? Or are you saying it's more or less like Carey, that it was all essential? There's quite a difference in theory. I guess I'm repeating Justice O'Connor's question in a way.
Charles Stephen Ralston: Well, our contention would be, if we were in the situation in district court to justify all those hours, that they could be justified. The district court--
John Paul Stevens: As necessary to the federal litigation?
Charles Stephen Ralston: --As necessary. Now, the district court might say, well, some percentage wasn't really related to the federal question and, using a Hensley type analysis, split some of it off. But again, that was never done in the district court because of the district court's ruling as a matter of law that none of it was compensable, period.
John Paul Stevens: Well, he at least gave you the time it took you to write the complaint.
Charles Stephen Ralston: Pardon?
John Paul Stevens: He didn't begin with the filing of the complaint, at least.
Charles Stephen Ralston: Yes, he allowed us to prepare and write it. But anything else was not allowed. And as we've pointed out in our brief, the time spent in preparation to filing the investigation and talking to people is an important amount of time spent, and certainly a substantial amount of the time spent was very comparable to just what one would do through discovery. This Court has pointed out, for example, in Chandler versus Rotabush that the time... the record of an administrative proceeding may be very useful to a court in sharpening the issues, limiting what happened. And that certainly is, we're arguing, we take the position, is the case here. Again, the central point that we would make is that the lower courts here became focused in on the mandatory issue, and our position is that the statute does not say any mandatory proceeding. It says any proceeding. The fact that a proceeding is mandatory, it must be followed, certainly makes it reasonable to follow it, but it doesn't follow the other way, that just because something need not be done it is not reasonable to do it and therefore compensable. And as a matter of policy, to essentially penalize someone for attempting to enforce his rights before going to federal court would simply mean an increase in cases filed in federal courts and a much longer time spent in federal court than if this type of time were compensated for. I'd like, if there are no further questions, I'd like to reserve the remainder of my time.
Warren E. Burger: Mr. Headrick.
S. Russell Headrick: Mr. Chief Justice and may it please the Court: The Respondents would contend, in opposition to Petitioner's assertion, that the issue in this case is not whether the time spent in the administrative proceeding can be excluded, but whether Congress intended to include within the purview of Section 1988, intended to sanction an award of fees for optional state administrative proceedings. And we contend that when the language of the statute and the legislative history and the purposes behind Section 1988, as well as the substantive civil rights statutes for which fees are properly awardable, are considered, that this Court should affirm the judgment of the Court of Appeals. In this case, as we understand it, Petitioner has essentially advanced two arguments in support of his proposition that fees are properly awardable for optional state administrative proceedings under Section 1988. First, the Petitioner contends... and this is what I call his reasonableness argument... that he filed an action in the federal court, he prevailed in settlement of the action, and therefore the only question left for resolution by the courts is whether time was reasonably spent. If so, Petitioner contends Hensley versus Eckerhart compels an award of fees in the instant case. We say that this argument basically fails for two different reasons. In effect, what the Petitioner is requesting this Court to do is to view the state administrative proceedings and the federal district court proceedings as one unit of litigation, when in reality there are two independent legal procedures.
Warren E. Burger: What would have been the situation under Tennessee law if he'd gone into the state courts and prevailed there? Collect fees or not?
S. Russell Headrick: No, sir. No, Your Honor. And as a matter of fact, since the issue was just raised in the reply brief of the Respondents, I've taken a look at Tennessee law, and the Tennessee Supreme Court has reaffirmed, most recently in 1979, Tennessee's adherence to the American rule. And there is no statute that I'm aware of that would authorize an award of attorneys' fees had the Petitioner in this case followed the state judicial route and had appealed and won his case and won reinstatement and back pay.
John Paul Stevens: Well, but is that true if he filed a 1983 action in the state court? Could he not have filed the same action, based on federal law, but filed it in the state court--
S. Russell Headrick: No, sir, not in the courts of the State of Tennessee.
John Paul Stevens: --They don't accept 1983 litigation?
S. Russell Headrick: No, sir, not in the courts of the State of Tennessee. It's been held by the Tennessee Supreme Court in a case that arose about 15, 20 years ago that the courts of the State of Tennessee do not entertain Section 1983 actions. That case has not been overruled to this day.
John Paul Stevens: Is that cited in the briefs? I missed it, I guess.
S. Russell Headrick: No, it is not, Your Honor. And unfortunately I do not have the citation of that case with me, and I'd be happy to supply that to the Court.
John Paul Stevens: Do you have any question about whether that's good law today or not?
S. Russell Headrick: Well, I understand that there is some question under a footnote, I believe in the Martinez case, as to whether or not state courts are obligated to entertain Section 1983 actions. But that's still the law.
John Paul Stevens: They're not... I see.
S. Russell Headrick: Yes, sir. And we think that the fact that the administrative action is separate from the federal civil rights action was recently noted and supported by this Court's opinion in Burnett versus Grattan, where this Court noted that the causes of action which Congress created in the federal civil rights acts are independent of other legal or administrative relief which may be otherwise available under state or federal law. So therefore, we think that the Petitioner's argument which seeks to view this as one unit of litigation ignores this fundamental distinction of federal law. Second and probably more importantly, Petitioner's argument jumps over the very statutory threshold issue which we view as presented by this case, and that statutory threshold issue is whether the optional state administrative proceedings were actions or proceedings, if you will, as that term is used in Section 1988. And we think that this Court's decision in Hensley versus Eckerhart, read together with this Court's decision in Carey, established that you have... that a prevailing party has to overcome the statutory threshold before you ever get to the question of reasonableness. And we contend that New York Gaslight Club against Carey, where the issue is can you get fee for state administrative proceedings, establishes that the issue for determination before anything else is determined by the Court is whether those proceedings are actions or proceedings within the purview of the federal civil rights attorneys' fee act. And we think that Petitioner's argument that seeks to jump over to the question of reasonableness ignores this very statutory threshold question which this Court established in New York Gaslight Club against Carey.
Sandra Day O'Connor: Mr. Headrick, in a case in which a claimant files a state administrative proceeding and does urge the same grounds as he later urges in a federal civil rights action, and spends time preparing for that administrative hearing and doing what amounts to discovery for purposes of dealing with the hearing, and later in the federal civil rights action relies on some of that time and effort as part of his preparation for the federal claim in the federal court, is any of that time recoverable in your view?
S. Russell Headrick: No, we do not think so, because the prevailing plaintiff, the applicant, has not made it over the statutory threshold. And the reason why that is so is because the applicant, the applicant has chosen to pursue an administrative remedy which Congress has not seen fit to encourage resort to through Section 1983.
Sandra Day O'Connor: Though certainly time spent for ordinary civil discovery would be recoverable, would it not, under Section 1988 for preparation time for the 1983 or 1981 claim?
S. Russell Headrick: We have no problem with that.
Sandra Day O'Connor: And if the work done is essentially the equivalent of discovery in the administrative proceeding, why should it not be recoverable?
S. Russell Headrick: Well, as a general proposition it may should be discoverable. But the question is did Congress intend by Section 1988 to authorize an award of attorneys' fees for what I think stretches the point of being an action or proceeding to enforce the enumerated federal civil rights statutes. And that's our contention, that the Petitioner in this case has simply not made it over the statutory threshold of demonstrating that these proceedings are in fact an action or proceeding within the purview of Section 1988.
Harry A. Blackmun: But certainly Congress indicated that they wanted 1988 to be broadly read.
S. Russell Headrick: I don't have any problem with that, with that as a general proposition, Justice.
Harry A. Blackmun: As just a general proposition?
S. Russell Headrick: Well, yes, and I think there's other references in the legislative history--
Harry A. Blackmun: Your view certainly provides a disincentive to pursue administrative remedies and to force everything right into federal court.
S. Russell Headrick: --Well, of course, one of the problems that is incurred in this type of situation is that I don't think you can equate the relief sought in the federal court with what the County Board of Education of Dyer County, Tennessee, was empowered to do with this plaintiff's civil rights claim. The only thing I think that the Dyer County Board of Education was empowered to do under Tennessee statute is merely to reinstate Mr. Webb and to give him back pay. And the only thing that the County Board of Education would do would be to judge the validity of the charges leveled against Mr. Webb. But in Mr. Webb's or Petitioner's federal civil rights complaint, he not only seeks a claim of race discrimination, he presents a claim of a million dollars in damages to his reputation which he says was incurred as part of this dismissal.
Byron R. White: Well, is there any Tennessee law on whether or not administrative agencies or County Boards will entertain federal constitutional claims?
S. Russell Headrick: Justice White, I certainly know of none. I would tend to think that if Tennessee courts say that Tennessee courts should not--
Byron R. White: Entertain 1983--
S. Russell Headrick: --entertain 1983 actions, then the fair inference would be that, no, that administrative bodies would not.
Byron R. White: --Let me ask you this. Let me ask you this. Isn't there some law in Tennessee as to whether administrative agencies will entertain state constitutional claims, as well as the claims under the specific statutes that regulate... that set out the substantive standards for their work?
S. Russell Headrick: I can't address that as a general proposition, whether there is enabling legislation that says statewide all boards can.
Byron R. White: Are there any kinds of decisions in your courts?
S. Russell Headrick: No, sir, I'm not aware of those.
Byron R. White: Or any custom of your administrative agencies?
S. Russell Headrick: Well, I certainly know that in this particular case, from a review of the record even, although those points were made, I don't think they were seriously considered.
Byron R. White: Did you represent the Board?
S. Russell Headrick: No, I did not. The Board was represented by other counsel.
Byron R. White: Well, was there any objection by counsel to entertaining these claims or to the introduction of evidence to support them?
S. Russell Headrick: I don't think there was specific objection to the argument of counsel concerning constitutional claim, and I'm not sure that there is a way to divide the evidence that Petitioner submitted. But in any event, you do run into this problem, I think, of the fact that the relief sought in the federal court simply could not have been granted by the Dyer County Board of Education. I don't think Petitioner would contend that there's any way that the County Board of Education could render a million dollar damage verdict, nor could it certify a class action which was sought in the instant case to vindicate the rights of all black children, all black educators within the Dyer County Board of Education, within that school system. So we think the Petitioner has simply not crossed that statutory threshold. Petitioner's argument in the alternative appears to be that the word "proceeding", which we view as the scope or threshold issue, can be construed to mean an optional state administrative proceeding. And Petitioner relies on this Court's decision in New York Gaslight Club against Carey for that proposition. We think that if you consider... that if the Court considers the way it analyzed the problem in Carey, that the opposite result should obtain in this case. In Respondents' view, we contend that the underlying rationale of New York Club against Carey was that the statute which created the right to attorneys' fees also required the Petitioner in that case... or the Respondent in that case... to exhaust the state administrative remedies. And the underlying thought behind that was, if you do not award fees for these proceedings which the statute requires the party to undergo, then the party may decide, if he has to pay his own attorney, he might not advance what would ultimately be a meritorious civil rights claim. In this case those considerations simply are not present. As I think the Petitioner has conceded, there is simply no exhaustion requirement. There is simply no part of the costs that federal law requires Petitioner to undergo in this case in order to vindicate his rights that was done in the Dyer County Board of Education hearings. We would also contend that this Court's observation in footnote 14 of Smith versus Robinson, recently decided by this Court, supports this application of Carey in the instant case. In that case the Court... and this was cited in our supplemental brief... this Court drew that very distinction of Carey and Title VII on the one hand and Section 1988 and a 1983 claim which was not required to be exhausted. And the Court's conclusion in that case was that, since there was nothing in federal law that required the plaintiff in that case to pursue the administrative remedies, then he could have, just as Petitioner could have in this case, gone straight to court. And we contend that the New York Gaslight Club against Carey case, as most recently applied in Smith versus Robinson, supports the Respondents' argument that Congress did not intend fees to be awarded under Section 1988 for optional state administrative proceedings. Further, as to the legislative history, this Court observed in Hensley versus Ekerhart, the very case upon which the Petitioner relies, that the very purpose of Section 1988 is to ensure effective access to the judicial process. And we contend that this evidences this Court's recognition that the civil rights that are set forth in Section 1988 are to be enforced primarily in court. Patsy has held that Congress has not encouraged the use of state administrative remedies for the enforcement of these rights, and therefore this Court should deny fees for optional state administrative proceedings. We would also emphasize that to leave lower courts with no better guidance than what is reasonable to do in situations such as these will further spawn litigation, because these courts will be making judgments concerning proceedings that do not occur before them, as to the amount of hours, the monetary service... the monetary value of the services, and the impact of those proceedings on federal court litigation. And the courts may have very familiarity with these procedures and the procedures do not occur under the auspices or the control of the courts, and in our view we think that this will spawn further litigation as to what is reasonable in these particular cases, and it will take up already crowded trial and appellate docket time to litigate questions that are only peripherally related to the vindication of the underlying civil rights act.
Sandra Day O'Connor: On the other hand, as Justice Blackmun points out, the costs of not at least permitting the courts to consider the preparation time is to provide a disincentive to follow alternative remedies and stay out of court altogether.
S. Russell Headrick: Now, of course, there's no... and there may be some of that disincentive. But there's no clear indication, at least from the Court's opinion in Patsy, that administrative remedies provide the swiftest or most accurate way to resolve these disputes. And as I've also pointed out, the relief that's granted at the administrative level may not be coextensive with the rights that are sought to be protected by the Petitioner, as in this case. So that even had Petitioner prevailed in this case, he still might have wound up in federal court on his damage to reputation claims and damage claims, as well as injunctive class relief. So we think that that proposition cuts both ways in this case in particular. And in view of the increased litigation over this question of reasonableness, we think the balance should be struck the other way. And on balance, we would assert in the Respondents' view that denial of fees for optional state administrative proceedings in this case would indeed provide lower courts and counsel with a clear line of demarcation and a bright line of demarcation to determine what services are compensable under Section 1988 and what services, if the Petitioner chooses to pursue those remedies, for which he must bear his own counsel fees. If there are no further questions, I'd like to thank the Court for its attention. That concludes my remarks.
Warren E. Burger: Mr. Headrick. Do you have anything further?
Charles Stephen Ralston: May it please the Court: I have a very few responses. With regard to what went on in the administrative process and what was sought in district court, it is true that broader relief was initially sought in district court, but the case was actually settled based on exactly what the school board could have granted. That is, the back pay plus in this case, since Mr. Webb had gotten another job, not reinstatement but the wiping out, expungement of his record and allowing to change a dismissal to a resignation. Indeed, if one looks at the transcript of the hearings before the school board, it reads remarkably like a proceeding to vindicate a racial discrimination claim, a claim of racial discrimination in employment in an individual discrimination claim brought under Section 1981. For that reason, the work that was done clearly was relevant to the federal claims, and clearly we believe aided in the ultimate resolution of this case through settlement. With regard to whether our rule that we request would open up further litigation over what is reasonable, again, the district courts on a daily basis, dealing with counsel fee applications, deal with whether some particular time spent was reasonable, with regard to whether it was necessary to spend so much time taking depositions, which are not done before the court, whether discovery was reasonable, whether other activities. If the defendant objects to time as being too much, being unreasonable, then the district courts have found themselves perfectly capable of dealing with that. And frankly, I don't see anything inherently more difficult in dealing with looking at an administrative proceeding such as was gone through here and deciding whether or not what was done was reasonable in terms of attempting to enforce federal civil rights.
John Paul Stevens: Mr. Ralston, let me ask you a question on that point. Supposing there is one day of work in the state proceeding that clearly did not facilitate anything in the federal proceeding. Just, you had to go in and get a continuance or some stipulation about state procedure, but you spent six or seven hours doing it. But you would not have had to do that in order to bring out your federal case. Are you entitled to pay for that time?
Charles Stephen Ralston: Your Honor, in that particular instance the district court could very well look at that and say, that was not time reasonably spent in vindication of federal civil rights, that's not compensable here.
John Paul Stevens: So you're not claiming that you're entitled to be compensated for all the time spent in the administrative proceeding, all time necessary to that proceeding?
Charles Stephen Ralston: Not necessarily. I mean, it depends on the circumstances, just as if the case had gone straight into federal court the district court might decide that someone spent 20 hours researching a memo and they could have done it in two hours or it wasn't necessary really to do it at all.
John Paul Stevens: It's hard to get the flavor of it, but as I read the district court opinion I thought he was treating the claim as though the lawyer who was then representing the plaintiff thought he was entitled as a matter of law to be compensated for the time in that proceeding more or less as he is in the federal proceeding.
Charles Stephen Ralston: Well, the counsel for plaintiff was arguing that all the time was reasonably spent and therefore he should be compensated for it fully. Now, if the district court had reached that issue he may have well disagreed and said: Well, no, I'm only going to give you for 50 hours or 60 hours.
John Paul Stevens: But see, I got the impression the parties didn't fight about the allocation, that there was kind of an agreement that 58 hours was on the federal case and 82 hours was on the state proceeding, and you either got the 82 hours or you didn't. And I think you're making a little different argument now.
Charles Stephen Ralston: Well, the defendants objected to any of the time as a matter of law, and that's the issue that we're focusing on.
John Paul Stevens: And you in effect argue you're entitled to all of it.
Charles Stephen Ralston: We said, yes, we're entitled to all of it unless you can convince the court that some of it--
John Paul Stevens: That's what I don't find, is the "unless you can convince" part.
Charles Stephen Ralston: --Well, I guess that issue was never reached, Your Honor, because it all got focused in on whether any of it could be compensated at all and that's the way it was decided. Now, the defendants did also object to certain... they said 14 hours going to and from a hearing was too much. I imagine plaintiff's counsel are wont to say that was necessary. You know, plaintiffs' counsel don't like to lose hours that they're going to get paid for. But the court, district court, never grappled with that issue at all. It just ruled as a matter of law.
Byron R. White: Mr. Ralston, suppose there's a case where everything you do to enforce your state rights, state statutory or state constitutional rights, are absolutely the same as what you would be doing to enforce the federal right, and in the state proceeding you just... you have a federal constitutional claim, but you also have these state claims, and you just go forward.
Charles Stephen Ralston: Your Honor, in that case it would be the same issue that was grappled with, I think, in Hensley. If the claims are so intertwined as to be not divisible and if the party prevails, then they'd be entitled to be compensated for that time, assuming that it was a substantial federal claim.
Byron R. White: Even though if he hadn't joined his claim, his federal claim, he would have done exactly the same thing?
Charles Stephen Ralston: Yes. If he has presented a substantial federal claim and hasn't just thrown it in there to try to get fees... and in this case these facts do not present that circumstance, because here was a substantial federal claim, particularly the claim of racial discrimination which was the heart of Mr. Webb's claim all along... then he should be compensated for it under Hensley. Thank you.
Warren E. Burger: Thank you, gentlemen. The case is submitted.
Speaker: The Honorable Court is now adjourned until tomorrow at 10:00.