Opinion ID: 545184
Heading Depth: 1
Heading Rank: 4

Heading: eaja eligibility

Text: A. Johnson's Eligibility Clarified 21 We now turn to the heart of this lawsuit--whether Johnson is eligible for an EAJA award. To be eligible for an award of fees and expenses under EAJA, the party seeking fees must show that: (1) it is a prevailing party; (2) if an individual, his or her net worth did not exceed $2,000,000 at the time the action was filed or, if a corporation, its net worth did not exceed $7,000,000 and it did not have more than 500 employees at the time the action was filed; and (3) that the fees and other expenses sought were incurred by that party in [the] civil action in which it prevailed. 28 U.S.C. Secs. 2412(d)(1)(A)-(2)(B). 22 Clearly, Johnson is a prevailing party. The EAJA standard is not stringent; a plaintiff [must] receive at least some relief on the merits of his claim.... to be a prevailing party. Hewitt v. Helms, 482 U.S. 755, 760, 107 S.Ct. 2672, 2675, 96 L.Ed.2d 654 (1987). 4 The SEC achieved none of the relief it sought against Johnson, while Johnson obtained all that he sought in pursuing his defense. Johnson was found not to have committed the alleged violations and no injunction was granted. Johnson therefore unquestionably prevailed. No one disputes this fact or that Johnson's net worth does not exceed the allowable limits. 23 Rather, the SEC and Johnson dispute whether Johnson incurred the legal fees and expenses within the meaning of EAJA. The SEC says he did not and asserts that National Union is the real party in interest for an EAJA award; Johnson, on the other hand, says he did and states that if he is not a real party then surely Comserv is. 24 Both are addressing the wrong issue. Neither National Union nor Comserv was a prevailing party in the underlying action. National Union was never a party to the action at all 5 while Comserv, although a named party, did not prevail. 6 The SEC achieved its sought-for result against Comserv, even though the dispute between the SEC and Comserv ended with Comserv's consent. The Hewitt standard still applies. Cf. Dunn, 842 F.2d at 1433 (party who achieves sought-for result in litigation is still regarded as prevailing party, even if result was achieved by settlement through entry of a consent decree). Therefore, as among Johnson, Comserv, and National Union, only Johnson was a prevailing party. The question that remains, therefore, is whether Johnson incurred legal expenses as required by the statute. 25 B. Did Johnson Incur Defense Costs? 26 Neither EAJA nor the legislative history provides a definition of the word incur. Thus, we begin with an examination of whether Johnson actually paid his own legal expenses. Mr. Johnson and Comserv entered into a severance agreement at or about the time that Mr. Johnson left Comserv in 1983. In that agreement, Comserv agreed to pay for Mr. Johnson's legal fees and expenses incurred in connection with the SEC investigation, which includes this litigation. Johnson Response to April 16, 1990 Order at 5 (hereinafter Johnson Response). Thus, Comserv was contractually obligated to pay Johnson's legal fees. It is also true that, even if Comserv and Johnson had not entered into this agreement, Comserv very likely would have been required to indemnify Johnson under Minn.Stat.Ann. Sec. 302A.161(22) (West Supp.1989) and Minn.Stat.Ann. Sec. 302A.521(2) (West 1985). These provisions mandate corporate coverage of legal expenses for officers and directors in certain circumstances. 7 Johnson's attorneys directly billed Comserv and subsequently its successor MSA for Johnson's legal fees. These companies paid the bills, and then turned to National Union for reimbursement under the insurance policy. Johnson was never exposed to unconditional liability for legal fees in the SEC litigation. 27 Under the policy, National Union was obligated to reimburse Comserv for Comserv's indemnification of its officers and directors only when the Directors and Officers shall have been entitled to indemnification by Comserv. Johnson was so entitled. In recognition of this obligation, National Union agreed, in September 1986, to reimburse Comserv for all of the attorneys' fees, experts fees and costs incurred in the defense of Thomas Johnson since May 1, 1984 through the conclusion of the Johnson suit. Johnson Response, Exh. 2. This agreement was part of an overall settlement that concerned National Union's reimbursement of expenses for other suits arising out of the same fact situation as Johnson's. 28 As to the possibility that National Union might have a right to recovery by way of subrogation any fees to which Johnson might be entitled under EAJA, the district court observed: [T]he major part of any award of attorneys' fees in this case most likely will end up in the pocket of National Union pursuant to a subrogation clause. In response to an explicit question set forth in our April 16, 1990 order concerning reimbursement of National Union pursuant to the subrogation clause, counsel for Johnson stated: 29 National Union has not been reimbursed, pursuant to subrogation or otherwise, for the payments of legal fees and expenses of Mr. Johnson. 30 With respect to the future, we have been informed by the counsel for Comserv/MSA that Comserv/MSA contends that, pursuant to the September 2, 1986 letter, National Union is not entitled to any future reimbursement. Counsel for Comserv/MSA indicates that the September 2, 1986 letter sets forth the agreement regarding all of the attorneys' fees that Comserv/MSA incurred as a result of the underlying events, that this letter reflects a global settlement regarding attorneys' fees in all the proceedings, and that National Union waives any right to subrogation. It is unknown whether National Union takes a different position. 31 Johnson Response, at 6. 32 Nonetheless, the September 2, 1986 agreement does not provide explicitly that National Union waives its rights, whatever they might be, to subrogation. Therefore, although Johnson's counsel may be correct, we cannot conclude that National Union is not entitled under its policy with Comserv to subrogation with respect to any EAJA award to which Johnson might be entitled. 8 33 One thing is clear, however. Johnson has never paid any attorneys' fees. We thus turn to cases construing EAJA or similar statutes in instances where one or more prevailing parties did not pay out-of-pocket expenses. 34 We turn first to United States v. 122.00 Acres of Land, 856 F.2d 56 (8th Cir.1988), a case applying not EAJA, but the Uniform Relocation Assistance and Real Property Acquisition Policies Act, Pub.L. No. 91-646, tit. III, Sec. 304, 84 Stat. 1906 (codified at 42 U.S.C. Sec. 4654 (1982)), whose fee shifting provisions turned on whether the fees had been actually incurred. 9 There the party seeking fees from the United States had property the government sought to obtain by eminent domain. He retained an attorney under a contingency fee contract which provided that:  'If there is no recovery, the undersigned will bear no expense for attorneys' fees.'  Id. at 57 (emphasis added by 122 Acres court). Although the property owner prevailed in his jury trial for just compensation, the government ultimately abandoned its plans to obtain the property, and the case was dismissed prior to his recovery of any funds. We held that because the property owner had no obligation under the contingent fee arrangement to pay his attorney anything, he had not incurred attorneys' fees within the meaning of the statute. Id. at 58. The lesson of 122 Acres is that fees are incurred when there is a legal obligation to pay them. 35 In the instant case, Comserv, not Johnson, was legally obligated to pay Johnson's attorneys' fees. Whether the source of Comserv's legal obligation was grounded in contract or statute is immaterial. What is relevant is that, from the inception of the underlying lawsuit, Johnson was able to pursue his defense in the SEC action secure in the knowledge that he would incur no legal liability for attorneys' fees. To hold he incurred such fees is to turn the word upside down. 36 Such verbal gymnastics are not necessary to serve the primary intent of Congress in creating EAJA. That intent was  'to diminish the deterrent effect of the expense involved in seeking review of, or defending against, unreasonable government action.'  10 Cornella v. Schweiker, 728 F.2d 978, 981 (8th Cir.1984) (citations omitted). Neither the client in 122 Acres nor Johnson in the instant case required the assistance of a federal fee-shifting statute to overcome the deterrent of attorneys' fees. Both were protected by private agreement (and Johnson perhaps also by state statute) from the burden of attorneys' fees. To allow either to shift his fees under a statute intended to remove the deterrent effect of fees is pointless. 37 We acknowledge there is an exception to the requirement that a legal liability for attorneys' fees must be incurred in order to be eligible for an EAJA award. In Cornella v. Schweiker, 728 F.2d 978, 987 (8th Cir.1984), we held that parties who were represented by pro bono counsel are not barred from receiving an EAJA award, even though they had not actually been assessed attorneys' fees. In so holding, we relied in part on legislative history, which suggests that awards to pro bono organizations were contemplated by Congress. See id. (quoting H.R.Rep. No. 1418, 96th Cong., 2d Sess. 15, reprinted in 1980 U.S.Code Cong. & Admin.News 4994). We held that where a pro bono attorney forgives a fee to a client unable to afford legal expenses, that client is eligible for an EAJA award on the basis of that arrangement with the attorney. Other courts have reached a similar result. See, e.g., American Ass'n of Retired Persons v. EEOC, 873 F.2d 402, 406 (D.C.Cir.1989); Watford v. Heckler, 765 F.2d 1562, 1567 n. 6 (11th Cir.1985). 38 122 Acres and Cornella can be harmonized once the EAJA's purpose to remove the deterrent effect of attorneys' fees is understood. The client in 122 Acres had eliminated any deterrent effect of fees by means of his contract with his attorney. Fees ceased to exercise a deterrent effect on his litigation decisions. Nor is it apparent that the incidence of litigation by those deserving representation would be increased. By contrast, in Cornella we observed that [i]f attorneys' fees to pro bono organizations are not allowed ..., it would more than likely discourage involvement by these organizations in [cases against the government], effectively reducing access to the judiciary.... Id. at 986-87. Thus, by assisting in the financing of the pro bono representation effort, EAJA unquestionably contributes to removing the deterrent effect of fees for those pro bono-dependent clients and thereby increases the incidence of deserving representation. Thus, neither 122 Acres, when its reasoning is applied to EAJA, nor Cornella is at odds with the intent of Congress to reduce or eliminate the deterrent effect of fees. 39 The lesson we draw from these two cases is that EAJA awards should be available where the burden of attorneys' fees would have deterred the litigation challenging the government's actions, but not where no such deterrence exists. 40 Focusing on deterrence sheds light on the problem of the stand-in litigant who seeks fees under EAJA that, if received, would be passed on to an ineligible litigant. In Wall Industries, Inc. v. United States, 15 Cl.Ct. 796 (1988), aff'd without opinion, 883 F.2d 1027 (Fed.Cir.1989), for example, the court held that a corporation which prevailed in a tax refund case, Wall Industries, could not recover attorneys' fees under EAJA where the company's accounting firm, Arthur Young, required that Wall Industries initiate the lawsuit, chose the attorneys and directed the litigation strategy, and was the sole beneficiary of the underlying judgment in favor of Wall Industries. Wall Industries was a stand-in for Arthur Young, an otherwise ineligible litigant. The burden of legal fees could have deterred no one other than Arthur Young, a deterrence not cognizable by EAJA. 41 A similar situation arose in Unification Church v. INS, 762 F.2d 1077 (D.C.Cir.1985), where three individuals and the church sued the INS to overturn its refusal to allow the three individuals to remain in the United States. Id. at 1079. The plaintiffs prevailed. The church, which had more than 500 employees, could not satisfy the statute's definition of party. The individual plaintiffs could. The church had paid the legal fees for all plaintiffs, and each used the same lawyer, an individual who had represented the church since 1974. The court held that where the fee arrangement among the plaintiffs is such that only some of them will be liable for attorney's fees, the court shall consider only the qualification vel non under the [EAJA] of those parties that will be themselves liable for fees if court-awarded fees are denied. Id. at 1082. Only those liable could be deterred by the obligation to pay fees. While admittedly the Church served an interest of a higher sort than did Arthur Young, both were parties without EAJA protection. 42 Like Arthur Young and the Unification Church, neither Comserv nor National Union was eligible for an EAJA award for fees. If Johnson recovered fees under EAJA, and if National Union were to be subrogated as a result of that award, National Union would recover an EAJA award to which it is not entitled. EAJA was not written to compensate National Union for the risks it has assumed or its costs of doing business.