Opinion ID: 12452
Heading Depth: 3
Heading Rank: 2

Heading: Setoff of Marre's Attorneys' Fees

Text: 25 Next, we consider whether the district court erroneously prohibited the government from setting off the award to Marre's attorneys against Marre's tax liabilities. At the conclusion of the first trial, the court awarded Marre, in addition to $215,000 in damages, $308,444.60 in attorneys' fees and $17,738.02 in costs pursuant to section 7430. On appeal, we affirmed the judgment as to the amount of damages and costs, but reduced the attorneys' fees award to $107,500, to reflect the reasonable fees paid or incurred by Marre for the services of his attorneys, Urquhart & Hassell, under their contingency fee agreement. On remand, the district court in setting forth the plaintiffs' damages and attorneys' fees awards in a final judgment calculated Marre's attorneys' fees by adding his damages of $215,000 and attorneys' fees of $107,500, and then dividing the total in half to reflect the attorneys' fifty percent interest in the amounts recovered, or $161,250. 9 After adding the $17,738.02 in costs, the court ordered that the government pay Urquhart & Hassell a total of $178,988.02. 26 Section 7430 provides that the prevailing party may be awarded a judgment or a settlement for ... reasonable litigation costs incurred in connection with such court proceeding. 10 26 U.S.C. § 7430. Under the statute, if the court decides to award attorneys' fees to the prevailing party, the fees are to be awarded in addition to any damages awarded to the prevailing party. In other words, the attorneys' fees are not awarded out of the prevailing party's damages, but rather are awarded on top of any damages the prevailing party receives. See generally Plant v. Blazer Financial Services, Inc. of Ga., 598 F.2d 1357, 1365-66 (5th Cir.1979) (disallowing setoff by creditor for violation of Truth in Lending Act where debtor was awarded attorneys' fees under statute making creditor liable for the costs of the action together with a reasonable attorney's fee as determined by the court); Duncan v. United States Dept. of Army, No. 88-2143, 1989 WL 117742, at  1 (4th Cir. Oct.4, 1989) (unpublished opinion) (disallowing setoff of attorneys' fees by Army for violation of Right to Privacy Act, 12 U.S.C. § 3401 et seq., where fees were awarded under 12 U.S.C. § 3417(a)(4), making Army responsible for the costs of the action together with reasonable attorney's fees as determined by the court). Thus, damages and attorneys' fees under section 7430 are separate awards, the former going to the prevailing party and the latter to the prevailing party's attorneys. In this case, because the attorneys' fees awarded under section 7430 belong to Urquhart & Hassell, and not Marre, the government cannot set off Marre's tax obligations against the attorneys' fees award, as no mutuality of debt exists between the government and Marre's attorneys. 27 That the statute provides that attorneys' fees are to be awarded to the prevailing party is not controlling. The issue is not whether plaintiff is nominally to receive the money but whether ultimately it is to go to her attorney or to be credited toward defendant in repayment of plaintiff's debt. Plant, 598 F.2d at 1366. Here, as in Plant and Duncan, the prevailing party is only nominally the person who receives the award; the real party in interest vis-a-vis attorneys' fees awarded under the statute are the attorneys themselves. 11 See, e.g., Id. at 1366; Duncan, 1989 WL 117742, at  3. 28 To the extent we conclude that Marre's attorneys' fees award belongs to Urquhart & Hassell--and therefore is not subject to set off--the government cannot take advantage of either United States v. Cohen, 389 F.2d 689 (5th Cir.1967), or United States v. Transocean Air Lines, Inc., 386 F.2d 79 (5th Cir.1967), cert. denied, 389 U.S. 1047, 88 S.Ct. 784, 19 L.Ed.2d 839 (1968). Cohen involved a prisoner who successfully sued the United States under the Federal Tort Claims Act for failure to prevent his being assaulted by a fellow inmate. The court awarded the plaintiff $110,000, and of that amount $15,000 was awarded in attorneys' fees under 28 U.S.C. § 2678, free and clear of any and all claims which the Internal Revenue Service, the Treasury Department or the United States of America ... might have or assert against the plaintiff in this case. Id. at 690 (internal quotations omitted). On appeal, we reversed the district court's denial of setoff, holding that under section 2678, the attorneys' rights to the fees were derivative of the plaintiff's recovery and, therefore, subject to the government's right of setoff. Id. at 691-92. 29 In Transocean Air Lines, plaintiff, a bankrupt air carrier, sued the government over disputed compensation allegedly owed it for its transportation services. The government and the trustee in bankruptcy settled for $75,000, to be credited against a larger claim the government held against Transocean. Plaintiff's attorneys, who under a contingency fee agreement were to be given a one-third interest in all amounts recovered, sought to recover $25,000 for their services. The district court granted judgment in favor of the attorneys in the amount of $25,000 directly against the government and reduced Transocean's judgment to $50,000. In reversing the judgment, we reasoned that the attorneys' interest in the fees was derived from Florida contracts law, and because the right to sue the federal government cannot be granted by state law or through contractual relationships with third parties, the judgment could not be sustained as against the government. Id. at 81-82. We also held that the attorneys' fees award could not be characterized as an assignment of Transocean's claim, as any such assignment of the judgment would be invalid under the Anti-Assignment Act, 31 U.S.C. § 203. 12 Id. 30 Unlike the case at bar, the attorneys' fees in Cohen and Transocean Air Lines were awarded out of the plaintiffs' damages. In Cohen, the attorneys' fees were awarded pursuant to a statute that then provided that the court could award reasonable attorneys' fees of up to twenty percent of the amount recovered by the plaintiff  'to be paid out of but not in addition to the amount of judgment ... recovered, ...'  Cohen, 389 F.2d at 690 n. 3 (citing 28 U.S.C.A. § 2678) (emphasis added). In Transocean Air Lines, the fees were awarded under a contingency fee contract that provided that the attorneys would receive a one-third interest in the recovery. See Transocean Air Lines, 386 F.2d at 80. Because the attorneys' interest in the fees was derivative of the plaintiffs' interest in the judgment, we allowed the government to set off the attorneys' fees awarded to the plaintiffs against the judgments favorable to the plaintiffs. See Duncan, 1989 WL 117742, at  3 (distinguishing Cohen on the basis that the case involved two creditors, the government and plaintiff's attorneys, competing for rights to the plaintiff's judgment). As stated earlier, the case before us does not involve derivative rights of the attorneys to the fees; instead, the fees were awarded to Marre's attorneys in addition to the full statutory damages awarded to Marre. 13 31 Our holding that the government may not set off the attorney's fees extends to, but only to, that portion of the fees awarded pursuant to section 7430, i.e. $107,500 in fees and $17,738.02 in costs, or $125,238.02. The government may still set off the remaining portion of the attorneys' fees which was awarded out of Marre's $215,000 in damages, or $53,750. This is so because the $53,750 falls within and comes out of the $215,000 awarded to Marre as damages, which we have held may be set off by the government because of mutuality of debt between the government and Marre. 14 32