Court Opinion

ID: 9892953
Source: CourtListenerOpinion
Date Created: 2023-10-25 17:00:43.789306+00
Date Added: 2024-06-11T08:50:54.282035
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

JULIE A. SU, Acting Secretary of          No. 22-15378
Labor, United States Department of
Labor,                                       D.C. No.
                                          1:18-cv-00155-
              Plaintiff-Appellee,           SOM-WRP

 v.
                                            OPINION
BRIAN J. BOWERS, an individual;
DEXTER C. KUBOTA, an individual;
BOWERS + KUBOTA
CONSULTING, INC., a corporation;
BOWERS + KUBOTA
CONSULTING, INC. EMPLOYEE
STOCK OWNERSHIP PLAN,

              Defendants-Appellants.

       Appeal from the United States District Court
                for the District of Hawaii
       Susan O. Mollway, District Judge, Presiding

        Argued and Submitted February 15, 2023
                  Honolulu, Hawaii

                 Filed October 25, 2023
2                          SU V. BOWERS

    Before: Carlos T. Bea, Daniel P. Collins, and Kenneth K.
                      Lee, Circuit Judges.

                    Opinion by Judge Lee;
    Partial Concurrence and Partial Dissent by Judge Collins

                          SUMMARY *

                 Equal Access to Justice Act

    The panel affirmed the district court’s denial of
attorneys’ fees and nontaxable costs under the Equal Access
to Justice Act (“EAJA”), and remanded the district court’s
award of taxable costs.
     The U.S. Department of Labor brought the underlying
lawsuit under the Employee Retirement Income Security
Act, alleging that Appellants Brian Bowers and Dexter
Kubota sold their company to an employee stock ownership
plan (ESOP) at an allegedly inflated value. The
government’s case hinged on a single valuation expert, who
opined that the plan overpaid for that company. The district
court rejected the opinion, and the government lost a bench
trial. The district court denied Appellants’ request for
attorneys’ fees and nontaxable costs under EAJA, finding
that the government’s litigation position was “substantially
justified” and that it did not act in bad faith,

*
 This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                         SU V. BOWERS                         3

     The panel held that the district court did not abuse its
discretion in concluding that the government’s position at
trial was substantially justified, and in denying attorneys’
fees and nontaxable costs under EAJA. The panel noted that
the government could not rely on red flags alone, such as the
“suspicious” circumstances of the ESOP transaction, to
defend its litigation position as “substantially justified.” The
government, however, did not know heading to trial that the
district court would reject the expert’s entire opinion as
unreliable. The panel further held that it was constrained by
the deferential standard of review, and it could not say that
the district court abused its discretion in finding that the
government’s position was substantially justified at the time
of trial. Given the panel’s holding that the government’s
position was substantially justified, the district court did not
clearly err in finding that the government did not litigate in
bad faith.
    The panel held that the district court abused its discretion
in reducing the award of taxable costs because it relied on a
clearly erroneous finding of fact in reducing the magistrate
judge’s recommended award of taxable costs.
    Judge Collins concurred with the majority’s decision to
vacate the district court’s order reducing the award of
taxable costs, and dissented from the majority’s decision to
affirm the denial of EAJA attorneys’ fees. He would reverse
the district court’s determination that the government’s
position in this case was substantially justified, and would
remand for the district court to consider the government’s
remaining argument that none of the Appellants satisfied the
“net worth” requirements of EAJA.
4                       SU V. BOWERS

                        COUNSEL

David R. Johanson, I (argued), Hawkins Parnell & Young
LLP, Napa, California; Douglas A. Rubel, Hawkins Parnell
& Young LLP, Cary, North Carolina; William M. Harstad,
Carlsmith Ball LLP, Honolulu, Hawaii; Scott I. Batterman,
Clay Chapman Iwamura Pulice & Nervell, Honolulu,
Hawaii; for Defendants-Appellants.
Christine D. Han (argued), Attorney, Office of the Solicitor;
Sarah M. Karchunas, Attorney, Plan Benefits Security
Division; Jeffrey M. Hahn, Counsel for Appellate and
Special Litigation; G. William Scott, Associate Solicitor for
Plan Benefits Security; Seema Nanda, Solicitor of Labor;
United States Department of Labor, Washington, D.C.; Jing
Acosta and Elisabeth Nolte, Trial Attorneys, United States
Department of Labor, Chicago, Illinois; for Plaintiff-
Appellee.
Richard J. Pearl, Faegre Drinker Biddle & Reath LLP,
Chicago, Illinois; Mark D. Taticchi, Faegre Drinker Biddle
& Reath LLP, Philadelphia, Pennsylvania; for Amicus
Curiae The ESOP Association.
                         SU V. BOWERS                         5

                          OPINION

LEE, Circuit Judge:

    Congress enacted the Equal Access to Justice Act
(EAJA) to curb abusive and costly lawsuits involving the
federal government. 28 U.S.C. § 2412. The EAJA thus
allows a prevailing party to seek attorneys’ fees and costs
from a federal agency if the agency’s litigation position was
not “substantially justified.”
    The U.S. Department of Labor’s Employee Retirement
Income Security Act (ERISA) lawsuit here was time-
consuming and expensive for Appellants Brian Bowers and
Dexter Kubota, who sold their company, Bowers + Kubota
Consulting, Inc. (“B+K”), to an employee stock ownership
plan (ESOP) at an allegedly inflated value.              The
government’s case was also shoddy: It ultimately hinged on
a single valuation expert, who opined that the plan overpaid
for the company. The expert’s errors led the district court to
reject his opinion, and the government lost after a five-day
bench trial. The district court, however, determined that the
government’s litigation position was “substantially
justified” and denied Bowers and Kubota’s request for
attorneys’ fees and costs.
    We hold that the district court did not abuse its discretion
in denying attorneys’ fees. In hindsight, the Department of
Labor’s case had many flaws. But the district court did not
err in concluding that the government was “substantially
justified” in its litigation position when it went to trial. The
government’s expert, despite his errors, arguably had a
reasonable basis—at least at the time of trial—in questioning
whether the company’s profits could surge by millions of
dollars in just months.
6                       SU V. BOWERS

    We, however, remand on the award of costs because the
district court based its denial of costs in part on a clearly
erroneous factual finding.
                     BACKGROUND
I. The Secretary of Labor Brings an Unsuccessful
   ERISA Action Against Bowers, Kubota, and B+K.
    To understand the district court’s decision under the
EAJA, we must first take a brief look at the merits of the
Department of Labor’s ERISA lawsuit. For the most part,
we need not delve into the minutiae of the case. But it is
useful to understand the basic nature of the ESOP
transaction, why the government sued, and—most
importantly—why the government lost.
    A. Bowers and Kubota sell B+K Consulting to an
       ESOP.
    Bowers and Kubota owned all the stock in B+K, a
construction management, architecture, and engineering
design firm based in Hawaii. In 2008, Bowers and Kubota
began exploring options for selling the company. After
some haggling with a potential third-party acquirer, Bowers
and Kubota decided to sell B+K to an ESOP. As suggested
by its name, an ESOP is an employee benefit plan that gives
employees an ownership stake in their company. 26 U.S.C.
§§ 401(a), 4975(e)(7). An ESOP has a trustee who owes
fiduciary responsibility to the plan’s participants and
beneficiaries. 29 U.S.C. §§ 1104, 1106(a)(1)(A), 1108(e),
1102(18).
    In the fall of 2012, B+K retained Libra Valuation
Advisors (LVA) to prepare a fair market valuation for the
company. On December 3, 2012, B+K appointed a trustee
to the ESOP.
                       SU V. BOWERS                       7

    From there, the deal moved quickly. On December 7,
LVA changed its engagement letter to state that it was
working for the ESOP trustee rather than B+K. Negotiations
over the sale began on December 10. On December 11, LVA
valued B+K at between $37,090,000 and $41,620,000. And
by the end of that day, the ESOP trustee agreed that the
ESOP would buy B+K from Bowers and Kubota for
$40 million. Shortly after the agreement, LVA submitted its
final report, which concluded that B+K’s fair market value
was $40,150,000. With LVA’s advice that the $40 million
price was fair, the deal closed on December 14—the ESOP
trustee having billed only 30.1 hours of work.
 B. The Department of Labor Sues Bowers, Kubota,
    and B+K Under ERISA.
    Two years after the B+K sale, the transaction came under
government scrutiny when a drop in the company’s share
price aroused the Department of Labor’s suspicion that B+K
was sold to the ESOP for more than its fair market value.
The government conducted a multiyear investigation,
culminating in a complaint filed against Appellants. The
complaint alleged that Bowers and Kubota breached their
fiduciary duties and engaged in self-dealing by inducing the
ESOP to pay above the fair market value for the shares of
B+K in violation of ERISA, 29 U.S.C. §§ 1001 et seq.
    After surviving a motion to dismiss and a summary
judgment motion, the government’s case proceeded to trial.
The government emphasized the circumstances of the ESOP
transaction, questioning LVA’s independence as well as the
ESOP trustee’s diligence. But when the dust settled on the
government’s case, the only question that mattered was
whether B+K was sold for more than its fair market value.
8                       SU V. BOWERS

    To support that the ESOP overpaid for B+K, the
government depended on its valuation expert, Steven
Sherman.       Sherman opined that LVA significantly
overvalued B+K by basing its findings on an unsupportable
projection of the company’s 2012 Earnings Before Interest,
Taxes, Depreciation, and Amortization (EBITDA). LVA
provided a 2012 EBITDA estimate of $9.2 million. In
contrast, Sherman—arguing that LVA’s estimate far
exceeded B+K’s past performance and the earnings achieved
by industry peers—estimated $4.8 million.
    To reconcile this gaping difference, Sherman flagged
that LVA’s forecast projected lower subconsultant expenses
than B+K historically averaged, which Sherman argued
would have inflated LVA’s EBITDA estimate and
ultimately its valuation. Sherman concluded that by
adjusting these fees to align with historical averages, one
could produce a 2012 EBITDA that better matched B+K’s
past performance. As it would turn out, however, Sherman
was wrong because these subconsultant fees were not
expenses on B+K’s profit and loss statement but costs passed
through to the company’s clients. On top of his EBITDA
adjustments, Sherman further reduced LVA’s valuation by
applying a “limited control” discount, which he argued
would account for his observation that Bowers and Kubota
controlled B+K after the sale, even though the ESOP had
complete ownership of the company. Sherman concluded
that B+K had a fair market value of $26.9 million at the time
of the ESOP transaction.
    After a five-day bench trial, Appellants prevailed. The
district court rejected Sherman’s expert report as unreliable,
finding that several errors—his revised EBITDA estimate,
his treatment of subconsultant fees, and his limited-control
discount analysis—caused him to “significantly and
                         SU V. BOWERS                          9

unreasonably undervalue[]” B+K.          Sherman erred in
deducting subconsultant fees because he mistakenly treated
them as B+K expenses, not as pass-through costs. His
limited-control discount analysis was erroneous because it
relied on post-sale facts that should not have been
incorporated into the pre-sale valuation. And he faltered in
his EBITDA estimate by glossing over B+K’s upward-
trending earnings and its backlog of contracts. The district
court added that these issues might have been avoided if
Sherman or the government’s attorneys had interviewed
B+K management about the company’s finances.
   Without a reliable expert to show that B+K was sold for
more than its fair market value, the government’s case
crumbled.
II. The District Court Grants in Part and Denies in Part
    Appellants’ Bill of Costs and Motion for Attorneys’
    Fees and Nontaxable Costs.
    After the trial, Appellants filed a bill of costs, seeking
reimbursement from the government for the taxable costs
incurred in the case. 28 U.S.C. § 2412(a)(1). A magistrate
judge recommended taxable costs of $72,962.95. The
district court adopted this recommendation in part,
modifying it to $41,810.46 based on its finding that certain
depositions taken by Appellants “were unnecessary and
unreasonably increased the cost of this litigation.”
    Appellants also sought attorneys’ fees and nontaxable
costs under the EAJA. The magistrate judge recommended
denying the request, finding that the government’s position
was substantially justified and that it did not act in bad faith.
The magistrate judge concluded that the government
reasonably relied on Sherman’s expert opinion, despite its
flaws, when proceeding to trial. The district court adopted
10                       SU V. BOWERS

the magistrate judge’s findings and conclusions. Appellants
then timely appealed.
                         ANALYSIS
    Congress enacted the EAJA to “eliminate financial
disincentives for those who would defend against unjustified
governmental action and thereby to deter the unreasonable
exercise of Government authority.” Ardestani v. INS, 502
U.S. 129, 138 (1991). The EAJA partially waives the United
States’ sovereign immunity and allows prevailing parties to
seek attorneys’ fees and nontaxable costs if (a) the
government’s position was not “substantially justified” or
(b) the government acted in bad faith. 28 U.S.C. § 2412(b),
(d)(1)(A), (d)(2)(A). The EAJA also empowers a court to
award taxable costs. 28 U.S.C. § 2412(a). We affirm the
district court’s denial of fees, but we remand its award of
costs.
I. The District Court Did Not Abuse Its Discretion in
   Finding the Government’s Position “Substantially
   Justified” and Denying Attorneys’ Fees and
   Nontaxable Costs under 28 U.S.C. § 2412(d).
    Under the EAJA, a prevailing party can seek attorneys’
fees unless the government’s litigation position was
“substantially justified.” See Comm’r, INS v. Jean, 496 U.S.
154, 159, 165 (1990). For the government’s position to be
substantially justified, it “must have a ‘reasonable basis both
in law and fact.’” Meier v. Colvin, 727 F.3d 867, 870 (9th
Cir. 2013) (quoting Pierce v. Underwood, 487 U.S. 552, 565
(1988)). Of course, the government’s position need not be
correct, but it must be “justified to a degree that could satisfy
a reasonable person.” Underwood, 487 U.S. at 565–66 &
n.2.
                        SU V. BOWERS                      11

    Courts thus must avoid placing “too much weight on the
government’s ultimate loss” in hindsight, and instead assess
“the reasonableness of the government’s position at the time
of the litigation.” Gonzales v. Free Speech Coal., 408 F.3d
613, 620 (9th Cir. 2005). In deciding whether the
government’s position was substantially justified after we
already know the outcome, “it is not enough to repeat the
analysis of the merits decision, and add adjectives.” Taucher
v. Brown-Hruska, 396 F.3d 1168, 1175 (D.C. Cir. 2005)
(Roberts, J.). The central issue, then, is whether the
government’s position at trial was reasonable, despite its
ultimate failure to prove that position.
    We review the district court’s fee determination under
the EAJA for an abuse of discretion. Underwood, 487 U.S.
at 559–60. “A district court abuses its discretion when . . .
its application of the correct legal rule is illogical,
implausible or without support in inferences that may be
drawn from the facts in the record,” Meier, 727 F.3d at 869–
70 (citing United States v. Hinkson, 585 F.3d 1247, 1261–62
(9th Cir. 2009) (en banc)), such that we are left with a
“definite and firm conviction” that the district court’s
conclusion was a mistake, Hinkson, 585 F.3d at 1262.
 A. The Government Cannot Rely on Red Flags Alone
    to Defend its Litigation Position as “Substantially
    Justified.”
    To start, the government makes much hay about the
“suspicious” circumstances of the ESOP transaction. It
points out, among other things, that the plan used the same
valuation advisor (LVA) that B+K had previously hired; that
the ESOP trustee billed only 30 hours; and that the deal was
completed at breakneck speed and landed on the same price
that Bowers and Kubota had wanted when they started the
12                      SU V. BOWERS

process. Hearkening back to the adage “where there is
smoke, there must be fire,” the government implies that its
litigation position was “substantially justified.”
    While these red flags can justify the investigation, they
alone cannot be the basis for proceeding to trial. The
government’s case here depended on its claim that the ESOP
improperly relied on LVA’s opinion and paid well above the
fair market value of the company. Put another way, the red
flags were a red herring if the plan ultimately paid fair
market value for the company. That means the government
must have provided some evidence that the ESOP sale price
was inflated. And here, the government relied only on its
expert’s valuation opinion. We thus must review whether
the district court abused its discretion in finding that the
government reasonably relied on its expert’s valuation
opinion, despite its flaws, as the parties proceeded to trial.
 B. The District Court Did Not Abuse Its Discretion in
    Finding that the Government was Substantially
    Justified in Relying on Sherman’s Opinion at Trial.
    The government’s valuation expert, Steven Sherman,
asserted that the $40 million valuation offered by LVA,
B+K’s advisor, was inflated because it had relied on a
dubious $9.2 million projection for the company’s 2012
EBITDA. In 2011, the company’s EBITDA was only
$2.6 million. Sherman cast doubt on LVA’s projection of a
sudden spike in EBITDA, given the company’s historical
performance and the results of comparable companies in the
industry. Sherman concluded that $4.8 million would have
been a more accurate projection for the 2012 EBITDA, and
he downgraded the company’s value accordingly.
   Sherman believed that B+K’s subconsultant fees
possibly contributed to the inflated 2012 EBITDA
                        SU V. BOWERS                      13

projection. So he deducted those expenses in preparing his
valuation of the company. But Sherman was wrong. He
conceded at trial that he had mistakenly considered the fees
as company expenses when in fact they were passed through
to B+K’s clients. Put another way, the subconsultant fees
could not have affected the 2012 EBITDA projection.
    The government either knew or should have known
about this error before trial because Appellants’ experts
pointed out this mistake during discovery. Indeed, this error
also would have been apparent had Sherman interviewed
B+K management in accordance with the Uniform
Standards of Professional Appraisal Practice.            The
government thus was not substantially justified in relying on
this aspect of its expert’s analysis.
    But this error, as plain as it was, did not necessarily
undermine Sherman’s big-picture EBITDA analysis—and
the government’s position—as the parties headed to trial.
Sherman’s main objection to LVA’s valuation of the
company was that “the profitability of this company, which
had historically been two to five or $6 million EBITDA, was
not going to turn on a dime and go to nine or $10 million.”
He was stumped by how LVA could justify such a massive
surge in expected profitability in such a short time in a
competitive environment.           One reason for this
overestimate—he thought—could have been LVA’s
understated forecast of B+K’s subcontract expenses; other
candidates might have been LVA’s failure to adjust for
additional wages. Whatever the cause, Sherman stood firm
in his conviction that B+K was not as profitable as LVA
predicted. As he testified at trial, “the adjustment to
subcontract expenses was more illustrative than anything
14                             SU V. BOWERS

else. . . . I looked at the historical EBITDA . . . [a]nd there
was a radical change.” 1
    Ultimately, the district court rejected Sherman’s
EBITDA analysis and his entire opinion. It found that
Sherman overlooked that B+K’s earnings trended upwards
and that the company had a backlog of contracts. 2 The court
also noted that Sherman should have known that his
projection was too low because B+K had notched a 2012
EBITDA of $7.047 million by the time that he produced his
opinion.
    But the government did not know heading to trial that the
district court would reject Sherman’s entire opinion, even if
it knew or should have known that Sherman had erred in
assessing the subconsultant fees. The government could
have rationally believed that LVA’s valuation analysis was
faulty, given that LVA predicted that profitability would
balloon in a matter of a few months with no compelling
explanation why. Indeed, the actual EBITDA in 2012 turned

1
     Sherman’s application of a limited-control discount was also
problematic because it was based on post-transaction circumstances. But
this error does not necessarily suggest that the government’s position
was unreasonable. For one thing, the discount constituted only a small
part of Sherman’s overall analysis. What’s more, the EAJA does not
require the government’s position to be faultless to be substantially
justified under 28 U.S.C. § 2412(d). See Underwood, 487 U.S. at 565
(stating that “substantially justified” does not mean “‘justified to a high
degree,’ but rather . . . justified to a degree that could satisfy a reasonable
person”).
2
  Sherman had plausible responses to the district court’s critiques of his
opinion. For example, Sherman recognized that the company had strong
revenue growth—indeed, his opinion incorporated B+K’s revenue
projections—but he contended that the company’s profits remained far
short of LVA’s projections.
                             SU V. BOWERS                             15

out to be $7 million, far lower than LVA’s estimate of $9 or
$10 million (although much higher than Sherman predicted).
And the fact that the district court denied Appellants’ motion
in limine to exclude Sherman as an expert witness suggests
that the government did not know the court would later reject
Sherman’s opinion as unreliable.
    In short, the government’s litigation position at the time
of trial was weak on evidence but perhaps not without a
reasonable basis. We recognize that this is a close call. We
also note that the EAJA is not a toothless tool when
combatting governmental overreach: the statute entitles
parties to seek fees from the government when its case is
based on incorrect legal positions or dubious evidence and
expert testimony. Indeed, had the district court awarded fees
here, it might not have been an abuse of discretion to do so.
But we are constrained by that same deferential standard of
review. And we cannot say that the district court abused its
discretion in finding that the government’s position was
substantially justified at the time of trial. 3

3
   The dissent suggests that we are establishing a laxer standard for the
government to prevail in an EAJA case. Not so. Our decision is largely
based on our deferential standard of review and the unique facts of the
case. At the time of trial, the government appeared to have substantial
evidence for its case because its expert pinpointed the anomaly of
Appellants’ estimate that EBITDA would double in a short period of
time (it turned out that both the government and Appellants were
substantially off in their EBITDA projections). In the end, the
government’s case completely crumbled, but we cannot say that the
district court abused its discretion in finding the government’s position
to be substantially justified at the time of trial.
16                        SU V. BOWERS

II. The District Court Did Not Abuse Its Discretion in
    Denying Attorneys’ Fees and Nontaxable Costs
    under 28 U.S.C. § 2412(b) Because the Government
    Did Not Act in Bad Faith.
    Appellants also appeal the district court’s denial of
attorneys’ fees under 28 U.S.C. § 2412(b). Section 2412(b)
allows a court to award attorneys’ fees where the
government acted in bad faith. Rodriguez v. United States,
542 F.3d 704, 709 (9th Cir. 2008) (quoting Chambers v.
NASCO, Inc., 501 U.S. 32, 45–46 (1991)). Here, the district
court found that the government did not act in bad faith. We
review that finding for clear error. Ibrahim v. DHS, 912 F.3d
1147, 1166 (9th Cir. 2019) (citing Cazares v. Barber, 959
F.2d 753, 754 (9th Cir. 1992)).
    “Mere recklessness does not alone constitute bad faith;
rather, an award of attorney’s fees is justified when reckless
conduct is ‘combined with an additional factor such as
frivolousness, harassment, or an improper purpose.’”
Rodriguez, 542 F.3d at 709 (quoting Fink v. Gomez, 239
F.3d 989, 993–94 (9th Cir. 2001)). Naturally, this is a higher
burden than § 2412(d)’s requirement that the government’s
case be “substantially justified.” See Underwood, 487 U.S.
at 566 (“To be ‘substantially justified’ means, of course,
more than merely undeserving of sanctions for
frivolousness.”). Given our holding that the government was
substantially justified in its position, the district court did not
clearly err in finding that the government did not litigate in
bad faith.
III. The District Court Abused Its Discretion in Reducing
     the Award of Taxable Costs.
   Finally, we hold that the district court incorrectly
reduced the magistrate judge’s recommended award of
                         SU V. BOWERS                       17

taxable cost by relying on a clearly erroneous finding of fact.
Hinkson, 585 F.3d at 1263; 28 U.S.C. § 2412(a)(1).
     The parties agree that the district court mistakenly
believed that several depositions occurred after it had denied
Appellants’ motion for summary judgment and that the
depositions therefore “unreasonably increased the cost” of
litigation. In reality, the depositions were taken before that
judgment. Because the district court’s reduction of costs was
mainly based on that clear error, it abused its discretion. We
thus remand the issue of costs so that the district court may
reconsider its decision on the corrected record.
                      CONCLUSION
     The EAJA deters the government from using its vast
resources and power to pursue abusive litigation against its
citizens. Appellants soundly defeated the government’s
flawed case against them. But whether the district court
abused its discretion in denying attorneys’ fees is a different
question. And under that deferential standard, we do not
have the “definite and firm conviction” that the district court
erred in finding that the government’s position was
substantially justified. Hinkson, 585 F.3d at 1263. We
AFFIRM the district court’s denial of attorneys’ fees and
nontaxable costs, and we REMAND the district court’s
award of taxable costs.
18                       SU V. BOWERS

COLLINS, Circuit Judge, concurring in part and dissenting
in part:

    I agree with the majority’s decision to vacate the district
court’s order reducing the cost award, and I therefore concur
in Part III of the court’s opinion. However, I dissent from
the majority’s decision to affirm the denial of attorney’s fees
in this case.
    As a general rule, if a civil case brought by the
Government is unsupported by substantial evidence, then the
Government’s litigating position is not “substantially
justified” for purposes of determining the defendants’
eligibility for attorney’s fees under the Equal Access to
Justice Act (“EAJA”), 28 U.S.C. § 2412(d)(1)(A). Here, the
majority does not dispute that the Government’s case against
Defendants-Appellants was unsupported by substantial
evidence, yet the majority nonetheless upholds the district
court’s denial of attorney’s fees. The majority does so on
the ground that the Government reasonably failed to
recognize, in advance of trial, just how weak its case was.
See Opin. at 14–15. But this replaces the statutory standard
for when attorney’s fees may be denied (viz., when “the
position of the United States was substantially justified”)
with a standard that is much more forgiving to the
Government (viz., whether the United States reasonably
believed that its position was substantially justified).
Because the majority’s novel standard is inconsistent with
the statute and precedent and leads to the wrong outcome in
this case, I respectfully dissent.
                              I
    The relevant provision of the EAJA states that, “[e]xcept
as otherwise specifically provided by statute, a court shall
                        SU V. BOWERS                       19

award to a prevailing party other than the United States fees
and other expenses . . . incurred by that party in any civil
action (other than cases sounding in tort) . . . brought by or
against the United States in any court having jurisdiction of
that action, unless the court finds that the position of the
United States was substantially justified or that special
circumstances make an award unjust.”               28 U.S.C.
§ 2412(d)(1)(A) (emphasis added). Under the EAJA, the
default rule is that attorney’s fees will be awarded if the
Government loses the case, unless the Government carries
its burden to show that its position in the litigation was
substantially justified or that, for other special reasons, an
award of fees would be unjust. Here, the district court denied
Defendants’ motion for attorney’s fees under § 2412(d)
solely on the ground that the Government’s position was
substantially justified, and so the central question before us
is whether the district court correctly so held.
    In Pierce v. Underwood, 487 U.S. 552 (1988), the
Supreme Court construed the phrase “substantially justified”
in the EAJA by drawing upon the settled understanding of
the familiar, and similarly phrased, “substantial evidence”
standard that is applied in the administrative context. Id. at
564. Because that standard requires that an agency position
be supported with “‘such relevant evidence as a reasonable
mind might accept as adequate to support a conclusion,’” the
Court held that the EAJA standard likewise required that the
Government’s position be “justified to a degree that could
satisfy a reasonable person.” Id. at 564–65 (quoting
Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229
(1938)). That means, in other words, that the Government’s
position must have a “reasonable basis both in law and fact.”
Id. at 565 (citation omitted). We review “the position of the
United States” for substantial justification “as a whole,”
20                      SU V. BOWERS

rather than by breaking the case down into “atomized line-
items.” Ibrahim v. U.S. Dep’t of Homeland Sec., 912 F.3d
1147, 1168–69 & n.16 (9th Cir. 2019) (en banc) (citations
omitted).
    As we have recognized, Pierce’s explicit analogy
between the substantial evidence standard and the EAJA’s
“substantially justified” standard means that, except perhaps
in a “decidedly unusual case,” a judicial determination that
the Government’s case on the merits was “unsupported by
substantial evidence” will ordinarily mean that the
Government’s position was not “substantially justified” and
that fees should be awarded. Thangaraja v. Gonzales, 428
F.3d 870, 874 (9th Cir. 2005) (quoting Al-Harbi v. INS, 284
F.3d 1080, 1085 (9th Cir. 2002)); see also Meier v. Colvin,
727 F.3d 867, 872 (9th Cir. 2013).
    Under these standards, this is an easy case. As I explain
in the next two sections, (1) the Government’s case against
Defendants was not supported by substantial evidence; and
(2) there is nothing about this matter that would make it the
sort of “decidedly unusual case” in which the Government’s
position can be said to have been “substantially justified”
despite the lack of substantial evidence.
                             II
    The Government brought this suit against, inter alia,
Defendants-Appellants Brian Bowers and Dexter Kubota,
the founders of a design firm called Bowers + Kubota
Consulting (“B+K”), alleging multiple violations of the
Employment Retirement and Income Security Act
(“ERISA”), 29 U.S.C. § 1001 et seq. As the majority notes,
see Opin. at 7, the Government’s central theory was that
Bowers and Kubota had committed multiple violations of
ERISA in selling B+K to an Employee Stock Ownership
                            SU V. BOWERS                             21

Plan (“ESOP”) for an allegedly inflated value of $40
million.1 This theory, however, was unsupported by
substantial evidence.
                                  A
    A review of the Government’s claims in this matter
confirms that the Government’s case rested dispositively on
the central premise that Bowers and Kubota had inflated the
value of B+K when selling it to an ESOP in December 2012.
    First, the Government alleged that Bowers and Kubota—
who were allegedly “fiduciaries” of the ESOP within the
meaning of ERISA, see 29 U.S.C. § 1002(21)(A)(i)—had
engaged in a transaction prohibited by § 406(a)(1)(A) of
ERISA, 29 U.S.C. § 1106(a)(1)(A). That section prohibits
ESOP fiduciaries from causing the ESOP to engage in the
“sale or exchange, or leasing, of any property between the
plan and a party in interest.” 29 U.S.C. § 1106(a)(1)(A).
However, ERISA carves out certain transactions from that
prohibition, including an “acquisition, sale, or lease [that] is
for adequate consideration.” Id. § 1108(e)(1). For purposes
of that provision, “adequate consideration” means (as
relevant here) “the fair market value of the asset as
determined in good faith by the trustee or named fiduciary.”
Id. § 1002(18)(B). To establish the applicability of this
exception, it was Bowers and Kubota’s burden to prove, as
an affirmative defense to the Government’s § 406(a)(1)(A)
charge, that B+K’s $40 million sale price was not inflated.
Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir. 1996); see
also Perez v. Bruister, 823 F.3d 250, 262 (5th Cir. 2016);

1
  An ESOP is “a type of pension plan that invests primarily in the stock
of the company that employs the plan participants.” Fifth Third Bancorp
v. Dudenhoeffer, 573 U.S. 409, 412 (2014).
22                       SU V. BOWERS

Elmore v. Cone Mills Corp., 23 F.3d 855, 864 (4th Cir.
1994).
    Second, the Government alleged that Bowers and
Kubota had engaged in a transaction prohibited by
§ 406(b)(1) and (b)(2) of ERISA, 29 U.S.C. § 1106(b)(1),
(2). Those subsections prohibit fiduciaries from “deal[ing]
with the assets of the plan in his own interest or for his own
account,” 29 U.S.C. § 1106(b)(1), and from “act[ing] in any
transaction involving the plan on behalf of a party (or
represent[ing] a party) whose interests are adverse to the
interests of the plan or the interests of its participants or
beneficiaries,” id. § 1106(b)(2). The district court construed
these allegations—i.e., that Bowers and Kubota were acting
in their “own interest,” and acting on behalf of a party
(themselves) “whose interests are adverse to the interests of
the [ESOP]”—as requiring the Government to make a
showing that the $40 million sale of B+K was “for more than
fair market value.” In other words, the district court
concluded that Bowers and Kubota would not be acting in
their “own interest,” id. § 1106(b)(1), or in the service of
interests “adverse to the interests of the [ESOP],” id.
§ 1106(b)(2), if they arranged the sale of B+K for a price that
fairly reflected the ESOP’s interests (i.e., for a price
reflecting fair market value). The Government has not
challenged the district court’s legal analysis of the elements
of this claim.
    Third, the Government alleged fiduciary imprudence and
disloyalty by Bowers and Kubota, in violation of
§ 404(a)(1)(A), (B), and (D) of ERISA. This cause of action
rested on allegations that Bowers and Kubota had failed in
their duties as trustees by (1) “[c]ausing unreasonable,
inflated revenue projections” for B+K to be forwarded to a
firm (LVA) conducting an evaluation of the value of B+K;
                           SU V. BOWERS                           23

(2) failing to adequately monitor the ESOP trustee
(Saakvitne) to ensure that “he acted in the best interests of
the [ESOP’s] Participants and Beneficiaries”; (3) relying on
a valuation of B+K, prepared by LVA, that “significantly
overvalued the shares of [B+K],” without ensuring that
reliance on LVA’s valuation report “was reasonably justified
under the circumstances”; (4) relying on another LVA-
created “Fairness Opinion,” which “indicated that the fair
market value of the Company as of that date was
$40,150,000,” without “making certain that reliance on the
Opinion was reasonably justified under the circumstances”;
and (5) “[c]ausing the ESOP to enter into the purchase of the
Company’s stock at a price in excess of fair market value
which was not solely in the interest of the Plan’s
participants.”
    Three of these five allegations—allegations (3), (4), and
(5) above—rested explicitly on the Government’s claim that
B+K’s overall value was overstated. Allegation (1) also
rested indirectly on that valuation claim, because the
allegedly inflated 2012 revenue projections would cause a
loss to the ESOP only if they ultimately caused the company
to be sold for more than it was worth. Allegation (2) also
rested implicitly on the premise that the company was
overvalued, because the Government’s theory was that
Bowers and Kubota’s failure to monitor Saakvitne led to his
agreement to buy B+K for an inflated price, in violation of
his obligation to “act[] in the best interests of the [ESOP’s]
Participants and Beneficiaries.” 2

2
  The Government also alleged that Bowers and Kubota were liable as
co-fiduciaries, that they engaged in knowing participation in trustee
Saakvitne’s fiduciary breaches, and that they orchestrated improper
indemnification agreements with the ESOP. The first two claims were
24                          SU V. BOWERS

    Accordingly, Bowers and Kubota’s liability in this case
ultimately hinged dispositively on whether they had inflated
the value of B+K when selling it to an ESOP in December
2012. Although the party with the burden of proof on that
issue shifted depending upon the claim, a finding that B+K
was worth more than $40 million would doom the
Government’s entire case.
                                  B
     As the district court found, the evidence of both sides at
trial showed that B+K was worth more than $40 million at
the time it was sold to the ESOP. Although the Government
sought to prove otherwise, its valuation methodology
contained several obvious errors that, once corrected,
confirmed that the company’s value exceeded $40 million.
     Specifically, the Government at trial relied exclusively
upon a valuation expert named Sherman, who testified that
at the time of sale, B+K was in fact worth just $26.9 million,
and that Bowers and Kubota’s competing valuation report
was flawed. However, as the district court concluded,
Sherman made three significant errors that caused him to
“significantly and unreasonably undervalue[] the Company”
(emphasis added).
   First, Sherman erroneously treated some $10.5 million in
“subconsultant fees”—which the company had in fact
passed on to clients—as if they were company expenses that
had to be “deducted in determining the value of the

entirely derivative of the Government’s other claims. The third claim
was not, strictly speaking, an operative substantive claim: the district
court held that, properly construed, the Government’s indemnification
claim sought no finding of liability against Bowers and Kubota on the
merits, but sought merely to hold certain indemnification agreements
void in the event that liability was found on another ground.
                         SU V. BOWERS                       25

Company.” As the district court concluded, “[t]his was a
notable error” that caused Sherman’s valuation of B+K to be
“correspondingly too low.”
    Second, Sherman erroneously applied a nearly $3
million discount to the company’s value based on
circumstances occurring after the company’s sale. This was
a clear violation of the applicable appraisal standards.
    Correcting just these two obvious errors in Sherman’s
analysis leads to a valuation of more than $40 million. That
is, had Sherman correctly omitted the $10.5 million in
subconsultant fees and the erroneous $3 million discount, his
calculated value of the company—applying his own
methodology—would have been $40.4 million.
    Third, Sherman erroneously relied on the sale price
floated in a nonbinding indication of interest from a third-
party company, URS. URS had earlier raised the possibility
of purchasing B+K for $15 million, “plus or minus ‘cash and
debt on the Company’s balance sheet.’” The Government
claimed in its Proposed Post-Trial Findings of Fact and
Conclusions of Law that “Sherman appropriately considered
URS’s indication of interest as an objective, market-based
indicator of the value at which a willing seller would
purchase B+K.” This aspect of Sherman’s analysis was also
seriously wrong. As the district court observed, B+K had
approximately $14 million in “cash and working capital” on
hand—meaning that Sherman, and by extension the
Government, had “ignore[d] the actual ‘cash and debt on the
Company’s balance sheet’ that the URS indication of interest
expressly acknowledged should be considered.” Moreover,
the URS indication of interest was, in essence, an initial low-
ball negotiation position on the part of URS; it was not an
actual estimate of the company’s fair-market value.
26                           SU V. BOWERS

Accordingly, the URS indication of interest on which
Sherman relied had “little relevance to the actual value of the
Company.”
    In light of these errors, the district court found that
Sherman “significantly and unreasonably undervalued the
Company.” “Not only does this render his ultimate valuation
unreliable,” the district court concluded, “it also undermines
the usefulness of his critique of LVA’s valuation” (i.e., the
competing valuation relied upon by Bowers and Kubota).
    Without substantial evidence on the Government’s part
that B+K was worth anything less than $40 million, and
faced with competing valuation evidence substantiating a
value of over $40 million, Bowers and Kubota prevailed on
the central issue at trial—viz., “that the Company’s shares
were worth at least what the Company’s ESOP paid for it”
(emphasis added). 3
    Accordingly, it is established, for purposes of this
appeal, that the Government’s case on the merits was
unsupported by substantial evidence. That brings this case
within the general rule that there is no “substantial
justification under the EAJA” where the Government’s
position was unsupported by “reasonable, substantial and

3
 Moreover, even with respect to the subsidiary issue of whether the 2012
revenue projections were inflated, see supra at 22–23, the district court
held that the Government’s claims were simply unsupported. As the
district court stated, Sherman inexplicably failed to take into account
several relevant considerations in estimating his proposed “corrected”
projections, thereby rendering his estimates “unreliable.”
                             SU V. BOWERS                              27

probative evidence in the record.” Thangaraja, 428 F.3d at
874; see Al-Harbi, 284 F.3d at 1085. 4
                                   III
    The only question, then, is whether this is the “decidedly
unusual case” in which the Government’s position might be
said to be substantially justified despite a wholesale lack of
evidentiary support. Al-Harbi v. INS, 284 F.3d at 1085. It
manifestly is not.
    We found Al-Harbi to be such an “unusual” case, but our
rationale for doing so has no applicability here. In Al-Harbi,
we “upheld the government’s central positions in th[e]
appeal,” but we nonetheless granted relief to the alien based
solely on an additional issue that had been “articulated only
relatively briefly in Al–Harbi’s presentation to this court.”
284 F.3d at 1085. “Under these unique circumstances,” we
held, “the government’s litigation position as a whole [was]
substantially justified, albeit not ultimately adequate to
sustain the agency’s decision.” Id. Nothing comparable is
presented in this case. Here, in contrast to Al-Harbi, the
Government lost on the central issue that was the focus of
the entire case, and it lost precisely because its position on
that loadbearing issue was wholly unsupported. There is no
sense, as in Al-Harbi, that it could be said that, despite its
substantial-evidence-based loss on the dispositive issues, the
Government’s position could still be thought to be
substantially justified as an overall matter.

4
  Contrary to what the Government contends, this conclusion does not
rest on or lead to the view that, whenever the Government loses a case
on the merits, its position is not substantially justified under the EAJA.
Here, the Government did not merely lose the case; it suffered a
wholesale failure of proof on the central issue in the litigation that
rendered its position, as an objective matter, wholly unsupported.
28                        SU V. BOWERS

     The majority does not directly dispute that the
Government’s case was not supported by substantial
evidence, but it nonetheless holds that the Government’s
litigating position was substantially justified. According to
the majority, when the Government proceeded to trial, it “did
not know the court would later reject” its expert’s valuation.
See Opin. at 14–15. Until the district court did so, the
majority asserts, the Government could reasonably have
relied on that valuation “at the time of trial.” See Opin. at
15. This approach is contrary to the statute and the caselaw
construing it.
    The district court’s merits decision here rested upon, and
was driven by, objective—indeed, incontestable—flaws in
the Government’s expert’s valuation of B+K. Given these
objective errors—which were inherent in the Government’s
case even before the district court pointed them out—the
majority is wrong in saying that the Government’s litigating
position was somehow reasonable up to the point that the
district court rejected it. The district court’s merits decision
simply recognized and enumerated the patent substantive
deficiencies that were built into the Government’s case all
along.
     The majority suggests that, even though there was no
evidentiary support for the Government’s central claim
about the valuation of B+K, the Government’s position was
still substantially justified because, in light of the allegedly
inflated 2012 earnings estimates, the Government “could
have rationally believed that LVA’s valuation analysis was
faulty” as well. See Opin. at 14 (emphasis added). As an
initial matter, this effort to isolate one assertedly valid sliver
of the Government’s case provides no basis for concluding
that the Government’s position was substantially justified.
In applying that standard, we do not break down the
                         SU V. BOWERS                       29

Government’s case into “atomized line-items” of this sort.
Ibrahim, 912 F.3d at 1168–69 & n.16 (citations omitted).
Rather, we ask whether the Government’s case was
“justified in substance or in the main,” Pierce, 487 U.S. at
565 (emphasis added), and for the reasons that I have
explained, it obviously was not. Moreover, the majority’s
effort to salvage some sliver of this shoddy case also fails on
its own terms. As noted earlier, the district court held that
the Government had failed to present “reliable” evidence to
support its critique of these earnings estimates, because its
expert’s analysis simply overlooked multiple relevant
factors. See supra note 3. The district court also faulted the
Government for failing to establish its broader claim that
these earnings estimates ultimately caused the company to
be sold for more than it was worth. In short, the
Government’s flawed reliance on these earnings estimates
only further confirms that its case was objectively and
seriously flawed.
     More importantly, the majority’s rationale effectively
replaces the statutory standard for denying attorney’s fees—
viz., whether the Government’s position was “substantially
justified,” 28 U.S.C. § 2412(d)(1)(A)—with the much looser
standard of whether the Government “could have rationally
believed” that its position was substantially justified.
According to the majority, even though the Government’s
case was not supported by substantial evidence, it was still
“substantially justified” because “the government’s
litigation position at the time of trial was weak on evidence
but perhaps not without a reasonable basis.” Opin. at 15
(emphasis added). This is a gross dilution of the EAJA’s
standard, which does not allow the Government to defeat a
fee request based on speculative guesses about whether the
case was “perhaps” supported by substantial evidence. The
30                          SU V. BOWERS

statute, as construed by the Supreme Court, requires that the
Government’s case objectively rest on “such relevant
evidence as a reasonable mind might accept as adequate to
support a conclusion.” Pierce, 487 U.S. at 564–65 (citation
omitted). That standard was not met here, and there are no
special circumstances that would suggest that this is the
“decidedly unusual case” in which the Government’s
position is substantially justified despite being unsupported
by substantial evidence. Al-Harbi v. INS, 284 F.3d at 1085.
                        *        *         *
    Accordingly, I would reverse the district court’s
determination that the Government’s position in this case
was substantially justified, and I would remand for the
district court to consider the Government’s remaining
argument that none of the Appellants here satisfied the “net
worth” requirements of the EAJA.            See 28 U.S.C.
§ 2412(d)(2)(B) (limiting the eligibility of individuals and
entities to claim attorney’s fees under EAJA to those whose
“net worth” is under specified amounts).
     I respectfully dissent.