Court Opinion

ID: 9916308
Source: CourtListenerOpinion
Date Created: 2024-01-09 18:01:11.294538+00
Date Added: 2024-06-11T13:24:59.752576
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.
              Plaintiff-Appellee,        1:18-cv-00155-
                                           SOM-WRP
 v.

BRIAN J. BOWERS, an individual;           ORDER AND
DEXTER C. KUBOTA, an individual;           AMENDED
BOWERS + KUBOTA                             OPINION
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
                Amended January 8, 2024
2                          SU V. BOWERS

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

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

                          SUMMARY*

                 Equal Access to Justice Act

    The panel filed (1) an order denying a petition for panel
rehearing, denying a petition for rehearing en banc, and
amending the opinion filed on October 25, 2023; and (2) an
amended opinion affirming the district court’s denial of
attorneys’ fees and nontaxable costs under the Equal Access
to Justice Act (EAJA), and remanding 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 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 following a bench trial.
The district court denied Appellants’ request for attorneys’
fees and nontaxable costs under EAJA, finding that the

*
 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

government’s litigation position was “substantially
justified” and that it did not act in bad faith.
     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.” But,
because of the evidence that the quickly ballooning projected
earnings were dubious, the panel could not definitely and
firmly believe that the district court abused its discretion in
finding that the government’s litigation position at the time
of trial had a reasonable basis. 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), 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) and Sarah M. Karchunas,
Attorneys; 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, Plan Benefits Security
Division, 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 ESOP Association.

                          ORDER

    Judge Bea recommended, and Judge Lee voted, to deny
the petition for rehearing en banc. Judge Collins voted to
grant the petition for rehearing en banc. The full court has
been advised of the petition for rehearing en banc, and no
judge has requested a vote. Fed. R. App. P. 35. The petition
for rehearing en banc (Dkt. No. 39) is DENIED. No future
petitions for rehearing or rehearing en banc will be accepted.
                        SU V. BOWERS                        5

   The opinion filed October 25, 2023 (Dkt. No. 37) is
amended, and the amended version has been filed
concurrently with this order.

                         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 affirm the district court’s denial of attorneys’ fees.
In hindsight, the Department of Labor’s case had many
flaws. But the district court did not err in concluding that
6                        SU V. BOWERS

the government was “substantially justified” in its litigation
position when it went to trial. We cannot say that the district
court abused its discretion in finding that the government’s
expert, despite his errors, had a reasonable basis—at least at
the time of trial—for questioning whether the company’s
profits could surge by millions of dollars in just months.
    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
                       SU V. BOWERS                       7

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.
    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.
8                      SU V. BOWERS

    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.
    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
                        SU V. BOWERS                        9

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
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.”
10                       SU V. BOWERS

    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
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
                         SU V. BOWERS                         11

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.
    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.
12                       SU V. BOWERS

     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
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,
                        SU V. BOWERS                      13

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
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.”
14                             SU V. BOWERS

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
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

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

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 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 out to be
$7 million, far lower than LVA’s estimate of $9 or
$10 million (although much higher than Sherman predicted).
Put another way, the government reasonably believed at the
time that LVA’s estimate of skyrocketing EBITDA was
dubious, even if the government’s reason why was wrong.
And the fact that the district court denied Appellants’ motion
in limine to exclude Sherman as an expert witness would
suggest to a reasonable person that the court would not later
reject Sherman’s entire opinion as unreliable.
     In short, because of the evidence that the quickly
ballooning projected earnings were dubious, we cannot
“definitely” and “firmly” believe that the district court
abused its discretion in finding that the government’s
litigation position at the time of trial had a reasonable basis.
Hinkson, 585 F.3d at 1262. 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
16                           SU V. BOWERS

discretion in finding that the government’s position was
substantially justified at the time of trial.3
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

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. We do not believe that the district court abused its discretion when
it held that at the time of trial the government had substantial evidence
for its case: its expert reasonably 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.
                          SU V. BOWERS                          17

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
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
18                       SU V. BOWERS

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.

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
                        SU V. BOWERS                       19

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
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
20                      SU V. BOWERS

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,”
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.
                            SU V. BOWERS                             21

                                  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
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

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

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);
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
                        SU V. BOWERS                       23

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;
(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
24                          SU V. BOWERS

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
    Accordingly, Bowers and Kubota’s liability in this case
ultimate 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,

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

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 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
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 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
26                           SU V. BOWERS

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.
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

3
  Moreover, even with respect to the subsidiary issue of whether the 2012
revenue projections were inflated, see supra at 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

    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
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 this
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

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 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.
     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, the Government “did not know heading to trial
that the district court would reject” its expert’s valuation.
See Opin. at 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 quite 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
                          SU V. BOWERS                         29

inflated 2012 earnings estimates, the Government
“rationally believed that LVA’s valuation analysis was
faulty” as well. See Opin. at 15 (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
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. 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 “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 it was assertedly not yet clear to the
30                          SU V. BOWERS

Government “at the time of trial” that its position lacked “a
reasonable basis.” Opin. at 15. This is a dilution of the
EAJA’s standard, which does not allow the Government to
defeat a fee request based on its failure to subjectively
appreciate that its case was not supported by substantial
evidence. The 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 who
“net worth” is under specified amounts).
     I respectfully dissent.