Free Response to Motion - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS NORTH STAR ALASKA HOUSING CORP., Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) )

No. 98-168C (Judge Allegra)

DEFENDANT'S RESPONSE TO PLAINTIFF'S MOTION FOR ATTORNEYS' FEES AND LITIGATION EXPENSES Defendant, the United States, respectfully opposes the motion of plaintiff, North Star Alaska Housing Corp. ("North Star"), requesting that the Court award over $2.4 million in attorneys' fees and litigation expenses pursuant to the "badfaith" exception to the American Rule embodied in 28 U.S.C. § 2412(b), Equal Access To Justice Act ("EAJA"). To recover fees

and expenses for bad faith conduct pursuant to section 2412(b), North Star must demonstrate that the Government abused the judicial process. See Centex Corp. v. United States, 486 F.3d Fee awards pursuant to

1369, 1372-74 (Fed. Cir. 2007).

section 2412(b) cannot be assessed based solely upon claims of bad faith "primary conduct" that form the basis for the substantive claim for relief. See id. at 1372.

Examples of "abuse of the judicial process" include abusive litigation practices in connection with court proceedings such as practicing fraud upon a court or defiling "the very temple of justice." See id. at 1373-74 (citing with approval and

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parenthetically explaining Chambers v. NASCO, Inc., 501 U.S. 32 (1991), Roadway Express, Inc. v. Piper, 447 U.S. 752 (1980), and Universal Oil Prods. Co. v. Root Ref. Co., 328 U.S. 575 (1946)). The bad-faith exception applies to "actions that led to the lawsuit," see Roadway Express, 447 U.S. at 766, but that phrase has been equated with cases where the action is filed in bad faith. See Ass'n of Flight Attendants, AFL-CIO v. Horizon Air

Indus., Inc., 976 F.2d 541, 550 n.12 (9th Cir. 1992) (citing Roadway Express). Indeed, the traditional concept of the bad faith exception authorized an award of fees for bad faith in bringing suit or in the course of litigation. See Cordeco Dev. Corp. v. Santiago It is

Vasquez, 539 F.2d 256, 262-63 (1st Cir. 1976).

questionable whether the imposition of fee awards for wrongful conduct in the events leading to suit can be reconciled with the rationale that it is the province of Congress to control changes to the American Rule because, subject to the traditional judicially fashioned exceptions, to which Congress is deemed to have acquiesced, Federal courts are not free to award fees to litigants except under the authority of a statute. See id.

at 263 & n.11 (citing and discussing Alyeska Pipeline Co. v. Wilderness Society, 421 U.S. 240 (1975)). North Star's principal argument is that the Government abused the agency-level Contract Disputes Act dispute resolution 2

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process, forcing it to engage in litigation "to vindicate rights that would almost certainly have been recognized . . . by an impartial contracting officer." Plaintiff's Memorandum In

Support Of Its Motion For Attorneys' Fees And Litigation Expenses ("Pl. Memo.") at 17-19. In Centex, 486 F.3d at 1372 n.1, the

Federal Circuit noted out-of-circuit authority for a "broader conception of the bad faith exception to the American Rule" that "the judicial process is abused by a defendant's bad faith response to a claim for relief after the claim accrues but before the judicial process is formally invoked." The court noted that

"[u]nder that theory, if a defendant forces the plaintiff to go to court to obtain relief to which the plaintiff is clearly entitled, that conduct can be regarded as a type of bad faith for which a court may shift attorney fees." Id. (citing Am. Hosp.

Ass'n v. Sullivan, 938 F.2d 216, 220 (D.C. Cir. 1991)). The Federal Circuit did not endorse that "broader conception"; it stated only that "[t]he trial court noted that it did not need to decide whether that theory is valid."1 Despite

1

The Centex court also discussed that in Vaughan

v. Atkinson, 369 U.S. 527, 528-34 (1962), "the Supreme Court approved an attorney fee award based not on conduct giving rise to the substantive claim but, rather, on the defendant's `willful and persistent' bad faith treatment of that claim after it accrued." 486 F.3d at 1373. Vaughan appears to provide (continued...) 3

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out-of-circuit authority, and to avoid adopting a theory whose validity is questionable, the Court should adhere to the traditional concept of the bad faith exception and base its section 2412(b) determination upon the Government's conduct in litigating these cases. Cf. Zapata Hermanos Sucesores, S.A.

v. Hearthside Baking Co., Inc., 313 F.3d 385, 390-91 (7th Cir. 2002) (reversing apparently non-EAJA fee award and holding that ". . . behavior in the litigation itself . . . is the only lawful domain of the relevant concept of" the "inherent authority of federal courts to punish misconduct before them"). However, even pursuant to the broader conception, North Star does not demonstrate entitlement to a section 2412(b) award. North Star fails to demonstrate that any action of the Government that did not constitute "primary conduct" nevertheless "abused

(...continued) authority for North Star's position. Cir. 2007).

1

See Centex Corp. v. United

States, 71 Fed. Cl. 40, 49 (2006), aff'd, 486 F.3d 1369 (Fed. However, the Federal Circuit appeared to distinguish Vaughan upon the ground that in that case the Supreme Court "held that attorney fees are recoverable as damages in an admiralty case, a principle that has long been recognized in admiralty law, notwithstanding the applicability of the American Rule in other contexts." See 486 F.3d at 1373; see also Cordeco, 539 F.2d at 263 n.10 ("But Vaughan was subsequently read, Fleischmann Corp. v. Maier Brewing Co., 386 U.S. 714, 718 [] (1967), as a case affirming attorney's fees as compensable damages under traditional admiralty practice."). 4

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the judicial process."2

See Centex, 486 F.3d at 1372-74.

The

Government's conduct of the internal dispute resolution process was "primary conduct" upon which the Court based its finding that officials of the Department of the Army breached the covenant of good faith and fair dealing. 77. See Mar. 7, 2007 Opinion at 44, 75-

North Star also points to the Government's decision to apply

a depreciation schedule to items other than carpet, but that, too, is primary conduct upon which the Court based its finding that the Army breached the covenant of good faith and fair dealing. Id. at 62-63.

2

Although Maritime Management, Inc. v. United States,

242 F.3d 1326 (11th Cir. 2001), and Brown v. Sullivan, 916 F.2d 492 (9th Cir. 1990), support North Star's position, even in those cases the courts pointed to litigation conduct in addition to conduct that was not part of the litigation. In Maritime Management, the court noted that the Government filed the same incomplete administrative record to the district court as it had to the General Accounting Office, and "[u]ntil the eleventh hour . . . consistently maintained [to the district court] that it had submitted a complete administrative record." at 1328, 1333-35. See 242 F.3d And in Brown, the court pointed to agency

conduct during agency proceedings upon remand from the district court, including the failure to produce a transcript of an administrative hearing within the time period ordered by the district court and delay in producing documents. at 496. 5 916 F.2d

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In addition, North Star does not demonstrate that the conduct of Department of Justice attorneys with respect to depreciation abused the judicial process. North Star points to a

January 30, 2003 email of Acting Housing Division Chief Cynthia Larson, in which Ms. Larson stated that Department counsel stated that "depreciation will apply to everything." However, by that

time the Court had not ruled that applying depreciation schedules breached the lease. Indeed, although the Court denied the

Government's motion for summary judgment upon this issue on July 3, 2002, the Court noted in its decision of that date that "defendant points to Judge Wiese's recent decision in WDC West Carthage Associates v. United States, Docket No. 00-622 (Fed. Cl. 2002), which involved contract provisions very similar to those at issue," in which, the Court stated, "Judge Wiese found that [Missouri Baptist Hospital v. United States, 555 F.2d 290 (Ct. Cl. 1977)] required incorporation of depreciation adjustment when calculating the lessee's liability for `cost of repairs' associated with occupant damage to carpeting." Order On Summary Judgment at 6. Although the Court distinguished West Carthage (id. at 6-7), the Court did not, on July 3, 2002, rule that the Government owed North Star the full cost of replacement carpet. In fact, the July 3, 2002

Court appeared to leave open the possibility that some adjustment might be appropriate: 6

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To be sure, plaintiff arguably receive [sic] some benefits as the result of not having to replace the carpeting in a particular unit until later than would have otherwise been the case, which benefit seemingly ought to reduce the damages owed here, see, e.g., Restatement (Second) on Contracts § 347 (c) (1979). But, whether that benefit is captured by the formula unilaterally adopted by the Army or is even truly quantifiable here hinges on several things, among them, the useful life of the carpeting, the time value of money, and inflations [sic] impact on carpet pricing. All these inquiries present fact questions not resolvable here. Id. at 6. It was not until October 4, 2004, more than 20 months after Ms. Larson's email, that the Court concluded that North Star was entitled to summary judgment as to liability upon the issue of depreciation. In its decision, the Court noted that the reversal

of this Court's West Carthage decision in WDC West Carthage Associates v. United States, 324 F.3d 1359, 1364 (Fed. Cir. 2003), lead the Government to conclude that (quoting the Government) "the Government is responsible for reimbursing North Star the full costs of replacing carpeting due to damages which are caused by the Government and are `beyond normal wear and tear,' without regard to depreciation of the replaced carpet." Oct. 4, 2004 Order On Summary Judgment at 5. The Government's

abandonment of its position regarding liability upon this issue subsequent to the Federal Circuit's West Carthage opinion demonstrates that the Government's litigation conduct with respect to depreciation was not an abuse of the judicial process. 7

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North Star also points to the IRACO audit and the criminal investigation; however, the involvement of Army officials in the criminal investigation (and, presumably, the IRACO audit) also constitutes primary conduct upon which the Court based its finding that Army officials acted in bad faith in administering the lease. See Mar. 7, 2007 Opinion at 76-77. North Star points

to the stay that resulted from the audit and the investigation, but fails to demonstrate that the stay abused this Court's processes. Although the Court stayed case No. 98-168C from

April 3, 2003, through May 5, 2004, it did so based upon the Government's in camera submissions, rejecting four attempts by North Star to lift the stay, three of those without waiting for a response from the Government.3 North Star does not demonstrate

that those in camera submissions were fraudulent or otherwise filed in bad faith. Finally, North Star fails to identify any relief to which it was "clearly entitled" that the Government forced it to obtain from the Court. See Centex, 486 F.3d at 1372 n.1. North Star

argues that "[n]one of the legal fees claimed here would have been incurred had the disputes process operated as required" (Pl. Memo. at 15), but fails to take into account that the Court

3

The Court stayed case No. 02-1632C from April 3, 2003,

through July 7, 2004, and stayed case No. 03-2699C from March 1, 2004, through July 7, 2004. 8

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awarded only $241,754.96 of the more than $12.5 million in damages requested in this litigation - a nearly $12.3 million gulf.4 Mar. 7, 2007 Opinion at 39 n.29; Apr. 15, 2008 Judgment.

Even with respect to the category in which North Star obtained the most monetary relief - incentive fees - the Court awarded less for each year awarded than North Star requested. Apr. 15, 2008 judgment with PLX 409 at 007 (appended). Compare In

addition, the requests upon which the Court did not award any amount include $2,397,810.04 in monetary requests that either the Court did not possess jurisdiction to entertain, corresponded to categories for which the Court found against North Star upon liability, or were not segregable from other claims upon which the Court found for North Star.5 Mar. 7, 2007 Opinion at 83-85.

4

Although North Star brings to the Court's attention the

contracting officer's decisions upon North Star's August 23, 2007 claim and the Government's settlement of case Nos. 04-1396C (Fed. Cl.) and 05-930C (Fed. Cl.), it provides no authority that would support taking that extra-case conduct into account in determining whether to award fees and expenses pursuant to 28 U.S.C. § 2412(b) in these consolidated cases.
5

We arrive at this figure by subtracting the $241,754.96

awarded on April 15, 2008, from the $2,639,565 identified by the Court in this category ($1,445,972 + $1,193,593 = $2,639,565 $15,695.63 - $7,506.33 - $56,667 - $55,437 - $52,835 - $53,614 = $2,397,810.04). See Mar. 7, 2007 Opinion at 39 n.29, 83-85; Apr. 15, 2008 Judgment. 9

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They also include requests for $1.3 million in "increased operating expenses" and $8.6 million in "decrease in the market value of Birchwood Estates" that were based upon expert analysis and calculations that the Court found were "riddled with flaws ­ so many, in fact, as to render [the expert's] findings worthless." See id. at 39 n.29, 77, 80.

For the foregoing reasons, the Government respectfully requests that the Court deny North Star's motion for attorneys' fees and litigation expenses. Respectfully submitted, GREGORY G. KATSAS Assistant Attorney General JEANNE E. DAVIDSON Director s/Donald E. Kinner DONALD E. KINNER Assistant Director s/Timothy P. McIlmail TIMOTHY P. MCILMAIL Trial Attorney Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 Telephone: (202) 616-0342 Facsimile: (202) 514-7965 Attorneys for Defendant

OF COUNSEL ANA-VALLI GORDON Assistant District Counsel United States Army Corps of Engineers Galveston District

August 4, 2008

10

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Certificate of Filing I hereby certify that on August 4, 2008, a copy of the foregoing Defendant's Response To Plaintiff's Motion For Attorneys' Fees And Litigation Expenses electronically. I

understand that notice of this filing will be sent to all parties by operation of the Court's electronic filing system. may access this filing through the Court's system. Parties

s/Timothy P. McIlmail