Schock v. United States

United States Court of Appeals
For the First Circuit
____________________

No. 00-2514

ELEANOR C. SCHOCK,

Plaintiff, Appellant,

v.

UNITED STATES; FEDERAL DEPOSIT INSURANCE CORPORATION in its capacity
as deposit insurer and in its capacity as Receiver of Old Stone Bank,
F.S.B.,

Defendants, Appellees.

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. Ronald R. Lagueux, U.S. District Judge]

____________________

Before

Torruella, Circuit Judge,
Cyr, Senior Circuit Judge,
and Lynch, Circuit Judge.

____________________

John D. Deacon, Jr. for appellant.
Lawrence H. Richmond, with whom Ann S. DuRoss, Assistant General
Counsel, Robert D. McGillicuddy, Supervisory Counsel, and J. Scott
Watson, Counsel, Federal Deposit Insurance Corporation, were on brief,
for appellees.
____________________

June 21, 2001
____________________

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 LYNCH, Circuit Judge. In the Equal Access to Justice Act

(EAJA), Congress provided that a prevailing party may recover

attorneys' fees and expenses in a civil action against any

"agency . . . of the United States" unless the court finds the

position of the United States "substantially justified." 28

U.S.C. § 2412(d)(1)(A). This appeal is about the denial of EAJA

fees to a plaintiff who was successful in a contract claim

against the FDIC as receiver of an insolvent bank. Attorneys'

fees and expenses in the sum of $27,896.00 are sought for a

judgment for plaintiff of $23,331.72. The district court denied

the claim on the ground that the FDIC as receiver was not an

agency of the United States. We affirm, albeit on different

grounds.

I.

Schock, the daughter and only heir of Ragnar Miller,

discovered that her late father's attorney, Pat Nero, had

embezzled from her father's estate, including the sum of

$23,331.72 in Miller's savings account at Old Stone Bank. At

the time Nero withdrew the funds, Old Stone was being run under

the conservatorship of the Resolution Trust Corporation (RTC),

the FDIC's statutory predecessor. As holder of her father's

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estate's claims, Schock sued the FDIC, as receiver for Old

Stone, for breach of contract, alleging that the bank permitted

an unauthorized signatory (Nero) to withdraw funds on deposit in

the Miller savings account. Schock also brought a conversion

claim against the United States under the Federal Tort Claims

Act and a claim for insurance liability against the FDIC in its

corporate capacity, and subsequently amended her complaint to

bring a negligence claim against the FDIC-Receiver.

Schock moved for summary judgment on her breach of

contract claim. The FDIC-Receiver invoked the protection of

Rhode Island's version of the Uniform Fiduciaries Act (UFA),

which provides a defense to "a person who in good faith pays or

transfers to a fiduciary any money . . . which the fiduciary is

authorized to receive" if the fiduciary later misappropriates

those funds. R.I. Gen. Laws § 18-4-16. Schock argued that this

law did not apply because Nero's apparent authority to withdraw

the money as Miller's agent, under the Restatement (Second) of

Agency, ended by operation of law when Miller died. See

Restatement (Second) Agency § 120 cmt. c (1958).1

1 Restatement (Second) of Agency § 120 states:

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 The district court rejected Schock's argument, ruling

that apparent agency terminates only when a third party has

notice of the termination. Schock v. United States, 21 F. Supp.

2d 115, 121 (D.R.I. 1998) (Schock I). The court noted that the

Rhode Island Supreme Court has not yet ruled whether reliance on

an agent's prior agency status is sufficient to qualify the

agent as a fiduciary under R.I. Gen. Laws § 18-4-6. Id. at 121-

22. But the court predicted, based on its reading of

Restatement (Second) of Agency § 125,2 that the Rhode Island law

(1) The death of the principal terminates the authority of
the agent without notice to him, except as stated in
subsections (2) and (3) and in the caveat.

(2) Until notice of a depositor's death, a bank has
authority to pay checks drawn by him or by agents authorized
by him before death.

(3) Until notice of the death of the holder of a check
deposited for collection, the bank in which it is deposited
and those to which the check is sent for collection have
authority to go forward with the process of collection.

Comment c states:

Like authority, apparent authority terminates with the death
of the principal. Third persons who, in ignorance of the
death, deal with the former agent . . . have no rights upon
the contract against the estate of the deceased, unless the
situation is one within the rules stated in Subsections (2)
or (3) or the Caveat . . . .
2 "Apparent authority, not otherwise terminated, terminates
when the third person has notice of: (a) the termination of the agent's
authority . . . ." Restatement (Second) Agency § 125.

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protects third parties who rely on the apparent authority of

former agents before they have notice of the termination of

agency and in good faith pay money to the apparent agents. Id.

at 122. The court applied Restatement § 125 to the situation of

death of the principal, despite the language of § 120 comment c

dealing with that situation. The court noted the Restatement's

definition of "notice" as "when the third party . . . 'knows,

should know, has reason to know, or has been given a

notification of the occurrence of an event from which, if

reasonable, he would draw the inference that the principal does

not consent to have the agent so act for him.'" Id. (quoting

Restatement (Second) of Agency § 135 at 333). Finding material

issues of disputed fact as to the question of actual notice to

the bank of Miller's death, the court denied Schock's summary

judgment motion on her breach of contract claim. See id.

Schock renewed her summary judgment motion, asking the

district court to reconsider its rejection of her argument that

apparent authority ends by operation of law upon a principal's

death. Schock directed the court's attention to Restatement §

120 comment c. The court rejected comment c as "illogical" and

contrary to what it believed Rhode Island public policy to be.

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Schock v. United States, 56 F. Supp. 2d 185, 193 (D.R.I. 1999)

(Schock II). Schock also offered evidence that the bank had

actual notice when it permitted the Nero savings account

withdrawal that Miller had died. Schock's new evidence included

a bank employee's statement that the bank had in place a

procedure for checking the obituaries in the local paper to see

whether bank clients had died, and that an obituary for Miller

appeared in that paper. The court found the evidence disputed

and again denied Schock's motion for summary judgment on her

breach of contract claim. Id. at 195.

After a bench trial, where it was established that the

bank did indeed have such a procedure, the district court

concluded as to the contract claim that the bank should have

known that Miller died because his obituary was published in a

local newspaper. That the bank had notice of Miller's death,

the court concluded, extinguished Nero's apparent authority, and

the bank therefore was not entitled to invoke R.I. Gen. Laws §

18-4-16 as a defense to liability for breach of contract. The

court also entered judgment for the FDIC on Schock's tort claim.

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Judgment entered for Schock on her contract claim.3

Schock filed a motion for an award of attorneys' fees

and expenses incurred in her claim against FDIC-Receiver

pursuant to the Equal Access to Justice Act, 28 U.S.C. § 2412

(1994), which allows a prevailing party to recover fees and

expenses incurred in a civil action against the United States,

including "any agency . . . of the United States." Id. §

2412(d). The district court denied the claim, concluding that

the FDIC in its role as receiver is not an "agency of the United

States" within the meaning of the EAJA. Schock v. FDIC, 118 F.

Supp. 2d 165, 171 (D.R.I. 2000) (Schock III).

II.

A. The Equal Access to Justice Act

The EAJA provides that a court "shall award to a

prevailing party . . . fees and other expenses . . . incurred by

that party in any civil action . . . brought by or against the

United States . . . unless the court finds that the position of

the United States was substantially justified or that special

3 As of March 26, 2001, the judgment with interest amounted to
$46,331. The FDIC, as receiver of Old Stone Bank, has paid the sum.
As a result, Schock's appeal from the district court's dismissal of her
Count 3 depository-insurance claim is now moot.

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circumstances make an award unjust." 28 U.S.C. § 2412(d)(1)(A).

The United States is defined to include "any agency and any

official of the United States acting in his or her official

capacity." Id. § 2412(d)(2)(C). The purpose of the EAJA is to

remove economic deterrents to parties who seek review of

unreasonable government action by allowing certain prevailing

parties to recover an award of attorney fees, expert witness

fees, and other expenses against the United States. See H.R.

Rep. No. 96-1418, at 5-6 (1980), reprinted in 1980 U.S.C.C.A.N.

4984, 4984. Schock is a prevailing party as to the contract

claim.

We review the district court's denial of Schock's fee

application under the EAJA for abuse of discretion. Pierce v.

Underwood, 487 U.S. 552, 557 (1988) (reviewing grant or denial

of EAJA fee applications only for an abuse of district court's

discretion). Whether the EAJA applies to a contract claim

against the FDIC when it acts as a receiver of a bank -- that

is, whether the FDIC as receiver acts as an agency of the United

States for EAJA purposes or merely functions like a private-

sector receiver or bank -- is a difficult question. It is

difficult because what is an "agency" of the United States for

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EAJA purposes is not a self-defining term, and there are

differing and conflicting policy objectives that are relevant to

determining congressional intent. We decline to reach the

issue.4 Mindful of the Supreme Court's admonition not to turn

an EAJA fee application into a second major litigation, Pierce,

487 U.S. at 563, we prefer to resolve the less problematic

question whether the FDIC-Receiver's litigation position was

"substantially justified." See Armster v. United States Dist.

Court, 817 F.2d 480, 483-84 (9th Cir. 1987) (reaching

"substantially justified" question under § 2412(d)(1)(A) and

bypassing "agency" question); BayBank Middlesex v. Ralar

Distribs., 69 F.3d 1200, 1202 (1st Cir. 1995) (appellate court

may affirm district court's ruling on any ground adequately

supported by the appellate record).

B. Whether the FDIC's position was substantially justified

The burden is on the government to demonstrate that its

position was "substantially justified." See Sierra Club v.

Secretary of Army, 820 F.2d 513, 517 (1st Cir. 1987). Although

4 Perhaps Congress will see fit to give greater clarity before
this Court is required to resolve the issue.

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the language of the statute refers to a "prevailing party," 28

U.S.C. § 2412(d)(1)(A), the statute makes clear that courts are

to examine both the prelitigation actions or inaction of the

agency on which the litigation is based and the litigation

position of the United States, id. § 2412(d)(2)(D); see Sierra

Club, 820 F.2d at 516. A position which is substantially

justified at the initiation may not be justified later in the

agency's continuation of the litigation. Dantran, Inc. v.

United States Dep't of Labor, 246 F.3d 36, 41 (1st Cir. 2001).

The government need not show that its position was

"justified to a high degree"; rather, it must show that its

position was "justified in substance or in the main -- that is,

justified to a degree that could satisfy a reasonable person."

Pierce 487 U.S. at 565 (internal quotation marks omitted). The

Supreme Court has said this is equivalent to the "reasonable

basis both in law and fact" formulation we have used. See,

e.g., United States v. Yoffe, 775 F.2d 447, 449 (1st Cir. 1985)

(asking whether government's position was "reasonable both in

law and fact"). As the Supreme Court has said, this area is a

difficult one for "useful generalization." Pierce, 487 U.S. at

562. Nonetheless, some rules of analysis have emerged:

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1) There must be an examination of the actual merits of the

government's litigation position as to both the facts and the

law. See Pierce, 487 U.S. at 568-69.

2) The mere fact that the government does not prevail is not

dispositive on the issue of substantial justification. See De

Allende v. Baker, 891 F.2d 7, 13 (1st Cir. 1989).

3) Conversely, that the government succeeded at some stage of

the litigation does not by itself prove the requisite level of

justification. Dantran, 246 F.3d at 40.

4) Nonetheless, the legislative history of the EAJA indicates

courts should look closely at cases where there was judgment on

the pleadings or a directed verdict against the government or

where an earlier suit by the government on the same claim had

been dismissed. H. R. Rep. No. 96-1418, at 11 (1980), reprinted

in 1980 U.S.C.C.A.N. 4989-90.

5) Whether one court agreed or disagreed with the government

does not establish that the government's position was not

substantially justified, but a string of court decisions going

either way can be indicative. Pierce, 487 U.S. at 568; see also

De Allende, 891 F.2d at 13 (reversing grant of fees where

government's position was supported by decisions in parallel

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cases and by three members of the Supreme Court).

6) When the issue is a novel one on which there is little

precedent, courts have been reluctant to find the government's

position was not substantially justified. See, e.g., Washington

v. Heckler, 756 F.2d 959, 961-62 (3d Cir. 1985).

We examine first the agency's prelitigation position.

The FDIC-Receiver initially disallowed Schock's reimbursement

claim because it found Schock "failed to prove the facts set

forth in the claim to the satisfaction of the Receiver." An

agency's request that a claimant provide facts in support of her

claim does not strike us as an adequate ground to say the

government's position was not substantially justified.

Furthermore, the legal effect flowing from the facts was the

subject of real dispute, as we describe below.

As for whether the ensuing litigation was substantially

justified, Schock argues that the weakness of the FDIC's

position was established by the fact that she was clearly

entitled to (although she was denied) summary judgment, twice,

on her contract claim. The district court erred, Schock says,

in denying her motions for summary judgment in light of the

"unanimous rule" of state agency law that death of the principal

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terminates apparent authority or because the undisputed facts

demonstrate that the bank had actual or constructive notice of

Miller's death. See, e.g., In re Estate of Kelly, 547 A.2d 284,

288 (N.H. 1988) (recognizing general rule that attorney's

apparent authority terminates at death of client); accord Gallup

v. Barton, 47 N.E.2d 921, 923-24 (Mass. 1934). Thus, Schock

claims, the FDIC-Receiver's resistance to her reimbursement

claim was not substantially justified. The FDIC-Receiver

counters that the issues in the case are novel and unsettled

under Rhode Island law and that substantial disputed issues of

material fact existed when Schock moved for summary judgment,

rendering the FDIC-Receiver substantially justified in its legal

and factual arguments.

In response to Schock's complaint, the FDIC-Receiver

asserted as an affirmative defense that Old Stone Bank, its

predecessor in interest, had acted at the request of an agent of

Miller who was possessed of actual or apparent authority.

Depending on how this is viewed, that was a matter of fact or of

law, or a mixed issue of fact and law. The initial question of

law was whether an agent's death terminates apparent authority

by operation of law without notice. If the answer to that

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question was no, then two more questions arose, one of law and

one of fact. The fact questions had to do with what actual or

constructive notice the bank received. In Schock's second

motion for summary judgment on her breach of contract claim,

Schock for the first time produced evidence that bank employees

had actual notice of Miller's death at the time of Nero's

withdrawal based on the fact that Miller's obituary was

published in a local newspaper. This then raised the legal

question of what type of notice is sufficient, assuming the

agent's death did not automatically terminate apparent

authority.

As to Schock's legal argument -- that it is well-

settled that apparent agency terminates with the death of the

principal -- the question on an EAJA petition is not whether the

district court was correct or incorrect in its prediction about

Rhode Island law. Schock overstates the effect of the

Restatement rule. Restatement § 120(1) is largely concerned

with the effect of the death of the principal on the authority

of the agent, not on third parties who rely on the apparent

authority of the agent. Further, §§ 120(2) and (3) are

concerned with the effect of a depositor's death, without notice

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of death, on negotiable instruments. Whether these provisions

would apply to withdrawals by the former agent in the form of

treasury checks is an open question.

The two cases Schock relies on in support of her

argument are inapposite. The only Rhode Island case Schock

cites, Industrial Trust Co. v. Colt, 128 A. 200 (R.I. 1925),

involved whether the authority of an agent is revoked by the

principal's insanity where the authority of the agent is coupled

with an interest. The court recognized the general rule that

the death or insanity of the principal operates as a revocation

or suspension of the agent's authority, but did not discuss the

issue before us, whether apparent authority similarly ends under

the general rule. In Walker v. Portland Savings Bank, 93 A.

1025 (Me. 1915), a case which Schock relied on at oral argument

and which she presented to the district court, a bank was held

liable to the estate of a depositor for allowing a withdrawal

from the depositor's account by an individual who at the time

possessed no authority, apparent or otherwise, to act as an

agent for the decedent. The court held that the subsequent

appointment of the individual as administrator did not validate

the bank's earlier payment to him because he did not seek

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payment as a representative of the estate but "as an individual

with pretended rights against the estate." Id. at 1027.

Accordingly, Walker has no applicability in this case, where the

FDIC-Receiver claimed to have relied on Nero's prior agency

status.5

Absent any Rhode Island precedent on point, the

district court made an "informed prophecy" of what the state

court would do in the same situation, Blinzer v. Marriott Int'l

Inc., 81 F.3d 1148, 1151 (1st Cir. 1996), seeking guidance in

"analogous state court decisions, persuasive adjudications by

courts of sister states, learned treatises, and public policy

considerations identified in state decisional law," id. The

court concluded that the Rhode Island Supreme Court would adopt

5 During oral argument in this appeal, Schock pointed out that
some states have adopted the Uniform Durable Power of Attorney Act,
which protects a third party who acts in reliance on a written power of
attorney and who "did not have, at the time of exercise of the power,
actual knowledge of the termination of the power by revocation or of
the death, disability, or incapacity of the principal . . . ." See
Mass. Gen. Laws ch. 201B, § 5. Because Rhode Island has not adopted
the Act, Schock argues, the district court was bound to follow Rhode
Island law and acted improperly in anticipating a new rule. We are not
aware of whether Rhode Island has ever considered adopting the Act. In
the absence of any evidence of such consideration by the Rhode Island
General Assembly or courts, and given the Rhode Island courts'
historical reliance on the Restatement (Second) of Agency in other
contexts, the UDPAA can offer us no insight whether current Rhode
Island law incorporates the automatic-termination-by-death-without-
notice rule which Schock advocates.

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the Restatement (Second) of Agency § 125, as Rhode Island had

adopted that Restatement for other issues, and ruled that R.I.

Gen. Laws § 18-4-16 applied to "third parties who in good faith

pay or transfer money to an apparent agent." Schock III, 56 F.

Supp. 2d at 194. The relationship between Restatement § 120,

Restatement § 125, and the Uniform Fiduciary Act on these facts

is far from obvious. Cf., e.g., Mubi v. Broomfield, 492 P.2d

700, 702 n.1 (Ariz. 1972) ("[A] further exception [to the

Restatement rule of automatic termination of a power of attorney

upon a principal's death] is sometimes made where innocent third

parties are protected from dealings made in good faith with an

agent and death of the principal is unknown."). The court was

also faced with the FDIC's strong argument that banks should

have no obligation to investigate and warrant the bona fides of

an apparent fiduciary; otherwise the bank becomes a guarantor of

the fiduciary, and such a result was contrary to the policies

behind the UFA. It is not necessary for us to decide whether

the district court's conclusion is correct; it is enough that

the FDIC's legal argument was at least "justified to a degree

that could satisfy a reasonable person." Pierce, 487 U.S. at

565.

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 After the district court rejected Schock's suggestion

that Rhode Island law would deem third parties' notice of the

principal's death irrelevant, there was then an open question of

what constitutes notice to the bank of Miller's death. Although

the district court ultimately concluded that Miller's obituary

in the local newspaper was sufficient notice to the bank, that

ruling does not render the FDIC-Receiver's litigation position

unreasonable. In its opposition to Schock's motions for summary

judgment and throughout the trial, the FDIC-Receiver disputed

whether any bank employees had actual notice of Miller's death.

The FDIC also argued that the proper measure of notice was

actual knowledge, not constructive notice, and so the

publication of Miller's obituary was insufficient to establish

notice to the bank of Miller's death. That argument was not

unreasonable. Indeed, in its ruling denying Schock's motion for

attorneys' fees and costs, the district court acknowledged that

its previous ruling on Schock's contract claim "established a

new rule on the issue of notice." Schock III, 118 F. Supp. 2d

at 168.

In sum, the FDIC-Receiver's litigation position -- that

it was not liable to reimburse Schock because the bank had

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allowed withdrawal by a fiduciary with actual and apparent

authority despite the death of the principal -- had a reasonable

basis in law and fact, and so we cannot say that it was not

substantially justified. We do not decide whether the district

court erred in holding that the FDIC was not an "agency . . . of

the United States" under the EAJA, or in its prediction of Rhode

Island law governing the termination of an agent's power of

attorney upon the principal's death. Affirmed.

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